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Edited Transcript of ETEL.C earnings conference call or presentation 14-Nov-19 1:00pm GMT

Q3 2019 Telecom Egypt Co SAE Earnings Call

Cairo Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Telecom Egypt Co SAE earnings conference call or presentation Thursday, November 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adel Hamed

Telecom Egypt Company S.A.E. - CEO, MD & Director

* Mohamed Hassan Shamroukh

Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director

* Sarah Shabayek

Telecom Egypt Company S.A.E. - Head of IR

* Tarek Abdelhamid

Telecom Egypt Company S.A.E. - Senior Director of Consumer Sales & Marketing

* Wael Hanafy

Telecom Egypt Company S.A.E. - Senior Director of Finance

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Conference Call Participants

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* Alexander Vengranovich

Renaissance Capital, Research Division - Analyst

* Dalal Darwich

Arqaam Capital Research Offshore S.A.L. - Research Analyst

* Hassan Abdelgelil

CI Capital Research - Analyst

* Paul Farah;Steyn Capital Management;Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Telecom Egypt's Third Quarter 2019 Results Conference Call. I now hand over the call to Hassan Abdelgelil. The floor is yours, sir.

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Hassan Abdelgelil, CI Capital Research - Analyst [2]

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Hello, everyone. This is Hassan Abdelgelil from CI Capital. I would like to welcome you all to Telecom Egypt's Third Quarter 2019 Results Conference Call. Joining us from Telecom Egypt, Mr. Adel Hamed, Managing Director and CEO; Mr. Mohamed Shamroukh, CFO; and Ms. Sarah Shabayek, Investor Relations, Senior Director.

I'm now going to hand over the call to Ms. Sarah Shabayek to begin the company's presentation, which will be followed by a Q&A session. Sarah, the floor is yours.

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [3]

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Thank you, Hassan, and thanks to CI Capital for hosting this quarter's conference call. Good afternoon and welcome to our Q3 2019 earnings call. We will start the call with a briefing of the operational performance in the quarter presented by our CEO, Adel Hamed, followed by the key financial highlights presented by Mohamed Shamroukh, our CFO. Kindly note that the presentation is available on our IR website under the Quarterly Results section of the Financial Information tab.

Without further delay, I would like to draw your attention to our safe harbor statement. We may make some forward-looking statements in the course of this conference call. These statements will be based on information available to us as of today, and you should therefore not assume in the future that we continue to hold these views. We do not commit to notify you if our views change. We refer to our public filings for some factors that may cause forward-looking statements to differ from actual future events or results.

I will now hand over the call to Mr. Adel Hamed.

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Adel Hamed, Telecom Egypt Company S.A.E. - CEO, MD & Director [4]

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Thank you, Sarah. Good morning and good afternoon, everyone. Thank you for joining our call today.

This quarter is marked by continuing strong underlying growth in our top line and EBITDA, especially in light of the absence of any infrastructure or submarine cable project. As you all know, Q3 of last year included the Bharti deal and the schools' connectivity project.

The market continues to be hungry for data, both in retail and wholesale segments. Data revenue in retail continues to grow across the board in mobile and fixed with a combined 33% growth year-over-year. This is the result of the continuing growth of the ARPU and customer across our sectors.

Similarly, our infrastructure revenue in wholesale, fueled by the data demand of the domestic operator, grows by 55% year-over-year. As you also know, in the beginning of this year, we have taken a decision to expedite our copper-to-fiber replacement program. In the 9 months of 2019, Telecom Egypt utilized all its resources and workforce to complete its ambitious project. This has reflected on our CapEx with EGP 6.3 billion in CapEx in-service in the period. This is, by far, TE's highest investment in a 9-month period time and almost double as much as last year.

The investment is quite strategic for the company. We have created a large opportunity and exceptional position for us to monetize such investments for years to come. And we intend to leverage this position to capture a larger share of the market growth. The side effects of this higher investment is a jump in depreciation and finance expenses, which has pressured our bottom line. However, we believe that the long-term gains and the monetization of such investments are already visible in our top line growth and will continue to drive this growth in the future. We are also very well positioned to capture more of the strategic projects such as new capital and the digital transformation project which will kick off in 2020.

On other news, last quarter, I briefly introduced our mobile wallet application. And today, I'm very pleased to tell you that we have launched WE Pay commercially in cooperation with Banque Misr. WE Pay will enable our customers to carry out a wide range of monetary transaction, and our customer will be able to deposit and withdraw cash from WE Retail stores and link their Banque Misr debit and credit card to the wallet.

With that, I come to the end of my operational brief, and I will now hand over the call to Mr. Mohamed Shamroukh, our CFO, to discuss this quarter's key financial trends.

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [5]

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Thank you, Mr. CEO. Hello, everybody. Actually, this quarter, our consolidated revenue landed at EGP 6.3 billion, declining at 13% year-over-year. Excluding the Bharti deal, it recorded a 12% year-over-year growth, thanks to our strong retail performance, which constituted 58% of our top line. The 30% year-over-year spike in the Home revenue offset a 17% year-over-year decline in Enterprise revenue due to severe effect of recognizing the school project connectivity in Q3 2018.

Mobile revenue increased 46% year-over-year driven by both the count of customer base and a healthy ARPU trend. Our wholesale revenue, on the other hand, declined by 34% year-over-year due to the base effect of the Bharti deal. However, adjusted revenue accepted a 10% year-over-year increase, mainly driven by 28% of growth in domestic revenue.

Also this quarter, we have extended our early retirement program to an additional 1,000 employees with a cost of [EGP 0.5 billion]. The extension of the early retirement program will be financed using the proceeds we received from Vodafone Egypt and the sale of its subsidiary, Vodafone International Services, to Vodafone Group. The program has a payback period of 2.5 years. Adjusted for the early retirement program and the Bharti deal, EBITDA came in flat year-over-year at EGP 1.5 billion.

Investment income from Vodafone is on a rise, supported by the sale of its subsidiary, the reversal of dispute-related provisions and strong operational growth. The growth of Vodafone income along with FX gain recorded in Q3 2019 softened the increase in depreciation and amortization expenses and finance costs as well.

(inaudible) acceleration, as has been mentioned, of CapEx program, bringing our net profit to EGP 1.1 billion, flat year-over-year after excluding the Bharti deal. Our net debt reached EGP 13.7 billion because of the high CapEx spending, bringing our in-service CapEx to 33%. However, our effective interest rate dropped 2 percentage points year-over-year, reaching 8.4%, thanks to the restructuring of our debt -- of our debt.

By this, I have reached the end of my comments, and now I will pass the floor for the Q&A session. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Dalal Darwich from Arqaam.

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Dalal Darwich, Arqaam Capital Research Offshore S.A.L. - Research Analyst [2]

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I have a couple of questions. The first one is on employee costs. So why did adjusted figure rise 1% quarter-over-quarter and 26% year-over-year in Q3? And if you can explain a bit about the loyalty pension fund program and how it impacts your employee costs. And I also have a question on call costs. So they also increased around 21% year-over-year in Q3 and 16% in the past 9 months, even though top line is largely driven by data. So also if you can shed some light about that.

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [3]

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Yes. Actually, for the employee costs, again, we have some one-off incentives that is related to some projects that we are looking for in (inaudible) during this quarter. And also, on the 9 months projections, we have also one-offs for the incentive for employees that we released during the first quarter and during the second quarter as well. This is the main reasons for the increase on quarter-on-quarter basis and year-over-year basis. But it's not intended to continue as we have only a normal -- sorry, adjustment, which is around 10% year-over-year.

For the employee pension fund, again, it was related to the basic salary from the employee, and the increased contribution from Telecom Egypt is increasing every year by 10 percentage points. But again, we decided to cap this contribution going forward at EGP 200 million per year. So going forward, it will be capped and not related to the basic salaries of the employee staff.

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Adel Hamed, Telecom Egypt Company S.A.E. - CEO, MD & Director [4]

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And the business view in 2018?

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [5]

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Yes. Also, in 2018, it did not contribute. So actually, it was accounted for during 2017 but it wasn't considered during the closing of 2018. For the call costs, again, it's not related to the call costs only. It includes the national roaming, and it's related to support from mobile revenue. And again, our long-term strategy is having this national roaming cost decrease in go-forward time by having a new rollout of our network and controlling our traffic into the networks that we already roll out right now. Thanks.

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Dalal Darwich, Arqaam Capital Research Offshore S.A.L. - Research Analyst [6]

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Okay. Great. And if I may, just one last quick question. How do you expect to monetize the recently launched digital wallet? And if you can give us a quick outlook on the mobile money payment market in Egypt in general.

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Adel Hamed, Telecom Egypt Company S.A.E. - CEO, MD & Director [7]

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Sarah?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [8]

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Tarek Abdelhamid, our Chief Marketing Officer, will answer this call.

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Tarek Abdelhamid, Telecom Egypt Company S.A.E. - Senior Director of Consumer Sales & Marketing [9]

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Briefly, the landscape in the market, we have around 22 to 24 wallets, primarily driven by the banking institutions. Our 3 competitors have their own wallets since a few years ago. We see a lot of traction on the digital money. Recently, the Central Bank of Egypt improved the regulatory environment, gave more freedom for interoperability and international remittances. We see a lot of potential on the peer-to-peer transfer, digital payments. The unique value proposition that we are trying to hang on is primarily to facilitate payments. We have launched our wallet with utilities, including electricity, water, gas, basically transfer to our co-purchase. Central Bank recently announced that around 100,000 point of sales have QR codes available within the next few months.

So in brief, this ecosystem will improve a lot. We see a lot of government services now cashless. So it's, again, improving the consumption of digital money. At the end of the day, we capitalize on our reach. We have more than 1,000 outlets to start with. And later on, we'll start with rolling out our network for a nonexclusive point of sale.

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Operator [10]

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(Operator Instructions)

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Hassan Abdelgelil, CI Capital Research - Analyst [11]

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I have a question. I'm Hassan. Just wanted to ask on the receivables because we -- quarter-over-quarter, receivables have -- and debt has actually have increased. And on the other hand, we've seen credit is going down. So can you shed more light on this?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [12]

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Wael Hanafy, our Head of Finance, will answer this question.

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Wael Hanafy, Telecom Egypt Company S.A.E. - Senior Director of Finance [13]

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The facility explain this and the increase in revenue. For sure, there will be an increase in accounts receivable. And we have some projects in the (inaudible) of collection, which is related to (inaudible) and in the Board side that we recognized during the beginning of this year. Also, there is some projects for the international cables. They will be collected in the quarter 4. So this is mainly the main driver for the increase in accounts receivable this quarter.

For the payables, yes, there is a decrease, which is around EGP 1 billion because we're trying to expedite our payment process with our vendors. But you can see, on the other hand, we're increasing the overdrafts and the loans facility. That's just -- to try to how to manage our management for the cash.

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Hassan Abdelgelil, CI Capital Research - Analyst [14]

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Okay. So should we expect the same trend in quarter 4 2019 for the payables?

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Wael Hanafy, Telecom Egypt Company S.A.E. - Senior Director of Finance [15]

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For the payables, no, our expectation is trying to stretch the vendor terms for our vendors maybe for the next quarter and the beginning of the first -- the coming years. And after that, we are going to try to [in payment] our payables to the business.

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Hassan Abdelgelil, CI Capital Research - Analyst [16]

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Yes. Okay. So in other words, can we -- so what's the -- what's sort of -- is there a cap? Or is there a maximum for the overdraft that Telecom Egypt wishes not to exceed?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [17]

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We -- so far, we have a mandate from the Board of Directors not to increase long-term debt at EGP 13 billion. We have an overdraft of around EGP 3 million. This will be revised with the budget, which we are currently discussing. And with the full year results, we'll give you a new guidance for debt as well as for 2020.

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Hassan Abdelgelil, CI Capital Research - Analyst [18]

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Okay. You said that the mandate is not to exceed EGP 14 billion?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [19]

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EGP 13 billion because that was before the expediting of the CapEx program. We're going back to our Board with a new budget as is the tradition every year for the budget of 2020 and also our new business plan. And we'll come back to the market with the full year result -- or probably even before that, once the Board approves the budget. We will release a guidance for the full year once the Board has approved the budget.

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Operator [20]

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The next question comes from Alex Vengranovich from Renaissance Capital.

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Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [21]

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So I'm just wondering why you have such a solid increase in the mobile customers in the third quarter. In fact, so you've reaccelerated the growth of the customers there. And I just wanted to understand what are the reasons behind it and how sustainable this growth could be in the coming quarters.

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Adel Hamed, Telecom Egypt Company S.A.E. - CEO, MD & Director [22]

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Okay. So the start of (inaudible). The reason why we've seen an improvement in the net adds in Q3, primarily due to the fact that we launched or revamped our main prepaid offer. It's a hybrid bundle, monthly bundle. And we've seen a lot of good traction. That was coupled with on-ground activation in clubs and -- in all the summer seasonal destinations. Additionally, we matured a little bit our channel structure.

So all this together, and coming with the ATL campaigns, on-ground activation, improving the channel, improved a lot the acquisition level. On the churn side, we contained most of the trend effects that came from 2017 launch program. Plus, we've launched our BTL CDM campaigns to engage and retain our customers. So it's a good effect of improving the gross adds and decreasing the churn rate.

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Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [23]

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Okay. So will you continue this campaign in the fourth quarter and going forward? Or it's kind of a...

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Adel Hamed, Telecom Egypt Company S.A.E. - CEO, MD & Director [24]

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Yes. So far, we've seen -- we're seeing the same level of acquisition and more or less, the same level of churn rates.

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Operator [25]

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There are no further questions in today's conference call. I now give back the floor to Ms. Sarah for final remarks.

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [26]

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Moderator, if we can do a final reminder.

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Operator [27]

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(Operator Instructions) The next question comes from [Tanal Nuihek] from [Morazart Asset Management].

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Unidentified Analyst, [28]

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Do you mind to highlight what is the CapEx for 2020? If you can give us a guidance for the coming 2 years. And when are you expecting to normalize?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [29]

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So basically, we should be again reviewing our guidance. However, it looks to be similarly in line with what we said before that next year will be the peak of our CapEx and that we will go down from 2020 because by then, we would have completed the accelerated CapEx program. We're expecting a similar CapEx to this year in absolute terms, could be a little bit higher because we are wrapping up a lot of projects. But then definitely, 2020, we go back to normalized CapEx, coming down in...

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Unidentified Analyst, [30]

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In 2020, you mean?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [31]

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Yes. 2020, starting 2021.

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Mohamed Hassan Shamroukh, Telecom Egypt Company S.A.E. - Senior VP of Financial & Administrative Affairs, CFO and Executive Director [32]

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If you allow me, Sarah, actually, a good thing -- for more clarity. If we consider the CapEx for coming year, which will be at a very high rate compared to capital sales ratio, in reality, the deferred liabilities that we have in carrying from the current years in order to completely -- in order to have a full -- or to complete our current projects will be 50% of the capital that we would allocate for next year. So if you wanted to have a more clarity on that, you'll see that new CapEx such as ours spending going forward. Internet (inaudible) back from the high surplus that we were spending in the last 2 years. But going forward to our planning to have the new CapEx approach is like 15% to 20% of sales and only [reinforce the] deferred liabilities that we are incurring from the existing approach. This is to minimize the immediate financing for that. And also we're maintaining the current depreciation expenses and do not have this hike again in the depreciation as we see during this year. But in reality, we are back to mid-20%s or 15% to 20% of CapEx-to-sales ratio going forward.

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Operator [33]

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The next question comes from Paul Farah from Steyn Capital Management.

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Paul Farah;Steyn Capital Management;Analyst, [34]

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My question is very much the same. I guess you're saying that normalized CapEx will be 15% to 20% of sales. If I'm looking at your cash flow from operations, though, it's quite a bit less than that. So when do you think you're going to generate free cash flow?

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [35]

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Our operating cash flow is basically pressured with the payables. This is a result again of the expedited program. So our balanced working capital will lead to free cash flow hopefully by 2021.

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Operator [36]

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There are no further questions. I now give back the floor to Ms. Sarah for final remarks. Thank you.

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Sarah Shabayek, Telecom Egypt Company S.A.E. - Head of IR [37]

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Thank you, everyone, for dialing in. And as usual, if you have any further questions, please contact the IR team.

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Operator [38]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines.