Q2 2021 Gildan Activewear Inc Earnings Call
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Financial and administrative officer momentarily Rod will take you through the results for the quarter and and Q&A session will follow.
Before we begin and I'd like to remind you that certain statements included and this conference call may constitute forward looking statements within the meaning of the U S. Private Securities Litigation Reform Act of 1995, such forward looking statements involve unknown unknown risks uncertainties and other factors, which could cause actual reason.
The differ materially from future results expressed or implied by such forward looking statements. We refer you to the company's filings with a U S Securities and Exchange Commission and the Canadian Securities regulatory authorities that may affect the company's future results and with that I'll turn the call over to Ron.
Thank you Sophie.
Good morning to all and thank you for joining us and the call today and.
This morning, we reported strong second quarter results, which as anticipated reflected a significant recovery from the height of the Covid shutdowns and the second quarter last year.
We also delivered improved sequential performance building from the solid start that we saw and the first quarter of this year further when compared to prepandemic levels and the second quarter of 2019 Ah results are showing that even though we have not seen it full top line recovery are back to basic strategy is unfolding better than plan.
Benefit from eliminating redundancy and complexity and our business or driving solid sales performance efficiencies and our operations cost savings and stronger profitability.
Of course this strong performance is supported by strong execution and once again, our team demonstrated exceptional operating capability during the quarter by delivering on our targets, while navigating through the challenges of a tight supply chain environment.
And the and we were able to deliver higher than anticipated sales of $747 million adjusted operating margin of 19.9% adjusted EPS of 68.
Up 21% over the second quarter of 2019 and record second quarter free cash flow of 208 million.
Given the strong recovery, so far the better than expected progress of our back to basic strategy. The company's prospects for continued free cash flow generation and with our net debt leverage ratio and now it 6 or board approved yesterday, the reinstatement of our share repurchase program to buyback over the next 12 months up to 5% of the company's outstanding shares.
So overall another strong quarter.
Now turning to more specific details on our results.
As I just mentioned for the second quarter, we generated sales of $747 million up 225% over the prior year driven by volume creases across all product categories and favorable product mix.
Activewear sales came in at 597 million up 354% and sales and the hoser and underwear category, where $150 million up 53% versus last year.
Volumes were up and all markets and geographies, particularly and and principles driven by the strong recovery and <unk> and the impact of the non-recurring of significant distributor inventory Destocking, which we saw last year and distributors grew down there and maturity during the Covid shutdown period.
From the underwear and hosiery front, we saw double digit growth drive higher underwear entire underwear unit sales during the quarter as well as and hosiery products, which were particularly impacted by last year's store closures.
Compared to the second quarter of 2019, which was a strong quarter sales were down 7%.
Which we nonetheless think is encouraging when considering the impact of both lower and principles net selling prices this year and product mix slightly unfavorable compared to 2019.
Overall, and principals <unk> was down approximately 8% compared to the same period and 2019, showing some further improvement from the 10% decline and we saw going into the quarter, mainly due to improving trends in North America.
Specifically and principles Qos in North America was down and the single digit range compared to the second quarter of 2019, while POF and international and principles markets remained weak down close to 30%.
And retail channels overall pass and the quarter was up compared to the same quarter and 2019.
So overall, we were pleased with the top line performance, we delivered and this quarter, especially given the context of a tight supply chain environment, where labor shortages and the us are continuing to affect your and supply and constraining our ability to completely rebuild inventory levels fall and and the hurricane from last year.
Moving to gross profit, we reported a strong recovery over last year generating adjusted gross margin of 35% and the quarter.
While last year, we had significant COVID-19 related costs and back to basics related charges in the second quarter of 2020 flowing through our numbers. We're now also seeing the favorable impact of product mix lower raw material costs and benefits stemming from a back to basics initiatives in our growth margin.
This was evident on a sequential basis.
With adjusted gross margin and the quarter up 240 basis points from $28 and 1%.
After excluding the onetime USDA pandemic assistance benefit we received and the first quarter of this year, which impacted margins by 300 basis points.
Likewise, our margin performance compared to 2019 Prepandemic levels also improved meaningfully even though sales have not yet fully returned to 2019 levels.
Adjusted gross margin of 35% and the second quarter was up 270 basis points compared to 27, 8% and the second quarter of 2019.
The increase was driven primarily by lower raw material costs and back to basis cost savings, which more than offset lower and principles net selling prices and slightly unfavorable product mix compared to 2019.
Turning to SG&A are SG&A expenses, and the quarter, where 80 million up approximately $15 million over last year, driven primarily by increases and variable compensation expenses and volume driven distribution costs offset in part by back-to-basics cost savings.
As a percentage of sales SG&A expenses of $10 and 7% were down significantly from last year as you would expect and 80 basis points better than 11.5% and the second quarter of 2019.
Adding up these elements, we generated adjusted operating income of 149 million translating to and operating margin of 19.9% and the quarter.
The significant recovery from the loss, we posted last year was driven by the higher sales strong gross margin performance and SG&A leverage.
Lower financial expenses, driven by reduced average debt levels and the non recurrence of fees related to that facility amendments. We made last year also offset the impact of higher income taxes.
Consequently, we generated net earnings of 146 million or 74 cents per diluted share and adjusted net earnings just over $135 million or 68 cents per share compared to a net loss of 250 million or $1.26 per share and and adjusted net loss of $197 million.99.
Per diluted share and the second quarter last year.
Compared to 2019 stronger adjusted gross margin and SG&A performance drove at 360 basis points, adjusted operating margin improvement and the quarter compared to $16 and 3% and 2019, which led to a 21% increase and adjusted EPS.
Finally from a cash flow perspective, we generated $208 million and a quarter, which was a record for a second quarter up from $177 million last year and $26 million and 2019.
The increase over last year was primarily due to higher operating earnings and included a net cash benefit of $18 million from insurance proceeds we received and connection to damages sustained from the Hurricanes last year.
These positive elements were partly offset by higher trade receivable balances driven by the sales increase a lower drawdown and inventory compared to last year, when our facilities were idled and higher capital expenditures related to our manufacturing capacity.
Our net debt position at the end of the second quarter was 363 million down from $542 million at the end of March and our debt leverage ratio fell to 0.6 times net debt to trailing 12 months adjusted EBITDA, which is now below our historical target target leveraged range and down from $2..1 at the end of the first quarter of 2021.
Consequently is highlighted at the beginning of the call given the strength of the results we are achieving and the free cash flow. We are generating we were pleased to announce this morning that in addition to the reinstatement of our dividend last quarter. We are now reinstating our share repurchase program.
And important step given the emphasis we place on return of capital to shareholders under our overall capital allocation program.
This sums up the key highlights of our results for the second quarter and short strong results driven by a number of considerations, which on balance gives us reason to feel good about our outlook.
On the positive side, we are encouraged by the recovery, we have seen in North America, so far including the sell through trends for our products as well as the benefits we're seeing from our back the basic strategy and.
And the other side of the ledger, we remain cautious about certain factors, including the pace of recovery outside of North America, which currently is weak.
Further on the supply chain site U S. Labor shortages continued to be a factor affecting you are and supply. Although we have seen some improvement more recently.
And we're also seeing tightness and raw material inputs and broader transportation related issues, which are creating inflationary pressure.
Consequently, we can sum it up by saying we remain cautiously optimistic as the recovery progresses confident that our people and our strategy or positioning us well to continue to move to this environment and capitalize on market share opportunities as we fully utilized and grow our manufacturing capacity deliver on our profitability targets and create shareholder value.
For the long term.
This concludes my formal remarks, and with that I will turn it back to Sophie.
Right.
And with that I will now turn it over to our operator and go out to begin the question and answer session will out go ahead.
Thank you ma'am and as a reminder, if you wish to ask a question since the price far then the number 1 and your telephone keypad once again and that a star 1 and your telephone keypad.
Your first question is from the line off.
Fall and who S from <unk>. Your line is now open.
Hey, Thank you guys, Gary and you could talk a little bit more about the supply chain and.
And which pieces of the supply chain and might be getting better versus worse, where do you think you have visibility and I'm curious, how you're thinking about pricing.
As you kind of absorbed some of the higher costs.
And what do you think in terms of pricing power already have it and what might be the timing on where you take where and why and you take price. Thanks.
Okay are large and a question first and supply chain. So we are really Wherever's, Craig Craig now and our supply chain is mainly and R. U S U R and operations as we.
<unk> our production as we exited the.
And the end of last year due to the hurricane.
Compounding with the labor shortages and the Marquez take us a little bit longer to bring folks back to our facilities and get them up and running which are now running and better right and they were before and.
And continuing to approve so we're pretty optimistic about momentum and we have as we go forward and we're going to continue to.
And incremental capacity as we move into the year occurred run rate. Despite these supply chain.
Restraints as we're running at the same levels and the back half.
Whereas reacted as 2.2 is 19 levels and during the year we've repurposed.
And a lot of the we're all of the equipment from our Mexican operations, which will allow us actually to have a substantial increase and capacity which were working forward too.
And our objective is to continue to increase our volumes as we move through the year and and enter into 2022.
As far as the price and is concerned.
Look we're going to leverage our back-to-basics strategy.
Although price through our presentations and belief.
Streamlined our business and we have a lot of manufacturing efficiencies.
And obviously, they're not large enough to offset the fixed spike and raw materials and some of the transportation costs. So we will have to adjust price and as we move and 222 level.
We'll leverage as much as we can from our from our operating efficiencies and then adjusted difference in price and I think the most important thing is that our objective is to maintain day, 18% operating margins. So will balance those 2 out and just make sure that we're in line with our standard goals as we move forward and to try to.
Got it. Thank you good luck.
Yes.
And our next question is from the line of <unk> from National Bank. Your line is now open.
To the shop.
Sort of a cat harrier made any and it be coming out and your question sorry.
<unk> and just thanks for taking my questions can you hear me now.
Yes, and Harry Thank you okay.
Okay, great with respect to the 18% operating margin target.
Obviously guild and doing better than most would have thought it but at this juncture and each 1 tracking above those targets understand inflation is coming and all the same.
Take price, but given that you are still trapped into that 18 should we think that Hai falls below that 18% operating margin a level as inflation comes in and you kick and price towards the back end of the year.
Yeah, if you look at the 18%, which Glenn and called out which is really important to US right. That's effectively we're we're targeting as you look at the combination of our gross margin and SG&A.
We have done well and and achieving that target. We thought we would get there we got to move that to 2019 levels revenue levels and we've achieved that earlier than we thought but if we go into the back half of the year of the shallow and and we will see pressure, we will see inflationary pressure.
In Q3, and we will see it and Q4.
Both and all areas of the business really if you look at.
And the raw materials will be called out we've got cut and prices going up and.
And that transportation. So all of that is coming through so as we go through the back half of the year will see that flow through our margin, but I think we've achieved 18% now and our plan is to hold at 18% as we go forward and and I think you can assume that in 2021 and that's the number we can deliver full year.
Okay.
Just what are you seeing and in the in the market right now lives given the pervasive inflation are your competitors from talking to specifically the.
And principal wholesale market are some of your competitors taking price at this juncture.
There has been from our price taken and the market.
So far this year.
And our strategy is to continue to and hope temperature or low cost manufacturing and repack the basic strategy. So.
And what we'll do is we'll adjust like I said our pricing.
Irrelevant of our competition, because you know and and what's happening is look we're taking share and me and the market hasn't recovered.
We're doing well.
We're very happy with our positioning.
We have a lot of capacity that and we're going to be bringing on as we move into 22 with you with the installation of all of our.
<unk> and Central America from our Mexican operations.
So we're going to balance volume growth with operating margins and make sure that we have a good balance between those 2 so not too and nature on price and we can probably take prices up a little bit higher if we wanted to but I think we we feel that maintain.
Maintaining a discipline operating margin target as well as.
Focusing on top line growth is really what's going to create long term shareholder value for us.
Okay, and and maybe just the last 1 here just given me the inflation come again and.
And then the transportation challenges and Labour Challenge, how would you how would you reflect on the financial health of the wholesalers and their ability to comment accommodate altered some lp's pressures.
Well I think a look of inflation is good for wholesalers and higher prices is necessarily.
And the sheriff units, so they make more money off higher prices, so it's necessarily and it's it's a positive.
From a wholesale perspective.
And.
Thing is is that it's not just the it's.
And it's not just the inflationary costs, it's actually.
The capabilities is doing businesses restaurants are closing because it on that and place.
That's really much more than.
And that's a structural issue really that and the financial ones. So I think that's what.
I think and the US Mr. Careful of is making sure that we can get employment.
We've done a good job and we have to to income salaries up and and incentives for employees to come back to work, but we are and a good place right now and we have good momentum. So the rest of our operations and Central America. We don't have those types of issues and employment is abundant and.
There is some inflation, but it's more and input costs associated with.
Factoring and power electricity of transportation, but.
And as a laborer Central America, So I really focus right now is making sure that we got our yarn facilities up and running to support the capacity building.
Thank you.
Joe next question is from the line off Stephen Matthews from BMO capital markets. Your line now open.
Thank you good morning.
Or I just wanted to ask about the labour backdrop, and particularly as it relates to the orange spending business.
And you talked about it impacting our ability to rebuild inventories.
Or is there are you seeing are there are there are areas, where demand is actually being unmet because of the labor shortages.
Well restart to channel and queue to basically and so I would probably be a good reflection of that.
We're leaving and.
Sales on the table basically and our inventories are relatively low so.
Demand is strong and and and I don't think to manage this from.
Because the come back on the market and into matters also stronger because onshoring is also becoming a bigger factor of me and.
And I think that's also big benefit for us as we look forward and that a future is that there is more demand for our products and the other thing I think also that recall there are a couple of quarters ago was that we believe that the overall market has expanded.
As well, which was also I think and Ah.
Drive demand.
And our channel so things are looking pretty good in terms of demand side.
And I think we're well positioned as we move out of this you out of 21, and the 22 to capitalize and.
And potential upsize and volume growth.
Okay. Okay. That's helpful.
And then I'm just wondering if you're able to give any any more sort of discrete color around.
How things are shaping up and the back half of the year and you're in terms of your outlook section and the past you've given some and some directional indicators around pls and demand trends were able to do that for for Q3 and and to queue for.
And I look I think Steve and 8 and you can see what the the way that pass improved and the second quarter of the we called out how we started a quarter. How we finished the quarter and obviously things are getting better and.
We as we move through the year as we look at the back half of the year and if you look at our sales overall.
And we think that 2019 levels are.
Look pretty reasonable and we think about it as Glenn said, we're running our capacity now at 2019 levels. So as we as we think of the back half. That's what we're focused on as I said, the 18% margin overall for the for the full year. So guy So I would say, it's and improving environment, but it is not without risk as as we said.
When we opened up the call with our remarks overall, if you look at it.
Bubbly and you think about a comparison versus 2019 Q3, a little lower queue for a little higher right given the way to solve the supply chain is is evolving.
But that's about it I would say that color. We can provide right now as we and we sit here today.
Okay that so that's very helpful. Thank you rock thanks line.
And next question is from the line of Luke and on from <unk>. Your line is now open.
Hey, Thanks. Good morning first question question for me is on.
Capital allocation and you guys finish a quarter and.
And a very clean balance sheet here, which obviously.
Inspired you guys to bring back the share buyback program I'm, just curious, though if I had just 2 quick math and I.
And that you invest a little bit and inventory going forward plus.
Fulfilled and CIP, but.
But still be June and very clean physician balance sheet wise. So do you see any changes to your near term capital allocation priorities.
So we are very happy with the balance sheet is effectively and I think over the last 12.18 months, we've seen a significant strengthening of our balance sheet as we move through the the Covid environment and we are generally we generated a lot of cash.
Last year, and we're generating a lot of cash this year. So I would say, we're very pleased about the balance sheet and.
And we look forward, we've got our target leveraged range 1 to 2 times that we're working too and we will target effectively capital allocation capital return.
To put us inside that range again, where like everybody else, we don't have a crystal ball and we have to be a little cautious as we move through the back half of this year into next year.
Given the overall a broader situations so.
And we are very very pleased with the state of the balance sheet and we will obviously, we plan to generate cash as we move through the back half we.
We do plan to buy back the repurchase stock as we called out and as we go forward will will basically you working to that range, probably the low and and the range is where I would look as you think about where we're going to set as as we move through the and.
And of this year and and 2.2022.
Understood. Thanks for that and then just quickly as well.
And the press release, you guys talk about and.
And retail overall pos's up during the quarter relative to 2019 and I'm. Just curious if you can quantify that at all.
Well on the retail side of and and effectively we did see.
Good strength in our.
Overall, if you look our underwear pass as being really strong I think I would say we are very happy with the way that the underwear has performed.
Versus versus 20 versus 19, so underwear and very good.
Activewear overall down a bit versus versus 19, but activewear again is is doing well overall and then hosea. We'd say hosiery is is effectively if you look at verses 2020, we were up very definitely and if you look at 19 and I'd call. It flattish.
Okay. Thanks.
And the next question is from the line of priestly from desk job. Your line is now open.
Hi, Good morning influence you sell and wondering buying and if you can share with us a little bit more of what's driving the international.
News.
Well I think.
My feeling is it's a book.
Less of.
And Europe is not our lifestyle market like a as in the North American market and Susan Moore and.
Tourism markets and I think there's been and lack of tourism and which is I think this has affected the business orbit because.
Lots of T shirts, and and Europe are sold and the.
Tourism shops et cetera.
It could be possibly 1 I think just the overall.
Market there just hasn't is not as Christmas day, Besides the market's not as large as the U S.
And it's also may be a little bit driven by us and lack of sickness and the market.
I don't know, it's hard to say for us and we also through but.
It's down.
Ultimately 30%.
And there's still there's still a pulse and investing we're still optimistic that is can recover from.
Better assist taking a little longer.
Okay. That's helpful. And then just shifting over to the USA and remember last quarter. I think you mentioned that the distributor inventory levels were about 40% below the 2019 level and I'm. Just wondering if you have and updated number for us.
On that site, while day, we do stock together and and a quarter, so probably more like 45, now and say.
Okay. That's helpful. Okay. Thanks very much.
Thank you.
Your next question is from the line up from Brian Morrison from DD Securities and your line is now open.
And and thank you and good morning.
I want to go back to your inventories mean, and the yarn shortage needs to provide some color on your view to source and puts relative to some of your peers is I presume you must have an advantage with your political integration and then Furthermore, when you say the distributors.
Pardon me I think are you gaining market share from this and then with respect share, 45% calm and keeping a numerical value on that.
45 per cent of an inventory and the inventory and so if you look at the 4 we called out last quarter. We said it was over $100 million with effectively the way to think about the the destock that occurred versus 2019, and then a further destock that we're looking at this quarter is probably and other $30 million.
On top of that so we're down probably 135 million somewhere in that range and we'd say versus 2019.
Okay, Thank you and and as far as sexy cars and supply chain concerns, but we're we're vertical right. So we're we're running a few people who.
Make yarn.
Manufacturer yarn through finished goods, so our competitors are sourcing urine or sourcing fabric tube.
Manufacturers or product so.
That is for us is and.
I think a strategic from long term advantage and Ah.
Short term and what happened was that the Royals.
And some of our classes and the hurricane at the same time as a labor shortage was happening and growth suited for C. So it's taken just a little bit of time to get.
And get the folks back to run the plant, so which were making big progress and 1 of them.
And it's been it's been a grind higher 3 lose too and that type of situation, but.
And it's not a lot of people because we don't have a lot of people and our yard and facilities Lester Grace and things but.
And the less.
What type of employment is so, but we're making progress and we feel very comfortable as we move forward.
Greaser overall volumes and to your point and Brian about our vertical integration and when we do feel that were and are better positioned from a supply chain perspective than our and our competitors overall.
So we are we don't feel disadvantaged in any way, we everybody is dealing with very tight supply chain and we think our team is doing and a great job and this environment and.
And also there is a lot more inflation on.
Source churn, particularly and Asia than there is and this hemisphere and pricing and Asia.
Yarns and fibers has gone up significantly relative to more of a stable cost structure I think in our hemisphere and approximately.
Yeah, So it's gotta be and advantage and so I want to turn to and you call up and pass it retails for and principles and that's offsetting other vehicles that hadn't returned yet can you just ballpark the size of your national account business and maybe the size of the opportunity to you see is unsure and.
Essentially seats further growth and online.
While our government's universe book for supporting the night use the views of the World and that's just as all of these companies are looking to the.
Particularly exit China and number 1 and I think is 1 of the big benefits I think and and number 2 and look at her and trying to get closer to market both.
Our big brands on our retail partners based Bureau looking to buy.
Byproduct locally so large screen printers and service mass market retailers are growing their businesses.
Which has been a drive and part of our success of our Tos. So when we look at it and we sort of look at it holistically.
And our Pls basically with blood centers.
Slightly below 19, but I would say in July and we're seeing.
Closer to the 19 levels and and pruning. So every month things just continue to get better and then the other side of our I think of our pass big opportunity as is.
Gatherings occur and we're starting to see bigger orders and the market.
Which were just non existent up until now so all of these things are encouraging but at the same time and there's.
And there's a delta viruses and heading out and and so we're cautiously optimistic that and it was a relatively good position and have good balance will get variable levels and inventory and <unk> and R.
And our warehouses, our customer warehouses and.
I think thats global supply is tight and 1 of the reasons also and way global supply is Titus and turn independent demick, particularly and raw materials and other factors is that during the pandemic.
People idled equipment globally right. So people looked at for example, saying.
So many plants and these ones are.
Don't have the proper cost structure, and the role department and they Idaho and goes facilities and and taken capacity out of the market.
So there's been a big reduction of capacity and then and if you look at the equipment market today and buying new equipment, It's 12 to 18 months and.
Let's say for example, which tells you that things are going to be tight for quite some time as people and look to rebuild capacity.
And so that's also a good sign in terms of where we think.
The market is so weird and growth of the we feel good position.
With our structure and a cost structure and as well as our operating structure.
Thank you.
And next question is from the line of diesel from UBS Your line and snow open.
Hi, good morning, vicious <unk> sagna on behalf of J. So.
First of all congratulations on the results and I wanted to ask a couple of things first on on the price and strategy and is there like a a pricing GAAP do you have and mine and principles business versus their competitors and you kind of like target and.
And and the other hand.
And you talked about inflationary pressure should we think that and will mostly affect the.
The cost of goods sold or should we also see some that.
Hitting the SG&A dollars and the second half of the year, just thinking and also because the channel dollar versus 2019.
And we're like down 14% and the second quarter and just thinking about like a level that we should think about for the second half or.
And hanging regarding inflation there. Thank you.
Okay, and we'll all lesser pricing and Rod Road will take care of that part of your question I'm sorry.
As far as a person is concerned look at we have a significant advantage on price and the market today.
These pricing and inflation as everybody.
The only caveat is that I think that we have.
Positive manufacturing efficiencies companies, who are back to basic strategy.
As we continue to streamline our operations so our pricing strategy will be a function of maintaining our operating margins and probably be 18% and 80% level and focusing on top line growth and that's how we're going and panel. So that was so we're really focused on making sure to cough line grows as we reported the 22 and at the <unk>.
And time is delivering a good financial reserves the results and targets that we set for the market.
And and inflation on the SG&A line. The bottom line is yes, I mean inflation is everywhere and we expect inflation to flow through anywhere where you have labor for sure on the distribution side.
We have upward pressure and we see it elsewhere. So we do expect the labor to to impact SG&A that being said, we do believe we have our SG&A Donald and very well if you look at where we were for the quarter and how we're traveling versus our overall SG&A targets, which we had out there for some time I think we are performing well and.
And we think that we will be able to manage our SG&A.
Tightly as we as we move through the back half of the year again.
And this overall to deliver that full year, 18% number from and operating perspective, so but it's inflation is everywhere. It's everything everywhere you look there's inflation.
Got it thank you very much and congratulations.
Thank you.
And our next question is from the line of back to share Baker from Scott Camp and your line is now open.
Good morning, everyone. My questions on the quarter have been asked and answered, but perhaps you take this opportunity to provide us and an update of how things are going to the Bangladeshi.
And he built.
While we're continuing to move forward and Bangladesh.
Asked plan.
We're still projected to start the plan at the end of 2.4 and 22 and.
And be wrapped up during the year is 23 is really where we stand today.
And where maybe 1 or 2 months I think probably a little later than we anticipated, but it's still moving forward and and we feel comfortable with.
Deliberate Atlanta at the end of the queue for 22.
Thank you.
Thank you there are no further questions I'm sorry, there are no further questions presenters. Please continue.
Oh.
With that I guess once again I'd like to thank everyone for their participation today and we look forward to speaking to you soon and.
Have a wonderful day, everyone that and thank.
Thank you.
And with that and this concludes today's conference call. Thank you for attending you may now disconnect.
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