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RBC Bearings Inc (ROLL) Q1 2020 Earnings Call Transcript

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RBC Bearings Inc  (NASDAQ: ROLL)
Q1 2020 Earnings Call
Aug. 01, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Q1 2020 RBC Bearings Earnings Conference Call. [Operator Instructions] I would like now to turn the conference over to your host, Mr. Chris Donovan.

Chris Donovan -- Investor Relations

Good morning, and thank you for joining us for RBC Bearings Fiscal 2020 First Quarter Earnings Conference Call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer; and Daniel A. Bergeron, Vice President, Chief Financial Officer and Chief Operating Officer.

Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition. These factors are also described in greater detail in the press release and on the Company's website.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the Company's website.

Now I'll turn the call over to Dr. Hartnett.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Thank you, and good morning. Net sales for the first quarter of fiscal 2020 were $182.7 million versus $176 million for the same period last year, a 3% -- 3.8% increase. Organic growth for the quarter was 6.5%, and we think that's a respectable start for FY20.

For the first fiscal quarter, sales for the industrial products represented 36% of our net sales with aerospace products at 64%. Gross margin for the quarter was $70.7 million or 38.7% of net sales. This compares to $67.7 million or 38.5% for the same period last year, a 4.4% increase. Operating income was $38.5 million versus $36 million last year, a 6.9% increase. EBITDA was $50.8 million, a 7.9% increase over last year. We are very pleased with the performance for this quarter and it follows an excellent year for the Company.

During the year -- during the first quarter, industrial products lost some grounds over the period, and we're down about 7.2%. Last year, the expansion in that quarter was 18.3%, so we were up against some pretty difficult comps. Industrial OEM was down 7.2% and distribution in the aftermarket was 7.1% down year-over-year.

On the aerospace and defense side, the first quarter organic net sales were up 16.3%. This was driven by both OEM and aftermarkets. Aero and defense OEM were up 14.6% on an organic basis. Supply constraints internal and external have been significantly mitigated as a result of our internalizing many processes certified to date. More internalization of processes will follow. This sector will likely continue to perform at double-digit growth level for the foreseeable quarters as we introduce additional manufacturing capacity and convert new contracts currently in the breach.

At this point in our year, we enter our second quarter, most of our aerospace businesses are booked at or beyond fiscal 2020. If the 737 MAX receives its FAA certifications in calendar Q4 and production is accelerated, it may be difficult to support the demand by the subcontracting base. We continue to add capacity to support our customers' future requirements and should be well positioned for FY21 in this regard.

Regarding our second quarter, we are expecting sales to be between $180 million and $182 million, which results in organic growth rate of 6.5% to 7.7% over last year. If we can produce more, it will have a greater turnout in sales, but it's largely on the aerospace and defense side capacity constraint.

I'll now turn over the call to Dan for more detail on the financial performance.

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

Thanks, Mike. SG&A for the first quarter of fiscal 2020 was $30.1 million, compared to $29.6 million for the same period last year. The increase is mainly due to -- on $1 million of additional incentive stock compensation and $0.1 million of other items, offset by $0.6 million lower professional fees. As a percentage of net sales, SG&A was 16.5% for the first quarter of fiscal 2020 compared to 16.8% for the same period last year.

Other operating expense for the first quarter of fiscal 2020 was expense of $2.1 million, compared to expense of $2.2 million for the same period last year. For the first quarter of fiscal 2020, other operating expenses were comprised mainly of $2.3 million in the amortization of intangible assets, offset by $0.2 million of other items. Other operating expense for the same period last year consisted mainly of $2.4 million in the amortization of intangible assets, offset by $0.2 million of other items.

Operating income was $38.5 million for the new first quarter of fiscal 2020, compared to operating income of $36 million for the same period last year. Other non-operating expenses were $0.2 million for the first quarter of fiscal 2020, compared to $1 million for the same period last year.

For the first quarter fiscal 2020, other non-operating expenses just comprised of $0.4 million of foreign exchange loss, offset by $0.2 million of other items and other non-operating expenses for the first quarter of fiscal 2019 consisted primarily of $1 million loss of early extinguishment of debt.

For the first quarter of fiscal 2020, the Company reported net income of $30.5 million compared to net income of $27.5 million for the same period last year. And on an adjusted basis, net income was $30.5 million for the first quarter of fiscal 2020, compared to an adjusted net income of $28.1 million for the same period last year.

Diluted earnings per share was $1.23 per share for the first quarter of fiscal 2020, compared to $1.12 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal 2020 was $1.23 per share compared to an adjusted diluted EPS of $1.15 per share for the same period last year.

Turning to cash flow, the Company generated $40.1 million in cash from operating activities in the first quarter of fiscal 2020, compared to $33.8 million for the same period last year. CapEx was $12 million in the first quarter of fiscal 2020, compared to $7 million for the same period last year.

In the first quarter of fiscal 2020, the Company paid down $17.1 million of debt and ended the quarter with $32.7 million of cash.

I'd now like to turn the call back over to the operator for the Q&A session.

Questions and Answers:

Operator

Thank you so much. [Operator Instructions] All right. And your first question comes from the line of Pete Skibitski of Alembic Global. Your line is now open.

Pete Skibitski -- Alembic Global -- Analyst

Congrats on the nice quarter. Can you give us maybe a sense of where you saw the weakness in industrial OEs? Kind of is it across the board, general economic weakness? And do you sense that things could get worse? Or maybe by the fourth quarter, by that point, I think maybe things would normalize on a comp perspective. So would just be sharing your thoughts there?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

Yeah. It's the same four major industries that we discussed in Q4. It's mining; energy, which is oil and gas for us; semiconductor; and general distribution were mainly impacted. I think if you look quarter-to-quarter, our industrial OEM Q1 compared to Q4 is actually up 1.8%, so we continue to push hard on the OEM side.

Distribution, I think there's a lot of restocking and inventory deleveraging that the distributors in the industry had gone through over the last four months and so that impacted the business. We're starting to see long-term orders actually picking up into our Q3 and Q4. And so for us, it's really going to count on our in and out business within the quarter to see how the quarter comes out. We count on about at least 30% of our revenue on the industrial side on in and out activity within the quarter.

Pete Skibitski -- Alembic Global -- Analyst

Got it. Okay. I'll just ask one more and I'll get back in the queue. Can you talk about the strong first quarter margin? You guys had talked about a good pricing environment in the past and then the margin benefits of insourcing and automation, so is there one thing that you can maybe point to, to pin down what the driver was of the great margin? And I'd love to hear more about kind of trends going forward as well on that front.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Yes. I think the margin could have been better, Pete. The -- we have several programs that are still in start-up and these are major programs for us. And we continue -- we're going to see margin expansion all the way through the rest of this year. And I just came back from Southern California spending a week with the operations over there. And I think we're making really good progress on several -- in several of our sites on major programs in terms of execution and getting approvals on key processes that we need to in-source. And so that's going to all accrue to better margins in the future. So the margins were strong this quarter and -- what do they say, you ain't seen nothing yet.

Pete Skibitski -- Alembic Global -- Analyst

That's great Mike. That's great news. And so you guys are actually talking about insourcing even more beyond what you had previously planned and talked about over the last year.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Well, we probably just didn't talk about it in the -- with the detail that maybe was needed. But yeah, I mean, if you look at the kinds of things that we're insourcing -- I mean, we're insourcing cad plate, copper plate, chrome plate, heat treatment, HVOF processing, zinc-nickel plate, aluminum pigment coating, powder lubrication and elastomeric bearings. We're insourcing all of that stuff and we're pretty far along in terms of the industrialization of those processes and the certification with the OEMs to supply from those internal processes.

So I think we're about maybe a third of the way through the process approval, but with the OEMs, which is sort of the long pole in the tent. And -- but I think that's accelerating now. I think the more difficult processes have been approved. And we -- I would expect by the end of December, we'll be two-thirds of the way through approval. We have some new equipment coming in, which can't be approved until it's cited. And so that will be cited in our third quarter. And probably those processes approved in our fourth quarter. So it's significant. It's a big deal.

Pete Skibitski -- Alembic Global -- Analyst

That's great. Thanks for the color guys. I appreciate it

Operator

Thank you. And your next question comes from the line of Steve Barger of KeyBanc Capital Markets. Your line is now open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hi, good morning guys.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Good morning Steve.

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

Good morning.

Steve Barger -- KeyBanc Capital Markets -- Analyst

I'm going to stick with the industrial question. We've seen revenue coming in late, but not so negative year-over-year for some end markets. Are you able to track market share? Or do you think there has been any shift in the served end markets, any aggressive pricing from competitors or new products that are getting some momentum?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

No. I don't think we have, Steve. I think it's just some of these markets are fairly big for us. And they're all for oil and gas and mining. Both of them are 10 to 15 plus size markets for us. And we had a really nice quarter last year, so it's put a little bit on that pressure on that comp. But -- and distribution was down. Offsetting some of this was our Marine business and -- which is -- as we talked about on the Q4 conference call was going to be a light year on growth. It's still going to have growth, because we're only down to 1 boat build with Newport News on the Virginia-class subs, but that's going to definitely jump up in the coming years, in 2021.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Okay. And so just from a mix standpoint, as I think about next quarter, would you still expect down revenue industrial and more like a double-digit growth rate for aerospace? Or are you starting to see aerospace moderate more and maybe more of a recovery in industrial? How should I think about that for the quarter coming up?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

I think, once again, industrial had another tough comp, so we'll be down on industrial and we'll have double-digit growth somewhat like we've experienced in Q1 for aerospace and defense.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got you. Any -- you talked about those four big end markets for you. We are seeing some construction orders start to moderate -- is that -- construction equipment, is that a big market for you historically or what are you seeing there through the channel?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

It's not a huge market for us. On -- mining for us would be heavy haul trucks for Caterpillar, Komatsu, Liebherr, folks like that. And we're starting to see that coming back in again, but it's booking into our Q3 and Q4. Those leading items are a little longer than the normal in and out business that we get in the quarter.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got you. But like cranes, aerial work platforms, that sort of thing, not as big?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

No.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. I'll get back in line. Thanks.

Operator

Thank you. And your next question comes from the line of Kristine Liwag of BofA Merrill Lynch. Your line is now open.

Kristine Liwag -- BofA Merrill Lynch -- Analyst

Good morning, guys.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Good morning, Kristine.

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

Good morning.

Kristine Liwag -- BofA Merrill Lynch -- Analyst

On the 737 MAX today, could you discuss the volume that you have and the implied production rate that you're currently producing? And then also, if Boeing were to go ahead and have a temporary pause in the program, what would that mean for you?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Let's see. So our current -- we're currently feeding the 737 MAX at the 42 ship per month rate. Some operations a little more, some operations a little less. I don't know why that occurs that way, but it is what it is. We noticed in some operations that the demand rate is 32. And in other operations, the demand rate is 52. So it's a little confusing.

From the information that we're getting from Boeing, they expect to turn that ship on in October. Now I'm sure they know more than I know. So I have no comment on that. But they're telling the supply base to get ready to turn that ship on in October at such and such rate. And to bring that rate up substantially quarter after quarter. So let's hope that's the case. If it doesn't -- if there is a pause, I'm not sure how that's going to affect us, because really our schedules are loaded and we have new contracts that were -- we expect to be signing soon, which will more than offset any of the push-outs that we would expect as a delay. So I think our aerospace business is really kind of locked and loaded for the balance of fiscal '20.

Kristine Liwag -- BofA Merrill Lynch -- Analyst

That's helpful. And maybe switching gears. You ended the quarter with a net cash position, and your stock's pretty close to record highs. So you've got currency there if you want to use it as well. Can you discuss the pipeline then for M&A? And what are your strategic and financial requirements?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Well, the pipeline for M&A is good. And so we continue to look at small and large M&A options. And we expect to actually complete something small in our second quarter. Whether that actually occurs or not is anybody's guess, but it looks like -- it looks pretty positive. The -- what was the second part of your question?

Kristine Liwag -- BofA Merrill Lynch -- Analyst

What are your hurdles, the strategic hurdles, financial hurdles that you're looking at either return on invested capital or some sort of metric?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

Well, Kristine -- for us, Kristine, we look at it to have a business that we can bring in that will have the same synergies and products that we can bring across to our current customer base. And we're looking at for it to be accretive in the first year and to be able to meet and exceed our current targets on return on invested capital, which is a little north of 12% now. And from a leverage standpoint, we -- when we did Sargent deal, we levered up to a little close to 3 times. So that wouldn't scare us. And we told The Street we'd pay that down in five years and we paid it down in four. So if we could find another Sargent deal, that would be great. And in the meantime, we're also looking at a lot of -- like Mike said, a lot of tuck-in opportunities that are really nice product line extensions to our current business model.

Kristine Liwag -- BofA Merrill Lynch -- Analyst

Thank you. Very helpful.

Operator

Thank you so much. And next question comes from the line of George Godfrey of CL King. Your line is now open.

George Godfrey -- CL King and Associates -- Analyst

Thank you. Good morning, gentlemen. Thank you for taking the question. Two questions. The first one is, just for the sake of argument, if Boeing on the 737 were to lose customers to the Airbus A320, would it be a difficult issue for you to ramp up A320 production for your ship set versus the Boeing 737? Or would that take time to reconfigure factory and volume floors?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Well, we have firmed substantial content on the A320 also, so it would move not as much content. We probably have 80% of the content on the 320 as we have on the -- yeah, on the MAX. So...

George Godfrey -- CL King and Associates -- Analyst

From a production standpoint, it wouldn't be difficult to then ramp up that production versus in pushing down the 737. That's what I was trying to get at.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

It's pretty much what we're tooled on. Actually, a lot of the parts that are used on both ships are virtually identical. Many parts are not, but a lot of them are. And so it wouldn't be difficult. And obviously, the LEAP engine is the same engine on both ships. And the geared turbofan is the engine on the 320. And we have presence -- substantial presence on both engines.

George Godfrey -- CL King and Associates -- Analyst

Got it. And then the second part is, on the capacity constraints, I just want to delineate between shop floor space and equipment versus OEM certification. By the end of September, from an infrastructure standpoint, will you have the equipment and shop floor space ready to go and now you're just waiting for the OEM to be certified or the process to be certified? Or do you -- would that also need more equipment and more space in the December or March quarter next year? Thanks.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Well, on an 80-20 basis, 80% of the equipment is in place. The plants are built. The processes have been installed. Some have been certified already. More than a third of them have been certified already. And we have OEM representatives in here every week working to certify the other site. So I think we're kind of where we need to be. It's -- we have some very substantial contracts that we're expecting to be -- to convert over the next eight weeks, which will push the machinery issue a little bit in some of the plants and we'll have to tool some of the plants with more of the same.

George Godfrey -- CL King and Associates -- Analyst

Got it. Thank you for taking my questions.

Operator

Thank you. And next question comes from the line of Michael Ciarmoli of SunTrust. Your line is now open.

Michael Ciarmoli -- SunTrust -- Analyst

Hey, good morning guys. Thanks for taking the questions. Just back to the 737. I mean, it sounds like even if we get certification, Boeing potentially talking picking up, it sounds like it's going to take about two years to burn down the inventory of 737s. I mean, does that have any impact on how you guys are looking at sustaining this double-digit growth rate scenario, if even in the best case, we see a flattish production rate of 52?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Yeah. I mean, I don't see a 2-year burn down rate. I mean that's -- because they've only been out of -- only been -- I mean, they've got the backlog and they just have been out of shipping the ships for the last three or four months -- four months.

Michael Ciarmoli -- SunTrust -- Analyst

Well, that's -- I mean that's what -- I mean, Spirit AeroSystems going to have -- even into October, they're going to have close to 100 fuselages. And they basically said they're going to be at 52 all of next year, regardless if Boeing -- if they get that plane. So it -- I mean, the unfinished product is going to be out there. Again, the airline's ability to take delivery of these planes is going to slow that process as well.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Yeah. Well, I don't think this subcontracting base can be put together -- back together that fast because some of these guys stayed in production at the 52 rate. Some of them didn't have the working capital to support the 52 rate. Some of them didn't believe Boeing that they were going to come back that strong. I mean, everybody had their own opinion on how to run their operation. And so to put Humpty Dumpty back together again is going to take some time and a lot of glue.

So I think if they can get back to the 52 rate next year, they'll be doing good. Their objective is obviously higher than that, so -- as it should be. Frankly, if they get back to the 52 rate, we're still -- we have got so much content on some of the other platforms that are new and tooled. We'll -- I suspect we're still going to be in that double-digit range.

Michael Ciarmoli -- SunTrust -- Analyst

Okay. Is that -- and you mentioned the content. I mean, because as we look into these coming quarters, there's quite honestly not that much growth in terms of deliveries. The 787 is at rate, 350 is at rate, 777 looks to be delayed. I mean, we just covered 37 [Phonetic]. A320 might have a little bit. So are you -- I mean it sounded like from the last call too, market share gains, content expansion. Is that going to be the supporting driver behind the double-digit growth rate?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Yes. Yes. It's market share gains and the content expansion. It's exactly right.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. And then just last one on the industrial. Can you give us -- you talked about the four key OEM markets. Can you just give us a sense from last quarter to this quarter, which ones got better sequentially and which ones got worst sequentially?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

No. I can't, because I don't have last quarter in front of me. I'd have last year Q1. And it's just the ones we talked about, but I am sorry. I just don't have the Q4 numbers in front of me.

Michael Ciarmoli -- SunTrust -- Analyst

Okay. Got it. But I mean, everything we -- do you believe that sequentially that the ordering trends -- I think you mentioned you've got some pretty good line of sight. You haven't seen any erosion in any of those end markets? I mean, I mean, I know your semi has been having a pretty trying time, but nothing that really jumps out?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

No. Matter of fact, we're starting to see semi starting to point up again, so it won't impact Q2. We'll feel it more in Q3 and Q4, but it's more positive.

Michael Ciarmoli -- SunTrust -- Analyst

Okay. Perfect. Thanks a lot guys. I'll turn back in queue.

Operator

Thank you. [Operator Instructions] And your last question comes from the line of Josh Sullivan from Seaport Global. Your line is now open.

Josh Sullivan -- Seaport Global -- Analyst

Hi, good morning.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Good morning, Josh.

Josh Sullivan -- Seaport Global -- Analyst

Just on the aerospace side, to follow-up on the various 737 shipping rates you mentioned. I think you said anywhere from 32 to 52 per month. Are your products -- do these products carry large inventories? Or are these short cycle products? And I guess what I'm getting at, is there any pre-production inventory for these products, 32 per month, that's pretty low -- that still needs to be burned off at this point?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Yeah. I'm trying to think of what the answer to that is. We try to maintain an -- there's so many line items that we're in production on that we try to maintain an inventory position, a finished goods inventory position on most of these line items, so that we can ship them from the stock and have MRP flexibility on the plant floor. I don't see any burn down issue. I think the issue is, if they -- if and when they turn the MAX on and that looks like it's more and more likely to be sooner rather than later, are the inventory positions deep enough.

Josh Sullivan -- Seaport Global -- Analyst

Okay. And then I think last quarter you mentioned the tightness in your markets here. Even getting to 57 per month next year was a challenge. I mean, do you still see that dynamic? Or do you think that they can get to that 57 by next year?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

I don't see how that happens. I'm not a believer that it can get there. We'll get there. I mean, we'll have the capacity to support it, if they do get there. But there's an awful lot of subcontractors in the system here and I suspected -- I'm hearing that they still have shortages on the 737 on the current build rate.

Josh Sullivan -- Seaport Global -- Analyst

All right. Okay. Thank you for the detail. And then just switching gears over to the industrial side. What are your thoughts on the PCD bearing market? Is that an area where you guys have some applications? Are you seeing PCDs take any meaningful share of traditional markets at this point?

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

What's a PCD?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

I'm not [Indecipherable] we understand.

Josh Sullivan -- Seaport Global -- Analyst

Yeah. The synthetic crystal bearings that are coming to the market particularly in some energy applications.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

No. I'd love to read about them. Maybe, OK, I'll go to YouTube and see what the hell those things are.

Josh Sullivan -- Seaport Global -- Analyst

Got it. Thank you for the time.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Yeah.

Operator

Thank you so much. And I'm showing no further questions at this time. I would now like to turn the call over back to Dr. Hartnett.

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Okay. Well, thank you again for your interest in RBC Bearings and your participation in the call today. And we look forward to speaking to you again in October.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Chris Donovan -- Investor Relations

Michael J. Hartnett -- Chairman, President and Chief Executive Officer

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer and Chief Operating Officer

Pete Skibitski -- Alembic Global -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

Kristine Liwag -- BofA Merrill Lynch -- Analyst

George Godfrey -- CL King and Associates -- Analyst

Michael Ciarmoli -- SunTrust -- Analyst

Josh Sullivan -- Seaport Global -- Analyst

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