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Edited Transcript of HTO.AT earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 Hellenic Telecommunications Organization SA Earnings Call

Athens Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Hellenic Telecommunications Organization SA earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charalampos G. Mazarakis

Hellenic Telecommunications Organization S.A. - Group CFO & Executive Director

* Michael Tsamaz

Hellenic Telecommunications Organization S.A. - Chairman, CEO & MD

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Conference Call Participants

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* Ivan Kim

VTB Capital, Research Division - Equities Analyst

* Russell Aberdour Edward Waller

New Street Research LLP - Communications Services Analyst

* Stamatios Draziotis

Eurobank Equities Investment Firm S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, ladies and gentlemen, and welcome to the OTE Conference Call on the Third Quarter 2019 Financial Results under IFRS. We have with us Mr. Michael Tsamaz, Chairman and CEO; Mr. Babis Mazarakis, Chief Financial Officer; Mr. Panayiotis Gabrielides, Chief Marketing Officer, Consumer segment; and Mr. Evrikos Sarsentis, Head of IR and M&A. (Operator Instructions) I must advise you that this conference call is being recorded today.

We now pass the floor to Mr. Michael Tsamaz. Please go ahead, sir.

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Michael Tsamaz, Hellenic Telecommunications Organization S.A. - Chairman, CEO & MD [2]

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Good morning, and good afternoon to everyone. Welcome to our third quarter earnings call. We had another very solid quarter, building on the trends of the first half and even intensifying them in certain areas. In Greece, retail revenues, which are the indicator we follow closely increased in both fixed and mobile. The number of broadband subscribers was up 6% compared to a year ago, but even more importantly, fiber subscribers were up 44% and moving close to 700,000, with the resulting ARPU uplift.

In mobile, data continued to lead the advance, with traffic up by more than half versus last year and continued growth in the number of active data users, revenues rose hardly. We're continuing to monetize our offerings in data, an area where we expect further growth. We have worked hard on the ramping of the credit offering with appreciable results and are confident about the postpaid improving trends. The economic environment is definitely more positive. Consumer sentiment is going up, and investors are regaining confidence. So we are reasonably optimistic about these trends continuing in the future, even if competition intensifies.

In Romania, no doubt, the situation is challenging, and our performance is still far from our expectations, but we believe that the situation is under control. The trend in retail revenue is improving, and the company is actively pursuing new avenues of growth, growing new partnerships and distribution channels. At the same time, we are continuing to streamline the cost base of our Romania operations. So there will be new initiatives to support this goal in the current months into the next year.

Driven by Greece, EBITDA rose significantly in the quarter. We had a strong margin of 37.2% at group level and 44% in Greece alone. Adjusted free cash flow generation is also robust, as we had anticipated. It was up more than 40% in the first 9 months of the year, and we are well on track to meet our full year target of EUR 450 million. Reported free cash flow should also be on target. We now believe that the spectrum license auctions we've budgeted for this year will slip into 2020.

A few days ago, Standard & Poor's upgraded our long-term credit rating, which means that we are back to investment grade, the only Greek issuer in that position. This, followed by the upgrade of Greek sovereign debt and our refinancing other particularly favorable terms. It represents an important step for us, one that are particularly proud of. We have been through a tough period that has required a lot of focus, a lot of investment and a lot of sacrifice and we'll come up on top. This doesn't mean that we are planning on resting on our laurels, quite the contrary. We know we have still plenty to do to adapt our structure and cost base to a new world in which we are active. But we're taking on the challenge of our transformation with a solid financial structure, and a long-standing track record in margin our operations and investing in the future.

In the shorter term, we remain fully confident in our ability to deliver a solid full year performance in our Greek market and to build a new healthy platform for growth in Romania.

Thank you. And now I will turn the call over to Babis to review our results in the quarter. Babis?

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Charalampos G. Mazarakis, Hellenic Telecommunications Organization S.A. - Group CFO & Executive Director [3]

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Thank you, Michael. Good day to all of you, and thanks for being on the call with us today. Group revenues this quarter passed the EUR 1 billion mark, totaling EUR 1.011 billion, up nearly EUR 36 million or 3.7% compared to the third quarter last year. While over half of this increase came from wholesale, primarily Romania, we made decent progress in a number of other areas as well. In Greece, revenue grew by more than 2% or an additional EUR 17 million to EUR 771 million, with a nice improvement across the board.

In Romania, where market conditions remained challenging, wholesale pushed revenues up more than 7% to EUR 244 million. Excluding this factor, revenues were essentially unchanged, but we see encouraging signs in the underlying numbers. We had another quarter of strong adjusted EBITDA growth as Michael underlined. Just as a reminder, the EBITDA numbers we are discussing here, this year are before IFRS 16. The news release also features adjusted EBITDA after leases or AL, so you have the quarterly series on which we will base our discussions and comparisons starting in 2020 and going forward. Now the increase in group EBITDA this quarter was nearly EUR 14 million or 3.8% to EUR 376 million. Particularly in Greece, adjusted EBITDA jumped close to 6% to EUR 340 million, an increase of some EUR 19 million. Conversely, adjusted EBITDA for Romania declined more than 12% to EUR 36 million. While we're still feeling the consequence of the operating issues, they have penalized our Romanian activities for a few quarters, their impact is diminishing quarter-after-quarter, and we are confident that this turnaround is in good shape. At 37.2%, the group's EBITDA margin was resilient, showing an increase of 10 basis points. The EBITDA margin increase for each part was up an impressive 150 basis points.

Let's now focus on Greece, to look at the drivers of this good performance. So revenues from Greek retail fixed services rose 1.8% in the quarter, a modest deceleration from the first half of the year level, entirely due to voice. Growth in mobile service revenues, on the other hand, accelerated further in the quarter and reached 3%. Altogether, our core customer business is up nicely, generating nearly EUR 12 million in incremental revenues compared to the same quarter of last year. With regards to retail fixed services, the growth once again was steered by strong appetite for our broadband services, resulting in a more than 8% increase in revenues, extending the very solid trend of the first half. And TV revenues were up again this quarter by nearly 4%, a strong performance considering the growing competition from over-the-top players and not far from the growth rate we achieved in the first half.

The total Greek market lost 11,000 access lines in the quarter, and the bulk of disconnections came from our subscriber base, reflecting a mix of competitive and seasonal factors. However, we don't expect this trend to continue. We added another 18,000 broadband connections during this quarter. As we have now reached a 75% penetration rate in our fixed customer base, we expect the pace of growth to continue at a moderate pace. The fiber customer base, on the other hand, is growing rapidly, and we added another 49,000 connections in the quarter for a grand total of 695,000 fiber customers at the end of the quarter. We have added another 450 active cabinets in the quarter. Over 80% of our fiber customers now take advantage of speeds exceeding 50 Mbps. Just a year ago, this proportion was well south of 50%. In TV, we added 5,000 subscribers during the quarter and 15,000 over the year, an increase of nearly 3% to a total of 549,000 customers. TV revenues were up close to 4% compared to the third quarter of last year. Our over-the-top offering, which I mentioned last quarter, should come onstream in the coming weeks, and we expect it will create additional momentum for our service.

ICT revenues were up sharply this quarter. In the news release, we have highlighted a couple of quarter multiyear European public sector contracts. The quarter's increase reflects robust demand in both the private and e-government sectors, which is expected to continue in the fourth quarter. Greek Mobile service revenues posted a sharp increase in the third quarter, reflecting our strategy with regards to data, and the structural changes we have executed in the prepaid segment. Following a negative progression last year, an increase of 1% and 2%, respectively, in the first 2 quarters of this year, mobile service revenues rose 3% in quarter 3 to EUR 265 million, with strong numbers and KPIs in most segments.

As you know, (inaudible) has put a lot of energy in redefining and strengthening each prepaid offers, and we are quite pleased with the results. Prepaid revenues were up nearly 12% this quarter and prepaid ARPU rose significantly following the measures we have taken to improve the attractiveness of our packages. We are making progress in postpaid as well, but have been constrained by regulatory initiatives late last year. As the comparison base improved, and we are invested regulatory interventions that have hampered our progress. Improved organic growth should intensify this trend in the fourth quarter and into next years. The evolution of mobile data continued to be the main driver of growth in Greek mobile. Year-over-year, traffic was up 57%. The number of active data users now at 3.8 million customers, and this was up 12%, and data revenues were up 21% over last year.

During the summer period, average monthly data usage passed the 3 gigabyte mark. This momentum should continue as consumers are clearly responding positively to the reduction of more-for-more packages.

As told before, blended ARPU was up nicely this quarter, driven by the sharp increase in prepaid. Rounding out our big activities, wholesale revenues were up a little over 2% this quarter, mainly reflecting fiber take-up of subscribers served from competition. In Greece, operating expenses before IFRS 16 and excluding depreciation and amortization and one-offs, totaled EUR 453 million in the quarter, virtually unchanged from the third quarter last year. Personnel expenses were down nearly 6%, extending the trend that we have witnessed since the beginning of the year. Altogether, total adjusted EBITDA increase before IFRS 16 amounted to nearly EUR 340 million in the quarter, an increase of 5.9%. Consequently, the Greek adjusted EBITDA margin at 44% was 150 basis points higher than in the same quarter of last year.

Now in Romania. In Romania, we are seeing evidence that our turnaround efforts are starting to bear some fruits in a number of areas. If we strip off the factor that obscure comparisons, notably real estate sales and one-off items, the picture points to a slight improvement and marks an inflection point continued to past periods. Total revenues in the country stood at EUR 244 million, and it was up EUR 17 million or more than 7%. Excluding wholesale, revenues were essentially unchanged. Revenues from retail fixed services of more than EUR 56 million were down 6%, roughly in line with the trend of the previous quarter and the continued improvement compared to earlier periods. While trends within retail fixed services were a little bit softer than in the second quarter, they continued to represent significant improvements versus long-term trends. The decline in voice revenues continued along similar lines, but broadband and TV revenues were unchanged and slightly up, respectively.

Mobile service revenues totaled EUR 80 million, 8 0, also materially reducing the rate of erosion to below 3%. On an underlying basis, if we exclude certain one-offs in Q3 last year, mobile service revenues were nearly unchanged in the quarter. While the market in fixed and mobile remains competitive, the overall pricing environment is gradually improving. Postpaid ARPU is increasing, but we have been able to shift customers towards contract, thereby improving loyalty and reducing churn. The company has rewarded on a number of initiatives to expand this footprint, distribution footprint, notably partnerships with retailers to reach our top market segments, paired with new products and services. Additionally, we had another strong quarter with regards to the FMC customers, the comparison services, now adopted by 823,000 users, a 25% year-over-year increase. FMC mobile service revenues rose by over 32% compared to Q3 of last year, underscoring the company's leadership in this market segment. Wholesale revenues jumped by 67% to EUR 41 million, largely reflecting low-margin transit traffic. Total Romania operating expenses before IFRS 16 were down slightly in the quarter. The connection costs directly linked to the increase in wholesale traffic rose significantly. In line with the Q2 trend, budget provisions were about half last year's level. Personnel costs were significantly down by nearly 9% compared to the same quarter of last year. As we are taking a number of additional initiatives, we anticipate further reduction in the cost base going forward.

Total adjusted EBITDA in Romania was at EUR 36 million, down from $41 million in the third quarter of last year. The EBITDA margin was 14.8%. This being said, this represents our third consecutive quarter of EBITDA growth from a low point in the fourth quarter of 2018. Excluding the impact of real estate disposals, higher than usual budget provisions posted in Q3 of last year and one-off reversals in the current quarter, adjusted EBITDA would be slightly up compared to Q3 2018. As we continue to work on our cost base, we are confident that this progress will continue quarter after quarter.

Now let's turn to the rest of our financials. At EUR 376 million, consolidated group adjusted EBITDA was up 3.8% in the third quarter, a sharp sequential improvement fueled by our robust performance in Greece. Total group operating expenses before IFRS 16 and excluding depreciation and amortization and one-offs amounted to EUR 642 million, stable compared to the third quarter of last year. Excluding variable costs, we are making further headway in structuring our cost base and a strong organization. Group personnel expenses were down more than 6% in the quarter. Group depreciation and amortization was EUR 203 million in this quarter. The EUR 19 million increase compared to last year's quarter is entirely attributable to the implementation of IFRS 16. The 25% increase in net interest expense is also related to the IFRS 16 application. Adjusted net debt before IFRS 16 totaled at EUR 773 million at the end of September, down more than 4% from the level, one year earlier. The increase in adjusted net debt in the quarter is due to the payments of dividends. Adjusted net debt to trailing 12-month EBITDA was 0.6x at the end of the period, and we take into consideration, the IFRS 16 impact, the ratio stands a bit low than 1x. Earnings before taxes totaled EUR 171 million this quarter, up more than 10%. Our income tax provision for each part was down marginally at EUR 34 million.

Adjusted net income was EUR 125 million in the quarter, up 17%. In the first 9 months of the year, adjusted net income was EUR 287 million, up 26% versus last year. CapEx, excluding spectrum amounted to EUR 133 million in the third quarter, down roughly 10%. In the first 9 months, adjusted CapEx was almost in line with the corresponding 2018 level. And at this point, we do confirm our full year adjusted CapEx guidance roughly about EUR 650 million.

We generated adjusted free cash flow of EUR 121 million in the quarter as compared to EUR 129 million in the third quarter last year, reflecting changes in the timing of working capital, notably payables. Reported free cash flow increased from EUR 82 million to EUR 110 million in the quarter. The increase in free cash flow primarily reflects higher operating free cash flow due to reduced payments related to voluntary existing programs compared to the same quarter of last year. We also confirm our EUR 350 million reported free cash flow outlook for the year, but with a small twist. As you know, we were expecting around EUR 50 million of Spectrum auction payments to be incurred in 2019, but it looks increasingly likely that now this will slip into 2020. So there's a shift of this EUR 50 million from '19 to '20.

So to conclude, I want to reiterate our satisfaction with our results in Greece in the quarter and in year-to-date and are confident that we are moving to the right direction in Romania.

Now Michael and myself and my -- and our other colleagues are on the table, are now ready to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question. Please go ahead.

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Stamatios Draziotis, Eurobank Equities Investment Firm S.A., Research Division - Research Analyst [2]

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This is Stamatios Draziotis from Eurobank Equities. Just 3 questions, if I may, please. Firstly, on the free cash flow in Romania. The cash contribution of Romania, if we define these as simply, EBITDA minus CapEx, was just marginally negative in Q3, which was similar actually to the performance in Q2, effectively registering a notable improvement in the context of the EUR 30 million, EUR 40 million annual cash burn over previous years. May I just ask to what extent the actual cash contribution of Romania, i.e. cash flow, including working capital movement has also been neutral or close to neutral in the last 2 quarters? And whether you feel that the business has indeed reached the bottom from a cash flow perspective. And I guess, I should let you reply to that question before I move on to the next.

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Charalampos G. Mazarakis, Hellenic Telecommunications Organization S.A. - Group CFO & Executive Director [3]

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Thank you for this question. You said that the cash flow at the end of the day is a reflection of the performance quarter-by-quarter and the year-to-date. So what we see here is, as we are improving gradually quarter-by-quarter, the performance, as we explained in the speech, there's inevitable improvement also on the cash flow. It is true that the CapEx for this quarter is more or less adjusted to be able to produce exactly what you said, probably a 0 cash contribution in order to preserve the position of the company. So the more we increase the operating, let's say, cash flow due to the measures that we are taking, combination of both commercial and cost cutting, the more we have more flexibility to adjust our CapEx timing and our CapEx priorities.

Now there is, obviously, always a seasonal situation in all the quarters and Q3, usually, has the biggest seasonality for most of our businesses. So I would be happy to see this year that Romania will burn less cash than last year, including the working capital and the one-off payments. However, the trend is there and, hopefully, we will experience the same trend in the next quarters.

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Stamatios Draziotis, Eurobank Equities Investment Firm S.A., Research Division - Research Analyst [4]

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Okay. That's clear. And secondly, on group free cash flow, you mentioned this deferral of mobile Spectrum auctions into next year. Assuming the related cash outlays towards the end of 2020 or maybe even pushed back in 2021, how might this change your distribution policy in 2020, please?

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Charalampos G. Mazarakis, Hellenic Telecommunications Organization S.A. - Group CFO & Executive Director [5]

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The overall distribution policy aims at providing a steady, let's say, framework for a combination of our dividends and the share buybacks. Now as we experienced this year, we see -- we had a plan that a small part of the upcoming auction would have happened this year, EUR 50 million we had assumed. This will not happen. Of course, this will not adjust any remuneration policy since this money will be most likely be taken out next year. Now which quarter depends on the overall Spectrum auction that will be happening. But I would like here to say that the remuneration policy aims again at providing a stable profile rather than erratic up and down depending on shifting of payments. So since this EUR 50 million will happen inevitably next year is not going to affect the distribution policy, which remains, in principle, unchanged.

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Stamatios Draziotis, Eurobank Equities Investment Firm S.A., Research Division - Research Analyst [6]

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Okay, that's clear. And last question on competition in Greece, we saw ARPU trends accelerating further in Q3, underpinned by what you said regarding pricing in prepaid and data revenue growth. Just wondering, do you feel this was a general trend for the entire market? Or do you think you managed to outperform your competitors. And related to that, I guess, is how has the competitive landscape evolved in recent months in mobile? Has there been any change in the more-for-more dynamic, for example, deflation on the headline tariffs or inflation on the headline tariffs? Or if you could comment on that, please?

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Michael Tsamaz, Hellenic Telecommunications Organization S.A. - Chairman, CEO & MD [7]

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Yes. First of all, as you can understand, we cannot comment about competition most because this is something that is observed in the market. However, we can say that I would like to point out to pick up on your point. We have not increased prices. We have not increased the prices. We -- actually, we are offering the opportunity to our customers to utilize more of our products, data, voice, et cetera, especially data. And we take advantage of the fact that following the -- not only the national but also the international trends, the data usage is increasing and as a result, there's a formal -- more-for-more situation for our customer base. And this is what we observed.

As for the street prices, the risk price in many cases have gone down. And the per gigabyte, there has been a big reduction or a sizable reduction on a per gigabyte basis. But of course, people are using -- utilizing more gigabytes than before, which is an international trend, I would say. We take advantage of that one, which is actually -- proves that our strategy to build a very competitive and superior 4G network over the years, with significant investments in the Greek -- in the entire Greek territory now pays off.

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Operator [8]

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We have no further questions at this time. (Operator Instructions)

We will now take our next question. Please go ahead.

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Ivan Kim, VTB Capital, Research Division - Equities Analyst [9]

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This is Ivan Kim. A question on the profitability in Greece. So you're citing that one of the reasons is the favorable mix in the wholesale revenue. So I was just wondering what's been driving that. And maybe secondly, if you can give Romania sale, even though I understand it's quite hard to say much now with the (inaudible) around that's -- anything you can tell would be great.

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Charalampos G. Mazarakis, Hellenic Telecommunications Organization S.A. - Group CFO & Executive Director [10]

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Thank you for the question. I will start with the second one, which is a short question and a short answer. We continue to explore all possibilities. Unfortunately, there's nothing to announce right now. So we cannot say more. On the first question about the profitability increase, yes, we reported a higher wholesale number, but this is not the main driver of profitability. The main driver of the profitability is a growth on the service revenues for both fixed and mobile. Particularly for wholesale, to your question, the reason this is increasing is because the mix of the wholesale lines that we sell to the market now is more towards -- there's an increasing weight of the VDSL and high-speed lines, which on the monthly rental structure, they bear a higher monthly rental fee, which is also regulated. So the mix of the 2 creates, at least for this quarter, an increase in the wholesale revenues. But on natural amount, this is small compared to the service revenue contribution.

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Operator [11]

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We will now take our next question.

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Russell Aberdour Edward Waller, New Street Research LLP - Communications Services Analyst [12]

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It's Russell from New Street Research. I've got 2 questions, please. The first one, so you're obviously losing subscribers on mobile as number of second SIMs decreases. Could you -- so therefore, it makes it difficult for us to look at kind of underlying ARPU trends. Could you talk about what revenue per user is doing on primary SIMs, please? And then my second question is on -- just on mobile pricing. So it looks as though Vodafone has cut some of its pricing recently in the market. Is that something that you agree with? And could you talk about the effect that you think that might have on mobile service revenue growth going forward?

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Michael Tsamaz, Hellenic Telecommunications Organization S.A. - Chairman, CEO & MD [13]

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Okay. For the first question, regarding the average revenue per user, I guess you referred to the prepaid space, which we are losing, I mean, the second SIMs, these are very low ARPU SIMs and second SIMs, which after the changes we've made in the top-up facilities, they are getting disconnected. But nevertheless, the ARPU in the prepaid segment is growing with a very high double-digit number, very close to 14%. We have similar trends, not in that numbers, in postpaid as well. And this is driven mainly through the prepaid to postpaid migrations.

Now regarding the second question that was about mobile prices, for Vodafone. We really don't know the strategy, but we've seen this many times. This refers to online offers. These are seasonal offers. And as we do sometimes, I guess, the market is trying to boost the online sales -- the digital channels versus the physical ones. So we don't expect that there is a severe, let's say, change in price levels in the market.

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Operator [14]

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There are no further questions at this time. (Operator Instructions)

And we seem to have no further questions at this time, sir. Please continue. We have no further questions at this time. I will now hand the call back to your call -- to the host. Please continue.

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Michael Tsamaz, Hellenic Telecommunications Organization S.A. - Chairman, CEO & MD [15]

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Okay. Apparently, operator, can you hear us? Apparently, we receive messages from analysts that they are trying to get connected and they cannot get connected into the Q&A session for some reason.

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Operator [16]

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(Operator Instructions) At the moment, I don't see any other names.

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Michael Tsamaz, Hellenic Telecommunications Organization S.A. - Chairman, CEO & MD [17]

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Well, apparently, okay. It's not -- in order for someone to press *1, they have to have been accepted by the system. But apparently, the system -- your system does not accept it anyway. So to whoever is still there, we will say thank you for the time and for your attention, your questions and interest in our company, OTE.

Have a nice day, and we are looking forward to talking to you in 2020 for our fourth quarter and full year results.

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Operator [18]

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That does conclude our conference call today. Thank you for participating. You may all disconnect.