New focus starts to bear fruit

Evolva 12 March 2019 Update
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Evolva

New focus starts to bear fruit

FY18 results

Food & beverages

12 March 2019

Price

CHF0.22

Market cap

CHF169m

Net cash (CHFm) at 31 December 2018

60.4

Shares in issue

769.8m

Free float

100%

Code

EVE

Primary exchange

SIX Swiss Ex

Secondary exchange

OTC US

Share price performance

%

1m

3m

12m

Abs

6.2

1.4

(25.3)

Rel (local)

3.1

(5.4)

(28.6)

52-week high/low

CHF0.3

CHF0.2

Business description

Evolva is a Swiss high-tech fermentation company. It has a proprietary yeast technology platform, which it uses to create and manufacture high-value speciality molecules for nutritional and consumer products.

Next events

AGM

8 April 2019

H1 results

21 August 2019

Analysts

Sara Welford

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Evolva is a research client of Edison Investment Research Limited

Evolva’s FY18 results demonstrate that the actions undertaken over the past 18 months are starting to come through into the numbers. Innovation has led to the expansion of ingredients systems with new variants and new markets, and the product pipeline continues to develop. The customer pipeline is progressing, and the maiden royalty payment from EverSweet was received, albeit small. The EPA registration of nootkatone for pest control applications was delayed by the US government shutdown, but is expected in the next couple of months. Our fair value reduces marginally to CHF0.56/share from CHF0.58/share.

Year end

Revenue (CHFm)

PBT*
(CHFm)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

6.8

(40.9)

(7.0)

0.0

N/A

N/A

12/18

8.9

(25.4)

(3.0)

0.0

N/A

N/A

12/19e

11.5

(15.2)

(1.6)

0.0

N/A

N/A

12/20e

28.4

(6.0)

(0.6)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Customer-focused strategy is paying off

Over the past 18 months, Evolva has significantly de-risked its strategy and operations by choosing to remain asset-light and focusing on its existing partnerships. A lot of work has occurred behind the scenes, both to improve the customer and product pipeline in order to maximise potential revenue, and on the expenses side to reduce costs. Variants of resveratrol and valencene have been introduced to drive new applications of the products, but equally the R&D and manufacturing teams have worked together to reduce future manufacturing costs.

FY18 results

Total revenues of CHF8.9m beat our forecast of CHF7.6m, with product revenues a touch lower than expected, and R&D revenues significantly higher. Operating profit was broadly in line with our forecast, and higher interest costs and lower tax income led to a net loss of CHF29.2m, above our forecast of CHF26.1m. Net cash of CHF 60.4m at end FY18 was higher than our forecast of CHF 51.7m. Guidance remains unchanged, with cash break-even still expected in FY21/23. We cut our product revenue estimates in line with guidance for the FY18 trajectory (+70%) to be maintained.

Valuation: Fair value of CHF0.56 per share

We have updated our model to reflect current FX. We continue to value Evolva on a DCF basis with a 25-year model, assuming break-even in FY21, in line with management guidance. We have delayed our assumptions for the use of nootkatone in pest control by a year, to reflect the delay in EPA approval and the guidance that use in pest control is likely to start to make a contribution from FY20. We have also updated our model to reflect the higher than expected net cash at end FY18. Overall, our fair value decreases slightly to CHF0.56/share (from CHF0.58/share previously).

Valuation

We detail our valuation in Exhibit 1. Our fair value decreases very slightly to CHF0.56/share (from CHF0.58/share previously). As discussed above, we have delayed our peak nootkatone sales by a year (to FY24) to allow for the delay in EPA approval and then further registration, with sales for pest control applications not starting until FY20, and updated the end-FY18 net cash figure to reflect the reported number. We have also cut our FY19 revenue estimates in light of guidance that R&D revenues are likely to be broadly flat and that product revenues will continue on the same trajectory as FY18 (ie +70%). Our FY19 revenue forecast moves to CHF11.5m from CHF17.8m previously.

We still assume that profit break-even for the company occurs in FY21, in line with management guidance, and we now assume cash break-even will occur in FY22, again in line with management guidance, which is that profit and cash break-even will occur between FY21 and FY23.

Exhibit 1: Summary of DCF valuation

Product

Value (CHFm)

Value/share (CHF)

Notes

Stevia (royalty stream)

123.7

0.16

Launched; peak sales: $600m; royalty stream: 5%.

Resveratrol

13.1

0.02

Launched; peak sales: $140m; likelihood of success 80%; margin: 30%.

Nootkatone

201.3

0.26

Launched; peak sales: $150m; likelihood of success 75%,* margin: 40%.

Valencene

19.5

0.03

Launched; peak sales: $10m; likelihood of success 90%; margin: 40%.

R&D partnerships

27.2

0.04

Assume revenue falls until FY20 and then stabilises.

Capex

-10.1

-0.01

Includes contribution to Cargill for commercialisation of EverSweet.

Net cash

60.4

0.08

Reported net cash at end FY18.

Total

435.0

0.56

Using FY19 average number of shares throughout.

Source: Edison Investment Research. Note: WACC = 12.5%. *There is no development risk associated with nootkatone, but we have applied a risk adjustment due to uncertainty about the use of the product as an insect repellent.

We use a 25-year DCF valuation with a fade. Each product has varying peak sales, margins, ramp-up assumptions and probabilities of success, as detailed above. In each case, we reduce the R&D and operating expenditure after launch to reflect the lower level of investment required once the product is established on the market. We start to fade stevia in 2031 (year 13) and the other products in 2035 (year 17), and we also assume they become commoditised and their operating margins fall to the single digits, which is the level of commoditised food ingredients. Stevia remains a key product, at c 25% of our valuation, after adjusting for tax and capex, but note that we see greater value overall in nootkatone.

Our valuation purely reflects the products on which Evolva has chosen to concentrate, and we ascribe zero value to all other alliances/collaborations and other projects. We recognise that the latter do retain some residual value, but for the sake of conservatism we err on the side of caution. Management has stated that if commercial partners were to express an interest in these existing projects (for example saffron or santalol), it would consider them. We also ascribe no value to the three new compounds discussed in the FY18 results, which are relatively close to going to market, but still remain unknown to the market. While the specific nature of these three compounds is unknown, what has been disclosed is that they are ‘ready-to-go-to-market’ – and hence presumably do not require further extensive R&D – and that two of the compounds have applications in the flavours & fragrances segment (the first also pertains to the human health segment), while the third targets ‘several’ (unspecified) market segments. Full commercial sales for these products are currently expected in the FY21–23 period.

Exhibit 2: Financial summary

CHF'000s

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

9,576

6,845

8,933

11,512

28,411

Cost of Sales

(2,951)

(4,698)

(6,816)

(2,611)

(10,384)

Gross Profit

6,624

2,146

2,117

8,901

18,026

EBITDA

 

 

(33,965)

(37,601)

(23,350)

(14,518)

(5,600)

Operating Profit (before GW and except.)

(36,078)

(39,776)

(24,827)

(13,045)

(5,027)

Intangible Amortisation

(5,090)

(5,126)

(5,909)

(5,909)

(5,909)

Exceptionals

0

0

0

0

0

Operating Profit

(41,169)

(44,902)

(30,736)

(21,380)

(12,096)

Net Interest

497

(596)

(622)

242

161

Other financial income

(338)

(482)

40

0

0

Profit Before Tax (norm)

 

 

(35,919)

(40,854)

(25,409)

(15,230)

(6,026)

Profit Before Tax (FRS 3)

 

 

(41,009)

(45,980)

(31,318)

(21,139)

(11,935)

Tax

5,160

7,023

2,104

2,537

1,432

Profit After Tax (norm)

(30,880)

(33,854)

(23,305)

(12,694)

(4,594)

Profit After Tax (FRS 3)

(35,850)

(38,956)

(29,214)

(18,602)

(10,502)

Average Number of Shares Outstanding (m)

452.8

482.1

770.6

770.6

770.6

EPS - normalised (c)

 

 

(6.8)

(7.0)

(3.0)

(1.6)

(0.6)

EPS - FRS 3 (c)

 

 

(7.9)

(8.1)

(3.8)

(2.4)

(1.4)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

141,356

132,125

145,825

151,389

150,401

Intangible Assets

130,256

124,487

138,838

132,930

127,021

Tangible Assets

7,522

5,208

4,769

4,193

3,999

Other fixed assets

3,578

2,430

2,218

14,266

19,380

Current Assets

 

 

56,880

107,697

67,192

43,650

36,056

Stocks

5,687

8,009

4,040

5,207

12,851

Debtors

2,139

1,831

1,941

2,763

6,819

Cash

47,517

97,185

60,380

34,851

14,125

Other current assets

1,537

673

830

830

2,262

Current Liabilities

 

 

(5,690)

(12,261)

(14,705)

(14,245)

(15,080)

Creditors

(1,174)

(1,933)

(743)

(285)

(1,132)

Short term borrowings

0

0

0

0

0

Finance lease obligations

(978)

(781)

(782)

(782)

(782)

Other current liabilities

(3,537)

(9,546)

(13,180)

(13,178)

(13,166)

Long Term Liabilities

 

 

(19,489)

(6,840)

(4,150)

(3,358)

(2,567)

Long term borrowings

0

0

0

0

0

Finance lease obligations

(3,564)

(2,400)

(2,394)

(1,603)

(811)

Other long term liabilities

(15,925)

(4,440)

(1,756)

(1,756)

(1,756)

Net Assets

 

 

173,057

220,721

194,162

177,436

168,810

CASH FLOW

Operating Cash Flow

 

 

(33,551)

(35,196)

(23,247)

(19,100)

(19,702)

Net Interest

(301)

(379)

(360)

242

161

Tax

0

0

0

0

0

Capex

(947)

(582)

(364)

(378)

(393)

Acquisitions/disposals

(210)

0

0

0

0

Financing

0

86,457

(209)

0

0

Dividends

0

0

0

0

0

Other cash flow

(677)

(658)

(12,595)

(6,291)

(791)

Net Cash Flow

(35,686)

49,641

(36,775)

(25,528)

(20,725)

Opening net debt/(cash)

 

 

(83,228)

(47,516)

(97,182)

(60,379)

(34,851)

HP finance leases initiated

0

0

0

0

0

Other

(26)

24

(29)

0

0

Closing net debt/(cash)

 

 

(47,516)

(97,182)

(60,379)

(34,851)

(14,126)

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Evolva and prepared and issued by Edison, in consideration of a fee payable by Evolva. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Evolva and prepared and issued by Edison, in consideration of a fee payable by Evolva. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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