Swisher Hygiene's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Swisher Hygiene, (SWSH)

Start Time: 08:33

End Time: 09:06

Swisher Hygiene, Inc. (NASDAQ:SWSH)

Q4 2013 Earnings Conference Call

March 18, 2014 8:30 AM ET

Executives

Garrett Edson – ICR LLC

William M. Pierce – President, Chief Executive Officer and Director

Blake W. Thompson – Chief Operating Officer and Senior Vice President

William T. Nanovsky – Chief Financial Officer and Senior Vice President

Analysts

Justin P. Hauke – Robert W. Baird & Co., Inc.

Michael Epstein – Northeast Securities Co., Ltd.

Operator

Good day ladies and gentlemen and welcome to the Swisher Fourth Quarter 2013 Earnings Call. At this time all participants are in a listen-mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

As a reminder, today’s call is being recorded. I would now like to turn the call over to Garrett Edson with ICR, sir you may begin.

Garrett Edson

Thank you. And by now everyone should have access to our earnings announcement and Form 10-K which were filed earlier yesterday and can be found at swsh.com under the Investor section. Before we begin our formal remarks, I need to remind everyone this conference call may include forward-looking statements regarding Swisher Hygiene, Inc., its business and prospects.

This forward-looking information are subject to risks, uncertainties and other factors that may cause actual results and performance to materially differ from results or performance expressed or implied by the forward-looking information.

Swisher undertakes no obligation to publically revise the forward-looking information presented except as acquired by law. Also our discussion today may include references to certain non-GAAP measures, reconciliation of these measures to the most comparable GAAP measure can be found on our website at swsh.com under the Investor section.

At this time I would like to turn the call over to Bill Pierce, President and Chief Executive Officer of Swisher.

William M. Pierce

Thank you, Garrett and good morning. With me today are Bill Nanovsky, our Senior Vice President and Chief Financial Officer as well as our Senior Vice President and Chief Operating Officer, Blake Thompson both of them will be available later in the call to answer questions.

The fourth quarter of 2013 for Swisher saw revenue of $50.4 million, down 5% from the prior year period. Net loss from continuing operations excluding impairments was $0.05 per share compared to a net loss per share of $0.20 in the prior year period.

Our adjusted EBITDA loss was $6.9 million versus $4.5 million in the prior year period. Bill Nanovsky will take you through the financials in more detail in just a few minutes. We are now six months into our tenure as a management team here at Swisher. And while we have not efficiently turned the corner, I do believe we are beginning to peek around it. Let me summarize what I think we currently stand regard to our operations and our expectations.

Total revenue has not yet turned positive year-over-year although two months of the first quarter, through two months of the first quarter. We are seeing certain business operations and regions up year-over-year. It is our biggest near-term challenge in the area where we must improve in 2014.

Quite simply we need to see revenue turn positive on the year-over-year basis in order to be able to fully execute our business strategy and we are not there yet. For revenue comparison purposes going forward, the assets held for sale make up approximately $14.1 million of revenue including approximately $7.1 million from those sold before the year ended 2013, that should be measured quarter-over-quarter as we get into the first quarter.

However, there were numerous positives with regard to our expenses in the quarter that have pushed further into 2014 as we started to see some significant movement with cost reduction initiatives and operating efficiencies from our business plan. Our cost of sales, route and SG&A expense lines all began to show improvement from the prior year period. We were particularly pleased with the continued improvement in our route expense from our route optimization and operating standardization efforts which represented 11% positive shift over Q4 of 2012.

We are further encouraged to see accelerated improvement on our operating costs thus far in the first quarter of 2014. Also we have started to see a significant decline in our CapEx, the majority of which related to dish machines and chemical dispenser placed at customer locations.

We have seen a 65% drop in total CapEx spending through February 2014 and a 75% decrease on dishwashers and dispensers spending year-over-year, but with more installations than the prior year period. We expect to spend less than $10 million on total CapEx in 2014 compared to nearly $17 million in 2013. So while the cost reductions are clearly beginning to bear fruit, how do we generate top line growth in 2014? Quite simply through our philosophy of sales through service. As a service-based organization, we must provide our current customers with the top five service experience on every – everyday and we must feel better than our competition.

If you do the right thing the first time, every time with your existing account base, you will not only maximize revenue from the customers you already have, increase your retention and set the base from which you can build future growth with new customers.

By taking care of the customers needs first on every stock you then have the ability to take advantage of cross selling opportunities to the same customer. We have seen some recent account wins in the first quarter as well as strong retention on our chemical side and Blake will be along shortly to talk about the progress there. That said as much as it is necessary to improve our sales performance, we also need to be cognizant that we are doing it in a way that will ultimately lead to our profitability.

Looking at our current position and moving forward, we realize that we can’t be everywhere – and once in some pieces of business, while we drive top line growth could ultimately promise us on the bottom line. We must focus on our strength in the specific regions, in areas of the country to fully generate most of our new business and markets where we already have strong capability, the best people, the best delivery, the best service and best products.

But we just laid out for you is the path the profitability. In 2013, we’ve earned a lot of cash, and we’ve been consistent on the point that we must reverse that course in the short-term. I can tell you that we have seen significant improvement in our cash flow thus far in the first quarter of 2014, which you should see, when we report our first quarter results in May. However, there is still more work to do.

We expect the continued realization of efficiencies in 2014, but we also need to see our revenue turn positive year-over-year. When we report our first quarter results in May, I believe we will be able to have the talk about the timeline on operating and cash flow profitability.

Our overall focus on service, people and profitability has not delivered and we do believe we have the team in place to deliver. We reorganize our selling operation and are currently filling out our sales force in the areas of need in a number of our major metropolitan areas.

We have already started to see positive year-over-year growth in the number of areas. We now need to translate that success to all of our key markets and business operations. So we can take advantage of the large amounts of opportunities that we see and we represent in the multi billion dollar chemical and hygiene market. As I’ve said on our last call, we don’t need to dominate the sector to grow successfully.

We just need to win our fair share of the profitable business going forward, continue to provide premium service to our customers and further improve our cost structure. We are progressing in each of those areas as we are managing the business, better making the hard decisions on customer growth and where to spend our money, but we can and must do better in 2014.

I will now like to turn the call over to Chief Operating Officer, Blake Thompson, who will give you more detail that where we are in our operating plan execution.

Blake W. Thompson

Thanks Bill. I would first like to provide some detailed follow-up from our last call on our progress made with cash management and expense controls, and then spend more time talking about revenue and our plans to grow profitably. Our goal is to improve our cultural discipline to become better stewarts of the company’s cash by improving our work standards. As Bill mentioned, we have began to see the results of our work in better managed cash outlays for the purchased equipment in Q4 of last year and continue into the first quarter this year.

Enhanced dish machine refurbishment centers are up and operational, their output is significant, we are able to fulfill the customer requirements at a much higher level than in the past. Customers continue to have the options to rent through a third-party financing program or purchase their equipment through us. This continues to be an effective strategy as dish machine placement trends are up year-over-year on the first quarter.

We also are seeing improvement in our accounts receivable, days outstanding and inventory days on hand. Again areas where we are building a more disciplined culture around work standards. Improvements in our expense controls continue to trend positively quarter-over-quarter from Q4 2013 into Q1 2014, specifically in incentives targeting total payroll route expenses, rent and utilities, supplies, travel and bad debt.

Our route optimization efforts remain on track as well as our execution of planned facility eliminations and downsizings. We realized a 60 basis point improvement as a percent of sales from Q3, 2013 to Q4 of 2013 in total route expenses and should realize additional sequential improvement in Q1 2014 due to our ongoing efforts. Rent and utility cost are trending at a 60 basis point improvement as a percent of sales into Q1 2014 and supplies, travel, bad debt expenses are trending at a 200 basis point improvement into Q1 2014.

Our field, service and sales teams have been instrumental in delivering these expense improvements. We will continue to drive the cultural disciplines in these areas of the business that will make the improvement sustainable from the bottom up over time. Softness in volume, business segment mix shifts and year adjustment to expense supplies led to an increase in cost of sales as a percent of sales Q4 2013. We are seeing improving trends in Q1, 2014. We have one final plant consolidation plan in 2014, which we expect to contribute the most in terms of operating efficiencies when considering all of our previous consolidations.

Although, we have not yet turned year-over-year positive in revenue, we are seeing slightly improved year-over-year revenue growth in our chemical segments, which is adjusted for assets recently sold. Our key opportunities entering 2014 are two lagging chemical business operations with customers located mostly in the Northern U.S. in their chemical segments and our hygiene segment which is struggling. We believe the opportunity for improvement exist equally in each of our four sales regions.

Now, let me walk you through our key plans to grow revenue profitability. Building a strong foundation for our – service and sales team is paramount. We have recently realigned the two teams allowing them to work more effectively together and developing selling strategies and executing geography by customer, by business segments.

We are deploying our sales assets to those segments that we believe have the highest probability for success. Also improvement industry alignment or important industry alignment is ongoing development of our account managers. Other than our hygiene specialists, the account managers are the key linked to a day-to-day customer relationships. We expect this group of team members to be growers of the business, by providing service excellence to each and every customer, every time they face a customer. We expect this to yield three outcomes, improved customer retention, allowing us to up sale with our existing customers, and build our reputation for service that will ensure revenue growth from new customers.

For hygiene services revenue growth opportunities we are attacking on two fronts. First, focusing on our service compliance execution at the route level, and installing the accountability in our hygiene specialists, we are not there yet. And secondly, we are resetting the way we sell our [indiscernible] with customer prospects and closing deals. As always our expectation is that we lead with our value proposition of service excellence and then hold ourselves accountable to deliver it.

We will continue to focus our efforts on building our service and selling organization from the bottom up to be built the last. Having a supporting organizational structure, providing processes, systems and tools, ensuring we have the right leaders in place and setting the expectations that everyone is responsible to grow the business profitably in all key.

We continue to work diligently and filling our revenue pipeline, that’s good wins with specific customers again there is much work to do, but we continued to be confident in our approach and in our people.

I’d like now to introduce Bill Nanovsky, who’ll review the financial results for the quarter in more detail.

William T. Nanovsky

Thanks Blake and good morning. The fourth quarter 2013 revenue was down 5% from the prior year as we continued to fill the consequences of the business last at the end of 2012. In addition, we have the sale of certain non-core businesses, which resulted in a decrease in revenue as discussed earlier by Bill Pierce. Fourth quarter cost of sales improved 2% from the prior year period, however as a percentage of revenue was up a 170 basis points from the fourth quarter of 2012. The increase was primarily due to the lower revenue in the fourth quarter of 2013, the higher mix of chemical revenue and our year end adjustment.

Fourth quarter route expenses declined 11% from the prior year period and as a percentage of revenue fourth quarter route expenses improved a 130 basis points from 2012 due to significant progress made with route optimization and operating standardization initiatives.

SG&A expenses were down $3.6 million from the fourth quarter of 2012 excluding unusual expenses SG&A declined $1.5 million from the prior-year period. During the fourth quarter of 2013 the company sold a portion of its assets held for sale for $6.1 million.

Additionally, the company recorded an impairment of $3.1 million on the remaining assets held for sale. As of December 31, 2013 Swisher had assets held for sale on its balance sheet of $4.5 million. In addition in the fourth quarter of 2013, Swisher recorded a goodwill impairment charge of $93.2 million in conjunction with the impairment test that we did at 12/31/2013.

On the balance sheet we have $21.5 million in non-restricted cash and $43 million in working capital as of December 31. We also have $7.3 million in outstanding debt having paid down an additional $700,000 during the quarter and paid down a total of $7.6 million in 2013. Also for 2013, we spent $16.8 million on property and equipment purchases, the majority of which was related to dish machines and chemical dispensers placed at customer locations plus the cost associated with the consolidation of our chemical manufacturing facilities.

As mentioned before we expect to spend less than $10 million on property and equipment purchases in 2014. At this time I would like to turn the call back over to Bill Pierce for closing remarks.

William M. Pierce

Thank you, Bill. To sum it up the fourth quarter stock begin to realize the cost efficiencies as we started to execute our business strategy, while our expense lines are showing improvement we still have so many work to grow our top line in a profitable manner and this our primary focus in 2014 for both the chemical and the hygiene portions of our business.

We are entering our seasonally strongest six months period with the firm strategy in place and we remain committed to our philosophy of service, people and profitability. We have an operating plant, committed management and field team and assets necessary to achieve success. We know there is a demand for an alternative provider in this $30 billion industry, now it’s up to us to execute and go out and get the business.

Thank you for joining our call this morning and for your continued support. We will now open the call for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Justin Hauke of Robert W. Baird. You may begin.

Justin P. Hauke – Robert W. Baird & Co., Inc.

Hi, good morning. So I guess maybe the first thing to drill into is, you talked about some of the items that impacted the top line. And I guess I was hoping to get a little more color, maybe you could quantify, the contribution from the businesses that were sold throughout the year, and maybe the contribution of the lost customers. And I guess the next part of that question would be where there incremental lost customers this quarter or are these ones that were previously lost earlier in the year.

William M. Pierce

Good morning, Justin. Good question. Let me try to break that apart, and I’ll ask Blake to fill in anything that might have missed, essentially on terms of a year-over-year basis on Q4 2013 to Q4 2012 there was a water filtration business that was quite proper for us that was sold late, closed late in Q4 of 2012. So you got that business that had a full quarter’s impact, you had the three customer losses, which had impact for the majority of the quarter and that we announced that we had lost and I believe in earlier filings, but they still had deliveries well into November and in one case into December, you had those three customers that you need to pull out. Then we had the sale of a relatively small first asset held for sale or a couple of non-core route operations sold early in the fourth quarter of 2014.

If you add all those up and Blake and I accounting through the numbers together, its probably a little less than half of the 5% so that means that on a true year-over-year basis, if you strip those out, I’m answering your question properly, we had about a 2.5% to 3% year-over-year loss adjusted for those factors. Okay and looking at where the softness came from I’ll ask Blake if he wants to applying on it, same issues we saw some softness in the northern geographies of our business late in the fourth quarter that had some negative impacts for us on a year-over-year basis. And your second question I believe was for us the other 2.5% or 3%, where it come from some of that was in the softness in year-over-year and those Northern geographies, but quite frankly as we’ve said before we need to continue and improve upon our retention, so that our new sales will translate in deposit revenue year-over-year. Blake do you have any other comments on…

Blake W. Thompson

Yes, just to reiterate what Bill’s comments were we’ve had – we look at our business in really seven business ops. One of that – one of those is primarily dedicated to linen, the others have excellent hygiene and chemical business. Four of those ops had positive trends in the first quarter year-over-year with chemical growth. One of those had fairly significant growth year-over-year and one geography of the U.S. Our softness when you look at our businesses as I mentioned earlier really came in our Northern geographies and a couple of business units that have a predominant customer base in that area as well as softness in our hygiene business that we’re continuing to address.

William M. Pierce

That was kind of this report card as we’ve got late into Q4 in addition of what we did outline and that spilled over in Q1. Does that answer your question, Justin?

Justin P. Hauke - Robert W. Baird & Co., Inc.

Yes, that was very helpful. I appreciate all the color that help us think about this a little bit better. I guess maybe just following on the sales question and then I’ll move on to cash flow, but you mentioned the business lines that are positive in the first quarter and you said that’s mostly the chemical line pressure is still in the hygiene services lines. I guess I’m trying to think how much of the business is positive I mean it just do you have the seven ops, is it one or two of them that are positive, is it half of the businesses is now having positive growth. I’m just trying to think of what the trajectory is as we move into 2014?

William T. Nanovsky

Well, I think if you look at our business majority of our sales are on the chemical side and year-over-year we have a positive trend on the chemical side of the business with the exception of those geographies that I mentioned in the Northern part of the U.S. and again hygiene is playing a fairly significant piece of the gap although it’s a smaller percentage of our total sales.

William M. Pierce

Yes, Justin I think if you’re talking about. So was it take to turn this thing positive it’s the – the continued improvement on the retention on the base, which is showing up on the chemical side and continued growth getting those the areas that have underperformed in the North in the early part of the quarter to start getting ahead. And then, continued focus on the hygiene as well to short up, so, that we can – you’ve got the base to which the spring boarding growth firm. We can see a path to get there and the fact that, the hygiene business has grown in some of the markets. So we just need to get all the pieces clicking at the same phase and that’s what the focus is and Blake will talk a little bit about the reorganizing the sales force to address these in the areas we need some improvements. So if you were to quantify if there is probably 30% of the business that we need to see have the most positive steps to turn the whole piece, whole, but we got to keep the gains nearly 70%, is that fair Blake.

Blake W. Thompson

Yes.

William M. Pierce

Does that answer your question?

Justin P. Hauke – Robert W. Baird & Co., Inc.

Yes, no it does I mean I guess it sounds like 1Q is going to still probably be on a consolidated basis, negative year-over-year and potentially as we move through 2014 the later quarters hopefully going to turning positive reflecting positively.

William M. Pierce

Yes, when we report on the Q1 again we said in the talk that the asset that closed, held for sale that closed part of the end of the year had a revenue contribution in 2013 at around 7.1.

Justin P. Hauke – Robert W. Baird & Co., Inc.

Right.

William M. Pierce

So we’ll be better prepared to quantify that, that equates to about $600,000 year-over-year of assets held for sale that you’ll pull out. So along your line of company where the percentages came from when we report in Q1, when we report that in May we’ll have talk, try to give you an analysis, but you’ve asked the question with respect to here what it was year-over-year, here is with the linen piece was, you know about and here would be the base, the resulting base of business that would be helpful.

Justin P. Hauke – Robert W. Baird & Co., Inc.

Yes, that would. I guess just moving on and I guess I want to address the cash flow, that the burn rate was a little higher than what we were looking for this quarter and you know I know some of that because that the revenue was lighter, it’s positive that the CapEx needs are going to be coming down, but I guess, I am just trying to think you’ve got just over $21 million in cash, you got call it roughly $10 million of CapEx need, you got another $5 million of debt payment that’s due this year and in the businesses is not turned to a point where it’s generating positive operating cash flow. So I’m just trying to think, is there anything that we should be thinking about in terms of how you are thinking about the cash liquidity of the business over the year ahead?

William M. Pierce

On the – let me give you a little detail and I’ll answer – I’ll answer your question broadly, but let me give you a dropdown and give you a little detail on the, there is about $5 million in the financing or obligations that you outlined of that only 2.7 is outside of it – is outside of the P&L, there is some insurance financing that runs through the P&L, some capital leases that runs through the P&L. So if you look on the balance sheet and see okay, we saw the 5.2 or something a long-term obligations, that’s going to run through the P&Ls and is already baked into our internal planning. So the difference is last year I think we had about almost $5 million and Bill Nanovsky you can correct me, almost $5 million in notes payable beyond our operating cash flows, this year its total of about $2.7 million. So of the $5 million you are looking at $2.7 million is notes payable that are other than operating cash flow and the rest that it runs with the P&L. Okay, so that kind of breaks down.

Justin P. Hauke – Robert W. Baird & Co., Inc.

So only half of that will be a financing in the other half.

William M. Pierce

Yes, you got it, yes, exactly. The rest of it runs through, while half of it runs with the P&L and the other half is basically notes payable below the operating cash flows. We have the capital that execute on our plan and late in the fourth quarter, we started to see everything come together, which is not unusual in my experience, when you got, when you are trying to get a group of people focused around the core values that happened 60, 75 days before, but once you get everyone moving in the same direction, we still have work to do there.

The results started to come in at Q4 which I’ve said in the couple of conferences that we started to see late in the quarter, late November into December, starting to really start showing up and it’s a tribute to the folks in the field they are making this happen. We have a very strong regional operating group that has bought into this, that is driving these results in the field and it started to accelerate and pick up stream.

So let just say that and we’ll be reporting in May, let’s just say that cash usage in Q1 looks nothing like it did in Q4, we still need to improve and quite frankly we – that concludes a headwind in Q1 if you read through all the K in detail have $1.9 million in cash that we had to pay for a – the cash went up, it was an expensive Q4 that the cash was paid early in Q1 from a settlement of a lawsuit that had to do with discontinued lease segment that has nothing to do with the continuing operations.

Justin P. Hauke – Robert W. Baird & Co., Inc.

And then to be clear on that legal settlement that’s the only cash obligation in the company right because of the other, the one that you press release to $5.5 million.

William M. Pierce

That’s reimbursable by insurance wide.

Justin P. Hauke – Robert W. Baird & Co., Inc.

Right, okay. All right.

William M. Pierce

Yes, it’s covered in the reimbursable by insurance.

William T. Nanovsky

Yes, so despite these, so when I tell you that there is a – the Q1 is significantly improved that includes the headwind, something that was not anticipated which is the 19 settlement, that’s outside of our offering piece and we’ll be reporting on that. So you can get your arms around it and in May, but the significant improvement, a significant difference if you look at – if you were to look – take a snapshot and we still have work to do. So I don’t want to be misleading in that work where we want to be or need to be, but it’s a different cost structure and a different operating result as it relates to cash, heading into this year, and our plan – our plan calls for significant improvement on that.

Justin P. Hauke – Robert W. Baird & Co., Inc.

Great, that’s helpful. I’ll jump back in queue and maybe come back in one or two more later.

William M. Pierce

You bet.

Operator

Thank you. (Operator Instructions) We have a question from Michael Epstein of Northeast Securities. You may begin.

Michael Epstein – Northeast Securities Co., Ltd.

Good morning gentlemen. I hear a much improved management team which I thank you for. We added the linen business at the current time?

William T. Nanovsky

Good morning, Mike. No we’re not, we have a significant item, Michael can you hear me?

Michael Epstein – Northeast Securities Co., Ltd.

Yes, hearing you, fine, thank you.

William T. Nanovsky

Okay. Good morning.

Michael Epstein – Northeast Securities Co., Ltd.

Good morning.

William T. Nanovsky

No, we’re not out of the linen business, we have still operating some of the assets held for sale, but we also have a profitable relatively large processing plant that is additive to our operations, that is extremely well run, that is very competitive in its market place, and that continues to add to the value of company, and we’re happy with it. And so we still retain that, it’s not in and out itself, it is not a material part of the companies revenue mix, but it is profitable and so its additive to the cash flow answer that we’re all looking for.

Michael Epstein – Northeast Securities Co., Ltd.

Okay. How would you define the company, are we a chemical company, or we a service company, or do we make chemicals that filled in the needs of the restaurant and the hospitality industry. I guess that’s my question?

William T. Nanovsky

We are a hygiene company with chemical and product solutions, primarily for the hospitality industry, but also for restaurants sanitation and a number of commercial office and other applications. Okay, the primary - is the hospitality market.

Michael Epstein – Northeast Securities Co., Ltd.

Okay, when do we think we’re going to get profitable?

William T. Nanovsky

We’re going to talk in detail about that on the May call. I’ll talk – I said what we have in a minute, we haven’t turned a corner yet, but we’re peeking around it Michael. And in May we’re going to tell you what that relates to in terms of when you can expect to see operating and cash flow profitability.

Michael Epstein – Northeast Securities Co., Ltd.

Okay, another suggestion, I might have is 10 for 1 reverse split will take us out of the basement of this on the dollar stock, which today the brokerage compliance of province do not let individuals purchase shares and its consideration that I would like to put up – put forward to the board.

William T. Nanovsky

Thank you, Michael. As NASDAQ actually is requiring us as part of our compliance with them to have a plan for reverse stock split in place if it is necessary, the board obviously will comply with that, in the shareholder meeting there will be a discussion about that. So your point is noted and were actually required to do that by the NASDAQ, and but so you know this management team is focused solely on delivering the results to get us there, if it we can get there based on the investors confidence in the company on our actions and on our results. So while NASDAQ is going to require it, your team is focused on delivering the results that would get us there based on the visibility of our actions.

Michael Epstein – Northeast Securities Co., Ltd.

I wish you guys lots of luck, you have a great management team in place and I wish you the best.

William T. Nanovsky

Thanks, Michael.

Michael Epstein – Northeast Securities Co., Ltd.

Thank you.

Operator

Thank you. I’m showing no further questions at this time. I’d like to turn the conference back over to Bill Pierce for closing remarks.

William M. Pierce

Justin, do you want to jump back in.

Justin P. Hauke – Robert W. Baird & Co., Inc.

No.

William M. Pierce

Okay, we appreciate everyone’s attention. We appreciate your attendance. We have climbed a pretty steep hill, we can see the valley and there are other hills ahead of us, and we can only get over them as a team, and that’s what we are focused on. Thank you for your continued interest and have a great day and a great week.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.

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