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Edited Transcript of CPS.WA earnings conference call or presentation 7-Nov-19 3:30pm GMT

Q3 2019 Cyfrowy Polsat SA Earnings Call

Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Cyfrowy Polsat SA earnings conference call or presentation Thursday, November 7, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katarzyna Ostap-Tomann

Cyfrowy Polsat S.A. - CFO & Member of the Management Board

* Maciej Stec

Cyfrowy Polsat S.A. - Vice Chairman of the Management Board

* Miroslaw Blaszczyk

Cyfrowy Polsat S.A. - Chairman of the Management Board

* Stanislaw Janowski

Telewizja Polsat Sp. z o.o. - CEO

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Conference Call Participants

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* Ankit Prakash

Citigroup Inc, Research Division - Assistant VP & Senior Associate

* Michal Potyra

UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage

* Nora Nagy

Erste Group Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Dear, ladies and gentlemen, welcome to Polsat Third Quarter 2019 Results Conference Call.

I will now give the floor to Miroslaw Blaszczyk, CEO of Polsat. Sir, you may begin.

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Miroslaw Blaszczyk, Cyfrowy Polsat S.A. - Chairman of the Management Board [2]

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Good morning, good afternoon, and welcome to Polsat Group quarterly results call. As usually, we will summarize the quarter and discuss our operating and financial results. This section will be run by Staszek Janowski. Later on, Kacha will comment on our financial performance.

But before I hand the floor to the team, let me summarize this interesting quarter briefly. Q3 was opened with our OTT box launch. We started offering it in July, and we strongly believe this product changed our competitive position in the broader market, including urban areas.

The second topic that we were focused on is our broadened football offering. PKO Ekstraklasa, which is a Polish premiership has been offered to Cyfrow Polsat customers this summer and creates another platform to build satisfaction and value of our consumers in the future.

Thirdly, we continue to see excellent sales dynamics of our mobile services. Last time, Kacha told you that our smartphone offer meets a growing demand and actually, you can clearly see the outcome in our dynamic revenue development.

And last, but definitely not the least, the new exciting project that we were focused on is our joint venture with Discovery Group. It took us a few months to find an agreement with Discovery and TVN teams. But finally, we are successful in agreeing the terms of cooperation that are satisfactory for both parties. At the moment, we still are ahead of getting regulatory approvals for this deal. Hence, we won't go into details of the project today. Nevertheless, I believe the project will be revolutionary in the expanding and easing access to the Polish content provided online.

Okay. It is the time to give the floor to Staszek.

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Stanislaw Janowski, Telewizja Polsat Sp. z o.o. - CEO [3]

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Good afternoon. The introduction made by Mirek was largely focused on our Pay TV and telco business. Nevertheless, let me speak for a while about our smaller business segments.

This year, we expected the second part of the year to be commercially stronger, hence the deposit channels got a more attractive autumn scheduling. We have invested in some additional TV formats like Love Island and Ninja Warrior, both of them were very popular. Moreover, summer 2019 was very crowded with numerous valuable events that attracted a lot of viewers to our sports channels. Our investment decisions proved right as both the channels maintained almost 25% viewership in a commercial group, while the main channel remained #1. Please remember, this achievement means we were close to the higher end of our long-term strategic goal, which is 23% to 25%.

Last time, I guided you for a better market momentum expected for the second part of the year, and I'm happy to report it to you today. On the next slide, you will see that our content investments met TV advertising market rebounding. After the stagnant first half of the year, the total TV ad market grew by almost 2% year-on-year, which meets our initial assumptions. In this healthier market environment, TV Polsat channels outperformed again. Our TV advertising and sponsorship revenue grew by 3.7%, which is 1% point faster than the broad market. As a result, our share grew to almost 28%, which I find as a very good result.

Let's now switch to Slide #10 that summarizes our 9-month viewership performance. Also, in this perspective, PV Polsat remains the #1 choice of the Polish viewers, with 11.2 audience share. If we look at our full portfolio, our 34 channels together generated over 24 % viewership. A very stable result, again, in the upper end of our target corridor.

And to make it short, let's look at 9 months TV advertising market performance. If you look at the Slide #11, you will see that the Polish TV advertising and sponsorship market was under a slight pressure so far, with the total market declining by almost 1%. Actually, I believe the market still has a chance to show a positive full year dynamics. However, you should not expect it to be far from flat.

What makes me especially happy is the fact that on this challenging market, TV Polsat generated positive ad revenue dynamics in each single quarter so far. As a result, our TV advertising revenue grew by PLN 14 million or almost 2% year-on-year. As a result, it since 2019 full year result will show TV Polsat ad market share growing again.

Thank you very much for this conference. And now I give the floor to Maciej, who will tell you more about our retail business.

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [4]

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Thank you, Staszek, and congratulations on strong results. In the retail business, as usually, I will start with the smartDOM program. I'm happy to underline that the number of our multiplay customers clearly heads towards 2 million. The dynamics of growth continues to be strong with 220,000 customers added over the last 12 months. A number of services used by our multiplay customers grows as well, getting close to 6 million. But the most important outcome of our multiplay strategy is reflected in our churn ratio. As you can see, our churn ratio dives below 7% per annum, 6.8% is the level that marks another record for our group, and we are extremely proud to have so loyal customers. If we combine low churn with strong sales, naturally, we see our RGU base growing dynamic as well.

Slide #14 shows our RGU base going up by 531,000. This result was driven by a very dynamic development of our mobile segment, while pay TV and Internet services are stable. As a result, we provide 14.6 million contracted services at the moment, 4% more than a year ago. And naturally, more services sold translate into higher ARPU. In the third quarter, our contracted ARPU went up by 1% year-on-year, which is slightly better than a quarter ago. On average, each of our contracted customers uses 2.58 services and this ratio keeps going up as well.

And finally, let's switch to prepaid. You still need to remember, in 2018, we decided to sell our low-end brand, [Adva] mobile to one of our MVNOs, which still is facing year-on-year decline as presented. However, if you look at quarter-on-quarter perspective, you will see our prepaid base growing by some 70,000 RGUs. Actually, it should not surprise you, as Q3 is usually seasonally strong in this segment, especially in mobile. But this time, a major part of our growth comes from Pay TV segment. Our consumers are more and more willing to pay for our content provided online via IPLA platform, which bodes well for our JV products as well.

If prepaid ARPU is concerned, this time it was very stable at a level of almost PLN 21, which meets our expectations.

That concludes my presentation this time. What makes me happy in Q3 is the continued growth of our multiplay base, growing ARPU and churn declining to extremely low 6.8% level. Moreover, I'm very happy to build an agreement with Discovery Group, and I hope we will be able to present our common OTT product to our current and future customers in the near future.

Now I will give the floor to Kacha.

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Katarzyna Ostap-Tomann, Cyfrowy Polsat S.A. - CFO & Member of the Management Board [5]

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Good afternoon, everyone. Today, I have the pleasure of presenting you with Q3 results. Please note that as of January 1, 2019, we adopted IFRS 16 reporting standard. Therefore, 2019 financial results are not comparable to 2018 results. For your convenience, we're presenting the results for 2019 in 2 versions, with and without IFRS 16.

So passing to the results. Excluding IFRS 16, our revenue grew by almost PLN 150 million. Given net year consolidation does not disturb this picture anymore, you should treat this as organic growth. In this context, I find 5.4 growth rate as a very strong. A large part of this growth is naturally driven by our continuous investments in a more and more attractive content. Nevertheless, our EBITDA is almost stable and amounts to PLN 901 million, if we reported under former reporting standards or slightly above PLN 1 billion, including IFRS 16 impact.

2019 is a year of more intensive CapEx investments as well as our free cash flow goes slightly down. I will elaborate on that later on. If average is concerned, it went slightly up to 2.62, which should be connected with our decision to return to dividend payments this year.

Passing to the next slide. If we decompose the growth by segment, you can see that both our segments delivered healthy top line growth. This time, our retail business grew by PLN 76 million and benefited mostly from strong demand for smartphones, while our TV segment grew by PLN 66 million, mostly based on content sales. However, if you look at our EBITDA development, you should note that both our segments invest in content at the moment. Our retail segments predominantly buy football rights in order to sell it to our pay TV customers, while our TV broadcasting segment was under an impact of numerous volleyball events, more attractive autumn scheduling, as commented by Staszek. All remaining cost items are under control.

As far as the cash flow is concerned, this year, we see a small CapEx intensive than in the past. Moreover, as recently plugged, a strong demand for smartphones offered under installment plans requires incremental investments in our working capital. In this context, I found PLN 244 million generated slightly stronger, than my initial expectation for this quarter.

If the full year perspective is concerned, I believe you should rather expect the annualized free cash flow to go stronger down this year. We prepare ourselves for strong sales in Q4, and the handset stocks needs to be rebuilt to meet the market demand. In this context, approximately PLN 1.2 billion of free cash flow seems more realistic level to be expected in Q4 2019.

Now passing to the cash flow. First of all, you will notice we spent over PLN 100 million for some acquisitions this time, including settlement with Eleven Sports Network founders. Secondly, the CapEx revenue ratio is 11.1% and meets my initial assumptions for this year, and you should not expect it to decline by the end of the year. Netia is focused on modernizing its network as soon as possible, and we support their efforts.

Thirdly, on the chart, you can see PLN 288 million outflow related to dividends. Please remember, it's the first tranche of the payment, while the second one was executed on the beginning of October. In total, PLN 595 million was paid to the investors this year, which will be reported in our full year results.

And now passing to debt. Please note that despite dividend payment, our net debt is still below PLN 10 billion. Utilization of our RCF went up to PLN 750 million. However, we intend to rebuild this buffer in the months to come. As previously, we present you with our leverage ratio, both including and excluding the impact of IFRS 16. The leverage ratio under our SSI definition amounts to 262, while the one including IFRS impact declines to 272. Our weighted average interest cost remains at 3.3% level. And this would have been now as far as the financials are concerned. This time, I'm especially satisfied with a very dynamic top line growth in both segments that are with our stable bottom line. Additionally, our cash flow generation allows us to invest dynamically and pay dividends according to our policy without any major impact on our leverage ratio.

And now for the summary, and I'm passing to Mirek.

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Miroslaw Blaszczyk, Cyfrowy Polsat S.A. - Chairman of the Management Board [6]

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Thank you, Kacha. As you can see, our results continue to be very sound. So I can only summarize our quarter. First of all, OTT Box launch which faces results, they are very promising. The product that is available for everybody, everywhere. Secondly, if operations are concerned, we were successful in building our multiplay base in ARPU. Moreover, our churn ratio declines to 6.8%, which I find as an excellent result.

Finally, financials as presented by Kacha. Revenue, PLN 150 million up, allowing for continued content investment, stable EBITDA and strong cash generation, allowing for high dividend payout. And finally, our new baby, which is a joint venture project with another major [Yo-kai] TV producer, Discovery Group. The fact that both competitive parties find a common ground and share an opinion that building a common OTT platform is our future, shows that the market is very mature and reasonable. I believe the newly created platform will meet the expectations of our viewers who want to be provided with an extensive library of Polish content in one place.

That concludes our presentation and takes us to Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions). The first question received is from Michal Potyra.

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Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [2]

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I have a question regarding the new OTT platform. If you could share please a bit more details. If this new platform is supposed to be more like a long-term replacement of the existing pay TV? Or you see it more as a kind of upgraded lPLA like an add-on solution for nonlinear distribution of the existing content? And also, just a bit more detail. Do you plan some original content to be distributed only via this platform? Do you plan it to be paid by subscription or by ads? So just if you could share a bit more details, please.

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [3]

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Maciej Stec. So this OTT box, so this is like a stream. So this is some kind of a new user experience because this is between like standard pay TV, like for example, our DTH platform and new 3 platform, which we can observe in Internet. Because in this platform, we have like user experience of TV, and correlated with, in fact, flexibility of different plus 3 platform in interim because you buy packages on a monthly basis. So you buy package for 30 days. So this is completely new positioning for the product. So this is like, I believe, more individual product for people who can -- who would like to have like, TV user experience and have full flexibility like buying what do they want to watch and when they want to watch. So if they don't watch, they don't pay. If they watch, they pay. So that's more or less the concept of the product.

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Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [4]

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Okay. But just maybe I misunderstood because that was kind of -- as I understood, like a big joint venture project and...

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [5]

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Okay. Sorry. So I understood that you are asking about like OTT. Our OTT is new --

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Katarzyna Ostap-Tomann, Cyfrowy Polsat S.A. - CFO & Member of the Management Board [6]

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Set-top box.

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [7]

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New set-top box stream. But with the platform, it's like -- this is like our -- the new OTT platform will give viewers single destination to access the best of Polish content, including all our content, which are movies, series, documentary, sports and entertainment. And the service will include, in parts of production supplied by TBN and Polsat and acquired content and all the new serious commission, specifically for this new entity. So we believe that we will offer a little bit different for proposition to global OTT services, and will be, I believe, differentiated by our more local approach. What is like breaking through for this project is like, we are really glad to be cocreating a project we need, which is likely in our opinion to become a real alternative to international OTTs.

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Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [8]

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Should I understand, i think, it will be basically an upgraded IPLA and player combination?

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [9]

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To be honest, we recognized the regulatory bodies' process now, so we cannot elaborate too much about details.

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Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [10]

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All right. I have one follow-up question, please. Actually, about IPLA, if you -- it's been a few years, this IPLA is working, and it's quite popular, but if you could share what sort of revenues you are able to generate from this service? And what kind of margin you can generate on that, please?

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [11]

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To be honest, it's profitable. That's what I can say, but we do not disclose this data.

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Operator [12]

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And the next question received is from Nora Nagy.

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Nora Nagy, Erste Group Bank AG, Research Division - Research Analyst [13]

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I just have 2 questions. First is on the recently announced new financing worth up to PLN 1 billion, but what is the main use of the new financing source? And the second is a follow-up question on the joint venture with Discovery. What is your intention actually behind the agreement? Could it be a Polish brand for Polish viewers and/or open your OTT platform to international markets as well in the future?

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Katarzyna Ostap-Tomann, Cyfrowy Polsat S.A. - CFO & Member of the Management Board [14]

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Nora, thank you for the question. It's Kacha Ostap speaking. As far as the financing is concerned, just please note that we -- first of all, we have just announced that we're looking at the market, and we don't exactly specify which instrument and on exactly which value we'll take. Our aim is to have more flexibility with the cash. As you probably noticed on one of the slides that we have a usage of PLN 700 million of RCF. And I would like to have just more flexibility in having the cash available. That's the main aim of this additional financing, and that's basically it at the moment. As far as the second question, I guess, Maciej will answer that.

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [15]

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Yes. So concerning back to OTT platform -- streaming platform is really important that this new project has the capability to bring like Polish content to international viewer. So this is like aim for us.

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Operator [16]

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And the next question received is from Ankit Prakash of Citigroup.

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Ankit Prakash, Citigroup Inc, Research Division - Assistant VP & Senior Associate [17]

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So my first question is regarding the TV advertising outlook for FY '20, like this year, it will be flat. Do you see this improving next year? And my second question would be regarding the postpaid pricing update, like when do you see this price increase at your end? Or what are your plans regarding that? And third question would be like your outlook on the fixed mobile convergence, given UPC's entry and plays reselling agreement with Vectra? So that's all.

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [18]

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Okay. Thank you. So concerning advertising, so although TV ad market is minus 0.7% after 9 months of this year, we believe that still low single-digit growth this year is achievable. So this is the first thing. So -- but our first estimation for next year is that TV advertising market can increase next year, also at the same level, so low single digital first prediction. But we will, in fact, have more outlook after the December booking. So then we know exactly how the year ended. So this is concerning advertising.

So the second about like this fixed mobile convergence. So to be honest, we control all key assets and our strategy is like multiplay strategy. So based on our key product, which is smartDOM. So this is our binding offer. And to be honest, we focus on our strategy because we control key assets. So we have like TV production. Also produce content. So then we have like mobile operator. We operate in high-speed LTE mobile Internet, which have like the biggest pay TV platform in Poland, which is based on satellite. We opened like OTT stream box. We operate also -- we started to operate IPTV Cyfrowy Polsat. So -- and finally, we bought majority of shares in Netia, which is like fiber optic company with 2.5 million household -- home pass, I can say. So to be honest, we focus on our key assets and we can build whatever product we would like. And this is, for us, the key thing. As you can see on our results, and that's what we presented today, we have almost 2 million multiplay customers nowadays, and we would like to grow this base because then what you also saw that-- what you also could see in the presentation, we just achieved the record in terms of churn. So our churn ratio was like 6.8% only, and this is really exciting for us because it means that our customers are very loyal, and they are satisfied from our services. So this is about mobile convergence, fixed mobile convergence.

And in terms of postpaid pricing. So finally, we have decided just to change our offer by the end of this quarter, and -- so it means the end of the year. So more details, we will provide soon.

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Operator [19]

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(Operator Instructions) And there are no further questions. I hand back to the speakers.

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Miroslaw Blaszczyk, Cyfrowy Polsat S.A. - Chairman of the Management Board [20]

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Thank you for the conference today. Actually, the next location when we'll meet you is March. Soon we will be also going to Boston, New York. So see you there.

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Stanislaw Janowski, Telewizja Polsat Sp. z o.o. - CEO [21]

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Thank you.

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [22]

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Thank you.

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Operator [23]

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Ladies and gentlemen, this concludes this conference. Please, you may disconnect now.