GulfMark Offshore, Inc. F4Q08 (Qtr End 12/31/08) Earnings Call Transcript

Feb.23.09 | About: GulfMark Offshore, (GLF)

GulfMark Offshore, Inc. (NYSE:GLF)

F4Q08 Earnings Call

February 23, 2009 9:00 am ET

Executives

David Butters – Chairman of the Board

Ed Guthrie – Executive Vice President & CFO

Quintin Kneen – Chief Financial Officer, Senior Vice President - Finance and Administration

Bruce Streeter – President, Chief Executive Officer, Director

Analysts

James West – Barclays Capital

Michael Ainge – TIAA-CREF

Pierre Conner – Capital One Southcoast

Brad Cragin – Eastbrook Capital

Operator

(Operator Instructions) I would like to welcome everyone to the GulfMark Offshore Fourth Quarter Earnings Conference Call. It is my pleasure to turn the conference over the Chairman of the Board, Mr. David Butters.

David Butters

Welcome everyone to GulfMark Offshore’s Fourth Quarter 2008 Earnings Conference Call. This morning I hope we can dispel some of the fear and uncertainty surrounding the markets in general and the offshore supply market in particular. Our fourth quarter results, as you know, have been good, if not great and we have a fair degree of confidence of the results that we will be showing for the full year 2009.

To that end we have this morning Ed Guthrie and Quintin Kneen who will cover the financial aspects of our performance in the fourth quarter and Bruce Streeter will then come on and talk about the markets in general and our performance and outlook.

Ed, why don’t you take it from here.

Ed Guthrie

First of all I’d like to dispense with the formalities of the forward looking statement. This conference call will include comments which are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors. These risks are more fully disclosed in our filings with the SEC. The forward looking statements by myself, Quintin, Bruce and David on this conference call should not therefore be regarded as representations that the projected outcomes can or will be achieved.

Having dispensed with the formalities one of the things we normally focus on is sequential quarter to quarter performance but I think there are a few things that we need to point out with respect to the year before we get into the normal analysis. We did achieve record EPS of $7.56 for the year that’s excluding our vessel sales that amounted to $6.13 way above our previous record earnings per share.

Despite the divestiture of five older vessels throughout 2008 the owned fleet grew 51% in the year from 47 vessels to 71 vessels through the addition of seven new build deliveries and the 22 Gulf of Mexico vessels acquired at mid year. The recent acquisition at mid year provided approximately one third of the operating income in the second half of the year and is to continue to provide solid results.

Moving on to the quarter, as we indicated in the press release, several records were established in the fourth quarter. Again, earnings per share of $2.35 or $1.72 excluding our vessel sales were achieved. Utilization in the quarter in both the North Sea of 96.8% and Southeast Asia of 99.2% established new records in part due to lower drydock activity but primarily due to solid contract color resulting from turned contracts.

The operating margin in the fourth quarter of 47% exceeded all previous quarters in the year despite a slight fall off in revenue. Comparisons of the fourth quarter of 2008 to the same quarter of 2007 are highlighted in the press release and will be further detailed in our 10-K which will be filed later this week.

With that I’ll then compare the results revenue for the quarter was down slightly $2.7 million or 2.2%. As noted in the press release the Americas region was up some $4.2 million or 9.4% while both the North Sea and Southeast Asia were down a combined $6.9 million with most of the decrease coming from the North Sea. The Americas was up due primarily to the added new vessels that were delivered in the quarter and higher utilization.

The North Sea decrease was the result of a number of factors. The day rates were actually higher in the quarter in the currencies in which they were earned, before the impact of FX. The dollar strengthened as we indicated against both the Pound and the Kroner and the result would have been approximately a day rate of $25,600 before currency effects versus $21,200 roughly after currency effects. The result of that decrease was about $9 million which was directly attributable to the currency, the strengthening of the dollar versus the pound and the kroner.

Utilization actually improved to record levels and contributed $4 million of increased revenue primarily as a result of both of the anchor handlers that went to West Africa attaining virtually 100% utilization in the fourth quarter versus much lower utilization in the third quarter. The balance of the fall off in the North Sea revenue was due to lost revenue from the sale of the vessel that occurred early in the quarter.

Southeast Asia was down just slightly $0.7 million to $20.4 million in revenue. The primary reason there was a loss in revenue from the sale of one vessel in the quarter and the full impact of a vessel that was sold in the third quarter, partially offsetting were the impacts of higher day rates and improved utilization. Bruce will talk more later about sector day rates in his portion of the presentation.

Our operating costs of $39.8 million were down some $6.6 million. Lower operating and repair costs coupled with the positive effects of the currency movement in the quarter accounted for $5.5 million of that decrease. Bareboat fees also decreased some $2 million during the quarter from the third to the fourth quarter, partially offsetting was the cost of the newly delivered vessels of $0.9 million so roughly a $40 million operating cost run rate.

Drydock expense in the quarter was down some $2 million from the third quarter to $1.5 million as drydock days decreased from 229 from 88 in the third quarter. We completed 18 drydocks for the year, one less then in 2007. Quintin will talk more later about the drydocks.

G&A at $10.9 million as a percent of revenue was still in the 9% range and essentially was unchanged from the quarter and within the estimates that we provided in the third quarter call. Depreciation expense was actually down in the quarter $0.9 million and that was virtually due to the favorable impact of currency on depreciation expense. Operating income then of $73.1 million is the highest in the company’s history. It included vessel sales of $16.1 million from the sale of the North Fortune in the quarter as we had indicated in the previous third quarter call.

When we look at the currency impact you remember we talked about a $9 million hit on the revenue line but of course it also affects both operating costs, depreciation and G&A so the net impact on the fourth quarter versus the third quarter was about $0.21 or roughly $5 million. It will be difficult, as always, to predict exactly what’s going to happen to currency going forward but I think it’s always helpful to have the net effect on the operating income line.

Our interest expense of $7 million was $1.9 million higher during the fourth quarter then the third quarter and is primarily due to a reduction in capitalized interest as new vessels delivered during the third quarter and the new build progress payments were minimal in the fourth quarter. Our interest income was essentially unchanged and our other was actually had a swing of almost $3 million.

If you remember correctly at the third quarter we had a settlement on a tax claim in Brazil which accounted for the majority, almost $2.4 million in the third quarter as income. The swing was almost $3 million and that was related primarily to currency effects in the fourth quarter.

Our tax expense and rate in the fourth quarter was slightly above the 9% rather then we had estimated for the fourth quarter. This was due primarily to increased earnings from higher rate jurisdictions and the provision for taxes at statutory rates for some income that could potentially fall outside of the tarnish tax. Our ongoing rate is still expected to be about 10% to 12% depending upon the mix of income from higher versus lower rate jurisdictions.

That fairly well wraps up the actual results and I’ll now turn the call over to Quintin to discuss in more detail the drydock program, CapEx, our financial position, tax structure and contract cover.

Quintin Kneen

As Ed indicated we had 29 drydock days for the quarter and drydock expense for the quarter was approximately $1.5 million. Those amounts are lighter then our quarterly average we have anticipated doing three drydocks for Q4 and we ended up performing two. For the year we performed 18 drydocks that resulted in 368 drydock days. These were done for a total cost of $11.3 million.

In Q1 we are estimating that we will have five drydockings, three in the North Sea and two in Southeast Asia. We expect that they will result in 92 drydock days and cost approximately $3.5 million. We are currently estimating that we will perform 22 drydock days for the entire year of 2009 and that they will result in approximately 450 drydock days and will cost approximately $20 million.

Capital expenditures for the quarter totaled $15.5 million that represents primarily the ongoing progress payments under our new build program. We took delivery of one vessel in the fourth quarter the Mako that we mentioned on the Q3 call and we took delivery the Swordfish just last week. The Swordfish is a 176 foot crew boat. Both of these vessels will be operating in the America’s operating segment.

As of year end, we had 12 vessels still under construction. We expect to deliver six in 2009 and six in 2010. For the five remaining vessels we expect to deliver in 2009 we anticipate one more delivery in Q1, two in Q2, one in Q3 and one in Q4. Estimated capital expenditure requirements for the new build program in 2009 is approximately $111 million. The capital requirement in 2009 for the new build program is estimated to be approximately $57 million and that would complete the requirements under the current new build program.

Interest expense during 2009 is expected to be approximately $25 million. Required principal payments pertaining primarily to the amortization of the senior facility total approximately $20 million. Cash on hand today is approximately $111 million and cash on hand at year end was $100.8 million. We anticipate that the capital expenditure requirements and the debt service requirements that I just spoke of will be satisfied through cash on hand and cash from operations in 2009.

All totaled, net debt decreased by $67 million since September 30, combined with $90 million of repayments we made during the third quarter our cash generation is on track with the aggressive pace we set for ourselves to be able to pay off the debt resulting from the acquisition of Rigdon Marine by the end of 2010.

You will notice that we did not make any significant repayments on our revolving credit facility during the fourth quarter. Instead, we elected to build cash. I expect that we will begin to repay the revolver again during the second quarter. It is certainly not my or our desire to hold unnecessary amounts of cash we just felt that given the turmoil in the credit markets that holding cash was the best alternative over the past few months.

At year end, the senior notes represented $159.6 million of our outstanding indebtedness and there is $84.3 million outstanding under our $175 million revolving credit facility. The outstanding balance on the senior facility if $153 million and the subordinated facility outstanding balance remains at $85 million. Total outstanding indebtedness is therefore $481.9 million and net of cash the balance at year end was $381.1 million.

Overall contract cover for 2009 stands currently at 65%, that’s a decrease from what the 2008 outlook was at this time last year. A major component of the decrease results from our entry into the US Gulf of Mexico market, typical contract rate in the Gulf of Mexico market is much lower then in other areas of the world such as the North Sea. Consequently you will notice the significant decrease in the contract cover for our Americas operating segment.

Nonetheless, even after adjusting for the impact of our entry into the Gulf of Mexico overall contract cover is down. That said, it’s still over the opening year levels that we had in 2007 and 2006. Two thousand eight was just an extremely good year in terms of forward visibility not surprisingly forward visibility has diminished somewhat over the past six months.

With that I will transfer the call over to Bruce to give more detail on current market conditions and more perspective on our plans for 2009.

Bruce Streeter

I’m sure most everybody is interested in our forward outlook and I suspect that they passed quickly over what we did and what we accomplished in 2008, but 2008 is important for a number of reasons. Pparticularly 2008 gave us the opportunity to expand in our market range adding the Gulf of Mexico and it also gave us the opportunity to build cash, build and protect balance sheet, at the same time that we expanded our customer base and we expanded our capacity and ability to generate cash as we move forward.

There is no question that 2009 provides a difficult economic scenario and that everyone today faces and that there is no way that a weak oil price does not impact our business. However, we have, and continue to build a strong company with a correspondingly strong balance sheet and a modern forward directed fleet built to sustain us through weak periods and able to lift results in strong markets as they develop. We demonstrated that with the outstanding results in 2008.

Our focus has always been on establishing long term relationships and reliable contract coverage. This often means that we miss the high points and generally the low points in markets. Thus looking ahead at 2009 if there is pressure on rates we would hope it is less so on us then on others. Today we have strong contract coverage. Our forward contract position is to some extent dependent on options being taken but less so today then is recent times. We view our customer base as strong as our fleet is expanded that customer base is expanded as well.

Obviously, as you can see from the results we have a strong focus on cost and a belief in evaluating how and when it is best to make expenditures. You can see that in the fourth quarter we benefited on the cost side from currency in certain locations but the cost control in areas where our effective currency is the dollar shows the effort and the overall benefit. You cannot wait for tough times you must make cost discipline an ongoing part of operations.

Both Ed, and to some extent Quintin, highlighted the impact of selling the older less capable ships which allowed us to reinvest the money in the future. You have seen the gains on sale but in most cases I’m sure you’ve glossed over those and moved ahead.

In reality, the decision to sell vessels, especially in strong markets means that you give up near term earnings for future benefit. We have done that and this has allowed us to purchase vessels timely when pricing was right, allowing us to have vessels that cost less then competitive units purchased later in the cycle. Couple pricing with operating efficiency, a strong interest in safety culture and the result is we can be competitive in a tough environment.

We’ve said we have good equipment, a strong cost control practice and a very effective safety culture. Even with all of that we’re not in the best of economic times. We have seen the price of oil fall dramatically. Some customers will have concerns about creditors, others will have difficulty with viability of specific projects at today’s prices and everyone wants to know when the recovery in oil price will come. It may come quicker then one expects it may be a long way off.

Clearly it is not coming in the next quarter or two so our strategy is to build cash, protect the balance sheet, maintain contract position, improve vessel and fleet characteristics and be prepared as and when improved opportunities and dynamics develop. Strong contract cover gives us a head start on that concept. We have now built the cash on hand to a point where it is above $100 million. Our CapEx requirements are reduced from previous years and our view is that we can maintain a high cash balance while paying for CapEx and to some extent reducing debt.

The first quarter of each year tends to be our weakest. This year the short term market is the US Gulf and the spot market in the North Sea are weak. To some extent that is seasonal and normal but the weakness is surely exacerbated by economic and oil price concerns. With a strong balance sheet we can afford to continue our normal practice of accelerating drydocks into the first quarter. This year we currently have five vessels schedules but based on the drydock plan, unless we move up further units this will be an average quarter.

Two ships have completed DP upgrades so far this quarter and one more is scheduled to finish before the end of the quarter. We mobilized two vessels back to the North Sea at contract end at our cost and we have had three vessels that lost significant time for maintenance and repair during the first quarter. Additionally we are discussing further vessel sales which could result in fewer vessel days available for charter. The intent is to use the first quarter to set up the forward quarter and we are doing it at a time when revenue pricing is working against us.

However, the bulk of our business continues to be based on term contracts and we do not generally see the wide gyrations in vessel pricing the analysts have referred to. Most of the pricing we look at is based on spot market results and those tend to be much wider and much different then what actual term contracts generate.

As an example, we have vessels trading in short term in Asia but not many and we have the first two of the capital anchor handlers delivering over the next two quarters in Asia. In both cases we expect those vessels to go on term contract at or shortly after delivery. Overall we have seen no real change in pricing for our equipment in Asia.

In the North Sea our spot exposure will from three owned vessels at various times during the quarter and one managed pool vessel. However, two of the drydocks, two of the DP upgrades, the two mobilizations and one of the vessels doing extended maintenance were in this group of vessels that will be at some point in time in the spot market. Thus, while we do have spot market exposure it is not at the level that one might expect.

The rest of the vessels continue to be on term contracts under rate structures that have been developed over a long period of time and we expect reasonable stability in that marketplace. In the Gulf of Mexico the crew boats tend to roll over fairly quickly and we do have two of the GPA 654 class in the short term or spot environment. Once again, the majority of our vessels are trading term contracts, stable relationships with good customers.

In Brazil our next rollover is not until the second quarter. While we do have short term market exposure in some parts of the world and some level of risk on existing contracts our base line cash flow is strong. Our development continues and 2009 is unlikely to set any records, it is not going to stop us from building more valuable company as we move forward.

Our presentations for a number of years have focused on the growth of our fleet, providing much of the increase in earnings potential. The new vessels added tend to bring the majority of increased earnings year over year. That continues in 2009, we will have the full year benefit of the GulfMark Americas vessel and the new build vessels that were delivered in 2009.

This year we continue to add vessels with the two anchor handlers in Asia that I have already spoken of, three crew boats we’ll deliver in the Gulf, completing the rigged and construction plan. One of those vessels has now delivered and will be in the market shortly and the other two will be added over the course of the summer.

Late in the year we will add two PSVs, new vessels offset by any further vessel sales will continue to be an integral part of our earnings growth. Two thousand eight was a great year. No one expect the same for 2009. However, if we are realistic and if we understand our potential we can do as well or better than anyone expects over the course of this year. We’ll be better positioned to quickly take advantage of market improvement. Our view is that you do not create a company for the short term and those that understand the best our development will benefit the most.

At this point we’re ready to turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James West – Barclays Capital

James West – Barclays Capital

In the past I believe you’ve given a number on your conference calls, you called it vessel EBITDA and this would be the EBITDA or the cash flow associated with your contract coverage. I apologize if I missed that but I was hoping we could get that number for 2009.

Quintin Kneen

The number is $212 million for 2009.

James West – Barclays Capital

Certainly we could probably back into it but if we look at that contract coverage perhaps by region are the rates in the contracts, the forward coverage for ’09 are they consistent with market rates as of the fourth quarter?

Bruce Streeter

I would say you have to keep in mind that even though people consider the rates are under pressure that we have vessels that are on fairly long term contracts. Many of them come up for renewal or opportunities to reposition based on rates that were fixed when rate were well below where the market is today. At the same time you also have shorter term contracts, some of those were higher rates then you would expect today. You’re going to have a mix. We see some positive opportunities for growth in rates no matter what the market level is and some where there’s a risk to the rate.

James West – Barclays Capital

Looking at Brazil, clearly there’s been a lot of focus on that market recently you guys have been successful in moving some assets in given that their Petrobras is likely to announce a number of rig, helicopter and supply vessel contracts over the next several months. I was wondering if you could tell us how you see that market unfolding perhaps over the next two to three years and then what kind of role do you think GulfMark will play.

Bruce Streeter

There’s the question and the impact of new construction vessels and I think that’s still some way away. The first Petrobras tender is out, they’re looking at results which I think are probably well above what they expected. There seems to be no quick response. Even if those vessel contracts are awarded the deliveries will be 2011 or later probably.

At the same time, their drilling fleet continues to expand. They have difficulty as far as adjusting to the size of demand based on the size of the logistics base. Clearly they have continuing need for additional equipment and we’ll continue to see opportunities there. I think we’re better focused to take advantage of those opportunities with the fact that our fleet is expanded to where we have vessels that are closer.

At the same time, you do see some growth in the demand from the international operators. There are a number of construction projects that will occur in the second half of this year and into the first half of next year. There’s no available equipment in Brazil to handle this so that equipment will come from outside of the region. Brazil clearly is an area of expanded demand.

Operator

Your next question comes from Michael Ainge – TIAA-CREF

Michael Ainge – TIAA-CREF

I wanted to ask a question on the contract cover going into 2010 similarly to the 2009 numbers, the 2010 numbers are a little lower then they were last year looking forward and maybe more meaningfully lower I don’t know. In any event I wanted to get a feel for what your strategy was as far as getting 2010 vessel days under contract and how things look in terms of day rates and what not.

Bruce Streeter

The number in 2010 is lower; I think its 34%. At the same time we have a number of contracts and relationships that I would expect end up continuing to turn over as long as there aren’t significant changes in the customer’s capital base and their ability to continue. I don’t think that we’re particularly surprised or concerned about 2010 contract coverage. Against most other years historically it’s above what we had at this point. Part of that is that the newer vessels tend to generate longer term contracts.

For instance, the two new vessels in Southeast Asia we don’t add those in to the term coverage until they’re delivered and on contract. Both of those will provide added coverage in 2010. We’re not at this point particularly concerned the 2010 coverage is outside of where it should be.

Quintin Kneen

The average contract length in years, for example in the North Sea, at the end of 2007 we were looking at 2.2 years for 2008 and now we’re looking at 2.4 years for 2009. Even though the contract cover for 2010 is down its actually going up a little bit longer. We’re getting little bit more tender but obviously something that we’re focused on.

Michael Ainge – TIAA-CREF

Is that extension in contract terms you just mentioned the North Sea right there, is that something that’s happening in other regions as well.

Bruce Streeter

To some extent Southeast Asia as you get newer equipment into the marketplace and you get more specific definition of programs you’re seeing vessels on hire for longer term contracts. It’s a market today where first some people have concerns about their capital budgets others expect rates to go down some are more concerned with identifying equipment for the long term. There a mix of expectations and that means that there’s a mix of tendering periods.

Operator

Your next question comes from Pierre Conner – Capital One Southcoast

Pierre Conner – Capital One Southcoast

You mentioned when you spoke about OpEx and actually you did quite a good job on controlling those costs, $40 million run rate and was that meant to be a quarterly guidance expectation on a vessel day’s basis I’m assuming of course additional vessels I understand would increase then.

Ed Guthrie

It will increase obviously as those new vessels delivered throughout the year. As a baseline we’re relatively comfortable with that level. Remember, that’s based on the exchange rate that was in effect for the fourth quarter. If that changes it will obviously impact our cost number too, it will go up if the dollar weakens.

Bruce Streeter

The other thing is remember we are putting more emphasis on getting costs out of the way in the first quarter so I would expect that you’re going to see it a bit higher in the first quarter and drop back in the second and third.

Pierre Conner – Capital One Southcoast

On the contract coverage, as I recall it was $204 million for ’09 at the time of the last quarterly update and I think what you said was $212 million so correct me if I got the numbers wrong. I was wondering if that should have been more. Did you experience any cancellations or deferrals or pushed out during the quarter of prior coverage?

Bruce Streeter

We’ve had one customer who had some financial difficulties and curtailed operations and ended up with terminating the contract and returning the vessel to supply duties and putting in a different contract in the Gulf of Mexico. We obviously have to stay very close on receivables and contract positions. That did take some forward contract coverage away. We have a shorter term contract as opposed to a two year contract in that scenario. We are going to see some of those things.

Ed Guthrie

When we run our contract coverage forward we also change the exchange rate. What you might have had at the beginning of the third quarter or when we had the third quarter call, has now changed because we’ve dropped that exchange rate.

Bruce Streeter

The strong dollar has had an obvious effect and I don’t know how long it will strengthen. Basically our contract structure appears to be very good. We were watching closely and as I said we’ve had one. Generally rate structures have held, pricing is reasonable, and contract continuation appears to be there.

Pierre Conner – Capital One Southcoast

You mentioned that the two deliveries in Southeast Asia, that’s the Cherokee and the Comanche there have contracts that will go into coverage when they get delivered, they’re not in there now. In the Gulf of Mexico the Tiger, the Blacktip do they have contracts currently that they’ll be delivered again, are they already contract or will you be working to find.

Bruce Streeter

A couple of the crew boats have fairly long term contracts. Most of them are on shorter period and I wouldn’t expect that we’ll even start marketing the last two until probably May or June. They do not have any contracts.

Pierre Conner – Capital One Southcoast

You mentioned you do have one rolling over in Brazil in the second quarter and then you mentioned how many you thought out of the legacy rig and fleet would roll over in the Gulf of Mexico, whether you’d have an opportunity to re-contract.

Bruce Streeter

As of today we have two of the 654s the 4,000 barrel liquid mud vessels are basically in the short term market. As we head into the second quarter we’ll have others that will roll to further opportunities or reset from where their previous rate were and/or enter the short term market. Right now there are all of the 5,000 barrel liquid mud boats are fixed in term rates and its essentially the 4,000s that there are roll over potentials on. Later in the summer we’ll see some availability of 5,000s potentially.

Operator

Your next question comes from Brad Cragin – Eastbrook Capital

Brad Cragin – Eastbrook Capital

Given the step up in cash flow that you guys are seeing, what kind of cash balance do you think you need to maintain going forward? What are your latest thoughts about the possibility of a share repurchase or even a potential dividend?

Bruce Streeter

Obviously current prices of share repurchase sounds pretty good to me. Basically what we have done is we have built cash and let cash sit on the balance sheet which doesn’t sound like a good financial policy but given the amount of turmoil and concerns about the banking sector we felt it was necessary. Obviously we do expect and we are seeing a very strong cash build. As the cash build continues we have indicated we will start paying down debt. We will carry a fairly significant cash number until we’re sure that we have a stable environment that we can live with.

However, as we continue to build cash we’ll be looking at opportunities for reinvesting, that’s historically been the best use of our capital. At the same time, we have a much strong balance sheet, a much wider fleet, a much stronger cash flow then we’ve ever had before. Logically we can look at the sustained capital build and I’m sure that as the year develops and as the future continues we will be looking serious at the concept of dividends.

Brad Cragin – Eastbrook Capital

Is there anything in particular you need to see in terms of road markers along the way that would make you more willing to shift that use of cash?

Bruce Streeter

Our primary banks have been very close to us. They continue by and large to be reasonably stable and continue to give us strong indications of support. We’re not particularly worried, if you will, but the wider scope of the banking environment is such that we want to see stability in the banking sector before we’re willing to make a lot of changes. We’re certainly not willing to risk our balance sheet in the current environment. When we see some level of stability then obviously we’re going to react fairly quickly.

Operator

At this time there are no further questions. I’ll turn the conference back over to you for any additional or closing comments.

David Butters

I want to thank everyone for joining us this morning. We look forward to seeing you in a few more months.

Operator

Thank you very much for joining today’s GulfMark Offshore Conference Call. This concludes your conference. You may now disconnect.

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