Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL)
Q1 2017 Earnings Conference Call
November 22, 2016 11:00 ET
Jessica Hazel - Senior Manager, Investor Relations
Sandy Cochran - President and Chief Executive Officer
Jill Golder - SVP and Chief Financial Officer
Chris Ciavarra - VP, Marketplace and Product Development
Jeff Wilson - VP and Principal Accounting Officer
Joseph Buckley - Bank of America
Steve Anderson - Maxim Group
Michael Gallo - C.L. King
Alton Stump - Longbow Research
Jake Bartlett - SunTrust
Bob Derrington - Telsey Group
Good morning and welcome to Cracker Barrel Fiscal 2017 First Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jessica Hazel, Senior Manager, Investor Relations. Please go ahead.
Thank you, Todd. Good morning and welcome to Cracker Barrel’s first quarter fiscal 2017 conference call and webcast. This morning, we issued a press release announcing our first quarter results and our outlook for the 2017 fiscal year. The press release can be found in the Investors section of our website crackerbarrel.com. In that press release and during this call, statements maybe made by management of their beliefs and expectations of the company’s future operating results or future expected events. These are what are known as forward-looking statements, which involve risks and uncertainties and in many cases are beyond management’s control and may cause actual results to differ materially from expectations. We urge caution to our listeners and readers in considering forward-looking statements and information. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning’s press release and are described in detail in our reports that we filed with or furnished to the SEC. We urge you to read this information carefully.
We also remind you that we do not comment on earnings estimates made by other parties. In addition, any guidance or outlook we provide or statements we make regarding trends speak only as of the date they are given and we do not update or express continuing comfort with our guidance, outlook or trends, except in broadly disseminated disclosures such as this morning’s press release, filings with SEC or as otherwise required by law.
On the call with me this morning are Cracker Barrel’s President and CEO, Sandy Cochran; Senior Vice President and CFO, Jill Golder; Vice President, Marketplace and Product Development, Chris Ciavarra; and Vice President and Principal Accounting Officer, Jeff Wilson.
Sandy will begin with a review of the business and Jill will review the financials and outlook. We will then open up the call for questions for Sandy, Jill, Chris and Jeff. We ask that you please limit your questions to matters relating to the company’s performance, outlook and plans.
With that, I will now turn the call over to Cracker Barrel’s President and CEO, Sandy Cochran. Sandy?
Thank you, Jessica. Good morning, everyone. Thank you for joining us on the call. This quarter marks the 10th consecutive quarter of positive sales growth and our 20th consecutive quarter of outperforming the casual dining industry. We believe that differentiation of our brand experience and our excellent operations execution and our broadened marketing efforts helped us in outpacing the industry.
We grew our first quarter earnings per diluted share by 18% to $2.01, which was above our previously stated guidance and above consensus. In short, this favorability was driven by additional commodity favorability and the timing of some anticipated expenses just partially offset by increased retail markdown spend. Jill will be providing more detail around the financials for the quarter, but before she does, I would like to share highlights from the quarter and update you on some of our plans for the remainder of the year.
This quarter included the final month of our summer campfire menu promotion, which ran through mid-August and drove continued favorable sales mix. Following the summer promotion, we introduced our full menu offerings, which included an indulgent pumpkin spice pancake breakfast, a guest favorite French dip sandwich platter, and a new harvest kale chicken salad. We are pleased with the guest responses toward this promotion, which ran for much of the quarter. Our stores are currently gearing up for the busy holiday season as we focus on growing our off-premise business. This year we will offer an expanded family sized meals to go program, during the Thanksgiving and Christmas holidays. We are excited about the growth of this platform to include a heat and serve offering that serves up to 10 guests and can be picked up in stores during the holiday week and prepared at home. We believe our strong equity and real homestyle foods and history as a destination for holiday occasions position us well for the large party off-premise solutions and we anticipate the system-wide rollout will drive favorable sales mix during the holidays.
Regarding our retail business, this quarter proved to be very challenging period both within Cracker Barrel and within the retail industry as a whole. We had fewer restaurant guest visits with fewer of those guests purchasing a retail product. And for the first time since the second quarter of fiscal 2014, we reported negative quarterly retail sales. Across merchandise categories, the favorability in print media offering like cookbooks and stationery as well as in décor and cookware was offset by year-over-year declines in apparel particularly, outerwear, accessories and candles. Our teams are working diligently to address the current sales situation through the use of promotional activity, as we continue to see guests favoring value price points in our assortments. Additionally, we have new product assortments that will hit the floor beginning this week and we will continue introducing fun, unique and nostalgic themes throughout the fiscal year to drive guest interest and purchase intent.
Our first quarter marketing efforts centered on brand strengths, including the affordability of our menu and our unique breakfast all day platform. First, regarding our messaging around our everyday menu affordability through national cable advertising, local television, media heavy ups and localized Spanish media advertising, we brought the story of our country dinner plates category to life. This core menu category allows the guest to customize their meal by selecting 1 of 10 protein offerings and pairing it with two of our more than 20 side options. Served with the choice of biscuits or cornbread at $7.99 price point, the country dinner plates category builds value perceptions targeting the dinner day part.
Recognizing that today’s consumers are focused on value, affordability and variety, we will continue to feature our country dinner plates throughout our 6-week second quarter cable flight. Another brand strength we chose to highlight in our first quarter marketing efforts was our Breakfast Y’all Day platform, and for those of you didn’t hear me, I did in fact say, y’all day. Breakfast all day has been a key differentiator to the Cracker Barrel brand since 1969 and we chose to play on words to convey our distinct Southern brand heritage in a humorous way, particularly targeting the millennial consumer. With breakfast all day emerging as a recent topic of conversation among consumers looking for differentiated experience and with it being one of our natural brand strengths, we identified an opportunity to interact with guests through the use of our billboard advertising, social and digital media and retail merchandise in a fun and uniquely Cracker Barrel way.
Looking to our fiscal year marketing efforts, we are continuing our national cable advertising flight with pulsed on-air weeks throughout the remaining three quarters. We are expanding our social media presence with the addition of new channels. We are leveraging location-based marketing to effectively reach our consumers and we are increasing our presence in paid search advertising. We believe the diversification of these marketing efforts will keep our brand relevant and drive both reach and frequency with today’s consumer.
The operations team made significant progress on our identified cost reduction initiatives during the first quarter. As a result of our fusion learnings, we changed the structure in our retail sales and service functions and now cross-train our retail sales associate and cashier positions. This system-wide change allows us to deploy fewer associates during our low volume hours reducing store hourly labor by between 25 hours to 30 hours per week. We believe this initiative will be a significant contributor to our fiscal 2017 cost savings. Additionally, we continue to see favorability in our restaurant cost of goods line driven by our targeted food management initiative as well as in our utilities line from the implementation of LED lighting, which is currently being installed on the exterior of our stores.
We continue to grow our store base in new and developing markets and open 2 new Cracker Barrel stores during the first quarter, including our second store in Las Vegas. We have been pleased with the guest responses to our new store openings and we currently anticipate opening 6 or 7 additional Cracker Barrel stores this year, including our entry into the Pacific Northwest. We opened our third Holler & Dash restaurant earlier this month and continue to be pleased with our progress. Each store has provided its own learnings around performance in different markets or types of locations. With stores open in Homewood, Alabama, Tuscaloosa, Alabama and now in Celebration, Florida, we remain optimistic about the brand and are excited about our upcoming opening in the Nashville area.
Before I turn the call over to Jill, let me say that our fiscal year is off to a good start. We are seeing early success from our cost saving initiatives, continuing to experience commodity favorability and are excited about growing our off-premise business through programs like our holiday heat and serve offering. While we continue to believe our efforts will resonate with our core and targeted guest base, we remain cautious in our traffic outlook for the fiscal year. Yet I remain confident that our continued strategic focus to enhance the core, expand the footprint and extend the brand will further move the brand forward and deliver solid returns for our shareholders.
And with that, I will turn the call over to Jill Golder, our CFO for more details on the quarter.
Good morning, everyone and thank you, Sandy. I would like to begin by discussing our financial performance for the first quarter of fiscal 2017 and then our outlook for the 2017 fiscal year.
In this morning’s release, we reported first quarter net income of $48.4 million or $2.01 per diluted share, representing an 18% increase over prior year earnings per diluted share of $1.70. For the quarter, we reported total revenue of $710 million, an increase of 1% when compared to prior year revenue of $702.6 million. Our restaurant revenue increased 2% to $573.7 million. This was partially offset by a 2.9% decrease in retail revenue to $136.3 million.
Our total revenue increase was driven by positive comparable store sales growth and the net opening of 2 new Cracker Barrel stores, one in Mayfields, Kentucky and one in Las Vegas, Nevada. Comparable store restaurant sales in the quarter increased 1.3% as average check increased 3% and traffic decreased 1.7%. The increase in average check reflected menu price increases of approximately 2.2% and the favorable mix menu impact of 0.8%.
The first quarter mix favorability was driven primarily by seasonal featured offerings, including a limited time mushroom Swiss hamburger steak country dinner plate, our core menu grandpa’s country fried breakfast, and our limited time pumpkin spice pancake breakfast. All of which, we believe were offered at a great value to the guests. Comparable store retail sales decreased 4%. As Sandy shared, the quarter included negative store traffic in addition to fewer guests making a retail purchase. We continue to be cautious in our outlook of our retail business through the holiday season.
Total cost of goods sold in the quarter was 30% of total revenue, a 170 basis point improvement from the prior year quarter. Our restaurant cost of goods was 25.4% of restaurant sales compared to 27.5% in the prior year quarter. This 210 basis point improvement was driven primarily by favorability in our commodity market basket. On a constant mix basis, our food commodity costs were approximately 5.1% lower in the quarter than in the prior year quarter driven primarily by deflation in most of our market basket categories, with the greatest dollar favorability from our eggs and beef categories. The commodity deflation we realized in the first quarter was more favorable than we had previously anticipated.
Our retail cost of goods sold was 49.6% of retail sales compared to 48.6% in the prior year quarter. This 100 basis point increase was primarily the result of increased markdown spend. Our retail inventories at quarter end were $146.9 million compared to $145.3 million at the prior year quarter end. Labor and related expenses were $249.1 million or 35.1% of revenue compared with $244.3 million or 34.8% of revenue in the prior year quarter. This 30 basis point increase was primarily due to higher wage pressure, increased management staffing and a higher store bonus that was driven by first quarter favorability versus planned. These were partially offset by favorability we realized through our retail sales and service cost reduction initiatives and by employee benefits favorability.
Other store operating expenses in the quarter were $137.9 million or 19.4% of revenue compared with other store operating expenses of $135.7 million or 19.3% of revenue in the prior year quarter. This 10 basis point increase was primarily driven by planned depreciation and advertising expense increases that I spoke to on our last quarterly call. This unfavorability was partially offset by favorability related to lower expenses for our current year district manager meeting than for our prior year biannual manager conference and training event as well as by decreased utility expenses from the implementation of our LED lighting initiative. Store operating income was $109.8 million in the first quarter or 15.5% of revenue compared with store operating income of $99.6 million or 14.2% of revenue in the prior year quarter.
General and administrative expenses in the quarter were $34.1 million compared to $34.3 million in the prior year quarter. As a percent of revenue, G&A decreased 10 basis points to 4.8% versus 4.9% in the prior year first quarter. This 10 basis point decrease was primarily driven by lower incentive compensation.
Operating income was $75.7 million or 10.7% of revenue compared with operating income of $65.3 million or 9.3% of revenue in the prior year quarter, a 140 basis point improvement. This favorability was primarily driven by sales growth, additional commodity deflation and timing of expenses we now anticipate occurring in the second half of our fiscal year. These timing shifts, which drove approximately $0.10 of our first quarter earnings per diluted share growth, included expected increased marketing spend and investments in employee-related expenses, which will now occur in the second half of our fiscal year.
Net interest expense for the quarter was $3.7 million compared to $3.5 million in the prior year first quarter. Our effective tax rate for the first quarter was 32.9% compared to an effective tax rate of 33.8% in the prior year quarter. This 90 basis point decrease was primarily due to the reinstatement of the Work Opportunity Tax Credit.
Turning to our balance sheet, we ended the fiscal year with $125.1 million of cash and equivalents compared to $127.5 million at the prior year quarter end. Our total debt was $400 million at quarter end. With respect to our fiscal 2017 outlook, everyone should be mindful of the risks and uncertainties associated with this outlook as described in today’s earnings release and in our reported filed with the SEC.
As we announced in this morning’s release, we are raising our full year earnings guidance. We now expect to report earnings per diluted share for the 2017 fiscal year of between $8.10 and $8.25. We continue to expect total revenue of between $2.95 billion and $3 billion. We continue to anticipate comparable store restaurant sales growth for the full fiscal year in the range of 1% to 2%. We now expect our fiscal year performance to be in the lower half of that range driven by a modest expectation for traffic improvement in the second half and the planned second half pricing deceleration.
We now anticipate comparable store retail sales of approximately negative 0.1%, reflecting a more cautious outlook in the retail environment. Specifically, we believe that retail sales will improve from our first quarter performance, but will remain negative through the second quarter. We now expect to open 8 or 9 new Cracker Barrel stores in fiscal 2017. We anticipate increased fiscal 2017 second half pre-opening expenses attributable to this updated expectation and to support planned openings for the first quarter of fiscal 2018. We continue to expect to open 4 or 5 new Holler & Dash stores in fiscal 2017. We now expect decreases in food commodity costs on a constant mix basis in the range of 3% to 4% for the fiscal year, with the first half of the year being more deflationary than the second half of the year.
We believe the additional anticipated favorability is being driven by the lower industry traffic, yielding additional to domestic supply in the commodity market. We have blocked in our pricing on approximately 60% of our commodity requirements for fiscal 2017 compared to 50% at this time, last year. We expect depreciation expense of between $85 million and $87 million for the year. We expect our operating income margin for the year to be approximately 10% of total revenue. We anticipate net interest expense of approximately $15 million. We now expect an effective tax rate for the year of approximately 32%. We anticipate that capital expenditures for the year will be approximately $125 million.
For the second quarter of fiscal 2017, we expect to report earnings per diluted share of between $2.05 and $2.15. The second quarter guidance is predicated on our current expectations, including expected headwinds from a continued cautious traffic and retail sales outlook, coupled with an anticipated increase in retail markdown spending, partially offset by tailwinds from the anticipated commodity deflation and second quarter favorability in our advertising spend.
And with that, I will turn the call over to the operator, so that we can take your questions. Thank you very much.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Joseph Buckley with Bank of America. Please go ahead.
Hi. Thank you. I have two questions. Jill, could you go through the $0.10 of timing EPS benefit in the first quarter, I think you mentioned marketing and employee related expenses, but could you expand a little bit on that and when do you think that will surface, is that like a third quarter, fourth quarter timing when those expenses will come back into play?
Sure, Joe. The timing shift, which we believe drove approximately $0.10 of our first quarter earnings growth included shifts in anticipated incremental marketing spend. Some expected impacts from employee related expenses like training as well as general and administrative expense timing. And we do believe these expenses will occur in the second half of our fiscal year.
Okay. On the marketing side, was there any difference in number of weeks you were on TV year-over-year or was this spending outside of that TV medium?
Yes. Joe, this is Chris. We had one fewer week in Q1 versus prior year. As we move into Q2, we will have the same number of weeks on a year-over-year basis with more [waits] [ph].
Okay. And then, we have one more question just kind of just big picture. Sandy, are you seeing any change in consumer behavior, any sign that consumer might be picking up again at this point?
I was wondering, how long it would take for that question, Joe. We don’t comment in between the periods. So I won’t comment on the performance in the second quarter. As we stated on our last call and as we do currently believe, we are hopeful that the consumer environment will be improved in the second half of the year.
Okay. Thank you.
The next question will be from Steve Anderson with Maxim Group. Please go ahead.
Yes. Good morning. I have a couple of questions, first I wanted to ask about any impact that you saw from Hurricane Matthew, given your exposure from the – in the Southeast U.S.? And I have a follow-up on labor costs.
Great. Good morning Steve. Yes, there were several unfortunate weather events during the first quarter, which included flooding in Southern Louisiana, Hurricane Hermine and Hurricane Matthew. We believe these events negatively impacted our traffic results in the quarter by about 20 basis points, with the majority of that impact from Hurricane Matthew in October.
Okay. And with regard to the potential change in the managerial overtime costs, in fact as it’s slated to go in some – by December 1, I just wanted to ask if you have a detailed estimate of what you would see that going forward?
Detailed estimate of – I am sorry.
I am sorry, this is the regulation that requires increased compensation for managerial overtime?
Yes. Okay. We have done that analysis, of course and are in well positioned to – when it goes into effect on December 1, it had a modest impact on our managers.
Okay. Thank you.
The next question is from Michael Gallo with C.L. King. Please go ahead.
Hi, good morning. Just a question on the spread between – obviously check up 3%, commodities down 5%, I know you have talked about in the past that you thought that would moderate, so given that commodities have continued to be probably if anything a little bit more deflationary, I was wondering how we should think about your plan for pricing, as you come to the back half of the year and some of the pricing rolls off? Thanks.
I will let Chris. Chris, why don’t you take that one?
Okay. Good morning, Michael. I think we launched our market level pricing programs a few years ago. And look, we continue to refine that program, believe through continued selective adjustments that we can reach our guidance. As a matter of confidence, we continue to read our pricing actions and believe that we can pull through those planned increases. Obviously, we remained careful in this environment, as Joe noted a plan for a slightly lower level pricing in the back half, which is baked into our guidance.
And the next question is from Alton Stump of Longbow Research. Please go ahead.
Hi. Thank you. Good morning and congrats on first quarter results.
Thank you, Alton. Good morning.
Good morning. Just a quick question following up on the consumer question of certainly it’s been a choppy last couple of quarters in the restaurant space, but based on what you guys reported and also a couple of other family dining concepts that obviously have a lower average ticket, you seem to be holding up better than sort of mid to high-teen average ticket in the bar grill space, etcetera. Is that in line with what you are seeing and is that part of your strategy to focus more on value with your advertising?
Well, with respect to the consumer, as we talked about on the last conference call, the environment that we certainly were in during the first quarter and to a certain degree expect to continue to be in through the second is uncertainty. Clearly, with the election behind us, some of that has been resolved, but there are a number of issues that will continue to be on I think consumers mind and potentially impact the degree to which they eat out at restaurants. In terms of our emphasis, we have believed that value was important to our consumer and that we needed to ensure that our marketing programs and our offerings were reinforcing our value position. We also do want to highlight the new news in the menu things like our campfire offering and then reinforce the strength of our brand with things like breakfast all day, as I mentioned in my remarks. In addition, our marketing plans, I think in the emphasis that we placed on integrating our marketing plans this year and putting more emphasis on the digital side, we were able to engage with our guests in new ways that continue to make the brand more relevant.
Helpful. Thanks. And just a real quick follow-up, I know it’s awfully early with your new two stores on Vegas, but any sort of a really read out to how that’s going in comparison to other stores that you have opened up, perhaps into the core markets, if there is any differences that you are seeing?
We have been very pleased with the guest reaction out in Las Vegas. And we now have two stores there. And I don’t know [inaudible] rather than we are pleased. We appear to be attracting some of our guests are clearly tourists in Las Vegas. It appears that some of them are traveling to dine with us from California. And we haven’t had a restaurant that was close enough prior to these two. And so I am optimistic about our move to the West.
Great. Thanks Sandy.
The next question is from Jake Bartlett of SunTrust. Please go ahead.
Great. Thanks for taking the question. Understanding that you don’t give very much detail about the current quarter, I believe you said that you didn’t mention that retail was going to be negative, are you giving any indication of what you expect for the restaurant same-store sales, as you have done in some quarters in the past?
No, we are not really providing much more than the guidance that Jill gave. I think we were more clear about the retail given that, that environment was unusual and we did feel that the retail environment, the weakness there would persist or at least we are anticipating that it is going to persist through Christmas and through potentially the end of the second quarter.
Okay. And is that weakness, is it purely just the conversion or I guess would it also be a function of traffic and what you are expecting there?
It’s both really. So as I mentioned, it is we – our traffic was down, so we had fewer guests to begin with and then within that group, our conversion was down in the first quarter. I think to some degree that reflects the impulse nature of a lot of our retail offering and in an environment where the consumer is challenged, anxious. They – you might come and dine with us, but then decide to wait on the retail purchase. The team did a good job, I think of using our mark-down spend to drive retail sales in the categories that we did. And I am optimistic about the new product that’s coming onto the floor and hope that that will be interesting to the consumers that we drive in over the next couple of months.
And just on pushes and pulls in the quarter and I know Christmas and the timing of Christmas has had different impacts for competitors. I believe you mentioned in the last quarter call that you expect it to be a benefit. And I want to understand that given that I would think that Sunday will be a pretty good day for you anyway. Maybe if you can clarify how Christmas is a benefit having it shift to Sunday this year? And maybe if you could go into some of the differences with the take-out or the full meal offering that you are doing this year in Thanksgiving and in Christmas versus what you have done in the past?
Right. Why don’t I start with Christmas question and then I will ask Chris to speak on the off-premise offering. So generally, when people talked about it being a benefit, it’s the number of days between Thanksgiving and Christmas and in this year what we are getting is an extra Friday, which we consider to be – it’s a very strong day, so that – in our projections we view that as a positive and that’s baked into our plan for the Christmas season. Chris, I will let you speak to the off-premise product.
Sure. So I think you all know we have a pretty successful off-premise business in Q2 particularly tied to Thanksgiving and to a, what we call, ready to serve program. It’s a hot program that goes out our doors for about $65, this year $67.99. One of the limitations that program has been that is only able to be served on that day. So, it places a lot of pressure on our stores both in terms of the ability to service that business and our dine-in business. So, we have been testing over the past couple of years a cold program, we call heat and serve carries a higher check at Thanksgiving $99.99 that serves 10 and allows the guests to pick it up to 2 days in advance that holiday. So thereby opening up more occasions we can serve and reducing demands and constraints on our stores. We are excited to extend that program also into Christmas and so obviously that program will have some benefit for us in the form of mix, which is baked into our projection.
Great. And lastly, in the first quarter here, how much was the lower – how much did the lower commodities help, what were you expecting, I think you got the 5.1% deflation, what were you expecting in the first quarter?
Go ahead, Jill.
Well, I would just say that we did expect to have lower commodities, but more modest than what we actually experienced, but we don’t like to give out the detailed line items.
Thank you very much.
[Operator Instructions] The next question comes from Bob Derrington of Telsey Group. Please go ahead.
Yes, thank you. Chris, could you give us a little bit of color on your – the TV spots here locally in the national market, I think I have seen recently some of your TV spots featuring your country dinner plates with the price point. The spots look better than – I shouldn’t say better, but it looked more appealing from a food photo standpoint. Are those different? Have those changed over the last couple of months?
So – hey, Bob, good to talk with you. Yes, I think we did – I think as Sandy talked about it in prepared remarks we were focused on driving a message around affordability and variety at the dinner day part in Q1. We utilized the new spot we call troubadour, which was really a way of kind of bringing the guest – or the customer experience in the store to light, having some fun, being a lot more engaging and using that as a vehicle to drive excitement and interest in the brand. So as Sandy said in her prepared remarks, we are really trying to drive affordability and value and variety.
It’s interesting you say that, because when I think about affordability and value and I look at the pricing that you have got this year for your Thanksgiving dinners in the store. It looks like the adult menu, the adult meal is priced 8% higher and the kids meal is priced 14% higher. So, is it a function of having a captive market out in suburbia, where you can charge that much and you are not afraid of any pushback from consumers?
Yes. I would say, I will talk about it in a couple of ways. One is obviously we continue to believe we have got a very competitive offer in the marketplace and are pretty proud of what we have. We pay a lot of attention to the other offers that are in the marketplace and ensure that we are driving what we believe is both competitive and a good value and we continue to believe that what we present is that. So I am not sure talking about the captive market so much is just ensuring we are presenting something that works.
Well, in this area, there is not too many restaurants open on Thanksgiving, so yours is a go-to place. Thank you.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Sandy Cochran for any closing remarks.
Yes. Thank you all for joining us today. I am pleased with our first quarter results and encouraged by the initial progress we have made in our business plans. We look forward to building on the success of this quarter throughout the remainder of our fiscal year. We appreciate your interest and support and wish you all a safe and happy holiday season.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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