Paragon 28, Inc.

Q1 2023 Earnings Conference Call

5/4/2023

spk00: Good afternoon and welcome to Paragon 28 first quarter 2023 earnings conference call. Currently participants are in listen only mode. We will be facilitating a question and answer session at the end of today's call. To register a question please press star followed by one on your telephone keypad. As a reminder this call is being recorded for replay purposes and I would now like to hand over the conference to the host of today Mr. Matthew Brinkman, SVP of Strategy and Investors Relations. Mr. Brinkman, please go ahead.
spk06: Good afternoon, and thank you for joining Paragon 28's first quarter 2023 financial results and earnings calls. Presenting on today's call are Albert DaCosta, Chairman and CEO, and Steve Deitch, CFO. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations, or predictions of future events, results, or performance. These forward-looking statements are subject to a number of risks, uncertainties, estimates, and assumptions that may cause actual results to differ materially from these forward-looking statements. All forward-looking statements are based upon current available information, and Paragon 28 assumes no obligation except as required by law to update these statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. During this presentation, we will refer to the non-GAAP financial measure of adjusted EBITDA and constant currency net revenue growth. A reconciliation to the most comparable GAAP financial measure net income and reported net revenue growth is contained in our press release issued earlier today. And with that, I will now turn the call over to Albert.
spk04: Thanks, Matt. Good afternoon and welcome to our first quarter 2023 earnings call. Throughout this call, I will provide an overview of our first quarter 2023 performance and give a business update. Steve will then provide additional details regarding our financial results and provide an update on our 2023 financial guidance. We will then open the call to Q&A. Total net revenue for the first quarter was a record $52 million, representing constant currency growth of 27% year over year. I'm incredibly pleased with our first quarter performance this year, which is especially impressive against our strong growth comps of 25% in the first quarter of 2022 and 23% in the first quarter of 2021. First quarter U.S. net revenue was $45 million, representing growth of 25% over the first quarter of 2022. I am proud to say that in the first quarter of 2023, our U.S. business delivered 20% or greater growth in each of the five foot and ankle subsegments. Our balanced growth underscores our focus on improving patient outcomes across the entirety of the foot and ankle market. Our U.S. net revenue increased during the first quarter of 2023 was driven in large part by our 247 producing sales reps, an 18% increase compared to the first quarter of 2022. This also represented a 6% increase compared to the fourth quarter of 2022. Despite the sizable increase in the number of producing reps during the quarter, our revenue per producing rep also increased year over year by a mid-single digit percentage, annualizing to more than $700,000 per producing rep. We once again did business with over 2,000 U.S. Surgeon customers during the first quarter, an increase of 12% compared to the prior year. Importantly, in addition to new customer additions, we continue to see nice increases in revenue with existing customers. First quarter international net revenue was a record $7 million, representing 42% constant currency growth over the first quarter of 2022. International revenue growth was driven primarily by our largest international markets of Australia, South Africa, and the United Kingdom. B-28's consolidated revenue growth of 27% for the first quarter was almost four times the estimated foot and ankle market growth rate. The investments we have made are paying dividends and are positioning us well for long-term success, including our exciting and innovative product pipeline that surging customers have come to expect from Paragon 28. Thank you for the extraordinary contributions made by all of our team members around the world. The P28 team has an incredible ability to deliver results and is committed to our mission to improve foot and ankle patient outcomes. I will now turn it over to Steve.
spk08: Thank you, Albert. Expanding on your earlier comments on the first quarter of 2023, Paragon 28's net revenue was a record $52 million. representing 25.8% reported growth and 27.1% constant currency growth, respectively, compared to the first quarter of 2022. Foreign currency headwinds reduced reported quarterly net revenue and net revenue growth by approximately $600,000 and 1.3 percentage points, respectively. As we communicated in early March, P28 was in the midst of a great quarter. And the quarter ultimately finished very strong. Gross profit margin for the first quarter of 2023 was 82.9% compared to 83.6% in the first quarter of 2022. This small percentage decrease was primarily due to an increase in excess and obsolete inventory costs. Research and development costs were $7 million, an increase of 22.1% compared to the first quarter of 2022. P-28 continues to expand its investments to improve foot and ankle patient outcomes, including new product development efforts and clinical studies. Selling general and administrative expense was $43.8 million or 84.2% of revenue for the first quarter of 2023 compared to $37.2 million or 90% of revenue in the first quarter of 2022. This margin improvement of greater than 500 basis points demonstrates the strong leveraging of our past investments in Salesforce expansion, marketing and medical education, and company infrastructure. Adjusted EBITDA for the first quarter of 2023 was a $1.4 million loss representing a 57% improvement compared to the $3.3 million loss in the first quarter of 2022. On a dollar basis, we have experienced sequential quarterly improvements in adjusted EBITDA every quarter since the start of 2022. P28's revenue growth rates are expected to continue well above market growth rates, and this expected revenue growth, combined with steady increases in operating margin, will bring P28 closer to break-even adjusted EBITDA on an annualized basis throughout the year. Operating cash use for the first quarter of 2023 was $14.1 million, which included a $9 million legal settlement payment. Normalized for this payment, operating cash use for the first quarter of 2023 was $5 million, a $4.4 million improvement, or 47%, compared to the prior year. Investing cash use for the first quarter of 2023 was $7.6 million compared to $42 million in the prior year quarter. The prior year quarter included two significant one-time items, the Dizier acquisition for approximately $18 million and the purchase of our Denver headquarters building, also for approximately $18 million. We ended the first quarter of 2023 with approximately $146 million of liquidity, including $86 million of cash in short-term investments, and up to $60 million of cash available via our senior credit facility. We are very comfortable with our liquidity position, which we expect will enable us to reach cash flow breakeven as a result of continued above-market revenue growth coupled with continued improvements in operating leverage and free cash flow. Turning to our 2023 net revenue guidance, P28 is off to a fantastic start in 2023. 2023 quarterly revenue seasonality appears to be shaping up more in line with pre-COVID historical trends, including, for example, the return of more normal spring and summer vacations with revenue concentration more heavily weighted in the first and fourth quarters of each year. And the procedural trends through today continue to validate our thinking. For the full year of 2023, we are reaffirming our previous net revenue guidance of $214 million to $218 million, representing reported growth of approximately 18% to 20%, respectively. Our revenue guidance also assumes currency translation rates remain consistent with current translation rates. That is the end of our prepared remarks.
spk04: Operator, please open the lines for questions and answers.
spk00: Perfect. Ladies and gentlemen, if you'd like to ask a question, please press star followed by 1 on your telephone keypad. That's star followed by 1 on your telephone keypad. To withdraw your question, press star followed by 2. And please do also remember to unmute your microphone when it's your turn to speak. Our first question comes from Dave Turclay from GMP Securities. Dave, your line is now open. Please go ahead.
spk05: Thank you, and congrats, guys. I appreciate the color about the return to normal, maybe pre-COVID seasonality. That's great to hear. But just as we look at the guidance, and given how strong this quarter came in, you're not seeing anything in 2Q that concerns you, And we should probably think of this as being somewhat conservative, given that it's still early in the year. But there's nothing that you're seeing that would cause you to believe that there's any deceleration coming.
spk08: Hey, Turk, it's Steve. Thanks for the question. It's a great question. We're really excited to see more normal seasonality. And, you know, look, we're off to a terrific start in 23. Top line growth, 27% against the tough comp last year, 25%. better EBITDA, better cash flow. So we're really hitting on all cylinders. And when we look at our guidance for the full year, we decided to reaffirm simply due to the fact that we are in continued macroeconomic uncertainty and, you know, use the word conservatism. I would say just we're being prudent when we look at the uncertainties in the macroeconomic environment we're operating in. But our business is hitting on all cylinders. We're as strong as we've ever been. We continue to expand our sales force at record levels. We continue to drive productivity across our sales force, and our international business is humming as well. So, all good with P28.
spk05: I like the prudent term, too. And just to reaffirm that, I think you said that the five divisions or categories in the U.S. were over 20. In the past, I think you said they were all up double digits. I don't recall over 20%. So, Again, that implies that something even accelerated in one cue versus the past, correct?
spk08: Yeah. I mean, look, this was a great quarter, and we specifically called it out that way. Our U.S. business grew 20% or greater in every foot and ankle category, and that is the balance that the business was designed with, to be truly the preeminent foot and ankle specialist, serving all the needs of foot and ankle surgeons around the globe, honestly, and and it's working well.
spk02: Thank you.
spk07: You got it. Thanks, Dave.
spk00: Thanks, Dave. Our next question comes from Kyle Rose from Canaccord. Kyle, your line is now open. Please go ahead.
spk01: Hi, this is Caitlin. I'm for Kyle. Thanks for taking the questions and great quarter. Just to start off, you know, speaking to the Salesforce, you saw some strong additions in the Q1. What are your plans for the rest of this year? And do you continue to expect that, you know, the factors of Salesforce productivity and Salesforce additions will really kind of equally drive growth?
spk08: Hey, Caitlin, nice to hear from you. And yeah, we had a really nice contribution from producing reps really in the first quarter. We grew our producing rep count 18% to 247, which was also not just a nice increase year over year, but a 13 sales rep sequential increase. So the investments that we've been making are really starting to deliver like we had expected them to. It does take 12 to 15, 18 months sometimes to really get experienced reps up and running at their potential. And so we're really starting to see that. So as you drive up the number of producing reps, your productivity tends to go down a little bit just because of the math you're bringing in newer reps. But in this quarter, we saw a nice single digit, mid single digit increase in productivity. So we expect over time that those will sort of balance out again. But this quarter was more heavily influenced by the expansion of our Salesforce in the U.S.
spk01: Got it. And then just quickly on SMART28, do you still expect the first module launch this year? And what do you think really the potential longer-term contribution from SMART28 could be?
spk04: Yeah, thanks, Caitlin. We are expecting a limited launch later this year, early next year. One of the first modules, really a reflection of more of a Dizior type platform. And I think it's going to give us pretty good visibility to what that type of enabling technology is going to look like. I would tell you on a long-term basis, we had made no secret that we think enabling technologies, giving us better visibility in the planning phases of surgery, in the diagnosing phases of surgery, and even predicting outcome phase, that we expect that to contribute in a meaningful way to improved outcomes for patients. And we think the foot and ankle market desperately needs that. We still have higher complication rates, and Paragon 28 has always been on a mission to improve those outcomes. And we think this is one of the most significant opportunities to do that.
spk09: awesome thanks so much of course thank you our next question comes from george sellers from steven inc george your line is now open please go ahead hey thanks for taking the question and congrats on a great quarter uh i just wanted to ask about the new device launches expected this year sort of the cadence uh as we think about the rest of this year and any new devices you may be having a pipeline. And then can you also just remind us of some of the recent launches you've made maybe last year as we think about sort of the year over year comps as we're modeling the rest of this year? Thank you for the time.
spk04: You got it. Thanks for the question, George. I'll actually start in reverse, right? So last year we called out a few key product launches and particularly because they were in areas we weren't totally participating at. XFIX was a great example of that. We launched earlier in the year, we launched a pin-to-bar system, which is primarily used for more of the fracture fixation. And then later on, we launched a circular fixator, which is used more in ankle deformity and the Charcot segment of foot and ankle. Those were pretty significant contributions for us and great to have more participation and more of the indications around foot and ankle, which has been a goal. We also launched a couple of soft tissue products last year. And I've called out one that we, although we have some products there, we see soft tissue playing a pretty heavy role in the future of foot and ankle. And we were proud to launch a few key products like the React Stabilization System, which is used in the fracture fixation market again. And that product put a spotlight on the fracture fixation product line, in particular ankle fracture for us. So we had a really nice complementary effect there for some of those launches. This year, so far, we've really launched so far two products. The first being the MET shortening product, which is a complementary product to the bunion segment. And I've always said that, you know, foot and ankle procedures tend to be a tandem of two and three different indications in each surgical procedure. And our goal is to make sure that we can address with meaningful technology, address every one of those indications and The MET shortening product is exciting for that reason. It gives us a better, more soft tissue balanced solution to address shortening of the second and potentially even the lesser metatarsals following or in tandem with bunion surgery. We also launched, in a limited respect, we launched the supramalleolar system late last year, early this year, which if you remember is more of an ankle realignment procedure. That procedure can be done just by itself to realign the ankle, make sure that we're parallel to the ground when we're walking. But it's also a really nice complement for things like total ankle replacement, where we need that alignment to prep us for the total ankle replacement. So another really nice complementary product. I'd expect to see a couple of more additions to that Supermalleolar product later this year. And then the second half of this year is probably going to be a little heavier weighted with product introductions. And I've always said, All of our product introductions are meaningful to us. I don't have favorites, but it is really nice to continue to address more and more indications, and the foot and ankle market needs that. So we're pretty excited about what's going to happen later this year.
spk09: Okay, that's really helpful. Thank you. And then, Steve, maybe one for you. You previously talked about profitability and sort of the timeline there. Just curious your updated thoughts on, how you're thinking about Paragon 28 returning to profitability. Thank you.
spk08: Yeah, George, it's still the same from, you know, what we had talked about last quarter where we said we expect a $5 million to $10 million improvement in our adjusted EBITDA this year, which would have us approaching breakeven. So it's going to be soon when Paragon sort of pierces the profitability on an EBITDA basis. We continue to make great progress on driving high quality growth, which drives strong gross margins. As you saw, we delivered 83% again this quarter. So it all starts there. And then just making investments where they matter, continue to make investments in things like Salesforce expansion, new product development, international expansion, and so on. So that's where we focus our time, energy, and money, and we leverage everything else. And so Excited about our pathway to continued profit or improved profitability and cash flow over time.
spk09: Okay, perfect. Thank you again for the time and congrats again on a great quarter.
spk04: Thanks, George.
spk00: Our next question comes from Craig Bijou from Bank of America. Craig, your line is now open. Please go ahead.
spk02: uh good afternoon guys thanks uh for taking questions congrats on another strong strong quarter i wanted to follow up on uh the revenue cadence uh steve and i recognize you know i i heard your comments on uh where the revenue concentration will will uh will be um your your comps though are you know a little bit um you know, variable, I guess, you know, when you look at Q2, or sorry, 22. So, just maybe if you guys could provide a little bit more color on how to think about, you know, maybe Q2 in relation to Q1, and then, you know, the back half in relation to the first half.
spk08: No, great question, Craig, and great to see you. And we're looking forward to seeing you next week at your conference. You know, we are pleased to see a more normal seasonality for the foot and ankle business that we operate within. And really what that means is we have a concentration of revenue in the fourth quarter being in the first quarter after that. So the first quarter for us, obviously, was really strong, 27%. You did mention some strange comps as we roll through the year. For us last year, though, the first quarter was a 25 percent comp. So, you know, really pleased with that. You know, when you think about like the actual distribution of revenue, though, typically the second and third quarters are the lowest on a dollar basis each year. And then the third quarter begins to ramp up into as we get out of the vacation schedules. And then the fourth quarter is really a bolus of procedures. In a normal environment, which I think that we're in now, you would see a second quarter step down from the first quarter levels. And, you know, we think our second and third quarters are going to have similar growth rates this year, year over year, due to some strange comps that you mentioned. And last year, our second quarter was larger than our first quarter, and the third quarter was quite a bit larger than the second quarter, which is pretty unusual. So we're expecting more of a normalized trend this year, where the first quarter is strong, We see a bit of a step down on a dollar basis, but still good year-over-year growth rates. And then building into the third quarter and then a really, really strong fourth quarter from an overall revenue perspective.
spk02: Got it. That's helpful. And Albert or Steve, you talked about the 20% growth across all your categories. We've heard other ortho programs procedure revenue or other ortho procedure growth in Q1 is as strong as there might be some recovery or catch up. So we'd love to kind of get your take on what you're seeing in the foot and ankle market. And I know part of it is trauma and not necessarily elective, but from an underlying perspective, procedure perspective, we'd love to just kind of get what or understand what you're seeing and how you see procedures play out over 23.
spk08: Yeah, and Craig, I'll start, and then Albert has some perspectives here as well for sure. In our first quarter, like in a typical first quarter, a normal seasonality first quarter, you do see some spillover of patients that were scheduled into the fourth quarter but were unable to get their procedures done. because of just the heavy surgical volumes, not just in foot and ankle and orthopedics and med tech, but across med tech. And so, you know, you typically see January as a very, very strong procedural month. And then February is pretty good. And then when you get into March, you start seeing some seasonality with spring breaks and things like that. And then that continues into the second quarter. But look, the underlying markets are strong. And we're excited about our position to take advantage of those markets.
spk04: That's right. I think just to add to that and outside of seasonality stuff, I feel like our team's just executing really well on the fundamentals there, right? The Salesforce additions, the medical education, product launches. I feel like everything really is playing a part in contributing to some nice growth rates there.
spk02: Great. Thanks for taking the question, Seth.
spk04: Thank you.
spk00: Our next question comes from Mick Mattson from Needham Company. Mick, your line is now open. Please go ahead.
spk07: Yeah, thanks. I just want to ask one on training. You didn't really give any kind of metrics there. And I think you maybe have stepped away from giving a lot of detail. But I was just curious if you could give us any kind of updates, even if it's more qualitative in nature, surge in training.
spk08: Yeah. Yeah, happy to, Mike. The FNA training programs are really strong again in the first quarter. Our mobile lab, it's really, really doing well for us. We trained almost 250 surgeons in the mobile lab alone in the first quarter. So that's really exciting for us and is adding a different avenue for us to get to these surgeons. And we didn't really train a whole lot of surgeons internationally this quarter. But in the U.S., we trained over 600 surgeons. So we are really happy with the continued interest in our product lines and our ability to get to these surgeons for training in a really becoming a more cost-effective way too with the mobile lab. And then the added benefit of all this training is we get to train and work with our reps more. And they get to spend more time with their existing doctors and potentially new doctor customers. So it's a really nice program for us. And it was, again, in the first quarter.
spk07: Okay, got it. And then just a couple of financial questions. So the OPEX in the quarter was a little higher than what we were modeling. You know, just wondering if you expected to kind of stay around the 50 million, sorry, 51 million kind of run rate from here for the year?
spk08: You know, so we would expect to continue to see leverage on our total OPEX as we move forward throughout on a quarterly basis. We're going to continue to invest in R&D and Salesforce and medical education. And in terms of the actual dollars or expectations per quarter, not really ready to talk about that, but of course we're going to continue to drive leverage as we continue the path to EBITDA positivity.
spk07: Okay, got it. Thanks. And then just gross margin, kind of same thing. It was a little bit higher than what we were modeling. And was there any kind of one-offs in there or anything that led it to be maybe, I think we were kind of more in the, you know, 81% sort of range versus 83 that you did?
spk08: No one-offs, you know, just good solid uh, contribution from a lot of very strong products that, you know, that, uh, we're able to secure for pretty reasonable pricing from our partners. So, uh, you know, our team works really hard to get product at reasonable price and then our sales teams and our contracting teams work to make sure we get paid appropriately. And so nothing unusual in the 83% margin. You know, we do, we do, uh, continue to recommend, think about our business as an 80% plus, margin business and, you know, comfortable with that level as you think about your models going forward.
spk07: Okay, great. Thank you.
spk08: Thanks a lot, Mike. Thanks.
spk00: Our next question comes from Neil Chatterjee from B. Kelly, B. Riley. Neil, your line is now open. Please go ahead.
spk10: Good afternoon. Thanks for taking the questions. Like most of mine have already been asked, but just maybe coming back to the international, you know, if you could just talk about, you know, what's kind of driving that strength on the international side, whether it's, you know, anything specific in, I guess, UK or South Africa or Australia, or just kind of via the state industry.
spk08: Hey, Neil. Thanks. And, you know, look, we're really pleased with our international business. You know, similar to our U.S. business, we've been making some really key strategic investments in certain markets and, And they keep delivering. So we'll continue making investments there. And, you know, our UK business, our Australia business performed extremely well again in the first quarter. You know, just really, really doing well for us and really, really excited about the momentum there. Our South Africa business continues to perform. And then in new markets, we're starting to see, you know, increased penetration in areas like Germany. in Italy, in Spain, as well as in Canada. So, you know, we've got a lot of opportunities for growth there and it's a, you know, it's an area that we're going to continue to focus on going forward.
spk10: Great. I mean, and then as far as those expansion countries, I mean, anything call out there in terms of, you know, sizing those opportunities?
spk08: You know, look, I would tell you our existing markets can get a lot bigger. you know, including our big three, those are going to get bigger for us. And then the markets that we're just getting into, they have, you know, they have a nice opportunity to grow. The foot and ankle market, as you know, is very large internationally, over $2 billion. And so we want to make sure that we continue to focus there, not just for the revenue, but also just so that we can be a truly globally focused foot and ankle company taking into account the best practices and procedures of how to treat foot and ankle patients and improve outcomes. So it's important to help drive revenue, but it also helps us develop better products.
spk10: Got it. And that's a belabor the point on just the quarterly cadence. I think you gave some pretty good color here, which is, you know, I just want to add specifically, I guess, about the vacations kind of returning to kind of pre-pandemic levels. I mean, is that, You know, does that apply that, that say for like April or July, August, those vacations, you know, are picking up versus say 22 or just, you know, how is 22 versus, you know, expectations for 23?
spk08: Yeah, no, it's really interesting, Neil, to look at. And we, you know, obviously look at this very carefully and talk to customers in our sales force about it and And we just are seeing more normal vacation schedules where surgeons and patients are actually taking things like spring break and scheduling summer vacations again. And so that's great to see. There's been practices that have in hospitals that in the past not allowed the physicians to travel as much as they would have liked to and then put some sorts of restrictions on their ability to do procedures when they would return. And those have been lifted by and large. So we're happy to see our customers be able to take vacation, but we can't wait for them to get back in the OR. I'll tell you that.
spk10: Got it. Thanks, guys. That's it for me.
spk02: Thanks, Neil. Thanks, Neil.
spk00: Our next question is from Matt O'Brien from Piper Sandler. Matt, your line is now open. Please go ahead.
spk03: Hi. This is Samantha. I'm for Matt. Thanks for kicking our question, and congrats on the quarter. I guess our first question is about maybe what new products influenced Q1 and maybe how do you expect those to continue to impact the business moving forward?
spk04: Yeah, thanks for the question, Samantha. Maybe I'll hit that. I mentioned we had a couple of key launches. I'm really hesitant to say that because, again, I don't want to – glamorize one piece over the other, but sometimes newer products could be in an earlier cycle of growth and can lean more on their contribution. But I really think if you look at our ankle portfolio, and that includes ankle fusion, total ankle replacement, we launched a lot of those key products on the backside of COVID. And with medical education being a pretty high demand for those products, we're still seeing a really nice influence from those. But every subsegment of foot and ankle saw meaningful growth in Q1, right? We've had impact from new products in fracture fixation and flat foot, which is PCFD, the bunion market or the forefoot market, which we call it Charcot, and ankle, right? Charcot saw a really nice influence from our external fixation. Yeah, so just I feel like I'm giving you a more broad answer to that question, but I feel like a lot of our products in all of the segments really contributed nicely to Q1 success.
spk03: Perfect. Thanks so much. And then just one more question on international specifically. You know, obviously it's a meaningful growth rate and maybe what are you seeing there and how durable is that? Thank you.
spk08: It's very durable, Sam. We've got a lot of room to keep growing. And, you know, the international market is comparable in size to the U.S. market. So a lot of opportunity there. You know, like I mentioned, in the markets we're already established and have a strong beachhead, lots of room to grow there. In markets where we don't really have a significant presence, you know, those are going to become important for us, more important over time. So it's an important part of our growth. plan going forward, and we're excited to keep investing in those markets.
spk04: Maybe I'll add one thing to that, Samantha, too. You know, a lot of the new products we launch here in the United States have a little bit of a delayed reaction with the international market, just given regulatory procedures there. And so we're still really excited about the opportunity with some of the products we launched in the last two or three years and seeing the impact those could have on the international success.
spk03: Perfect. Thank you so much.
spk05: Thank you. Of course. Thanks.
spk00: We currently have no further questions, so I would like to hand the call back to Albert Acosta from Final Remarks. Please go ahead.
spk04: Thank you again for your time today. We look forward to seeing many of you at the future investor and industry conferences, including next week in Las Vegas at the Bank of America Healthcare Conference on May 9th and 10th. Have a great day.
spk00: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.
Disclaimer

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