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Edited Transcript of TL5.MC earnings conference call or presentation 23-Feb-17 6:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Mediaset Espana Comunicacion SA Earnings Call

Madrid Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Mediaset Espana Comunicacion SA earnings conference call or presentation Thursday, February 23, 2017 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luca Giammatteo

Mediaset Espana Comunicacion, S.A. - Head of IR

* Massimo Musolino

Mediaset Espana Comunicacion, S.A. - General Director of Management and Operations

* Javier Uria

Mediaset Espana Comunicacion, S.A. - CFO

* Kiko Alum

Mediaset Espana Comunicacion, S.A. - Publiespana General Manager

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Conference Call Participants

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* Chris Johnen

HSBC - Analyst

* Annick Maas

Liberum Capital - Analyst

* Ivon Leal

BBVA - Analyst

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Presentation

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Luca Giammatteo, Mediaset Espana Comunicacion, S.A. - Head of IR [1]

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Good evening, everybody, and welcome to the full year 2016 results presentation of Mediaset Espana Comunicacion. I am Luca Giammatteo, head of Investor Relations.

Today's speakers are -- I mean the presentation will be hosted by Massimo Musolino, General Operational Manager. And the presentation will be followed by the Q&A session with Massimo Musolino and Kiko Alum, Publiespana General Manager, and the group CFO, Javier Uria. Massimo Musolino will start the presentation. So, Massimo, over to you.

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Massimo Musolino, Mediaset Espana Comunicacion, S.A. - General Director of Management and Operations [2]

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Good evening. Welcome to our full year 2016 results presentation. I will quickly highlight our main results and achievements over 2016 and then we can move on to Q&A.

Looking at our 2016 full year results on page two in terms of financials, you can see that our total net revenues were up by 2.1%. Our revenues had a two-sided evolution. On one side, the advertising revenues for our media were up by 5.2%, in line with the evolution of the advertising market as published yesterday by Infoadex.

On the other side, third party media and movie activity suffered a double digit decrease due to the end of the agency agreement with Movistar TV and the strong result from the movie Ocho?Apellidos?Catalanes. Both of these were expected and announced in our full year 2015 results call.

Our full year costs were flat even though this year we had the extra cost to our new HD channel, BeMad, and the broadcasting of 23 Europe Cup matches.

We achieved an EBIT of EUR224.4 million, up by more than 9%. This result represents a 22.6% margin over total net revenues, up by 1.5% versus last year. This is the highest EBIT achieved by our group since 2008. Net profit for the period was EUR171 million.

As you are probably aware, in December 2016 the Spanish government approved a number of modifications in the corporate income tax code. Firstly, tax deductions relating to losses of participating companies declared before 2013 have to be repaid to the tax authorities at a rate of one-fifth of the difference per year.

Secondly, from the December 2016 onwards, losses from the sale of stakes in participating companies are no longer deductible. We adjusted the value of our tax assets accordingly, and of course recognized an extra tax expense this year.

The impact of this one-off amount on our annual accounts was EUR4.7 million. We have adjusted our net profit in this amount. It is related to past activities of the company, not to this year's results.

The adjusted net profit at the end of 2016 was EUR175.7 million, up by 5.7% versus last year. The adjusted EPS is EUR0.52 per share. The significance of this figure is that it was the reference used today by the Board of Directors when deciding the remuneration policy for this year.

After total payments during the year 2016 of EUR258.8 million between the dividend and buyback, the net cash position at the end of December was EUR177.4 million.

Free cash flow in the same period was EUR242.5 million. This is what I like to call the perfect free cash flow, an amount equal to the operational margin equal to our EBITDA.

As always and in line with our business model, the total increase in net revenues dropped to the operational profits, and the latter is fully converted into cash. We generate high margins and we convert them into cash like no other company in our segment.

Moving now onto page three, you can see the goals we set for the year 2016 during our call of the 25th of February last year. I would like to go over them now.

One of the targets was to be leader in audience share per group, and the main channel,?TELECINCO, being the height of its competitors. Mediaset Espana delivered in audience among the commercial broadcasters since 2002, when we drew with our main competitors.

If you turn now to page four, you can see that in 2016 Mediaset Espana was leader in audience, with 30.2%, 3.1 points ahead of its main competitor. In 2016, we set a new historical record audience for our group in primetime. We achieved an audience of 50.1%, the highest level ever, increasing the gap with our main competitor to 2.5 points.

On page five, you can see that Telecinco channel has managed to come out on top for the last five years in a row with a 14.4% share, 1.6 points ahead of its main competitor, which is the largest difference since 2011. Telecinco has been the leading commercial channel for 17 years in a row. I repeat 17, a long time.

Obviously, we cannot be leader every single day or month. The important thing is to be leader on a full year basis or during the main TV season. Also last year, we won more than 68% of days. That is 250 days over the year.

Telecinco was also leader in commercial targets. And for the last five years, we have been leaders in primetime, with the highest figures for the last seven years.

On page six, you can see our next target for the year was to be leaders in the TV advertising market. As shown on the chart on page seven, we had a 43.3% advertising market share according to Infoadex data, confirming last year's figures and confirming our leadership once more, something which we have kept on doing since 2004.

Every company has to set its own benchmark when measuring economic results. Up until now we have compared our figures to those of our main competitor, showing our long trend of undisputed leadership.

However, the front place is not a benchmark to set targets. To be the best, you have to beat the best. We cannot lower our benchmark to be the runner up. As a leader, we must use our own historical results as our benchmark. Like an athlete, our aim is to beat our personal best, improving our results every year.

On page eight, we have our last and most important target for the year. This is the target that we want to repeat every year, being the leader in profitability. As you know, in 2016 cost guidance for total cost, including depreciation and amortization, was EUR770 million.

First of all, on page nine, let's talk about profitability. This year we had the highest net profit and earnings per share since the year 2008. And as you know, net profit over total net revenues was 17.7%, which is one of the highest in our sector in Europe. Once again, in 2016 we recorded higher margins than our Spanish competitors, as well as achieving some of the highest in Europe.

Turning now to page 10, you can see the evolution of our EBITDA margin since the year 2009. This year we achieved our best quarter since 2008, EUR241 million, which is a margin over total net revenues in excess of 24%.

We are steadily getting closer to pre-crisis levels. We are also one of the most efficient and profitable broadcasters in Europe. In the last five years, we have increased our EBITDA margin from 7.3% to 24.3%.

Finally, on page 11 we have the evolution of our costs. As I stated before, at the beginning of the year we gave you guidance of EUR770 million for 2016 annual cost. We expected to increase this by EUR10 million compared to the previous year level due to the launching of the new HD channel, the increase in variable costs, and the fact that we are cautious and honest with you. We don't expect to be as successful in programming as we were in the previous year.

At the end of the year, our costs stood at EUR759.5 million. We beat the guidance thanks to the high successful rate that we have in our programming, which made us able to save EUR10 million versus the budget we had for the year.

The appreciation on the Euro Cup rights was not incremental to our programming cost budget thanks to our flexible business model. We manage our group cost in such a way that it has permitted a savings of almost EUR210 million in six years.

And finally, on page 12, now that we have seen that we successfully achieved all our targets that we had set for 2016, let's move to the new targets for the year 2017. As I mentioned before, our benchmark is to beat our personal best. So, for the next year our objectives are the same for the last year, but we will try to do it better; profitability, of course, which is our primary target, followed by leadership in audience share and in the advertising market.

And for the year, the new cost guidance, including depreciation and amortization, is the same as our initial guidance for last year, EUR770 million.

And before the Q&A, just a few words regarding the shareholders' remuneration. Shareholders have always been a priority for top management of this company, whose commitment has always been to give them back the money not needed for the business.

Since the IPO back in 2004, we have chosen always to fulfill such commitments, high dividend payouts and buybacks. Since the IPO, we have paid our shareholders close to EUR2.5 billion between both.

This year the Board of Directors has proposed, pending, of course, the approval of the shareholders' meeting, a dividend payment of EUR175 million, EUR0.52 per share, which represents a 100% payout on the group's adjusted net profit. With this decision, our Board have decided not to allow the changes in the income and tax registration to penalize our shareholders.

Jointly with the ordinary -- with the dividend payment, the Board of Directors have decided to launch a new buyback program for a total amount of EUR100 million, to be carried out during the year 2017.

And we are now ready to take your questions.

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Luca Giammatteo, Mediaset Espana Comunicacion, S.A. - Head of IR [3]

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Thank you, Massimo. Thank you very much. This is the end of the presentation. We are now ready to take your questions.

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Questions and Answers

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Operator [1]

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Thank you. (Operator instructions.) Chris Johnen, HSBC.

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Chris Johnen, HSBC - Analyst [2]

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Yes, thanks. Good evening, everybody. A couple of questions from my side, first on advertising share. I think for the year you did fine. In Q4, however, your ad market share was down I think 150 basis points. Your competitor was only down 10 basis points. And I think to me most notably was pay TV being up I think around 100 basis points. I'm just curious how you think about what sort of view you have on that development and how we should be thinking about that going into 2017.

Then a question on current trading. You've probably seen what your competitor suggested for the market. They are sort of criticizing also your pricing policy. Maybe you could share your expectations in terms of pricing and your piece, sort of what view you have on 2017 with that respect.

And then coming to -- sorry, again on advertising, coming to the sectors, I know you don't like discussing individual advertising clients. But comments from Telefonica, at least in the press, seemed to suggest that telcos may be a little bit more difficult in 2017. I'm curious what sort of view you have and how you see that developing. Thank you.

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Kiko Alum, Mediaset Espana Comunicacion, S.A. - Publiespana General Manager [3]

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Good evening. About our market share, we ended the year achieving our target, once again leader, as we have seen since 2004.

And the third quarter result was slightly lower than expected due to a weaker evolution during the month of October, we'll have to say that, because we decided not to sign with three of our clients, and that decision has affected our final result. The main reason we had that decision was pricing. Those clients were asking for a larger discount than we were prepared to offer so we didn't close the agreements.

When we decided not to have those clients on board in October, we knew that we would suffer in the short term, but the strategy has a longer term perspective. And this point is really important, because your other question was about pricing.

I mean, we have increased the price, our pricing in 2016 by 3%, I think our main competitor by 1%. We have three times more. We are -- in the last quarter of this year our price -- our difference with competitors in the last quarter in prices was just 4%, the lowest gap in the year.

In the whole 2016, the difference with our main competitor have reduced by almost 2 points. And we aim to reduce -- to further reduce the difference in 2016. Why is that? Because our -- well, our target for next year is again to be the leader in market share. This is very important for us.

What does it mean? It's like if we want to be leader in market share, we think that we have to repeat the same level of share that we had this year, which is around 43%, because 43% gives you the leadership.

And this year the market growth comes from prices, as there is not much inventory level. Then we have to increase our prices, and we have to increase our prices more than our competitor if we want to be the leader -- to maintain our leadership again this year.

Then I can't understand your question, sorry. I mean, we are carrying out our policy, our pricing policy where we increase our price by 3% last year. Our growth numbers this year will be between 3% and 5%. We are doing that during the months of January and February. We think that in January and February we are gaining advertising share according to our estimations. Then I don't know what's the question.

About Telefonica, we think that the TV market is stronger than ever. The TV is the most important for the clients, for the campaigns. And all the feedback that we have from the clients is that we are going to have a positive month for -- a positive year for 2017, maybe in the line of last year, more or less, with 2016. And I think that TV is going to maintain at least its advertising share or even increase, a further increase of that.

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Chris Johnen, HSBC - Analyst [4]

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Okay. And in terms of coming back to pay TV, I guess like the last couple of times, you are still not worried about pay TV taking share away from the market.

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Kiko Alum, Mediaset Espana Comunicacion, S.A. - Publiespana General Manager [5]

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No. No, we are not worried about that. I mean, we are going to have the impact of the new channels, not the pay TV channels. The new channels was almost fully included in 2016. And while in 2016, it's a very small impact and maybe all in the first quarter. But, no, about pay TV we don't think so.

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Luca Giammatteo, Mediaset Espana Comunicacion, S.A. - Head of IR [6]

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Thank you, Chris.

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Chris Johnen, HSBC - Analyst [7]

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Thank you very much.

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Luca Giammatteo, Mediaset Espana Comunicacion, S.A. - Head of IR [8]

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Thank you.

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Operator [9]

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(Operator instructions.) Annick Maas, Liberum.

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Annick Maas, Liberum Capital - Analyst [10]

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Hi. Good evening. My first question is just -- I mean, your costs have been exceptional over the last years, and you seem to beat your guidance almost all the time. I was just wondering how much longer do you think you can do this, and where would you take the costs out of the business?

And then, just going back to your pricing policy, I mean, if we look maybe beyond this year, how do you think you can evolve these prices in the medium term? Then if you could give us just a guidance on where you expect the other revenues to grow in 2017, by how much, broadly.

And then finally, your competitor seemed to suggest that Q1 the TV ad market looks to be up 5%. Is that a similar trend that you are seeing at this stage? Thank you.

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Massimo Musolino, Mediaset Espana Comunicacion, S.A. - General Director of Management and Operations [11]

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In terms of costs, we have here that our -- this is pretty stable, because we can say that this is the right amount for the current TV model we have. There could be some changes only if there will be some news, for example.

The only material changes that we can see for the year 2017 is the fact that we have a new channel for 12 months. So, of course this is -- this increased costs, because we will have more transmission cost. And of course, we have to increase the quality of the programming, including all the channel demand.

Personnel cost is really stable during this year. Every time we do something new we try -- we find a way to compense, to balance this new cost with some savings. So, we can say that EUR770 million, something more or something less, but let's say in order to -- the EUR770 million is something that reflects the current business that we are running.

Another thing that can modify year by year is the movie cost, because you know that we have the obligation to invest 5% of our revenues in movies and Spanish series. At least 3% of our revenues we have to invest in movies. And of course, it is possible that one year we premier five, six, seven movies and the year after only one or two. So, this can change, the only change that we can move our cost basis year by year by the moment.

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Kiko Alum, Mediaset Espana Comunicacion, S.A. - Publiespana General Manager [12]

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Okay. About the market in the first quarter, a competitor which you mentioned who have said that in January we had -- the market was going good, around 5%. February was slightly below our expectation with an increment of 1%, 2%. But don't forget that last year, 2016, February was an excellent month. And according to our estimation again, February 2016 grew more than 18%.

And it's very difficult to estimate a single month's size. I mean, businesses outlays of EUR2 million nearly represent than 1% of the market. And one client just for a year one campaign may completely change the trend of one single month.

However, we need to realize that March, given historical sales, will be a good month. Don't forget that month -- that March by far is the most important month of the quarter. And we think that March will be a good month, and that clearly into this quarter we will have evolution by 4%, 5%, 6%. I don't know. It is normal. I have to wait for that. But we think that March is going to be the most -- or the strongest month in the quarter.

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Javier Uria, Mediaset Espana Comunicacion, S.A. - CFO [13]

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And in terms of the other revenues, as you will have seen this year there is a decline from EUR8 million versus last year. This is basically due to the movie activity. Those EUR8 million more of last year had to do with a film that we released at the end of the year, and which was extremely successful. And it was very, very good in terms of interest of box office.

For next year, as Massimo said before in terms of costs, the movie activity is going to be pretty much the same. In terms of revenues, this year revenues have been good because -- they have been positive.

As a matter of fact, in the last three years, we have obtained a positive marking, something that in this business, being a legal obligation and not something that we do because we want to, is very difficult to forecast.

But I will say that with this answer, regarding what kind of revenues we will obtain next year, aside from that, I guess, and the other lines that make for this caption, I don't expect to see a significant difference. So, all in all, I think that we can be seeing a similar figure next year to the one that we have seen in 2016.

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Kiko Alum, Mediaset Espana Comunicacion, S.A. - Publiespana General Manager [14]

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About the prices, I forgot the question about the prices. Market growth transforms prices. And there is not much -- I mean, well, everything knows that. Our price increase target is -- for the full year is between 4% and 5%.

But obviously, the effective growth will be a consequence of the market evolution. And is there further room for increments? We think yes, because TV in Spain is cheap if we compare within other countries and if we compare within other medias. They are making the existing room for further increments in TV prices.

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Annick Maas, Liberum Capital - Analyst [15]

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Great. Thank you very much.

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Massimo Musolino, Mediaset Espana Comunicacion, S.A. - General Director of Management and Operations [16]

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Thank you.

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Luca Giammatteo, Mediaset Espana Comunicacion, S.A. - Head of IR [17]

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Thanks, Annick.

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Operator [18]

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Ivon Leal, BBVA.

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Ivon Leal, BBVA - Analyst [19]

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Hello. Good afternoon, everybody. Just to clarify a bit on the OpEx guidance because I think I'm misunderstanding something. You're closing this year with EUR760 million, give or take, including D&A. You're guiding to EUR770 million, so that means actually you're investing all of the football cost of last year in new content. That is right? And we should assume that the cost in the cinema is going to be fairly the same in 2016 and 2017, okay? That's the first one.

And the second one for Kiko, when you're saying that March is strong, or you expect March to be strong, you're adjusting for the Easter impact, or that is basically due that this year we are not having Easter in March? And last year I think we missed like two or three days, but (inaudible).

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Massimo Musolino, Mediaset Espana Comunicacion, S.A. - General Director of Management and Operations [20]

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About the costs, you may remember that when we booked the European Cup, I said in a call that we paid the right price, that it was the right price. And it means -- and at the same time, if you look at our costs now, 2016 costs, they are lower than the guidance that I gave at the beginning of the year.

What does this mean? It means that we were able to replace the cost of other programs with the cost of the Euro Cup. It was not -- it wasn't an incremental cost in our programming grid. We were able to replace it.

So, this year we have to do the contrary. We have to broadcast 21 primetime. I remember that we broadcasted 23 matches. 21 of them -- out of them were in primetime. So, we have to produce 21 new in primetime, achieving good audience share. And in this way, we must obtain a good audience to permit the advertising sales to maintain the same level of last year.

So, at the end of the day, I don't see that we are reinvesting the football cost in new programs. It's the contrary. Last year we invested our budget in the football and not in other programs. And this year we go back to the initial and normal situation.

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Kiko Alum, Mediaset Espana Comunicacion, S.A. - Publiespana General Manager [21]

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About March, what I tried to say is that we think that, I mean, in general we have an increment of 4%, more or less, February 1%, 2%. We think in terms of increments March is going to be the strongest, more than 4%. We think so. And even it's going to be the strongest month in terms of revenues, because the size of March is a really important size, not in February.

For that, we think at the end that -- in the end we think that March is going clearly be ahead of January and February, and is going to improve the quarterly evolution. We think that, but I don't know if it's going to have to be 4%, 5%, 6%, 7%. I have no idea.

But the information we have from the advertising and from the buyers is that March is going to be a positive month. I don't know the number at this moment. I have to wait maybe one week more. But the first news are good news.

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Ivon Leal, BBVA - Analyst [22]

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Okay. And I guess, Kiko, all of the growth that we've seen through the beginning of the year is price driven, I guess, because --.

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Kiko Alum, Mediaset Espana Comunicacion, S.A. - Publiespana General Manager [23]

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Yes, almost 80%. And we may be 60% in February. Almost all is price, yes.

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Ivon Leal, BBVA - Analyst [24]

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Okay. Thank you very much.

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Kiko Alum, Mediaset Espana Comunicacion, S.A. - Publiespana General Manager [25]

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Okay. Thank you.

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Luca Giammatteo, Mediaset Espana Comunicacion, S.A. - Head of IR [26]

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Thanks, Ivon.

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Operator [27]

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Thank you. We currently have no further questions.

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Luca Giammatteo, Mediaset Espana Comunicacion, S.A. - Head of IR [28]

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Okay. Let's close the conference call. Thank you very much for attending the presentation. If there is any further question, do not hesitate to contact the Investor Relations department. Thank you very much. Goodbye. Good night. Bye-bye.