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Edited Transcript of EXCL.JK earnings conference call or presentation 1-Nov-19 6:30am GMT

Q3 2019 XL Axiata Tbk PT Earnings Call

Jakarta Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of XL Axiata Tbk PT earnings conference call or presentation Friday, November 1, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Allan Bonke

PT XL Axiata Tbk - Director

* Dian Siswarini

PT XL Axiata Tbk - President Director & CEO

* Indar Singh Dhaliwal

PT XL Axiata Tbk - IR Executive

* Mohamed Adlan bin Ahmad Tajudin

PT XL Axiata Tbk - CFO & Director

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Conference Call Participants

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* Arthur Pineda

Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research

* Choong Chen Foong

CIMB Research - Analyst

* Colin McCallum

Crédit Suisse AG, Research Division - MD

* Kresna P. Hutabarat

PT Mandiri Sekuritas, Research Division - Analyst

* Niko Margaronis

PT. Danareksa Sekuritas, Research Division - Analyst

* Piyush Choudhary

HSBC, Research Division - Telecoms Analyst, South East Asia

* Ranjan Sharma

JP Morgan Chase & Co, Research Division - Analyst

* Sachin Mittal

DBS Bank Ltd., Research Division - VP

* Siward Ludin

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to XL Axiata's earnings conference call for the first 9 months of the 2019 financial year. My name is Rishi, and I'll be your coordinator today. (Operator Instructions) And as a reminder, this conference is being recorded for replay purposes.

Now we would like to turn the conference over to our host, Mr. Indar. Please proceed.

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Indar Singh Dhaliwal, PT XL Axiata Tbk - IR Executive [2]

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Thank you, Rishi. Good afternoon, everyone, and welcome to the call. On behalf of the XL management team, I would like to thank all of you for taking the time to join us today. With us on the call today, we have Ibu Dian, our Chief Executive Officer; Pak Adlan, our Chief Financial Officer; and Pak Allan, our Chief Commercial Officer.

Now Ibu Dian will share the highlights for the first 9 months of 2019, which will then be followed by the Q&A session. I will now hand the call over to Ibu Dian.

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Dian Siswarini, PT XL Axiata Tbk - President Director & CEO [3]

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Thank you, Indar, and good afternoon, everyone. We are pleased with our continued strong performance this year despite the challenges in the market since July with increased competition. This is now the fifth consecutive quarter we have recorded a sequential increase in service revenue, and we are seeing strong growth across all financial metrics as well as consistent profitability. The continued positive performance despite increased competition is a direct result of the consistent execution and implementation of our strategy, which aims to position us as the mobile data provider of choice in Indonesia.

Our strategy continues to be focused on our attractive dual-brand data-led product proposition, enhanced with analytics-driven customer value management initiatives, continued network investment in building out our 4G network and focus on growing our Axiata market share.

In the first 9 months of 2019, our revenue increased 11% year-on-year, mainly due to service revenue, which rose 16% year-on-year. And driving this is data revenue, which increased 30% year-on-year. Data growth continues to be driven by increased customer usage of data through our product and analytics-driven strategy. As a result, data revenue in third quarter now accounts for 90% of service revenue and continues to be higher than our peers, enabling us to weather the effects of declining legacy service better.

Profitability growth has also been strong, with EBITDA rising faster than revenue at 19% year-on-year due to our focus on cost efficiencies, with margins increasing 3% year-on-year to 39% in the first 9 months of 2019. This strong growth in EBITDA is driving our return to profit this year with 9 months' normalizing profit at IDR 505 billion.

Indonesia's data-savvy customers have continued to respond well to our improved network as we are increasingly being recognized as the brand of choice for first smartphone users. As [of] the third quarter of 2019, our smartphone subscribers stand at 47.7 million, a 14% growth compared to same period last year. This makes up 86% of our subscriber base, which is significantly higher than the industry average. And we also continue to see a fast rate of migration of subs to 4G, where 4G customers make up 70% of our total subscriber base.

Our customer numbers have declined this quarter to 55.5 million compared to the previous quarter, although on a year-on-year basis, it is still up. This is mainly due to more intense competition in the market, which is not affecting our longer-tenured customers. However, there is an impact to the shorter-tenured part of the base. Given that our revenue as well as our ARPU increased Q-on-Q, it is clear that the subs we lost are in the lower value segment.

Our customer value management initiatives are the key parts of our efforts in driving higher ARPU and our success in upselling our customers. These are based on analytics through our omnichannel platforms. We are doing pilots on cross-selling more telco products and offers through our customer interaction. In addition to that, we are also doing real-time contextual interception of customer transaction to upsell our products. We intend to do more in this space with tailored and dynamic pricing as well as expansion of our customer retention and upsell activities.

In parallel, we continue to ensure high-quality data experience to our customers through the ongoing rollout and upgrade of our network. Thus, our total BTS count is now above 129,000 BTS, with our 4G LTE service covering 410 cities across Indonesia. We also continue to invest in fiberizing our network as this will help in handling the increase in data traffic we are seeing. At the same time, we continue to increase the number of our tower sites that are fiberized.

Our network investment continues not only within Java but with a focus also on ex Java, which have translated to better coverage and network performance in these areas. And we are increasingly known as nationwide brand. This has also translated to a stronger revenue performance outside Java, which continues to grow at an exponentially faster rate than Java and increase overall contribution to revenue. We intend to continue to execute on our strategy to finish the year on a strong note, in line with our objective to become the preferred mobile Internet operator in Indonesia. However, we continue to monitor competition in the market and hope it doesn't further intensify.

Thus, given our strong performance in the first 9 months of 2019, our revenue guidance is raised, where we expect revenue to now grow at better than market. Our EBITDA margin guidance is also raised, where we expect EBITDA for 2019 at closer to 40%. We maintain our CapEx spend guidance at around IDR 7.5 trillion, which will remain focused on data network investment in 4G and continuous network improvements and modernization in and outside Java.

Thank you, and let us now proceed to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question we have is from the line of Piyush Choudhary.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [2]

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Congratulations for a great set of numbers. 2 questions. Firstly, if you could elaborate a little bit more on the competitive environment and what's the outlook for ARPU improvement going forward. Secondly, any plans to monetize towers? And if yes, what are the time line from which we are working?

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Allan Bonke, PT XL Axiata Tbk - Director [3]

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Yes. Thank you, Piyush, for the question. Let me first elaborate a little bit regarding the competition scenario in the Q3. So what we have seen is that Smartfren continue with the unlimited in the market, and they gained some acquisition in the market, meaning that they took a fair share of the acquisition overall. We also saw that starting in Q2, that Indosat started following Smartfren with the unlimited offering. And so far, we know that more than half of the acquisition for Indosat was also coming on the unlimited plan. Surprisingly, we also saw in Q3 that Telkomsel introduced (inaudible) products, meaning its low validity products, so low price. So they also gained some momentum in acquisition. And that's the reason, as Ibu Dian said in the introduction, that we lost some customers, only low-value customers, due to this intense competition when it comes to the pricing.

Very difficult to predict what's happening right now. But what we have seen in the market, that Indosat removed their unlimited product in the market in Q3 -- sorry, in Q4 here. And we know that there are still some stock for unlimited in the market so they'll still be gaining some acquisition on unlimited. But otherwise, we see some -- maybe some cooldown at the moment, especially from Indosat when it comes to the pricing. But very, very difficult at the moment to predict what's happening in the market.

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [4]

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Yes. Piyush, on your second question on towers, I think we have said this before as well, right? We've got close to around 4,000-plus towers remaining. And as we move into a more distributed architecture, I think a lot of these towers, from strategic it becomes nonstrategic, right? And hence, that make it possible to be considered for sale, right? So is there a plan? I think yes, but when -- at this point in time, I think when we are ready, we'll probably come back and make the necessary announcement to the market.

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Operator [5]

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We have the next question from the line of Ranjan Sharma from JPMorgan.

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [6]

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Two questions from my side. Firstly, you've attributed the increased competitive environment to Smartfren and Indosat. But if I look at the price plans, especially for unlimited plans, Smartfren is offering unlimited data -- unlimited plan at IDR 70,000, which seems to get a premium ARPU -- a premium to your ARPUs. So it doesn't seem to be that competitive. Is there something else that you're seeing locally which is leading to a disruption in the market? Indosat plans also seem to be at the higher end at IDR 60,000 with a free YouTube in the unlimited plan.

The second question is on the loss in customers. Are you seeing this in Java? Or are you seeing this outside of Java as well?

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Allan Bonke, PT XL Axiata Tbk - Director [7]

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Yes. Thanks, Ranjan, for the question. And this could be a long answer. I'll try to make it short. Because you're actually spot on when you -- your question asked about this is localized. And I would say it's very, very localized in Indonesia at the moment. It's actually into each city, into each small cluster, you will see different prices and different products. So what you see at the web page or the home page at the moment doesn't match what you actually see in each of the clusters.

And you're also right, saying that it's high-priced. It's not IDR 70,000. It's IDR 65,000 for the unlimited products in the market. And we see that it has affected on acquisition on the urban white collars if we look into that segment. So it is at a higher scale. But Smartfren actually have a full range of products coming from the very low (inaudible), very low validity going up to unlimited. So it's not only unlimited that takes the acquisition. But again, it depends on which city, which cluster you're going to, and you have different prices. So we are monitoring each of the clusters at the moment, and of course, we're doing what is needed to be competitive in these markets.

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [8]

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Okay. On your second question, I think -- the loss of customers, I think if you see that we are still going in areas outside Java, right? And you know that the intense competition is primarily coming from the areas in Java. So we could say that mainly coming from -- loss of customers mainly coming from Java.

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Operator [9]

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We have the next question from the line of Arthur Pineda from Citigroup.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [10]

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Two questions first. Firstly, on the non-Java versus Java growth, are you able to provide color on how those 2 regions are trending? What's the percentage coming from ex Java? Second question I had is with regard to your other telco revenues. It seems to be declining. I recall this is linked to the towers. What's driving that down?

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [11]

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Okay. Arthur, we will not be specific about it. I think still, suffice to say that where we are today, both Java and ex Java is actually growing, right? However, ex Java is growing, I would say, double-digit, right, very healthy from the trending that we are probably seeing, right? So -- and today, ex Java actually make up actually more than 20% of the total revenue today, right? So definitely, ex Java shares is actually growing quite significant and ahead of others, right? So -- and we really hope that this trend can continue as we continue to invest more outside Java.

Your second question on other revenues, I think primarily due to the decline in the tower revenue. I think you probably would know as well, right? The industry landscape has also changed, right? The average tower revenue today has come down quite significantly from an average, I would say, IDR 20 million, IDR 25 million down to probably about IDR 10 million to IDR 13 million, right? And we also face similar situation. There have been renewal of tower leases as well over this year, and hence, I think that has probably contributed to the decline in the other telecommunication services, mainly from the decline in the tower lease revenue that we are probably seeing. And that's in line with the market.

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Operator [12]

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And the next question we have is from the line of Sachin Mittal from DBS.

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [13]

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Three questions. Last year, I think you talked about you had about 15% market share outside Java, and you want to double it over the next few years. So first question is, are you close to what you wanted to achieve outside Java?

And number two is if you could disclose anything about, in terms of revenue contribution, is ex Java coming close to 30%, 40% of your revenues? And what percentage is coming from ex Java versus Java?

And lastly, after a long time, we saw your revenue for MB actually trend up 2% quarter-on-quarter. So -- and at the same time, we saw some subscriber loss. So has it got to do anything with the -- that you kind of priced -- you repriced your offering, and hence, it became less competitive in Java? And is this something you can correct in the near term? Could you comment on that?

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [14]

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Okay. So yes, on your first question, right, ex Java, yes, I think we have said in the past that there is aspiration to double up our revenue share outside of Java, right? So -- and I think if we look at the trending today, we have definitely seen that we've taken market share outside of Java. Whether we've really achieved our objective of doubling up, probably not. But I think that's probably our goal in the mid- to long term, right? So -- but at least we are probably on the right track to probably achieve that target, right? So that's one, right?

Your second question is with regards to the revenue outside Java. I think I've probably mentioned earlier that today, I think revenue outside Java is probably contributing more than 20% of the total revenue, right? To be exact, we are probably closer to 23%, right? So -- and it has been growing. If -- for example, if we are able to keep up with the pace that we are doing today, you would expect that the distribution between ex Java and Java would probably get closer. But I think it's probably still going to be -- majority will still going to be coming from Java. So I think it's something that we will continue to track as we go along, right?

So -- and the third question, Allan's going to answer.

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Allan Bonke, PT XL Axiata Tbk - Director [15]

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Yes. So in regards to your third questions regarding the customer loss and the package that customers are buying, I think we have many, many nights talking about tactical moves, what to do and not to do in these markets in Q3. And our final decision was not to follow at the moment on the unlimited package and not to go down to both that level below the unlimited and to choose unlimited at all. We would wait to see what happened. And it seems like it's paid off for us. One of our competitors are now removing unlimited, but still, of course, very aggressive. So you're right. We lost some rotational churn, as we call them, in the lower end of the markets, which didn't affect our revenue and didn't affect our ARPU in that sense. So right now, again, we are still going to look into what tactical move we should do depending on the competition heating up or slowing down at the moment.

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Operator [16]

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And we have the next question from the line of Choong Chen Foong from CIMB.

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Choong Chen Foong, CIMB Research - Analyst [17]

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Two questions for me. Firstly, again back on competition. In terms of the subscriber loss, did that come at the beginning of the quarter? Or did that largely come toward the end of the quarter? I'm just trying to figure out whether we are progressively seeing a greater impact from competition. And as you mentioned, most of the sub loss are in the lower value segment. Have we started to see any sort of impact on the slightly medium to higher ARPU segment thus far into the fourth quarter? And if it continues to be just the lower value segment, can we sort of presume that XL will continue to keep to the current pricing strategy? That's the first question.

Second question, regarding the network. You mentioned, I think, earlier about the target to reach about 90% 4G coverage in ex Java by the end of the year. Where are we in terms of the progress there? And I've noticed that the base station additions in the third quarter was actually at its lowest in the last 3 years. Anything to read into this? Those are my 2 questions.

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Allan Bonke, PT XL Axiata Tbk - Director [18]

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Yes. I think in your first question, you added 3 questions within the first question. So let me try. So the first one, was it actually all through the quarter and then [to the end]? Yes, it was. It started mainly because Indosat and Smartfren has the unlimited and the lower price in the beginning of the quarter and continue to the full quarter. So talk about this rotational churn that went down with our network. Yes, it was through the whole quarter, right?

Secondly, you're asking, will we do any aggressive moves to compete in that space? So far, we are keeping our strategy. We are not changing our strategy regarding our 2 brands, which is the Axis brand and the XL brand. And we strive to distinguish between these 2 brands in terms of price and in terms of value proposition. So right now, we are not changing. But at the same time, we have a daily monitoring as what happened in each of the clusters, each of the cities to see if these guys are moving in an irrational move -- way or they're not doing it. So, so far, we are still on a tactical move and we are monitoring these guys. So I cannot yet reveal if we are changing the prices up or down at the moment. But we are following our strategy, and we are not doing any irrational thing in the market at the moment.

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [19]

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Your second question, Foong, I think if you look at where we are in terms of 4G coverage ex Java, yes, I think we are probably on track on hitting the 90% population coverage as we talked about in past calls. So I think if you look at the way that we do our network rollout, of course, every time when we do a rollout, we probably want to chase for the peak period, right, to get all the network up and running before Lebaran. And that's typically what we have done, right? I think if you look at the incremental that you probably see in the first half in terms of 4G base station, it's been quite significant.

I think in the second half, we'd probably be a bit -- slowing down a little bit because the plan is to deliver all before Lebaran. And I think in the second half, I think we'll probably be thinking about next year's plan already, which we already started. And hopefully, I think, in terms of issuing out POS would probably happen in this quarter, right, and hence, to probably chase to rollout for 2020 plan to be ready before Lebaran. So is there any change in plan? No. It's exactly what have been planned for, and the aggressive number that you've probably seen in Q1 -- in first half was actually to chase for Lebaran, and hence, slowing down a little bit in Q3.

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Allan Bonke, PT XL Axiata Tbk - Director [20]

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I think I forgot to answer one of your sub-questions in question #1, where you asked about do we see any changes on the higher values subs in our network. And here, I must say we haven't seen that so far, which is mainly due to we are still competitive on the pricing, and it's due to the SIM registration process. So it's still a little bit difficult. It's a little bit of a hassle to change the SIM, and then you're still attached to your number. So we haven't seen any big changes for the higher value.

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Operator [21]

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And we have the next question from the line of Siward Ludin from Goldman Sachs.

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Siward Ludin, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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So it's a follow-up question on the BTS actually. With your CapEx guidance of IDR 7.5 trillion, does it mean that the fourth quarter CapEx will decline quite a lot? And also, does it mean that you're satisfied with your current level of network quality, especially since Indosat is still growing out its network aggressively?

And the second question is, last quarter, you mentioned -- you gave some color on profitability outside of Java. How is it currently? And how is the outlook for profitability there?

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Allan Bonke, PT XL Axiata Tbk - Director [23]

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Regarding the network rollout, yes, we have seen that our competitors have been aggressive in rolling out their own network. But also, you have to remember that for the last 2 years, we have been aggressively rolling out network and spent quite amount of CapEx in that sense. I can link it to the NPS score in Indonesia at the moment, what it looks like. And we are still a very strong #2 in the Net Promoter Score. And if I deep dive into the network, it's very clear that we are still progressing. We still have a good NPS score, but also admit that both Indosat and Smartfren are gaining when it comes to the NPS score for their network. So you're absolutely right that they are getting some traction in the network and building out their network, but we are still a very strong #2 when it comes to the network in Indonesia.

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [24]

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Okay. On profitability, if you look at our share outside Java, it's still relatively small, right, if you compare it to the market leader. And we probably need to hit some scale in terms of -- to recover the investment outside Java. So are we profitable outside Java at the moment? The answer is not, right? And hence, however, we have seen very positive trends coming from outside Java, I think, as you've seen that we are growing double-digit in terms of revenue outside Java. And it's faster than what we have actually -- than what we expect and what we have targeted for this year, right? So -- and definitely, we have taken market share, right? So if the trend continues, I think, as you would expect, that within the next 2, 3 years, I think we should be able to turn this investment that we've made outside Java by increasing our market share from where we are today into probably getting some positive return from that investment.

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Operator [25]

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We have the next question from the line of Kresna Hutabarat from Mandiri.

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Kresna P. Hutabarat, PT Mandiri Sekuritas, Research Division - Analyst [26]

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My first question is on the finance lease liabilities pickup in the quarter '19. Can you just confirm if this is coming mainly from fiber leases or tower leases? And can I also please get your thoughts on how finance lease liabilities balance can head up over the next few quarters, especially in anticipation of the full IFRS 16 implementation in 2020?

My next -- my second question is on D&A charges. I recall that you previously guided the D&A to grow 6% to 7% over the normalized D&A run rate in full year '18. But the 9 months' '19 trends have been way lower than that. So do you see the need to revise that guidance? Or should we expect the D&A gross rate to be materially lower in full year '19?

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [27]

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I think the finance lease liability is actually growing, I think, partly driven by the fact that we are building fiber. On IRU basis, I think we are capitalizing it as finance lease, right? So that is the primary driver of our financial lease. And as you would expect, right, in the next 1 or 2 years, we expect to hit our fiberized sites, 50% on both sides to be fiberized. So that's probably going to be one of the main driver of our financial lease.

What is that going to be in the adoption of IFRS 16? For us, it will take into effect on 1st January 2020. And that being said, I think what will -- the impact would probably be all our operating leases today, especially on towers, will need to be capitalized. And that will probably result in higher financial leases number that you see. But at the same time, it will also drive your EBITDA margin up quite substantially, right? Because quite a big portion of our tower leases today are still on operating lease, right? And hence is classified as both EBITDA, right? So all in all, I think a full implementation of IFRS 16 would be in January 2020.

D&A, I think if you look, D&A is slightly trending below what we forecasted. So yes, we did forecast that it will be low single-digit growth on D&A compared to last year. However, we are slightly -- we would expect that probably this year, we'll probably end up at around flattish compared to 2018 for D&A.

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Operator [28]

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We have the next question from the line of Ranjan Sharma from JPMorgan.

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [29]

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Just a couple of questions -- a couple of follow-up questions from my side. Firstly, again, on your customers, we also see that your smartphone users have declined. I mean, considering the other operators, you do seem to have been investing more aggressively over the last few quarters or the last couple of years. So I'm just wondering where these customers could be going because, I mean, some of your other competitors have very limited networks. So can they actually be competitive in gaining customers away from you? If you could share your thoughts.

The second thing is on your EBITDA margin guidance being revised upwards. Does this have any contribution of operating leases being classified as financial leases or it's just that you're seeing a scale benefit?

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [30]

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Yes. Okay. So on smartphone penetration. I think what you probably see, we are quite [lackluster] this quarter compared to last quarter right? So I think -- but overall, if you would compare our smartphone penetration and volume penetration over the last 4 quarters, for example, we have grown quite substantial, right? So it's not that we are probably losing share, but I think over the years, I think we have grown quite significant. If I'm not mistaken, about -- if we look at last year, our smartphone penetration -- today, we are at about 86%, but I think from fourth quarter last year, we are just slightly below 80%, right? So that's been about 600% growth in smartphone penetration over the last 4 quarters, yes?

So secondly, on EBITDA margin, I think, as I said, the leases are primarily coming from fiber leases, which we are building new to connect all our end sites. And that's -- given the aggression, I think, that we are fiberizing our site, that's probably driving the financial lease. However, EBITDA margin growth are probably coming primarily from the growth in revenue as you expect that our operating leverage are quite high. And given that revenue growth has been very strong this quarter and this year, it has probably driven EBITDA margin up. So that -- and on top of that, there's also cost efficiency that we are continuously driving that has also helped in terms of driving up the EBITDA margin this year.

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Operator [31]

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And we have next question from Arthur Pineda from Citigroup.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [32]

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Just a few follow-up questions, please? Can you provide more color on your tower rentals? What percentage of your towers are still on IDR 15 million to IDR 20 million per month as compared to -- and when are these up for renewals?

Second question I had again is on the tower side. I'm just wondering about your earlier comment on intention to sell them. Given that IFRS 16 is coming and the liabilities will still be lodged under your books, and you don't really need cash as well given your balance is under leverage, what's the incentive to actually examine selling off the towers?

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [33]

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Okay. So I think, Arthur, on tower rentals, I think if you look at most of our towers are actually subject to renewal over the last -- this year and probably some next year, right? So within these next 2 years, I think majority of our towers is up for renewal, right? So I would say that the portion of towers that's based on the old rate are not many, right? Majority have actually been renewed as we speak today, yes?

Secondly, on IFRS 16 and selling off towers, right? So I think the motivation of selling towers is probably driven by not so much on the need of cash. But I think we probably look at 2 points, right? One is from NPV basis, right? In terms of the costs of running the towers versus doing a sale and leaseback, how would that benefit the overall company in terms of cash, in terms of profit, in terms of return, for example, and NPV, right? So that's primarily the main driver. Secondly is also looking at the multiples, right? I mean if I'm able to secure by selling off towers a multiple of 8x, 9x or even 10x, for example, right, compared to what multiple that XL has today at around 4x, 4.5x, I think we are, in a way, that we are looking at how do we monetize these assets, right?

So having said all that, we have not decided whether we're going to sell towers or not, right? But we are thinking if we were to sell towers, firstly, we expect monetization given the higher multiple; and secondly, is comparing between the sale and leaseback transactions as compared to the cost of running the towers ourselves, right? Also, running the towers are probably not easy today given the cost of land lease, right, the community issues that we are probably facing, permits and all that, right? So taking all that into account, I think when we do the overall assessment, we'll compare that against the proceeds that we'll probably get from the sale and leaseback, right? So I think not so much driven by cash but so much of how do we monetize that.

And last point as well, I think we don't have much more towers, so we don't have the scale to operate these as well, right? So in terms of, let's say, operating efficiency from our part is also less as compared to people that's holding quite a significant number of towers like the big tower companies, right?

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Operator [34]

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And we have the next question from the line of Colin McCallum from Crédit Suisse.

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Colin McCallum, Crédit Suisse AG, Research Division - MD [35]

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Congrats on the good numbers. Two questions from me. First one, just a housekeeping one. Adlan, you mentioned 86% smartphone penetration. What would you be at in terms of if we talked about 4G penetration, someone who had a 4G handset and was actually using 4G functionality? What would that be now compared with, say, December last year? That's the first question.

Then the second question is, I'll try my luck with Ibu Dian on this, and that the new ICT Minister, do we have any feel yet for what the attitude might be towards consolidation, keeping spectrum, post consolidation, those sorts of issues? Do we have any feel for that as yet? Those are my 2 questions.

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [36]

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Well, Colin, on the first one, I think today, our smartphone -- our 4G penetration is around 70%. And if you compare that against a year ago, we are around 53%, right? So there has been significant growth in our 4G customers over the last 4 quarters.

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Dian Siswarini, PT XL Axiata Tbk - President Director & CEO [37]

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So Colin, on the second question, the new Minister Head just been appointed. So we haven't heard much from him. But we look forward to working with him, and we are hopeful that his objective will support equal growth for the telecommunications sector in Indonesia.

And -- but he already mentioned that one of his objective is actually increase nontax revenue. We're actually hoping that, knowing that Indonesia has one of the highest spectrum payment rates as a percent of revenue in Asia, we hope that the Minister would rather improve the business environment in Indonesia, which suffers from intense competition, and will lead into improved tax revenues for the government.

So we hope that the new Minister will actually come out with policies and also guidelines for improving the industry efficiency, such as network sharing of policy, network consolidation. And also actually, if the Minister could improve [excessive] power position by reducing capital imports of network goods. And we hope that also, the Minister would actually come up with the spectrum allocation for our -- to make more spectrum affordable for us, which is -- because currently with 4G, the industry will require more spectrum for 4G. And on top of that, 5G is coming. So we will require even more frequency for 5G. But in terms of what will be his strategic objective, at this moment, we have not heard much from him.

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Operator [38]

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(Operator Instructions) The next question we have is from the line of Sachin Mittal from DBS.

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [39]

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I have 2 questions. You talked about unlimited plans taken off by Indosat and other probable [competitor]. And these are high-end plans. So I'm wondering, high-end plans probably need a better network quality. How's the network quality of players like Indosat? Is it now is matching in XL already that they're getting lot of traction for the high-end plans? So just a question on the network quality. Has the differential been narrowed -- significantly narrowed?

And second question is on -- what are your thoughts given that XL is not just a Java operator now? You are a Java plus ex Java operator with potential savings now. What is the primary benefit for XL to acquire any other operator or merge with any of the operator. Because this hypothetical question, I'm just trying to understand, if you're already competing well with the bigger sales, what are the key benefits of any consolidation XYZ whatever consolidation with you?

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Allan Bonke, PT XL Axiata Tbk - Director [40]

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I'm not 100% sure I understood or got the first question correctly. But what I heard is that you said, yes, we have higher value package, higher than the unlimited, which is absolutely correct. We have higher package with higher GB and more voice, et cetera. So that, we have in our portfolio.

At the same time, you also asked about the -- are we narrowing down the advantage that we have in the network compared to our competitors. And there's no doubt about that. Yes, they are building the network. And of course, for every year or every 6 months they are building the network, it's getting closer to us. The competitive advantage is narrowing down. We don't have that anymore -- we still have, but of course, you're absolutely right, it is narrowing down. But -- sorry, that was a little bit -- was there another question? Or...

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Dian Siswarini, PT XL Axiata Tbk - President Director & CEO [41]

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No, no. I think that he's -- hello?

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Allan Bonke, PT XL Axiata Tbk - Director [42]

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No. Well, I think that there was some disturbance on the line. So yes, there's some disturbance on the line.

So yes, you're right. It is narrowing down. Our competitors are getting closer when it comes to network advantage. But in the future, I think we are looking into smart networks, meaning that we do not believe it's only going to be about speed in the future. It's also going to be about experience. So today, yes, people are buying a certain GB package, but we also see that they use demand for different OTT players on top of the package. And these OTT players do not only look into the speed of the network, but it's more about the experience. What are you actually getting out of that OTT service that you're getting? So we're looking into that, how to deliver a smart network and not only talking about speed in the future.

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [43]

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Okay. And your -- Sachin, on your second question, I mean, if I can hear correctly that you're asking, given that we are now a nationwide player, why do we need to go for acquisition? First, definitely, I think -- is that right?

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [44]

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(technical difficulty)

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [45]

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Sachin, are you still there?

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [46]

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Yes. I'm here. Can you hear me?

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [47]

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Yes. Did we get your question -- your second question correct?

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Sachin Mittal, DBS Bank Ltd., Research Division - VP [48]

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Yes. What are the benefits, if any?

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [49]

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Yes. Okay. So the way we look at it, right, I think we are fully supportive of any M&A, right? I think any M&A would probably lead to better industry overall position, right? I mean with consolidation in the market, I think you probably would see that competition would probably hopefully will improve and actually will bring the overall industry up.

Second is, in any consolidation, I think one of the key aspect for us that we will probably look at is probably from a spectrum position as well, right? Given that where we are today, given our spectrum position, given the geography that we are facing in Indonesia and how data is actually growing in Indonesia, spectrum has always been a constraint. I think if you were to compare spectrum position of operators in Indonesia versus in most of the other countries around the region, we are probably in a very disadvantaged position, right? So with consolidation, for example, and with the ability to probably acquire more spectrum, that would actually help in terms of providing better network quality at a lower cost.

Thirdly, I think there are definitely synergies that probably -- one would probably look at in any M&A, right? I mean, in this case, I think not only looking at Java, ex Java but also from segments, right? There are synergies between customer segments, where some of the other operators from strong in some segments as compared to the other, right?

So those are probably some of the areas that we look at. And definitely, from a cost perspective, definitely, I think you will probably be able to consolidate your costs, your network sites and all that. That probably drives and gives you a bigger network and at a lower operating cost, right? So I think there are many, many factors that we will probably look at in terms of M&A and not that primarily driven by whether we do have network in Java or ex Java.

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Operator [50]

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The next question we have is from the line of Kresna Hutabarat from Mandiri.

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Kresna P. Hutabarat, PT Mandiri Sekuritas, Research Division - Analyst [51]

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I just have a quick question on IMEI regulation. Can we please get your thoughts on the CapEx that you may have to incur and also business proposals that you may have to adjust in order to comply with the planned regulation?

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Dian Siswarini, PT XL Axiata Tbk - President Director & CEO [52]

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So thank you for the question. So the government already mentioned that IMEI regulation will take effect in April 2020. And this regulation will require all new customers to have their handset registered to the IMEI database. We don't know actually the impact yet because currently, we are still estimating how much will it cost to comply with the new regulation in terms of setting up the new system. So the government, the regulator, has not actually defined the process or the customer journey, so then we could not actually now calculate what kind of system that we have to put. So we don't know yet the impact to the -- in terms of cost by this regulation. However, to the basis, I think the impact to telco business will be neutral.

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Kresna P. Hutabarat, PT Mandiri Sekuritas, Research Division - Analyst [53]

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Okay. Got it. So you're not expecting any sort of impact that you saw like in previous [recalibration] in 2018, I suppose?

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Dian Siswarini, PT XL Axiata Tbk - President Director & CEO [54]

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No, we don't think so. We don't.

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Operator [55]

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The next question we have is from Niko Margaronis from Danareksa.

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Niko Margaronis, PT. Danareksa Sekuritas, Research Division - Analyst [56]

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I'd like to go back to the competition and about your product portfolio. So what is the kind of contribution between your main brand, XL, and Axis? And where Axis is doing better? Is it doing better in Java or outside Java?

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Allan Bonke, PT XL Axiata Tbk - Director [57]

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So we don't share the ratio between XL and Axis. But I must say and I can say that both of the brands have been growing significant. And especially, Axis has growing very well. So the difference between these 2 brands, we're trying to say that we want to be -- first of all, Axis want to be more digital brand, meaning that you have to use our digital platform to acquire the Axis service. And secondly, this is more skewed towards the young population of Indonesia. And when we look at the XL, XL you can buy all over. And at the same time, it's skewed towards the urban white collar and the urban blue collar as well in Indonesia. So the contribution, we will not share, but both of the brands has a set business and growing in significance all through 2019.

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Operator [58]

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We have the last question from Piyush Choudhary from HSBC.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [59]

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Two questions, please? Firstly, if you look at data usage, it's rising with an already healthy pace, around 56% year-on-year, 9 months. Just want to check, how are we placed on the 4G capacity utilization in Java areas? Are there any risk of capital intensities rising going into 2020?

Secondly, if I can check on the churn rate. What's the churn rate now? And is it still trending down?

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Mohamed Adlan bin Ahmad Tajudin, PT XL Axiata Tbk - CFO & Director [60]

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All right. Okay. So Piyush, I think if you look at 4G, I think as traffic continue to grow, I think we have continued to build our coverage as well as capacity as well, right? So I think where we are today, utilization is still less than 50%. So we are still in a good shape in terms of serving more data traffic as we go along towards quarter 4 and next year, right?

So churn rate, I think where we are today, I think churn rate has come down. I think now it's probably at closer to the high single digit, close to 10%, right, above 10%. So we, given the prepaid registration, I think we are not -- we are still -- we can still not imply the churn rate yet. But definitely, the trending is coming down. So I would expect that maybe within the next 12 months or so, you'll probably see improvements before it stabilizes at some point

(technical difficulty)

the mid-single digit or so.

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Operator [61]

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As there are no more questions at this time, I would like to pass the call back to the host. Thank you.

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Indar Singh Dhaliwal, PT XL Axiata Tbk - IR Executive [62]

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Okay. Thank you, everyone, for your participation in today's call. As always, do get back to us if you need more information. And we'll speak to you next quarter. Thank you.

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Operator [63]

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Thank you. That concludes today's conference call. All lines may now disconnect.