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Edited Transcript of ETL.PA earnings conference call or presentation 12-Feb-21 8:00am GMT

·49 min read

Half Year 2021 Eutelsat Communications SA Earnings Call Paris cedex 15 Feb 12, 2021 (Thomson StreetEvents) -- Edited Transcript of Eutelsat Communications SA earnings conference call or presentation Friday, February 12, 2021 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Michel Azibert Eutelsat Communications S.A. - Deputy CEO * Rodolphe Belmer Eutelsat Communications S.A. - CEO & Director * Sandrine Téran Eutelsat Communications S.A. - CFO ================================================================================ Conference Call Participants ================================================================================ * Aleksander Peterc Societe Generale Cross Asset Research - Equity Analyst * Giles Thorne Jefferies LLC, Research Division - Senior Research Analyst and Technology Research Analyst * Michael Bishop Goldman Sachs Group, Inc., Research Division - Equity Analyst * Nicholas Michael Edward Dempsey Barclays Bank PLC, Research Division - Research Analyst * Patrick Thomas Wellington Morgan Stanley, Research Division - MD and Head of the European Media Equity Research * Roshan Vijay Ranjit Deutsche Bank AG, Research Division - Research Analyst * Sarah Simon Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the Eutelsat First Half 2020 and 2021 Results Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Rodolphe Belmer, CEO. Please go ahead. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [2] -------------------------------------------------------------------------------- Welcome and thank you for joining us today for our first half 2020-2021 results presentation. I am Rodolphe Belmer, CEO. And I'm joined on today's call by Michel Azibert, Deputy CEO; and Sandrine Téran, our CFO. Let's start by taking a quick look at the operating recent highlights. First, our first half revenue performance was slightly above expectations. And this strong start of the year enables us to raise the low end of our revenue objective for the current year and to absorb the negative net perimeter effect related to operations in the fixed broadband vertical in the second half. Our activity continues to be resilient in the COVID context as evidenced by the evolution of our top line. We also delivered robust profitability despite the costs associated with broadband ramp-up, including the integration of BigBlu. Free cash flow generation, the key metric for us, was high in the first half, already amply covering the full year dividend paid in November. We recorded a solid commercial performance, including notably the award of a second EGNOS payload on the HOTBIRD 13G satellite, representing EUR 100 million revenue over 15 years. And we made significant headway in our fixed broadband strategy, paving the way for a return to growth. More on this later in the presentation. In terms of financial performance now. First half revenues stood at EUR 629 million, down 1.6% on a like-for-like basis. Operating verticals revenues stood at EUR 613 million, down 2.1%. The EBITDA margin stood at a high level of 76.7%, down 1 point versus last year. Cash CapEx stood at EUR 117 million, mainly reflecting favorable phasing in the first half. Discretionary free cash flow stood at EUR 257 million on a reported basis and EUR 275 million on an adjusted basis, EUR 158 million year-on-year. It benefited from an improvement in working capital requirements trends. And net debt-to-EBITDA ratio stood at 3.09x at end December, 0.11x lower than a year earlier. Let's take a closer look at our performance since the onset of the COVID-19 crisis in the third quarter of last fiscal year. Operating vertical revenues have recorded a quarterly CAGR decline of minus 0.6%. The bulk of this impact stems from mobile connectivity since occasional use has now largely recovered. If we exclude mobility, revenues were down at a quarterly CAGR of just minus 0.3%. The slower pace of new business as a direct consequence of the COVID crisis means that this trend is likely to deteriorate in the coming quarters. Turning to commercial performance. We recorded several important wins. In Broadcast, activity remained dynamic in Sub-Saharan Africa with the expansion of our contract with MultiChoice, one of our core African customers, which committed to additional capacity on a multiyear basis. And with the extension of our multi-transponder contract with ZaapTV, another African customer at 36° East and the leading pay-TV provider in Portuguese-speaking countries. Among the other applications, in Fixed Data, the renewal and expansion of contract with Liquid Telecom at 7° East for VSAT networks; in government services, the previously mentioned EUR 100 million deal for the second EGNOS payload for a 15-year period; Fixed Broadband, we signed a strategic wholesale agreement with TIM, Telecom Italia, was almost EUR 150 million. We also secured 2 smaller contracts in Africa, a B2G deal with the Post Office in Ivory Coast and a distribution agreement with TelOne, the incumbent telco in Zimbabwe. Recent quarters have seen several major steps to prepare the return to growth in fixed broadband. First, the entry into service of EUTELSAT KONNECT satellite in November, which brings a superior economic performance and long-awaited new capacity in Europe and Africa, enabling the launch of our new retail office; major wholesale agreements with Orange and TIM, respectively, for the French and Italian capacity on EUTELSAT KONNECT and the upcoming product, VHTS. And promising discussions with other major European distribution players are currently ongoing. The reorganization of our European distribution in broadband with the acquisition and smooth integration of the European activities of BigBlu Broadband, adding a retail pillar to our distribution strategy; and the disposal of our stake in EBI, including the KA-SAT satellite, which is now redundant, an operation which is expected to be closed by the end of the current quarter. As a reminder, we also have a MoU with Schoolap to provide high-speed connectivity to almost 4,000 schools in the Democratic Republic of Congo and are continuing to explore similar opportunities with -- for government-backed digital inclusion programs, which will be a key component of our African broadband expansion. Now over to Michel Azibert to look at our activity vertical by vertical. -------------------------------------------------------------------------------- Michel Azibert, Eutelsat Communications S.A. - Deputy CEO [3] -------------------------------------------------------------------------------- Thank you, Rodolphe. Total revenues for the first half stood at EUR 629 million, down 1.3% on a reported basis. This included a negative currency effect of EUR 12 million related to the euro-dollar rate, largely offset by hedging impact included in other revenues, which saw a positive swing of EUR 15 million and a positive perimeter effect of circa EUR 2.5 million, reflecting the contribution on the second quarter from BigBlu Broadband. Revenues of the 5 operating verticals were down by 2.1% on a like-for-like basis. Let's look at them in more detail. As a reminder, all comments are based on like-for-like change, i.e., at constant currency and perimeter. Broadcast, 62% of group total, recorded revenues of EUR 379 million, down 1.8% versus last year. Data and Professional Video, 13% of group total, saw revenues of EUR 81 million, down 4.5%. Government Services, 13% of group total, saw revenues of EUR 77 million, up 2.5%. Fixed Broadband, 7% of revenues, stood at EUR 42 million, a progression of 2.3%. And Mobility, 5% of revenues, saw revenues of EUR 34 million, down by 13.9%. Finally, other revenues stood at EUR 15 million. They included a positive EUR 6 million effect from hedging operations compared to a negative impact of EUR 5 million last year. Overall, they were higher by EUR 15 million than last year. Turning first to Broadcast. First half revenues were down 1.8% to EUR 379 million. This reflected predominantly the impact from 1st July of the renegotiation of contract terms with Greece's Forthnet, which represented a headwind of almost EUR 5 million for the half year. Second quarter revenues were down by 2.1% year-on-year. Quarter-on-quarter, they were stable, excluding a positive one-off of circa EUR 2 million in the MENA region, which was booked in the first quarter. As mentioned above, we expanded our agreement with MultiChoice, and we renewed our contract with Zaap in Sub-Saharan Africa. Nevertheless, we continue to face a broad slowdown in the pace of new business against the current operating backdrop, notably in Europe, which will be reflected in the second half. Channel count was down 4% year-on-year to circa 6,600 units, reflecting a lower lineup at 5° West following the technical issues on EUTELSAT 5 West B, which led to a reduction in certain services; an anticipated reduction in the Sky Italia lineup reflected in the contract renewal with lower volumes compensated by higher prices; technical factors, mainly the end of temporary dual illumination and contribution channels; the natural erosion of the business of distributors in Europe, which is not this year offset by new business; and fewer C-band channels following the reallocation of frequencies in the U.S. On the other hand, the number of HD channels continue to progress, reaching a penetration rate of 27%, 4 points higher than a year ago. All major orbital positions contributed to this progression. At the same time, the number of MPEG-4 channels was up 1%, and penetration of MPEG-4 at 72% continues to substantially exceed HD. Finally, let's take a closer look at core Broadcast, accounting for more than 60% of our revenues. As the graph on the left shows, if we exclude the FRANSAT DTT platform, core Broadcast has been resilient over the past 3.5 years with a CAGR of minus 1%. This is unique in the industry and reflects our geographic exposure, with emerging markets accounting for over 50% of revenues and our absence from the mature North American market and the fact that our business model is predominantly DTH, the most resilient subvertical compared, for example, with cable head-end feeding. Over the same period, our main channel KPIs were well oriented, leading to a slight progression in megabit per second consumption. Channel count, up 1%, with growth mostly in emerging markets and further progress in HD penetration from 17% to 27%, i.e., a 60% growth compared with a rise of 16% only in MPEG-4 channels over the same period. First half Data and Professional Video revenues stood at EUR 81 million, down by 4.5% year-on-year. Fixed Data benefited from improving volumes, reflecting notably the carryforward effect of new business secured in MENA last year, which partially offset the general ongoing pricing pressure. Professional Video remained in decline on a year-on-year basis, although occasional use, which was initially strongly impacted by the COVID-related lockdowns, has continued its recovery in the past few months following the reinstatement of live sports events. On the commercial front, as mentioned previously, our contract with Liquid Telecom for the provision of VSAT services in Africa or EUTELSAT 7B was renewed and expanded. First half Government Services stood at EUR 77 million, up 2.5% year-on-year. They reflected, on one hand, the contribution of the first EGNOS payload on EUTELSAT 5 West B, which entered into service in February 2020 as well as new business; and on the other hand, the negative carryforward effect of U.S. government renewals last year. Second quarter revenues were up by 4.5% year-on-year and by 2.1% quarter-on-quarter. As a reminder, second half revenues will reflect a tougher comparison basis as the same period last year included the first-time contribution of EGNOS from mid-February and a positive one-off related to the temporary relocation of EUTELSAT 7A in the fourth quarter. On the commercial front, as previously mentioned, we secured a contract for the second EGNOS payload or EUTELSAT HOTBIRD 13G. First half Fixed Broadband revenues stood at EUR 42 million, up 2.3% year-on-year, in the context of increased demand for Internet connectivity, leading to positive momentum of the European customer base in the last 12 months despite limited available capacity. Revenues also benefited from higher terminal sales in Europe, in particular, in the first quarter. As a result, second quarter revenues were down by 6.5% quarter-on-quarter but up 0.8% year-on-year. In Africa, while the contribution to revenues remained modest, we continue to enhance our distribution capabilities. We've won a contract to provide connectivity services to the Post Office in Ivory Coast, highlighting the potential of government-backed digital inclusion programs; and second, a distribution agreement with the Internet service provider, TelOne, covering Zimbabwe. In Europe, all the elements are now in place for a progressive return to growth. Rodolphe will give more color on that. First half Mobile Connectivity revenues stood at EUR 34 million, down 13.9% year-on-year. This reflected the impact of the COVID-19 crisis on aero mobility, leading to lower airtime-related revenues on KA-SAT and to the renegotiation of contracts with certain service providers. On the other hand, maritime revenues remained well oriented, thanks to the ramp-up of contracts secured in the last 24 months. Second quarter revenues were down 20% year-on-year and by 7% quarter-on-quarter. As a reminder, the second quarter of last year included a positive one-off of EUR 1 million. Turning finally to backlog and fill rates. The backlog stood at EUR 4.4 billion at the 31st of December 2020 versus EUR 4.3 billion a year earlier and EUR 4.1 billion at the end of June 2020. This includes the capacity commitments secured with TIM on EUTELSAT KONNECT and KONNECT VHTS but not yet the additional EGNOS payload. The backlog was equivalent to 3.4x 2019-2020 revenues, with Broadcast representing 67%. The number of operational transponders at the end of the year 2020 stood at 1,380, down by 7 units on end June. This reflected, on one hand, lower operational capacity at 5 West following the transfer of services from EUTELSAT 5 West A to EUTELSAT 5 West B in January 2020; and on the other hand, incremental capacity brought by EUTELSAT 7C in January 2020. The number of utilized transponders stood at 967, almost unchanged year-on-year and up by 7 units quarter-on-quarter. As a result, the fill rate progressed slightly to 70.1% compared with 69.7%, both a year ago and at the end of June 2020. Now over to Sandrine for the financial performance. -------------------------------------------------------------------------------- Sandrine Téran, Eutelsat Communications S.A. - CFO [4] -------------------------------------------------------------------------------- Thank you, Michel. Good morning. Starting with EBITDA, which stood at EUR 482 million at 31st December 2020 compared with EUR 496 million a year earlier, down by 2.7%. The EBITDA margin stood at 76.7%, 1.1 points lower than last year. This reflected the decline in revenues and higher costs associated with the broadband activity, including the slightly diluted effect of the consolidation of BigBlu Broadband. These effects were partially offset by strong cost discipline in the core business. In particular, the LEAP 2 cost-saving program is well on track to deliver its objective of EUR 20 million to EUR 25 million in annual savings with around half of this to be delivered by this year-end. Moving to the P&L. Group share of net income stood at EUR 137 million versus EUR 141 million a year earlier, down by 2.3% and representing a margin of 22%, unchanged versus last year. This reflected on the negative side the lower EBITDA as well as a net financial result of minus EUR 47 million versus minus EUR 41 million a year earlier, reflecting, on one hand, the benefit of previous debt refinancing; and on the other, an unfavorable impact related to the evolution of ForEx gains and losses. On the positive side, the tax rate of 14% versus 18% last year, reflecting a positive variation of deferred taxes of Satmex mostly related to currency and inflation and the 2-point reduction of the French corporate tax rate. Net cash flow from operating activities amounted to EUR 435 million, up by EUR 82 million. This reflected principally the decrease in EBITDA, lower tax paid partly relating to the timing of tax payments, a considerably improved trend in change in working capital from a favorable starting point, since June 2020 reflected the most acute stage of the COVID-19 crisis. Cash CapEx amounted to EUR 117 million, EUR 72 million lower than last year. It reflects the phasing of satellite program milestone and is not representative of the expected full year outturn. Interest and other fees paid amounted to EUR 61 million versus EUR 57 million last year, the slight increase reflecting a phasing effect. As a reminder, the bulk of the coupon payments related to our bonds fall in the first half, 3 maturities representing a nominal amount of EUR 1.7 billion, with only one maturity in the second half of EUR 500 million. As a result, discretionary free cash flow amounted to EUR 257 million on a reported basis. At constant currency and excluding the impact of hedging, one-off costs related to the LEAP 2 plan and the headquarter move, it stood at EUR 275 million, up EUR 158 million. At 31 December 2020, net debt stood at EUR 2.994 billion, almost unchanged versus end June. The EUR 257 million of discretionary free cash flow generated in H1 more than covered November's dividend payment of EUR 205 million. Changes in perimeter, mostly related to acquisition of BigBlu Broadband, generated an outflow of EUR 56 million. It is also worth mentioning that over the last 12 months, net debt was reduced by EUR 240 million. As a result, the net debt-to-EBITDA ratio stood at 3.09x compared to 3.2x at end of December 2019 and 3.05x at end June 2020. In the last couple of quarters, we continued to optimize our debt structure, raising EUR 800 million in financing, highlighting our ease of access to diversified sources of funding and extending our average debt maturity at compelling terms. In particular, the EUR 600 million bond was issued in October with an 8-year maturity and a 1.5% coupon to refinance the June 2021 EUR 500 million maturity. The EUR 200 million 8-year term loan was secured with the European Investment Bank to finance the KONNECT VHTS program at a rate of 0.49%. And our strong liquidity position enabled us to make an early repayment of EUR 200 million out of the EUR 600 million term loan of Eutelsat Communication maturing in March 2022. The average cost of debt after hedging was further reduced to 2.3% in the first half compared to 2.4% a year ago. The average weighted maturity of debt stood at 4.3 years or 4.9 years, excluding the already refinanced upcoming maturity, compared with 4.2 years a year ago. And last but not least, liquidity remains strong with cash and undrawn credit lines exceeding EUR 1.7 billion. Now back to Rodolphe to speak on the outlook. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Sandrine. As a reminder, we have a strategic road map with 2 pillars: first, maximizing cash generation, leveraging all components of free cash flow; and second, returning our company to growth by extracting additional value from the core video business and capturing the connectivity opportunity. In this framework, let's have a look at progress on the priorities for this year that we communicated in July. On cash generation, we are well on track to deliver on the LEAP 2 plan, with around half of the savings expected by the end of the current fiscal year. We are also well on track on freeing up C-band spectrum in the U.S., which would generate over $500 million of gross proceeds. In terms of improving working capital requirements, WCR, we returned to a positive variation in the first half. And we continue to maintain all levers and attention as highlighted by the strong free cash flow generation in the first half. At the same time, we work to extract further value from our Broadcast activities by maximizing yields in heritage markets notably by securing long-term renewals as with Sky Italia and tapping growth pockets as in the case of the expansion of our agreements with MultiChoice in Africa. And we made strong progress to prepare for a connectivity-driven return to growth with the integration of BigBlu broadband and the launch of retail office and the wholesale agreement we signed with Telecom Italia with TIM and the continued growth of our maritime business. Let's now get a closer look at the potential of the Fixed Broadband markets. First, a reminder of the addressable markets. The number of premises set to remain beyond the reach of terrestrial infrastructure, be it 4G, 5G or fiber, and with sufficient purchasing power to pay an alternative service, stands at some 4 million homes in Europe and 5 million in Africa. However, these are 2030 estimates. Between now and then, the market is even much larger. Demand for ubiquitous connectivity continues to grow and has been, of course, boosted by the COVID-19 lockdowns. At the same time, the number of premises each operator can serve is constrained by its production capacity. In terms of balance between supply and demand, there is, in our view, enough room, largely enough room for 3 or 4 players, including LEO constellations, even if they were to successfully address the handicap of terminal costs. Moreover, it is likely that available LEO capacity, which will be limited initially, will spread over a wider pocket than GEO, leading them to compete directly with telcos in some segments, which is not the case of GEO operators. Finally, the feedback from consumers is encouraging. More than 90% of satellite broadband households are satisfied with their connectivity. Depending on market, 60% to 70% of households in areas with poor terrestrial coverage show high interest in satellite broadband offers. This favorable market context is already being reflected in the takeup of our current and future KA capacity enhanced by the growing interest of telcos in satellite broadband as a means of fulfilling the digital divide objectives and broadening that subscriber base. As this slide shows, 3 strategic wholesale agreements have already been signed on KONNECT VHTS, with 2 of them, Orange and TIM, launching the service on EUTELSAT KONNECT. In total, these commitments represent a total contract value of over EUR 450 million with an average duration of 12 years and equates to over 20% of the capacity on KONNECT VHTS. And discussions concerning other such contracts are progressing well. The second leg of our approach is retail, which is why we decided to buy BigBlu Broadband, which is being smoothly integrated. With the KONNECT satellite now in service, we have launched our initial retail offers across Europe, starting with the U.K., Germany, Spain, Ireland and Portugal. They offer a compelling value proposition with speeds between 30 megs and 100 megs for fees ranging between EUR 30 per month and EUR 70 per month. Importantly, these prices include terminal lease and come with an affordable upfront fee for the installation. The initial results of these offers, which were launched mid-November on limited initial capacity, are fully in line with expectations. Net additions are set to ramp up with the satellite at full speed from end March and expansion of these offers to additional countries in the coming months. So turning to the outlook for the current year. As a reminder, as we said in July 2020, revenues for the current year are predicted to be front-end loaded, notably in Broadcast where the second half is expected to be lower than the first and in Broadband with the deconsolidation of EBI in the second half. Nevertheless, on the back of our solid first half performance, we are in a position to absorb the negative perimeter effect of the broadband M&A operations and to raise the low end of our full year objective of revenues of the 5 operating verticals by EUR 10 million at between EUR 1,190 million to EUR 1,220 million. As well, we remain well on track on our cash flow generation trajectory as highlighted by the robust first half performance. It should be noted, however, that the discretionary free cash flow objective for fiscal year '21-'22 based on the constant perimeter assumption is mechanically adjusted by the EUR 30 million net impact of perimeter charges. It now stands at between EUR 390 million and EUR 420 million. All the other elements of the financial outlook, including leverage targets and the dividend policy, are unaffected by these perimeter effects and are fully reconfirmed. Looking further ahead, the 3 next years are set to mark the end of the negative top line trend with the arrival and ramp-up of targeted incremental capacity EUTELSAT 7C entered into service in January last year, addressing Sub-Saharan Africa, one of the remaining pockets of growth in Broadcast. The deal with Canal+ in Ethiopia will contribute to filling this capacity. EUTELSAT KONNECT, also in service already, is already significantly derisked with wholesale commitments and a promising start in retail. EUTELSAT QUANTUM is now due to enter service in Q3 '21. Positioned at 48° East and with its unrivaled flexibility and joint distribution agreement with Intelsat, it will represent a compelling offer for government customers. KONNECT VHTS, which has also been slightly delayed in the COVID context from the very end of calendar year 2021 to the first half of calendar 2022, will start operations in early 2023. With 500 gigabit per second of VHTS capacity and firm precommitments from Orange, Thales and Telecom Italia, it will represent a major milestone in our connectivity strategy in Europe. And finally, EUTELSAT 10B, due to start operations in the first half of 2023, will bring 35 gigabits per second of incremental HTS capacity for mobile connectivity over the EMEA, of which 1/3 already firmly precommitted. On that note, I thank you for your attention. And Michel Azibert, Sandrine Téran and myself are ready for your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) I will take our first question from Aleksander Peterc from Societe General. -------------------------------------------------------------------------------- Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [2] -------------------------------------------------------------------------------- So first of all, on your guidance midpoint, which is rising slightly, is this essentially due to the second quarter revenue beat in your 5 operating verticals? Or do you see more positive trends in the remainder of the year? And if so, in which business? And then if I may, just a second question, should we lower our growth expectation going forward based on later launches that you announced today? Or are they broadly immaterial in your view? -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [3] -------------------------------------------------------------------------------- Well, on the first question on the reason why we are comfortable enough to raise the low end of our guidance, of course, it's due to the very good performance we had in the first quarter, which exceeded slightly our expectations. And second, we are also -- at this stage of the year, we have a very relatively strong visibility in the development of our operations and our revenues in the fiscal year to be in a position to slightly raise that midpoint -- the low end of our guidance and our revenue expectations. Meaning that the answer is that, first, due to the very good start into the fiscal year; and second, the relatively good visibility we have for the second part of our fiscal year. On the outlook for the following years, I think that's the topic of your second questions. The next few years will be far better than the previous ones and should mark a turnaround in the profile of revenues of our company in the next 3 years on the back of the expansion of the company, the accelerated expansion in the Connectivity segment. It's not the moment when we should give the outlook for next fiscal year, for fiscal year '22. It's a bit too early. But we can already say that we estimate that next fiscal year will be better, substantially better than this fiscal year. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- We'll take our next question from Michael Bishop from Goldman Sachs. -------------------------------------------------------------------------------- Michael Bishop, Goldman Sachs Group, Inc., Research Division - Equity Analyst [5] -------------------------------------------------------------------------------- Yes. Just to pick up on a couple of things. So firstly, on the video headwinds in the second half. I think it's clear you've said second half will be slightly worse than the first half, but I was just wondering if you could sort of refine that message for us slightly. I appreciate it's a tough year-on-year comp, so I was thinking more refining it sequentially. And then the second question is on Fixed Broadband. You've helpfully highlighted that the aggregation of the new contracts on KONNECT VHTS are over 20% and you've got some -- specifically selling the whole capacity in Italy, France, et cetera. How many more of those like big contracts do you think are out there? Because, obviously, we were in a slight sort of land grab situation in Fixed Broadband, so I'd be really interested in any color. And then just a very quick third question. You touched upon the high terminal costs of LEO relative to GEO. Where do you think we are in terms of the cost of GEO terminals of fixed broadband versus the cost of LEO terminals? Because it feels like even though Starlink charges $400, $500 for the terminal, I think they've acknowledged that the actual cost is higher. So I'd be really interested if you have any color as to how much higher. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [6] -------------------------------------------------------------------------------- Well, thank you, Michael, for this short list of question. Well, on the -- on your first question, on the profile of the second half of our fiscal year in comparison to our first half, as you said or introduced, the second half will have -- well, the second half revenues will be lower than the first half. And the trend in the second half will be worse than in the first half. Why so? Why would the second half will be lower than the first half? Mostly for contractual reasons, which can be summarized into 3 or 4 main elements. The first element is a perimeter effect. We are going to divest in the second half some broadband activities, notably EBI with KA-SAT, which has a negative perimeter effect, mid- to high single-digit million of revenues. Of the same kind of magnitude, there are some phasing elements which are nonrecurring, which will affect -- which will create a gap between the second half and the first half. Third element of the same kind of magnitude, that's a slowdown in the pace of the new business in the Broadcast segment where the new business this year, because of the effect of the COVID situation, will not compensate for the natural churn that we have every year in the Broadcast segment. And fourth element, because there are 4 elements, actually, I must say that we probably are a bit prudent on our outlook given the particular situation we are all experiencing, even though we are comforted on the resilience of our activities. That's for the first -- I think it gives an answer to your first question. Second question, on the large wholesale contracts in the Broadband segment, you mentioned rightfully that we signed 2 important contracts with telcos, one with Orange in France, whereby we sell all the production capacity of our broadband satellites, KONNECT and KONNECT VHTS, to Orange for the -- for France, whereby Orange is going to sell our capacity to the subscribers in France under their brand name. And we have signed the same kind of contract of the same kind of size in Italy. Well, Orange contract is worth around EUR 200 million, and Telecom Italia contract is worth around EUR 150 million. We have other discussions of that kind running at the moment with other incumbent telcos in other large-sized European countries, well-advanced discussions, but nothing I can comment on at the time being. Our focus, the focus of our distribution strategy is clearly wholesale. It's a practice in all of our verticals because we think it's the best way for us to maximize the rate of returns of our investments and to maximize the EBITDA generated by our business. And we strive to maximize that and to ink large contract with as many blue-chip distributors as we can in Europe or in Africa to resell our broadband capacity. We have expanded also in retail because we want to make sure we have a way to complement the fill rate of our satellites in countries where we wouldn't be in a position to sell 100% of our capacity to blue-chip customers. That's the kind of approach we are deploying. Last question, on LEO terminal costs. According to our internal views and to our engineers, some progress are being made on the front of LEO terminal cost currently. We envisage that those terminals will cost probably in between $500 per unit and $1,000 per unit in the midterm. Well, the price per unit is a bit higher at the time being, but it will decrease with the volumes of production in the next few years to land somewhere in that range that I've just quoted. Now what we see is that, first of all, when we calculate the production capacity of LEO constellations, even the largest ones, the production capacity is too small to absorb or to meet the latent consumer demand in geographies like Europe and, of course, in Africa, which means that there is largely room enough for LEO players and GEO players in those regions. Most probably, LEO will have to target the high-end markets because of the cost of the terminals. They have to practice prices -- monthly prices, monthly fees, which are higher. And they will target the high end of the market. And GEO players like us will address with more affordable solutions the rural markets. That's the way we see it. And we don't envisage -- given the size of the market, we don't envisage any head-to-head frontal competition between LEO and GEO. -------------------------------------------------------------------------------- Michael Bishop, Goldman Sachs Group, Inc., Research Division - Equity Analyst [7] -------------------------------------------------------------------------------- Sorry, just a quick one. Where do you think you are on the GEO terminals? Are they sort of like $200 or so? -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [8] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Nick Dempsey from Barclays. -------------------------------------------------------------------------------- Nicholas Michael Edward Dempsey, Barclays Bank PLC, Research Division - Research Analyst [10] -------------------------------------------------------------------------------- Just continuing on the theme of LEO. You've been pretty clear today and previously about the competitive situation in satellite broadband. I just wonder if you could talk about whether there could be any competitive threats in government data, in-flight connectivity. Where else in your business -- as we see these LEO constellations being built, where else could there be risks that we should take seriously competitively? Second question, can you perhaps talk about the momentum you've been seeing in selling capacity on KONNECT from a retail point of view? Has work from home, potentially work from second home situation at the moment created more demand than you would have expected? And the third question, yes, you've explained the free-to-air impact on your Broadband video revenues in second half '21. I mean, I guess as the world opens up, could we see that balancing act between churn and new channels swing back in your favor and be a bit of a tailwind maybe in second half '22? -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [11] -------------------------------------------------------------------------------- Okay. On the LEO competition, on the competitive threat it could create in the other segments of our business, what we said is that in the Broadband segment, we think that we will coexist well, and there is largely room enough for the -- for LEO constellations and for geostationary players. In the other segments, of course, Broadcast is not affected. In the Government segments, we think that -- and what we see in our discussions with the different governments with whom we talk, we see that the demand for geostationary capacity and notably for wide beam will remain very strong because it's needed in some applications where our customers don't want to be detected and require wide beams to be able to navigate discretely in -- well, within a very, very large geographical surface, a very large area, and they require wide beam for those reasons. And we see that untouched. And as you can see in the development of our government business, which -- and the renewal of our contracts, which were quite good in the recent renewal rounds, contracts which are usually long-term contracts, 5 years, means that our customers believe that they will continue to need our geostationary capacity in the medium term. In the other segments, we think that the maritime segment will be relatively unaffected. Well, in some cases, probably the aviation segment. In the aviation segment, there will be sort of head-to-head competition between LEO and GEO. Good for us. We are relatively exposed to that segment, and it's not at the center at all of our strategy. And what I must say is that the reason why different from some of our peers, we have chosen to focus mostly on the Fixed Broadband segments and to invest in majority in that segment. That's because we thought that those segments will be relatively immunized from the competition of LEO constellation. In that segment, LATAM market is very big. People will require in rural areas low-cost solutions. And that's why we have chosen -- and that end demand will be there for the very, very long time because those regions will not be covered efficiently by terrestrial solutions before a very, very, very long time. And that's why we are investing in those segments and not in other segments where we think that competition with other solutions will be higher, including competition from LEO. What I must say also, and that's a point which is very encouraging, we have been able to sign with quite sophisticated customer like Orange and Telecom Italia very long-term deals. We have quoted the average duration of the deals we signed with those customers, which are of 12 years on average. And those customers, they have accepted to sign deals with us with geostationary solutions because themselves, with their knowledge which is quite deep in telecommunication solutions, they believe that geostationary solutions are unrivaled for the next decade actually. In the free-to-air segment, as I said, we have a contractual sort of slight erosion in our broadcast profile second half because the new -- the pace of new business is slowed down by the COVID context. What we think is that this will come back to normal as of next fiscal year when the COVID crisis is behind us and the pace of new business in the free-to-air segment, notably all the foreign channels joining HOTBIRD, will come back to normal after that sort of recess period. And we estimate that our broadcast profile will be back to normal, being slightly declining as of next fiscal year. -------------------------------------------------------------------------------- Nicholas Michael Edward Dempsey, Barclays Bank PLC, Research Division - Research Analyst [12] -------------------------------------------------------------------------------- Sorry, Rodolphe. I asked a question as well about the momentum of selling capacity on KONNECT from a retail point of view. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [13] -------------------------------------------------------------------------------- Sorry, sorry for that. Well, KONNECT is doing very well, fully in line with our objectives and trajectory. Well, of course, there is the positive push triggered by the COVID situation where people need to work from home and notably from their secondary home, and we see that clearly. And that's one of the reasons why our subscriber base is growing in Europe. But also, what we realize that the solutions we bring to the retail market with our KONNECT satellite are good and are perceived as very competitive by people living in rural areas. What we estimate is that -- when we do our market surveys is that Europe varies from one country to another. But on average, 60% of people living in rural areas are interested by solutions of the kind -- of the ones we are bringing to the market currently with our KONNECT satellite. Meaning they're quite satisfied, quite encouraged by the early steps in the retail development of our KONNECT strategy. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- And we'll take our next question from Patrick Wellington from Morgan Stanley. -------------------------------------------------------------------------------- Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [15] -------------------------------------------------------------------------------- A couple of questions. Rodolphe, I think in the past, you've said that FY '23 will be the year when EUTELSAT returns to revenue growth. Do you want to reiterate that statement today and put it in context of the slight delays to things like KONNECT VHTS? And can you confirm when KONNECT VHTS will come into service? And secondly, we talked a bit about -- or the call talked about working capital having improved. Do you actually have the working capital number for the first half? And then the third one is just on your overdue receivables. Could we get an update on where those stand? So I -- yes, those are my 3 questions. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [16] -------------------------------------------------------------------------------- Thank you, Patrick. Well, if I may, I will pass the 2 last questions to Sandrine Téran, our CFO, and I will take just the first one. Fiscal year '23, return to significant growth, maintained, confirmed. It's true that the delay -- the slight delay, should I say, in the VHTS, the KONNECT VHTS program, is a headwind. But it -- but we still are of the view that we will deliver growth, substantial growth in '23, which will mark the first year of our return to substantial growth on the back of the entry to service of KONNECT VHTS at the very beginning of the civil year '22-'23, meaning in the middle of our fiscal year '23. Plus the ramp-up of the QUANTUM satellite, we think that with these 2 capacity online in fiscal year '23, we are far -- well, it will really enable us to accelerate in our connectivity strategy and to more than compensate the slight erosion of our core business that we have seen in the past -- the 5 years, that we are quite confident despite the slight tailwinds in the availability of the satellite programs that we are -- that we will be with a very good revenue trajectory in fiscal year '23. Now I'm turning to Sandrine Téran. -------------------------------------------------------------------------------- Sandrine Téran, Eutelsat Communications S.A. - CFO [17] -------------------------------------------------------------------------------- Yes. On the first question related to the working capital requirements, so at the end of H1, we have a year-on-year improvement of EUR 68 million, so a significant improvement in the trend. It's coming mostly from the receivable, and I will come back in more detail for this. For your second question, so significant improvement. It's coming from cash collection. We have caught up over the semester of some of the unpaid receivable at the end of June. And also, we benefit from a favorable comparison basis because, as I mentioned in the presentation, the end of June was the most acute phase of the COVID crisis. So overall impact, improvement of EUR 68 million for the total working capital requirement. For the receivables, when you look at the balance sheet, we have a total receivables net of depreciation, which is reducing by EUR 58 million. So here also, for the same reason, a significant decrease in the total receivable carried on the balance sheet. -------------------------------------------------------------------------------- Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [18] -------------------------------------------------------------------------------- So that takes the number down to about just below EUR 200 million. -------------------------------------------------------------------------------- Sandrine Téran, Eutelsat Communications S.A. - CFO [19] -------------------------------------------------------------------------------- The total is EUR 277 million carried on the balance sheet before depreciation. -------------------------------------------------------------------------------- Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [20] -------------------------------------------------------------------------------- Was that number not EUR 251 million for full year '20? -------------------------------------------------------------------------------- Sandrine Téran, Eutelsat Communications S.A. - CFO [21] -------------------------------------------------------------------------------- Sorry, the figure you are referring to is not the total, it's the receivable above 3 months. So I answered on the total receivable, Patrick. For the above 3 months maturity, which is the figure you have in mind, we now have EUR 210 million versus EUR 251 million, the figure you had in mind. -------------------------------------------------------------------------------- Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [22] -------------------------------------------------------------------------------- That is great. And Rodolphe, just on Slide 32, just to get this KONNECT VHTS right. Slide 32, which shows where KONNECT VHTS comes in, appears to show it coming in, in sort of Q1, if one looks at the arrow on that chart. I suppose it's -- those are calendar years. So if we can just be clear, in months, when would you expect -- which month would you expect to KONNECT VHTS to come into service? -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [23] -------------------------------------------------------------------------------- I think we don't give this kind of precision at this stage of the development of the satellite program itself. But what I said is that we expect the entry into commercial service of the KONNECT VHTS at the very beginning of 2023. -------------------------------------------------------------------------------- Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [24] -------------------------------------------------------------------------------- Calendar '23? -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [25] -------------------------------------------------------------------------------- I cannot be more precise at this stage, but at the very beginning of 2023, meaning just in the middle of our fiscal year '23. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Our next question comes from Roshan Ranjit from Deutsche Bank. -------------------------------------------------------------------------------- Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [27] -------------------------------------------------------------------------------- Great. Two for me, please, and maybe just to follow up on the previous ones. The slide on the wholesale contracts are very, very useful. Is it possible to get a sense of the capacity split versus -- for, I guess, Orange and TIM on the KONNECT versus the capacity due on the KONNECT VHTS satellite? And I assume that there is scope in the event of further delays to maybe bring more capacity onto the legacy satellites of KONNECT if VHTS is delayed further, that is. And secondly, could you just remind us when the Nilesat contract is up for renewal? You talked about the scope to maximize yield in the kind of legacy market. If that hasn't -- if those discussions haven't started yet, is it possible to just get a sense of how you approach those discussions in a different way to describe Italia 1 given Nilesat launching lower capacity next year? I'd just be interested to get your views there. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [28] -------------------------------------------------------------------------------- Well, thank you, Roshan, for those questions. On the wholesale contracts we signed with Orange, I'm not sure we can, well,really disclose in detail how much capacity we sold to Orange and to Telecom Italia. What we said is that in total, the percentage of the production capacity of the KONNECT VHTS satellite which is precommitted by all the large wholesale contracts we signed, which are Orange, Telecom Italia and Thales for the government services in Europe, well, they represent around 20% of the production capacity of the satellite, meaning that 80% are unsold yet. These 3 contracts represent in total an aggregate contract value of around EUR 450 million. And it's to compare with those 20% of production capacity that they will consume. And it's to be compared also with the total cost of the program, which is in the order of EUR 500 million in CapEx, which means that we are in a good position to create, well, truly significant value out of this investment in the KONNECT VHTS satellite. Well -- and what you should have in mind that, well, the capacity taken by Orange and Telecom Italia, they are commensurate with the price each of them pay. And Orange, they pay -- well, the contract value is in the order of EUR 200 million, as I said before, and Telecom Italia, it's EUR 150 million. -------------------------------------------------------------------------------- Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Sorry, just to follow up on that. Sorry. So the over 20% total capacity is on the VHTS KONNECT, ignoring EUTELSAT KONNECT. Is that right? -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [30] -------------------------------------------------------------------------------- Yes. Well, that's the same also proportion for -- well, a bit more for EUTELSAT KONNECT. But EUTELSAT KONNECT, it's a smaller-sized satellite. And the part of the production capacity of KONNECT, which is targeted to Europe, is temporary. Meaning that we use KONNECT to accelerate the ramp-up, the development of our KONNECT VHTS business in Europe. When KONNECT VHTS is launched, our plan is to redirect 100% of the production capacity of KONNECT to Africa. Second question you had on Nilesat, well, I'm not going to comment more on that question. Well, Nilesat contract expiry is scheduled on -- at the beginning of next fiscal year. It's not this fiscal year, it's the year after. Well, as you know, we decided to acquire back a few years ago our main distributor in the MENA region called Noorsat. And we think it was really for the good of the company. Integrating the distribution of the broadcast capacity in MENA has enabled us to truly leverage our very strong position in the region with our 7 and 8 West orbital positions. This position is very strong since we estimate that 90%, 9-0 percent, of the Arabic-speaking population in the world watch free-to-air television on this orbital slot, which gives us a very unique situation to deploy interesting or favorable marketing strategies in the region, notably to exercise a relatively good pricing power. And that's what we are doing well, and that's the reason why our revenues in the regions are growing so fast. Now, well, Nilesat happens to be the distributor of 7/8 West capacity in some Arabic-speaking countries. And we are envisaging to take back that capacity in our hands to distribute it ourselves. Of course, we do compare 2 options, renew with Nilesat in conditions that would be good enough to convince us not to take back and distribute by ourselves and by our very competent sales force the capacity they have in the hands in the region. And that's where we are at the moment. Situation undecided yet, but what I can tell you is that anyway, we think that the outturn will be relatively good for our company. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- And our next question comes from Sarah Simon from Berenberg. -------------------------------------------------------------------------------- Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [32] -------------------------------------------------------------------------------- I just had one question, which was on the Mobility revenues. You talked about renegotiating your contracts, presumably on the aero side because you talked about maritime separately. Is that -- was that a voluntary renegotiation? Because our understanding is that a lot of these contracts are actually fixed in nature. And can you talk about whether you've changed payment terms where you haven't done renegotiation in terms of volume or pricing? -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [33] -------------------------------------------------------------------------------- Well, you're right in saying that, well, the mention that we made of the renegotiations of some contracts in the Mobility segment concerns only the contracts we have in the aviation segment. In maritime, we are doing fine. We are doing well. We are growing, and we are growing because we gained significant market share in that segment, notably with key customers like Marlink or Telenor Maritime. In the aviation segment, the situation is more difficult because of the current context affecting the airlines industry. And of course, it does affect our own business. But for sure -- well, most of our contracts are on fixed terms, as you said, and only a minor portion of our contracts in that segment are on variable terms. Still, we had to concede -- it's not really voluntary, but we're under the pressure of some customers, meaning that these service providers that we -- that our customers in that segment are under the pressure of some service providers, which are particularly affected by the COVID situation, we had to exceed -- to concede some reduction of price. And that's the reason why we are reporting figures which are substantially negative in the Mobile Connectivity segment. That's because we had -- despite the fixed term of our contracts, we had -- given the circumstance, we thought we had to accept, to concede price reductions to maintain the relationship and to maintain on the long term the contractual terms with our customers. -------------------------------------------------------------------------------- Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [34] -------------------------------------------------------------------------------- That's really helpful. Can I just ask one follow-up, which is, what is the split within your Mobility segment between maritime and aviation, broadly? -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [35] -------------------------------------------------------------------------------- Well, mobility for us is relatively small. It represents around 5% of our revenues. And within that segment, which is small, aviation represents 60% and maritime 40%. I think that we are relatively little affected by what's happening due to the COVID crisis. We don't like it, of course, because the Mobility segment was growing nicely for us before this -- the outbreak of the crisis, but of course, we are very, very little affected. All the more than we are doing nicely in maritime, which compensates slightly for the air drop in the pocket in the aviation segment, if I may say so. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Giles Thorne from Jefferies. -------------------------------------------------------------------------------- Giles Thorne, Jefferies LLC, Research Division - Senior Research Analyst and Technology Research Analyst [37] -------------------------------------------------------------------------------- My first question was on the Liquid Telecom renewal. The biggest -- or one of the biggest pain points in the sector has been Ku-band wide beam oversupply in Africa. And here, we have a renewal with obviously an existing customer to renewal. So I wanted to get some color on what that renewal look like. And what does that tell us about how Ku-band, Y-beam business will look from here? The second question is on Netflix and the linearization of their content. And Rodolphe, you obviously sit in a privileged position sitting on their Board. So what is Netflix's work in linearizing their content? Tell us about the future of TV? Pretty broad questions, but it'd be interesting to hear your comments and read across to the broadcasters that you work with. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [38] -------------------------------------------------------------------------------- Well, on the first question, if I may, I will turn to Michel Azibert. -------------------------------------------------------------------------------- Michel Azibert, Eutelsat Communications S.A. - Deputy CEO [39] -------------------------------------------------------------------------------- Yes. So the situation on Liquid is that we signed a contract which includes renewal and expansion of capacity. It's with the new satellite at 7° East. Yes, it's wide beam, but the coverage of 7 East is excellent for Africa, in particular, for Eastern Africa where Liquid is present. And so we see, in fact, many instances in Africa, also for RDC where we have very good coverage with E3B, so there are really situations where you can manage something better with a traditional wide beam than, for instance, with an Epic. It just depends on the configuration of the service when it's a VSAT service in particular. And by the way, as you've seen, we have increased the volumes in fixed data overall, I would say, especially in MENA with very, very good results with -- like one of the main telcos in the region, also in Morocco and in South America, also in Mexico and Chile. So there are some good news on volumes we obtained with traditional, let's say, capabilities which is good and shows a good momentum also on backhauling. So that's it with Liquid. And the relationship with this group is excellent. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [40] -------------------------------------------------------------------------------- On your second question, Giles, which is a relatively broad question on the future of linear television. Well, starting with your comments on Netflix. Of course, well, it's not in my purview to comment on behalf of Netflix on their strategy in linear television. What I can say on a broader point of view is that, of course, OTT is progressing very well and impressively at a double-digit rate everywhere in the world, mostly in the most developed markets but also in emerging markets. What we see very well, looking at the ratings of television, penetration of linear television and penetration of satellite television, is that OTT comes mostly on top of television and doesn't cannibalize the consumption of linear television, which remains the entertainment of choice for homes everywhere in the world, especially in the emerging markets. What we also see increasingly from many OTT players is that they see some value in the linear exposition -- exposure of that content, which is a good way for them to promote the content and to maximize the discovery by consumers of the content. And we see that in many different cases, from many different OTT players in different domains, like series, like documentaries, like e-sports, and we see that as a key element which evidences the value of linear television, which is based on a very deep-rooted consumption habits from people in the world. People, they switch on television to entertain themselves, and what's better than linear television to deliver on that expectation, on the demand. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- And there are no further questions in the queue. I would like to hand the call back over to Rodolphe Belmer for any additional or closing remarks. -------------------------------------------------------------------------------- Rodolphe Belmer, Eutelsat Communications S.A. - CEO & Director [42] -------------------------------------------------------------------------------- Well, thank you for your attendance today. It's a very, very solid start into our fiscal year, which enables us to slightly raise our revenue objective for this fiscal year and which strengthen our confidence in the resilience of our operating model and of our business. Thank you for your attendance, and more on this in a few months from now. Goodbye. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.