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Edited Transcript of TRN.MI earnings conference call or presentation 13-Nov-19 4:00pm GMT

Q3 2019 Terna Rete Elettrica Nazionale SpA Earnings Call

Rome Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Terna Rete Elettrica Nazionale SpA earnings conference call or presentation Wednesday, November 13, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Agostino Scornajenchi

Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO

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Conference Call Participants

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* Anna Maria Scaglia

Morgan Stanley, Research Division - Research Analyst

* Bartlomiej Kubicki

Societe Generale Cross Asset Research - Equity Analyst

* Harry Peter Wyburd

BofA Merrill Lynch, Research Division - VP and Junior Analyst

* Sara Piccinini

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Stefano Gamberini

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Terna 9 Months 2019 Results Presentation. I must advise you that the call is being recorded today, Wednesday, the 13th of November 2019. I shall now hand over to the CFO, Agostino Scornajenchi. Please go ahead.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [2]

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Thank you. Good afternoon, everybody, and welcome to the first 9 months 2019 results presentation. Before starting to analyze the figures, I would like to share with you the recent trend of the electricity demand in Italy. In the first 9 months of the year, national demand was about 242 terawatt hour, substantially in line with the same period of 2018. Please mind that about 36% of this was covered by renewable sources.

Regarding national net total production, it stood at about 216 terawatt hour, with a strong increase registered in wind and solar production, plus 14% and 6%, respectively. In this regard, it is worth mentioning that only in the month of September, wind production grew by 24% versus the same period of last year, confirming the strong renewable growth trend already highlighted in the past months.

Let me now highlight the key numbers of the period. First of all, as usual, 2 main figures: net income up at EUR 553 million and group CapEx at EUR 670 million, respectively, 2% and 19% more versus previous year. Moreover, group revenues and EBITDA were up both by 4%, which means EUR 60 million and EUR 48 million higher than last year. To support the highlighted CapEx acceleration, our net debt stood at around EUR 8.2 billion versus about EUR 7.9 billion at year-end 2018, fully in line with our expectations.

So let's now have a deeper analysis of the figures. Moving to Chart #7. As usual, let's start with revenues analysis. Total revenues in the first 9 months of 2019 increased by 3.8%, reaching EUR 1,666 million, up by EUR 60 million versus the same period of last year. The growth was mainly attributable to regulated activities, which contributed for about EUR 37 million. Regarding domestic nonregulated and international activities, the increase versus the same period of 2018 of EUR 12 million and EUR 11 million, respectively, was mainly related to Tamini and our projects in Latin America, as we will analyze deeper later in this presentation.

Let's now go into detail with the regulated and nonregulated revenues evolution moving to the next slide. Regulated revenues reached EUR 1,518 million, EUR 37 million [that] last year. The increase was attributable on one end to 2019-2021 work update that, as you know, was set by the regulator at 5.6% at the end of 2018. And on the other hand, to the new assets becoming operational and, therefore, remunerated by the regulator. Other regulated revenues increased by EUR 10 million, mainly as a consequence of higher revenues related to quality of service. Nonregulated and international revenues reached EUR 148 million, about 19% higher than last year. The increase was mainly attributable to the evolution of Tamini's order intake, net of the last year one-off related to Avvenia acquisition and to the full contribution of the Brazilian projects entered into operation between the end of 2018 and the first semester of 2019.

Now let's go through operating cost analysis at Page 9. As shown in the chart, total operating cost stood at EUR 387 million, 3% higher than last year. The increase was mainly attributable to Tamini and international as a consequence of higher volumes of activities, while regulated OpEx registered a decrease of about EUR 3 million. For a deeper analysis of the group's open components, let's turn to the next slide.

Starting from regulated OpEx. We reported EUR 285 million, EUR 3 million lower than last year, despite the growing asset base. Also, as a consequence of implementation of the efficiency program announced in the strategic plan presented last March. On the other hand, nonregulated and international operating expenses amounted to EUR 103 million, EUR 15 million more than last year, mainly due to the increasing volume of activity related to Tamini.

Let me now analyze our EBITDA, moving to the next slide. Considering the abovementioned effects, group EBITDA reached about EUR 1,278 million, EUR 48 million better than last year. We registered a positive contribution both from regulated and nonregulated and international activities, which grew by EUR 40 million and EUR 8 million, respectively, versus last year. The increase was mainly attributable to higher regulated revenues consequent to the weighted average cost of capital update already mentioned as well as to the higher contribution coming from the full operation of the lines in Brazil.

Let's now have a look to the lower part of the P&L, turning to the next slide. Depreciation and amortization amounted to EUR 436 million. The increase versus last year was mainly due, as mentioned before, to the impact of new assets becoming operational in the period. As a consequence, EBIT reached EUR 842 million, 1.5% better than last year. We reported net financial expenses at EUR 61 million, EUR 5.7 million lower than the same period of last year, mainly as a consequence of inflation dynamics and to the reduction of the interest rates of the period. Taxes stood at EUR 227 million, with a tax rate of 29%, almost in line with the same period of last year. Consequently, the group net income reached EUR 553 million, EUR 11 million better than last year. The strong set of results presented will support the payment of EUR 0.0842 per share as 2019 interim dividend, fully consistent with the dividend policy presented in the 2019-2023 strategic plan and approved today by our Board of Directors.

Moving to the CapEx analysis at Page 13. For the first 9 months of 2019, total CapEx amounted to EUR 670 million, 19% higher than the last year, in line with the full year target set with this strategic plan. We invested about EUR 600 million in regulated activities, of which 7% related to projects that might be eligible to the 1% input-based incentive, as they have been included in the current incentivized categories. Among main projects of the period, it is worth mentioning the Italy-France interconnection and the Italy-Montenegro interconnection that will be officially inaugurated in the coming days. And the reinforcement of the first Foggia-Benevento line and the rationalization of Rome Metropolitan area. Amongst CapEx categories, development CapEx stood at EUR 217 million, asset renewals and other regulated CapEx was EUR 287 million, while defense CapEx was EUR 91 million. Other CapEx stood at EUR 75 million, which includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis. Net debt at the end of September was EUR 8,250 million, EUR 350 million higher than 2018 year-end, mainly as a consequence of the strong CapEx acceleration of the period. Thanks to our operations, we generated an operating cash flow of about EUR 900 million, thanks to which we were able to more than cover the CapEx spending of the period.

Let's now make a deeper analysis on our debt profile at Page 15. Despite the CapEx acceleration, our financial structure remains solid. Indeed, the duration of 4.9 years in the level of fixed to total gross debt allowed us to maintain a strong balance sheet and potentially mitigate potential financial risks. On top of this, let me remind you about the EUR 500 million bond successfully issued in July, with a coupon of 0.125%, the lowest for an Italian corporate bond with a tenor above 5 years. As a consequence of the debt management activities delivered in the period, we can confirm that 2019 cost of net debt could remain substantially in line with year-end 2018, despite the higher debt level to serve the mentioned CapEx acceleration.

Well, after having illustrated the results of the period, I would like to share with you some closing remarks. As you appreciated from this presentation, we confirm that we are proceeding at full speed with the strategic plan implementation, confirming the strong CapEx acceleration as a key driver of our growth. Furthermore, we are continuing to improve our EBITDA that registered a growth of about 4% in the first 9 months of 2019. On the basis of the reported set of results, the ongoing managerial actions plus the cost of debt optimization, we are confident to fully match or even improve our expected results. Moreover, let me also recall the payment of EUR 0.0842 per share of 2019 interim dividend on the 20th of November. I believe that this is the best way to align Terna's capability to accelerate from the realization of grid infrastructure, while at the same time ensuring excellent value to our shareholders. Thank you very much for your attention. We are now ready to open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We will take our first question from the line of Harry Wyburd from Merrill Lynch.

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Harry Peter Wyburd, BofA Merrill Lynch, Research Division - VP and Junior Analyst [2]

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Just 2 questions for me, please. So the first one is on net income. So if I've done my math right, you'd need to get about EUR 175 million of net income in the fourth quarter to hit your EUR 0.36 EPS guidance. And that, I think, would be about 15% growth year-on-year. If I've done my sums right, it should be quite a lot higher than your year-to-date run rate growth. So I wonder, is there something that you're projecting for the fourth quarter that will make the fourth quarter net income substantially higher than it was last year? And the second one just on the capacity market news that we had last week. Just -- it's a very general question. But I wonder if you had any thoughts from a Terna perspective on what the result of the auctions, how that will impact you. And what the impact could be on the ancillary services market.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [3]

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Well, let me start from the first one. As anticipated before, we are fully confident to match all the guidance that we have communicated and even to do something better. We have communicated that EUR 0.36 of EPS and we will fully confirm it. Regarding your -- in general, you can consider that on the basis of the results of September, we consider our guidance really rock solid.

Moving to the second question on capacity market. Let me -- allow me to give you a bit of a recap because a lot of things has happened in the latest 3, 4 months. You know that in June 2019, the Minister of Economic Development signed a decree to approve the rules of the capacity market. And consequently, the regulator approved such rules in September 2019, setting the economic parameters in order to run 2 auctions by the end of 2019. And these 2 auctions really took place, the first one on 6th November and the second one -- sorry, the first one took place in 6th November and the second one will take place by the end of November. Terna published the result of this auction related to 2022 delivery. The total capacity awarded has been 40,919 megawatts per year, of which 34,700 of existing capacity or 1.8 for the new capacity, 1 gigawatt has been awarded to renewable sources. Consider that the average awarded premium for the existing capacity has been EUR 33,000/megawatt, in line with the maximum cap set by the regulator. And the average awarded premium for the new capacity has been EUR 75,000/megawatt, again, in line with the forecast. We consider that this is a relevant advancement in the discussion about the stability and the resiliency of the system. We consider that capacity market rule is a key element of the stability of the energy sector in the future, assisting the process of energy transition. Of course, this is something that will be put into -- will be controlled and managed by Terna in its role of system operator, that a lot of action need to be put in place by all the other market operator, including generator. We consider that the existence of such mechanism is one of the most relevant achievements.

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Operator [4]

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(Operator Instructions) The next is from Sara Piccinini from Mediobanca.

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Sara Piccinini, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [5]

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I have a question on the regulation, the regulator has introduced the recognition to the work in progress in the latest consultation document. Could you please remind us the amount of work in progress in Europe? And what would be the impact that you estimate on 2020? And also, maybe the positive upside on your business plan assumption. And then the other question -- yes, sorry, and another question is just on the -- yes.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [6]

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Go on, go on.

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Sara Piccinini, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [7]

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Okay. And the other question is on the results, they look slightly better versus expectations. If you can please comment on the main factors contributing to the growth. If there is something that has gone better than your expectation. Just more color on the different contribution.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [8]

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Good. Regarding your first question, I would be more than happy if the authority will reintroduce the remuneration of work in progress. For the moment, we are not yet there. The discussion is that the level of consultation paper issued by the authority, and we expect a new release of such consultation paper in the coming weeks. Having said that, we are really happy for the fact that the authority for the first time, starting from 2015, decided to reintroduce to reopen the door on the discussion about the remuneration of work in progress. If you remember the story, such remuneration was given to Terna until 2015, starting from the date the regulator decide to cap it. Honestly, I'm not here to comment the decision taken at that time, but we are in a really strong CapEx acceleration phase, and the facts to not have any remuneration of work in progress is substantially nonsense. So we consider important that the authority reintroduce this principle. And we expect to see which will be the practical application decided by the authority. And after, we will make our calculation. And of course, this is one of the most relevant item that we are discussing today, and that will be part of the business plan update that we will communicate next spring.

On the second question regarding the results. There are a lot of factors. As anticipated before, consider -- we are pretty happy because we are comparing a 2019 that is fully industrial base with a 2018 that had something like EUR 15 million, if I remember well, as a one-off component. So it's a real growth. We are happy for that. There are different elements: the increase of revenues, the increase of the regulated factor that is a mechanical adjustment. But not only this part, also the part related to the increase of the asset base. But there is one important element that I want to mention, that is the cost control. This is a huge task that we have taken last year when we have presented the business plan to the financial community, to you. And despite the CapEx acceleration and the consequent increase of the asset base, we communicated that we have taken the commitment to reduce 15% of this Terna cost base.

For the moment, we are doing better. Of course, it's a little bit too early. We are at the beginning of the implementation of this stronger business plan. But if you see to the figures presented today, there is a reduction in the operating expenses related to the regulated business, respect to the previous year. And this is not for free. This is a consequence of a lot of managerial actions, and another action on the industrial process that we have analyzed and improved during the year.

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Operator [9]

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Our next question for today is from Bartek Kubicki from Societe Generale.

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Bartlomiej Kubicki, Societe Generale Cross Asset Research - Equity Analyst [10]

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Just 2. First one with relation to the other regulated revenues, were increased by roughly EUR 10 million in the third quarter per se versus the third quarter last year, and you are talking about better quality of service. I wonder if this is something recurring, and we should actually, into our model, put higher other regulated revenues than we expected. Or this is something of the one-off in nature? And the second thing will be on the tax rate. You are having 29% in the first 9 months. The guidance had been, I think, 29%, 30%. In this case, shall we stick to 29% for the full year results? Or do you think the fourth quarter should bring much higher effective tax rate?

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [11]

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So let me start from the second question. We confirm that the tax rate at the end of 2019 will be in full continuity as per what we have presented today. There are no relevant expectation. Of course, as you can imagine, this is an ongoing discussion on the fiscal budget for the following year. But for the moment, we don't expect any relevant change. So we confirm the guidance.

Regarding the first one, other regulated revenues are mainly related to quality of service. So it's something that is only partially under our control, is also a consequence of the natural elements. For the moment, 2019 is a very good year. We hope to keep such level of quality of service without suffering any relevant issue coming from, for instance, weather component. Consider that in Italy, autumn -- at the beginning of spring, so the month of November and the month of December, is let me say, the most dangerous. So I prefer to stop here and to comment again in this aspect when we will have concluded the year-end 2019.

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Operator [12]

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Our next question is from Anna Maria Scaglia from Morgan Stanley.

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Anna Maria Scaglia, Morgan Stanley, Research Division - Research Analyst [13]

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I have just a very quick question. I noticed you are not providing the revenues of Tamini this time. I'm not sure if it's a choice, but in case you can, can you give us something?

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [14]

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No, absolutely. It's not a choice. Consider that -- thank you. Thank you very much for this. Tamini accounted to EUR 76.8 million of revenues at the end of September, we expect EUR 59.9 million in 2020. So Tamini, just to give you a comment, is still growing as a consequence of the turnaround of process that we are managing. It's still in process. As you remember, we commented that 2018 -- 2017 and 2018 was the year for Tamini to acquire in order so to charge its order intake. Now it's time for them to put this order in production, assuring increasing marginality.

Last year, we were able to reach, let me say, a slightly positive EBITDA. We are continuing in the same direction. Of course, it's a matter of time. It's a matter of support to the company, we are giving to the company, all our support to achieve this target.

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Operator [15]

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(Operator Instructions) The next is from Stefano Gamberini from Equita SIM.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [16]

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Just 2 quick questions, if I may. First of all, regarding the CapEx. Could you remind us what is the target for 2019 of total investments and the back down between regulated and non? And what is the acceleration that we could expect in 2020 in terms of investments? Still on this, in the last 2 business plan presentation, you increased substantially the area of investment. Just if you can spend some color, if you see further room for further growth in March, when you will present the new business plan or not, just to understand where is the situation in term of authorization. And you are completing on track on your business plan in terms of CapEx, mainly?

The second question regarding the renewable capacity. All this investment, most of them are there in order to support the growth of renewable projects. Could you give us also, in this case, some color if you're seeing an increase in terms of demand of authorizations around Italy, also given the effect of the new decree with the incentives for renewables that was just presented by the Minister?

And last question, just regarding the interest rate scenario. Clearly, the update of the regulation will arrive in 2022. But anyway, considering the time, probably you will see a strong acceleration in your investments, but probably there will be a reduction of your lower WACC considering the lower spread between Italy and Germany and also some other adjustments that the regulator could introduce to the -- due to lower WACC. How you see your situation also in terms of potential leverage in that period, considering the effort on investments on one side and the possible 3 more reduction of lowered return on the other?

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [17]

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Well, let me start from the last one. Regarding the WACC, we are talking about post-2021 update. The consultation of this aspect has not started yet. Because you know that according to the current rules, the current WACC of 5.6 has been set until the end of 2021. So a new observation period will be open at the end of 2020. Regarding the evolution of interest rates and the traditional spreads, it's not anymore so true that spread has been reduced because, if I am not wrong, we are now again back to 160 or something like that. That is above the threshold for a mechanical update of the WACC, of the weighted average cost of capital.

The same we could say about the interest rate evolution. Of course, today, the general consensus is a stable and steady situation of interest rates for some months. But again, we have to look which will be the real evolution of the market. I would not be so surprised if we will see something different in the medium, long term. In any case, we are fully committed to continue with our financial operation. Honestly, let me mention the excellent job made by the team with our debt management.

We will continue to do that in order to keep the lowest interest rates possible to assist the growing process of the company.

On the second question -- the first question on CapEx. Let me say, it's never enough for you, but the communicated guidance is EUR 1.2 billion, and we are reaffirming this guidance. We don't have, of course, communicated any guidance up-to-date for 2020. But I confirm what I say several times. We are moving in this year from a company that was spending an average of EUR 700 million, EUR 800 million per year to a company that will spend on a steady base EUR 1.1 billion, EUR 1.2 billion, even EUR 1.3 billion depending from the precise scheduling of the projects. And if you remember, the discussion that we had during the business plan presentation in March, there are huge projects that will take place in the coming years. And also I confirm that we are talking about a long-term acceleration because there are huge process that, in any case, will need to be realized in that 10-year horizon, which is a horizon of our national development plan. So nothing will change. I don't see any kind of reduction. We will do our best to do what is necessary to assist the energy transition process.

Now let me come to the second question regarding the -- which is the mood of the map that people will understand regarding the increase of renewable WACC. Consider that respectively last year, we have seen an increase of more than 100% of the demand of new connections coming from private operators. This is a really important signal because when the private entrepreneurs decide to move on and decide to accelerate on the request of interconnection, even without a precise normative scheme, a precise incentive scheme, I think that is an excellent signal.

Again, we confirm that the energy transition process has started, and we will have to run in order to be ready to allow all these new distributed generation will be properly used for the stability of the system.

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Operator [18]

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As there are no further questions, so I'll hand the call back to yourself, sir.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [19]

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Thank you very much. Have a nice evening.

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Operator [20]

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Thank you very much. Ladies and gentlemen, that does conclude the call for today. Thank you all for participating. You may now disconnect.