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Bio-Rad Laboratories, Inc. (NYSE:BIO)

F4Q08 and Full Year Earnings Call

February 26, 2009 5:00 pm ET

Executives

Ron Hutton - Treasurer

Norman Schwartz - President, Chief Executive Officer, Director

Christine A. Tsingos - Chief Financial Officer, Vice President

Bradford J. Crutchfield - Vice President, Group Manager - Life Science Group

Analysts

Jon Wood - BAS-ML

Amy Wilson - Ramsey Asset Management

Steven Gellman - Investor

[Karthic Karshnan] - RNG

Doug Fisher - Kennedy Capital

John Gibbons - Odeon Partners

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2008 Bio-Rad Laboratories Incorporated Earnings Conference Call. My name is Kamisha and I will be your operator for today. (Operator Instructions) I would now like to turn the call over to your host for today’s call, Mr. Ron Hutton, Bio-Rad’s Treasurer. Please proceed sir.

Ron Hutton

Thank you very much. Before we begin the call I would like to caution everyone that we will be making forward-looking statements about managements goals, plans, and expectations. Because our actual results may differ materially from these plans and expectations, I encourage you to review our filings with the SEC where we discuss in detail the risk factors in our business. The company does not intend to update any forward-looking statements made during the call today.

With that I would like to turn the call over to Christine Tsingos, Vice President, and Chief Financial Officer.

Christine Tsingos

Thanks Ron. Good afternoon everyone and thank you for joining us. Today we will review the fourth quarter and full year financial results for 2008 as well as provide some insight into our thinking for 2009. As you know, we report our financial results on a GAAP basis, which includes several one time and non-cash impacts for the fourth quarter. We will try to give you as much color as possible to help you understand the true operating achievements of 2008.

Let’s start with a review of the quarterly results.

Net sales for the fourth quarter of fiscal 2008 were $448 million. This represents a decrease of 2.6% versus the year ago period sales of $459.7 million. However, on a currency neutral basis sales grew 3%. This year-over-year growth was fueled by solid performance in our clinical diagnostics segment, somewhat tempered by some industry challenges and our Life Science segment.

Consolidated gross margin for the quarter was a reported 55.1% up significantly versus last year’s gross margin of 50.8%. This improvement reflects a more favorable product mix as well as improved capacity utilization. During the quarter we recorded approximately $3.5 million of amortization expense and foregone profit margin as required under purchasing accounting for our DiaMed acquisition. This compares to just over $6 million of expense in the fourth quarter of 2007.

SG&A expense for the fourth quarter was $154.5 million or 34.5% of sales. This improvement reflects both disciplined spending as well as some positive currency effect. During the quarter recorded in SG&A is approximately $2.3 million of amortization expense related to DiaMed, about equal to last year’s impact.

Research and development expense in Q4 was 9.2% of sales or $42 million. This increase in spending, both sequentially and year-over-year is reflective of our focus on the development of new panels for the Bio-Plex® 2200, as well as our new fully automated instrument for blood typing, which we plan to release late in 2009.

During the quarter we recorded more than $28 million of non-cash expense for the impairment of goodwill and a small amount of purchase intangibles. This impairment primarily relates to goodwill associated with the 1999 acquisition of Pasteur Sanofi Diagnostics and the subsequent decline of value in our BES Testing business, a business that has been severely impacted over the past years by a decline in both test volumes and pricing.

Interest and other for the quarter was a net expense of approximately $18 million compared to $10.5 million last year. This net amount includes a one time foreign currency loss of 45.2 million related to the significant and extraordinary swings in some of our major currencies during December. In addition, the Q4 other expense reflects the impairment of investments of $6.2 million.

Because the impairment of goodwill on our investments is not deductible for tax purposes, the effective tax rate used during the fourth quarter is somewhat meaningless. Excluding these one time non-cash events, our quarterly effective tax rate was approximately 29%.

Reported net income for the fourth quarter was a loss of $8.2 million or -$0.30 a share on a diluted basis. We are estimating that excluding the one-time charges for impairment of goodwill purchase intangibles and investments of $35 million, coupled with foreign exchange losses of $5 million, diluted earnings per share would be $1.16 for the quarter.

Life Science reported sales for the fourth quarter decreased 7.7% from the year ago period to $170.3 million. On a currency neutral basis sales decreased 3% for the quarter. This year-over-year decrease reflects the industry wide drop in capital instrument sales as well as a tough compare to 2007 which included a sizable process media order.

During the quarter we continued to see strong sales of amplification products, as well as protein expression, separation and analysis products.

Gross margin in the Life Science increased significantly both sequentially and year-over-year primarily due to a more favorable product mix towards consumables as well as improved manufacturing costs and absorption. In addition to improved gross margins, our Life Science group also posted good operating leverage and segment profit, excluding the impairment charges, increased to more than $13 million as a result.

Our Clinical Diagnostic group reported strong sales for the quarter of $274 million, an increase of about 1% on a reported basis, but more than 7% currency neutral. These sales were led by continued strong performance in quality control as well as our blood virus, autoimmune, and diabetes product lines.

Diagnostic gross margins were up both sequentially and versus last year, primarily reflecting a more favorable product mix. As a result, reported fourth quarter segment profit for diagnostics increased to just over $30 million.

Looking at the full year results, we are pleased to report annual revenues of $1,764,000,000 an increase of nearly 21% over 2007. This is a 17.8% increase on a currency neutral basis and in line with the high teens guidance we gave at the beginning of the year.

Both of our primary segments contributed to growth in 2008. For the year Bio-Rad Diagnostic sales were just over $1.1 billion, an annual growth of more than 30%. During the year the group lost several new products in diabetes, blood virus, infectious disease, and quality control. On a geographical view, all of our primary regions were strong double-digit growers.

During the year we placed several new Bio-Plex® 2200s in the United States and Europe, bringing the installed base to 86 units. Sales of our MRSA and HIV tests in the United States continue to grow rapidly and in fact we are now the number one provider of HIV tests in the United States.

Finally, the inclusion of DiaMed into the Bio-Rad family has brought new opportunities for both geographic and market expansion and we are pleased with the success of our integration efforts thus far.

Late in the year we acquired two DiaMed distributors in Europe, which will continue to sales and profits in 2009.

We are also excited about the upcoming launch of our new fully automated instrument for use with the DiaMed Gel Card the gold standard technology for blood typing.

Despite a tough industry environment and another double digit decline in our BSE business, our Life Science group also posted good annual sales, primarily fueled by growth in our core markets of multi-flex protein analysis, electrophoresis, and gene expression.

Asia Pacific in the emerging markets continued to be strong growth regions for the tools business.

Reported growth in Life Science for 2008 is 4.6% or 1.4% on a currency neutral basis. Excluding the BSE decline, core Life Science sales grew more than 6% year-over-year.

During the year we introduced several new products for food testing, protein purification and analysis, and gene amplification. Our food pathogen testing business continues to be one of the fastest growing product lines within our Life Science group and during the quarter we expanded our opportunity for growth by acquiring certain assets from Safe Path Laboratories for the testing of Trichinella, Toxoplasma, and salmonella.

The company gross margins for the full year were in line with expectations at 54.6%, compared to 54.2% in 2007. This year-over-year increase becomes even more impressive when you consider that the 2008 margin includes the impact of more than $18 million for the amortization of purchase intangibles and inventory write up related to DiaMed.

Research and development expense in 2008 was also in line with expectations at $160 million or 95 of sales. During the year we launched more than 40 new products worldwide and have several more in the pipeline to help keep our return on R&D investments strong.

SG&A expense as a percent of sales was 33.5% for the year, an improvement of more than 100 basis points compared to 2007.

Net income for the full year was $89.5 million versus last year’s net income of $93 million.

Excluding the fourth quarter charges for impairments to goodwill, intangibles, and investments, and the unusual currency loss, we estimate net income for 2008 to be $129 million.

The tax rate for the full year of 31% was higher than originally projected due to the non-deductible charges taken in the fourth quarter. Going forward we expect the tax rate to be between 26% and 28%.

For 2008 Bio-Rad’s balance sheet also remains strong. As of December 31 total cash and short-term investments were $243 million compared to $224 million at the end of last year. During 2008 we spent more than $50 million to acquire additional shares of DiaMed holding as well as two European based distributors. Strong cash collections through out the year coupled with better receivables management has resulted in another year of excellent cash flow for the company.

Net cash generated from operations during the fourth quarter was $78 million and $191 for the full year.

Net capital expenditures were $22.1 million for the quarter and $84.8 million for the full year. Going forward we expect CapEx to be in the $80 to $90 million range for 2009 reflecting increased investment in information technology and e-commerce as well as the inclusion of our DiaMed requirement.

Finally, depreciation and amortization for the quarter was $22.8 million and $97 million for the full year.

Looking to 2009 it is difficult to predict the financial impact of the industry challenges in Life Science, the dramatic moves in foreign currency and the resulting competitive landscape. Our over arching goal is to organically grow sales in the low to mid single digits and grow operating income, excluding the impairment expense, in that same range. However, with more than 60% of our business outside of the United States, foreign currency translation could easily wipe out that growth on a reported basis, resulting in a year-over-year decline in sales and income. And, as you know, the majority of our expenses are US dollar based, which means that currency could have an even larger negative impact to our operating income. In other words, as the strengthening US dollar results in fewer sales on the top line, we won’t have a corresponding effect of fewer expenses on the operating line and this could result in operating margins on a reported basis returning to the single digits for 2009.

Given the uncertainty of the global economy, we have instituted a head count freeze and curtailed some expenses, but ultimately we will not jeopardize our long-term growth opportunities and exceptional customer care programs just to reap a short-term gain.

Now I will turn the call over to Norman for a few comments.

Norman Schwartz

Thank you, Christine. I think when we look past the fourth quarter impairments, 2008 was a very good year for us, not only financially, but as Christine mentioned, we also introduced a number of new products. We have been very successful so far in integrating DiaMed and generally good cash flow.

I think from Christine’s comments you can get the flavor that we’re certainly approaching 2009 with some caution. I think about fundamentally the markets that we serve have not been really dramatically affected as some other industries so far. I can tell you though, that the whole management team is focused on the fast changing environment and as the year unfolds we will watch closely and make any necessary course corrections to hold us in good stead for the long term and that is really where we are today.

Kamisha, with that we will open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jon Wood from BAS-ML.

Jon Wood - BAS-ML

Can you talk about what the capital equipment deterioration did to the growth rate for the life science business in the fourth quarter?

Ron Hutton

Well John, there is really two ways to look at it. We have capital equipment in terms of instruments and we have some instruments that are in the neighborhood of about $250,000. That certainly had an impact. But, we also have our process chromatography business which in effect is a capital instrument and certainly the kind of investment both in the hardware and media and those really did hurt us in the fourth quarter. They contributed significantly to the slow down, ultimately.

Jon Wood - BAS-ML

All right, so can you give us a range of impact? I mean if you exclude that hard chromatography comp and the capital quip and dislocation, I mean are we looking at low mid single digit type of growth in the Life Science?

Ron Hutton

Yes, I would say maybe mid single digits would be the impact of that. It was pretty substantial.

Jon Wood - BAS-ML

So think about those impacts for 2008 as a whole, what do you anticipate both the capital equipment as well as process chromatography compares to the whole year in the Life Science business.

Ron Hutton

The whole year, certainly they did have an impact, not clearly as substantial as in the fourth quarter. The main impact was in the fourth quarter. It was probably down maybe slightly, but the main part was really in the fourth quarter.

Jon Wood - BAS-ML

I guess a better way to ask that is if you look at 2009, I’m trying to get a sense for how difficult or easy the comp is in the capital equipment side. So, do you expect significant incremental deterioration in 2009 over 2008 and particularly the capital equipment side?

Ron Hutton

There is clearly a lot of uncertainty in the markets today, especially the US market. Essentially, I you look at the process chromatography business, I have a lot of visibility on those orders and I don’t see that as deteriorating or having a significantly negative impact as far as some of our capital instruments. And, now we’re talking about a relatively small number as a percentage, but that’s still in flux. If I look at the overall number I don’t see that as having a huge impact and obviously that’s been reflected in Christine’s projection.

Jon Wood - BAS-ML

Okay and then so, Christine, at current rates, what do your forecasts tell you for the FX on the top line in ’09?

Christine Tsingos

That’s a $64,000 question. When we do our planning and actually how we run our business, we do it on a local currency basis. So, when we roll up our goals for ’09 we are looking for that low to mid single digit growth on both the top line and operating income. Currency is the wild card and we can look at rates at 12/31 we can look at rates at 1/31 and we’ve seen some of the biggest swings that have been generated in a number of years, so it’s hard to project. I mean, if I take current rates we could be low to mid single digit decline on a reported basis, but who knows what currency is going to do.

Jon Wood - BAS-ML

Okay so just so I’m clear, the low to mid single digit operating income growth that’s excluding currency totally?

Christine Tsingos

Yes and I also took out the $28.8 million of the one time impairment above the operating income line in ’08 just to be fair, to make it true operating to operating.

Jon Wood - BAS-ML

Okay, but that is an organic number and so from there we have to take [interposing].

Christine Tsingos

You’re right, the reported number will be likely lower than that because of currency and the impact on the operating income line is greater than the impact on the sales line when currencies are going in this direction, because the majority of our spend is dollar based.

Jon Wood - BAS-ML

Okay, that makes sense. In the fourth quarter, can you give us the placement for the Bio-Plex® 2200? Was it six placements, because I have written down on the third quarter call it was about 80 instruments at the end of the third quarter?

Christine Tsingos

We said nearly 80, so I think it was probably 8 or 9 placements in the fourth quarter.

Jon Wood - BAS-ML

What is left to consolidate on the DiaMed side? When you do an acquisition of a distributor is that separate from buying out the minority shareholders?

Christine Tsingos

Yes. I mean although some of the distributors are also minority shareholders, but we won’t go down that slippery slope. There is a couple of things that are going on. One is we said from the beginning we’d like to acquire some of these DiaMed distributors to bring those sales direct, which is more in line with our traditional business model It obviously means we get the benefit of 100% of the end user sales and the profits as well. So, we are going to continue to pursue selectively picking up some of these distributors and bringing them directly into our business.

Separate from that, we still have the need, the requirement to purchase the remaining minority shares of DiaMed holding. We did pick up some more during the quarter, but we have about 6% of the outstanding shares, which I’m guessing is around $38 million, which we do plan to acquire hopefully in the first half of ’09.

We will continue to have a minority interest line on the P&L because there continue to be minority shareholders of DiaMed holding, but more importantly the biggest chunk of that minority interest line relates to some key subsidiaries where we don’t own 100% of the stock. At some point in the future we may look to buy the other half of the stocks that we don’t own and that could bring that minority interest line down.

Jon Wood - BAS-ML

Brad, could you perhaps give us some qualitative comments around what the NIH budget boost here, the stimulus boost, how quickly can you see that and how material could that be given the numbers you’ve seen out there?

Bradford Crutchfield

That’s a very good question and I think it’s something that’s really shaping up almost on a daily basis. We certainly know that our customers are beginning to get some feedback into the granting committees and how that money is going to be spent. We are certainly optimistic, because if you look at a lot of the money is dedicated for instruments under $50,000 into existing grant holders with the caveat that it be spent this year. So we see that as a potential upside given our product line of real time thermocyclers, there are things like Bio-Plex systems and then of course the suite of laboratory apparatus we have.

The question is really timing and how these granting committees are ultimately going to push this through. We would expect to probably, again this is our certain guess, to see a real positive impact of that starting in the second half of the year, but it seems substantial.

With that being said, and we saw some of this in the fourth quarter, is that people are generally conservative. Their own personal finances, their own 401-K, their own view of the economy, causes them to be a little bit more conservative with their budgets, even though in a lot of cases an NIH budget you can’t save it year-over-year. So things have changed appreciably really in the last ten days on this.

Jon Wood - BAS-ML

Okay, thank you very much.

Operator

Your next question comes from Amy Wilson from Ramsey Asset Management.

Amy Wilson - Ramsey Asset Management

I was wondering what the quarter-by-quarter placements were in 2008 for the Bio-Plex?

Ron Hutton

We don’t really have that number on hand.

Amy Wilson - Ramsey Asset Management

I guess you’ve mentioned it on previous calls so I can just look there.

My second question would be, just looking back at inventory levels in the fourth quarter of 2007 versus the fourth quarter in 2008, it was quite low in 2007 and then spiked up through the rest of 2008. What can we attribute that to?

Christine Tsingos

Well you are correct that we have been building inventory and it was extraordinarily low in 2007, in fact we got caught with some back orders and things like that; so, we did build inventory during ’08. We also have several new products that we are ramping up for launch in ’08 as well.

Amy Wilson - Ramsey Asset Management

How much of the gross margin improvement that we saw year-over-year can we attribute to the higher inventory levels?

Norman Schwartz

We don’t have that well quantified, but I think it’s probably fairly low. I know where you’re going, but I don’ think that’s a big factor. We’ve been actually watching that fairly closely, because otherwise you build a kind of ticking time bomb and certainly we don’t want to do that. We’re trying to balance between keeping the inventories under control, but serving the customer; so that’s a balance we’re striking.

Christine Tsingos

The other thing you can see, in my comments in the reported numbers Amy that’s important to see. A lot of the gross margin improvement is actually on the Life Science side of our business where this is real sustainable achievement on their part. Manufacturing has been moved, some of the product lines to Singapore. They’ve reengineered some of the products that are actually being produced at a lower cost. These are real improvements that are sustainable, whereas a lot of the inventory build is associated on the diagnostic side of the house where we are building for future orders and we build whole lots at a time. Our quality controls group did very well during the year and in that case we build multi-year lots and hold them on behalf of the customer.

Then of course not all of our inventory is held in the United States, so currency can sometimes have an impact on the value.

Amy Wilson - Ramsey Asset Management

Okay thank you very much.

Operator

Your next question comes from Steven Gellman an Investor.

Steven Gellman Investor

My first question is the Sartorius investment if that was included as part of the $28 million write down or if that is independent and doesn’t have to be mark-to-market?

My second question and I caught the conference call late, so excuse me if you’ve already gone over it, but are you planning to do any lay offs or have other reductions to increase the profitability?

Norman Schwartz

We’re not really planning other kind of lay offs at this point. As we said in the conference call, we’ve instituted a kind of head count stabilization, so we’re basically trying to stay with our same headcount as we had at the end of ’08. So, that is kind of where we are.

Christine Tsingos

Having said that, part of our being diligent about the business is looking at each of the product areas that we operate in to make sure that they’re appropriate for our long-term growth.

In terms of the impairment it didn’t have anything to do with Sartorius what so ever. It was related to assets that were acquired as part of the acquisition of Pasteur Sanofi Diagnostics in ’99, assets that related to the food testing business, primarily the BFE testing business, which has lost value over the last several years as that business has declined.

Steven Gellman Investor

The Sartorius investment is a huge investment, so I don’t know if you can comment about that?

Christine Tsingos

It’s still an investment on our books. You can see on our financial statements that the majority of our investment is in the form of voting shares, what they call ordinary shares and those are held on our books at cost. So it’s in a different category than we would look at on some of these other actions.

Steven Gellman Investor

Okay thank you very much.

Operator

Your next question comes from [Karthic Karshnan] from RNG.

[Karthic Karshnan] - RNG

I was just wondering if you can comment on how the first two months of the year are looking in terms of the general business conditions.

Norman Schwartz

Well were still in business! I think one month doesn’t make the quarter and the business still seems to be ticking over at a pretty reasonable rate and we’ll be back in a little while with the first quarter and tell you how it’s going.

Christine Tsingos

I think currency is going to have the biggest play in the year-over-year comparisons.

[Karthic Karshnan] – RNG

My next question is in regards to the operating line item. Should I look for a step function decrease in the first quarter and then possible improvements from that point onward or do you think it’s going to be a gradual impact to the operating margin compression this year?

Christine Tsingos

We generally don’t give quarterly guidance, or look at that level, or discuss that level of granularity externally. I think that it’s safe to say that the comparisons will be much tougher at the beginning of the year than they will be at the end of the year. But, again, who knows what currency is going to do to the operating result, so I think we’re just going to stick with giving high level guidance for the full year.

[Karthic Karshnan] – RNG

Okay, are there any changes in terms of your hedging programs for the dollar?

Christine Tsingos

Not significantly. It’s interesting; one of the currencies that had a big contribution to this unusual loss in the fourth quarter was the Brazilian real which traditionally is a currency we haven’t hedged, because it was just exorbitantly expensive to hedge. But, the devaluation moves in Brazil that caused the big swings had the silver lining impact to make the cost of hedging much less expensive than it ever has been in the past that I’ve seen. So that’s one change we may make. But, generally we cover our exposure and not try and predict movements one way or another.

[Karthic Karshnan] – RNG

Okay, thank you for that.

Operator

Your next question comes from Doug Fisher from Kennedy Capital.

Doug Fisher - Kennedy Capital

You talked about the process chromatography business thing impact on the fourth quarter. Can you give me some deal to frog brush how large that business is for you guys?

Christine Tsingos

Again, we don’t report our divisions and operating results by division publicly, but certainly the year-over-year decline in the process orders was enough to make a good impact on Life Science sales for the quarter.

Doug Fisher - Kennedy Capital

If you took that and you took the true capital equipment part of the business or the more traditional equipment part of the business, of those two impacts on the fourth quarter which one was larger would you say?

Christine Tsingos

The process order was larger.

Doug Fisher - Kennedy Capital

Okay that’s helpful. Can you just remind me on the Life Science side what percentage of the business is tied to kind of government and academic customers roughly?

Bradford Crutchfield

You know we try to look at it as, on a worldwide basis it’s about at 65% or 70% of our business is tied specifically to government sponsored research and then the rest would be in a for profit sector whether its pharmaceutical, food, diagnostic, other areas.

Doug Fisher - Kennedy Capital

Okay and on BSE testing another decline there. We kind of had hoped that business was going to flatten out in ’08. When you think about ’09 what have you embedded in your expectations? I do realize it’s getting to be a less and less important part of the overall business, but I just want to get a feel for what the impact is going to be on the Life Science growth in ’09.

Bradford Crutchfield

Yes well, I was hoping too. It was a lot more fun on the way up. The reality of it is that yes it is still going to have an impact. One of the things that happened at the later part of this year is that they changed the age of testing, so the market’s going to reduce even further on almost a stepwise function. Frankly, the numbers had begun to stabilize a little bit, because obviously the proportionality is working to our advantage. But, the stepwise function we see in Europe is going to have an other impact. Really no appreciable change to our market share, but again the overall market is just going to get that much smaller.

Doug Fisher - Kennedy Capital

Can you give me any feel in terms of either growth rate or reduction or size, dollar value size, some idea of what the impact is going to be in the year?

Christine Tsingos

We have talked about that in ’08 we’re expecting that business to go down to about a $40 or $45 million a year business and that’s probably not too far off. In terms of what will happen in ’09, it could be another incremental double-digit decline with this change in age of testing across the entire EU community. The good news is at some point here soon; hopefully the fabulous growth in the traditional food safety, food pathogen, testing business will out strip the decline of the BSE business.

Doug Fisher - Kennedy Capital

I am looking at those numbers, or what I think they are. Maybe by 2010 given the trajectories of the two businesses they get to be the same size?

Christine Tsingos

Yes, maybe even late this year. We’ll see. I mean it just depends on the growth of the one and the decline of the other, obviously, so 2010 is certainly reasonable.

Doug Fisher - Kennedy Capital

In terms of Bio-Plex how should we think about the placements? I know it’s impossible to have real clarity or visibility on that, but if we look at the fourth quarter placement rate, did we think about that kind of a run rate going into ’09, or how should we think about it?

Norman Schwartz

I think as we go into 2009 we’re going to have more panels that get approved and are on the system and that should kind of enhance the placement rate in 2009. So the thought is that that will pick up a little bit in 2009.

Doug Fisher - Kennedy Capital

Okay, thanks for the feedback.

Operator

Your next question comes from John Gibbons from Odeon Partners.

John Gibbons - Odeon Partners

I just want to say I love your website, but do you know your website has not updated the results that you have reported?

Christine Tsingos

I did not know that John. Thanks for pointing that out. If you love our website now just wait until we launch the new one.

John Gibbons - Odeon Partners

I love it, it’s got a lot on it, but I was so surprised that they never updated the results.

Christine Tsingos

Yes, thanks for that tip.

Operator

At this time there are no questions in queue.

Norman Schwartz

Okay well thank you all for joining us today. We appreciate all your continued interest and we look forward to seeing you on the next conference call.

Operator

Thank you for your participation in today’s conference. This concludes your presentation.

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