A look at how Everton financed the last transfer window's activity, and the consequences going forward
The surprising answer to this question is that we (Everton) are likely to have financed the summer by using our existing resources. Financially, at least, whilst there are large challenges ahead, it looks like we are in extremely capable hands, working our resources and credit facilities to maximum advantage.
The coming finacial year (18-19) is a different story, and as I’ve stated on several occasions a capital injection, be it a rights issue or further quasi-capital (debt with no repayment date) from Farhad Moshiri is required.
I’ll touch on it later in the article but financial year 2018-19 will show significant losses in the absence of increases in commercial/sponsorship monies, or a further trimming of the squad including player sales.
The caveat to all below is that without seeing the books it is impossible to be totally accurate, but using fairly solid assumptions (assuming that transfers in and out are paid over equal terms and no major change to other creditor/debtor relationships), it’s possible to see how the transfer activity and continued high wage bills have been paid (to date, at least) and their future impact.
Let’s start with what debt facilities Everton have:
ICBC – Industrial and Commercial Bank of China. Everton entered a rolling three year, £60 million credit facility in July 2017.
Santander – Everton have used Santander to advance (receive early) future transfer payments. Initially, we had an advance on a payment due for John Stones from Manchester City for £13.75 million and a further advance of £18.75 million for an instalment on the Lukaku monies owed by Manchester United.
Although the charges relating to those advances still show as outstanding on the Companies House website, they were settled by payments from Man City and Man Utd on 8th August and 14th July 2018 respectively.
Everton have entered a further arrangement with Santander taking an advance on 1st June 2018 for the two outstanding instalments due from Manchester United, each of £18.75 million (payable by United in July 2019, and July 2020).
Therefore, we have received £37.5 million from Santander to be repaid by the funds due from Manchester United in 2019 and 2020.
How much have we spent?
Whilst not a fan of net spend, when looking at cash flows in and out of a business it’s obviously useful. In season 2017-18 we committed to transfers in valuing £182 million, selling £113 million, creating a transfer deficit of £69 million.
This window to date, we have committed to £82.7 million of transfer payments receiving £21.4 million, an additional transfer deficit of £61.3 million.
None of these figures take into account payments to agents – from an accounting point of view they, turn up in the black hole that is "other operating costs", more later.
The final element of calculating how much cash we have used comes from looking at the Profit & Loss accounts and looking at the operating performance of the club. From that, we can get an idea of whether the business is generating cash or spending it.
The bad news is that we are currently spending well in excess of what we are earning. If you recall, at the beginning of the transfer window, there was much talk about having to reduce the squad size and reduce the wage bill. Whilst we’ve reduced numbers, the most recent activity will have increased the wage bill for FY 18-19. That may change with further outgoings in the remaining weeks of this month. Also turnover falls in FY 18/19 due to the absence of European football.
I’ve summarised income and expenditure for 2016-17, 2017-18 (based on Robert Elstone data) and 2018-19 (projected), in £,000s.
|Profit & Loss||31-May-16||31-May-17||31-May-18*||31-May-19*|
|Other operating expenses||30,428||39,184||61,100||60,000|
*estimated; EBITDA = Earnings before interest, taxes, depreciation, and amortization
The above calculation shows whether the business is generating cash or spending more it generates. From the above you can see that the club was profitable in season 16-17, but based on Elstone’s projections for 17-18 and my own for 18-19 we spend more than we generate.
Just a note, some of the other operating costs are costs associated with the new stadium which will be capitalised once planning permission is granted allowing future adjustments, however in cash terms, this is money being spent now.
So how much cash do we have or not have?
As of 31 May 2017 (the last accounts), we had £9.6 million in cash. We also know from the accounts that, between the beginning of the financial year and the publication of the accounts in December 2017, Moshiri contributed an additional £45 million. We have also received the advance of £37.5 million from Santander (which drops into FY 2018-19).
If we assume transfer payments in and out are paid and received over three years, we can estimate that by taking into account the previous three years transfer activities, we would have made net payments of £31 million in 17-18, and will make net payments of £63 million in 18-19 (current financial year) based on the above assumption.
The contribution from the business to cash flow (operating profit/(loss)) using Elstone’s and my own forecasts, is negative for 17-18 and 18-19 as above, to the tune of -£14 million and -£34 million respectively.
Taking all that into account, the club should have had a cash balance at the end of May 2018 similar to the previous year of around £9 million. This will become apparent in the next published accounts.
Projecting forwards in to this financial year, taking into account the increase in transfer payments to be made and the operating loss, we will not only use all our credit facilities (Santander & ICBC) but require a significant capital injection, particularly when we have not considered additional stadium costs prior to funding in these calculations. By my estimates, in cash terms we will see a cash outflow approaching £97 million in 2018-19. By design or co-incidence, that is the extent of our existing credit facilities.
Should we be concerned?
I think the short answer is No. We are in good financial hands under Moshiri and Ryazantsev who are operating at levels very different from seen previously at the club. However, it is clear we cannot operate as we are currently without that much talked about further injection of capital in this financial year.
Not only is it required for the stadium but, in the absence of much higher commercial revenues, it is needed to fund continued losses and meet on-going commitments in the transfer market.
In summary, we have got through this window despite the earlier calls for reducing the squad further, using our own resources. We have not had to call upon Moshiri to fund further than his existing £150 million to date.
However, the situation beyond this financial year is an entirely different matter and will require significant investment, a reduction in unnecessary costs and increases in commercial income as well as the use of our existing credit facilities and a much-needed further capital injection.
Reader Comments (60)
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1 Posted 13/08/2018 at 18:18:44
2 Posted 13/08/2018 at 18:24:19
The one disappointment on deadline day was that Bolasie and Besic stayed on the books. Hopefully we can move them on and still command the £20M we were asking for.
There is also a case for selling Lookman in my view, if we needed to try and balance the books – however the fact that we kept him speaks to me about the ambition of Moshiri.
3 Posted 13/08/2018 at 18:41:26
4 Posted 13/08/2018 at 19:03:18
A reality check on life, and the business side of football. In FM and his appointed team, Id like to think that the club is in capable and safe hands regards managing the business.
It feels like at last the club has a business plan and clear line of site, well thats how it seems.
Lets hope so.
5 Posted 13/08/2018 at 20:51:15
I hope Moshiri' can persuade his mate Usmanov to stick his 'Arsenal Money' into our Club or else the borrowings will become a burden too much to bear.
Many more windows like the last two summers without seeing success on any front will make it difficult to find the dough to drain Bramley-Moore Dock, let alone build a £500M stadium. Evertonians beware!
6 Posted 13/08/2018 at 20:53:14
7 Posted 13/08/2018 at 21:45:09
Hopefully, Everton FC has ceased to be a rest home for the nearly retired and it will continue to recruit hungrier younger players with a point to prove.
I remain convinced that only a benefactor with the wealth of a 'Usmanov' can deliver us to the place we all yearn to be both geographically in our new dockside stadium and figuritvely mixing it with the big boys on an almost equal footing.
This season and the next one will see whether one of those objectives will be achieved, without the new stadium we can forget about attracting new investment, sponsors etc and we will have to settle for being a slightly richer version of plucky little Everton.
We as fans can play our part in the coming season by backing Silva and the players to the hilt and if the team can react to that backing by winning a trophy or regaining European football that will be a positive step in the right direction. It is (again) a critical time for Everton FC and we can't afford many more mistakes, in the quest to see the club back to where it should be.
8 Posted 13/08/2018 at 21:50:59
There's no comparison between him and Moshiri, who made his fortune swimming in shark-infested financial waters and is, by formal education and profession, an accountant.
One bought a club on a whim, the other with an idea.
Lerner apparently hired the same types to run Villa as he did with the NFL Cleveland Browns. When it became a bother, he did the same as he did with the Browns. He sold out.
Moshiri straightened out the financial picture, yet hired the wrong people to run the day-to-day. He recognized it, cut them loose, then hired the competent group we have now.
We'll see how it all plays out, but a "Lerner" Moshiri is not.
9 Posted 13/08/2018 at 22:01:55
'The coming year (18-19) is a different story, and as I've stated on several occasions a capital injection, be it a rights issue or further quasi-capital (debt with no repayment date) from Farhad Moshiri is required.'
For what it's worth I was under the impression that had at some point been given a 'wink' tip' call it what you like that it was more than likely that Uncle Bill was to step down this August. The fact that Usmanov has seen fit to cash in his chips at Arsenal at this particular time makes me wonder whether the two things are inter-related. Thereby killing several birds with a couple of stones. We get shot of 'just a millionaire' and land ourselves a far bigger fish that can 'park his bus, sorry ship, right next to his new stadium.
Someone on another thread said they didn't have the time to trawl through these different threads, You, Paul, must have spent some quality time on these figures, thanks, Good man.
10 Posted 13/08/2018 at 22:06:46
It looks like Moshiri is gambling on Champions League money and the new stadium to offset his losses through the valuation if his shares, as he's never getting money back through dividends.
11 Posted 13/08/2018 at 22:11:52
12 Posted 13/08/2018 at 22:19:12
We've gone heavy on the overdraft and I think I read recently that we are borrowing against future TV revenues. I'm happy to be corrected on the latter if it isn't the case btw.
That's what we used to in the Kenwright, Moyes and Elstone years. Then for working capital during the season we'd get a shady loan at about 8% from the Brtish Virgin Islands off Robert Earl or Phil Green.
After clearing all our debts, it seems Moshiri has decided to put this window "on the card". That will be the last big tilt at major progress on the pitch unless another investor comes in. Unless, that is, the investment on playing and management staff pays off and we make significant progress on the pitch.
As for a share issue, that would only offer a shorter-term fix. The perfect time to do that would be after we break the trophy drought with a domestic pot, hopefully this season.
13 Posted 13/08/2018 at 22:26:22
Lord(s) knows that when we get to the Oval or Rectangle we'll be sitting on Edge o'ur Baston (sic) watching the money roll in through the t'stiles. It will certainly be a Test of Moshiri's Captaincy and could well Bowl a few Over.
14 Posted 13/08/2018 at 22:44:01
I don't want to get too carried away after one match and an exciting transfer window, but it certainly feels like we're heading in the right direction...
It's hard without European football to attract talent, but with the prospect of Bill stepping aside, a new stadium and more money to come, it's hard not to get a bit excited.
18 Posted 13/08/2018 at 23:56:33
It seems to me we are now structured and financed like a big club; it is up to the players and coaches to ensure we respond accordingly as the income stream needs significant enhancing.
19 Posted 14/08/2018 at 08:05:47
We arent spending heavily on a yearly basis to simply challenge for 8th or 9th very season are we?
It would be nice to begin with some kind of silverware to finally end the longest trophy drought even though that wont appease the financial needs like getting regular Champions League football, it is becoming more important now that the supporters see something at the end of all the lavish spending.
Its a hard ask for Marco Silva, after all whats gone before is hardly his fault but thats football in the modern era, such is the level of money involved in the game.
20 Posted 14/08/2018 at 09:03:25
21 Posted 14/08/2018 at 09:20:00
No doubt we'll still see people complaining about it even though it's patently untrue.
22 Posted 14/08/2018 at 09:20:18
23 Posted 14/08/2018 at 09:26:59
24 Posted 14/08/2018 at 09:29:18
25 Posted 14/08/2018 at 09:41:24
Given the cost of the stadium, here's hoping Farhad Moshiri has just laid the groundwork for his partner to come on board in the coming months.
26 Posted 14/08/2018 at 09:45:26
27 Posted 14/08/2018 at 09:55:08
With the introduction of Brands and Silva, squad cutbacks where done from an assessment perspective and we now know with a keen eye and negotiating savvy to make room for suitable players for preplanned tactics and system.
Going forward, you have identified a need for Capital introduction. The policy of this Summer would seem to have been taken in this context. Moves must be afoot to secure such funding.
As you correctly state, Everton are operating financially at a different level. I can't see Mr Bill staying much longer, he is out of his depth. Everton have moved up a gear professionally and I am now confident the new stadium will be built.
Thank you very much, Paul.
28 Posted 14/08/2018 at 10:29:52
Great article Paul, even if I found some of it over my head, but it's even better reading some of the posts, and the fantastic knowledge, that certain people possess.
I dream of a Usmanov, and this last transfer window, most notably the final day, and how calm everything seemed behind the scenes, makes me think, that maybe my dream, might just have a little chance for once.
29 Posted 14/08/2018 at 10:38:45
30 Posted 14/08/2018 at 10:44:51
31 Posted 14/08/2018 at 10:59:38
I've also gone on record saying M&M would have had to work miracles to match last season's position with the squad they inherited. Now I'm optimistic that they can do better than that, but how much better is a moot point.
That said, as many others have said, let's be patient, support the three Ms, and be optimistic. What can possibly go wrong by doing so?
32 Posted 14/08/2018 at 11:01:50
33 Posted 14/08/2018 at 11:26:35
I think as a club we are emerging from the dark ages.
34 Posted 14/08/2018 at 11:44:25
Moshiri is his business partner (they trust each other) and will be needing finance to build the stadium. An investment of a spare £250m as finance for the Megafon Stadium and buying the other shareholders out for £200m would leave him change of £100m from his deal with Kroenke.
I think he would take great delight in knocking Arsenal out of the top six with Everton.
Dave will be happy when he swaps places with BK. Watch this space.
35 Posted 14/08/2018 at 12:02:54
Bye be Bill hello happiness.
we can but hope.
36 Posted 14/08/2018 at 12:07:53
I do have one query. You are focussing on the cashflow side of the picture, which is of course interesting from how funding is arranged, but I wonder if you are maybe double counting an important item? On the cashflow side, you make assumptions about transfer payments and receipts as they become due. But then you take the P and L data to try and create a total picture.
But I am wondering whether player trading is included in the P and L or whether it is the D or even the A in EBITDA. I don't have a copy of the accounts handy to check this. The reason I question this is because that wage bill, if it is just salaries, looks higher than I would expect for 18/19. If you took say £20m off for non player salaries, that would suggest player salaries of £4m per annum assuming a squad of say 30. We have a few players earning in excess of £80k per week but I would have thought the very clear minority among a squad of 30. Looking forward, we've added some guys presumably on high wages but then also taken a few away like Klaassen, Mirallas and Williams.
So are you sure that wages figure isn't including the player trading account? Obviously the way player trading is accounted for, as I understand it writing down the transfer cost over contract duration, would not exactly mirror cashflow needs but would effectively double count when you start looking at transfer instalments, whether in or out.
If that wage figure is just wages, nothing else, that is a very scary % of income and the position, while perhaps manageable in the very near term given our current owner's wealth, is certainly not sustainable. Somehow, that income is going to have to go up sharply. I don't think it will wait for the new stadium either, which is a long way off and is unlikely to add much net income, once costs are accounted for. I'm not convinced Moshiri's pockets are big enough to fund this. Do you have any feel for what a 5 year funding figure might look like?
37 Posted 14/08/2018 at 12:11:02
38 Posted 14/08/2018 at 12:28:06
39 Posted 14/08/2018 at 12:30:45
Welcome aboard Uncle Alisher.
40 Posted 14/08/2018 at 12:35:12
41 Posted 14/08/2018 at 12:36:57
But because Walsh, Koeman and to some extent Allardyce bought mostly less effective players, Everton have wasted a whole season getting rid of unwanted players and managers. I just hope the present manager can be with Everton for more than 2 seasons.
42 Posted 14/08/2018 at 12:39:44
That said, I do have a feeling he will stick around for 2 or 3 barring the good ship Everton not going to shit.
43 Posted 14/08/2018 at 12:46:23
44 Posted 14/08/2018 at 12:49:53
I think he said something along the lines that he needs to be seen to stay at a club for a longer period of time than he has done in the past.
I know talk is cheap, but hopefully he'll do well here and stick around for a bit.
45 Posted 14/08/2018 at 12:55:19
I think Farhad is doing a marvellous job without Usmanov. Koeman didn't meet expectations so he got rid of him, he hired Allardyce to keep us up knowing full well that the playing staff were inadequate. Fired Allardyce once the job was done then brought in the men he really wanted and backed them in the transfer market.
Now with have a more than useful looking team playing attacking football. Very happy. Of course, if Usmanov joins us then the sky's the limit.
46 Posted 14/08/2018 at 12:56:33
47 Posted 14/08/2018 at 12:58:32
48 Posted 14/08/2018 at 13:01:48
Thanks for clarifying. Wow, then it is a scary picture. I imagine it is not easy to project cashflow requirements beyond where you have but I could imagine that EBITDA losses are not suddenly going to go into decline and that given our recent net spend, negative cashflow on transfer payments/receipts are only going to amplify that. Would it be unreasonable to imagine a negative cashflow of anything up to £150m for the 3 year period beyond where you have, assuming we don't manage a Lukaku type transfer to help balance things out.
And of course, if I have this correct, it would also mean an end to net transfer spend for most of those 3 years, which presumably isn't the intent if we are serious about breaking top 4.
What his data is suggesting to me, if no-one else, is that we will need Usamov shaped pockets...
49 Posted 14/08/2018 at 13:08:56
Dave, he owns the flock of geese that lay Golden Eggs.
All together now... "Ali Usmanov's Blue and White Army."
50 Posted 14/08/2018 at 13:33:30
1.) Personal interest: He is a massive Arsenal fan, with extensive ties to London and the stock exchange. Cant see him travelling to Liverpool every other week to watch a team he doesn't support.
2.) Moshiri: Everton is Moshiri's gig, he took over here as he wasn't getting a say at Arsenal. Why would Moshiri want to give up control? Equally, I can't see Usmanov wanting to force his own business partner out.
3.) Financial gain: He will have to fund a new stadium, and make a significant investment into playing staff and club infrastructure to get consistent Champions League football. So when could he realistically make a decent return on his investments?
As per the USM Holdings investment into Finch Farm, and Usamonv's statement that he is 'happy to help' Moshiri at Everton, it seems most likely he won't take a front seat at all, but will provide some support or funding to Moshiri (provided of course it will make a return).
51 Posted 14/08/2018 at 14:02:51
And also my blind optimism based on absolutely nothing at all.
52 Posted 14/08/2018 at 14:03:50
Other option is Usmanov has played blinder and will emerge to be some secret investor – but denies all connections to the authorities!
Also Dan @59, I don't believe he will take over, but I think Usmanov may well have said to Moshiri to go ahead and assess EFC and report back. There are other options for Usmanov but I don't think money matters now. Its all about flashing the cash and showing your 'assets'. When you're a billionaire, it's all about materialistic stuff. Owning a football club is a big statement.
53 Posted 14/08/2018 at 14:04:00
54 Posted 14/08/2018 at 14:10:49
My mate is close with an ex Everton captain, and after another had slagged off Peel, for the price of B/M, he said that if things went to plan, then the feelings of our new owners, was that it wouldnt buy you a car park, in our very overpriced capital city. (I know Ive printed this before, but maybe, its just our time?)
I spoke to a Liverpool fan briefly, not long after having this conversation, and he said he didnt think “BIG AL” was that much of a gunner, especially if there is money to be made elsewhere. (This man didnt know Usmanov personally, but he told me he had been around his company, on more than one occasion)
This gets me around to why I was having the conversation with a kopite anyway, and it was because of Peel, Bramley Moore, and Laurie Hartley! Seriously Laurie has told us many times about his adopted city (Im addicted to underbelly at the minute) and the great transformation, which was started by a stadium on Melbourne docks.
Money goes to money, and thats why Ive always prayed, hoped, and reckoned that Peel, would end up in bed with Moshiri, simply because of his best mate/bosss steel. I still remain to be convinced though, although only my dreams coming true, can change that!
55 Posted 14/08/2018 at 14:23:22
56 Posted 14/08/2018 at 14:45:11
57 Posted 14/08/2018 at 15:07:49
58 Posted 14/08/2018 at 16:44:24
Everton will be the Spratt that catches the mackerel – the Waterfront (all of it).
59 Posted 15/08/2018 at 07:52:01
You may recall that when I started raving on about the development of the Liverpool Waterfront regeneration, I mentioned the likelihood of the Mersey Tidal barrage being revisited at the time the waterfront development starts, well:-
I think it will happen.
I am not a green but I have thought for some time that tidal power will be come a major source of power generation in the coming decades.
Why? What is one thing you can guarantee about this earth as long as it keeps spinning regardless of winds, or the lack thereof, or clouds?
Answer: the tide will come in and go out twice a day and unlike coal you don't have to keep digging it up.
Building a barrage would be quite a civil project. Peel reckoned it would cost £1.5 billion in 2011. There is going to be quite a demand for office space near the project. :)
In my opinion, Merseyside is in for one hell of an upsurge over the next two or three decades. About time too.
60 Posted 15/08/2018 at 09:29:39
Im getting older, its a short process for the body, but a much longer one for the brain, but the most surprising, (for me to imagine) although great thing about this project, is that the city of Liverpool, is going to benefit just as much as Everton.
I never used to care that much about these things, but Im a proud scouser really, and our city, like our club, has took more knocks than most down the years. Most of us just get on with it, but weve obviously had a few who act like Paul Merson, down the years, people whos moaning, gives everybody else a chance to laugh at us?
But forget about that because Im dreaming of sea-cats coming flying across the Mersey, Im dreaming of railways, and Im dreaming of good jobs. Im dreaming of life, something most scousers pocess in abundance, and Im dreaming of my sons, watching Everton become great again!
61 Posted 15/08/2018 at 12:02:23
62 Posted 15/08/2018 at 20:49:52
63 Posted 19/08/2018 at 18:54:10
I would like to use the platform you have laid out to offer a slightly different opinion.
I read nothing into the borrowings from ICBC and Santander. Quite simply, they were cash flow bridges. We had agreed to receive instalments for transfers and in the case of Santander, used the receivables from United and City to obtain cash upfront.
It is rare in my opinion these days to see large transfers where the cash is paid upfront (I think it's only the deals like Neymar or Kepa where buy-out clauses are met that this happens... but neither Stones nor Lukaku had buy-out clauses.).
So for us to benefit from cash upfront from a sale, we can agree to instalments from the buying club and borrow against that receivable. The interest cost could well have been built into the selling price so we net a figure we are happy with.
That gives us a true cash warchest to fund transfers. It would appear our team of Walsh and Koeman were not the greatest at negotiating transfer fees or wages so very significant amounts had to be paid upfront. This required Moshiri to top up his funding.
So this was nothing more than a cash flow process designed to support a sub-par transfer strategy which proved costly in more ways than one.
As to your next question: Will we see further spending of the magnitude we have seen recently? Well, I don't think we can say definitively No or Yes, as the variables are too many.
There would be at least 4 considerations:
1. Do we need to spend heavily each summer?
Off the bat, one would like to think that our transfer policy will become more discerning and we will sell £5-10m of fringe players each year and buy one or two high-class players at £50-70m. That is not only a sustainable approach, but the right one too. Having spent upwards of at least £130m in each of 2017 and 2018 calendar years, it would mean you are right, but not because we can't afford to.
2. Can the Club Afford to Adopt a Discerning Approach from its own Resources?
If the club can afford to, it is always best if the club uses its own resources to purchase players. Transfer fees are the single largest and arguably most important expenditure for a club. So, if these can be met from the club's own cash (or from borrowing against future receivables) then, rather than approach shareholders, a well-run outfit would take care of the expenditure itself.
3. Will the shareholders fund if the club can't afford the required transfers?
The answer depends on what Moshiri gets for doing so. It is totally unreasonable to expect him to keep pumping £150m for no return. So far, he provided the funding with no interest and with his shares staying at 49.9%. He has, it appears, to have a deal to go to 76%. If the price for that share increase is locked, then there is a platform for him to fund. So the club could have access to his money, over and above their own resources.
4. Accretion and Value.
You mentioned the club could be worth £1bn in equity if it secures Bramley-Moore Dock. Moshiri has outlaid £87m for his shares and £150m before this summer. I think he may have provided a further £50m for transfers this summer, taking him to £287m. For Bramley-Moore Dock, my view is he will provide £150m so that takes him to £437m. He could supply another £63m next summer taking him to around £500m. If he acquires 76% shares in the process, he would be sitting on 1.5x his money (760/500). Not a bad accretion but probably below where typical Private Equity benchmarks its returns. Were the club to be worth £2bn, his stake would be worth 3x a £500m investment which is more like it. So Accretion and Value is key.
These are just some of the variables. I think there is capacity for Moshiri to put 50-£60m more towards transfers, and the club should be able to raise the cash from disposals to top this up. Don't be surprised to see additions in January, but we still have a large squad so I expect to see some sales too. Then there is our own performance on the pitch and additional income streams (prize money, sponsorship etc).
Even before any bounty from Usmanov, there is the platform for Moshiri to invest a decent sum towards transfers for the third season running. Potentially the next round of cash could be put to very good use if Brands and Silva's acquisition of Richarlison is anything to go by.
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