Q3 2022 FirstService Corp Earnings Call
Okay.
Yes.
Welcome to the third quarter investors conference call.
Today's call is being recorded.
Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward looking statements that involve known and unknown risks and uncertainties.
Actual results may be materially different from any future results performance or achievements contemplated in the forward looking statements additional information.
<unk> concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in the company's annual information form as filed with the Canadian Securities administrators and in the company's annual report on form 40 F. As filed with the U S Securities and Exchange Commission.
As a reminder, today's call is being recorded today is October 26 2022.
I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead Sir.
Thank you Krish.
Morning, everyone.
Thank you for joining our third quarter conference call.
I'm on the line today with our CFO Jeremy Rikku Sir.
Let me open by saying that we're pleased with the results for the quarter.
It showed continued strong organic growth.
A tribute to our teams and the quality of our service delivery.
Our service excellence culture drives customer retention.
Repeat business and word of mouth referral and our high single digit organic growth for the quarter and year to date is a reflection of that.
Total revenues for the quarter were up 13% over the prior year with organic revenue growth at 8%.
Just about evenly between our between our two divisions.
EBITDA for the quarter was $95 5 million.
Up modestly from 2021, reflecting a margin of nine 9% compared to 11, 1% in the prior year.
Jeremy will walk you through the year over year margin variance.
At first service residential rep.
Revenues were up 13% with organic growth over 8%.
Organic growth was driven by solid year over year increases in amenity management.
And again this quarter by strong net new contract wins.
The higher management fee and labor related revenue.
We achieved particularly robust growth in Florida, and the southeast where we have a very strong presence.
Again this quarter, we estimate the price accounted for between two and 3% of the quarterly guidance.
Looking to the fourth quarter at first service residential we expect to show mid to high single digit revenue growth all organic.
Moving onto first service brands revenues for the quarter were also up by 13% approximately half of which was organic.
Our home improvement brands led by California, Closets were again very strong this quarter with year over year growth of near 30%.
The growth figure reflects higher capacity of production relative to the third quarter of 2021.
There was weakened by supply chain and Covid related disruption.
Sequentially revenues were up modestly relative to Q2.
As we continue to have some success in adding production capacity, despite a tough labor market.
We're very pleased with the results from our home improvement brands that exceeded expectation for the quarter. The teams have done a great job of capitalizing on strong demand and a tough operating environment.
Looking forward to the fourth quarter, we expect to again show sharp sequential growth from Q3 and year over year increases of about 15% against a strong fourth quarter and 2021.
Let me now.
Territory century fire before we talk restoration.
Century had another strong quarter growing by over 20% half organic.
Growth was again buoyed by a solid commercial construction market and strong momentum with our national account.
Service and repair program.
Backlogs in bid activity remained very strong.
And we expect similar year over year growth in Q4.
Yeah.
Our restoration brands, Paul Davis, and first off site.
Generated revenues that were approximately flat with the prior year and down mid single digit organically.
We did not book any revenues during the quarter from named storms or area wide events.
And are pleased that we were able to match prior year revenues setting.
That included $30 million, primarily from Hurricane Ida.
Organic organic growth for the quarter, excluding storm revenues was about 10%.
On September 24, as Hurricane Fiona swept through Atlanta, Canada, causing damage, primarily in Nova Scotia, and New Brunswick, and Prince Edward Island.
Both Paul Davis, and first onsite responded to the event and are working in the area, but we did not book any revenue in September .
Revenue generated from Yamana will fall into our fourth quarter and perhaps into next year.
A few days later on the 28th of September Hurricane.
Made landfall in southwest, Florida and cause significant damage in the Fort Myers area.
And continued up through Orlando and the northeast coast of Florida.
Went to offshore.
And that made landfall again in South Carolina.
This was a big cat afore category four event.
It caused catastrophic damage primarily from flooding related to an unprecedented precedented storm surge.
We have thousands of associates that live and work in the area of the storm and thankfully, they're all safe.
Although a number of them Unfortunately lost their homes or suffered significant damage.
We are helping these employees that have been impacted through the first service relief part.
It was set up five years ago to provide aid and are situations just like this.
Both first service Corporately and our associates contribute to the fund.
And I am proud to report that in the last four weeks, we have provided over 250 grants.
<unk> team members that experienced financial hardship related to the storm.
The storm not only impacted our associates, but also many of the communities that we manage in the area through first service residential.
Our teams are working closely with our boards and residents to.
The document damage for insurance purposes.
And to facilitate the cleanup mitigation and restoration process.
Both Paul Davis and first on site have been on standby and are working closely with first service residential throughout Florida, and South Carolina to.
To help our managed communities during this difficult time, the collaboration has been very strong.
Separate and apart from first service managed communities, both Paul Davis, and first onsite are engaged and working on hundreds of projects in the affected area.
It is still too early to quantify what this will mean to our restoration businesses in terms of revenue in the coming quarters.
Many of the jobs, we are tentatively engaged on maybe kind of tear down and rebuild rather than mitigation and restoration jobs.
In addition, we're working with many clients to confirm insurance coverage.
Before a restoration commences in the outcome could affect the amount and type of work performed.
The situation continues to evolve.
At this point, our best estimate is that restoration will show about 20% revenue growth in Q4 relative to the prior year.
This is assuming we generate $70 million from hurricanes in and Fiona with the bulk.
From South, Florida work relating to Hurricane Irma.
In the fourth quarter of last year, we generated $40 million from Hurricane Ida.
Work related to Ian and Fiona will definitely roll into 2023.
But we're not in a position to quantify the level of backlog that will carry forward at this point, we'll obviously provide an update.
On our year end call.
Okay.
Staying on restoration.
Earlier. This week, we were excited to announce the addition of three companies to our restoration platforms.
The acquisitions enhanced our geographic footprint and service capability.
First on site acquired watermark restoration bolstering our presence in the U S southeast, particularly in Alabama, and North Carolina.
And adding several significant customer relationships.
In Canada first onsite acquired the assets of contract Global solutions, a reconstruction company that enhances our full service restoration of offering to commercial clients in the Toronto Metro market.
And finally, we acquired a majority stake in our Paul Davis franchise, serving the Nebraska and southern Missouri.
It's one of the largest and most successful Paul Davis franchises in the network and we're excited to partner with Roger fresh from and Jeff payable to drive further growth in the Midwest U S.
On that let.
Let me now hand off to Jeremy to walk through the results in more detail.
Thank you Scott Good morning, everyone. Our third quarter financial results came in largely matching our internal expectations and mirrored the quarterly performances delivered during the first half of this year.
The overriding themes also remained similar to prior quarters with strong across the board top line organic growth driving our performance, partially offset by the same factors contributing to margin dilution.
I will elaborate on these drivers momentarily, but let me first summarize our consolidated results for.
For the current third quarter for service recorded total revenues of $960 million up 13% and adjusted EBITDA came in at $95 5 million up 1% relative to the prior year period.
Our adjusted EPS was $1 17 down from a reported $1 50.
From Q3 last year, which included a 21 cents per share gain on sale from a non core business. So.
So earnings per share down modestly year over year against a normalized $1 29 after adjusting for this prior year gain.
Highlighting our consolidated performance for the nine months year to date, we have delivered revenues of $2 73 billion up from $2 $3 9 billion.
In the prior year period, an increase of 14%, which includes 8% organic growth.
Adjusted EBITDA sits at $249 $2 million with our overall EBITDA margin at nine 1% compared to $243 $8 million and a 10, 2% margin for the prior year period.
And lastly, our adjusted EPS year to date is $3 <unk> down from $3 36.
<unk> reported for the same period last year.
Our adjustments to operating earnings and GAAP EPS in providing adjusted EBITDA and adjusted EPS, respectively are disclosed in this morning's earnings release and are consistent with our approach in prior periods.
I'll now dive further into our third quarter segment results for our two divisions.
At first service residential we generated revenues of $478 6 million, a 13% increase over Q3 2021.
This strong top line performance drove EBITDA of $49 6 million.
A 10% increase year over year.
We incrementally continue to close our year over year margin comparison with the current quarter EBITDA margin, yielding 10, 4% 30 basis points lower than the 10, 7% in last year's Q3.
The margin was influenced by a higher mix of the labor based services that Scott referenced earlier as driving our growth.
<unk> to higher margin and salaries.
Higher margin transfers and disclosures revenue in particular saw a greater than expected year over year decline due to reduced home resale activity compared to the robust levels, we have called out in previous quarters.
We are pleased with our progress and clawing back from a 100 basis point margin gap with improving comparisons sequentially over the past four quarters.
Okay.
Now on to first service brands.
The division generated revenues of 481 $9 million during the current third quarter up 13% versus the prior year period.
Our brands EBITDA was $48 $8 million with a 10, 1% margin down versus $53 million in a 12, 4% margin in last year's third quarter.
Our brands margin decline during Q2 Q3 was due to the combination of continued growth related investments in our restoration operations together with the absence of revenue from any notable weather driven activity versus last year, which benefited from the hurricane Ida and Texas freeze event.
<unk> during the comparable period.
We explained the same margin dilution dynamic in our most recent second quarter call as well and on a sequential basis compared to Q2, our brands margin improved by 80 basis points up from nine 3%.
Now on to our consolidated cash flow, where before working capital we generated $72 million of operating cash flow in line with the prior year.
Working capital requirements during the quarter absorbed all of this cash flow for a couple of reasons, we had timing related tax and payroll payments that were both adverse to our cash flow in the current quarter and compared unfavorably versus the prior year period.
In addition, with Hurricanes Fiona and in landing in the latter half of September our restoration operations incurred meaningful upfront mobilization in preparation costs in advance of those events without realizing any corresponding revenue during the quarter.
As Scott mentioned earlier, our teams are still in the early stages of the damage assessment and remediation planning with our clients and preliminary indications are that we will have a link the backlog tail into 2023.
Although timing is unclear at this juncture, we will ultimately see cash conversion of the working capital investments related to these weather events over future quarters.
Beyond working capital the other leg of investments supporting organic growth is our capital expenditures.
Capex during the quarter came in at $19 million, resulting in $55 million of spending year to date.
We are pacing within our previously said annual target of $85 million and may come in a little lower than that level for the full year.
In terms of our tuck under acquisition program. We have remained steadfastly disciplined with what we are willing to pay for potential targets in the face of aggressive competitive bidders and this has tempered our activity during 2022.
We strive to be prudent and opportunistic with all of our investment dollars, whether deployed for organic growth purposes or towards acquisitions to meet our return on investment expectations.
We did see some modest acquisition activity during the quarter and as Scott touched on we also closed a couple of additional restoration transactions post third quarter.
These tuck <unk> will augment our growth heading into 2023.
Our deal pipeline remains active and we expect to convert an additional opportunities in the coming months.
Our balance sheet at quarter end included net debt of $556 million, resulting in a leverage coming in at one six times net debt to trailing 12 months EBITDA up slightly from one five times in the previous second quarter.
This leverage threshold is very much in line of where our capital structure settled over the past several years and remains conservative and well within our comfort level.
Our liquidity and debt capacity also remains strong with approximately $550 million of total cash on hand, and undrawn availability under our credit facility.
At the end of the third quarter, we also announced new three year senior note facility arrangements with our two long standing lenders Prudential and New York life simultaneously with the issuance of an additional $60 million.
Of 10 year notes with a 453% coupon from New York life.
The financing improved the current balance of our debt mix to a healthy level of one third fixed and two thirds floating.
The facilities also enhance our financial flexibility to incrementally tap into multiple tranches of long term notes in varying amounts over the next three years.
With the uncertain and volatile interest rate environment flexibility in managing our financing costs and diversifying our debt maturities is a key element in maintaining a strong balance sheet.
In terms of our outlook for closing out 2022, our consolidated revenues for the fourth quarter, we will see low double digit to mid teens percentage growth over Q4 2021.
Including the assumption of realizing roughly $70 million of Hurricane work as Scott mentioned.
We expect that Q4 consolidated EBITDA growth should roughly match the topline performance with consolidated margins in line or possibly a little better than the prior year quarter and somewhat dependent on the type of restoration work performed during the period.
After going through budget and strategic planning review processes with each of our operations in the coming weeks.
We will provide a 2023 outlook during our 2022 year end earnings call scheduled for early February .
That concludes our prepared comments operator can you now open up the call to questions. Thank you.
Thank you Sir.
To ask a question you will need to press star one one on your telephone please standby as we compile the Q&A roster.
One moment for our first question.
Our first question will come from Michael <unk> of Scotiabank. Your line is open.
Hey, good morning, guys.
Hi, Michael.
The first question I had was really on the residential piece here just trying to figure out the margin story because it feels to me like there is two major drivers here and I'd like to pull those apart just for the sake of better understanding.
Where margins can land in Q4, and obviously in 2023 for that segment.
On the one hand, it sounds like Youre, raising price and you're having success, there driving better labor recoveries on.
On the other hand, you are calling out unfavorable mix and I'm not sure.
You know what the comps look like for the next coming quarters. So just given those puts and takes.
Do you think the net trend is still positive for that segment for us.
2023.
Hi, Michael Yes, I'll take that.
Continued improvement and we've done it for four quarters and we continue to expect to close the margin gap Best guess is that we will in Q4 match year over year margin performance.
The.
Perhaps a little bit of the shortfall in Q3 and accounting for that as well in Q4, and my and what I, just said would be a significant falloff in transfers and disclosures revenue home resale activity at the lowest level for this quarter in the last 10 years, So it's actually reversed from.
Above average levels over the couple of years during Covid, two well below average levels in this quarter and so that's a mixed dynamic.
And as for the other component in terms of covering up wage inflation deflation, it's a combination of pricing and efficiencies in.
We believe that dynamic at least for now is is largely covered off it was really more of a mixed phenomenon.
Got it helpful. Thank you and then on restoration.
How should we think about the margin improvement there and how it plays out in the medium term again, putting aside the variability from the storm activity.
I guess the way I'm thinking about it does the margin normalization there happened as you complete the investments or is it really just a function of higher revenues higher throughput and scale that will absorb the higher opex investments.
In the absence of any meaningful weather events. This is going to play out over a longer period than the next couple of quarters.
Through 2023 at a minimum.
We're going to be operating at.
Below.
Kind of more like mid single digit margins like we have at Q2 and Q3.
Without any weather the weather events give us operating leverage to perform at a higher level brings in incremental EBITDA at a higher margin level.
When we through the investments, we expect to reap, but thats, a kind of multiyear exercise and I spoke at Q2 that it's analogous to a multi year exercise that we went through with first service residential.
<unk> eight years ago.
Okay Perfect goes for me too thanks.
Thanks, Michael.
Thank you.
One moment please for our next question.
Our next.
<unk> will come from Stephen Macleod of BMO capital Your line is open.
Thank you good morning, guys.
Just wanted to get some color on home improvement.
Strong Q2, again strong Q3, and just curious if you can give a little color around what youre seeing in terms of job leads heading into Q4.
And then maybe more importantly, heading into next year, considering the weaker macro backdrop that we're that we're seeing.
Sure Stephen I mean, I think I mentioned.
Last quarter that leads and bookings have come off in the last several months.
Do still remain at a healthy level.
And.
We have clear visibility through year end and as I mentioned in my prepared comments, we expect to show.
15% revenue growth over.
Q4 that was.
Last year, there was quite quite strong at this point, we believe we will enter 2023 and a similar.
Healthy position with a with a solid backlog.
We'll certainly provide more color and visibility on our year end on our year end call.
It's our intention.
That we will certainly grow in 2023.
It's not likely to be at the same pace as.
As we're seeing this year, we're knocking out some big numbers and.
In home services, but certainly.
We will grow next year.
And even.
With the with the backdrop of this uncertain environment I mean are our perspective in these markets is that they are huge and our share is modest to small even in a downturn. The work will be there and we need to grow up and get it.
Right Okay.
That's great.
And then just turning to acquisitions.
Jeremy mentioned.
He is continuing to be disciplined but you did complete a couple of deals recently a few deals I'm wondering if you can just.
Give some color as to where youre seeing.
The pipeline being most robust and where you'd like to execute if the prices are right.
Well.
Really nothing has changed as Jeremy said the pipeline is.
Is pretty good it's solid.
Certainly in terms of the number of deals we closed.
It slowed in the first six months, but you saw our announcement earlier as Jeremy said, we expect to close a few more this year and we think on balance this year will end up being a decent year.
On the acquisition front.
It's balanced.
We're looking across all our platforms and engaged.
Across all of the platforms restoration continues to be.
Healthy.
As it has been for the last couple of years.
I would expect.
The next year to resemble.
What we've done the last few years.
I don't know if I answered your question completely but.
Yes, no thats.
Great Scott I mean, it sounds like things are tilted towards restoration.
In terms of the end markets unless unless there is other areas that you're interested in too.
It is which it has been for the last few years, but we are engaged.
Across all the platforms.
Great. Okay. That's all I had thank you very much.
Thanks.
Thank you.
One moment for our next question.
Okay.
And our next question will come from Faiza <unk>.
Deutsche Bank your line is open.
Yes, hi, good morning.
I wanted to get your perspective on on the labor market and it sounds like things have eased a little bit from where we were just a few months ago.
But wanted to get your perspective on what Youre seeing in the marketplace now and sort of if you have any prognosis.
We might go as we as we look ahead to 2023.
You said, it's eased a little bit I think that's right on.
Got.
It has eased, but it's been very incremental for us.
Labor availability remains a big big issue.
<unk>.
Not the top priority very close.
At every one of our brands.
Remains most pronounced at the entry level.
Where we still have too many open positions so.
Everybody is on it there's been some improvement through 2022, but it has been it's been slow and I think it is going to remain I think it is going to remain tough.
For the foreseeable future.
Okay. Okay. That's helpful.
And I guess I'm curious you've talked about a little bit of pricing.
Are you at this point.
Have you recovered sort of all of the cost increases that you've been seeing so all of the inflation that you've been seeing or you sort of on a one to one basis at this point or is there still more of a recovery to go in terms of pricing and recovery of cost.
As we look ahead to 2023.
Yeah, I'll start with that and then Jeremy maybe you can you can fill in because there is a difference between our two divisions.
At first service residential.
It is an ongoing exercise.
The.
Price increase baked into our organic growth is sort of between 2% and 3% certainly our costs are up by more than that so we have not recovered at a first service residential.
We're clawing our way back.
Through price increases, but also through efficiencies to Jeremy.
You can fill that out more detail and then we're having much more success on the brand side in terms of.
Pass them through.
The price cost increases.
Jeremy anything you want.
Yes, I think Scott characterized it correctly on the on the brand side a lot easier to pass forward.
Not just in terms of having more pricing power, but their job base. So you don't have to wait for annual contract renewals typically up to typically a quarterly lag.
But absent the investments in first onsite or other businesses home services in first.
Century fire has performed very well on the margin side.
Meaning that pricing is covering off all the inflationary pressures labor and and other material inputs.
And on the resi side again, the outlook to close the gap and.
You have flattish year over year margins by Q4, we're using multiple levers as Scott said the <unk>.
Continuing efforts on pricing, but we need the efficiency angle as well to cover off the fact that cost a little higher than.
And then pricing in that side of the business.
Got it thank you so much.
Thank you.
Again at one moment for our next question.
Our next question will come from Daryl Young of TD Securities. Your line is open.
Hey, good morning, everyone.
Hi, Good morning first question.
First question is around century fire.
50% of the business on the on the monitoring side would be it would be highly resilient on the other 50% could you just give us a little bit of color on the installs.
What end markets would be the key drivers there is the multifamily or is it more and more commercial.
It's it's commercial.
And we include multifamily.
That definition.
All types of.
Rental buildings three story walk ups.
High rise towers.
It also includes.
Distribution warehouses, which remains strong.
Data centers and it really cuts across.
Okay.
Office and retail as well.
Very well.
Our robust right now for us sprinkler installation NLRB installation.
Okay, Great and then second question is also on century fire just looking out a few years.
Rates have been exceptional at century fire is there an investment cycle similar to what's happening in restoration that will need to happen at century fire as you integrate that platform in or are you still a few years away from sort of going through a similar exercise.
No.
It's not as significant of an exercise.
Because the growth has been.
As strong as it's been it's been pay.
Paced over.
I guess.
Seven years now.
So we've been at it.
And we.
We do have a platform that we are integrating our tuck under us into and we've been investing in the last several years, but just.
More modest moderately relative to the.
The significant expenditure we're seeing it.
First on site.
Okay, Great and actually maybe just one last one with respect to first service residential I think the answer is no because you didn't call it out but.
Is there anything we should be aware of in Florida related to the hurricane activity that could be an issue for <unk> residential.
We don't think so I mean.
It's very.
Stressful on our teams.
This whole this whole event.
Because we do manage so many properties that were in the area of the store. So our managers our teams are working.
Greenlee hard.
Yeah.
But these communities still need to be managed in and.
Through this event and so.
There really won't be.
We don't see any impact one way or the other.
Got it alright, that's it for me thanks.
Thanks.
Thank you.
And one moment our next question.
Okay.
Our next question will come from Stephen Sheldon of William Blair. Your line is open.
Hey, Thanks, just one quick one for me and brand.
How concerned are you about weakening consumer sentiment is starting to weigh more on demand in the home improvement businesses. It doesn't sound like it's having any notable impact yet, but do you see that as being much of a risk in the 2023.
Or does the demographic of the customer base that typically serve provide some support.
No I think were.
We see it as a potential risk Steven definitely.
But.
As I said.
Earlier these are huge markets and we have small share.
And we're the largest in all of these targets.
So it's our belief that we can we can grow.
In any environment.
The work is out there and we saw that in <unk>.
Particularly with.
Short of pro painters and floor coverings international and the Great financial crisis, we grew right through it.
Cal Closets was hit a little harder, but we think we're in a better position now than we plan, we think that the lie.
Likely.
Recessionary environment will be different so.
Sure.
We feel good about 'twenty three.
Great. Thank you.
Okay.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone standby as we compile the Q&A roster.
Okay.
And our next question will come from Frank for your question Raymond James Your line is open.
Good morning, guys.
During the previous earnings call you express confidence in closing some tuck in acquisitions and fairly short order and obviously, we see it we saw that earlier this week.
How are you feeling about the pipeline as you exit this year and start looking at next year.
Well, it's I think we have.
Opportunities in our pipeline that will.
We won't close until 2023.
So at this point.
I feel optimistic.
And I think our expectation is that we'll see.
In the coming year, we will see more opportunities.
We have liquidity.
And are in a position to move quickly.
Whereas relative to some of our competitors.
That we've been.
Patients in the last couple of years.
It may be more radish secondly.
And we will interest rate environment that we're going to see that we're seeing today and we will see in 'twenty three so I think we're optimistic.
Great and is the focus still predominantly on building your restoration franchise versus.
<unk> and being remaining opportunistic in other service lines.
I would say, yes, but we do have opportunities.
Really across the board right now.
And so the focus on restoration will be.
We will be coming off as we continue to fill out our footprint.
We're getting to a point.
We're not there yet, but but we'll get to that point, where.
We will have primarily an organic growth engine.
And that's where a lot of this investment is focused.
Jeremy <unk> been describing.
A couple of quarters.
Okay. Another question is on the first service residential 8% organic growth, which.
If you exclude the 3% you got from gaining is right.
Smack with in line with your long term guidance.
How do we think about that going forward and indeed.
Is it <unk>.
Reasonable to assume that the price increases you experience in the quarter could be repeated in the next two or three quarters or I mean, do you expect things to kind of sell back to the long term average target that you have.
No I think the pricing, we've always had some level of price increases, even though even though it was modest so our price increase level is up about a percent.
Or a percent and a half and we expect to continue to see that in the next few quarters.
We did get.
A boost this quarter from.
Amenity management, primarily pool maintenance and repair and work that had been deferred through COVID-19.
We wouldn't expect to see the same kind of boost in the fourth quarter.
Because it's a non seasonal quarter in that business.
But we think will will settle back into the.
And in the mid single digit level.
Going forward.
Thanks I appreciate the clarification, that's all I have thanks.
Thanks.
Thank you.
Again to ask a question. Please press star one on your phone.
Please.
And I'm seeing no further questions in the queue I would now like to turn the conference back to Mr. Scott Patterson for closing remarks.
Thanks, Christian and thank you for joining.
Everyone. We look forward to reporting on our year end in early February .
Have a great rest of your day.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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Okay.
Yes.
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