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How to Use Financial Early Warning Indicators to Understand Competitor KPIs

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How to Use Financial Early Warning Indicators to Understand Competitor KPIs

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How to Use Financial Early Warning Indicators to Understand Competitor KPIs

  1. 1. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by How to Use Financial Early Warning Indicators to Understand Competitor KPIs A Complimentary Webinar from Aurora WDC 12:00 Noon Eastern /// Wednesday 17 August 2016 ~ featuring ~ Ryan Macumber Derek Johnson
  2. 2. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Ryan Macumber Ryan Macumber is Sr. Manager, Competitive & Market Insights, at Best Buy Company. He has worked for Best Buy for 10 years and in the Competitive Intelligence and Market Insights groups since 2011. Ryan is a subject matter experts on competitive, macro-economic, and consumer trends that impact the retail industry in addition to providing marketplace research and analysis for strategic projects throughout the enterprise. Email: rpm587@gmail.com The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems. Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC at http://AuroraWDC.com.
  3. 3. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by α Use the Questions pane on your GoToWebinar control panel and all questions will be answered in the second half of the hour. α You are welcome to tweet any comments on Twitter where we are monitoring the hashtag #IntelCollab or eavesdrop via http://tweetchat.com/room/IntelCollab α Slides will be available after the webinar for embedding and sharing via http://slideshare.net/IntelCollab α To view the recording and download the PPT file, please register for a trial membership at http://IntelCollab.com Questions, Commentary & Content
  4. 4. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by AGENDA 1. BACKGROUND 2. WHY FINANCE? 3. HOW YOU CAN WORK WITH FINANCE 4. CASE STUDY
  5. 5. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by BACKGROUND CEO CMO Personalization and Strategy Enterprise Research Primary Research Competitive and Industry Insights A bunch of other stuff Best Buy Where We Reside • Consumer Electronics and Appliances • Founded in 1966 (50 years, yay) • Formerly called Sound of Music • $40 Billion Annual Revenue • 1,600 Stores • 125,000 Employees
  6. 6. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by WHY FINANCE?
  7. 7. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by 1. You tried to trade 50 basis points for a prize at Chuck E Cheese 2. You think Alan Greenspan is a 24/7 news channel. 3. You can’t spell 10K or 10Q. 4. You wonder why some profit is gross. 5. You think Paul Volcker is a bad guy in Star Trek. 6. You think an abacus is the first name of a character in To Kill A Mockingbird. 7. You think Net Present Value is the amount Santa spent on your kids. 8. You think a balance sheet goes in the linens drawer. 9. You tried to look for the Cash Flow ride at the Wisconsin Dells. 10. You think COGS is a style of wooden shoe. TOP 10 SIGNS THAT YOU MIGHT NEED HELP FROM YOUR FINANCE PARTNERS…
  8. 8. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Your finance partner can help ‘decode’ financial results to help understand the health of a competitor… … for a fraction of the cost of a doctor. Doctors are required to ‘decode’ output from medical instruments to understand the health of a person. MUCH LIKE MEDICAL INSTRUMENTS HELP EXPLAIN HOW HEALTHY A PERSON IS, FINANCIALS HELP EXPLAIN THE HEALTH OF A COMPANY…
  9. 9. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by FINANCIAL ANALYSIS DOESN’T WORK INDEPENDENT OF THE EXISTING COMPETITIVE INSIGHTS TOOLKIT.
  10. 10. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Competitor Profiles, CI Frameworks, CI Process, etc Leadership Financial Background Information MarketingStrategy Products Etc Enhances ability to… • Break apart your competition into digestible portions FINANCE AS AN INPUT AMONG MANY • Identify key performance metrics and vulnerabilities • Connect competitor actions to results • Create early warning systems by identifying KPI trends & deviations • Scenario plan (do they have money for this strategy?) • ‘Bend and stretch’ existing insights and observations
  11. 11. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by HOW DO YOU ACTUALLY WORK WITH YOUR FINANCE PARTNERS?
  12. 12. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by A FRAMEWORK CAN HELP… Customers Stakeholders Shareholders Customers Revenue Suppliers COGS Employees / Landlords / etc SGA Banks Loan Interest Expense Government Taxes Business Reinvestment CapEx Pay Outs Dividends / Stock Buybacks Cash Flow!!! = Financial results help you understand how well (or not well) a company is doing at making money. All companies have the same basic goal – make money.
  13. 13. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Cash Flow!!! Revenue Transactions Traffic / Sales Leads Close Rate Revenue Per Transaction Units per Transaction Avg Price Variable Costs Materials or COGS Average Cost Shipping Hourly Labor # of Employees Avg Wage Fixed Costs Facilities Cost # of Locations Avg Size, etc Management Headcount Remainder Shareholder Returns Re-Invest Pay Shareholders BREAK YOUR COMPETITION IN TO COMPONENTS. START BY WORKING BACKWARDS FROM A COMPANY’S ULTIMATE GOAL… • Awareness Initiatives (Advertising) • Promotions • Employee Training • Product Availability • Upsell / Add-on Tactics • Assortment Strategy • Vendors • Logistics Model • Labor Model, Labor Strategy • Store Strategy, Types of Stores • Management Structure • Company Stage: Growth, Stable, etc Goal Drivers / KPIs Company Psyche Tied to Financial OutcomesFinancial Path Is the company generating cash flow? -Why or Why Not? What are key vulnerabilities keeping it from generating cash flow? How does it typically generate cash flow?
  14. 14. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Cash Flow!!! Revenue Transactions Traffic / Sales Leads Close Rate Revenue Per Transaction Units per Transaction Avg Price Variable Costs Materials or COGS Average Cost Shipping Hourly Labor # of Employees Avg Wage Fixed Costs Facilities Cost # of Locations Avg Size, etc Management Headcount Remainder Shareholder Return Re-Invest Pay Shareholders … BREAK OUT THE FINANCIAL PATH A COMPANY FOLLOWS TO ACHIEVE ITS GOAL • Awareness Initiatives (Advertising) • Promotions • Employee Training • Product Availability • Upsell / Add-on Tactics • Assortment Strategy • Vendors • Logistics Model • Labor Model, Labor Strategy • Store Strategy, Types of Stores • Management Structure • Company Stage: Growth, Stable, etc Goal Drivers / KPIs Company Psyche Tied to Financial OutcomesFinancial Path Does your competitor rely more on volume and lower costs? Are they struggling in a particular financial area? Does your competitor operate in a lean manner? Or higher prices/premium products?
  15. 15. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Cash Flow!!! Revenue Transactions Traffic / Sales Leads Close Rate Revenue Per Transaction Units per Transaction Avg Price Variable Costs Materials or COGS Average Cost Shipping Hourly Labor # of Employees Avg Wage Fixed Costs Facilities Cost # of Locations Avg Size, etc Management Headcount Remainder Shareholder Returns Re-Invest Pay Shareholders WHAT ARE KPIs (KEY PERFORMANCE INDICATORS) THAT DRIVE THE COMPANY’S FINANCIALS? NOW YOU HAVE A PROFIT TREE! • Awareness Initiatives (Advertising) • Promotions • Employee Training • Product Availability • Upsell / Add-on Tactics • Assortment Strategy • Vendors • Logistics Model • Labor Model, Labor Strategy • Store Strategy, Types of Stores • Management Structure • Company Stage: Growth, Stable, etc Goal Drivers / KPIs Company Psyche Tied to Financial OutcomesFinancial Path If your competitor is struggling, where and why are they struggling? Do they have too much management, too many stores, etc? Are they not drawing enough customers?
  16. 16. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Cash Flow!!! Revenue Transactions Traffic / Sales Leads Close Rate Revenue Per Transaction Units per Transaction Avg Price Variable Costs Materials or COGS Average Cost Shipping Hourly Labor # of Employees Avg Wage Fixed Costs Facilities Cost # of Locations Avg Size, etc Management Headcount Remainder Shareholder Returns Re-Invest Pay Shareholders FINALLY, ADD COMPETITOR BEHAVIORS AND STRATEGIES • Awareness Initiatives (Advertising) • Promotions • Employee Training • Product Availability • Upsell / Add-on Tactics • Assortment Strategy • Vendors • Logistics Model • Labor Model, Labor Strategy • Store Strategy, Types of Stores • Management Structure • Company Stage: Growth, Stable, etc Goal Drivers / KPIs Company Behaviors Tied to KPIsFinancial Path
  17. 17. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Cash Flow!!! Revenue Transactions Traffic / Sales Leads Close Rate Revenue Per Transaction Units per Transaction Avg Price Variable Costs Materials or COGS Average Cost Shipping Hourly Labor # of Employees Avg Wage Fixed Costs Facilities Cost # of Locations Avg Size, etc Management Headcount Remainder Shareholder Returns Re-Invest Pay Shareholders GREAT. WHO DOES WHAT? • Awareness Initiatives (Advertising) • Promotions • Employee Training • Product Availability • Upsell / Add-on Tactics • Assortment Strategy • Vendors • Logistics Model • Labor Model, Labor Strategy • Store Strategy, Types of Stores • Management Structure • Company Stage: Growth, Stable, etc Goal Drivers / KPIs Company Psyche Tied to KPIsFinancial Path Finance Partners CI Team
  18. 18. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Revenue Metrics Costs Newton: “To every action there is always an equal and opposite reaction.” Business: “To every action there is hopefully an unequal and opposite reaction” Most strategic decisions involve an inherent trade-off between revenue and cost / profit rate metrics The idea is to ‘leverage’ costs to produce disproportionate revenue Examples Increasing advertising spend (lowers income) in hopes of increasing revenue (increases income) Sacrificing gross margin by cutting prices (lowers income) in hopes of driving close rate and/or traffic (increases income “Cost Leverage” ANOTHER WAY TO THINK ABOUT THE METRICS…
  19. 19. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by LET’S APPLY THIS TO FOUR OF THE LARGEST RETAILERS ON THE PLANET WHY RETAIL?
  20. 20. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by HOW DO DIFFERENT RETAILERS VIEW THEIR BUSINESS? THINK BACK TO THE PROFIT TREE Cash Flow!!! Revenue Transactions Traffic / Sales Leads Close Rate Revenue Per Transaction Units per Transaction Avg Price Variable Costs Materials or COGS Average Cost Shipping Hourly Labor # of Employees Avg Wage Fixed Costs Facilities Cost # of Locations Avg Size, etc Management Headcount Remainder Shareholder Returns Re-Invest Pay Shareholders
  21. 21. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Each company… • Has different growth strategies • Has different merchandising/assortment strategies • Pays attention to different financial indicators In short, each of these companies defines “winning” differently, which means you cannot treat them the same when analyzing their business models. THESE COMPANIES ARE ALL DIFFERENT
  22. 22. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Total SKUs Assorted vs. Revenue per SKU THIS SHOWS UP IN THEIR SKU ASSORTMENT
  23. 23. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by • Amazon’s goal is to offer as many products as possible (ideally all of them) • SKU and vendor setup is highly automated; it does not need to scale headcount to scale assortment • This is the opposite strategy of a Costco, which offers a tightly curated, carefully selected sku assortment and sells those fewer items in tremendous quantity • Walmart splits the difference • Target is sort of like Walmart with a bigger focus on experience, but with fewer skus and less revenue WHAT DOESTHIS MEAN?
  24. 24. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by NOW, YOU CAN ORGANIZE AND UNDERSTAND COMPETITORS BY SIMILARITIES AND DIFFERENCES The {Insert Industry} Pentagon is an effective way to do this…
  25. 25. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Target’s focus on experience is more costly and therefore requires the company to drive higher margins CONVENIENCE Costco’s focus on low prices results in low margins, but is made up for in volume and a lean cost structure TARGET VS COSTCO
  26. 26. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by THE MOST VALUABLE PART OF THE FRAMEWORK ISN’T ACTUALLY THE FRAMEWORK. RATHER, THE TRUE VALUE COMES FROM THE EFFORT AND PROCESS OF COMPLETING THE FRAMEWORK.
  27. 27. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by CASE STUDY TIME ISSUE: AMAZON WAS TAKING OVER THE WORLD GOAL: WE WANTED TO BUILD A DEEPER UNDERSTANDING OF AMAZON’S PSYCHE AND FINANCIAL MODEL VS OTHER RETAILERS, FOR PURPOSES OF EDUCATING KEY DECISIONS MAKERS.
  28. 28. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by • "We've done price elasticity studies, and the answer is always that we should raise prices… by keeping our prices very, very low, we earn trust with customers over time, and that actually does maximize free cash flow over the long term." • “We are stubborn on vision.We are flexible on details….” • “We see our customers as invited guests to a party, and we are the hosts. ” • “Start With the Customer and Work Backward” • “A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well.” • “We can't be in survival mode. We have to be in growth mode.” • "There are two kinds of companies:Those that work to try to charge more and those that work to charge less.We will be the second.” • “If we can keep our competitors focused on us while we stay focused on the customer, ultimately we'll turn out all right.” Source: Fool.com, goodreads.com FIRST, WHAT IS AMAZON’S PSYCHE? To understand Amazon, understand Jeff Bezos…
  29. 29. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by RELENTLESS.COM
  30. 30. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by AMAZON’S FINANCIAL GOALS REFLECT THE COMPANY’S PSYCHE Sources: Amazon.com “Do a bunch of stuff to make money. Invest all of that money back in to the business to improve the customer experience. “
  31. 31. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Amazon’s Growth Formula • Consumers come to Amazon for three things: — Selection — Price/Value — Customer Experience • Amazon’s strategic focus: — Driving Traffic — Enhancing Selection — Providing Value — Personalized Experience This formula results in a lower cost structure that Amazon passes to consumers in the form of lower prices, which further accelerates the wheel. “Every time the math tells you that you shouldn’t lower prices because you’re going to make less money. That’s undoubtedly true in the current quarter, in the current year. But it’s probably not true over a 10-year period…. – Jeff Bezos, Amazon CEO Sources: Amazon.com, Forester Research HOW DOES AMAZON MAKE MONEY? THE FLYWHEEL Amazon’s Flywheel of Growth
  32. 32. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by SO, WE STARTED TRACKING AMAZON’S FREE CASH FLOW AS A KEY FINANCIAL METRIC From Amazon’s Q4 2012 Earnings Call: “Trailing 12 month free cash flow decreased 81%“ “The increase in capital expenditures reflects additional investments in support of continued business growth consisting of investing in technology infrastructure including Amazon Web Services and additional capacity to support our fulfillment operations.”
  33. 33. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by AS AMAZON’S FREE CASH FLOW APPROACHED ZERO, THE COMPANY HAD SOME DECISIONS TO MAKE… THIS WAS AN EARLY WARNING INDICATOR
  34. 34. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by TURNS OUT AMAZON’S PRICE HIKE FOR PRIME WORKED AS INTENDED…
  35. 35. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by … AND IT GOT A HANDLE ON SHIPPING COSTS
  36. 36. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Cash Flow!!! Revenue Transactions Traffic / Sales Leads Close Rate Revenue Per Transaction Units per Transaction Avg Price Variable Costs Materials or COGS Average Cost Shipping Hourly Labor # of Employees Avg Wage Fixed Costs Facilities Cost # of Locations Avg Size, etc Management Headcount Remainder Shareholder Returns Re-Invest Pay Shareholders Observed Scott Devitt of Morgan Stanley during Amazon’s Q4 2012 earnings call: “…it looks that you have successfully begun the transition of your logistics costs in the direction of being more of a fixed fulfillment cost with lower unit based shipping costs..” SPEAKING OF COSTS, RECALL THE FRAMEWORK AND CONCEPT OF COST LEVERAGE from to
  37. 37. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Net Income Percent of Revenue (Past 10 Years) Companies like Walmart and Costco focus on costs while maintaining fairly predictable business models and results … … Amazon clearly doesn’t, which is what makes them dangerous. WHEN COMPARING AMAZON’S FINANCIALS AND PSYCHE TO OTHER RETAILERS, THE DIFFERENCES BECAME APPARENT…
  38. 38. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Costco CEO Jim Sinegal: MUCH LIKE AMAZON, COSTCO’S RAZOR THIN FINANCIAL STRATEGY REFLECTS THE MENTALITY OF ITS LEADERSHIP • “We’re low-cost operators, and it would be a little phony if we tried to pretend that we’re not and had all the trappings.” • “We want to turn our inventory faster than our people.” • “We pay much better than Wal-Mart. That's not altruism. It's good business.” • “Paying good wages is not in opposition to good productivity.” • “Competition makes you stronger. If our top competitor didn’t exist, we would have to make them up.”
  39. 39. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by • Product Mix: Treasures (1/4) and Triggers (3/4) • Costco stocks only 4,000 Stock Keeping Units (SKUs)… also know as ‘things’ • The average supermarket stocks 40,000 SKUS • Wal-Mart stocks 125,000 SKUs • Amazon stocks 8,000,000 SKUs COSTCO’S MODEL
  40. 40. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by HOW COSTCO ACTUAL MAKES MONEY Source: Fool.com • Costco just about breaks even on product… • And makes most of its money on membership fees
  41. 41. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by COSTCO’S SGA RATE STAYS AT ROUGHLY 9.9% TO 10.1% It took a recession to budge Costco’s line
  42. 42. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by COSTCO’ STORE GROWTH Despite pressure to scale more quickly, Costco’s model is to open stores in a measured fashion. Store growth drives total sales… Is store count reaching saturation?
  43. 43. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by • A change in SG&A • A change in the number of new stores • A change in same store sales • A change in its inventory model COSTCO’S EARLY WARNING INDICATORS
  44. 44. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by • Similar to Amazon’s – Grow quickly, use scale to muscle suppliers to the lowest possible cost • Acquire international players • “Save Money, Live Better” • It’s not just WMT’s tagline, it is a mantra within the company as well • Reduce SG&A (save money), grow the company (live better) WALMART’S MODEL
  45. 45. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Walmart Found SamWalton: WALMART’S PSYCHE • “You can make a lot of mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.” • “Give ordinary folk the chance to buy the same things as rich people.” • “Control your expenses better than your competition.This is where you can always find the competitive advantage.” • “Capital isn't scarce; vision is.”
  46. 46. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by • Topline Sales Growth • Cost of Goods Sold (COGS) Rate WALMART’S EARLY WARNING INDICATORS
  47. 47. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by SLOW GROWTH TRIGGERS STRATEGIC CHANGES “Wal-Mart is spending $1.5 billion in higher wages and training next year.” “Wal-Mart also said it was adding curbside pickup for groceries” Source: Google, Walmart.com, AdAge, Reuters
  48. 48. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by WHAT DOES IT ALL MEAN?
  49. 49. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by THIS MEANS WE’RE SEEING A PASSING OF THE RETAIL TORCH Here’s Porter’s 5-Forces in Action in Real-Time!
  50. 50. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by WRAPPING UP… EVERY COMPANY, EVEN ONES THAT APPEAR VERY SIMILAR HAVE A DIFFERENT DEFINITION OF “WINNING”
  51. 51. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by WRAPPING UP… FIND THE KEY METRICS THAT YOUR COMPETITORS MONITOR AND MANAGE ABOVE ALL OTHERS
  52. 52. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by WRAPPING UP… GET HELP FROM YOUR FINANCE DEPARTMENT IF YOU CAN’T SPELL 10-Q OR WONDER WHY SOMEONE PUTS THE WORD GROSS IN FRONT OF PROFIT
  53. 53. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by WRAPPING UP… BY UNDERSTANDING THE FINANCIAL PERFORMANCE OF A COMPANY, LISTENING TO PUBLIC COMMENTS, AND BUILDING THE “PSYCH PROFILES” ON COMPANY LEADERS, YOU’LL BE WELL ON OUR WAY TO DEVELOPING AN EARLY WARNING SYSTEM AND HAVING INFORMATION TO POPULATE CI FRAMEWORKS.
  54. 54. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Thank you! Now how about a little Q&A? Email: rpm587@gmail.com Phone: (612) 291-5860 LinkedIn: linkedin.com/in/ryan-macumber- 172a122 The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems. Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC at http://AuroraWDC.com. See you next time!

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