General Electric Company CEO discusses NBCU Transaction

Seeking Alpha

Executives

Trevor Schauenberg - VP, Investor Communications

Keith Sherin - CFO

Jeff Immelt - CEO

Analysts

Scott Davis - Barclays

Steve Tusa - JPMorgan

Jeff Sprague - Vertical Research

Deane Dray - Citi Research

John Inch - Deutsche Bank

Steve Winoker - Sanford Bernstein

Operator

Good day ladies and gentlemen and welcome to the General Electric, GE Investor webcast. At this time, all participants are in listen-only mode. My name is Shequana (ph) and I will be your conference coordinator today. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the program over to your host for today’s call, Trevor Schauenberg, Vice President of Investor Communications. Please proceed.

Trevor Schauenberg

Thank you Shequana (ph). Good morning and welcome everyone. We’re pleased to host today’s webcast. Regarding the materials for this webcast, we issued a Press Release earlier last night and the presentation slides are available via the webcast. Slides are also available for download and printing on our website as usual at www.ge.com/investor.

As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes, please interpret them in that light.

For today's webcast, we have our Chairman and CEO, Jeff Immelt; and our Vice Chairman and CFO, Keith Sherin. Now I'd like to turn it over to our Vice Chairman and CFO, Keith Sherin.

Keith Sherin

Trevor, thank you. Good morning everyone (audio gap) and the implications for GE and I’ll start off with deal itself. We reached an agreement to sell our remaining 49% equity stake in NBCU to Comcast for $16.7 billion. We think this is an attractive exit price. It’s about 10 times the 2012 EBITDA and it’s about 18 months earlier than our first put opportunity which as all of you know was only for one half of our remaining stake.

In addition, we reached in an agreement to sell the NBCU floors in 30 Rock to NBCU. GE Capital has owned those floors since 1996 and Comcast is also buying the CNBC Headquarters in Englewood Cliffs, New Jersey from GE Capital.

The total for the real estate is $1.4 billion and the total proceeds we’re going to receive are $18.1 billion. On the right bar, the second bar shows the composition of the proceeds. GE Capital will receive $1.4 billion of the cash. GE will receive the rest.

In addition of the cash that we’re receiving, we will be getting $4 billion of Comcast guaranteed notes and $700 million of NBCU preferred stock. All of the securities can be monetized at or after closing at GE’s discretion and we’re still working on the details of how we’re going to do that.

We have a plan with Comcast right now to close all of this by late March. As we close this, GE will realize a $1 billion pretax gain on a 49% sale and GE Capital will realize a $900 million pretax gain on the real estate sale. For cash planning purposes this is for GE Industrial, is the sale of the final stake of 49% and as a result we're going to paying approximately $3.2 billion of cash taxes.

So I just put that in there so that when we look at capital allocation planning, we can get the net number. After monetization of the Securities, the GE Parent will realize approximately $13.5 billion in after tax cash. So, we’re really pleased to have reached this agreement with Comcast. We think we're exiting at an attractive price and with that let me turn it over to Jeff to talk about Investor messages.

Jeff Immelt

Great Keith. Good morning everybody. I think it is a great transaction for GE and then what does it mean for GE investors? First, we don't expect any earning solution from the loss of NBC earnings in 2013 and ’14 and we’ll cover that in the next page. It really is an acceleration of cash from our capital allocation frame work. So we really intend to continue our disciplined balanced approach that we've been using and we’ll increase and accelerate the buyback.

Our board has authorized an increase to our buyback from the existing $25 billion to $35 billion through 2015. As of today we have about $23 billion remaining and our plan is to buyback approximately $10 billion worth of stock this year alone. So really, a significant acceleration. And this will really allow us to make significant progress of our objective by reducing our share count below a 10 billion shares.

We remain committed to improving our industrial earnings mix and we will continue to be disciplined on M&A. The gains will enable us to fund additional restructuring and I’ll cover more of that on the next page and as with Keith, but this restructuring will also help us exceed our $2 billion cost of the goal through 2014. So we're making great progress on margins and we think this will allow us to accelerate that and continue that. And so with this acceleration we plan to return $18 billion to shareholders in 2013 through dividends and buybacks.

So, with that back to Keith to really talk about the impact on our outlook and on earnings.

Keith Sherin

Thanks Jeff. Just on the left side, we plan to invest these gains in restructuring in 2013 for our industrial businesses. Our two year cost out goal will be higher than the $2 billion. We don't have the final numbers on that, we're still finalizing the details of restructuring as you can imagine so we're going to have to give you more clarity on that as we finalized those programs but it will exceed the $2 billion goal. The actions are also going to help us ensure that we deliver our margin expansion goals and on the GE Capital side, we plan to accelerate some additional non-core asset exits.

The vast majority of the restructuring, our plan right now is that’s going to occur in Q1 and Q2 and as I said we're still working on the details and we’ll give you more clarity as we finalize what those restructuring programs are.

On the right side, this is the look at the earnings impact. By selling the remaining 49% stake we're going to giving up about we're going to be giving up about $0.06 of NBCU after tax earnings from Q2 through yearend. And there is really three offsets in 2013. First we plan to get about $0.02 worth of benefit from the higher and more accelerated buyback.

Second as you know we had $0.02 of restructuring in our framework that was not planned to be offset by gains. Now it is offset by gains, so the $0.02 is not a drag in our framework, so that's a plus. And third with the additional restructuring we expect to offset the remainder with those benefits in 2013, and obviously in 2014.

Finally if you look, we continue to offset the dilution in '14 of the lost NBCU earnings and beyond and those are going to happen because of the ongoing benefits of the buyback plus the restructuring benefits, plus the earnings from potential M&A. So no change to our overall 2013 earnings framework and as we execute on both the restructuring and the M&A, we expect positive momentum from this transaction as we go into 2014.

Next is a recap of capital allocation. On the left side you can see we're expecting to have $75 billion plus of capital of allocate on '13 through '15. It's coming from our industrial cash flow from our operating activities, plus the GE Capital dividends we expect, plus the NBCU proceeds. And then on the right side is a look at 2013, accelerating this NBCU exit makes 2013 a great capital allocation year obviously.

We started the year with $10.5 billion of parent cash. That's above our $8 billion target. We're expecting $17 billion of $20 billion of CFOA and we’ll have the NBCU proceeds. As Jeff said, you know our disciplined balanced approach to capital allocation hasn't changed. What we have here is an acceleration. We've accelerated and increased the buyback. We have the plan to pay the $8 billion of dividends. We're investing about $4 billion of plant equipment for organic growth and we plan to close the AVEO deal later this year.

So we're going to keep the strong parent liquidity balance. We continue to target that at $8 billion and we obviously have the flexibility to do more M&A or maybe even more buyback depending upon the opportunities that we see out there. So our priorities here haven’t changed but the timing and flexibility have improved significantly.

And finally just to wrap up on the framework, as I said, Jeff said, there's no change to our outlook, the top for both the industrial or the capital segment earnings. So we’re expecting Industrial to be up double digit and GE Capital be a neutral to drop slightly, and so those two things haven't changed with this outlook.

And the one thing that does change here is for corporate, we previously said that the corporate line was going to be approximately $3 billion for 2013 and that reflected a cost run rate of $2.4 billion. Now you add the $300 million of the GE Capital preferred dividend, plus the $300 million in restructuring and excessive gain. So we said at the end of the year, the outlook was for $3 billion.

So what's the outlook now? The total goes to $3.5 billion and it’s pretty straightforward. We’re losing about $800 million of NBCU pretax earnings from Q2 through Q4 and that’s partially offset by the $300 million of restructuring that’s now being offset by the NBCU gain.

So the only other update on the pages in the cash flow lines, while we’re going to receive $16.7 billion of proceeds from the NBCU sale, those don’t show up in CFOA, Cash From Operating Activities, those proceeds will show up in investing activities. However, the industrial cash taxes that we’re paying will be included in CFOA.

So, we just want to point out that while the overall cash is going to be incredibly strong, the cash taxes are going reduce the reported CFOA when they’re paid. So no other updates on the framework and with that Trevor, Jeff, let’s open it up for Q&A.

Trevor Schauenberg

Great, thanks Jeff, thanks Keith. Well lets open up the phone lines for some Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Scott Davis representing Barclays. Please proceed.

Scott Davis - Barclays

Just kind of the natural question here I think, does this put any pressure to decrease GE Capital faster, as far as so many assets or joint ventures or accident businesses , just because clearly the GE Capital now becomes little bit of bigger part of the earnings mix?

Jeff Immelt

Well, I think just on the math alone, it’s a small impact for 2013 versus our current plan. We will still expect GE Capital to be smaller in 2013 than it was in 2012 and obviously we showed you the targets that we put out previously Scott of somewhere between 65% and 70% of our earnings coming from industrial as we go forward here.

So our goals haven’t changed at all. We’re still totally focused on that. Does it cause us to go faster? I think the one nice opportunity here obviously is the gain in GE Capital from the sale of 30 Rock. We’re going to be able to work on exiting some noncore assets sooner than we had planned and I think that’s a real positive. We’re obviously still working on the details of that, but I think directionally and strategically nothing changes. Do we have it as a priority? Sure!

Keith Sherin

Completely agree Scott. I think what we’ve talked about in the past on GE Capital, I think remains the case and we will be opportunistic on the rest.

Scott Davis - Barclays

And then just also because your pulling forward restructuring and you were fairly confident in your call and then your yearend meeting and your margins targets. Could be now think of your 70 basis points as being more of a minimum target at this point rather than a likely target?

Jeff Immelt

I think it obviously helps. We had as you know some restructuring in the framework that we’re planning to do in the first half of this year and this is going to allow us to do even more sooner and for us, we’re excited about that. I think it’s going to help us to really get after this cost structure transformation. That's going to help us to certainly put a lot of confidence in the 70 basis points margin target for this year and we’re obviously internally working on more than that Scott and I think that's all really positive. We're excited about the opportunity, redeploy this cash and reinvest it and restructure the company. So as you said, it’s a very positive thing we'll work through the numbers and give you more updates as we get to the first quarter earnings but directionally that is all true.

Keith Sherin

I think the $1 billion that we’ve got outlined, $1 billion plus, we can invest at maybe a 1.5 year payback, something like that. So that gives you a sense of the math and that's positive. I think it helps us.

Jeff Immelt

This is to offset those losses, the last piece of the lost embassy earnings but it also really does help us to get after all those other plans.

Operator

Your next question comes from the line of Steve Tusa representing JPMorgan. Please proceed.

Steve Tusa - JPMorgan

Just on the M&A, doesn't sound like there is much change. Just wanted to make sure you'd said something around $4 billion or less. Does it change that dynamic in the near term?

Jeff Immelt

Yes, Scott. My view is that the (inaudible) that continues to be, it's been the successful strategy that we've had and I still feel like that's the principal focus of the company. I always like to hedge it a little bit. If we saw a deal like AVEO that was a bolt on, low risk executions, stuff like that, we would take a hard look at it but the principle focus remains to be bolt on focused low execution risk and that really hasn't changed.

Steve Tusa - JPMorgan

And then taking the restructuring early here in the first half, that's a lot of restructuring to run through the P&L. Can you just comment on what you guys have seen from an order perspective so far through January and early February?

Jeff Immelt

We don't have any update to the outlook that we said up in December. Look, in the fourth quarter earnings call, there's just nothing that really has changed for us in terms of our view of our economy and the world so far Steve, so.

Keith Sherin

You know Steve I was with, I actually flew back last night from Norway and I was with a bunch of oil and gas folks for the last 2 days. Super strong, no change at all and I just think our framework continues to be kind of the way we looked at 2013.

Steve Tusa - JPMorgan

Okay, and one last question, who came to who again, just to be clear on this. How did this come about, did Comcast come to you guys or how did this come about?

Keith Sherin

You know Steve, memory on these things is always like everybody has their own story but I think this is something that we had envisioned for a long time. Our recollection is that the Comcast guys approached us, but that's, in many ways we've talked about it consistently over time and we've had a great relationship and I think this is not a huge surprise that it happened on this timing.

Operator

Your next question from the line of Jeff Sprague with Vertical Research. Please proceed.

Jeff Sprague - Vertical Research

I'm just wondering if you can share a little more color on the nature of the restructuring that you're going to do. It is a lot. Are there particular businesses that stand out? Are these plans you had on in the shelf or are you scrambling to find additional things to do, maybe a little color around that?

Jeff Immelt

Well we've been looking at obviously a lot of plans, given our simplification targets and the overall goal to get the $2 billion cost out Jeff. So I think we've had the teams working a lot. We have a dedicated officer in Europe who's working on the cost structure of the whole company in Europe. She's been working for more than a year now. We've got a lot of plans there. And we've got a massive shared services effort that we've been going at for more than 15 months now.

So there actually is quite a bit of work that's been done. The primary focus I think is going to continue to be around Power and Water, Healthcare, Energy Management. Those will be the three primary places that have significant opportunities to continue to take out cost, and as I said, by the time we get to the first quarter call, we'll give you more details of that but we do have opportunities to continue to restructure facilities.

We have things from acquisitions that we've done, that we can work on to get more cost efficient cost structures and we're doing so much in shared services across the company, reducing the number of P&Ls that there's also going to be some global employee impact as we go through this restructuring, but we don't have it all finalized. As you said, it's still coming together but we have a decent framework for 60% - 70% of it, probably I would say today.

Jeff Sprague - Vertical Research

Would you characterize all of it ultimately being structural cost take out or is there some element of, I don’t know, environmental cleanup or warrantee issues or stuff like that that just kind of need to be fixed and put to bed.

Jeff Immelt

I don’t have any of those yet but let us get through the first quarter on what the total amount is. I don’t have the final full pretax gain kind of allocated. Jeff, so I thought (inaudible) I don’t anticipate, the vast majority is restructuring. I don’t anticipate anything big and anything like environmental or things like that.

Jeff Sprague - Vertical Research

Just quick one GE Capital. Do you think there is any real earnings ramifications on what you might be existing or is it kind of low or no profit, noncore stuff that you’d be using the gain to clean up?

Jeff Immelt

Well, I don’t have a specific number. Obviously, for example 30 Rock, the real estate team did make some money on that. I think it’s around $50 million a year, but for the red assets that we’ll be exiting, these are relatively low return as our current thought and I think there will be minimal impact and we really focused on noncore.

Operator

Your next question comes from the line of Deane Dray representing Citi Research. Please proceed.

Deane Dray - Citi Research

Jeff, I’d be interested in hearing you talk a bigger picture question about the pace of change in the organization. You’ve talked about simplification efforts. You’ve now put a checkmark against the exit of NBCU but there certainly are more divestiture to be contemplated and just talk about the pace of change that you think investors should be expecting.

Jeff Immelt

Deane, I think this is a big event. Our focus in ’13, a lot is on execution and I think we continue to be focused on the framework and executing along those lines. I think other than that kind of this disciplined focus on capital allocation that we’ve had, we want to continue to focus on share repurchase dividend and strategic bolt on acquisitions. And then around the portfolio I think the focus is on executing getting the industrial earnings mix kind of up to 60%, 65%, 70% overtime within our control and we’re always going to look at ways to help to do that, both by growing our industrial earnings and by reducing GE Capital.

And then I think in the organization look, we’re trying to get the SG&A as a percentage of revenue down to at least 16%, maybe lower and at the same time keep up the investment on R&D and globalization. Deane, when I think about it from an investor's standpoint, taking this great cash flow we've got, really redeploying it in a super investor friendly way, which we're trying to do and I think we've been very focused on that. I think positioning the organization to grow in a world that's got still some volatility in it by having great products and great global footprint, which is where we’re investing.

Doing that, in a way that can still expand our margins both this year and into the future, and then driving value through increasing the industrial percentage of earnings, these are the things we want to do with the company, capital allocation, expanding margins, investing in growth and increasing the industrial percentage of earnings and when I look at a transaction like this, Keith said it earlier, this gives just more tailwind to all of the above. It just gives us the ability to reward investors, reposition GE Capital, reposition Industrial, drive margins, lower our cost to investment growth and continue to keep focused on increasing the industrial mix. So we just got to execute on that stuff. We know what's in front of us and I view this as just a way to explode it faster.

Deane Dray - Citi Research

Keith, I was hoping you could expand on the description of the non-cash proceeds you’re getting the Comcast at in the preferred. Any comments, further color on the terms, covenants, you said that these are, that you have the ability to sell them after the close but just any further color there would be helpful.

Keith Sherin

Sure Deane, first the Comcast guarantee notes, we’re going to receive $4 billion of Comcast guaranteed notes. The Press Release talks about a subsidiary, they’ll probably be NBC hold co-notes guaranteed by Comcast. These are completely monetizable. Our current plan would be look at selling them at closing and Comcast actually has an option to give us cash if they want to do that earlier. So, I think that's readily monetizable and then there's $700 million or so of preferred stock at the NBC Hold. Our current plan on that is also to sell that at closing. We may hold some depending upon the terms and how attractive it is but the vast majority of this is most likely to be monetized at closing Deane.

Operator

Your next question comes from the line of John Inch representing Deutsche Bank. Please proceed.

John Inch - Deutsche Bank

Keith, the $0.5 billion of capital gain, I understand the concept that this would allow you in turn monetize the redline assets and respectively some of the equity investments you have in international banks and so forth. So I get the point that you wouldn't have wanted to necessarily incur losses on those events previously, but the losses map to what asset base in terms of receivables that you could maybe more accelerate the monetization.

Keith Sherin

Again I don't have a specific transaction in mind. I'll give you the broad categories on noncore assets though, John. Certainly our global mortgage portfolio, if there were an opportunity to execute a transaction where we could reduce our ending net investment associated with global mortgages that added economic price, not destroying capital now that we’ve kind of got a gain, that would be very attractive to us. Certainly maybe there are other things in the real estate portfolio and the real estate equity portfolio that might have a bid aspect but really is a target we can hit now and accelerate some of these noncore reductions.

We have an economic plan. We're looking at not destroying shareholder value. We don't need to sell early. But at the end of the day if there's an opportunity to monetize some of these things and reduce our investment in some of these noncore assets and the economics look attractive to us, we're going to evaluate those hard now, and I think this gain gives us an opportunity to accelerate some of those things. So I'd say those would be the primary focus areas, the global mortgage portfolio and private real estate equity both John.

John Inch - Deutsche Bank

And Keith what about your $25 billion of international bank investments? Are those sitting with embedded losses? Obviously financial services company’s valuations are going up. So in theory if you waited right, you could perspectivly (ph) sell for better prices, what do those things look like in terms of sort of what you paid and what you could realize for them today.

Keith Sherin

Well, they're actually performing extremely well. I think if you look at the banks in the Czech Republic, Hungary and Poland, Russia, these are very good assets. They're largely self-funded and they're profitable. So I think for us those are strategic opportunities for us to find the right partner at the right time, but we're not holding back on any of that because there's some embedded loss somewhere. These are profitable operations that we think we're going to be able to sell at our current valuations or above and it's really finding a buyer at this point John. As the financial markets recover, as financial firms recover, as capital requirements become clearer, you’ve seen us be able to just move many more assets sooner than we thought and I think that’s going to continue as we go into ’13 and ’14 on things like what you’ve described.

John Inch - Deutsche Bank

And then just lastly, how soon for modeling purposes would you expect the deluded share count to move, say sub $10 billion?

Keith Sherin

Well with this activity in 2013, our objective would be to get that down below that by ‘14 for sure. This is going to put a nice dent in that goal and we’re very excited about that opportunity. We think the stock is attractive at these prices. So we’re very excited about that?

John Inch - Deutsche Bank

But in theory you could hit that sooner than yearend.

Keith Sherin

Well, I think it depends on what the stock does obviously John with dilution. So you’ve got to take that into account. Our view is that by ‘14 we should be able to get that below 10 billion shares.

Operator

Your next question comes from the line of Steve Winoker representing Sanford Bernstein. Please proceed.

Steve Winoker - Sanford Bernstein

Just first on the restructuring, before you were talking about 70 basis points of expansion with $300 million of naked restructuring. Now we’re talking about say 70 basis points with $1 billion of covered restructuring. Just again help me think through what’s changed in the equation, such that you’re keeping the margin expansion number the same?

Keith Sherin

Let us work through it I think, because the only thing that’s changed is that we’ve accelerated this gain and we haven’t really been able to work through all of the mechanics and the timing of what these projects are going to deliver but for us it certainly solidifies the 70 basis points. Do we think internally that we have a higher number than 70? Yes we do, Steve.

Jeff Immelt

Steve, that’s what I would say. You’ve got to think that the internal number is going to be higher than that.

Keith Sherin

The math has to work that way Steve. You’re absolutely right.

Steve Winoker - Sanford Bernstein

And the GE Capital gain, this all going to be in continuing ops as well or someplace else?

Jeff Immelt

No, I think 30 Rock is a part of their equity investment portfolio. It’s just a sale of normal asset they have. That will be in continuing for as I understand today.

Steve Winoker - Sanford Bernstein

Okay, but the things that you sell, take the charge on would also be in that same bucket?

Jeff Immelt

I don’t know. I haven’t even worked through what those are going to be. We have a set of things that we’re evaluating but I don’t know whether I can definitely say that I think at the end of the day we’re trying now to differentiate based on where the accounting line falls. We’re trying to do the right economic thing here.

Steve Winoker - Sanford Bernstein

Right and I should have clarified that, that restructuring, the timing, you’re obviously going to get the gain this quarter but the restructuring would get paced throughout the year or earlier?

Jeff Immelt

Sure. Here’s what our framework and our plan is today, and that Steve is a good question. Our objective and our plan with Comcast is to close the 49% sale by the end of March. That gain would happen in the first quarter and based on the way the accounting works for restructuring, I think we will do a substantial amount of that restructuring against that in the first quarter, but some of that just based on the fact that not all the events will have occurred to book a restructuring charge will fall into the second quarter, maybe a little in the third quarter, but the vast majority will be done in the first half.

On GE Capital, our objective is to close that 30 Rock sale by the end of March but there are some closing additions that if we can't get those all done, that could go into the second quarter, the contract at the latest, that’s December 1st. Our objective as I said with Comcast is to close that by March 27 and again I don't know when the timing of the accounting is going to allow us to have everything done for restructuring GE Capital but our expectation is vast majority in the first half. That's the best plan we have today.

Steve Winoker - Sanford Bernstein

And Jeff, just a higher level question, I guess. When you go back to the thinking on whether to do this earlier or not and you traded off the improving EBITDA that was coming out of NBCU over the next couple of years with re-trends and other things, was this just very simple sort of rather have a bird in the hand kind of thing than risk?

Jeff Immelt

Let me answer in two ways because I just want to put a finer point to what Keith said earlier and that is sometimes things just are what they are and I would say that we don't see any change in the economy. We like our framework for 2013. This just kind of happened and we thought it was opportunistic and just is good. It's just good. So I view this as nothing but good news for investors.

I think Steve, from our perspective we’re a minority shareholder. The Comcast guys have been great. We always viewed this as a way to monetize the NBCU asset in two steps overtime. One was in 2010 or 11, once today. If you look at these transactions versus where we started, it's a tremendous value accretion in two steps for us as an investor and it takes away any risk on the future and the media that is really not core to GE, not what we wake up every morning worrying about. We wake up every morning worrying about things and so it takes that risk off the table.

We did it at a valuation that's substantially more attractive than tranche number one and we can redeploy the cash in doing a buyback or other things. So it just seemed like, just from a risk reduction, from who we are and what our investors really look to us to do, this seemed like a great transaction.

Keith Sherin

I totally agree Jeff. At the end of the day Steve, we're sitting here, we have a put (ph) for half our stake in 2014. We have a valuation formula. We had a view of what that was worth and we negotiated a buyout today that we think is very attractive relative to what that future value might have been and it's up 19% since we closed in January '11. It's $2.7 billion of additional value since that closing and it's going to be monetized in cash with all the other great benefits, accelerated buyback, more restructuring, reinvesting back in the business, organic and inorganic growth. So I just think it came together and both of us think we got a good deal and you can see the market likes of both of us which I think says that maybe we both did get a really good deal.

Operator

I would now like to turn the call over to Mr. Trevor Schauenberg for closing remarks.

Trevor Schauenberg

Great. Thank you everyone for joining on short notice. Just to close out, the replay of today's webcast will be available this afternoon on our website. As a quick reminder our first quarter 2013 earnings will be on Friday, April 19th, and we have announced our annual shareowners meeting which will be held on Wednesday April 24th in New Orleans. So as always, we'll be available for your calls and questions today. Thank you everyone.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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