Q3 2023 Soho House & Co Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by my name is Bob I shouldn't I'll be your conference operator today at this time I would like to welcome everyone to the southern housing cause third quarter 'twenty to 'twenty three results conference call and webcast.
At this time all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply pause just a follow up on the number one on your telephone keypad.
If you'd like to destroy your question. Please press the star followed by the one once again.
Thank you I will now hand, the call over to Thomas Allen, So housing Cos Chief Financial Officer, you May begin your conference.
Okay.
Thank you for joining us today to discuss so watching shows third quarter financial results.
My name is Thomas Allen and I'm, the Chief Financial Officer.
Here with Andrew Carnie, our CEO.
Today's discussion contains forward looking statements that represent our beliefs or expectations about future events. All forward looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward looking statements.
Some of the factors that may cause such differences are described in our SEC filings.
Any forward looking statements represent our views only as of today and we assume no obligation to update any forward looking statements if our views change.
By now you should have access to our third quarter earnings release, which can be found it suraj co dot com in the news and events section.
We have posted our third quarter presentation, which can also be found in the news and events section on our site.
During the call. We also refer to certain non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results reconciliation from the most comparable GAAP measures are available in today's earnings press release, now, let me hand, it over to Andrew.
Thanks, Thomas and good morning, everyone I'm going to start by talking you through the quarters highlights then provide an update on the progress we've made against our strategic priorities. I'll, then hand over to Thomas to talk through the financial performance given up on our balance sheet and our guidance before we move on to Q&A.
Now, let's discuss the quarter.
We're really pleased to be announcing another strong set of results with further growth in membership revenues and profitability.
We are delighted to welcome at 8000 members in the quarter.
285000, and Sad house members that rule a year, when you increase of 21% and a 5% rise quarter on quarter.
Churches. So hasn't came at me. She was also up growing 21% year on year and 3% quarter on quarter.
Weightless continued to grow reaching 98000 up from 95000 in the second quarter, and a 15% increase year on year.
Which again demonstrates the strong appeal of so house globally.
Total revenues grew by 13% year on year to 301 million supported by growth in our recurring membership revenues, which were up 31% year on year and 5% quarter on quarter.
While overall revenue in the quarter was very healthy.
It is also worth calling out that the bad weather, we had through the summer did have an impact on our houses performance.
Particularly given the number that those spaces that we typically get strong traffic across the warmer months.
Our like for like in House revenue compared to 2019 was up mid teens, but excluding weather, we estimate it would have been around 20% and consistent with the second quarter.
[laughter].
We managed expenses well and grew adjusted EBITDA margins by 640 basis points year on year, Despite high inflation.
Which led to Q3, adjusted EBITDA of 42 million with 14% margins at 22 million or <unk>.
208% increase year on year.
These results lead us again to increase the midpoint of our adjusted EBITDA guidance for the year.
We have also delivered positive cash flow from operations in the quarter. After we achieved that milestone in Q2.
Now let me give you an update on the progress, we're making against our two strategic priorities growing and enhancing the value of membership and delivering operational excellence to drive profitability and free cash flow.
As I've said before ensuring the very best member experiences at the heart of what we do and that remains our key focus.
In the quarter, we've continued to rollout new menus and in October we introduced seasonal menu changes at every house simultaneously for the first time.
We refurbished electric has in London during the summer, including a new grille menu sales and member feedback have been very encouraging since we launched.
That's a beach has Malibu had an exceptional summer benefiting from the introduction of our school piece concept.
And despite the weather so have farmers had a great summer benefiting from the high occupancy of the additional cabins, we opened in 2022 and the refresh dining options for our members Paris, Barcelona, and Rome, All show significant growth in performance, partially benefiting from more U K and American members visiting Europe. This summer as well as a natural ramp.
Being up of the very attractive offerings.
In September we opened the doors of Sarah has Mexico City.
First location in Latin America.
Formulate a private residence has since been restored and re imagined. The house includes several baas, including one entirely dedicated to tequila, They shake cases, local and regional brands.
An underground vinyl music room on our largest outdoor pool in North America, which is overlooked by a glass house restaurant.
The house has gotten off to a great start membership demand has been very high and we are well ahead of our typical maturation curve forecast of membership revenue and profits.
We have Sarah has some Paolo and Sarah House, Portland opening around the end of this year.
San Paolo will become our second property in Latin America, and first location in South America.
It's a natural choice given the city's created fears of architecture music and contemporary art.
Located on one of the city's principal streets came to some of the most influential cultural institutions, such as the San Paolo Museum of Art.
<unk> is situated within the C that matter outside project one of San Paolo is Ms significant heritage site Redevelopments.
The house will honor and share Brazilian culture and includes Sage six bedrooms, Jim Spa rooftop pool, and bar with multiple restaurants and clubs spaces.
So it has Portland is our first house in the Pacific Northwest and we let them within the historic Troy laundry building in the city's central East side neighborhood.
The household features two storey Jim we've talked to the mushroom a music room and dedicated working spaces for our members.
We've been part of Poland's creative community is now over six years hosting public events and programming without cities that houses members.
We feel confident on both these houses membership potential.
With these openings are total new houses since 2018, which is 26 given his 44 houses globally. This will enable us to continue to drive strong membership revenues and adjusted EBITDA growth with earnings today, we are raising our membership target to over 192000 members by year end.
And setting a target for over 210000 members at the end of 2024.
Turning to our second strategic priority operational excellence.
As you know our strategy is centered on three things.
First leveraging data remember insights operate and scale efficiently.
Second expanding in house margins third having operational discipline as we grow.
It's been another strong period of progress here, allowing us to achieve our second consecutive quarter of positive cash flow from operations.
Whilst delivering adjusted EBITDA of $42 million more than double versus 'twenty 'twenty to Q3.
At a time of continued pay inflation, we've continued to control wages well with wages as a percentage of revenues improving by approximately 300 basis points versus last year.
In house F&B margins continued to be strong up 230 basis points versus Q3, 19, and our like for like basis.
We've continued to deliver on driving higher occupancy and ADR, leading to revpar, increasing 6% year over year, that's a like for like properties.
31% versus third quarter of 2019.
Combined with higher membership revenues. These results drove house level contribution margins up 750 basis points year over year.
But the revenues performed very well with a beach club concept scope is having a great season, and mykonos with revenues growing well over 2022. Despite what we hear was a tough year for most of the properties in the market.
We are excited to be opening two large school passes in the next 12 to 18 months in Belgium and to lump. These properties will be similar to the original mykonos property with a large club a dining areas as well as ritual spaces, but we will also be adding bedrooms for the first time.
We will also be adding a fourth Ned in Washington D. C. In the same time period.
Lastly, I'm delighted to announce the promotion of tumbling as our new Chief operating officer.
Thomas spent the last 10 years, So house and most recently as managing director of U K Europe and Asia.
As we've discussed the past few quarters. These regions have really stood out in terms of delivering the change initiatives that we've been focused on and driving our improved results. Tom has been instrumental in this I'm thrilled to be giving him a broader role.
Now, let me pass on to Thomas to give you more detail on the numbers and our updated guidance.
Thanks, Andrew.
Total revenues for the third quarter grew 13% year on year to $301 million or 8% on a constant currency basis.
Membership in house, and other revenues rose, 31%, 6% and 7% year on year, respectively, or 27, 2% and 1% on a constant currency basis.
How several contribution increased 62% year on year with how several margins up approximately 750 basis points to 26, 5%.
Are their contribution was up 42% with a margin climbing approximately 650 basis points to 27, 5%, giving more details on revenue. We saw continued strong revenue growth year over year, increasing revenues by $35 million.
This is despite what we estimate to be around $5 million negative impact from weather highly.
Highlighting some more weather stats between New York L. A in London, our three largest markets ran far more than doubled year over year in the third quarter up 130%.
For a business that has a lot of outdoor space that has a real impact.
Membership growth and pricing drove a $22 million increase in membership revenues.
Good training in our houses, especially in the UK and Europe led to a $7 million increase in house revenues with stronger growth offset by weather.
And other revenues were up $6 million we.
We saw strong growth at Scorpius and design development and so our home sales offset by lower public restaurant sales, partially driven by closures.
Our third quarter, adjusted EBITDA was $42 million up $22 million year on year as we benefit from the profitability initiatives, we have outlined and continued membership and revenue growth.
We did benefit from $2 million of noncash rent moving from <unk> to <unk>, but even excluding our adjusted EBITDA for the quarter beat consensus and $38 million.
Now discussing our balance sheet, we ended the quarter with $163 million of cash and cash equivalents.
$607 million of net debt.
Supporting our cash position regenerated $42 million and adjusted EBITDA during the third quarter net of $1 million of noncash write off.
Offsetting we had approximately $8 million of cash interest expense too.
$2 million of cash taxes, and $22 million of net capex on the financing side, we repurchased $12 million of stock in the quarter at $6 a share moving to guidance for fiscal 2020 three.
We are raising our guidance for total <unk> members to now exceed 192000 at year and benefiting from the very strong demand we saw in the third quarter, including Mexico City outperformance.
On total membership revenues, we have narrowed the range from 360 to 367 million to 361 to 366 million on total revenues, we have narrowed the range and lowered the midpoint slightly now expecting 1.13 to 116 billion.
As we have discussed third quarter revenues were hurt by the wet summer weather.
The temporary closing of our house in Tel Aviv.
So it impacts our prior expectations and our adjusted EBITDA strong cost control and continued progress on our profitability initiatives I mean, we're raising the midpoint of our guidance moving from a range of $126 million to $134 million to $130 million to $135 million.
We have factored in Tel Aviv impacting our adjusted EBITDA guidance by about $2 million.
For 2024, we believe it's too early to give operating guidance.
However, we have clear visibility into our membership growth, which we expect several houses past 210000 members by yard.
The majority of this growth will come from the house that have opened since 2018 that are still in their ramp phase.
We have been prudent about our expectations for new houses, which while we still expect to be between 5% to seven next year remains uncertain given the development backdrop.
Thanks, Thomas it's been another strong quarter for the business with good growth in membership and revenues underpinned by a record waitlist.
Our operational excellence initiatives continue to drive profitability and adjusted EBITDA was ahead of expectations for the fourth quarter antibody, helping us raise the midpoint of our EBITDA guidance range again.
We continue to make great progress in our cash flow as we ramp with cash flow from operations and remain disciplined on Capex, which will continue in 2024.
We remain focused on delivering for our members and further driving membership value. We are more confident than ever on growth opportunities ahead for <unk> House and K.
I'd like to take this opportunity to thank all our teams around the world for their hard work and dedication in the quarter.
And with that we'll now open to questions. Operator, we can take the first question. Please as a reminder, you can eat the actual questions over the phone or submit them over the webcast.
Thank you at this time I would like to remind our teleconference participants in order to ask a teleconference question. Please press the star followed by the number one on your telephone keypad.
Our first question comes from the line of Sharon Zackfia from William Blair. Please go ahead with your question.
Hi, good morning.
Just a question on profitability because it has been.
Much better than expected at least relative to my expectations on the house level.
Also on the other contravenes Shannon.
It looks like Youll, Adam this year I had a kind of your goal, which I think it was 11% adjusted EBITDA margin I don't think there'll be adapted to that so how does that well how do we think about the <unk>.
What you can leverage on an ongoing basis.
You've had a lot of expansion year over year evaluation and coming out of that dynamic.
Looks like on a normal run rate of annualized margin expansion that you guys kind of target internally.
Hey, Sarah and good morning.
So we're really pleased with the margin performance. We are seeing this year, obviously, we set out at the end of last year Q2 strategic priorities widened growing ahead.
Membership and then two operational plans to drive greater profitability.
And we're delivering on both of those.
We think about.
The margin growth in the future, we have a medium to long term target.
15.
<unk> EBITDA margins.
We're not committing to when we will achieve that target, but we definitely expect to continue to improve margin next year.
And on a go forward basis.
Yeah.
Thanks for that I guess on the house level in <unk> on a consolidated basis, even kind of the mid twenties all year now you're bumping up on the high Twenty's.
Oh, you are more mature houses how high can those half of our margins actually get.
Okay.
Hey, Sharon.
Higher for sure.
Thomas said on his prepared comments, we have a lot of houses they have been since 2018.
Needed 26, that's what you're.
<unk> ramp up and they hit the maturity cash where we continue to increase our membership we can control our costs. We delivered great member experience, we improve our margins, that's where we're going to really see a ramp up.
<unk> contribution say Thats, what Youll see you're also seeing us.
Execute really well I would say.
I think we've improved significantly over the last year on how we run our houses and balancing delivering a great member experience, whilst improving those margins.
Thanks, and then last question for me you explain well what was going on within health revenues, but just curious if youre seeing any kind of pullback at all in the U S for humor. Thanks.
No.
We had a really good quarter.
We are a membership club.
B.
And we've raised our membership guidance today.
And we've also provided 20 full guidance on that ship. So that shows the strength of our business and thats across all regions and Thats, who we are what set of apps for membership club.
We had some lumps and bumps in the quarter you wouldn't believe the weather patterns that we've seen.
<unk> got all sorts of staff that we can talk about whether we also had entertainment strikes.
West Coast houses.
The good news is our shortfall in our revenues a bounce back in October, but what we are seeing in key so we feel good about that and I. Just think again I think one of the messages we want Aladdin today, well I'm really pleased with is we did have lumps and bumps in the quarter that we call managed companies or whether what you heard on the call is we improved.
<unk> experience we.
We doubled our profit so that for me.
<unk> shows that we're operating really well when things get thrown at us and careful with like weather and strikes.
Okay. Thank you.
Thank you. Our next question comes from the line of Shaun Kelley from Bank of America. Please go ahead with your question.
Okay.
Hi, Good morning, everybody. Thank you for taking my questions.
Andrew I wanted to pick up on that last point and I. Appreciate there's a lot going on here, but could you just give us.
Untack the sort of behavior that you saw a little bit on the consumer side.
Covers our visits or how you look at it and then Tom as I'm sure you've adjusted for your best shot at weather So Eddie.
If we kind of.
Look through all the noise just how you think like for like number spending proceeded as we move through the quarter and maybe most importantly, how does October feel.
So great question. So if you think about warehouses, we have a lot of houses a lot of grief and tool set that's our peak season predominately in July and August across all our major I would say the three big cities, La London, and New York.
The impact at all when we're having to close if I think of New York Dumbo and also have deal because of the Canadian <unk> about 50% at the time period.
That amendment just spend less what we've seen which is that we're excited about as we rolled out new menus.
We rolled out for the first time. It was 42 houses at the end of September we've improved member experience in the houses we spent a lot of time on that.
Like for like now back.
In October back to where we saw them in Q2, some members spend <unk> come back, which is which showed that the team is doing great Joe.
On delivering our member experience and the houses.
Yes, Shaun look I'll just echo what Andrew said is that when we look at October both visitation and spend per visitor trends have gone back to what we're seeing in the second quarter.
The third quarter.
Third quarter. They are just just the fact that they are allowed the first tropical storm in 84 years in California.
That's on a weekend not exactly what you want to see.
We have the Iranian July since 2009 in the U K.
So things like that obviously.
The impact of our performance on the topline, but we're able to control costs really well and deliver bottom line.
Great Great. Thank you for the color and then on.
Second question would just be.
As we think about your comment Thomas R&D financing environment as you start to look forward to openings in 2024.
Can you just comment a little bit more on maybe what you are seeing from possible partners and then what that could impact or what we should expect in terms of timeline for some of those openings. If they do end up skewing a little bit more towards the second half just maybe help us think about remember cadence or member growth cadence just so we.
Kind of account for that if you will.
Great question so.
Where membership club and we all I mentioned numbers say the most important metric for US even ahead of opening new houses achieve.
Achieving our goals so we feel super confident our membership in a development it's tough.
High interest rates high inflation. The good news is we have great partners in development.
We've got I think we've got the USP. It's a house that we are very very attractive to our partners and we have a lot of partners wanting to open new houses with it we have great tens, which highly attractive and we've got a really strong pipeline for the next three to five years that we're super excited about.
So we're not changing our guidance to $5 seven just yet we've moved to Mexico City, we've got some pattern Portland coming at the end of the year. They are three large amazing houses that's going to really add to our <unk>.
Membership.
What we did when we open houses, especially new regions like Mexico City, and some patents we had fantastic new members.
So at the moment like I said on the last call. We're very confident on achieving our membership goals and we will continue to open new houses, we delight our members, but for sure. There's some lumps and bumps, but I think we can.
Did the MAU and make sure that we deliver great houses over the next three to five years.
Great and last question, if I could sneak one more in would be just retention.
We've talked about this in a while and I don't know if there was a stat in the deck, it's still I might have missed it but.
Can you just give us kind of the latest on member retention either percentage or direction that'd be helpful. Thank you.
Great you managed to get three questions in here.
Two question I like it.
Retention.
Retention remains really strong it's one of our key metrics driving our recurring membership revenues.
As we've previously highlighted our retention dropped a bit in 'twenty one levels.
Still got highest retention we've had for the last seven years, we continued to focus on it it's actually slightly improving which is a nice trend to see again.
And.
It just shows the strength of what we're delivering for our members in our clubs. So at the moment, we feel really good about member retention, Sean Let me just add so and 2020. One we had 95 bps advertise generally is the highest level that we've been at in the prior seven years.
25, Q it dropped a bit to 93, 4% 21, we benefited from.
Just turning back post COVID-19.
So they were less likely to.
Joe.
The other thing that is.
Just looking at total number has changed.
We have a lot more new members than we've ever had before and if you look at our kind of attach incur the longer term algorithm more likely here to stay.
On an absolute basis that would bring the number down but.
If you look at it by cohort continues to be very very strong.
Yes, we disclosed that.
Patrick.
End of the year our 10-K.
Super Thank you everyone.
Thank you. Our next question comes from the line of Stephens accounting from Citi. Please go ahead with your question.
Great. Thanks, very much for taking my question.
I had a brief follow up on the questions around.
The quarterly performance as in House did you quantify I may have missed it the Tel Aviv revenue impact I heard it on EBITDA, but just on revenue and then.
The question I had just following up on the commentary about development being a bit tougher if you were to see that.
The growth profile dropped to more like four openings per year, what's the implications for the EBITDA margin at the best.
That slowed the potential for EBITDA margins to grow do you feel like you still have enough within your power to improve.
How you run houses just talk through that please.
Yes, well, let me start with the second part of the question.
<unk>.
If we lowered our house openings it wouldn't have an impact on our membership growth and thats. The most important thing.
Greg memberships it wouldn't impact our membership growth it wouldn't impact our membership revenue because we've got so many new houses that we've opened over the last three years.
Our EBITDA would actually go up.
Because as you know and we've talked a lot about this with you already when we open house for the most part the first year, we make a negative impact as well as the membership ramps.
So.
What you would see is EBITDA enhancement.
But no real effect on membership revenues. So we would actually improve our margins if that was the case that we dropped to less houses each year.
And then Dave on the Tel Aviv question, So as we said right.
I expect about $2 million EBITDA impact versus our prior expectations.
All of that will obviously be in the fourth quarter on the revenue side, it'll be a little bit higher.
But not meaningfully higher.
We're continuing to pay.
<unk>.
From the house, but we have.
Yes.
Hey.
We've allowed our.
Existing television members, they're all free membership, we're not charging them.
So that obviously has an impact.
Yes understood.
Can we shift to pricing and thinking about membership pricing as you look to 2024.
This year you implemented the different architecture with existing members versus new members different pricing growth. How do you think about that for next year.
We're still working through on pricing.
So I think we don't want to disclose what we're thinking about our membership pricing I'm going to give you a short answer on that.
<unk> is to always deliver value for members.
Every opportunity so we're still working through that at the moment.
Okay fair enough. Thanks, very much best of luck in the fourth quarter.
Thank you. Our next question comes from the line of J P volume from Ross and Kim. Please go ahead with your question.
Good morning, and thanks for taking the questions.
Maybe maybe kind of following up on one of Sharon's questions about when we think about kind of the in house contribution margin.
I know you've pointed out for a couple of quarters now some some meaningful improvement on the F&B side.
And I'm just kind of curious where are we in terms of improving the food and Bev margin and then as we think about really kind of the legacy houses the ones that arent, having this huge member ramp.
What's kind of the next step for improving.
Gross contribution margin there. Thank you.
Yes.
Great question.
So we have been in a very high inflationary periods over the past two years in particular in the UK and the UK was running double digit for most of last year.
I think the team has done a terrific job on improving margins in that environment and we did a lot of work on our supply chain a lot of work on efficiencies.
Just shopping.
Those elements, that's why we can grow our margins we feel confident that we can continue to grow our margins.
Across all our regions through being brilliant curious fantastic operators and as inflation drops, which if you read the reports last week in the UK is now dropping we will benefit from that so we are very confident in our margin performance and improvement going into 2024.
And then just a second question as power, we're going to keep on improving margins that are more mature houses.
It's all about operational lifeline cell right.
Yes.
As we've talked about over the past few calls we're offering new things for our members were during seasonal menu rotation, which we haven't done that.
Yes.
We're serving our members more to understand what they really want and thereby giving our members about our offering.
Drive higher spend per visit.
Yes.
And that does drive higher profitability.
Okay, Yes.
That's very helpful. And then I will just squeeze two others.
Frozen members number.
You can point out there.
And then just the stock buyback.
Any kind of capital allocation thoughts that would be highly appreciate it thanks guys.
Yes, just on frozen frozen managers, just normalizing it continued to normalize we are still below pre COVID-19 levels is just it's.
It's just part of our business with Super flexible with members. Most of offers that members are moving Cte changing lifestyle, having children. It's just say I wouldn't worry about PRASM members Hs Paul.
Our business and its still below what we used to see pre COVID-19.
Then.
Turning to capital allocation.
As you'll see average we've talked about in the past.
A few quarters, we have now had positive cash flow from operations.
And we expect that to continue in the fourth quarter.
Our priority is to invest back into the business given the long term growth opportunities, we see rates are out.
Next year, we're also investing in opening two new to shore bases, which we talked about on the call. We feel even more confident that barring how good scrubber has been conducted as results were this summer. We also like to have a healthy cash position.
<unk> bolster our financial flexibility.
And so.
Investing in the business and also reducing leverage our main priorities.
Buyback buyback or not our top priority.
When we see opportunities, we have the balance sheet to be flexible and to our buyback in the quarter were at a discount to where the stock was trading and so we thought of as a good opportunity.
Understood. Thanks for your time and best of luck moving forward.
Thank you.
Our next question comes from the line of Stephen gambling from Morgan Stanley. Please go ahead with your question.
Grambling RASM gambling.
Quick question on.
One of the comments you made about earlier.
A greater percentage of new customers new members versus history is there any specifics you can provide around what that mix looks like now versus where it's been and then also just any color on what spending looks like for new customers in house versus folks who are maybe.
Several year again to their membership.
Hey, Steve.
So I don't have the stat percentage of new members versus.
Versus legacy but.
You can back into it.
<unk>.
Based off of our earnings presentation, we gave net paying members by cohort to house and so that can help you right now we just given that number but that can kind of give you a guide.
In terms of spend per fan.
Per member based on their lifecycle.
It's pretty consistent.
<unk> edge can have can have a factor so.
The old our member and that typically the more they spend.
But based off of the lifecycle.
Yes.
Consistent.
On a per visit site side.
<unk>.
And then maybe a higher level question do you target a certain level of in house spend per person as youre thinking about it and do you view that as a sign of the health of the consumer or the health of the membership or other your efforts to be more profitable potentially going to impact spend in house.
As we look out next year and over the next couple of years.
Yeah, So I would say.
It's probably one of our biggest initiatives is increasing member spend average check value I think you'll hear a lot more about that from us over the next 12 to 18 months.
We've got a whole heap of initiatives around.
Delighting our members more we know our members better than ever before we are much more sophisticated in how we treat our members.
Which then will lead to drive our members to our houses or when they were in the house to actually spend a little bit more with us.
So it's a combination of us being inspired by our data understanding.
Understanding what our members want more from us, giving it to our members in the right way and that's going to drive member spend so we do have managed spend goals for short.
And we'll probably talk a lot more about that on our March earnings because it'll be youll see its going to be quite a big strategic initiative for us.
Look forward to it thank you.
Thank you there are no further questions at this time Thomas Allen I'll turn the call back over to you.
Thank you Bob So I'd just like to thank everyone for joining the call and we look forward to catching up with you again soon thank you.
Thank you. This does conclude today's conference call. Thank you for participating and you may now disconnect.
Okay.
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