MTH
$38.40
Meritage
($.55)
(1.41%)
Earnings Details
3rd Quarter September 2016
Thursday, October 27, 2016 7:32:33 AM
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Summary

Meritage Reports In-line

Meritage (MTH) reported 3rd Quarter September 2016 earnings of $0.88 per share on revenue of $752.9 million. The consensus earnings estimate was $0.86 per share on revenue of $750.2 million. The Earnings Whisper number was $0.88 per share. Revenue grew 12.4% on a year-over-year basis.

The company said it expects 2016 earnings of $3.40 to $3.60 per share on revenue of $2.90 billion to $3.10 billion. The company's previous guidance was earnings of $3.55 to $3.85 per share and the current consensus earnings estimate is $3.59 per share on revenue of $3.05 billion for the year ending December 31, 2016.

Meritage Homes Corp is a designer and builder of single-family attached and detached homes in the historically high-growth regions of the southern and western United States.

Results
Reported Earnings
$0.88
Earnings Whisper
$0.88
Consensus Estimate
$0.86
Reported Revenue
$752.9 Mil
Revenue Estimate
$750.2 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Meritage Homes reports third quarter 2016 diluted EPS of $0.88 on a 22% increase in net earnings, with 11% growth in home closing revenue and home orders

Meritage Homes Corporation (MTH), a leading U.S. homebuilder, announced today third quarter results for the period ended September 30, 2016.

Summary Operating Results (unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
2016
2015
% Chg
2016
2015
% Chg
Homes closed (units)
1,800
1,712
5
%
5,238
4,603
14
%
Home closing revenue
$
735,870
$
661,884
11
%
$
2,127,332
$
1,770,184
20
%
Average sales price - closings
$
409
$
387
6
%
$
406
$
385
6
%
Home orders (units)
1,737
1,567
11
%
5,797
5,532
5
%
Home order value
$
715,562
$
629,977
14
%
$
2,365,508
$
2,188,604
8
%
Average sales price - orders
$
412
$
402
2
%
$
408
$
396
3
%
Ending backlog (units)
3,251
3,043
7
%
Ending backlog value
$
1,375,857
$
1,264,872
9
%
Average sales price - backlog
$
423
$
416
2
%
Net earnings
$
36,887
$
30,308
22
%
$
97,734
$
75,841
29
%
Diluted EPS
$
0.88
$
0.73
21
%
$
2.33
$
1.83
27
%

MANAGEMENT COMMENTS

"We delivered another quarter of strong earnings growth as we continued to execute on our strategic plan," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. "Earnings growth was driven primarily by increased home closing revenue on higher closing volumes. We delivered 1,800 homes during the quarter and celebrated the closing of our 100,000th home in October. We have expanded and diversified strategically over the past 31 years, and continue to have significant opportunities for growth.

"I am very pleased with the initial success we’re having in our ’entry-level plus’ communities, including the first of our new LiVE.NOW.(TM) homes, which we unveiled earlier this month," said Mr. Hilton. "We are offering homes that are a cut above traditional entry-level homes and include Meritage’s signature energy efficiency, designed to appeal to more discerning first-time buyers. Many of those are Millennials, who represent millions of additional household formations over the next decade or more, and additional growth potential for Meritage. Our enhanced product offering provides a broader range of affordably-priced homes to address pent-up demand, which we expect will produce top-line growth and operational efficiencies over time to drive additional earnings."

He added, "We are benefitting from the numerous operational changes we made last year in our latest expansion markets and are experiencing higher absorptions in Georgia, North Carolina and Tennessee, which should lead to better returns and improved operating leverage for our company. As a result of those changes and stronger demand, we achieved a 14% increase in our orders per average community over last year’s third quarter, which drove our 11% order growth during the quarter," continued Mr. Hilton. "We believe the economic drivers of the housing market, including job growth, increased household formations and low interest rates, point to continued growth for well-positioned homebuilders.

"Based on our results for the first three quarters of the year and our positive outlook for the market, we have refined our projections for 2016 full year orders, closings, revenue and diluted earnings per share: We expect 7,300-7,500 orders and 7,300-7,500 home closings for full year home closing revenue of $2.9-3.1 billion in 2016. With a projected home closing gross margin of approximately 17.5% for the year, we expect to deliver full year diluted EPS of $3.40-3.60 for 2016."

THIRD QUARTER RESULTS

Net earnings for the third quarter of 2016 were $36.9 million or $0.88 per diluted share, 22% higher than the $30.3 million or $0.73 per diluted share reported for the third quarter of 2015, primarily reflecting higher home closing revenue offsetting lower home closing gross margins in the 2016 quarter.

Home closing revenue increased 11% over the third quarter of 2015, combining a 5% increase in home closings with a 6% increase in the average price of homes closed during the quarter. The rise in average closing price was driven primarily by increased closings and higher average prices in the West region. Central region home closing revenue grew 9% on a 5% increase in closings over the prior year. Closings grew 10% in the East region, partially offset by a 3% decline in average closing price, for a 6% increase in home closing revenue.

Home closing gross margin of 17.8% in the third quarter of 2016 declined from 19.0% in the third quarter of 2015, though it improved sequentially from 17.3% in the second quarter of 2016. Margins have been compressed in 2016 primarily due to limited pricing power to offset increased land and construction costs.

Selling, general and administrative expenses were 11.4% of third quarter 2016 total closing revenue, compared to 11.5% in the prior year.

Interest expense decreased by $4.0 million to $0.2 million in the third quarter of 2016, as more interest incurred was capitalized to assets under development.

Other income/(expense) increased by a net $5.4 million in the third quarter of 2016 compared to 2015, reflecting a $4.1 million adverse legal ruling in 2015, while the 2016 quarter included additional income from municipalities related to reimbursable property development expenditures.

The effective tax rate was 31.4% in the third quarter of 2016, compared to 35.1% in the third quarter of 2015, reflecting the benefit from federal energy tax credits on Meritage’s highly energy efficient homes. The benefit was recognized in the third quarter of 2016 compared to the fourth quarter of 2015, following the legislative extension of energy tax credits.

Total order value grew 14% to $715.6 million in the third quarter of 2016, compared to $630.0 million in the third quarter of the prior year. Total orders increased 11% due to a 14% increase in orders per average community, despite a lower community count in the third quarter of 2016 than in 2015. Orders per average community were 7.3 in the third quarter of 2016 compared to 6.4 in the prior year. Average sales prices also rose 2% over 2015’s third quarter.

Ending community count at September 30, 2016 was 237, compared to 250 at September 30, 2015, with a 2% decline in average active communities for the third quarter of 2016 compared to 2015.

September 30th ending backlog value was 9% higher in 2016 than in 2015, combining 7% more units in backlog with a 2% increase in the average price of orders in backlog.

YEAR TO DATE RESULTS

Net earnings were $97.7 million or $2.33 per fully diluted share for the first nine months of 2016, compared to $75.8 million or $1.83 per diluted share for the first nine months of 2015, a 29% increase in net earnings and 27% increase in fully diluted EPS. The increased earnings were primarily the result of a 20% increase in 2016 year-to-date home closing revenue and greater overhead leverage, partially offset by lower home closing gross margins.

Home closings for the first three quarters of the year increased 14% over 2015, and average closing prices increased 6% for the same period.

Year-to-date home closing gross margin in 2016 was 17.5%, compared to 18.9% for 2015, reflecting limited pricing power relative to increased land and construction costs, as well as immature markets within the East region.

Total commissions and selling expenses declined to 7.3% of year-to-date 2016 home closing revenue from 7.6% in 2015. General and administrative expenses declined to 4.3% of total closing revenue in 2016 compared to 4.8% in 2015.

Interest expense for the first nine months of the year decreased to $5.1 million in 2016 compared to $12.0 million in 2015, as more interest was capitalized to assets under development.

BALANCE SHEET

The company ended the third quarter of 2016 with $107.9 million in cash and cash equivalents, compared to $262.2 million at December 31, 2015. The decrease in cash was primarily due to investments in real estate inventory as a result of organic growth. The company had $25 million drawn on its revolving credit facility at quarter-end, which was repaid in early October.

Real estate assets increased to $2.43 billion at September 30, 2016, compared to $2.10 billion at December 31, 2015, as the balance of homes under contract under construction increased $176 million, accounting for most of the increase.

Net debt-to-capital ratio at September 30 was 43.0%, consistent with June 30, 2016 at 42.6%, and up from 40.4% at December 31, 2015 due to the use of cash to replenish the company’s land pipeline, as well as a growing inventory of homes under construction during 2016.

Total lot supply at the end of the quarter was approximately 28,800, compared to approximately 29,000 at September 30, 2015 and 27,800 at year-end 2015. Based on trailing twelve months closings, total lots at September 30, 2016 represented approximately a 4.0 year supply of lots.

CONFERENCE CALL

Management will host a conference call today to discuss the Company’s results at 12:30 p.m. Eastern Time (9:30 a.m. Arizona Time). The call will be webcast with an accompanying slideshow available on the "Investor Relations" page of the Company’s web site at http://investors.meritagehomes.com. Telephone participants may avoid any delays by pre-registering for the call using the following link to receive a special dial-in number and PIN.

Conference call registration link: http://dpregister.com/10092994.

Telephone participants who are unable to pre-register may dial in to 866-226-4948 on the day of the call. International dial-in number is 1-412-902-4125 or 1-855-669-9657 in Canada.

A replay of the call will be available through November 10, 2016, beginning at 2:30 p.m. ET on October 27, 2016 on the website noted above, or by dialing 877-344-7529, and referencing conference number 10092994. For more information, visit www.meritagehomes.com.

Meritage Homes Corporation and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2016
2015
2016
2015
Homebuilding:
Home closing revenue
$
735,870
$
661,884
$
2,127,332
$
1,770,184
Land closing revenue
16,987
8,072
21,187
16,285
Total closing revenue
752,857
669,956
2,148,519
1,786,469
Cost of home closings
(604,891
)
(536,267
)
(1,755,260
)
(1,434,843
)
Cost of land closings
(16,092
)
(7,445
)
(19,485
)
(14,992
)
Total cost of closings
(620,983
)
(543,712
)
(1,774,745
)
(1,449,835
)
Home closing gross profit
130,979
125,617
372,072
335,341
Land closing gross profit
895
627
1,702
1,293
Total closing gross profit
131,874
126,244
373,774
336,634
Financial Services:
Revenue
3,139
3,000
9,115
8,276
Expense
(1,398
)
(1,253
)
(4,152
)
(3,914
)
Earnings from financial services unconsolidated entities and other, net 4,215
3,854
10,802
9,155
Financial services profit
5,956
5,601
15,765
13,517
Commissions and other sales costs
(52,478
)
(48,097
)
(155,034
)
(134,876
)
General and administrative expenses
(33,258
)
(28,774
)
(91,774
)
(86,074
)
Earnings/(loss) from other unconsolidated entities, net
440
(123
)
856
(415
)
Interest expense
(167
)
(4,187
)
(5,127
)
(11,962
)
Other income/(expense), net
1,435
(3,996
)
3,263
(3,445
)
Earnings before income taxes
53,802
46,668
141,723
113,379
Provision for income taxes
(16,915
)
(16,360
)
(43,989
)
(37,538
)
Net earnings
$
36,887
$
30,308
$
97,734
$
75,841
Earnings per share:
Basic
Earnings per share
$
0.92
$
0.76
$
2.45
$
1.92
Weighted average shares outstanding
40,022
39,663
39,958
39,568
Diluted
Earnings per share
$
0.88
$
0.73
$
2.33
$
1.83
Weighted average shares outstanding
42,608
42,192
42,541
42,134
Meritage Homes Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, 2016 December 31, 2015
Assets:
Cash and cash equivalents
$
107,915
$
262,208
Other receivables
76,371
57,296
Real estate
2,429,014
2,098,302
Deposits on real estate under option or contract
91,053
87,839
Investments in unconsolidated entities
11,831
11,370
Property and equipment, net
33,983
33,970
Deferred tax asset
57,552
59,147
Prepaids, other assets and goodwill
65,436
69,645
Total assets
$
2,873,155
$
2,679,777
Liabilities:
Accounts payable
$
148,260
$
106,440
Accrued liabilities
180,687
161,163
Home sale deposits
36,988
36,197
Loans payable and other borrowings
45,183
23,867
Senior and convertible senior notes, net
1,094,632
1,093,173
Total liabilities
1,505,750
1,420,840
Stockholders’ Equity:
Preferred stock
--
--
Common stock
400
397
Additional paid-in capital
570,223
559,492
Retained earnings
796,782
699,048
Total stockholders’ equity
1,367,405
1,258,937
Total liabilities and stockholders’ equity
$
2,873,155
$
2,679,777
Real estate - Allocated costs:
Homes under contract under construction
$
632,454
$
456,138
Unsold homes, completed and under construction
377,490
307,425
Model homes
150,662
138,546
Finished home sites and home sites under development
1,268,408
1,196,193
Total real estate
$
2,429,014
$
2,098,302
Supplemental Information and Non-GAAP Financial Disclosures (Dollars in thousands - unaudited):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2016
2015
2016
2015
Depreciation and amortization
$
3,870
$
3,565
$
11,470
$
10,294
Summary of Capitalized Interest:
Capitalized interest, beginning of period
$
64,682
$
58,870
$
61,202
$
54,060
Interest incurred
17,372
17,857
52,644
49,665
Interest expensed
(167
)
(4,187
)
(5,127
)
(11,962
)
Interest amortized to cost of home and land closings (14,256
)
(11,144
)
(41,088
)
(30,367
)
Capitalized interest, end of period
$
67,631
$
61,396
$
67,631
$
61,396
September
December
30, 2016
31, 2015
Notes payable and other borrowings
$
1,139,815
$
1,117,040
Stockholders’ equity
1,367,405
1,258,937
Total capital
2,507,220
2,375,977
Debt-to-capital
45.5
%
47.0
%
Notes payable and other borrowings
$
1,139,815
1,117,040
Less: cash and cash equivalents
$
(107,915
)
$
(262,208
)
Net debt
1,031,900
854,832
Stockholders’ equity
1,367,405
1,258,937
Total net capital
$
2,399,305
$
2,113,769
Net debt-to-capital
43.0
%
40.4
%
Meritage Homes Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2016
2015
Cash flows from operating activities:
Net earnings
$
97,734
$
75,841
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization
11,470
10,294
Stock-based compensation
11,042
12,418
Excess income tax provision/(benefit) from stock-based awards
540
(2,040
)
Equity in earnings from unconsolidated entities
(11,658
)
(8,740
)
Distribution of earnings from unconsolidated entities
11,439
9,446
Other
4,942
1,246
Changes in assets and liabilities:
Increase in real estate
(318,490
)
(198,520
)
(Increase)/decrease in deposits on real estate under option or contract
(3,160
)
2,719
Increase in other receivables, prepaids and other assets
(14,201
)
(6,067
)
Increase in accounts payable and accrued liabilities
61,206
39,949
Increase in home sale deposits
791
10,208
Net cash used in operating activities
(148,345
)
(53,246
)
Cash flows from investing activities:
Investments in unconsolidated entities
(242
)
(300
)
Purchases of property and equipment
(12,256
)
(12,334
)
Proceeds from sales of property and equipment
144
92
Maturities/sales of investments and securities
645
--
Payments to purchase investments and securities
(645
)
--
Net cash used in investing activities
(12,354
)
(12,542
)
Cash flows from financing activities:
Proceeds from Credit Facility, net
25,000
--
Repayment of loans payable and other borrowings
(18,286
)
(4,044
)
Proceeds from issuance of senior notes
--
200,000
Debt issuance costs
--
(3,013
)
Excess income tax (provision)/benefit from stock-based awards
(540
)
2,040
Proceeds from stock option exercises
232
2,881
Net cash provided by financing activities
6,406
197,864
Net (decrease)/increase in cash and cash equivalents
(154,293
)
132,076
Beginning cash and cash equivalents
262,208
103,333
Ending cash and cash equivalents
$
107,915
$
235,409
Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(Unaudited)
Three Months Ended September 30,
2016
2015
Homes
Value
Homes
Value
Homes Closed:
Arizona
253
$
89,092
302
$
92,888
California
251
142,056
236
120,387
Colorado
167
84,114
123
56,927
West Region
671
315,262
661
270,202
Texas
542
199,499
517
183,455
Central Region
542
199,499
517
183,455
Florida
206
85,647
202
90,285
Georgia
83
27,477
62
20,663
North Carolina
177
71,641
165
63,532
South Carolina
76
22,658
80
25,812
Tennessee
45
13,686
25
7,935
East Region
587
221,109
534
208,227
Total
1,800
$
735,870
1,712
$
661,884
Homes Ordered:
Arizona
345
$
116,815
272
$
96,867
California
216
125,920
203
110,076
Colorado
121
66,213
84
43,782
West Region
682
308,948
559
250,725
Texas
488
178,934
452
165,206
Central Region
488
178,934
452
165,206
Florida
208
95,946
227
94,114
Georgia
85
28,841
67
23,143
North Carolina
149
61,537
138
57,168
South Carolina
71
22,434
88
26,766
Tennessee
54
18,922
36
12,855
East Region
567
227,680
556
214,046
Total
1,737
$
715,562
1,567
$
629,977
Nine Months Ended September 30,
2016
2015
Homes
Value
Homes
Value
Homes Closed:
Arizona
749
$
258,139
717
$
227,367
California
738
418,834
565
302,573
Colorado
474
231,913
364
166,914
West Region
1,961
908,886
1,646
696,854
Texas
1,563
566,377
1,466
510,439
Central Region
1,563
566,377
1,466
510,439
Florida
619
252,311
589
254,607
Georgia
229
76,874
156
49,178
North Carolina
474
198,525
389
148,721
South Carolina
231
71,577
247
77,630
Tennessee
161
52,782
110
32,755
East Region
1,714
652,069
1,491
562,891
Total
5,238
$
2,127,332
4,603
$
1,770,184
Homes Ordered:
Arizona
935
$
322,807
880
$
290,172
California
775
442,863
750
419,987
Colorado
459
237,237
454
213,610
West Region
2,169
1,002,907
2,084
923,769
Texas
1,629
597,947
1,644
574,533
Central Region
1,629
597,947
1,644
574,533
Florida
702
295,453
693
295,634
Georgia
305
102,392
197
64,051
North Carolina
497
205,562
467
191,460
South Carolina
296
95,123
283
85,767
Tennessee
199
66,124
164
53,390
East Region
1,999
764,654
1,804
690,302
Total
5,797
$
2,365,508
5,532
$
2,188,604
Order Backlog:
Arizona
503
$
182,574
355
$
129,023
California
326
208,175
397
241,377
Colorado
317
167,475
358
168,329
West Region
1,146
558,224
1,110
538,729
Texas
1,008
381,764
1,036
373,135
Central Region
1,008
381,764
1,036
373,135
Florida
370
161,148
341
143,597
Georgia
171
58,944
94
31,457
North Carolina
283
118,515
263
110,907
South Carolina
153
53,657
106
34,257
Tennessee
120
43,605
93
32,790
East Region
1,097
435,869
897
353,008
Total
3,251
$
1,375,857
3,043
$
1,264,872
Meritage Homes Corporation and Subsidiaries
Operating Data
(Unaudited)
Three Months Ended September 30,
2016
2015
Ending
Average Ending
Average
Active Communities:
Arizona
40
41.5
41
42.0
California
29
27.0
26
23.0
Colorado
10
11.0
15
15.5
West Region
79
79.5
82
80.5
Texas
74
73.5
70
68.0
Central Region
74
73.5
70
68.0
Florida
26
26.0
31
30.5
Georgia
17
17.0
17
16.5
North Carolina
19
20.5
25
25.0
South Carolina
15
15.5
17
18.5
Tennessee
7
7.0
8
6.0
East Region
84
86.0
98
96.5
Total
237
239.0
250
245.0
Nine Months Ended September 30,
2016
2015
Ending
Average Ending
Average
Active Communities:
Arizona
40
40.5
41
41.0
California
29
26.5
26
25.0
Colorado
10
13.0
15
16.0
West Region
79
80.0
82
82.0
Texas
74
73.0
70
64.5
Central Region
74
73.0
70
64.5
Florida
26
28.5
31
30.0
Georgia
17
17.0
17
15.0
North Carolina
19
22.5
25
23.0
South Carolina
15
16.5
17
18.5
Tennessee
7
8.0
8
6.5
East Region
84
92.5
98
93.0
Total
237
245.5
250
239.5

About Meritage Homes Corporation

Meritage Homes is the seventh-largest public homebuilder in the United States, based on homes closed in 2015. Meritage Homes builds and sells single-family homes for first-time, move-up, luxury and active adult buyers across the Western, Southern and Southeastern United States. Meritage Homes builds in markets including Sacramento, San Francisco Bay area, southern coastal and Inland Empire markets in California; Houston, Dallas-Ft. Worth, Austin and San Antonio, Texas; Phoenix/Scottsdale, Green Valley and Tucson, Arizona; Denver and Fort Collins, Colorado; Orlando, Tampa and south Florida; Raleigh and Charlotte, North Carolina; Greenville-Spartanburg and York County, South Carolina; Nashville, Tennessee; and Atlanta, Georgia.

Meritage Homes has designed and built over 100,000 homes in its 31-year history, and has a reputation for its distinctive style, quality construction, and positive customer experience. Meritage Homes is the industry leader in energy-efficient homebuilding and has received the U.S. Environmental Protection Agency’s ENERGY STAR Partner of the Year for Sustained Excellence Award every year since 2013 for innovation and industry leadership in energy efficient homebuilding. For more information, visit meritagehomes.com.

This press release and the accompanying comments during our analyst call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include management’s expectations with respect to future growth, projected orders, home closings and home closing revenue, home closing gross margins and diluted earnings per share for the full year 2016.

Such statements are based upon the current beliefs and expectations of Company management, and current market conditions, which are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The Company makes no commitment, and disclaims any duty, to update or revise any forward-looking statements to reflect future events or changes in these expectations. Meritage’s business is subject to a number of risks and uncertainties. As a result of those risks and uncertainties, the Company’s stock and note prices may fluctuate dramatically. These risks and uncertainties include, but are not limited to, the following: the availability and cost of finished lots and undeveloped land; interest rates and changes in the availability and pricing of residential mortgages; fluctuations in the availability and cost of labor; changes in tax laws that adversely impact us or our homebuyers; reversal of the current economic recovery; the ability of our potential buyers to sell their existing homes; cancellation rates; inflation in the cost of materials used to develop communities and construct homes; the adverse effect of slower order absorption rates; impairments of our real estate inventory; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of option deposits; our potential exposure to natural disasters or severe weather conditions; competition; construction defect and home warranty claims; failures in health and safety performance; our success in prevailing on contested tax positions; our ability to obtain performance bonds in connection with our development work; the loss of key personnel; enactment of new laws or regulations or our failure to comply with laws and regulations; our limited geographic diversification; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing due to a downgrade of our credit ratings; our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government regulations and the effect of legislative or other initiatives that seek to restrain growth of new housing construction or similar measures; legislation relating to energy and climate change; the replication of our energy-efficient technologies by our competitors; our exposure to information technology failures and security breaches; and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2015 and subsequent quarterly reports on Forms 10-Q under the caption "Risk Factors," which can be found on our website.

Contacts: Brent Anderson, VP Investor Relations
(972) 580-6360 (office)
investors@meritagehomes.com

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