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Edited Transcript of NOS.EP earnings conference call or presentation 23-Jul-19 11:00am GMT

Q2 2019 NOS SGPS SA Earnings Call

Lisbon Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Nos SGPS SA earnings conference call or presentation Tuesday, July 23, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* José Pedro Faria Pereira da Costa

NOS, S.G.P.S., S.A. - CFO, VP & Executive Director

* Maria João Hewitt Carrapato Moura Landau

NOS, S.G.P.S., S.A. - Head of the IR Department

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Conference Call Participants

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* Artur Amaro

Caixa - Banco de Investimento, SA, Research Division - Analyst

* Fernando Cordero Barreira

Grupo Santander, Research Division - Equity Analyst

* Henrik Herbst

Crédit Suisse AG, Research Division - Research Analyst

* Luigi Minerva

HSBC, Research Division - Senior Analyst

* Martin Michael Heinz Hammerschmidt

Jefferies LLC, Research Division - Equity Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Pedro Pinto Oliveira

Banco Português de Investimento, S.A., Research Division - Analyst

* Roshan Vijay Ranjit

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Maria João Hewitt Carrapato Moura Landau, NOS, S.G.P.S., S.A. - Head of the IR Department [1]

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Good afternoon. Welcome to our second quarter 2019 results conference call. José Pedro Pereira da Costa, CFO, will give you a brief rundown of the main highlights and the results. And then the whole team are available to take your questions after the presentation. The presentation is available on the website and there's also a webcast.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [2]

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Okay. Thank you, Maria, and good afternoon, everyone, and thank you for joining today's call. I would like to start with Slide 2 in the presentation. I would like to point out the main highlights of the quarter. We continue generating sustained Telco revenue growth of 1% with a strong recovery this quarter for the Cinema and the Audio units. This revenue growth translated to EBITDA growth of 2.8% at the group and Telco business levels, continuing to drive margin expansion. Higher CapEx this quarter, driven by transformational fixed and mobile network projects. And still, we continue going through a very positive free cash flow cycle, sustained in a solid capital structure.

Now moving to Slide 4 of the presentation and turning to the operating review. We have an operating performance recovery this quarter, as we expected, reflecting the normalization of churn levels in the context of a more mature and disciplined market. We have posted a positive fixed Pay TV and fixed broadband net adds of 3,000 and 7,000, respectively. It was supported by network expansion. On the mobile front, we have posted 20,000 net adds, continuing to expand our market share steadily. Overall, we were able to get, again, to positive territory in terms of total RGU net adds with a 27,000 net adds number in the quarter, also reflecting a relatively stable competitive environment.

On Slide 5, I'm going into more detail in the fixed area. In this quarter, our greenfield FttH expansion continued at the expected pace in line with the previous quarter and continued to support well our fixed Pay TV net adds of 3,000 in the quarter, reflecting good early take-up in new areas. As we said before, we expect around 50,000 new FttH homes passed added per quarter, with the majority of these numbers being deployed by NOS under our CapEx program. So this quarter number with 43,000 new homes passed is well in line with this trend. FttH deployment and access to new greenfield areas contributed by our partners will continue during the rest of 2019, reaching an expected total of 200,000 during full year 2019.

Fixed Pay TV net adds came in a balanced way from our own FttH network but also from the FttH we are using from our partners. Net adds in DTH are still negative but were considerably reduced this quarter when compared to previous quarters. So the total Pay TV net adds, fixed and DTH, returned to slightly positive numbers. As we said in the last call, the peaking churn of the first quarter was reverted to more normalized levels this last quarter, so we are back to the levels of 2018.

On Slide 6, convergent offers continued to increase with 3,100 convergent subscriber net adds, allowing us to reach 51% penetration of the fixed access base. That is an increase of 0.2 percentage points versus last quarter and 1.6 percentage points during the last 4 quarters.

On Slide 7, convergence continues to be a key driver of mobile growth with NOS adding 21,000 mobile postpaid net adds number in the quarter. So with almost flat prepaid net adds, total mobile subs increased 20,000 this last quarter, improving considerably versus last quarter. To this number, we also have a very positive contribution of the youth prepaid segment, which continues to grow consistently quarter after quarter.

On Slide 8, we continue deploying innovative commercial offers. Last one, our last fiber offer, more simple and flexible with integrated mobile tariff plans, allowing customers to have significantly more mobile data by adding additional SIM cards to the household plan, therefore allowing for mobile densification. This offer also gives advantages for customers signing up on our online sales platform. Also, we continue to upgrade our services in terms of new functionalities, last one being the NOS TV app, which is now available in picture-in-picture mode.

On Slide 9 and on the B2B front, we continue to enjoy good revenue growth trends across all segments, despite MTR pressure. On the larger Corporate segment, we continue growing in recurrent customer revenues, leveraging IT, cloud and managed services. IT now represents 17% of revenues in this segment.

We are also trying new verticals, including specific potential 5G applications around smart cities, industry and logistics. On the SME segment, we continue to post solid customer revenue growth despite continued ARPU pressure from MTRs. We keep having positive operational progress with increased weight of digital sales support, around 80%, and digital building, around 63%.

On the Wholesale segment, we have slightly negative year-on-year revenue growth with Voice traffic holding firm despite global market decline. In general and across all segments, these efforts are generating positive results, with customer revenue growth in the B2B ex Wholesale segment of 2.9% year-on-year in the quarter but also improving NPS metrics in this segment.

On Slide 10, a quick update on our technological transformation projects and starting with the fiber project. Our fiber deployment continues at a steady pace. Total fixed network coverage is developing according to plan. Both FttH and HFC, Docsis 3.1, with total 4.5 million households coverage by the end of this quarter, with fiber representing already 1.3 million households passed. That is around 29% of total coverage. In this 1.3 million fiber number, we are including around 200,000 contributed by our partner, which overlap with the cable areas.

The sharing agreement is going well with around 700,000 households being exchanged since the start of the project. And finally and as you may have seen, this last July 12, we have announced an agreement with DST, setting the framework for some additional fiber coverage of additional 900,000 to 1.2 million households in areas where there is currently no fiber networks. On one side, areas which we primarily serve through DTH, which, as you know, is currently facing challenging conditions due exactly to the emergence of new fiber networks but also areas that we currently serve through HFC. With this agreement, we will extend total next-generation coverage up to around 5.5 million households with a CapEx-light model.

On the mobile front, we are close to finishing the project with now over 95% of sites being upgraded to a single radio access network. With this upgrade, we are getting significant improvements in terms of customer experience, namely around 20% average reduction in refused calls rate, around 35% average reduction in dropped calls and more than 2x in average data throughput.

Finally and to conclude the operational review on Slide 11, on the Cinema and Audio units. We have a strong recovery as it was planned with the Cinema unit posting a 26% attendance increase and 22% gross box office revenue increase, still above the growth we have for the Portuguese market, therefore, maintaining a leading position with over 60% market share. This strong recovery is explained by the Easter school holiday period, which were 100% in the second quarter this year versus last year, and also by a good number of blockbuster movies, and one example of that was Avengers.

On the distribution front, we had also a very positive quarter in the context of the overall market recovery, having distributed 7 out of the top 10 movies this last quarter.

Moving to Slide 13 and moving to the financials. In terms of top line, we had a 1.8% revenue growth at the group level or 2.6% adjusted for MTRs as a result of the solid contribution of the Telco unit with 1% year-on-year growth. Adjusted for MTRs, 1.7%, also being supported by the strong recovery performance of the Cinema and Audio units, which have positively combined increase of 14% in this quarter. Cinema revenues increased in the quarter around 26%, following the increase in attendance, and the Audiovisuals posted a 8% revenue growth, also supported by the Cinema distribution business. Remaining Audio business is being relatively flat in the quarter.

On Slide 14, as we said, Telco revenues have achieved 1% year-on-year growth despite the impact of MTR cuts of 44% since July 2018. Adjusting for this effect, Telco revenue growth would have been 1.7%. As you know, MTR cuts have a detrimental impact on revenues but slightly positive impact at the EBITDA level.

From July this year 2019 onwards, there will be a further MTR cut but of significantly lower magnitude from EUR 0.42 to EUR 0.40, so the drag on year-on-year revenues due to MTRs should decrease substantially. On the other hand and starting on May 15 this year, new EU legislation imposed a cap on prices of international calls and SMS to the EU, and this has a negative impact at revenues and EBITDA level of around EUR 1.5 million per quarter.

In this quarter, to achieve the 1% Telco revenue growth, we had a positive contribution from the Consumer segment and the Business and the Wholesale segment. Still, this last one being affected by the slightly negative Wholesale performance. The Consumer segment posted a 1.3% year-on-year revenue growth, adjusted for MTRs, driven mostly by the residential fixed and personal mobile segments with growth of around 3% and 5%, respectively, and despite the pressure felt in the residential DTH segment. The Business and Wholesale segment is driven by the large Corporates and SME segments, with growth rates of mid-single digits. The larger Corporate segment continuing to benefit from increasing revenues on current customers. The Wholesale segment being more volatile had a slightly negative contribution to the segment performance this quarter.

On the next slide, 15. EBITDA in the quarter grew 2.8% at the group level, again growing EBITDA above revenue growth, driven by the strong performance of the Telco unit this quarter, also being supported by the Cinema and Audio units.

At the group level, margins in the quarter increased versus last year 40 basis points, reaching 43.2%. This number incorporating already the IFRS 16 impact regarding operational leases. Still, these numbers are fully comparable to last year's numbers, which were fully restated. Telco EBITDA grew also a solid 2.8%, posting also a margin improvement of 80 basis points versus last year.

On Slide 16, we continue managing very much with cost control and discipline as ever. In terms of nondirect costs, we continue to keep these costs under control, having increased just 0.9% year-on-year with commercial customer-related costs decreasing, with particular focus on areas like customer billing and finishing as an example of quicker wins of the transformation program and operating and structure costs increasing due mainly to increase in noncash bad debt provisions.

Regarding direct costs, we had in this quarter an increase of 1.3% year-on-year, with a decline in traffic costs impacted by the MTRs cut and the planned increase in sports-related content costs until June 2020. We also had some increase in corporate account service costs.

And finally, this quarter, we have a relevant increase in direct costs of the Cinema and Audio units due to the substantial increase in activity translating into higher royalty costs in these areas. If we are to exclude the increase in Cinema and Audio OpEx, total Telco OpEx decreased 0.4% year-on-year in the quarter, continuing to show the strong level of cost control.

On Slide 17, net income increased in the quarter to around EUR 48 million. That is a 6% year-on-year increase, taking advantage from the increase in EBITDA of over EUR 4 million in the quarter. D&A was kept relatively flat at EUR 103 million in the quarter, with some increase in current amortization due to the increase in depreciation rates of mobile equipment. We have a slightly positive contribution from the share of JV results consolidated through the equity method, with subs contribution being slightly positive, taking advantage of a 25% increase in prices approved by the regulator to mitigate the very significant local currency devaluation.

Financial costs continued to decrease around EUR 3 million in the quarter, driven by the lower-average cost of debt versus last year. And finally, income tax has increased up to around EUR 12 million due to the increase in earnings before tax and also to a reduction of tax benefits recognized last year. Still, cash taxes in the free cash flow statement continue to be well below P&L taxes.

On Slide 18, total group CapEx in the quarter, excluding the accounting impacts of leasing contracts, reached EUR 95 million, an increase of around EUR 3 million to EUR 4 million versus last year, reflecting an increasing technical Telco CapEx, reaching EUR 58 million. That is 15% of Telco revenues. FttH and single RAN mobile upgrade continuing to be the main drivers of current levels of technical CapEx this quarter. Technical CapEx also being impacted by peak in IT CapEx related to our transformation program. Technical CapEx tends not to be very stable every quarter.

Accumulated technical CapEx in the first half of 2019 was 13.8% of revenues. And for the full year, we aim to get back to a bit over 13% of technical CapEx to sales as we have been guiding in the past so more or less same levels as last year. We also have a decrease in terms of customer-related CapEx to around EUR 31 million due to the lower levels of churn we have in the quarter translating into lower levels of gross adds and SAC CapEx, also supported by higher levels of CPE recovery and reinjection in the context of the transformation program.

On Slide 19, we had a robust free cash flow generation level in the quarter, continuing to cover well our investment requirements and sustain our shareholder remuneration. EBITDA minus CapEx reached EUR 76 million, increasing 1.5% year-on-year, supported by EBITDA growth and compensating the increase in CapEx in the quarter. Operational free cash flow after lease payments and working capital variation reached around EUR 65 million, 6% increase versus last year. And this EUR 65 million translated into a net free cash flow after interest and taxes of EUR 57 million this last quarter, again showing a strong cash conversion.

On Slide 20, a quick note on the refinancing deals we just concluded. Taking advantage of the current favorable interest rate environment and the excellent conditions we managed to get in the banking market at the end of the second quarter and beginning of the third quarter, we were able to refinance 100% of the debt maturing in 2019 as well as to execute a liability management exercise, extending further maturities of 2020 and 2023 up to 2026, at the same time, reducing the cost of funding of the lines that were early redeemed.

In [concrete], we have closed 4 bank deals. First, EUR 100 million with CaixaBank BPI maturing in 2024: 50% through a bond issue and 50% with flexibility through a fully underwritten CP program. Some additional EUR 100 million with Caixa also maturing in 2024, also 50% bond issuance and 50% with flexibility. EUR 50 million with Mediobanca also maturing in 2024, again 50% bond issue and 50% with flexibility. And finally, EUR 100 million with BBVA through a fully underwritten CP program maturing in 2026, of which, 75% fully drawn and 25% with flexibility.

In total, these deals contributed positively to our strategic funding objectives, namely, the diversification of financing sources, extension of maturities, improvement of liquidity position and reduction of average cost of debt.

And lastly, on Slide 21, on the balance sheet. Net financial debt increased in the quarter to around EUR 1.1 billion as a result of the payment of yearly dividends of EUR 180 million, still compensated by the strong free cash flow generated. This net financial debt represents 2x the EBITDA level, adjusted for lease payments, which is in line with our stated target of close to 2x that we are committed to maintain. This net financial debt to EBITDA will be reduced during the rest of the year with the free cash flow generated. Average cost of debt decreased in the quarter to 1.5%, benefiting from the higher level of gross debt and the low marginal interest rates we have access to. And fixed interest rates, that represents around 75% of total gross debt.

Recent refinancing deals had still no material impact in the average cost of debt reduction since they were closed end of second quarter, beginning of this quarter. And we should only expect some further reduction towards the first quarter of next year after the maturity this next November of EUR 100 million bond issue, which is now fully refinanced. As a result of the refinancing deals completed and at the end of the second quarter, our average debt maturity increased to 3.1 years, 3.3 if we include the deals executed already this quarter. And in terms of liquidity, we maintain a strong liquidity position with cash and equivalents and unused credit facilities of around EUR 240 million.

And with this, we conclude the presentation, and we are ready to start the Q&A session.

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Questions and Answers

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Operator [1]

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Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And we do have some questions coming through. Sir, your first question comes from the line of Michael Bishop.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Just a couple of questions from me. Firstly, starting on the agreement with DST. I was just wondering why you've decided to enter into that agreement to access the last 1 million homes in Portugal now and whether you could touch on the economics that you might see with that transaction. Because it was my understanding that previously you'd looked at that from at least your own CapEx perspective and decided that it wasn't necessarily that accretive to go into the last million by yourselves.

And then just a second question on the consumer growth. I was just wondering whether you could sort of walk us through the moving parts in the second half because, hopefully, you might see an acceleration, given the competitive landscape. And also, as you mentioned, the MTR headwinds fall away, but I was just wondering whether there's any other moving parts.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [3]

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Okay. Thank you. On the agreement with DST. Yes, you're right. We're talking mainly -- not exclusively, but mainly areas of the country where we believe it wouldn't be wise from an economic point of view to invest alone and directly, but this is an open network that will be accessible for anyone that reached an agreement with DST and, as such, has completely different economics. On our side, we will be -- this is -- there is no CapEx from our side. We will be renting as we acquired customers. So the economics, you can see, is pretty obvious for us.

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Unidentified Company Representative, [4]

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Okay. So thank you, Michael. And the second question on the Consumer segment and the potential growth on the second half and the moving parts. So let's try to clarify a bit. So we are having very healthy trends in what we call basic subscription revenues. So it's basically what -- the base subscriptions continue to grow at a pace which is now very close to 2%. Still, we have to accommodate a number of drags in terms of consumer revenue growth. First one that we have always been very explicit on, we have the premium channel revenue decline. Year-on-year, this is decreasing on a high single-digit number. We have until now the drag in terms of MTR cuts. So from July onwards, we will not have this drag anymore, but then we'll have a new one, which is the regulatory impact of the new price cap on international call and SMS to the EU.

This affects both the Consumer and Business and Wholesale segment, but I would say more the Consumer segment, since the Business and Wholesale segment already have prices which are below the cap level. So in that respect, they will be affected less. And still, we continue to have some drag regarding DTH customers. So all in all, this points to a performance for the second half, which shouldn't be that different from the one that we have in the first half.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [5]

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And if I could just follow up on the DST agreements. Do you have any sort of time frame in mind in terms of the rollouts from the DST perspective? And how quickly you might be able to get access to those homes?

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [6]

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So it's -- not all the details are closed yet, and we would probably not made them public even if they were closed. Just to go back on your first question, I think it's important to stress or clarify that the whole country is -- can be covered with this agreement with the exception. So there is an exclusion of those areas where we have or will have in the future already planned FttH networks. So on our own or within the agreement we have with Vodafone. The remaining of the countries is included in this agreement, including some regions where there could be already an FttH network if it's not ours or it's not within the agreement we have with Vodafone.

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Operator [7]

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And your next question comes from the line of Henrik Herbst.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [8]

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Yes. I had a couple of questions. Firstly, in the new sort of fiber build-out, if you can give any color in terms of uptake and how that compares to the fiber footprints you build out a couple of years ago.

Then secondly, if you could give an update in terms of the latest around spectrum auction in Portugal. I think there wasn't very much to say last quarter, but if you got more visibility on when we can sort of expect 3.5 gigahertz auction in Portugal?

And then just lastly, if you could give an update on competition. I think last quarter, you said you saw sort of signs of competition improving in Portugal and whether that sort of continued and what's the latest stage?

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Unidentified Company Representative, [9]

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Thank you. Maybe, I'll start with the last and go down to the first question. But starting with the competition, there is no update on that front. We haven't seen anything very different from what we've seen and reported in the last quarter. On the spectrum auction, strangely enough -- and we don't think this is good for the industry or this is good for the country. But strangely enough, there is no visibility whatsoever in what concerns any process for spectrum allocation. So we have been living under radio silence from the regulator. So we cannot report any update because we don't have any update.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [10]

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Regarding penetration of the fiber areas, I can give you a couple of data points if we go back to the fiber expansion through '15 to '17. We have reached more or less around 20% penetration rates, which are quite good and provide a significant return on investment. On the more recent fiber build-out, we are already in excess of 10% penetration with a little bit over 1 year of commercial activity, which is also quite positive.

So these are good numbers. They show some strong early take-up, and some of these numbers are already in the context of the agreement we have with our partners. So in this case, it's 2 operators working commercially these new areas. But still, our number is around 10% and are also a good indication of the type of take-up we can have in these areas and already provides for net positive NPV investments with these levels of penetration.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [11]

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Great. And just on the fiber optic, is there -- are the ARPUs sort of similar to what you're seeing in the rest of your base?

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [12]

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Yes, very similar. Yes.

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Operator [13]

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And your next question comes from the line of Martin Hammerschmidt.

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Martin Michael Heinz Hammerschmidt, Jefferies LLC, Research Division - Equity Analyst [14]

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On the B2B and Wholesale. You've seen a slight dip in the quarter that sort of you said reflects some weaker Wholesale trends, but B2B seems to be tracking well. How should we think about that division? And having previously touched on the Consumer side, in terms of sort of revenue trajectory and growth drivers for the second half and sort of some guidance, specific line items, but any indication would be helpful.

And then my second question is on the Pay TV fixed access intake. I mean the improvement was sort of 3,500 customers in the second quarter has come through on the better channels you indicated sort of in the first quarter. But if we strip out, let's say, 500 net adds coming from B2B, we are sort of back with roughly 3,000 in the C2C. Would you say that this is a sort of good run rate going forward, given that the footprint expansion we've put up was hard to fix? That will be great.

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Unidentified Company Representative, [15]

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Thank you very much. Regarding the revenue trends in B2B and Wholesale, I think despite the less positive quarter on Wholesale revenues, this tends to be more volatile and less impacting on EBITDA and margin. The underlying customer revenue trends are good. And we had, on customer revenues, an evolution of around 3% in the whole of the segment, which I believe is a healthy trend and something that we look forward to continuing.

I didn't quite understand the -- your question on operational...

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [16]

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On the fixed Pay TV net adds, you mentioned the 3,000 on the Consumer business, that's more or less the run rate that we expect for the remainder of the year so -- on a quarterly basis.

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Operator [17]

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And our next question comes from the line of Roshan Ranjit.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [18]

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Great. Two for me, please. Just on the FttH rollout, we saw quite a pickup in the coverage, at 29% this quarter. I guess, as you said, that's coming from the overlap. Is it fair to say, given the new agreement with DST, that, that brings forward your previous guidance of 70% penetration by 2022?

And secondly, in addition to this DST, you've obviously got your JV with Vodafone. Is this signaling a kind of different stance taken by management in their approach to infrastructure? And in that context, can you just update us on your latest thoughts around the towers?

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [19]

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Okay. Thank you very much. On coverage, yes, percentage of our total footprint covered with FttH that we announced would be 70% by 2022. We'll have to update those numbers, both the total numbers of households covered with MGM networks and also the percentage on FttH. Something that we'll do in the near future once we close all the details of this agreement.

In terms of our view on the infrastructure, nothing changed. As I've mentioned in the previous question, this is -- these are areas where basically we believed that there was no rationale amount of testing on a stand-alone basis. We still believe that is the case.

But on the other side, we always believed on sharing. I think, in the past, we showed it several times. Our agreement with Vodafone, again, I think it's -- it makes clear our view on infrastructure and on sharing. So this is completely in line with what we think about infrastructure and the way we see sharing and owning an infrastructure. And our view, generally, in what concerns towers, again, we have the same view, the same perspective on potential sharing of towers. The same view we had 18 years ago.

First time, we tried to strike a deal. And this was before 3G rollout. We still, from a conceptual point of view, believe that there should be sharing on passive infrastructure, but the Portuguese markets and our markets, it was never possible in the past to do it, and we don't know if it will be possible in the future.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [20]

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Great. I guess I'm just going to follow up. It's regarding the towers, the key sharing. That's the word to achieve, hit it quite a few times. So it's all about kind of network sharing from the tower side from you.

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Unidentified Company Representative, [21]

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Our view is we believe in industrial projects, meaning that there is efficiency coming from sharing. We don't share the same enthusiasm in what concerns pure financial operation that don't add value to our shareholders. So we have different views probably when compared to other operators. We are strong believers in industrial projects that create value, less enthusiastic about financial transactions that don't create value.

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Operator [22]

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(Operator Instructions) And your next question comes from the name of Artur Amaro from Caixa BI.

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Artur Amaro, Caixa - Banco de Investimento, SA, Research Division - Analyst [23]

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I have only one question regarding the Cinemas and Audiovisual segment. From what I can see, there's a decrease in terms of -- significant decrease of the EBITDA margin, 5 bps. Just to understand what's behind that, if possible, and what can we expect for the second half of the year. And that's it.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [24]

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Yes. It has to do basically with the distribution business within the Audio unit. As you know, the distribution business is closely linked to Cinema exhibition. The margins are relatively low. And we have a mix of movies this quarter with a stronger weight of what we call major studio movies than independent producers. And typically, the margins are lower in this type of movies. So the overall activity went considerably up, but most of the blockbusters in the quarter were produced by the Hollywood studios, and with that, the margins decreased.

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Operator [25]

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

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Luigi Minerva, HSBC, Research Division - Senior Analyst [26]

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Luigi Minerva from HSBC. I wanted to -- well, 2 questions. One, on the transformation program. I don't know if there is any more initiatives that is worthwhile flagging to give us an idea of the progress and to track the progress.

And then secondly, just a more general question. I noticed you launched eSIM in Portugal, and I was wondering what is your view about it. Is it a threat, an opportunity? What are the first lessons you're learning from the experience?

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [27]

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Okay. Thank you, Luigi. On the transformation program, basically, we are, today, in what we call the second wave of initiatives. So first wave was 20 initiatives in total. We now have under planning and the execution mode the additional 15 new initiatives. One is mentioned to flag, I'd say that we're the ones that were mentioned in the presentation.

So we mentioned on -- for instance, in terms of customer support, and that we have been having some good results, in particular, in what concerns billing and finishing. So this is one particular project within the transformation, which is already yielding good results. So we are increasing significantly the number of digital bills and, therefore, avoiding sending paper bills to our customers.

And I would say the other one also mentioned in the presentation around CPE recovery, which is also translating already into concrete and tangible results and helped, for instance, this quarter to reduce the level of customer-related CapEx.

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Unidentified Company Representative, [28]

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Okay. So about the eSIM, we launched it a couple of months ago. It was more about the innovation and positioning right now, addressing the high-end smartphones, but it's too early to have it on the results.

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Unidentified Company Representative, [29]

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(inaudible)

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Luigi Minerva, HSBC, Research Division - Senior Analyst [30]

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Excuse me, can you speak a bit closer to the mic because I can't hear it?

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Unidentified Company Representative, [31]

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So we launched it a couple of months ago. It was about innovation and positioning, but obviously, addressing the high-end smartphones target. It's still too early to have results, so -- or to have a clear view of the impact in the market.

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Operator [32]

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And your next question comes from the line of Fernando Cordero from Santander.

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Fernando Cordero Barreira, Grupo Santander, Research Division - Equity Analyst [33]

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And first ones are related -- a follow-up on the DST telecom agreement. And in that sense, I would like to know, basically, if there is any minimum one did in terms of number of lines that you have to ramp from the network to be deployed by DST as well as if you have any chance to migrate the current ramping model that you have agreed to in the future, any kind of motorization model in order to migrate the variable cost base of the new customers in this network to a fixed cost base?

I have also another question, which is related with the CapEx. And we have seen some -- while the customer-related CapEx trends are encouraging, on the technical CapEx, we have seen some increase this quarter. I just would like to know if there has been just phasing issues on this 15% capital sales or Telco sales in the quarter.

And my final question is on Telco revenue. We have seen a strong performance within Telco for their revenues, almost 20% year-on-year. And I would like to know to understand which is the margin profile of these revenues. In that sense, if those revenues are having a lot of operational leverage or are basically contributing with average margins to the rest of the Telco operations?

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Unidentified Company Representative, [34]

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Okay. Thank you very much. On the agreement with DST, I believe you can understand that there are some details that are confidential. This is a commercial relationship. We are not supposed to make public all the details. What I can tell you is that, under this agreement, we are not committing any investment and we don't have -- we just have variable costs.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [35]

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On the CapEx question, Fernando, I mentioned in the presentation that the peak in this quarter had to do basically with the phasing of a couple of large transformation programs within the network, namely, the fiber and the single RAN, also with the peak in IT-related CapEx related to our transformation program. So this is phasing.

And again, we also flagged that we should expect technical CapEx to sales to come down to the levels that we have been guiding already for some time, so around 13%, more or less in line with what we have last year.

Maybe just to go back -- to add another information on your first question about DST and the commitment, what is worthwhile stressing is that on the regions that are within this agreement, we commit to use exclusively this network. That's our commitment.

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Fernando Cordero Barreira, Grupo Santander, Research Division - Equity Analyst [36]

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Yes. All right. (inaudible) And I guess just as a follow-up on the DST telecom topic. And in order to understand the opportunity, the market opportunity for you, could you share with us which is the current amount of DTH clients that you have in the planned areas where DST is going to deploy and where you are going to use that network?

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [37]

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Not really in the sense that the whole plan, the detailed plan, region by region is not closed yet.

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Operator [38]

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And your next question comes from the line of Pedro Oliveira from Caixa Bank.

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Pedro Pinto Oliveira, Banco Português de Investimento, S.A., Research Division - Analyst [39]

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I just have a question regarding your technical CapEx guidance on the midterm. If you did an agreement with TCS Telecom, part of your business will be more rent-oriented without any CapEx. So you basically are reaching more than 1 million subs -- houses without having to commit with a network and without having to do any maintenance CapEx on that network. So I was wondering if you believe we could have some downside on those 12% to 13% technical CapEx based on this.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [40]

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The way we see this, and we always say that we see over time, and in the long run, these levels of 12% to 13% technical CapEx. So whatever we are able to save through network sharing, infrastructure projects, those savings will be reinvested in a way. So we will keep -- we are keeping the same long-term guidance for the long run.

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Pedro Pinto Oliveira, Banco Português de Investimento, S.A., Research Division - Analyst [41]

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Okay. So just to follow up. In theory, when you don't have the network, your EBITDA margin, in theory, is lower than on the rest of the business. So that means that you would target a lower operating cash flow margin on those areas than on your current business?

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [42]

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Yes. Basically, we don't have CapEx, and we will pay rent. Where we have our own infrastructure, we have CapEx, and we don't pay rent. That's basically it, the logic. And so yes, EBITDA margin, it will be lower.

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Pedro Pinto Oliveira, Banco Português de Investimento, S.A., Research Division - Analyst [43]

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But the operating cash flow margin as well, right? Because you will reinvest the CapEx, that's what I'm saying.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [44]

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I'm not sure I do -- I just don't get that point.

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Pedro Pinto Oliveira, Banco Português de Investimento, S.A., Research Division - Analyst [45]

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No, no. I'm just -- it was -- your margin on CapEx was 12% over sales, right? So if you keep it, the sales that you are adding, where you don't have a network, you are still keeping the 12%. So you're still paying CapEx over those sales. That's basically my rationale, which means that it will pressure your operating cash flow margin overall.

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José Pedro Faria Pereira da Costa, NOS, S.G.P.S., S.A. - CFO, VP & Executive Director [46]

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We think that in terms of the level of usage of the networks, and they will depend basically on the success we will have in those regions and how many customers we'll have. Typically, these areas, and when we talk about the DST agreement, will be predominant to areas unreserved by DTH, which also has lower margins than typically fixed -- the fixed areas. Basically, we only use them -- we only use Pay TV as the core service.

So I think it's very -- it's a little bit early to anticipate the type of impact you are alluding. So the dilution of margin for us is not something that we are, at this stage, contemplating on those areas.

And also -- and I think you know that in the network sharing agreement that we have with Vodafone, after some time, we will stop paying Wholesale revenues to each other. So in a way, this is like we actually own economic with the networks.

So during a certain period of time, we'll get revenues from our partner, Vodafone, for them using our own network. We'll also pay some Wholesale fees to Vodafone for using their network. But after a certain period, basically, we'll stop receiving and we will stop paying. So effectively -- and the economic of this is, as we have our own network, so again, there is no margin dilution on this.

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Operator [47]

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Sir, there are currently no further questions at this time. Please continue.

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Maria João Hewitt Carrapato Moura Landau, NOS, S.G.P.S., S.A. - Head of the IR Department [48]

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So thank you very much for being with us today. If you have any more follow-up questions, you can contact me or (inaudible) on the IR team. We look forward to speaking to you after summer.

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Operator [49]

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