Transcript: Nightly Business Report — June 17, 2015

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

(BEGIN VIDEO CLIP)

JANET YELLEN, FEDERAL RESERVE CHAIR: The committee wants to see some further progress before feeling that it will all be appropriate to raise rates.

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Not just yet. Federal Reserve Chair Janet Yellen says the Central Bank isn’t ready to raise rates. But when it does, the focus should be on what happens next.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Dealt a blow. A California ruling could force big changes to Uber, potentially altering the $40 billion company’s business model.

MATHISEN: Stick with what you know. If that’s one of the secret to success, why do so in companies expand beyond their core businesses?

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, June 17th.

And good evening, everyone. Welcome. I’m Tyler Mathisen, reporting tonight from New York City.

HERERA: And I’m Sue Herera.

We begin with the Federal Reserve, which appears to be on track to raise interest rates sometime this year. Chair Janet Yellen provided only feint clues. She didn’t say when and she didn’t say by how much. But the central bank did upgrade its view of the economy, everything from housing to consumer spending.

Stocks rose as Yellen spoke at the news conference this afternoon. The Dow Jones Industrial Average rose 31 points, to close at 17,935. The NASDAQ 9 points higher, and the S&P 500 rose 4 points.

Yields or interest rates meantime turned lower with the 10-year note at 2.3 percent.

Hampton Pearson has more on what Ms. Yellen said about the first potential rate hike in nearly a decade.

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HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Federal Reserve monetary policymakers see an economy that has recovered since the beginning of the year, but it wants to see stronger gains in the job markets and higher inflation before raising interest rates for first time in nine years.

YELLEN: The committee continues to judge that the first increase in the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

At our meeting that ended today, the committee concluded that these conditions have not yet been achieved.

PEARSON: While the Fed gave no timetable for a rate hike, all but two of 17 policymakers think the central bank will raise key short-term rates sometime this year. With the first hike coming most likely in September.

YELLEN: On the one hand, waiting too long to begin normalization can risk significantly overshooting our inflation objective, given the lags in the operation of monetary policy. And on the other hand, beginning too early could risk a derailing recovery that we’ve worked for a very long time to try to achieve. And so, we’re trying to assess those risks.

PEARSON: Beyond job growth, the Fed still sees inflation as too low, which in the long run holds back economic growth. Business investment is slowed, due to declining energy prices. American exports have become more expensive because of the rising value of the dollar, all impacting the timing of that rate hike.

In hopes of preparing investors and heading off market volatility, the Fed chairman emphasized, whenever those rate hikes begin, they’ll happen gradually, depending on future economic data.

For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.

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MATHISEN: And joining us to talk more about today’s Fed action, or non-action, what it may mean for the U.S. economy is Alan Blinder. He’s the former vice chairman of board of governors at the Fed and is now of professor of economics and public affairs at Princeton.

Professor Blinder, always great to have you with us.

I gather that one of the things that you saw in the data today was that the members of the committee are saying that the economy is growing, or their forecast for it is slower and lower than previously thought.

Does that do anything to your view as to when the Fed may move to raise rates?

ALAN BLINDER, PROFESSOR OF ECONOMICS & PUBLIC AFFAIRS, PRINCETON UNIVERSITY: Well, yes. I think logically, what the Fed has been saying consistently and we really should believe them because it’s true, is that their decisions are data-dependent. And what you saw among other things in the forecast or the statement was a weaker outlook for the year. And not just because of the first quarter. They don’t give you quarter by quarter forecast.

But it looks like they are pretty mediocre on the second half of this year. And so, that logically pushes the date back if it pushes at all.

HERERA: So, Alan, given what you heard from the Fed chief, when they do eventually move on interest rates, what will subsequent rate hikes look like? How extreme will they be? Will they be gradual? Will they be month by month? What’s your read?

BLINDER: They won’t be month by month. But I’ve been thinking for some time and this statement, the accompanying dots diagram very much ratify the belief I’ve had, which is roughly speaking 100 basis points a year. So, if they are going in 25 basis point increments, that would mean four rate hikes a year — unless, of course, something happens to derail that plan.

MATHISEN: Do you think that the Fed broadly, and Chair Yellen more narrowly, are moved at all by the cautions expressed by the IMF and the World Bank?

BLINDER: I don’t. I think the cautions they are getting are coming from the data, not from the World Bank and not from the IMF.

HERERA: But if indeed the Fed does move on rates, what are the implications for the global economy? I mean, the IMF warning or perhaps, you know, the shot across the bow there, was implying that the global economy may not be strong enough to withstand an interest rate hike here at home.

BLINDER: Yes, one of the ironies is that Fed rate hike, when they come, often have more effects abroad than they do at home, which is kind of an unfortunate circumstance since the Federal Reserve gets its instructions from the U.S. Congress. And nothing in those instructions says anything about taking account of corollary effects on other countries.

So, the Fed is focused on what the United States economy needs, period, full stop. And there are times and this may be one of them, where it would be better for the whole world economy if the Fed wouldn’t raise interest rates so early or even so quickly. But that’s not going to move the Fed. The Fed is focused on the U.S.

HERERA: All right. Professor Blinder, always great to see you. Thank you for your help tonight.

BLINDER: You’re very welcome.

HERERA: And now to another issue the markets are watching closely, Greece. The deadline for that country to reach agreement with its creditors is fast approaching, and today, Greece’s finance minister said that a deal was unlikely to be reached at the euro group meeting scheduled for tomorrow.

Meantime in Athens, protesters took to the street in support of the government and against Greece’s creditors, for demanding changes in that country’s pension system in exchange for bailout money.

MATHISEN: Well, Sue, FedEx (NYSE:FDX) reported disappointing fourth quarter results today. Both revenue and earnings per share came in below Wall Street estimates.

The global freight and shipping company also issued disappointing current quarter guidance. And the company said the economy will continue to grow at just a moderate pace. Despite the muted growth outlook, the company does plan to increase capital spending by 7 percent to keep up with rising demand for online shopping. Shares dropped today about 3 percent.

HERERA: Ty, a record fine for AT&T (NYSE:T), $100 million. The Federal Communications Commission said the telecom company misled customers about unlimited data plans. The agency said AT&T (NYSE:T) slowed speeds for customers with those plans and failed to notify them of that practice, violating an FCC rule.

MATHISEN: Well, the future of the Trans Pacific Partnership, a 12-nation pact among the U.S. and Asia Pacific nations remains tonight in limbo.

John Harwood spoke to House Minority Leader Nancy Pelosi about her stance against the president on this issue — John.

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tyler, Nancy Pelosi delivered a setback to the president last week when she stood in front of the House and urge fellow Democrats to rally against his trade package but she said it wasn’t a betrayal of her president.

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HARWOOD: One of the headline said, “Pelosi knifes Obama”.

REP. NANCY PELOSI (D), CALIFORNIA: Well, that’s not fair, that’s just not fair. I’ve not been a big supporter of fast-track. I don’t think it’s even necessary. It’s a convenience for the administration. It’s an advantage for the business community. But it’s a hardship for workers because it just isn’t fair.

This has reached like a tipping point.

HARWOOD: But you don’t trust him in his assertion that this deal is good for middle class economics.

PELOSI: Well, let me just say this — I certainly trust the president, and I think all of our members trust the president. We disagree with the president on that because this TPP has not even been completed in terms of it. And people can reserve the right to take a look at that when we see that and make a judgment —

HARWOOD: What we’re going through now wouldn’t allow it to be completed.

PELOSI: Well, it completed without it. I have great confidence in the ability of our country to negotiate.

HARWOOD: Are you concerned that blocking the president on this front weakens him and could weaken U.S. leadership in the world?

PELOSI: No. What you saw on the floor on Friday was an expression of concern of the American people. We are representatives. That is our title and that is our job description.

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HARWOOD: And, Tyler, with news that has broken late this afternoon, it appears that the president is going to get his way on trade promotion authority and not have to negotiate that deal without fast track. The Mitch McConnell and John Boehner, the House and Senate Republican leaders, announced they have a path toward getting TPA to the president’s desk through a new series of votes that are not susceptible to the same Democratic blocking tactic that Nancy Pelosi engineered last week.

MATHISEN: So, from what you said, John, it looks like his allies on this, the deal being saved, he is going to owe it to the Republicans, not congressional Democrats.

HARWOOD: Funny how things change, doesn’t it Tyler. John Boehner and Mitch McConnell in fact have salvaged the president’s agenda on this. This is also an agenda that they share. So, they’re doing each other a favor.

MATHISEN: All right. John Harwood, reporting from Washington tonight. John, thanks very much — Sue.

HERERA: Still ahead, why a ruling in California could potentially spell trouble for Uber’s business model.

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HERERA: Uber was dealt a blow today in California. The ride-hailing company that’s valued at roughly $40 billion was on the losing side of the ruling that could significant raise its cost and potentially alter its entire business model.

Kate Rogers (NYSE:ROG) has more.

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KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: A ruling from the California labor commissioner could have big ramifications for Uber and the sharing economy as a whole. The ruling sides with an uber driver, Barbara Ann Berwick, saying she is an employee, not an independent contractor.

Berwick sued the ride-hailing company for costs related to her work. The plaintiff was awarded $4,000 in expenses, including mileage and bridge tolls. In a statement, Uber said the ruling is nonbinding, applies to only one driver and that it conflicts with its separate ruling made by the same commission in 2012, which said, quote, “the driver performed services as an independent contractor and not as a bona fide employee.”

Uber also said, “Drivers choose to use Uber because they have complete flexibility and control. The majority can and do earn their living from multiple sources including other ride sharing companies.”

The labor commissioner ruling is important because the fact that Uber and Lyft consider their drivers independent and not employees is a key part of their business models. This could stand to impact big cases against both Uber and Lyft in the state that are making their way through the courts right now over whether drivers are in fact employees.

In a previous interview, one of the plaintiffs’ attorneys in those cases, Shannon Liss-Riordan, said that contractor classification allows the startups to boost their bottom lines.

SHANNON LISS-RIORDAN, EMPLOYMENT RIGHTS ATTORNEY: Companies like to use what they call independent contractors instead of employees because they get to save all kind of costs. They don’t have to worry about wage laws. They don’t have to worry about unemployment or workers comp, or other protections that employees get.

ROGERS: Liss-Riordan said Wednesday, the labor commission ruling is a positive development for her cases. Action is expected on those big cases in August.

For NIGHTLY BUSINESS REPORT, I’m Kate Rogers (NYSE:ROG).

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MATHISEN: A big miss from Oracle (NASDAQ:ORCL). And that is where we begin tonight’s “Market Focus”.

The software company blamed the strong dollar as it delivered earnings and revenue that fell short of estimates. The board did however declare a dividend of 15 cents a share. So, it’s not all bad. Still, the stock did drop today by as much as 7 percent after the close. Before the bell, the stock was a fraction higher at $44.91.

An executive shake-up announced at Microsoft (NASDAQ:MSFT) today. CEO Satya Nadella said four senior executives, including Stephen Elop, the former chief executive of Nokia (NYSE:NOK), will leave the company. Nadella says the departures were related to his decision to organize the company’s engineering efforts into three groups. Shares rose a fraction to $45.97.

HERERA: Allergan (NYSE:AGN), the maker of Botox is buying a company called Kythera Biopharmaceuticals, she tried to say. It makes a treatment for double chins. The deal, worth more than $2 billion will add to Allergan’s mix of facial cosmetic treatments. Allergan (NYSE:AGN), a fraction higher to close at $289.79. Kythera popped 22 percent to $74.11.

TripAdvisor and Marriott announcing a partnership today. The joint effort will allow users of the travel guide website book rooms at Marriott hotels without leaving the site. TripAdvisor surged almost 15 percent to $87.65. Marriot, a fraction higher, to close at $77.06.

MATHISEN: All right. Here is something few ever expected to happen. The quality of new Japanese brand vehicles has slipped below the auto industry average. That is according to a new study by J.D. Power. So, what’s the problem for Japanese autos? And who builds the top autos now?

Phil LeBeau has more.

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PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you’re looking into buying a new car or truck and wondering which models will most be reliable when they leave the showroom, J.D. Power says the Korean brands are head and shoulders above everyone. In fact, a new study of problems found in the first three months of ownership showed Korean brands have far fewer than the industry average, with European models slightly ahead of Japanese and U.S. brands.

The results validate the strategy of Hyundai and Kia to slow down international expansion and concentrate on improving the quality of their vehicles. Meanwhile, the Japanese auto makers are struggling to cut problems in their new models as quickly as the Koreans.

For the first time in 29 years, J.D. Power says new Japanese vehicles are less reliable than the industry as the whole. In particular, the new study finds many Japanese models are among the worst when it comes to problems with voice recognition systems. That’s also the biggest problem buyers find in new vehicles from all auto makers, infotainment systems which are improving are still to inconsistent.

Overall, Porsche once again leads J.D. Power study on initial quality, followed by Kia, Jaguar, Hyundai and Infiniti.

What about the big three? J.D. Power says Ford and GM have improved and cut the number of problems in their new models, which Chrysler continues to lag the industry. In fact, three of the five lowest rated brands in fact in this study are owned by Fiat Chrysler.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

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HERERA: Target (NYSE:TGT) CEO Brian Cornell says the deal he reached with CVS (NYSE:CVS) Health announced earlier this week will help the company refocus on its core business.

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BRIAN CORNELL, TARGET CEO: You heard us talk about the focus on what we call signature categories and really getting back to our core DNA. Our focus on style, those important apparel, home and beauty categories, our focus on baby and kids, and more and more, our commitment to wellness. And this great partnership we put together with CVS (NYSE:CVS) is really part of that focus on building our wellness offering.

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HERERA: CVS (NYSE:CVS) will buy about 1,700 Target (NYSE:TGT) pharmacies and operate them through a store within a store format.

MATHISEN: Starbuck’s known for its coffee ventured into the pastry business not long ago. But after paying a reported $100 million to La Boulange store, today, Starbuck’s said it’s closing all 23 of those locations.

Jane Wells has more.

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UNIDENTIFIED FEMALE: I had no idea. Do you know why?

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Why? Well, Starbuck’s is closing all stand alone La Boulange stores by September because the company says they’re underperforming and sustainable long term.

ANGELA TAM (NYSE:TAM), LA BOULANGE CUSTOMER: When Starbucks (NASDAQ:SBUX) bought La Boulange, I kind of saw that it probably would happen eventually.

WELLS: The news is heartbreaking for fans in San Francisco, where Pascal Rigo started La Boulange before Starbucks (NASDAQ:SBUX) bought it three years ago for $100 million.

JOE PEETERS, LA BOULANGE CUSTOMER: This is totally San Francisco. So, to see it going away is a travesty.

RAISSA SIMPSON, LA BOULANGE CUSTOMER: Maybe I’ll go gluten-free. How about that?

WELLS: The news comes a year after Starbuck’s expanded La Boulange branded stores to Los Angeles, introducing a fast, casual concept where people could order duck confit hash for breakfast, and booze in the evening. And the opening was big news in La La Land.

There’s a lot of really foody area part of town, so competition will be interesting.

Apparently, the competition was a little too interesting. Starbuck’s has praised how well La Boulange products have sold inside its own stores, and that’s the only place you will be able to buy them after September.

CAROLIN FORRY, LA BOULANGE CUSTOMER: I like the chocolate croissants mainly. They are better than Starbucks (NASDAQ:SBUX).

WELLS: For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

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HERERA: So, is company expanding beyond the core business good or bad for them?

Bill George is here to discuss with us. He is former CEO of Medtronic (NYSE:MDT) and now professor of management practices at Harvard Business School.

Good to see you, Bill. Welcome.

BILL GEORGE, HARVARD BUSINESS SCHOOL: Thanks, Sue and Tyler. Good to be back.

HERERA: Let’s talk about Starbucks (NASDAQ:SBUX). I mean, I guess it comes down to the execution in the way the company expands. Is that a correct read?

GEORGE: It sure is in this case. I think Starbucks (NASDAQ:SBUX) should stick to its coffee. Actually, I love La Boulange. They go at that very store in Noe Valley. I think it’s great, but it is a totally different concept.

Starbucks (NASDAQ:SBUX) is trying to make the Starbucks (NASDAQ:SBUX) name ubiquitous. They have been very well. There are plenty of expansion opportunities right within the store. They don’t need to go out with another brand. I think they should stay to what they are. Frankly, instead of shutting it down, I think they ought to sell it to an entrepreneur who can build it.

But that’s what companies are doing today. They’re focusing on their core business, Sue, and building around that to become great companies and rather than a diversified conglomerate.

MATHISEN: So, we saw in the case of Target (NYSE:TGT), Bill, that they think CVS (NYSE:CVS) can do pharmacy better than they can — surprise, surprise. But what is the temptation inside a company, on a board for example, to expand in ways that may go a little beyond a company’s core competency? Whether it’s Target (NYSE:TGT), whether it’s Google (NASDAQ:GOOG) going into the driverless cars and other — and space and things like that?

GEORGE: Tyler, I think you have to look at ways to expand that extend your core and keep up with the latest technology like a Google (NASDAQ:GOOG) is doing, like a Facebook (NASDAQ:FB) is doing, like Medtronic (NYSE:MDT) is doing.

But I think if you go away from if core competency, then you are going to lose it. And that’s Starbucks’ coffee, and Target (NYSE:TGT) is being fashioned forward and very current with the trends. And I think they see an opportunity in CVS (NYSE:CVS) to build up their pharmacy business so they can build up everything around it. Health and beauty aides, which is more their strength. OTC.

So, I think you’ll see companies do that and do it well and constituted a growth, and find partners that do very well for them. That’s the key. But you can’t abandon your core strengths. You have to build on that, because you can’t be good at everything.

My colleague Francis Frei at Harvard says stick to your core strengths.

HERERA: You know, Bill, though, how much pressure do companies face, especially large companies, from shareholders, maybe from board members, to be viewed as current, to be viewed as growing, to be viewed as, you know, cutting edge?

There must be some of that pressure that makes companies even look at moving outside their core competency.

GEORGE: Sue, it’s never been greater. We just had 34 CEOs at a program I did up in Harvard. And I can tell you, the number one issue for them is growth, profitable growth. They are all looking for new opportunities, but there are plenty of opportunities right within your strengths.

But once again, the trouble are ones adding in growth without profitability, and they kind of, in both cases, La Boulange and the Target (NYSE:TGT) pharmacy, they weren’t making a lot of money, probably losing.

And so, if you can build on that strength, then you’re going to make a lot of money and you continue to build your strength. And that’s what I think companies for looking today. And, by the way, that’s Wall Street is looking for, too. They want to know that you feel confident you can sustain the growth.

HERERA: Absolutely. Bill, good to see you again. Thanks so much for joining us.

GEORGE: Thanks, Sue. Thanks for having me on the show.

Bill George with Harvard Business School — Ty.

HERERA: And coming up, Sue, Fitbit, the wearable fitness device company is facing increased competition and fighting lawsuits, too. So, why is it going public now?

(MUSIC)

HERERA: Here’s what to watch tomorrow, lots of data, including the consumer price index. A read on the labor market with initial jobless claims and the Philadelphia Fed will release its business outlook survey. And that’s what to watch on Thursday.

Well, Sue, Fitbit, the maker of popular fitness tracking bracelets was an established market leader. But now as the company prepares to go public, it’s facing competition from lots of sides.

So, why go IPO now?

Kayla Tausche takes a look.

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KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The company counting your steps is counting down to its first trade as a public company.

Fitbit, known for its ubiquitous health tracking devices, will go public on the New York Stock Exchange, an IPO set to value at $3.7 billion, capitalizing on the healthy living craze that exploded over the last few years and fueled Fitbit’s growth. Revenues growing to $750 million from just $14 million in 2011, selling nearly 11 million devices in 2014, up from just 200,000, and turning a profit just last year, a key milestone for the company. It’s got the lion share of the healthcare device market but competition is heating up.

And even Fitbit fanatics like Zillow CEO Spencer Rascoff wonder whether it’s the future or a fad.

SPENCER RASCOFF, ZILLOW CEO: I’m a big Fitbit fan. I carry one in my pocket. In fact, Zillow has given one to every employee. Two thousand employees at Zillow had Fitbit. So, I’m a believer. The question, though, is long-term, is there a role for a standalone tracker? Or is it all going to end up in a wearable or in an app on a smart phone?

TAUSCHE: The field for now is crowded for now. Misfit, Garmin (NASDAQ:GRMN), Android devices, Pebble, Jawbone, which has even sued Fitbit in recent weeks, alleging the company poached employees and intellectual property. Fitbit has denied the allegation.

But that list doesn’t even address the biggest potential wearable threat — Apple (NASDAQ:AAPL).

ALEX HAMILTON, SPQR CAPITAL: The big question not asked, is Apple (NASDAQ:AAPL) Watch going to be the category killer actually raises awareness of it, and I think a lot of people are going to go, oh, let me go buy this Fitbit, let me buy the Apple (NASDAQ:AAPL) Watch. At some point, does Apple (NASDAQ:AAPL) buy these guys or someone similar and bring the functionality in-house? Don’t know.

TAUSCHE: For now, Fitbit is stepping out solo at a time of breakneck growth for the company and strong demand for its stock.

Rascoff, whose Zillow has been public for four years, has some advice for how the company can keep it that way.

RASCOFF: The surest way to make sure they’re out of business three or four years from now is to react to the quarter and to become a slave to near term focus. Take big bets that will pay out down the road, or else you’ll be dead.

TAUSCHE: For NIGHTLY BUSINESS REPORT, I’m Kayla Tausche.

(END VIDEOTAPE)

HERERA: And that does it for NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us.

MATHISEN: And I’m Tyler Mathisen. Thanks from me as well. Have a great evening everybody. And we hope to see you right here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2015 CNBC, Inc.

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