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Edited Transcript of SRCG.S earnings conference call or presentation 22-Aug-19 7:30am GMT

Q2 2019 Sunrise Communications Group AG Earnings Call

ZUERICH Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Sunrise Communications Group AG earnings conference call or presentation Thursday, August 22, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* André Krause

Sunrise Communications Group AG - CFO & Member of Management Board

* Marcel Huber

Sunrise Communications Group AG - Chief Administrative Officer

* Olaf Swantee

Sunrise Communications Group AG - CEO & Member of Management Board

* Uwe Schiller

Sunrise Communications Group AG - SVP of IR

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Conference Call Participants

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* James Edmund Ratzer

New Street Research LLP - Europe Team Head of Communications Services & Analyst

* Luigi Minerva

HSBC, Research Division - Senior Analyst

* Matthijs Van Leijenhorst

Kepler Cheuvreux, Research Division - Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Michael Foeth

Bank Vontobel AG, Research Division - Head of Industrials Team

* Priya Viswanathan

Societe Generale Cross Asset Research - Credit Analyst

* Simon Alexander Arulraj Coles

Barclays Bank PLC, Research Division - Research Analyst

* Stephen Paul Malcolm

Redburn (Europe) Limited, Research Division - Research Analyst

* Ulrich Rathe

Jefferies LLC, Research Division - Senior European Telecommunications Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the half year 2019 financial results call and live webcast. I'm Andre, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Uwe Schiller, Head of IR. Please go ahead, sir

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Uwe Schiller, Sunrise Communications Group AG - SVP of IR [2]

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Good morning, and welcome to our Q2 H1 results call. With me on the call is Olaf Swantee, our CEO; and André Krause, our CFO. As usual, Olaf and André will talk you through the slides, which have been distributed on our website. There will also be an update on the UPC acquisition included. And following the presentation, we will start the Q&A session.

Without further ado, I would like to hand over to Olaf to start the presentation.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [3]

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Thank you, Uwe, and good morning, everyone. Welcome to our Q2 results presentation. You probably have seen that Q2 was another really good quarter after already strong start to the year in Q1. Besides outperforming the market and growing EBITDA, we clearly, from a strategic perspective, demonstrated technology leadership with 5G.

I want to go into some more details and then André will follow up with the financials. And then I'm sure there'll be a lot of questions today.

So first of all Slide 4. Q2 represents a quarter, where we continue to have market share gains. We grew our mobile postpaid base with 10%, and we achieved double-digit Internet and TV net adds for the quarter. The customer momentum overall was very strongly supported by B2B with enterprise wins like TCS, which is the local [RDOT] road service and the Global Aid Fund in the western part of the country.

Also in B2B, I'm pleased that we have achieved an acceleration in our SME business, which we talked about on previous calls. Also on looking at the financials, Q2 represents a really strong set of numbers. We achieved gross profit and EBITDA growth, and with B2B EBITDA in a double-digit growth territory. All in all, the first half of 2019 confirms that we are on right track and that our strategy is working. We, therefore, decided with our Board to tighten our previously announced EBITDA guidance range at the high end.

So I will just quickly give you an operational update and then André will do the financials in more detail. So Slide 6, postpaid customer base up 10%, another very strong 40,000 new postpaid customers with -- which is always the most important with a very high proportion of primary SIMs, 26,000. And as already mentioned, I think B2B was a very important supporter here with 21% subscriber growth. But also our budget brand yallo contributed to customer growth through their web channel, which worked well.

And on the Q highlight clearly was 5G. We're among the first operators in the world that have launched 5G handsets from Samsung, Huawei and Xiaomi. And unlike to the rest of the world or at least the European arena, our customers can actually already use 5G. And by mid-August, we have 5G in over 260 cities and villages. And this is now by far the largest network in Switzerland and among the largest in the world.

As shown on the right side of this slide, our prepaid customer base was affected by ongoing prepaid-to-postpaid migration. And as you know, we have spoken to that in the past, but this is a trend that is also an opportunity for us because the ARPU is typically 3x higher when we move pre to post.

Now moving to broadband and TV on the next page. Another strong quarter in Internet and TV or even very strong double-digit. Solid performance was coming again clearly through convergence, which you can see from our quad play base. The actual quad play customer base increased by 15% and to drive this commercial momentum in Internet, we continue to use promotions, but not only promotions, also services are essential to unlock market liquidity. So we have this unique Internet onboarding support to customers, where every customer gets basically individual support to implement the Sunrise solution, which is working very well and which gets very strong feedback from the market.

In the TV and Internet space, we also launched an OTT solution, which is running on an Apple TV box, and which you can download on your smartphone or tablet, which complements the IPTV offering that we have in the market. And you can see that, that worked pretty well in Q2. We already had 3,000 of these new TV OTT products out there with customers at the end of the quarter.

If we take a look at the average revenue per user, ARPU, on the next slide. The blended mobile ARPU, which you can see combining post and pre, prepay is almost stable due to strong customer growth in postpay and the pre-to-post migration, which I described earlier. On a stand-alone basis, ARPU decreased in both postpay and prepay. And postpay continued to see dilution, no surprise, from secondary data SIMs and from out-of-bundle activities. Additionally, roaming and reduction in mobile termination impacted the ARPU. The acceleration of the decrease was driven really by value mix as a result of annualization of last year's mobile price increase as well as the promotional intensity in the market. And of course, also the share of B2B, which particularly in enterprise has a slightly weaker ARPU compared to consumer. We expect value measures to support the mix positively going forward.

In prepay, as I said, high-value customers are migrating to postpay and OTT. That has the, of course, a negative impact on the ARPU here. Landline voice saw some ARPU decline continuation in line with the overall industry and driven by fixed to mobile substitution. Finally, we saw a slight weakening in Internet and TV, which is mainly driven by mix effects and dedicated promotions.

And now I would like to move to the next slide to update you on the acquisition of UPC Switzerland, before I hand over to André. As most of you have seen, UPC Switzerland disclosed its Q2 results 2 weeks ago with KPI and revenue momentum improving sequentially versus Q1 and H1 overall came in line with UPC's turnaround plan and is ahead of our conservative expectations.

Ourselves, I spoke on previous calls about the work that we can do in integration planning area. The competition authorities allow us to do that, and what we have found working diligently on the synergies that we actually expect to exceed our initial synergy estimates by an annual run rate of CHF 45 million. Concerning the arguments published by freenet last week, the Sunrise Board believes they are not justified and not in the best interest of shareholders. You have seen probably the detailed statement that has come out from our Board, but I will talk about that more in a moment.

In terms of the Swiss Competition Commission, Weko, they are currently examining the planned takeover in detail. This phase 2 review is in line with our expectation and we expect regulatory decision latest by the beginning of October, which then will be followed by the EGM and we expect the potential closing by the end of November this year.

So if you go on the next slide and just show -- go a little bit more in detail on the actual UPC results, clearly, as everyone, I think, knows on the call, when you look into turnaround, you look at the operational KPIs to -- which are the leading indicators for EBITDA improvement over time. And it's encouraging to see that the RGU losses were slowing down in Q2 and keep sequentially improving.

The same is on the revenue side, where we have seen sequentially improving trends, and hence -- and UPC has confirmed that they are on track with their overall turnaround plan when we look at the financials. Compared, which I said already before, but just with a little bit more detail, when we look at our own conservative assumptions, UPC's H1 was actually ahead. We, therefore, see around CHF 10 million to CHF 15 million upside to our own full year 2019 operating free cash flow assumption for UPC.

The TV side, which, of course, is very important, is progressing well. In Switzerland, TV is obviously a key driver for broadband, that's why it is such an essential product and also the customer base is very, very large. And the transformation is ongoing as of July. About 190,000 new TV boxes have been rolled out, which is clearly improving the customer experience.

In terms of convergence, UPC was able to further improve the penetration by very solid results on mobile, also ahead of our own predictions, which should, over time, help to further support churn reduction. Finally, what is important at this stage is that the necessary investments into quality are ongoing and many of those investments have been made, which gives us the plan around 1 gig to provide to as many households as we can. We have announced ourselves that we expect that by 2021, 90% of the households in Switzerland, including 5G capabilities can go to 1 gig as an offering.

Let's now move to the next slide, which talks a bit more about the synergies. These synergies clearly are very, very important, but they don't represent, of course, the full opportunity around long-term market share gains through an even stronger Sunrise. But when we look at the details of the synergies, at the time of the announcement in February, 27th of February, we announced that we expect the total annual synergy run rate of CHF 235 million. We've done a lot of integration planning work, and with all the details we have found that we can do CHF 45 million more, which is an increased synergy run rate to CHF 280 million on an annual basis and CHF 3.1 million over the full period.

And the areas where we identified the opportunities are -- the biggest component of that is actually the services that we will source initially from Liberty Global in Holland, and which afterwards, we want to and we have to build ourselves within our company. And after closing, we will start building up the infrastructure to internalize these capabilities at significantly lower costs. This will, of course, require, which you can see on the actual integration cost, some one-off investments, which we have captured in the revised cost plan.

Besides the incremental OpEx synergies, we also see room for more opportunities in other areas, in particular, the success of the MVNO, which is more than what we had expected. There we see possibilities. We also see opportunities further around B2B cross-selling on the revenue side. We have a slight increase of a few million in terms of revenue synergies. The bulk of the additional synergies come from cost.

If we now move to the next slide, which gives a summary of the acquisition of UPC Switzerland. The synergies, the improved synergies, which is really encouraging is CHF 300 million when we do the net present value, so it will go from CHF 2.8 billion to CHF 3.1 billion, which I already said. We need additional investments, one-off investments, in the tune of CHF 90 million to CHF 100 million.

This is mainly driven by 2 elements. I talked about the infrastructure that we need to build up to build our own TV and IT capabilities in-house. The second part is the opportunity that we are investigating of having one headquarters for the entire organization, which, of course, would be very helpful in driving common culture and ambition in the company.

All these incremental costs are reflected -- fully reflected in the CHF 3.1 billion NPV number. Timing-wise, the revised synergies are expected to be higher over the previously indicated period until 2022, with additional upside to be achieved by 2023.

So let me now take the opportunity to address the press release that freenet has given last week on Friday, and I will move from that to the next slide. As you know, there is a more detailed document available coming from our Supervisory Board that explains this. But let me just give you a quick summary. So overall, we are convinced that we have a really attractive transaction, which creates a stronger and more valuable Sunrise, even more so when we look at the increased synergy estimates and better-than-expected performance of UPC in the first half.

Now let me try to cover the key 5 points that freenet has raised, quickly, and then I'm sure there'll be a lot of questions afterwards. So leverage, price, synergy allocation, transaction and debt structure. If we look on leverage, overall, we remain absolutely committed like when we started the transaction -- to announce the transaction through a prudent capital structure and a progressive dividend policy. That is the -- how we underpinned this transaction. Following the better-than-expected UPC results and synergies, we are open to revising our starting leverage up from 3x. I also want to highlight here that the Sunrise Board supported a further reduction of the rights issue by CHF 1 billion, with the introduction of an equity-linked instrument. And this was, however, rejected by freenet and we will continue our existing dialogue with shareholders, of course, on leverage moving forward.

On the purchase price, we believe we are paying a fair price. The Board has done an independent fairness opinion that supports this assessment. We're paying lowest cable multiples in recent memory when you adjust the level for synergies and Switzerland's low tax and interest rate. The deal is accretive, as we have communicated in the past, to our adjusted equity-free cash flow per share from the first full year. And furthermore, I think it's worth to highlight that freenet did not challenge the purchase price in internal deliberation at the Board. There was actually a unanimous Board support on the CHF 6.3 billion price prior to the announcement, even when this was based on the original lower synergy and UPC poor performance scenario. And in addition, subsequent to freenet's most recent public statements, freenet Board representatives acknowledged that a straight purchase price reduction is really difficult to argue for.

On synergy allocation, we are keeping over 60% of the updated synergies for our shareholders. This compares very favorably to our cable deals, as you certainly will now.

On the structure, originally, which many of you know because we have mentioned this before, we offered a share consideration to Liberty. That is actually where the discussion started. But we were unable to agree on a value, on a governance leverage, and a distribution policy construct that works for both of us. Freenet agreed with that assessment at that time and supported the all-cash offer funded by CHF 4.1 billion rights issue when it was first made. Again, that offer was made with unanimous support from the Board. And again, the good news is that obviously, since those first announcements, we have seen higher synergies and a better performance on UPC.

On debt structure, UPC's debt is flexible, cost-effective and we have avoided taking market execution risk and paying significant financing fees. The debt market has indeed improved since announcement as a function of the interest rate environment, but the opportunity cost to Sunrise's shareholders is marginal.

So summing up, the Sunrise Board has announced, I think, very clearly this morning that we believe that freenet's concerns are not justified and are not in the best interest of all shareholders. And as we have clearly told many journalists this morning, the Sunrise Board and the management really believes that this transaction makes Sunrise stronger, more valuable and will drive very significant shareholder value.

Andre, would you like to continue?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [4]

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Yes, thanks, Olaf, and good morning, everybody, also from my side. Looking at the Q2 financials, the continued excellent commercial momentum has driven strong financial performance in the second quarter. So let's have a look at the overview of the results.

So starting at the top right, service revenue growth has slightly accelerated from Q1. So we have seen now a 3.1% growth year-on-year achieving CHF 386 million of service revenues in the second quarter. Total revenue has declined and the driver for that is the lower margin hardware and hubbing revenues, which have been declining. So the total revenue is at a decline at 1.7%.

However, as the service revenue growth is driving the majority and has the biggest impact on the gross profit. Our gross profit has continued to grow by 2.6%, reaching CHF 311 million in the second quarter of this year. The gross profit margin has slightly reduced, and I will elaborate on that in the upcoming slides.

Looking at OpEx. OpEx is almost flattish. I mean we have seen a slight increase of 1.8% reaching CHF 156 million of OpEx cost in the second quarter. And putting that all together, we turned out at a strong EBITDA growth of 3.4% with CHF 155 million adjusted EBITDA at the second quarter. For the first half year, we are now achieving CHF 302 million adjusted EBITDA, which is a CHF 12 million year-on-year growth, and we have also seen, for the first half-year combined, now an improved EBITDA margin of 33.5%.

Now with that, let's have a look at the -- detailed look at the at the service revenue dynamics on the next page. As already mentioned, on the top of the revenue bridge you see that our low margin revenue components mobile hardware and hubbing have been declining in total by 4%, by minus CHF 12 million and minus CHF 7 million. As you know, this business is volatile in nature depending on hardware launches and also on the hubbing structure. So overall, not a deep concern for us, this decline.

If we look at the service revenue, we have seen a strong growth of 3%. In the quarter now, we have seen mobile postpaid as plus CHF 5 million, mobile prepaid as minus CHF 5 million. The mobile postpaid number is slightly softer than what we have seen in the first quarter compared -- on a year-on-year growth basis. The key driver of that is mainly that we have seen a rolling off of a price increase that has now annualized. And additionally, as you have, of course, observed is that there is quite an intense promotional activity around winning new customers, which will also roll off over time when customers run out of their initial discounts. And as Olaf said, I mean we are looking also into additional value measures on the ARPU side to improve the picture going forward. Nevertheless, I also have to say that this is not a surprise, this is like what we have expected, so this is in line with our expectations.

Looking at landline voice. I think here positive trend now continuing. We see reduced impact from a service revenue growth perspective year-on-year. So stable outcome in the second quarter. And strong continued growth on the basis of the strong customer base growth on the Internet and TV side and a small contribution of CHF 3 million from other. So in total turning out a CHF 455 million, marking a 3% service revenue growth, as I mentioned already.

Now let me make one comment additionally. We are expecting that driven by normal seasonality, we expect also that the third quarter will be rather soft on top line development. Nevertheless, we are also expecting Q4 to accelerate again. These dynamics are fully priced into our tightened guidance that we are giving today.

So with that remarks, let's move on to the gross profit and OpEx numbers. On gross profit, we have seen a 2.6% growth. As I mentioned already, we have seen a slight reduction in the service gross margin. The driver for that have been, on the one hand side, mainly mix effect, I would say. Of course, with a growing B2B business, we do see that B2B revenues are taking more place now, and, of course, that is coming in with a slightly reduced margin compared to our other revenue streams. But also compensated by other positive effects like, for example, the MTRs, which had a slight positive impact on the quarter.

On the adjusted OpEx side, we talked about it, 1.8% increase in the quarter. And we see, excluding tower transaction and CHF 156 million being even lower than what we had at the previous quarter. Overall, we continued to invest into our growth activities, into our service activities, and I would also like to highlight that we are expecting, in the third quarter, an additional increase and a stronger year-on-year OpEx growth due to commercial push and growth investments that we are doing, but also this one is fully reflected in our tightened guidance.

Now with these remarks, I would like to turn to the equity-free cash flow and CapEx and leverage ratio chart. Maybe we start this time on the top right because the key change in the quarter is actually that the CapEx numbers are now including the Swisscom access deal payments that we have made and also the spectrum payments made. And as you can see on the top right, this is now pushing up the CapEx to CHF 426 million on an LTM perspective. I think here this is nothing that is surprising to any of us. I mean we know that the spectrum costs have been less than initially expected, but of course, it is having a marked impact on our equity-free cash flow bridge, if we now move to the left-hand side.

So on the left-hand side, I would say, the only real change is, on the one hand side, reported EBITDA on an LTM perspective going up from CHF 640 million to CHF 650 million. On the other hand side, you see net working capital more or less stable, tax more or less stable, interest stable, a little bit of an impact on other financing and -- activities and lease repayments. But the key change is actually in the CapEx line, which goes from last quarter LTM CHF 365 million to CHF 426 million. Now that is driving the equity-free cash to CHF 118 million. If we do our usual normalization to understand what is the underlying normalized cash generation of the business, we see a CHF 234 million, which is an increase of CHF 7 million quarter-on-quarter, and is well covering our dividend guidance for the year 2019.

Last piece on this slide, on the bottom right, if we look at the leverage ratio. Now if we include all of the moving parts and we have a slight increase year-on-year to 2.24 as a leverage ratio excluding IFRS 16, IFRS 16 is having an incremental impact driving the number to 2.49. But again, all this very much as expected. And of course, one key driver in this increase in leverage is also the dividend payment made in the second quarter, which represents a cash outflow that changes the net debt position.

Now with that, I am actually closing the overview of the financials. I think the strong financial performance and the advanced visibility that we have now, given that we have seen more or less 8 months of the year, we are today tightening our guidance at the top range.

And with that, I hand over to Olaf again.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [5]

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Okay. Thank you, Andre, and I will keep it very brief, 2 more slides, just very briefly on our strategic priorities. As you very well know now, I mean we have talked about this for the last few years. We're investing in 3 growth areas: network quality; differentiated customer interface; and innovation particularly in the context of convergence. I was particularly pleased with our results around the network quality side that we are in a unique position. I mean this is one of the absolute few operators worldwide that can say hey, we have started with 5G. We started with almost 50 Swiss cities and now we have already 262 cities and towns covered. And this, of course, is, for the long term, a very, very important lever for our mobile business.

And 5G continues to be complemented. That's one of the reasons we could move quickly by having a fantastic 4G coverage. We have geography coverage of 96%, which some of you probably already know, which enabled us to move much faster into 5G.

On the customer interface side, we won the connect shop test in Q2, which is really cool, which gets us to best shops across Germany, Austria and Switzerland in telco land. We had a modest expansion. We are pretty much, I would say, at the end of our build-out of a new, very high-quality distribution channel. We also -- which is encouraging. You remember, I've been speaking a lot about the fact that our online distribution channels had to improve in parallel to the refresh of our stores. And we're seeing good results from our online channels, in particular, in the support of our Salt brand, which is going really well on that platform. Finally, in the terms of innovation. I mean I spoke about 5G, but also the TV OTT product is, I think, an important step for us in new TV landscape as -- with an Apple TV box implementation and the smartphone implementation.

So let me come to the final slide and the conclusion. Overall, looking back at Q2, another very strong commercial momentum across the board in all product categories despite clearly a very competitive environment. As a result, our financials are very strong with 3.4% adjusted EBITDA growth, and this came from as a result of real growth through our gross profit line and not as a result of cost-cutting, as Andre said. In fact, we have -- we are continuing very carefully to invest in certain areas to underpin the long-term strength of the -- of Sunrise.

The reinvestments will accelerate in Q3 year-over-year and will soften, as Andre said, Q3 EBITDA development, but are important for the future. And already mentioned before but that's also I think encouraging, we are now guiding for CHF 618 million to CHF 628 million, so we were able to tighten the guidance at the high end, which is good news. Overall, I'm really pleased to see that today, we have a more diversified and resilient company compared to 3 years ago. When you look at the details of our product categories, we can see that prepaid and landline voice business has declined from 21% of service revenue at the time to only, it's still a big number, but 13%, which of course is a much better and healthier position. And in parallel, we have seen our Internet and TV business increase from 14% to 20% on the basis of convergence.

And now when we look at our end customer segments, I think it's pretty clear now that we have turned around B2B, which also gives us more balance across the entire business.

And an area which we didn't cover today, I didn't talk about it because it's small, but it was -- you may remember, it was a drag in the past on our position was the integration revenue. Also that line has actually turned around through the B2B transformation. Our multibrand strategy is working better than before. And last but not least, we are seeing a good solid growth in mobile data SIMs, where we believe, in the long run, there is more opportunities, with more connected devices coming to the market.

So with that, I would like to close a little bit longer presentation. Apologize for that, but I think there was a bit more to say than just the Q2 numbers. And now we can take your questions.

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Uwe Schiller, Sunrise Communications Group AG - SVP of IR [6]

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Yes, operator, could you please start the Q&A session?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Michael Foeth from Vontobel.

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Michael Foeth, Bank Vontobel AG, Research Division - Head of Industrials Team [2]

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Three questions. The first question is the additional synergies that you're seeing with the UPC acquisition. The -- it's approximately 20% higher synergies, but only resulting in just over 10% increase in your NPV calculation. Can you maybe just elaborate on how you -- or why is the NPV calculation growing less than proportional to the synergy increase?

The second question is why -- or could you elaborate further on why those additional synergies come at so high initial costs? You were explaining a little bit on that, but maybe a bit more color on that.

And the third question is the consideration of reduced rights issue of CHF 1 billion. Can you maybe elaborate further on the rationale behind that consideration?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [3]

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Yes. Michael, thanks for your questions. So when we look at the synergies and your question was why is the NPV increase less than -- in total, less than the revenue run rate increase -- or the cost run rate increase? Here the point is very much -- as you pointed out in your second question, there are higher integration costs linked to it. And the reason for that is, if you look at the increase, then the vast majority is actually coming from the TSA-related costs. And as we have explained earlier on the TSAs, we had very little visibility on how quickly we could actually migrate over those TSA services to Sunrise. And of course, if we take this over, we have to make an effort to actually rebuild those platforms at Sunrise. So now we have the visibility. We know what investments are that are required that's why the integration costs are going up.

And also on the other hand side, it's yielding the additional synergies. So that's why I would say there is a little bit of an imbalance between the synergy update, so to say, and the integration cost update. Additionally, we've also taken some caution on the integration cost number. In particular, in regards to the headquarter because we have a unique opportunity to potentially colocate the 2 headquarter organizations in one office, which, of course, will have significant upside for the cultural integration. But that comes with some additional costs of closing down one headquarter. And that has now taken into consideration. So that are the key drivers for your first 2 questions.

And on the last one, the rights issue reduction. Yes. On the rights issue reduction, here this is coming from 2 elements. In fact, the total amount that we offered towards freenet was even going up to CHF 1.5 billion. And there was a mix of, on the hand side, a potential increase of leverage and the second one was the issuance of a deferred mandatory convertible note. That deferred mandatory convertible note would have been sized probably in the range of CHF 1 billion and would have led to a, if you want, delay of the capital increase, but also to a diversification of the investors as these type of instruments, of course, attract a completely different class of investors. And as such, would have actually burdened our existing shareholders with a significantly lower amount of capital increase. Unfortunately, the proposal was turned down by freenet. And as the deferred mandatory convertible would require authorized capital, that authorized capital would have required 2/3 majority, which makes life no more complicated if freenet is actually not willing to take this option.

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Operator [4]

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The next question comes from the line of Michael Bishop from Goldman Sachs.

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

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Just a couple of questions from me. Firstly, more broadly thinking about the potential to raise the leverage, just to clarify, are you just referring to that in the context of the higher synergies? Or are you are thinking more fundamentally?

And then as a follow-on to that. The mention of convertibles seems quite an interesting way to finance incremental leverage. And obviously, that's been used in other cases like Vodafone at very attractive rates. So I was just wondering if you could give us any more insight into why you think freenet was also against that.

And then thirdly, on the higher synergies, given a lot of those are coming from lower TSAs to Liberty, are Liberty Global completely happy with that? Because obviously, that was, I guess, a mechanism whereby they were getting some incremental tail value to the transaction?

And then if I could just do one on the core business, on mobile ARPU. What value measurements are you thinking about taking that you mentioned on the call? And how long of promotions that you're talking about in terms of washing through the ARPU?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [6]

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Yes. Okay. Thanks very much, Michael, for the questions. So if I start off with the first 2 questions and Olaf will take the second 2. Then on leverage, firstly, I think what is very important that we are reiterating our stance to that, that we are wanting to continue a prudent capital structure, allowing for a progressive dividend payout. That is actually really what is driving our thinking around leverage. Now of course, one technical element is just because of the higher synergies, there of course, even at the same leverage, we could have somewhat higher debt number included.

And secondly, of course, we see that there is some potential flex because with the higher synergies as well, we are also expecting that the delevering can be somewhat accelerated. So that is our thinking around this, but it's really guided by our key principle around the prudent capital structure and the progressive dividend. And that's why we are thinking that there is potentially some headroom to be discussed.

On the other hand side, I would also like to flesh out that we always continue a, I would say, conversation with our shareholders because, as you know, there is very different appetites at different investors on what the right kind of leverage is. So I think this is also a little bit of a balancing act of finding the right balance for our existing shareholders in regards to their appetite on this.

Then on the MNT, I can't tell you really. I don't know what the reason is. Why they were not willing to engage into this potential opportunity. As I said, we believed it was a very effective and attractive instrument to us and also to our shareholders. They have not actually given any arguments for that. And I mean you have seen that they have come out with a press release last Friday. We don't have any further insight on that.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [7]

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On the -- on your question regarding synergies and if Liberty would be happy or not. Maybe 2 comments. Allow me to -- the synergy increase is obviously not only this -- the so-called TSA cost reduction. We have a small number on the revenue side in particular in relation to B2B. We have, furthermore, of course, the MVNO, which is doing better than expected. And we are seeing there some opportunities for additional synergies. And then we have a small number on procurement and CapEx.

But on the TSA, I think it was -- you need to ask the question also to Liberty. But in principle, it was from the start the idea anyway that we would build our own capabilities and services, and Liberty has agreed to that and that seems to be also in line with their model. So we don't see an issue there.

On mobile ARPU, your last question, your fourth question. Our view is really that the ARPU pressure from the value mix should progressively soften or, e.g., normalize over time as we apply value measures moving forward. As you can imagine, we -- these value measures have a high degree of commercial sensitivity. So we can't really disclose them. But what we can say in addition is that the reality in -- is also that we have seen that Swisscom have become more price aggressive especially in fact in the indirect channel. We're also facing very aggressive retention offers by Swisscom in B2B where we don't really understand the economic rationale behind them.

And so there is a clearly competitive intensity. And that's logical because we have been gaining share. We have been very performing in the market. But at the same time, we will apply more and more value measures moving forward. And lastly, I mean in this kind of market environment, you can imagine that also the benefits of the UPC transaction is becoming even more compelling. I mean they have demonstrated to be a more forceful competitor over the last 2 quarters. I guess when I say, they have performed better than what we had expected, it also means that they have been a stronger competitor over the last few quarters -- over the last 2 quarters. And it gives us a bigger customer base, more investment capability, purchasing power, and in particular, on the Internet side, an ability to reduce our dependency on the incumbent.

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Operator [8]

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The next question comes from the line of Simon Coles from Barclays.

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Simon Alexander Arulraj Coles, Barclays Bank PLC, Research Division - Research Analyst [9]

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Sort of been asked on freenet already, but I guess I'm just wondering, if there's still scope for further negotiations? Or do you think it's going to be a bit too difficult to try and reach a resolution that could appease freenet, but also be fair to your other minority shareholders? So are you now just focused on getting approval from the rest of the shareholder base that you say you're have conversations with?

And then linked to that, I guess, how are you thinking about the leverage and dividend on the pro forma company? Because you're talking about potentially, I think you said, CHF 500 million or so higher on the leverage side plus what would have been mandatory compared to what freenet had been open to that. So I guess there's a question mark on what could happen to the structure now? And what have shareholders generally been saying around leverage and the dividend from the conversations you've had so far?

And then finally, just on your OTT TV, I don't think anyone asked it on the last call either. I was just wondering, the thinking behind unbundling that from broadband because typically we've seen that as a churn reducer. So I'm just wondering, what the thoughts are around offering that as a standalone OT (sic) [OTT] TV. And where you see potential upside from doing that going forward?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [10]

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Yes. Thanks for your questions. So maybe I take the first two ones. On the negotiations questions, I understand your question is in regards to, do we have negotiations with freenet, correct?

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Simon Alexander Arulraj Coles, Barclays Bank PLC, Research Division - Research Analyst [11]

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Yes. Do you think you can carry on negotiating, or is it worth just focusing on the rest of the shareholder base now?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [12]

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Well -- so first of all, I think we have last week made a pretty compelling and attractive offer to them, which they turned down. They restated what they are looking for. Our Board has reacted to that. So I think if there is any new proposal on the table from their end, of course, we're going to have a look at it. But that's the way we'll look this, yes. So the focus will be very much on working with all shareholders going forward and to find the majority.

On leverage, like you rightly said, so we have offered up to CHF 500 million as part of the package that we discussed with freenet. Now I mean you asked for what is the view of investors, like I said, yes. So there's very broad range, right? I mean we have investors that deem 2 as an attractive leverage and we have others that actually say 5 is fine.

Now we will actually go through the discussion again. I think at the moment it's premature to make a judgment on this because I think people also have to digest the improved numbers now and make their stance and understand also the overall situation. So I think there is -- we will seize the opportunity going forward now.

I think what is also important to note is that freenet's position is pretty unique, yes. I mean they as an investor have their own problems, which they try to solve on the back of Sunrise. And I think that makes them pretty unique in their requests. So therefore, we believe that the offer that we have now on the table, and we will discuss whether there's fine-tuning needed. But overall, we are still convinced that this is very acceptable to the majority of shareholders.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [13]

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On the point regarding to TV OTT, I really encourage you to have a look at our product. It's actually a really cool product, a really good product. The reason that we are quite excited about it is, is because it allows us, in fact, to reduce some of the costs in the long run, around the whole business model because this TV OTT product requires, of course, much less hardware. And also we believe because there are many -- there is less heavy lifting in your home to use it, it will lead to lower services cost over time.

And lastly, it's, of course, also a true option for a segment in the market that is maybe moving a lot, that doesn't need to have a full IPTV traditional solution. So it was also something that was just really important to have to cover the entire market requirements.

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Operator [14]

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The next question comes from the line of Ulrich Rathe from Jefferies.

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [15]

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Three, I suppose. The first one, just coming back to the -- sort of the phasing that you are describing for the remainder of the year with investments sort of push in the third quarter and some benefit in terms of reacceleration in the fourth quarter. Could you sort of highlight, what you -- what your expectations for the overall market backdrop are? Is this saving also sort of, supported by the market quieting down in your expectation? Or would you expect the current emotional activity to sort of continue, and then you -- your actions would sort of overlay that and create this sort of second half that you're describing?

And the second question is, on -- in your Q1 call you sort of highlighted investors' feedback regarding what you see and your report telling each have got their overall tone. I suppose if one of these conversations have continued, could you give us a sense of whether you still see a broad support amongst the shareholders that are not freenet? And whether there are any particular geographic pockets that sort of support your criterion? And what may be the main points are to sort of bring up by and large across the board I suppose?

And another question if I may, I'm not entirely sure as you sort of put all the different bits together about what you have talked about with regard to adopting freenet. Did you say that you made a separate offer to freenet? Is this something that we know about? And can you please describe what that offer that you made to freenet last week, sort of entails? That would be helpful.

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [16]

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Yes. Ulrich, I take the first and the third. So starting off with your phasing question. So I would say, first of all, there is normal seasonality if you look at our past 2 years at the results. And there, the third quarter is typically seasonal-wise quite challenging and mostly softer than the other quarters in the year-on-year growth perspective. So the largest chunk of the phasing that I was describing is actually linked to seasonality, right?

So we have roaming, which is actually -- we are giving very tight pricing to roaming in order to facilitate attractive offers in the summer periods, and roaming is playing a big role mainly in the third quarter. And therefore, that has a very strong impact on our results. Additionally, like I said, we have this year also the impact from the running out of the price increase that we did in Q2 last year, which has started to impact Q2 but will continue to impact Q3. Again, this is not a surprise to us, but this is something that we obviously know.

And additionally, also usually after the summer period, the back-to-school time is very promotional intense and therefore, carries quite heavy OpEx cost in order to actually get prepared for the fourth quarter. Now then, typically also in the first quarter, you're benefiting from those upfront investments that you are doing as you're building order book into the fourth quarter and so on and so forth. So that's why we are expecting that the fourth quarter then will show seasonal-wise, commercial-wise. And as Olaf has said, we are continuously also reviewing our pricing and promotional approach, and adopting that where appropriate. So with all of that, that's why we believe that the third quarter will be rather softer and the fourth quarter will be -- accelerate again, and that is actually included, and integral part of our guidance that we have given.

Now on the freenet offer. We had a Board discussion at the beginning of last week, in which we informed freenet -- or the Supervisory Board informed freenet overall about the improved situation, i.e., the improved situation of higher synergies, better performance on UPC. And on the back of that, listening to the concerns that freenet was raising, and also trying to find a middle ground solution that would be also acceptable for all shareholders. And that had 2 components very much, so we were elaborating opportunities in regards to somewhat higher leverage. And we were elaborating an additional opportunity in regards to issuing a deferred mandatory convertible note. And that was kind of the offer that was on the table. And they only came back on Friday, I would say, lunchtime, where a Board meeting was set up. But we could already read in the press on that Friday morning what their answer was.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [17]

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On your second question, Ulrich, just briefly from my side, André has also covered it before. The Board and the management really believes that the shareholders will support this transaction because it's a good transaction. It's a transaction that makes sense. It's a transaction that has been done in many other markets, as you know. It's a transaction which is unique in a sense that we have an FNO and an MVNO that we can bring to us, hence, the synergies are on the cost side higher than in similar deals. The -- since the road show we have done, I mean we have visited 2 [Homeward] -- we have done 2 Homeward investors. We can now today confirm that the synergies after many months of detailed work with experts is actually significantly better and the management is committed to deliver on those synergies.

And we haven't -- I mean I haven't received so many questions, but more in the roadshow, we have had many discussions, of course, also about, hey, what can this combination actually do to the Swiss marketplace? What can it do in the long run to drive market share gains? And fundamentally, this new combination is simply significantly stronger than Sunrise standalone because we don't have in our current model CHF 3.1 billion synergies. We don't have, of course, the same size customer base. And moving forward, we still have to, on a standalone situation, pay to our incumbent in excess of CHF 100 million a year. And if we can reduce that bill that would also of course, strengthen our competitive position. And that's why we believe now -- the work still continues, of course. We have a long process ahead of us. As I said, we are waiting for the Weko, the competition authorities. And then we will certainly spend a lot of time with you and with others and with many other investors to continue to discuss this transaction in detail.

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [18]

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If I may just follow up on the very first question, the core of the question was whether you expect your markets to improve as sort of part of your outlook for this second half. And you sort of described just usual seasonality, which I suppose implies that you don't expect the market to improve. Is that correct?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [19]

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Well, I mean we are currently observing a continued, I would say, intense promotional activity. So it's hard to judge whether that would change. I mean there could be potentially some catalysts for it. And we think that some of the promotional activity is probably too far-reaching. Like -- but as I said, and Olaf said it as well, I mean this is very commercially sensitive, what our thinking here is. But we are reviewing our activities. And of course, we are not only reacting but we are also acting. And therefore, we will do what is appropriate in our point of view. I can't really speak and don't want to speculate on what the market is going to look like in the fourth quarter. It's not our base case that there will be a significant change.

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Operator [20]

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The next question from the phone comes from Georgios lerodiaconou from Citigroup.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [21]

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I don't think we can hear you.

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [22]

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Operator, can you please check for...

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Operator [23]

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Mr. -- yes. Mr. Ierodiaconou your line is open, please go ahead.

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Uwe Schiller, Sunrise Communications Group AG - SVP of IR [24]

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Okay. Can we please take the next one? Maybe he disconnected. And Georgios, if you can hear us then please register again for the question. Otherwise, we will call you after the -- after we finish this call and follow-up with you on this. Sorry, but we couldn't hear you.

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Operator [25]

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The 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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Three questions. The first is on -- again on the market dynamics. You mentioned Swisscom is more aggressive. Actually, Swisscom mentioned in their conference call last week that they thought the level of promotions in the market was not rational and not sustainable. So I'm wondering whether you're actually both behaving a bit irrational in this phase. If you can comment on that? And what you see from the Salt side, whether also Salt is becoming a bit more aggressive in this phase of the market?

Then, the second question is on the UPC performance. You mentioned it is improving. And I'm wondering how much the performance improvement is down to again aggressive promotions. Because if we look at the numbers, it looks like the premium TV customers continue to fall, and what is improving is really only the TV customers in the basic tariff. So if you can give us your view on that.

And then thirdly, going back to the synergies. Maybe a blunt question, but how sustainable do you think they are? Particularly, revenue synergies are famously unreliable, and CHF 50 million run rate of revenue synergies is quite a large number.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [27]

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Luigi, I will try to take your first and your third question, and then André will take your second. On the market dynamics, I can only say that our strategy from Sunrise is not only centered on promotions, it's centered on quality, right? I mean we have been significantly investing in our network. We're now for the first time ahead of the incumbent, our 5G network is twice the size last time I checked compared to Swisscom. Which I think is a clear proof point that we are driving differentiation through innovation, through network quality, service. I'll speak a little about service.

But at the same time, promotions in particular in the Internet and TV space had worked for us in the past and continue to work for us to unlock certain liquidity in the market. But as I've mentioned before, we can't really comment on details to what we're doing or what we're planning to do.

And on Salt, I can't say much about Salt. They will think -- they will come out with the numbers soon. We don't see them all the time in the market. The competitive intensity is similar as before from them. And you hear my voice, I'm a little bit -- it's difficult for me to comment so much on the competition or on the promotions, on the pricing because it is so sensitive. So if you don't mind I will leave it there for now on your first questions -- question.

Oh, no, you had also the point on -- well, the point on UPC, André will take. Let me, if that's okay, switch immediately to the synergies.

It is actually to clear, Luigi, that the synergies is the management team's responsibility, the credibility is with us to deliver on those. I can tell you, those -- that synergy upgrade that we have made didn't come just after a few days of deliberation. This has come from detailed work that we are -- that we have done. And we're not with synergies, going for immediately because that will be very risky to just go for the maximum. We go for the stuff that we know that we can deliver on and that is what is there. And hence, you actually see that the revenue synergies are very modest. We have put most of our focus on cost synergies. The revenue synergies are modest. Why? Two reasons.

One, because of what you said. Revenue synergies are difficult to predict in the beginning because you can't -- as you noticed with my answering your first question, we can't really foresee the exact development of the market. But secondly, they're also low because we have said, we want to come out quickly with attractive offerings to further help this -- the UPC standalone levers to improve the operational model behind them. Hence, mobile offerings or Internet or TV offerings. And the revenue synergies do not include, which I said in the very beginning. But we have those debates in more detail with -- during the roadshow. But I'm really excited about the opportunities that, of course, there are in the long run of further establishing potential leadership around TV, driving more market share gains in mobile, Internet and TV, et cetera, on the back of a stronger Sunrise. And those are not included exactly in the revenue synergies because that would be premature.

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [28]

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So then Luigi, if I cover your UPC performance question. So I think there are 2 angles to that question. The first one is, first of all, when we made the transaction, we had our own perspective on their performance for the year 2019. And compared to our expectation of how they would do, they are performing better, yes. And now that better means, of course, we were expecting still them to decline, but we were actually more cautious than they were in their own plan. So that's one reason why we are saying that was our own expectation, they are performing stronger.

Now -- then the other angle of course is now in absolute terms, how does this performance really evolve? And then I think if you look at it in detail of all of the components, they're making sequential progress. And this sequential progress is a clear indication that the business is on the path to stabilize in the upcoming quarters. Now this will not be immediate. I mean our own expectation was that to happen potential in the first half of 2020. But with all of the KPIs actually moving in the right direction, we believe that this is actually a really subsequent improvement that we are seeing.

Now on your TV question in particular, I think you also have to check for the announcement that they have made in regards to that -- the TV counts between basic and premium television, that they have actually changed a little bit the definition. So in the past, for example, they have counted the multiroom customers as basic TV connections, and have now revised that overall logic. That has driven actually some change to the numbers. But overall, if you look at the numbers, I think what we are seeing very compelling actually is also the strong growth in mobile, which is on a level, which we have not seen with UPC in the past years. And also the strong increase on convergence. And I think that's also a very strong indicator with convergence and with the improvement on the product, coming to 1 gig speeds at the end of the year and rolling out the box that the churn numbers will come down. And we can see that in the numbers of the Internet lines, which have sequentially -- strongly improved. So that's our readout on the performance in a bit more detail.

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Operator [29]

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The next question comes from the line of James Ratzer from New Street Research.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [30]

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Had 2 questions, please. The first one was just regarding your -- strength you're getting in the Internet and TV revenues in Q2. I mean it looks like a lot of that has been driven by some of your -- and the other voice revenues from your B2B strength. So I was wondering, if you could talk a bit more in detail about kind of how sustainable the recovery is that you're seeing in landline? I mean is this just a blip around when contracts are booked? How should we think about the growth in that area going forward on a more sustainable nature?

And then secondly, just interested in the moves around freenet representatives now no longer being involved in the deliberations on the transactions. I mean I understand that they don't approve of the transaction. You're clearly not happy with that. But it seems like quite a strong move now that they're no longer going to be involved in the discussions. Just wondering if you could talk us through the legality of that move? Is there a threat that freenet could try to legally challenge the move? And if so could that delay the transaction at all?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [31]

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Yes. Thanks, James, for your questions. I'll take the first one on the Internet and TV evolution. I would say, first of all, the key driver for the strong numbers that we are seeing is the growth in the customer base, yes. You have seen that we have -- had a strong quarter. And that was another strong quarter that has seen a lot of activations, that was coming from very strong order book that we have built in Q2, in Q1 and even in Q4, yes. So that is kind of now really materializing and is driving the upside on the Internet and TV revenue line in the second quarter.

There's also a contribution, of course, it comes from the growing B2B side. But that is more like, I would say, steady and there was one additional element which has, I would say, a little bit exaggerated, but not, I would say, to a large extent. But we had a very successful promotion with TV screens in -- I think it was in April, May, which has helped that number as well. Now some of that actually was obviously for the screen, which was low margin. And that will probably not sustain on that level. But given the success of the promotion, it's also likely that we will continue some of those exercises going forward.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [32]

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But that -- sorry, just to follow-up on that. André, it looks like the -- I mean a lot of the strength actually also in wireline has come on the voice side, if I strip out from your voice revenues, hubbing, and then the amount that you calculate from ARPU times voice customers. There has been quite a material pick up there. My understanding in the voice revenue is that that's where some of the B2B revenues are booked. I mean is that correct? That looks where there's been the sharpest improvement this quarter.

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [33]

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Yes. I think first of all, I mean we have seen that overall the landline voice decline has decelerated over the past quarters, right? So we now see that it's more kind of stabilizing. And there was an additional upside that was coming also from integration, which was also part of the landline revenues, which has -- actually also have that number, yes. So as you know, we are doing a strong turnaround of the integration business, and that has helped in the quarter. Could be a bit volatile going forward. But nevertheless, overall I think the trend is clear here that the decline in landline voice that we have observed in the past is decelerating, yes.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [34]

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And James, is that okay, shall I take the second question?

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [35]

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Yes, please. Please, Olaf, that's great.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [36]

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Yes. So on the second question, I mean this is -- this, of course, really is the Supervisory Board not the management that is involved. We can comment that they have sent the letter. Indeed the Board has noted that freenet has made a request that Sunrise take actions at the expense of our shareholders. The Board has felt that the discussions have been unconstructive. Very much in relation to the proposals we have made in terms of reducing the capital increase, and potentially. But there are strong indications for the Board that freenet representatives have actually breached their fiduciary duties. There is an internal, or there is a project that has started on this. On your question, will all of this activity have the risk to delay the transaction? I think the answer is clearly no. And -- yes, but the points that the Board have made are very, very serious.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [37]

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Sure. Can I ask what are the steps under Swiss law that allow the Supervisory Board to block the freenet representatives from the discussion? Is it a simple case that if you feel they've breached their fiduciary duties, then they're no longer allowed to participate in the Board discussions on this front?

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [38]

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Let me just hand over to Marcel, who's our General Counsel. He could just make a short statement on this.

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Marcel Huber, Sunrise Communications Group AG - Chief Administrative Officer [39]

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Yes. Hi, this in Marcel. So we have carefully discussed and assessed the topic in the Board meeting. So the decision that has been taken by the Board is to first launch an internal investigation, as regards to the potential breach of fiduciary duty, and for the time being. So in this light, we have shielded those 2 Board members through many deliberations, resolutions, et cetera. With regards to the transaction, of course. They remain fully on the Board, and they're informed for any other topics.

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Operator [40]

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The next question comes from the line of Steve Malcolm from Redburn.

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Stephen Paul Malcolm, Redburn (Europe) Limited, Research Division - Research Analyst [41]

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I've got a few questions. Just first one on the UPC improvement that you've talked about. Can you maybe elaborate a little bit on the specific numbers? I mean you mentioned CHF 60 million of free cash flow. When I look at Q2, revenues are down 4%. OCF was down 8.59%. I mean is the improvement coming from lower CapEx? Or is it slightly better rates here? And what are you expecting now for UPC in terms of OCF for the full year? And what were you expecting previously? Maybe to help us track this improvement that you've seen because I'm not seeing it quite as clearly possibly.

And then on the TSA savings that you've talked about. I mean it looks like a fairly substantial proportion of the TSA costs you can take out in the course of, I guess, 2 or 3 years, something like 30%, 40%. Can you just elaborate what those are? Are we talking about billing, Set Top Box procurement, data center management? What exactly are those cost savings that you've identified? And why is the Liberty cost so much greater than you can achieve in the external market?

And then on just the timing of the transaction. You've mentioned the regulatory approvals beginning of October. My understanding is that AGM could take place 2 or 3 weeks after that. And yet, you're expecting the deal to close end of November. So maybe you can just sort of map out, how you think if you do get regulatory approval at the end of October, things will map out from there.

And finally, just the share price reaction. I'm curious to know your thoughts on why you think the shares have gone up 6% to 7% on the freenet statement. You think this is sort of excessive short-termism about the risks of the capital increase, the market is getting this wrong. Just thoughts on that would be helpful thank you.

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [42]

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Yes. Thanks, Steve, for your questions. So maybe I'll start off the front with the UPC improvement. So overall, I mean we are not giving any guidance on the UPC business, yes. I mean that's not our role at this very moment. We are not in control of that business. I mean what we are saying pretty much, versus our own expectations for the year 2019, we are seeing operating free cash flow improvement of CHF 10 million to CHF 15 million. And this is mainly coming from what we are calling EBITDA. So the operating free cash flow on the other side is less from the CapEx side, which is more in line with our expectations, yes. So that's kind of the combination of what we're seeing.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [43]

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On the second question, on the TSA, to come back to that. The TSA is in our view is very high. So we get -- this TSA is about CHF 90 million a year. And when we look at what the components are that we were identifying with -- through the integration planning, where we can indeed, as you point out Steve, significantly improve the cost. It's really actually 2 main components.

So the first component is actually the TV platform itself, which is a very big part of the costs and of the agreement that we're buying on a regular basis, is the ability to build against a relatively standard UI to run a new TV platform to build that from scratch.

And then the second area is in space of more traditional types of infrastructure services in the areas of CRM. But also in the area of playing storage, processes, service, et cetera. So we have done a lot of work on that. We are actually able to reduce that. What I can say is when you announce a transaction, it is very difficult of course. You need time to go through this because these are very, very big projects that you need to analyze, if you can actually do that. And maybe, of course, then, the RFPs but we are convinced that we can do it at a significantly lower cost, okay?

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Stephen Paul Malcolm, Redburn (Europe) Limited, Research Division - Research Analyst [44]

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Olaf, just to be clear, is that -- are you sort of thinking about a large Set Top Box swap out or is it just a software download that you can do on the existing boxes, they...

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [45]

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Steve, it's actually not so much the actual boxes, it's really the actual video platform. So the service -- if you think about -- if someone in Switzerland is watching TV on a UPC system, the signals, the whole architecture behind it is predominantly driven out of Amsterdam. So that complete platform is the one that we would need to rebuild in our own company.

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Stephen Paul Malcolm, Redburn (Europe) Limited, Research Division - Research Analyst [46]

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Right. So you would be paying license fees I guess for horizon. And you wouldn't do that going forward, you would build your own platform basically?

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [47]

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Yes. Yes. And what was the intent from the beginning in this particular situation is just that we're seeing that actually the way to do it and with which partners we can do it has given us the conviction that we actually can further improve the synergy in relation to this line item.

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Stephen Paul Malcolm, Redburn (Europe) Limited, Research Division - Research Analyst [48]

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Okay. Great.

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [49]

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Okay. So if I take on the timing of the transaction. So the Weko has to come back by latest 1st of October, then we have a 20-day invitation period to the AGM. And we will then expect to, of course, do the capital increase quickly thereafter. So I would expect the transaction to be closed at around mid-November, yes. So that's kind of, I would say, the most realistic timetable at this point in time.

Then on the share price, I mean always difficult to, of course, understand what impacts the share price. From a high-level perspective, you could argue that, of course, on the day of the announcement of freenet last week, the markets were up quite significantly. And additionally, we have of course seen also some short interest, which has been closed. So I think there was a key driver that we have seen last week. All in all, if you take a broader perspective and not just only look the last couple of days, then I think after the transaction, there was a lot of shareholder rotation going on, people preparing themselves for the potential rights issue. Others, not liking the deal, potentially selling down. So I think that has impacted the share price over the past 6 months. We have seen a low point at CHF 68. We have now in the past, I would say, 6 weeks, seen a steady recovery to CHF 73, CHF 75 today.

So it's difficult to always comment on those movements. But I think that's a little bit our high-level readout, yes.

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Operator [50]

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The next question comes from the line of Matthijs Van Leijenhorst from Kepler Cheuvreux.

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Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [51]

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For arguments sake, what if you don't manage to get the majority during the upcoming AGM? What will the Swiss market look like in your view? What will happen to the competitive dynamics?

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [52]

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Okay, Matthijs, you have only one question that's good, so we can...

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Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [53]

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No, I didn't. There will be a follow-on.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [54]

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We're going to spend a little time on that. I mean the management and the Board of Sunrise have always said that Sunrise standalone is strong. We have strong commercial momentum in our business. I explained that we have completely changed the underlying revenue profile of the company. So we're in a much, much better situation from a standalone perspective. And we can continue to compete in the market as is.

The only thing that we can't, of course, address if we are staying standalone is the near CHF 150 million bill that we have every year from Swisscom, which creates a bit of, in the long run, as you can imagine, a millstone around our neck in terms of the competitive capacity.

The second is, the market is moving very quickly to convergence, not just in France, Spain, other markets, also in Switzerland. And if we want to play that game, and we are playing that. Of course, economies of scale is better from a customer base perspective.

And thirdly, we have chosen to drive a quality-based strategy, and not a pure price strategy. A real price performance model in winning in this market. To be able to execute that, that obviously requires, and you have seen that in the past, significant investments and the ability to have a broader investment capability. In particular, having much more assets on the Internet side that give us this differentiation, would fundamentally enable us to be even stronger. That is how we see the situation. And that's how we drive, of course, for this transaction. We believe so strongly in the compelling nature of it.

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Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [55]

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Yes. As a follow-on, it's regarding timing. I mean do you believe that somebody else like Salt could buy UPC? Or what is your view on UPC standalone performance? I mean if you look at your share price reaction obviously the -- many shareholders don't like the deal structure. So you could argue, why didn't you take the breakup fee of CHF 50 million and walk away and decide well, we get back to this deal with a new structure within a year? Will that not be -- yes.

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [56]

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Matthijs, the challenge is clearly that -- obviously the number -- there are a number of points that we can make here. The first point to make is clearly, if this deal doesn't go through, the optionality for Liberty Global is potentially increasing because the standalone business, at least as we have predicted it versus our own plan, has performed better than what was expected. The turnaround plan that a lot of analysts and investors were very skeptical about start showing signs that it is working.

Secondly, your comment on Salt, I can't comment on Salt. But clearly, indeed, there might be an opportunity. And lastly, if we just -- if our shareholders vote against it, I don't foresee that we would just come back to the table and start redoing all the work. I mean the management has spent I don't know how many months talking about integration and visiting investors, et cetera, et cetera. This is a deal that we have signed. This is a deal that we will do everything to get through at the AGM.

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Matthijs Van Leijenhorst, Kepler Cheuvreux, Research Division - Analyst [57]

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Is there any cooling-off period between -- if you don't manage to get the majority in making a new offer? Is there any?

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Olaf Swantee, Sunrise Communications Group AG - CEO & Member of Management Board [58]

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No.

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Operator [59]

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The next question comes from the line of Priya Viswanathan from Societe Generale.

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Priya Viswanathan, Societe Generale Cross Asset Research - Credit Analyst [60]

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One quick one for me, although it might take a while for the follow-up. Just to go back to you have said, you have always talked about prudent leverage. And in your comments this morning, also you mentioned that shareholders some of whom are comfortable with 2x, while there are others who are even comfortable with 5x of leverage. I want to get a sense of, if -- just given freenet's stance, if we keep that aside for a second. If you find that there is enough interest from the remaining shareholders, and you are -- have a good chance of getting the deal done, if leverage for instance is closer to the 5x. I'm not taking a specific stance here, but above the 3x that you have said you will try and keep to. How do you as management feel about it? I know you have been closer to 5x in the past. Is that something that you feel comfortable with in terms of -- and in terms of the risks that it would bring on and also in terms of how the financing would then change?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [61]

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Yes. Thanks for your question. So I think first of all, I mean what we said is that we think there is room above the 3x that we initially had. That's of course, technically coming from the higher synergies. And of course, there will be a debate with shareholders on what leverage we can find kind of balance. It's always difficult, and it's not going to be easy to find the right number. What will be guiding our decision at the end is that the Board and the management is of the strong conviction that a prudent capital structure enables a progressive dividend payout. And we believe that this is actually the core of the equity story of Sunrise.

It has been the core of it in the past. It has proven successful, and we are convinced that this has to be the core going forward. Now that I think means going to 5x is an exaggeration. And the point here is what we have in mind is that with -- whatever we do on leverage, there must be a decent path of delevering foreseeable that brings the company back towards an investment grade territory in the foreseeable future. Now if you go to something like 5x, it will take a long, long time if you at the same time also want to pay out a progressive dividend. So then the only way to accelerate the path to a lower leverage is actually doable by scrapping the dividend. And this is not what we would intend to do. So that's why we think there is room, but it's not going to 5x, yes. That's something that I think we can clearly state.

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Priya Viswanathan, Societe Generale Cross Asset Research - Credit Analyst [62]

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Fair enough. So I guess, to me it sounds like the pecking order is the progressive dividend and then coming out to an adjustment in the financing structure of the deal in itself. Even if your shareholders indicate that they are comfortable with doing it at a much higher leverage than what you are looking to do at this point of time?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [63]

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What I can tell you as well as I think if I look at those shareholders that are really comfortable with that high leverage, you can't find a majority on that, yes. That I can tell you, yes. So what I think that will not be the appetite of the majority to go to something like 5x. That I think you can rule out.

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Priya Viswanathan, Societe Generale Cross Asset Research - Credit Analyst [64]

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Yes. And my last remark on that, as I think probably if you were closer to 5x, it might just force a rethink on freenet's part. So you might just get your majority like this?

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André Krause, Sunrise Communications Group AG - CFO & Member of Management Board [65]

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Yes. No, but -- well, look, I mean we have said what we wanted to say on how we view freenet's request. And I mean at the end what we want to avoid is that freenet is solving its own financial problems on the back of Sunrise balance sheet, right? Then actually trying to have a low capital increase and then run away with a higher return and leave us with the higher leverage because that's exactly what we feel that they are currently not really a long-term shareholder of Sunrise. And they're not acting as a long-term shareholder. And that's why we see also the strong conflict of interest here.

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Uwe Schiller, Sunrise Communications Group AG - SVP of IR [66]

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Okay. This actually concludes our investor call this morning. Management will be on conferences in Switzerland, in London and in New York, and we will also be on the road show in Europe and North America. We will basically switch on all of the dates where we will be when they are final on our website, so please go there and inform yourself. And we hope to see you on these locations. With this, this only leaves me actually to say goodbye and wish you a good day.

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Operator [67]

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Ladies and gentlemen, the conference is now over. Thank you for choosing chorus call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.