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Edited Transcript of NOS.EP earnings conference call or presentation 3-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Nos SGPS SA Earnings Call

Lisbon Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Nos SGPS SA earnings conference call or presentation Friday, March 3, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Maria Joao Carrapato

NOS SGPS SA - Head of IR

* Miguel Almeida

NOS SGPS SA - CEO

* Jose Pedro Pereira da Costa

NOS SGPS SA - VP and CFO

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Conference Call Participants

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* Daniel Morris

Barclays - Analyst

* Paul Marsch

Berenberg - Analyst

* Nick Prys-Owen

Jefferies - Analyst

* Ivon Leal

BBVA - Analyst

* Laura Ashforth

Morgan Stanley - Analyst

* Pedro Oliveira

BPI - Analyst

* Nuno Matias

Haitong Bank - Analyst

* Henrik Herbst

Credit Suisse - Analyst

* Luigi Minerva

HSBC - Analyst

* Fernando Cordero

Santander - Analyst

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Presentation

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Maria Joao Carrapato, NOS SGPS SA - Head of IR [1]

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Hi, good afternoon. Welcome to our full-year 2016 results conference call. I have Miguel, who's going to give you a -- Miguel Almeida, CEO, who's going to give you a brief introduction on the results, and then Jose Pedro Pereira da Costa, CFO, will give you a review of operational and financial highlights for the period. And the remainder of the Executive Committee is in the room with us today to take your questions.

I'll hand over to Miguel.

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Miguel Almeida, NOS SGPS SA - CEO [2]

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Thank you, Maria Joao, and good afternoon to everyone. Thank you for attending this conference call.

2016 was another very positive year for our Company. We followed up on the previous couple of years, executing our strategic plan as announced, and this has allowed us to deliver our main strategic target two years in advance, since we have already achieved our 2018 target of 30% market share. This is by any standard a clear success.

This market share gain comes on top of another year of -- with very significant growth. We reinforced our leadership in pay TV, adding 57,000 new customers, thus consolidating our positive trend of the last two years after, as you know, a very long period where that leadership has been eroding.

In mobile, we continued our trajectory of exponential growth, and in the previous exercise we added another 330,000 new customers, which brings the total net adds since the beginning of 2014 to 1.2 million subscribers. This gives us a double-digit market share gain in a mature market, which is a success unseen in any other comparable market.

Broadband and fixed voice subscribers also saw very significant growth, with 120,000 and 101,000 net adds, respectively, and in B2B, we also continued our growth trajectory, with RGUs increasing by more than 10%, which allowed us to finally revert the negative revenue trend we had in the SME segment.

The other businesses of the Group, cinemas and audiovisuals, followed this extraordinary commercial performance -- sorry. Actually, 2016 was the best year ever for the cinema business, other in attendance and revenues.

In what concerns the financial performance and it followed this very strong commercial performance, despite some very well-known negative impacts. Revenues grew by 4.9%, with telco revenues growing 5.1%, which is a very solid growth in a market with no growth whatsoever, or with very marginal growth at best.

EBITDA also had a solid growth of 4.4%, despite the negative impacts of content cost inflation. In what concerns EBITDA minus CapEx, we grew 31% to EUR164 million, even though we maintained the relevant level of investment in customer acquisition CapEx, which is obviously value creating.

Net income also saw a healthy 9% growth, despite the negative impact of associate companies. We maintained a comfortable capital structure with net debt to EBITDA of 2 times, which allows us to propose to shareholders a distribution of a EUR0.20 per share dividend, which corresponds to a 25% increase over last year's dividend. All in all, we are very proud of the way the Company has been performing.

The execution of the strategy we have been following is clearly reinforcing the competitive position of NOS and improving the conditions for long-term, sustainable value creation. In looking forward, we will continue focusing what we believe is key for long-term value creation, delivering the best customer experience through high-quality products and services, running over the most advanced and reliable technical platforms and all this fueled by constant innovation, transforming the operating model to make sure that we are a very efficient, highly efficient operation with superior levels of quality and maintaining this comfortable capital structure, continuing to increase shareholder remuneration.

I will now hand over to Jose Pedro for a more detailed presentation on our results.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [3]

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Okay, thank you, Miguel, and good afternoon, everyone. We will follow the presentation that we've just put on our website, and starting directly with the second page, and we finished, again, 2016 in very good shape in operational terms, with another very strong operational quarter, with solid growth across all services.

If we look back at full-year 2016, we have [executed] 9 million RGUs by the end of 2016, with an impressive growth of over 600,000 RGUs. We grew across all services, in particular in pay TV, with 57 net adds -- 57,000 net adds, extending the market leadership, and we were the Company which grew more in all other services, namely fixed broadband, with 120,000 net adds number, fixed voice with around 100,000 net adds number, and finally, and even more impressive, with around 330,000 net adds number in mobile.

Turning to the next slide, as already referred in Miguel's introduction, as a result of this very impressive operational growth, NOS market share of revenues has been growing at a very significant pace, coming from around 25% back in 2012 to our stated target of 30% that was our ambition for 2018. Therefore, we were able to anticipate our main target achievement by more than two years.

On the next slide, on page 4, in terms of convergence, we continue growing at a very significant pace, having achieved 680,000 convergent unique customers, reaching 46% penetration of the fixed base. This has translated to almost 3.4 million RGUs sold under convergent bundles, having reached around 116,000 convergent RGU net adds in this last quarter. Again, we achieve to increase the average number of RGUs per convergence household from around 4.8 about a year ago to now almost five RGUs per household.

On the pay TV front, on the slide 5, we recognize the new FTTH areas of expansion have contributed greatly to our continued growth of the pay TV base, where we were able to deliver again a solid 15,000 net adds number above the level of the previous two quarters.

This FTTH network expansion program continued to be developed this quarter, having reached a total accumulated number of 512,000 homes passed, with the addition of around 20,000 new FTTH households in the last quarter. Average penetration is now around 22%, 2 percentage points up from previous quarter, again, already providing attractive rates of return on this investment.

On the fixed voice and the broadband front, on slide 6, we continued to post very positive growth. As we mentioned, we are the fastest-growing player in these areas. We have again in this last quarter around 20,000 net adds number on fixed broadband, and 33,000 net adds in terms of fixed voice.

On slide 7 and a positive note on churn, we continue to hold a high proportion of fixed-access customers under loyalty contracts, which have stabilized around 74%, and this has helped us to achieve what are really low historical levels in terms of churn, are increasing around 32% versus a couple of years ago. Of course, any impact coming from price adjustments that were made beginning of December is only to be felt in the first quarter of 2017.

On page 8, on mobile front, mobile remains our fastest-growing area, with another strong quarter, mobile net adds of 60,000 in this last quarter. Convergence continues to play a key role in this mobile growth, with NOS having a solid 78,000 mobile postpaid net adds number in the quarter.

On slide 9, smartphone penetration over total handsets continues to increase steadily to around 70% of the -- of the smartphone base, around 50% of it is already 4G enabled. The growth of smartphone penetration and the more attractive mobile data plans are increasing substantially mobile data traffic. Average usage of mobile data is now over 1 gigabit per month for smartphone users. In the case of 4G handsets, it's even achieving 1.6 gigabits.

On slide 10, and on the B2B front, we continued to grow consistently. In this quarter, we have had 36,000 RGU net adds, in line -- pretty much in line with the previous quarter. On the large corporate sub-segment, we continue to gain relevant accounts, increasing the level of IT telco service integration and shared [comm] spend, therefore resulting in a solid 5.2% year-on-year revenue growth in this last quarter.

Mass business segment is also a segment with very positive results. In fact, it is potentially even with a more positive trajectory. Since we have come through a relatively prolonged phase of negative revenue evolution, and starting beginning of this year, we have entered clearly into a positive revenue evolution, and we have ended this last quarter in very good shape, with 3.4% revenue growth year on year.

On slide 11, on the cinema exhibition division and moving to the other non-telco business units, following up on a very positive performance throughout 2016, we posted gross box office revenue growth of 6.9% and attendance growth of 5.8% in this last quarter.

We continued to outperform the market as a whole, both in terms of attendance and gross box office revenues, leading to very high market shares, over 60% and 62%, respectively. We have managed to conclude 2016 above the 2015 numbers in terms of attendance and revenues, with 2015 being a very positive year for the cinema industry, and in fact, as Miguel referred in his introduction, 2016 was our best year in the last decade.

Moving to the audiovisuals division, this division performance also positive and strong in the quarter, with market share in cinema distribution well over 60%, having distributed eight out of the top 10 most popular movies and also benefiting from the solid performance of the cinema exhibition division.

Now, moving to the financial review, and on slide 13, starting with revenues, this quarter, we continued to post overall consolidated Group-level revenue growth of 3.8%, taking advantage of a balanced positive contribution of, of course, the core telco division but also the smaller cinema and audio businesses.

Moving to the telco revenues, telco revenues on slide 14, they were up in this quarter, again, by 3.6%, growing well above the overall market. We estimate -- which we estimate to have grown for the first time in the last few years.

In full-year 2016, we estimate overall market growth to be between 0.5% and 1%, which compares against a full-year growth for NOS of 5.1%. To our solid revenue contribution, we have performance -- positive performance from all segments. Consumer and B2B performed quite well, compensating the MTR declines that continued to impact negatively revenues, but with a positive impact at the EBITDA level. If we were to exclude MTR declines, telco revenues would have grown in this quarter by around 4.5%.

On slide 15, to this strong performance at core telco revenues level, we had again, as we said, positive performance from both segments. From the consumer segment, we have increased revenues by 4.4% year on year, or 5.6% if we are to exclude MTR impacts. Within this consumer segment, it is worth highlighting the good growth in the residential sub-segment also helped with price adjustment in the beginning of December, and also a positive contribution from the personal mobile sub-segment that was only marginally negative year on year in the quarter, which is a substantial improvement from the long trend of previous quarters.

On slide 16, on the B2B area, we had a relatively flattish performance in the quarter, with 0.3% -- 0.5% year-on-year growth, or 1%, if we are to exclude MTR impacts to this performance. We have a negative perfect again of the wholesale sub-segment, in line with the last quarter, that posted a revenue decline of 5.1% year on year, due to the continued decline in the low-margin mass-calling service.

In what concerns consumer revenues and on the positive side, the corporate suggest continued to post growth of 5.2% year on year, continuing to benefit from market share gains. And also the mass business segment, which grew 3.4% in the quarter, taking advantage of a somewhat more benign environment.

On slide 17, and in terms of OpEx evolution, the strong operational growth, namely in the telco division, continued to drive the cost base. Most of the significant impact, as it was the case in the previous quarter, coming from the new football contracts.

In fact, out of them, in terms of direct costs, out of the EUR5.9 million increase in the quarter, EUR8.5 million came primarily from new football contracts, namely the new Sport TV distribution model, the new [FICA] contract and the new [Porto Canal] contract. The remaining direct costs were actually reduced, due to the decrease in MTRs and to more efficiencies in terms of these line rentals.

Commercial costs, they were up in this quarter by 5.5%, driven mostly by an increasing advertising spend associated with increased mass campaigns. Also in other operating costs, they were up by 5.8% in the quarter, due mostly to an increase in regulatory taxes and in non-cash provisions. Wages and salaries increased by 2.5%, with around 1.5% increase of recurrent salaries between average personnel increase and salary inflation, the rest being explained by more non-recurrent impacts.

On slide 18, and in this quarter, again, being mostly impacted by the new football contracts, we still managed to post EBITDA growth of 1.4% at the Group level. Without the content costs increase, EBITDA would have grown around 8.3%, which would be even higher number than what we have recorded in the first half of the year.

Moving to the slide 19 and moving to net income, we have mentioned net income evolution during this quarter was up by 30% year on year, well supported by the positive performance at the EBITDA level and also by a number of positive impacts below the EBITDA line. I should highlight the following.

Net financial expenses, which have decreased again 3.4% year on year to around EUR5.8 million in the quarter as a result of lower cost of debt. Also, we had a positive contribution from the consolidation of our subsidiaries, share of JV results, consolidated through the equity method, which represented a positive EUR2.3 million in the quarter, compared to a negative EUR1.4 million during the fourth quarter of 2015.

To this positive evolution, we had positive contribution from ZAP, which was able to post a marginally positive net income in this quarter, and also as expected, we also had a positive contribution from Sport TV as a result of the implementation of the new distribution model with pay TV operators, starting on August 1, 2016.

On the negative side, to the net income evolution, we have other expenses, which increased to EUR10.9 million in the quarter, again, with some curtailment costs and some non-cash write-off of deferred expenses related to judicial collections. Finally, and below the EBIT level, the income taxes number posted a positive impact of EUR0.3 million in the quarter, benefiting from tax incentives and a non-recurrent positive tax impact of some assets revaluation exercise.

On slide 20, in terms of CapEx, total CapEx in the quarter was around EUR100 million, 12% down versus last year. CapEx continues at a relatively high level, due mostly to the strong level of success-based telco customer CapEx, following the strong operational momentum reflected in solid revenue growth.

On slide 21, net financial debt remained at relatively same level in the quarter, at around EUR1.1 billion, with a relatively modest level of free cash flow generated in the quarter, again being impacted by the still high levels of CapEx and by some negative working capital impact of the new distribution contract with Sport TV, as explained in the last call.

Our net financial debt represents 2 times the EBITDA number. Again, this remains a conservative level and continues to be our target. Average cost of debt remains at low levels, as it reached 2.1% in the quarter. Average maturity, 3.15 years at the end of this quarter, and finally, in terms of liquidity, we continue to benefit from a strong liquidity position, with around EUR200 million of cash and equivalents and unused credit facilities.

Finally, in the slide 22, in terms of shareholder remuneration, the 2016 dividend to be paid in 2017 of EUR0.20 per share, proposed by our Board, to be submitted to AGM approval, clearly reflects a strong level of confidence in the operational and financial prospect for the Company, and as it increases dividends by 25%. It is also the first time that NOS has set dividends above the net income level, with the payout ratio over earnings of 114%, which is an important step up from the close to 100% payout ratio of the past three years.

Our target leverage of net debt to EBITDA of 2 times is a level we feel comfortable with in order to finance our activity at very attractive terms, and we do not see any benefit in going below this target leverage.

And with this, we finish the presentation, and we'd like to invite you to [stand for] the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions). And your first question comes from the line of Daniel Morris, Barclays. Please ask your question.

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Daniel Morris, Barclays - Analyst [2]

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Yes, good afternoon, and thanks for taking the questions. I've just got a couple, please. The first would be around I think the CapEx outlook really for 2017. I think you've mentioned already the very strong growth you're seeing in 4G and also how well you've done on the fiber program, so maybe you can give us some thoughts on both of those aspects and where you think the overall CapEx might end up in 2017?

And then a second point around cash restructuring costs. I noticed these have been reasonably material in the past, unsurprisingly post-merger. Again, can you give us a feel for levels in 2017 and possibly also whether they will also appear in 2018? Thanks very much.

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Miguel Almeida, NOS SGPS SA - CEO [3]

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Okay, thanks. Well, speaking about CapEx not only for 2017 but generally, and I'll go back to your question of 2017. Obviously, we will continue to invest as needed, to make sure we keep up to pace with our customer needs and expectations. That is what we believe creates long-term value, satisfied customers. If customers believe their needs can be better met with one of our competitors, they will leave us. So we have to keep up, obviously, with our expectations, but also with technology and the development of our own competitors.

In what does that mean in the short term? We will continue to evolve our fixed network. In the short term, we will upgrade our HFC network to a 1 gigabit network by rolling out DOCSIS 3.1. We will continue to evolve our mobile network, modernizing it to a single [run] network, and thus paving the way to a smooth roadmap to 5G. We will obviously continue to evolve our state-of-the-art TV platform to make sure we are always one step ahead of our competition, and we will continue to invest in datacenter capacity to meet the IT demand of our B2B customers.

If we look at 2016, you can see that non-customer-related CapEx in our telco business represented 48% of CapEx, with customer-related CapEx representing the remaining 52%. If you look at it in a different view, this means that technology and other non-customer-related CapEx was around 12% of telco revenues.

Looking at long series, we believe that something around this number, 12% to 13% CapEx to sales, is a healthy number, which obviously will vary. Some years, it will get closer to the high end of the interval. Other years, it will be closer to the low end or below the low end of this interval. And that's what we expect not only for 2017 but going into the future.

In what concerns customer-related CapEx, we will continue to acquire as many customers as possible, obviously with maintaining the current economics of this investment. This is obviously value creating, and we will not limit our ability to generate future value just to reduce a given year's CapEx. That obviously would be a very bad decision.

But obviously, we would love to maintain these levels of customer acquisitions, the ones that we had in 2015 and 2016, but realistically, that's not what we expect. We expect customer acquisition to go down, and as such, we expect customer-related CapEx to start to decline this year and to continue to decline over the next few years.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [4]

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Daniel, on your question in terms of cash restructuring payments, basically, the intention is that this number should go down. We expect still next couple of years, 2017 and 2018, with some costs associated with some additional restructuring to be made, but I'd say over that period we expect this to be a relatively negligible number, and with 2017 and 2018 being lower numbers than we had in 2016.

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Daniel Morris, Barclays - Analyst [5]

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That's clear. Thanks very much.

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Operator [6]

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And your next question comes from the line of Paul Marsch, Berenberg. Please ask your question.

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Paul Marsch, Berenberg - Analyst [7]

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Yes, thanks for taking the questions. I've got three questions, really. I wondered if you could just comment on the outlook for consumer ARPU now. You make the point in the statement that consumer ARPU growth has been driven by increasing RGUs in recent years, but clearly that RGU growth is going to slow. So the question really is what are your expectations for ARPU trends going forward? Can price increases offset what has been an RGU-driven trend in the past?

And then on business customer ARPU, a similar kind of question, really. What are your expectations given the continued impressive growth in corporate and the turnaround in the mass business revenue line? Do you still think that those can continue to grow in that low-single-digit to mid-single-digit rates into the medium term?

And then finally, just on CapEx, it's a point of clarification, really. Your customer CapEx was EUR50 million, which was basically flat year over year, but the level of RGU additions was about 30% lower. It seems that your churn came down rather than went up, so this wasn't a churn-driven, gross additions-driven number here. So can you maybe explain what's happening? It looks like the capitalized cost per gross add has gone up quite significantly, so I'm just wondering if you could give some color on that as well. Thank you.

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Miguel Almeida, NOS SGPS SA - CEO [8]

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Okay, thank you very much. If we look at what has been the -- what have been the trends in the recent years, on one side, we had a market that was very aggressive in terms of pricing. I think we have been discussing those trends over these conference calls for three years now. But at the same time, we managed to keep up ARPU by increasing the number of services per customer.

Going forward, we see obviously the upside, and the potential to increase the number of RGUs per customer obviously is declining. You're right. The opportunity is still there but declining. But at the same time, you have another very important effect, which is the fact that most of the repricing that we've suffered throughout this period is already made, and the fact that the market as a whole is now working at a higher level of -- higher levels of prices. And as such, the erosion of the customer base from now on will be much, much smaller than it was in the past. And that applies both for consumer and B2B, so all in all, our expectation is that RGU growth, so the number of subscribers, the growth will go down. But that will not stop us to continue to increase revenues.

In terms of just going to your last question, on CapEx per gross add (technical difficulty) different weights of different gross adds. Obviously, not all gross adds have the same CapEx, but I can assure you that the CapEx per gross add was stable throughout the whole year, and we don't expect it to increase actually, when we look more into the future. That is something that we expect to decrease.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [9]

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Just following up on Miguel's comments there, you should look more to the full-year number, not so much the quarterly number. There's typically some variations.

One thing that impacts overall SAC CapEx is the level of re-utilization of, for instance, terminal equipment. In some quarters, we can have some slight changes in the level of re-utilization that affects the figure that can affect the figure in a material way in a particular quarter, but if you look at the longer series of quarters, we can get -- it should be relatively removed from the analysis.

So the trend is that we are keeping CapEx per customer on a stable basis. Of course, it depends also on the mix, because not every RGU carries the same level of CapEx.

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Paul Marsch, Berenberg - Analyst [10]

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Great. Very clear. Thank you very much.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [11]

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Thank you.

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Operator [12]

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(Operator Instructions). Your next question comes from the line of Nick Prys-Owen from Jefferies. Your line's now open.

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Nick Prys-Owen, Jefferies - Analyst [13]

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Hi. Thank you very much for taking my question. First, I just wanted to follow up. You mentioned upgrading the HFC network to DOCSIS 3.1. I was wondering if there's anything you can say on the timing of this upgrade and perhaps any comment on how much the upgrade may cost in terms of both the network and customer equipment.

Secondly, I just wanted to question on your baseline CapEx. I noticed it declined pretty sharply in Q4. I was wondering to what extent this reflected timing or seasonality, the reverse of that in 2017, what we should think about CapEx, sales, ratio for baseline CapEx of below 8% being the new normal going forward.

And finally, if I may, just on consensus expectations, they've come down pretty sharply for 2017 EBITDA, and now sit around EUR580 million for this year, although that's quite a wide range. I was wondering if this is a level of EBITDA you'd be comfortable with for 2017. Thank you very much.

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Miguel Almeida, NOS SGPS SA - CEO [14]

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Thank you. We -- our plan is to deploy DOCSIS 3.1 over the next so this year and next year. We -- our plan is to have it completed by the beginning of next year, mid next year. Obviously, you asked for the costs and what concerns the customer equipment. We are upgrading the network, but we are not upgrading customers. It's compatible with the current equipment that our customers have, so we will only change equipment if a customer upgrades to a high-end offer, which is value generating, so we are not expecting any costs coming from the CPE part of the investment, just from the network part of the investment.

In what concerns CapEx to sales, it's -- I think you have to look at a longer series than a quarter. We have small -- some variations throughout the quarters, but the overall level of CapEx to sales I think I have already answered that question.

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Operator [15]

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Thank you. And your next question comes from the line of Ivon Leal, BBVA. Please ask your question.

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Ivon Leal, BBVA - Analyst [16]

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Hello and good afternoon, everybody. Just maybe following on this question on CapEx, actually, you're saying that you're going to upgrade to DOCSIS 3.1, and actually that is embedded on what you're expecting on those 12%, 13% of CapEx. But if you're successful on upgrading people to those higher-end bundles, then we should assume in the next 18 months increased level of customer-related CapEx, because actually you'll have to finance those set-top boxes. Am I right on that?

And the second one is if I look at 2015 and 2016, again on CapEx, sorry to insist on this, I think your net adds on homes passed -- on your homes passed have increased by 270,000 in 2015 and 160,000 in 2016. But your network expansion CapEx has not decreased materially, so what's the reason for this?

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Miguel Almeida, NOS SGPS SA - CEO [17]

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Okay, thank you very much. Well, you would be right that we could have some customer CapEx increase if we were to switch a significant number of customers' equipment. We don't expect that to be the case at all. Obviously, to have access to gigabit offers, this will happen at higher prices than the ones that the subscriber or the client has today, and as such, we expect some customers to upgrade, but again, this is value creating, because what we would be charging extra on the customers' monthly bill would be more than enough to pay for the additional cost of new equipment.

But again, we don't expect any material impact in our accounts for the next couple of years coming from that front, because we don't expect a big material number of customers doing that upgrade.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [18]

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In terms of CapEx per home passed, basically, we have started the expansion program in the fourth quarter of 2014. We have added in total the 512,000 homes passed number. It's true that in 2015 we did a bit more than in 2016.

The overall network expansion CapEx was roughly the same. Again, this depends a bit on the mix of developments we are doing, so not all the regions entail the same level of CapEx per home passed, but the differences are not so much pronounced. So also under the caption of network expansion, when we report CapEx, we also include some other integration projects, which are typically of non-recurring nature, so you cannot take the line --

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Miguel Almeida, NOS SGPS SA - CEO [19]

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From mobile expansion.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [20]

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And some mobile expansion as well, so there is a mixture of different things. I can tell you that the CapEx per home passed doesn't differ too much from 2015 to 2016, if we are to extract all of these factors.

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Ivon Leal, BBVA - Analyst [21]

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Okay, thanks very much.

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Miguel Almeida, NOS SGPS SA - CEO [22]

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Thank you.

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Operator [23]

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And your next question comes from the line of Laura Ashforth, Morgan Stanley.

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Laura Ashforth, Morgan Stanley - Analyst [24]

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Hi. Thanks for taking my question. I have two, please. So firstly, could you comment a bit on the customer response to your December price increases? How's churn behaved in the month since the price increases, and has it been better or worse than your expectations?

And then secondly, I appreciate that you're saving your midterm guidance for the Capital Markets Day, interested in the date for that, but please could you also explain why it's not been possible to provide any revenue or EBITDA guidance commentary for 2017? Thank you.

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Miguel Almeida, NOS SGPS SA - CEO [25]

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Well, if I remember well, and I am sure I remember well, we never gave guidance for EBITDA at the beginning of the year. We never gave guidance for CapEx at the beginning of the year, and we are not giving guidance for this year also. It's not something new. It's something that we never did, and we don't see a reason to start doing it now.

In what concerns customer response to price increases in December, obviously, nobody likes to have their bills increasing, but the response and the reaction was within our expectations, so we don't expect any material impact from that process.

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Ivon Leal, BBVA - Analyst [26]

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Thank you.

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Operator [27]

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And your next question comes from the line of Nuno Matias from Haitong Bank. Please ask your question.

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Nuno Matias, Haitong Bank - Analyst [28]

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Hi, good afternoon. Thank you for taking the questions. Just picking up on one of the last questions on expansion CapEx, from what I understood from your answer was that some of the initiatives that, perhaps, you were planning to do just for this year, some of that was already anticipated in 2016, perhaps, on the mobile side. Just to clarify that.

And, secondly, we are now almost -- we are half way through the Q1. In terms of revenue and EBITDA performance on the telco business, can you give us some indication in terms of underlying trends, if you are seeing an improvement versus the last two quarters in terms of the year-on-year performance? Thank you.

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Miguel Almeida, NOS SGPS SA - CEO [29]

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Thanks. Well, the -- starting with the first question, the investment that we mentioned in 2016 is not any anticipation of any plans for 2017. We obviously -- we keep evolving our mobile network as I said and we have other projects which are related to FTTH expansion. And that's the name of the game.

We did it in 2016. In 2017, more than that, as I think I already mentioned, in terms of the mobile network we will begin swapping current technology for a single run technology. And, as I mentioned, this is what we believe the best for our customers, but also it's a technology that allows us to safe significantly, mainly in terms of energy costs going to the future. And it enables us to evolve to 5G, which is, obviously, very long term, but evolve in a smooth way.

5G is not really a technology. It's the aggregation of different technologies. And we starting to develop the technologies that not only improve our current 4G network, but also will allow to have a smooth evolution to 5G.

Regarding this first quarter, I would have to -- I'm a little bit surprised, because you've followed this Company for a long time now and I don't remember we ever did any guidance on EBITDA or CapEx, or any guidance for the coming period, so, again, let me be very clear about that. We are not giving any guidance for 2017. We are not giving any specific guidance for this quarter. We are giving guidance for what we believe is relevant.

I've given guidance about CapEx. We believe -- I've given guidance about where we see revenues going forward. I gave you guidance and Jose Pedro gave you guidance on what we believe is a comfortable level of leverage, which is the one that we have today. I gave you guidance on what concerns revenue -- shareholder remuneration that we believe we will be able to continue to increase. So you have plenty of guidance, but we'd never ever give guidance about specific numbers of EBITDA.

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Operator [30]

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And your next question comes from the line of Pedro Oliveira, BPI. Please ask your question.

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Pedro Oliveira, BPI - Analyst [31]

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Hi, good afternoon. Thank you for taking my questions. First question is regarding order revenues. As far as I understand, you have some non-recurrent nature in the total amount of other revenues. I was wondering if you believe this level of other revenues is sustainable for 2017 and what should we expect going forward on this caption.

And my second question is regarding your other expenses that -- where you booked EUR10.9 million in the quarter. Could you please disclose the nature, how much of this is still integration costs and what should we expect for this caption for 2017? Thank you.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [32]

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Thank you, Pedro. On the other revenues question, this is a non-recurrent item which, actually, is becoming recurrent in nature, at least in these calls. It's again related to the same factors we have alluded in the last earnings call. So there's an impact of advertising revenue, so if you follow the companies in Portugal advertising revenues in Portugal have been growing. And we are in a sub-segment in terms of advertising, which is also growing.

It's also again related to some judicial collections, which, in some cases, they have non-recurrent nature, but they keep being recurrent in our P&L and there is nothing else. Also there are a number of other factors which we cannot allocate directly to the segments and they fall under this caption, so they are telco revenues, but it's difficult to say that -- whether it's consumer or business, so it's -- but they are telco revenues (multiple speakers).

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Pedro Oliveira, BPI - Analyst [33]

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But does it provide a tough comparable, or meaning it's sustainable or not? Just wondering if this puts some pressure top-line evolution for 2017.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [34]

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This year, quarter after quarter, we have been growing this line, so it's something that under the current circumstances we feel comfortable with the current evolution. So it's not factors that they will disappear in the next quarter, that's for sure. I cannot tell this.

Again, if we are not giving guidance on overall numbers I won't give you guidance on this specific line, but it's nothing that will become zero next year. So it's a lot of things, a lot of small things that typically we don't allocate to segments, but they are revenues and they keeping being recurrent this last year.

On the other expenses comment, I think on the presentation I mentioned curtailment has been -- it represents more or less 40% of the total number. It's not -- it's driven by our restructuring efforts. It seems -- we continue to target an efficient organization, we expect to continue to some type of costs related to restructuring.

But also in this case, and in this quarter, we have a more non-recurrent event which represented about close to EUR6 million, which was the write-off of the non-judicial collection business. And this we see as not a sustainable number. So this is something that was a one-off for the 2016 year.

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Pedro Oliveira, BPI - Analyst [35]

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Okay, thank you very much.

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Operator [36]

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(Operator Instructions). Your next question comes from the line of Henrik Herbst, Credit Suisse. Please ask your question.

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Henrik Herbst, Credit Suisse - Analyst [37]

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Yes, thanks very much. I just want to ask you about -- how we should think about the business. You've now reached your 30% market share targets and you've obviously invested a bit to get there in terms of commercial costs in the rebranding and just general push as you've built out and expanded your footprint. I guess you're now starting to -- you've done your footprint expansion and you've reached your market share target.

How should we think about your OpEx going forward? Are you now going to try to drive up usage in your -- or the number of RGUs per sub and now they require less commercial drive? Basically, how should we think about the OpEx base going forward in terms of your focus on either market share gain or driving up revenue in your existing base?

And then, maybe I missed it, but can you just explain the higher provisions in other operating costs, please? Thanks very much.

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Miguel Almeida, NOS SGPS SA - CEO [38]

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Thank you. Well, it's not as -- the drivers that allowed us to grow over these three years are not disappearing, so obviously we will continue to push for not only customer -- number of clients' growth, but also the penetration of the number of services, so the densification of our customer base will continue to pursue those efforts.

In what concerns the commercial costs in the sense, I think I already mentioned, those acquisition costs are capitalized, so that is what explains our customer-related CapEx. Our expectation is that we will be acquiring less customers going into the future. It would be, obviously, difficult to sustain these levels of growth. As we are not expanding our footprint, that also helps not to continue this level of growth, so the commercial costs, obviously, will go down.

Even though I should mention that to further expand our FTTH network it's an option that we keep open and something that is not going to happen probably this year. But it's something that we -- an option that we are analyzing probably for 2018. Nevertheless, we are always -- we will always be speaking of a marginal additional of coverage, not the kind of footprint that we did these last three years.

In terms of OpEx, obviously, we have been growing our customer base, continue to grow our customer base. That drives costs. That drives direct costs, obviously, direct to the number of customers and services that we have. It drives other costs. We have other negative impacts, as we have been mentioning, like the content costs -- the sports content costs.

But obviously (technical difficulty) to transform the operation, to be more efficient, to offset that growth in terms of the variables that drive costs with efficiencies and, as such, we see our -- that's why we see our EBITDA growing going into the future. Because we believe we will be able to increase revenues and sustain OpEx at a level that doesn't completely follow this run.

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Jose Pedro Pereira da Costa, NOS SGPS SA - VP and CFO [39]

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(Technical difficulty) provisions in the quarter we naturally increased the level of provisions in the quarter. It's something which in the quarter has some material impact. Again, if you look at the full-year number, it's not that significant. Basically, it relates to bad debt provisions.

In terms of bad debt numbers, we are quite comfortable with the level we have, which is a little bit north of 1%. And what I can tell you is the level of provisions that we have substantially covers the risk and we feel quite comfortable with it, so in terms of (background noise) we feel it completely covers the risk and we think it's again on the prudent side.

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Henrik Herbst, Credit Suisse - Analyst [40]

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Okay, thanks very much.

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Operator [41]

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And your next question comes from the line of Luigi Minerva, HSBC. Please ask your question.

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Luigi Minerva, HSBC - Analyst [42]

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Yes, good afternoon, Luigi Minerva from HSBC. Thank you. The first question is on the dividend policy. And I was wondering if you can maybe share some of the thinking at the Board level how do you see the relationship between dividend and leverage ratio and what was behind the decision to distribute more than the EPS.

And also, if I may, whether the Board would consider giving a three years' dividend guidance, which I think is very compatible with your leverage situation and would be probably the most important element to support the investment case of NOS and the share price.

The second question is again on CapEx. And I should say that we actually think CapEx are good, so don't get us wrong. But I'm just looking at your indications and doing some back of the envelope calculation. I was wondering if a number of EUR370 million in 2017 and maybe EUR340 million in 2018 is compatible with your ambitions. Thank you.

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Miguel Almeida, NOS SGPS SA - CEO [43]

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Thank you very much. That's a different way of asking what the CapEx will be in 2017. I'm sure you'll understand if I don't comment on your numbers.

In what concerns dividend policy, again, we -- again, I would say that we -- the Board feels very comfortable with this ratio, with this capital, with this balance sheet structure. We feel very comfortable with 2 times EBITDA as net debt and, as such, we see this number stable going into the future, which probably, and I say probably, would mean -- or will mean that dividend will be the combination of maintaining this number stable and the cash flow that, obviously, we will be able to generate each year.

But in terms of guidance what we can say is this. We are not -- the Board is not comfortable with giving specific dividend guidance for the next three years, except for this very relevant guidance that at least under these circumstances, economic circumstances and other, we feel very comfortable with this ratio. And that is what we are targeting going into the future.

Actually, when you look at the dividend that we will pay this year, it was -- I think it's a clear message, in the sense that it was achieved by looking at the end of the year and our expectation in terms of net debt to EBITDA at 2 times. And we felt comfortable to pay more than 100% our result, as Jose Pedro mentioned, for the first time, which goes in line with the guidance I'm giving you; maintain the net debt to EBITDA at 2 times going into the future and the remainder, obviously, will be distributed to shareholders.

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Luigi Minerva, HSBC - Analyst [44]

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Okay, very clear. Thank you.

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Operator [45]

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And your final question comes from the line of Fernando Cordero from Santander. Please ask your question.

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Fernando Cordero, Santander - Analyst [46]

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Hello, good afternoon and thanks for taking my three questions. The first one is related with churn performance in the fourth quarter, clearly, going down at least quarter on quarter. In that sense, I would like to know what has been the major drivers in order to understand this churn evolution from the third to the fourth quarter. And also going forward what -- or do you see any kind of additional levers to keep reducing the churn in the coming years?

The second question is related with your expanded footprint. And, in that sense, you have reported that in the fourth quarter you have added 2 percentile points of penetration in your extended areas. Just to -- how can I say, to take a view on what is the reasonable penetration that we should expect in this expanded footprint? And also to understand which is then the commercial projects -- the net adds in the expanded footprint are already offsetting the commercial pressure in your legacy areas.

And the final question is also related with this investment in expanding the footprint. You already commented in the third-quarter call that your returns were clearly above the double digit. Having said that, do you see these kind of returns and any potential additional expansion of the footprint as you have suggested for 2018? Thank you.

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Unidentified Company Representative [47]

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Thanks. I'll start with that last question, as I probably wasn't too clear about that additional expansion. We're talking -- we will always be talking at small numbers, or at models of investment different from the ones that we have used in the past, namely, we could analyze the option of joint investment. But at the end of the day always to make sure that we have the same kind of returns that we are having in the expansion we made over these last three years.

In terms of churn, there was a reduction in the fourth quarter. That is the result of -- as I already mentioned, the market is becoming less aggressive. The main challenger in what concerns triple play and pay TV, so the fixed market, increased the -- increased prices by end of August or beginning of September, which obviously reduces the pressure over our customer base. And that is -- we can see that on the fourth quarter.

Going forward, we don't expect the level of churn to reduce by much mainly in this first quarter that we have the hangover the price increases, but we expect overall as a trend, as the pressure -- as the repricing is pretty much done, obviously, we expect the pressure over our customer base to be smaller than it was in the past and, as such, that we will be able to continue to decrease -- slowly decrease the levels of churn.

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Fernando Cordero, Santander - Analyst [48]

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Okay, thanks. And regarding the penetration in the expanded footprint, what is -- what could be a reasonable scenario going forward? 30%, 25%?

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Unidentified Company Representative [49]

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We expect the levels of penetration in these new areas to reach the same numbers as the previous ones. We are already at 22% penetration overall on average. Obviously, the -- most of the growth comes in the first 12 months, but we have seen in the past and we have seen in the first stage of our expansion that we keep adding customers on those areas, so penetration continues to increase. We already have some areas where penetration is above 30%, but on average we expect these new areas to be at the same level as the previous ones.

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Fernando Cordero, Santander - Analyst [50]

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Okay, very clear. Thank you very much.

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Maria Joao Carrapato, NOS SGPS SA - Head of IR [51]

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Thank you very much. We have no more questions. As usual, we're always available to take your questions post the call, and look forward to speaking with you soon. Bye bye.

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Operator [52]

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That concludes your conference for today. Thanks for participating. You may all disconnect.