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DIRECTV (NASDAQ:DTV)

Q4 2012 Earnings Call

February 14, 2013 2:00 pm ET

Executives

Jonathan M. Rubin - Senior Vice President of Investor Relations and Financial Planning

Michael D. White - Chairman, Chief Executive Officer and President

Bruce B. Churchill - Executive Vice President, Chief Executive Officer of Directv Latin America Llc, President of Directv Latin America Llc and President of New Enterprises

Patrick T. Doyle - Chief Financial Officer, Executive Vice President and Member of Proxy Committee

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Vijay A. Jayant - ISI Group Inc., Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Bryan D. Kraft - Evercore Partners Inc., Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

John C. Hodulik - UBS Investment Bank, Research Division

Tuna N. Amobi - S&P Equity Research

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Amy Yong - Macquarie Research

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Operator

Good day, ladies and gentlemen. My name is Sarah, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the DIRECTV's Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the conference over to your host, Jonathan Rubin, Senior Vice President of Investor Relations and Financial Planning. Please go ahead, sir.

Jonathan M. Rubin

Thank you, operator, and thank you, everyone, for joining us for our fourth quarter 2012 financial results and outlook conference call. With me today on the call are Mike White, our President and CEO; Pat Doyle, CFO; Bruce Churchill, President of DIRECTV Latin America; and Larry Hunter, our General Counsel.

In a moment, I'll hand the call over to Mike, Bruce and Pat for some introductory remarks, but first, I'll read to you the following. On this call, we make statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results to be materially different from those expressed or implied by the relevant forward-looking statements. Factors that could cause actual results to differ materially are described in the Risk Factors section and elsewhere in each of DIRECTV's annual reports on Form 10-K, quarterly reports on Form 10-Q and our other filings with the SEC, which are available at www.sec.gov.

Examples of forward-looking statements include, but are not limited to, statements we make related to our business strategy and regarding our outlook for financial results, liquidity and capital resources. Additionally, in accordance with the SEC's Regulation G that requires company reporting non-GAAP financial measures to reconcile these measures to the most directly comparable GAAP measure, we provide reconciliation schedules for the non-GAAP measures, which are attached to our earnings release and posted on our website at directv.com.

So with that, I'm pleased to introduce Mike.

Michael D. White

Thanks, Jon, and thanks, everybody, for joining us today. I'm pleased to report that DIRECTV had a great fourth quarter, capping off another very strong year. I believe our results are entirely consistent with the long-term strategies we shared with you early last year designed to create significant shareholder value by generating industry-leading growth while continuing to return cash to our shareholders. In particular, I'd focused on 3 areas that I'd highlight from our consolidated results.

First, the strength of DIRECTV and SKY's premium brands, along with our differentiated suite of entertainment products and services, continues to drive tremendous consumer demand, market share gains and top line growth across all of the Americas. Propelled by strong fourth quarter results in Latin America and the U.S., full year gross additions soared to all-time highs, up over 5% from the prior record set in 2011. This considerable achievement culminated in the largest annual net subscriber gain in DIRECTV's history of nearly 3.8 million net new subscribers, including Mexico, furthering our position as the world's largest provider of pay-TV video services. And we exited 2012 with more than 35 million households throughout the Americas and are now a $30 billion company and growing.

Second, strong full year OPBDA and double-digit cash flow growth demonstrates our commitment to profitably grow our businesses while keeping a sharp eye on both cost containment and productivity.

And third, we're continuing to generate significant -- to return significant capital to our shareholders. As you saw in the earnings release, we repurchased more than $5.1 billion of DIRECTV stock this past year, helping to fuel a 32% lift in earnings per share to $4.58. And I'm pleased to announce that earlier this week, our Board of Directors authorized another $4 billion share repurchase program.

Now before I turn the call over to Bruce and Pat for a more detailed discussion of our fourth quarter results, along with our long-term strategies and outlook, let me offer just a few observations.

First, starting with Latin America. On balance, I thought DIRECTV Latin America's quarter and full year results were extremely strong and reflect the key financial and strategic priorities we shared with you at our Investor Day last March. Our competitive advantages and operating strengths continue to drive subscriber growth to all-time highs as we expanded our share of the growing pay-TV household market throughout the region. For the first time ever, full year gross additions not only exceeded those posted by DIRECTV U.S. but also shattered the record set by our U.S. business in 2011, adding over 4.4 million gross additions while attaining more than 2.4 million net additions, which was also our best net ever. Consistent with recent trends, this record performance was driven by strong growth from our middle market segments, as well as continued advanced product penetration gains. With this strong subscriber growth, full year 2012 revenues accelerated 23%, exceeding the guidance we provided in spite of some currency headwinds, particularly in Brazil. In terms of margins and bottom line, Bruce will discuss it a bit further, but importantly, Latin America delivered on its OPBDA margin target of around 30% in 2012. And this was particularly notable because it was achieved in spite of record gross additions, as well as the increased expenses related to digesting nearly an 80% or 4.5 million subscriber increase in our base over just the last 2 years.

Turning briefly to DIRECTV U.S. I think our fourth quarter and full year results reflect the early payback from successfully executing on our strategy to rebalance our top and bottom line growth so that we can achieve long-term sustainable and profitable growth. Specifically, we think our heightened focus on the quality, loyalty and profitability of subscribers is increasing the long-term value of our subscriber base and yielding stronger and more sustainable financial returns. These benefits are especially evident when looking at our full year 2012 revenue growth of more than 6%, which was in line with our guidance and primarily driven by our ability to grow ARPU and attain higher-quality subscribers in a challenging U.S. operating environment. In addition, our sharper focus on expense management, combined with a more disciplined customer acquisition strategy, drove operating profit before depreciation and amortization growth of nearly 7% in 2012, achieving the higher end of our full year guidance. Overall, DIRECTV U.S. met or exceeded all of the key goals we established at the beginning of last year.

Now it's clear we exit 2012 with good momentum, so let me explain how we're going to capitalize on that and generate -- continue to generate first quartile growth in 2013 and beyond. Now when looking at the macro trends, frankly, 2013, I think, other than Venezuela, will look a lot like 2012 as we expect continued modest economic growth in the U.S., high levels of competitive intensity and rising programming costs in the U.S. Taken together, this environment in the U.S., in particular, poses considerable challenges but also presents, I think, a world of opportunity for us at DIRECTV because we know consumers remain passionate about our brand and watching video both inside and outside the home. With that in mind, for our U.S. business, we have 3 strategic priorities.

First and foremost, we must continue to delight our greatest asset and earn the enthusiastic loyalty of our over 20 million subscribers. So our top goal is to make the customer experience a hallmark of the DIRECTV brand to not only increase loyalty but also drive better ARPU, lower churn and continue to meaningfully differentiate DIRECTV from our competitors. Now to achieve this, we've already created internally a new organization focused entirely on this mission, which we set up early last year. We've also introduced a series of major initiatives meant to drive higher loyalty levels and lower churn. And we've instituted a company-wide incentive plan with performance goals structured around delivering that unparalleled customer experience. We've challenged the collective efforts of our new organization and the larger DIRECTV team to drive a significant reduction in churn, 20-point increase in Net Promoter Score and also improve productivity by reducing call volumes by 20 million and unnecessary truck rolls by 20% over the next 3 years.

Second, the U.S. must continue to strengthen our DIRECTV's brand and advantage competitive position in the marketplace by accelerating our innovation and fulfilling our vision of providing the best video experience in the world anytime and anywhere customers want to experience it. Our team is collaborated on a robust product roadmap to advance the entertainment experience across multiple platforms and drive deeper customer engagement. For instance, in 2013, we plan to expand our DIRECTV Everywhere capabilities, significantly increase the penetration of our new Whole-Home Genie service and continue to improve our world-class user interface across all devices, with a special emphasis on search, Discovery and social networking. And with the future in mind, we're also investing in satellites, related broadcast infrastructure and developing foundational technologies to ensure we continue to deliver the best and highest quality video experience possible.

And finally, our third strategic imperative for our DIRECTV U.S. team is to continue balancing the top line sales and bottom line profitability in a way that ensures we deliver both sustainable and profitable growth over the longer term. Due to the rising cost of programming, driving top line sales and remaining disciplined in the management of credits and promotions has become critical for us to maintain our strong profit margins. So it's important that we put through responsible price increases as we have as we expand our value proposition and continue to grow ancillary and nonresidential revenue streams like DIRECTV CINEMA, addressable and local advertising and our commercial business. This year, we also plan to accelerate our transition towards greater investments and upgrading our most loyal and valuable subscribers which we think will yield very strong long-term returns. Having said that, let me emphasize, I still believe attaining new subscribers is highly accretive. It's just that we're being more disciplined to ensure that we maintain strong returns from those new subscribers. In fact, I fully expect that we'll generate positive net additions in the U.S. once again this year. On the cost side, our objective is to continue to tightly manage costs across our organization to help neutralize the impact of higher programming expenses on our U.S. margins. And in that regard, as it relates to programming costs, we're going to continue to remain very disciplined, continue to look for greater package flexibility and work hard to negotiate fair terms that reflect the value of the programming and the size and scale of DIRECTV and its customer base and also pursue digital rights, creating more value for our customers to watch what they want to watch, where and when they want watch it on whatever platform they want to watch it.

So on wrapping up, we believe the successful execution of these key strategies will position our DIRECTV U.S. business for continued operating and financial success while positioning us to continue delivering mid single-digit revenue and OPBDA growth over each of the next 3 years.

Now let me turn to Latin America. And notwithstanding the recent devaluation of Venezuela, there, the overall macroeconomic forecast, I think, is more favorable than the U.S., indicating a climate that's still relatively stable and growing. Household formation continues to grow, along with disposable income per household as the region-wide migration of millions of people into the middle-class continues inexorably. In parallel with these macro trends, pay television continues to gain acceptance as a must-have consumer product, supporting strong overall growth prospects. We continue to penetrate -- continuing to penetrate Latin America's emerging market also means managing risks, such as the impact of inflation on labor costs, foreign exchange fluctuations, foreign currency restrictions and regulatory activity in each country we do business in. And with that in mind, we remain committed to the strategy we outlined at our Investor Day last year, which was to capitalize on this growth opportunity while maintaining strong margins and cash flow. The top priority in 2013 will be to continue to reinforce our brand leadership in both the high end and middle markets with differentiated service offerings. This will be facilitated by continuing to leverage the synergies received from our U.S. business to gain competitive advantage with equipment features, especially High Definition, costs and time to market. We also plan to further leverage our competitive advantages so we can continue to profitably expand our service to the middle market as we expand penetration offering differentiated lower-priced entry-level packages for our services across the region. Now, attendant with that, it's also critical we complete construction of a world-class infrastructure to support the tremendous growth of our subscriber base we've seen and greatly improve our operating performance through productivity improvements, particularly in areas like our call centers and IT systems. And as part of that upgrade investment, we're also investing in satellites and related broadcast infrastructure.

And finally, we've heightened our focus on cost management, which includes capturing scale efficiencies to ensure that we can continue to deliver strong margins for the foreseeable future. With the successful execution of these strategies, I'm confident we will achieve our 5-year vision of doubling our subscriber base, revenues and profits while also generating significant free cash flow.

So in summary, I think all of our businesses remain extremely strong from an operating, competitive and financial perspective. And importantly, our long-term growth expectations have not changed. With the strategy shared with you today for both of our -- both our U.S. and Latin American businesses, I'm confident we'll continue to drive industry-leading top line and bottom line growth while also creating significant shareholder value for years to come.

As you know, I've also been clear about our desire to continuously explore opportunities to create further value by strengthening and expanding our core business. Evaluating GVT is consistent with that goal. So before I turn the call over to Bruce, let me just provide you with an update as best as I can on the GVT process. As you recall, last month at an investor conference, I outlined 4 key lenses through which we will be evaluating this business. So let me quickly recap those 4.

First, from a strategic perspective, we have to get comfortable we have a clear understanding of the advantages GVT has in its own right, as well as brings to our core business, while at the same time, assessing the incremental growth opportunities we would have in offering Internet service; second, we have to assess the financial impact, make sure that the hard synergies are quickly realizable and appropriately aligned with whatever premium and purchase price you might have to look at; third, we need to make sure that we'd be able to manage and fully integrate GVT into our existing SKY Brazil business. As I've seen with too many mergers, integrating different cultures and management styles can often be the most difficult hurdle of all, so I take this challenge personally and very seriously; and finally, we have to carefully consider the broader DIRECTV capital allocation lens, particularly relating to items such as our current share buyback plan, our strong desire and commitment to remain investment grade and the potential strategic firepower we'd have left for other opportunities should they arise for DIRECTV U.S. and DIRECTV Latin America.

The key takeaway for you is that we have an extremely disciplined and rigorous process to ensure that whatever our final decision will ultimately be the best one for our DIRECTV shareholders in the long term. Regarding the structure of a possible transaction, there's not much I can add to my previous public remarks other than we'll consider a wide variety of possibilities, consistent with those objectives I mentioned above. And in terms of timing, we certainly expect to have completed our internal assessment by the end of this quarter, but I can't comment much beyond that. Other than that, there's not much additional information I can share with you at this time. So as such, I'd suggest it's probably more productive to focus on our core business rather than GVT on the call.

With that, let me turn it over to Bruce.

Bruce B. Churchill

Great. Thanks, Mike. As you can see from our results, the fourth quarter was a great ending to another very strong year, with DIRECTV Latin America delivering record subscriber growth and strong financial results, particularly given the foreign exchange and economic headwinds that we faced coming into the year. As a reminder, our results exclude those of SKY Mexico, which we do not consolidate.

Our fourth quarter gross additions of 1,183,000 marked a new all-time high and represent an increase of 23% over last year. Some highlights to point out are, in Brazil, while overall sales were flat year-on-year, sales of our SKY Light and SKY FIT middle market products increased 21% and represented almost 80% of our gross additions. These products have now essentially replaced our traditional standard definition packages as the product of choice for the non-HD customer. In PanAmericana, gross additions grew 48% compared to last year, with sales of our prepaid product in Argentina, Colombia and Venezuela driving much of the growth. Prepaid sales represented approximately 54% of our gross additions in PanAmericana. Prepaid subscribers have increased approximately 75% compared to last year, reflecting higher gross additions and higher reconnection rates. Middle market subscribers now make up 37% of our 10.3 million subscribers compared to about 27% a year ago. But the story was not all about the middle market. Fourth quarter sales of HD to new subscribers grew 16% in Brazil and 50% in PanAmericana. Overall, approximately 28% of our 10.3 million consolidated subscribers now have an advanced product, including more than 2 million HD subscribers, a 57% increase over 2011.

Turning to churn. Our postpaid churn in the quarter of 1.48% increased versus the prior year as higher churn in Brazil was partially offset by lower churn in PanAmericana. In Brazil, a combination of our greater penetration of the middle market and the increased churn attributable to these middle market subscribers drove the increase. I believe that the lower postpaid churn in PanAmericana reflects the beginning of the payoff for the efforts and investments we have made in customer service in the region.

In summary, we added a record 658,000 net subscribers to our base this quarter and increased our market share year-over-year in all of our major markets. In terms of full year results, we have 4.4 million gross additions, with net additions of 2.4 million, leaving us with 10.3 million consolidated subscribers at year-end. Again, to be clear, these figures exclude SKY Mexico.

On that subject, Televisa has not yet released full year 2012 results, so I'm not at liberty to discuss SKY Mexico's result in today's call. However, you have seen their results through the first 3 quarters of the year. And based on those results alone and the generally favorable outlook for the Mexican economy, I can express our continued enthusiasm and positive outlook for that business.

Now turning to our financial results. Fourth quarter revenues increased 22% compared to last year or around 34%, excluding the impact of foreign exchange, mostly reflecting a 31% increase in our subscriber base. Most of the negative FX impact is a result of the average Brazilian reais exchange rate in the quarter, declining more than 15% versus the U.S. dollar compared to the same period last year. Excluding foreign exchange, ARPU was up slightly from a year ago, which reflects some price increases, as well as the significant contribution attributable to the large base of advanced services subscribers I referred to above.

Fourth quarter consolidated operating profit before depreciation and amortization, or OPBDA, increased 17% over last year, mostly due to the higher revenues, offset in part by higher programming and other operating costs associated with our larger subscriber base. In terms of OPBDA margin, we saw a decline due mostly to costs associated with certain litigation in Brazil and Argentina. In the absence of these items, our OPBDA margin for the quarter would have been flat year-on-year.

Cash flow before interest and taxes in the quarter of $82 million declined from $101 million a year ago as higher OPBDA and high dividends were more than offset by higher nonsubscriber-related CapEx and higher satellite payments and unfavorable working capital movements.

That wraps up my comments on 2012. Let me now turn to the outlook for DIRECTV Latin America for 2013. And given the recent events in Venezuela, I think it's best to deal with the outlook in its component parts. So let me begin with Brazil. Although many general market GDP forecasts have been moderated in recent weeks, we are still expecting a fairly robust year for the pay-TV market in Brazil, in general, and SKY, in particular. Even with all the growth the market has experienced in recent years, pay-TV penetration ended the year at only 27%. In our view, there's still a lot of room left for growth. In 2013, we expect gross additions of SKY to be in line with last year and for net additions to be a touch below last year at about 1 million. As we've discussed before, we believe that our product and geographic segmentation strategies will enable us to continue to drive profitable growth even in the face of some cooling in the economy. Middle market products will continue to drive sales, and we will continue our systematic effort to upgrade customers where possible and, of course, to continue pushing HD where appropriate. Therefore, in local currency terms, ARPU should be down modestly, and revenues should increase in the range of 20%, reflecting the larger subscriber base. Margin should remain relatively constant, and therefore, OPBDA growth should roughly be in line with revenue growth.

With respect to PanAmericana, I would like to tackle next year by putting aside Venezuela for the moment and discussing PanAmericana x Venezuela. So x Venezuela, in 2012, the PanAmericana platform had net additions a bit above 900,000. Proudly speaking, this territory should be able to achieve similar levels of sales in 2013, driven by sustained growth in Argentina and higher growth than most of the other countries, especially Colombia. Since churn should remain in check at 2012 levels, net additions will be a bit lower only due to the fact that there's a larger base. Again excluding Venezuela, and consistent with the guidance we've given in the past, ARPU will be down modestly as prepaid and other middle market packages become the larger part of the base. And there is some modest weakening of other currencies, partially offset by planned price increases and advanced product sales and upgrades.

With respect to Venezuela, we will continue our strategy of managed growth in which the key variable is our ability to import boxes to support growth. We will continue to use approved local importation mechanisms to import boxes using local currency. Therefore, we expect that gross additions will remain in the same range that they were in 2012, but that net additions will be a bit below 200,000. As you are aware, the Venezuelan government devalued the currency approximately 32% this past week from the bolivar fuerte rate of 4.30 to 6.30 to the U.S. dollar. As of December 31, we had approximately $563 million of cash on hand in Venezuela expressed at the former rate. Therefore, we expect to take a pretax charge of approximately $160 million in Q1 of 2013, relating mostly to the devaluation of the cash on hand. The Venezuelan devaluation will have an additional impact on overall results in 2013 for DTVLA, partially because of the unfavorable FX comparables year-over-year. In addition, we still expect the Brazilian reais to be modestly weaker against the U.S. dollar in 2013. Even accounting for a weaker reais, prior to the Venezuelan devaluation, we had expected overall revenues in OPBDA to grow a touch below 20% in U.S. dollar terms in 2013. However, because of the Venezuelan devaluation, we now expect revenues to grow only in the mid-teens and for OPBDA growth to be flat. The OPBDA figure reflects the effect of the balance sheet write-down and favorable FX comparisons and the fact that the OPBDA margins are higher in Venezuela than in the rest of PanAmericana.

Our CapEx spending for 2013 should be approximately $2 billion, about 70% of which is subscriber-related. The balance reflects higher-than-normal spending on the infrastructure investments, new satellites for both SKY Brazil and PanAmericana, as well as a modest ramp-up in our spending on wireless broadband.

Before turning the call over to Pat, I would like to reflect on the outlook I gave to you at our Investor Day in March of 2012. At the time, I said that doubling the size of our then 8 million subscriber base by the end of 2016 was possible, that we would generate revenues in excess of $10 billion, that we would deliver 30% OPBDA margins on that base of revenues. With our strong performance in 2012 and my view on 2013, I believe we are well on track to achieving that vision.

So with that, I'll hand the call over to Pat. Pat?

Patrick T. Doyle

Thanks, Bruce. Overall, I thought that DIRECTV U.S. had a great fourth quarter, highlighted by solid revenue, earnings and cash flow growth. As you heard from Mike earlier, these results are entirely consistent with our strategy to rebalance our top and bottom lines so that we can achieve long-term sustainable and profitable growth.

Looking first at the top line. DIRECTV U.S. revenues increased by 5% to surpass $6.3 billion and were primarily driven by ARPU growth of 3.7% in the quarter, as well as by net subscriber gain. As we've seen throughout 2012, the key driver of this growth, other than price increases, was increased penetration above new and existing customers paying for advanced services, as well as our policies to reduce credits and discounting. ARPU also continues to benefit from the strong pay-per-view and premium movie channel sales. Pay-per-view movie buys through DIRECTV CINEMA and our Connected Home strategy reached all-time highs this quarter, with revenues up by nearly 25% year-over-year. We had a good quarter in our premium movie category as well, where our buy rates per customer represented the best quarterly performance in at least 4 years. In addition, commercial and advertising sales contributed favorably this quarter as both grew revenues at a double-digit clip year-over-year.

Turning now to subscribers. The modestly lower gross additions were in line with prior quarters and consistent with our long-term growth strategies, including our greater focus on higher-quality subscribers, stricter credit standards and reduced promotional discounting. Churn of 1.43% in the quarter came in better than we forecast on the last earnings call, resulting in net subscriber additions of 103,000. Improvement is partially attributable to lower-than-expected voluntary churn related to the lapse of our programming agreement with TVB, a television company that provides Chinese and Vietnamese language programming. We've been able to mitigate the loss of subscribers by substituting similar international programming at a lower promotional rate. However, we expect to continue losing customers as the promotional period ends, which will place modest pressure on churn in the first quarter. We've also been successful with increasing the percentage of customers on auto-bill pay and commitments compared with last year, which, coupled with our more selective acquisition policy, has helped lower involuntary churn.

Moving now to the bottom line. Operating profit before depreciation and amortization margin improved in the quarter, driving OPBDA growth of 6%. Lower spending related to our more selective customer acquisition strategy helped margins, but we're also seeing the benefits from solid cost containment initiatives across the enterprise, as well as from improved productivity from prior year capital investments. As a result, many of our key cost areas, including subscriber services, broadcast operations and cash upgrade and retention expenses, grew slower than revenues in both the quarter and the full year. Partially offsetting all of these improvements were increased content costs, primarily related to annual programmer rate increases. Lastly, although it did not impact the income statement, the higher cash tax rate of $883 was mostly due to our new DIRECTV Genie Whole-Home DVR promotion, lower gross additions related to our fixed marketing costs, as well as from more Connected Home customers.

Moving on to the balance sheet. This quarter, we repurchased about 25 million shares of DIRECTV stock for $1.25 billion, bringing cumulative repurchases since 2006 to nearly $26 billion, reducing shares outstanding by approximately 60% over that period. Additionally, we launched a $2.5 billion commercial paper program at DIRECTV U.S. and closed the year with $358 million outstanding under the program. With these transactions, we ended the year with about $17.5 billion in total debt and a cash balance of $1.9 billion. And subsequent to the end of the quarter, we issued $750 million of investment grade notes in January, bringing our total debt to just over $18 billion and our total debt to trailing consolidated OPBDA leverage ratio target to about 2.4x.

Finally, I'd like to make a few comments about our 2013 outlook for DIRECTV U.S., as well as our expectations for performance at the consolidated level. Looking first at DIRECTV U.S. Our 3-year revenue outlook of mid single-digit growth is expected to be generated more from ARPU growth than from subscriber growth. And similar to last year, growth will be driven by price increases, less discounting and continued solid growth in areas such as commercial, ad sales and DIRECTV CINEMA. In terms of quarterly pacing, we're expecting ARPU growth to be greater in the second half of the year relative to the first half. This is primarily related to the absence of an NFL game, a reduced schedule of premier pay-per-view event and modestly negative subscriber growth expectations in the first half of the year, as well as the favorable impact from price increases for basic, advanced and some new services in the second half of the year.

That said, I'd like to highlight the subscriber guidance Mike provided earlier as we do expect positive net addition this year. Our 3-year OPBDA outlook of mid single-digit growth will be challenged by the rise in programming costs. However, we remain confident that we can effectively manage all costs on our P&L to achieve this growth target. And similar to the ARPU growth trends we just discussed, OPBDA growth in 2013 is also likely to be stronger in the back half of the year compared to the front.

This is primarily due to the impact of the lower ARPU growth on margins, as well as the timing of programming expenses related to some of the larger contracts we signed last year such as Viacom and Time Warner Cable SportsNet. That said, we're expecting programming costs per subscriber growth for the full year to be similar to the rate we saw in 2012 of about 8%. To help neutralize the impact of higher programming expenses on our margins, we will tightly manage our other costs across the organization, as well as drive to continue capturing productivity improvements, which will not only reduce costs but improve call center performance, field operations, retention and customer satisfaction. As such, we are targeting subscriber services, broadcast operations and G&A expenses to be relatively flat and, in some cases, down in each of the next 3 years as a percentage of revenues.

In addition, as Mike mentioned at an investor conference last month, we expect 2013 to be a peak year in capital spending at DIRECTV U.S. at approximately $2 billion. The higher capital expenditures are mostly related to key initiatives that are expected to greatly enhance our DIRECTV Everywhere experience, improve the user experience, drive deeper customer engagement and loyalty, as well as an upgrade to the DIRECTV campus in El Segundo. We are also increasing our investment in upgrade programs by approximately $200 million in 2013 for our longer-tenured and higher-value subscribers to improve customer satisfaction, ARPU and churn. We anticipate that these upgrade costs will be split fairly evenly between CapEx and expense.

Next I would like to make a few comments about our consolidated outlook. Let me begin by providing some additional color on our EPS outlook for 2013. Depreciation expense at DIRECTV Latin America and DIRECTV U.S. will increase by roughly 30% and 10%, respectively, compared to 2012. In addition, our effective tax rate will also be a few percentage points higher in 2013 as our 2012 rate benefited from the completion of a prior year audit, and we don't expect to have benefit going forward. As a result, we're expecting our effective tax rate this year to be in the mid-to-high 30% range. Having said that, excluding onetime items such as the Venezuela pretax devaluation charge of approximately $160 million, our guidance that we provided at our Investor Day in December 2010 remains intact as we're forecasting earnings per share to be $5 or greater in 2013. Free cash flow will likely come in lower than 2012 levels due mostly to the impact of the Venezuelan devaluation, as well as from higher taxes and interest. Cash taxes are expected to be higher in 2013 due to greater earnings before taxes, and a higher cash tax rate is expected to be in the mid-to-high 30% range, primarily due to an expected tax payment in 2013 upon the close of a tax audit, reversal of depreciation of benefits associated with prior year economic stimulus programs and the absence of a state tax credit carryforward that we had in 2012.

Finally, in terms of DIRECTV's strategy for returning capital, I'd like to first point out that our top priority for creating shareholder value remains to reinvest in our businesses. And as you heard from Mike earlier, if opportunities do not arise that meet our regular strategic and financial hurdles, we will continue our capital allocation strategy for share repurchases as we believe DIRECTV stock remains significantly undervalued. As such, on Tuesday, our Board of Directors authorized a new $4 billion share repurchase program and terminated the balance of roughly $860 million that remained from the previous authorization. We're expecting that this new authorization will provide sufficient funding to support our buyback program through early next year.

All in all, we entered 2013 from a position of strength, thanks to our strong balance sheet, cash flow, competitive position and quality subscriber base across the Americas. And if we accomplish all of our targets and deliver the expected financial results, I believe we will continue to lead the industry in revenue and earnings growth, as well as creating substantial shareholder value.

So with that, I'll turn the call back to Jon.

Jonathan M. Rubin

Thanks, Pat. And before moving on to Q&A, investors should note that we have members of the media on this call in a listen-only mode. I'd like to remind the media that they are not authorized to quote any participants on this call, either directly or in substance, other than the representatives of DIRECTV. In addition, we are webcasting this call live on the Internet, and an archived copy will be kept on our website. [Operator Instructions]

So with that, operator, we're ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

I have, I guess, 2 questions of clarification. Bruce, for you, on the guidance for '13, I think I heard you say 20% EBITDA growth in Brazil and then flat PanAmericana, including the impact of the charge. I just want to clarify if that was correct.

Bruce B. Churchill

No. So the 20% within the local currency, so 20% local currency revenue and OPBDA growth, rolling everything all in, so consolidated with PanAmericana and Brazil, it would be about mid-teens revenue and flat OPBDA. Sorry for the confusion.

Benjamin Swinburne - Morgan Stanley, Research Division

No problem. Thanks for clarifying. And then I hope this doesn't count as a GVT question, but I was curious, Pat, you talked about the buyback plan getting you through, I think, early next year. Is that sort of subject to what happens to GVT? You also talked about -- Mike talked about keeping the investment grade rating, and just maybe you could help put that into context for us.

Patrick T. Doyle

Yes, I know. I mean, the $4 billion in getting into next year would be kind of business as usual without introducing a strategic transaction. I think as we would look at it, I mean, obviously, we would be very conscious of, like I said, our credit rating and making sure we give ourselves the most financial flexibility.

Operator

Next from ISI Group, we'll move to Vijay Jayant.

Vijay A. Jayant - ISI Group Inc., Research Division

Pat, I just want to follow up. Is there any positive benefits from the economic stimulus in 2013 in your expectation?

Patrick T. Doyle

Well, I guess what I was saying, Vijay, is that we had a benefit in '12 as it rolls into '13. Now as we kind of look at the tiering of all of the years of the benefits, it's actually a net negative in '13 as you get the new benefits that got passed in the tax bill. But the roll-off of all the benefits that we've gotten in the past. So compared from 2012 to 2013, we went from a positive to a negative on -- net-net on the depreciation benefits.

Vijay A. Jayant - ISI Group Inc., Research Division

And then I have, again, a clarification for Bruce. So if you excluded the cash devaluation for Venezuela, the EBITDA growth, OPBDA growth for LatAm in 2013 would be something in the low double digits. Just the impact on the business, not the...

Bruce B. Churchill

That's about right. Yes.

Operator

Moving on, we'll move on to Jason Bazinet with Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

Just had a question for Mr. Churchill. Maybe this is a difficult question to answer, but I was looking at Citi's, just forecast for foreign exchange going out a few years. And they've got another reset in Venezuela and sort of pretty material deterioration in Argentina on a currency basis. And so I was just wondering, in your -- in the context of your comments regarding your -- the reiteration of your 5-year outlook, does that sort of assume that nothing else changes from a foreign currency standpoint? Or -- I don't know if that's a fair question or if it's possible to answer, but is that what's sort of baked into your expectation or at least...

Bruce B. Churchill

Well, it's not fair. It's impossible to answer, but I'll do it anyway. Look, I think we do have -- baked in some currency depreciations over time in our forecast. Having said that, I guess I would say I do not think we have baked in huge step function changes. So I don't know what's in that Citi forecast, so I can't comment about whether our assumptions are consistent with theirs. But as a general rule, we do tend to assume that the currencies, over time, depreciate vis-à-vis the dollar. It's very difficult, as you say, to be certain.

Jason B. Bazinet - Citigroup Inc, Research Division

Yes, yes. And given that your management team has a lot of experience in Latin America, as currencies sort of move around for those of us that are more ignorant about this, are there real business like fundamental things that change in these countries other than just more inflation? I mean, does it get easier or harder to conduct business when you've got a currency moving around?

Bruce B. Churchill

Well, look, I could argue that the devaluation will probably make it a little easier because it's probably easier to get to repatriate some dollars under these mechanisms that do exist to repatriate currency and particularly for, let's say, box purchases and satellite payments and things like that. Certainly, it does, however, put some pressure on inflation, which has an impact on our labor costs. And I think we've talked about that in the past. But our practice has also been in the past to pretty much price at least with inflation when we can, and in years past, we've often taken more than 1 price increase in a given year, in a given territory. So I think it's the kind of thing that you just have to accept that it's a part of life, and you operate your business accordingly. And as you say, it's something that is a more normal experience for executives who live and work and breathe these things all the time. But our experience has been it's something we've been able to manage over the long term.

Operator

Moving on to Bryan Kraft with Evercore Partners.

Bryan D. Kraft - Evercore Partners Inc., Research Division

I just want to see if you could elaborate on the additional investment in the U.S., the CapEx of $2 billion. Did you say 70% of that is subscriber-related? And if so, that seems like it's a big increase in what you're investing -- or what you invested in, in subscriber-related CapEx in '12. So I was just wondering what the increase there is. And also, if you could talk about the other infrastructure spending that you're doing.

Patrick T. Doyle

Yes, sure. I mean, I think the -- as I mentioned, one of the biggest pieces of it is we've done a lot of work on looking at how we reinvest our capital in the U.S. And I think we're definitely going to step up our upgrade program in the U.S. As I mentioned, there's probably about $200 million. We think about half of that is going to be capital. In addition to that, we've got a series of initiatives that we think, across the board, whether it's productivity, efficiency or expanding the customer experience, we've made a decision to increase the investment there. And then lastly, we're going through a fairly expansive upgrade of our campus here and trying to kind of consolidate buildings into a more cohesive area. And kind of the peak tenant improvement spend will be in 2013, and that will drop off pretty significantly after that.

Michael D. White

Bryan, it's Mike. I think there may be some confusion as well. So Bruce talked about 70% of the Latin America CapEx being subscriber-related. I don't think that would be exactly the same in the U.S. relationship. So the U.S. spending has been kind of running about a billion -- a little less than $1.8 billion, and it's probably going to be a little closer to $2 billion, of which $100 million of the increase is the upgrade in retention-focused strategy that we are implementing this year around our loyal customers. And then there's about $100 million for the build-out -- onetime build-out at El Segundo campus that goes away in 2014. So I don't think it's anything longer term that gives me any concern. I think, again, we should be able to manage the U.S. capital spending over the next several years to be flattish with kind of what we're targeting for this year, which is a tad less than $2 billion.

Bryan D. Kraft - Evercore Partners Inc., Research Division

How much satellite spend in the U.S. and LatAm is in the outlook for 2013? And if you can comment on '14 as well on satellite spend.

Patrick T. Doyle

So I think for both the U.S. and Latin America, the CapEx on satellite's in kind of the $150 million range for both.

Bryan D. Kraft - Evercore Partners Inc., Research Division

In '13, and $150 million in '14?

Patrick T. Doyle

Yes. '14, we'll start to see the CapEx drop off as we launch the satellites that year. So for the most part, '13 will kind of be up peak year, and then we'll start to see it flatten or at least decline as you get to '14. And then '15, it will definitely drop off.

Operator

Next, we'll hear from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I have 1 question for Bruce and then 1 for Pat. Bruce, in Latin America, can you talk about the progress with the wireless initiative you have? I think the last time we heard publicly it was a little bit slower than expected. So I just wanted to hear an update there. And then the second question on the RSN fee. Wanted to know if you are planning to roll this out to your current subs. And if so, will it be at the same level as the $3 for new subs?

Bruce B. Churchill

On the wireless, yes. I think when we last had a call, I had indicated that we've experienced -- rolled out a little slower than we thought, Marci, because the software wasn't quite up to our standards. And so that what we had originally planned for 2012 would roll more into 2013. That is still very much the case. I would say then that the CapEx that's associated with that is in line with the figure that we gave at our Investor Day, which was we said it was sort of in the $50 million to $75 million range. So that would be my expectation for this coming year. But I would say the easiest way to think about it, it almost got delayed a year just because of these problems with the software. But we now believe we have fixed those problems. It's frankly given us a chance to be a much better prepared as far as where we intend to build out. And the build-out will be occurring mostly in Brazil this coming year -- or this year.

Michael D. White

So Marci, it's Mike. I'll take the RSN question. Look, I think I've said many times, I believe the whole sports business model is broken, and that the only alternative that we have if we're going to carry sports channels in these few markets that are completely out of control and unaffordable, frankly, for the average consumer is with some kind of a surcharge. I noticed a couple of competitors following our lead in that regard, and it's about 20% of the country. And yes, we do plan to extend the surcharge to current customers in that part of the country.

Operator

From Bank of America Merrill Lynch, we'll move on to Jessica Reif Cohen.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

I actually had a similar question on the RSNs. How many subs actually have the charge so far? And I guess the response has been okay if you're rolling it out. But when will it be fully rolled out? And does the surcharge actually cover the cost in those markets, which it sounds like is L.A. and New York? And how much...

Michael D. White

So it's not fully rolled out. I mean, it -- we kind of tested it in a couple geographies. We did implement it fully with new subs in certain geographies, but we'll be rolling it out to current customers later this spring. And I would tell you, it doesn't come close to covering the total cost to sports in those geographies. Obviously, we're trying to take a look at price elasticities and how we think consumers will react. And it's a judgment we make for each individual negotiation on a sports league is how many of our subs are watching on a regular basis? And how much are they willing to pay? And then you make a judgment based on projected churn, other sports networks as to whether we'll carry it or not. And as you've seen, we've made choices in the last year not to carry certain sports unless we're allowed to carry it à la carte so that the average consumer can pay and choose on their own.

Operator

We will move on to John Hodulik with UBS.

John C. Hodulik - UBS Investment Bank, Research Division

Just a couple of quick questions on your subscriber trends. Either you've been -- you've seen churn relatively steady for the last few years. Some of the initiatives that you have in the U.S., do you expect that to see churn come down, say, in '13 and '14? Is that part of the goal here? And then secondly, I think, Pat, in terms of some of the subscriber guidance you gave for the year, did -- I may have missed it. You gave a lot of guidance, but did you suggest it may be negative in the first half of the year? If you could just sort of give some color on how we should see the net adds progress, that would be great.

Michael D. White

Yes, John, let me take that. So first of all, on your question on churn, absolutely. We are putting significant investments against our loyal customers. We also have strengthened the quality of our customers, changing credit scores last year. We have more of our customers on commitment with auto-bill pay than we've ever had. And frankly, as a result of that, we're beginning to see an improvement in the involuntary churn, which is good to see, first of all. Second of all, with the loyal customer programs, we are absolutely expecting to see improvements over time to further reduce churn in a meaningful way over the next 3 years. With that said, we do have a little bit of a headwind on churn in Q1 from the TVB thing. And so I would expect to see churn modestly above prior year, maybe a couple of basis points in Q1. And that's part of when you get to your second question, it kind of impacts. So Q2 is always a tough quarter for the industry. So we probably expect to be modestly net negative in the second quarter. The first quarter is a bit of touch and go. It would have been okay. It's a small quarter, to begin with, from a net add standpoint. With this incremental churn from the TVB thing, it's going to be touch and go. So far, year-to-date, we're positive net adds, but we'll see what the next 6 weeks bring. The price increase went in February 7, so we have to see that impact in March. And as Pat said, February 17, some of these promotions roll off on the TVB customers. So that's the reason that probably for the first half, at least it's possible we could be modestly -- very modestly net negative. But for the full year, we fully expect to be positive on net subscribers.

Operator

Next, we'll hear from Tuna Amobi with S&P Capital.

Tuna N. Amobi - S&P Equity Research

So Bruce, it seems like there's a divergence in trends between PanAm and Brazil. I'm wondering if the middle market thesis has kind of played out in PanAm more so than Brazil and how you see that developing over the next 3 years. Is there any blip that is making 1 market kind of diverge than what you're seeing in Brazil? I know it's kind of primarily pay-TV. So the market, I'm trying to understand if the market share shifts. You see yourself benefit in PanAmericana and how that kind of plays out relative to Brazil. And then separately, any color on why the pay-per-view and kind of movie buy rates, and like it was pretty strong. I don't know if it was an isolated trend or if you can help us understand what the key drivers of that, and whether that's kind of sustainable as you look out.

Bruce B. Churchill

Well, let me take the first part. I'm not sure I understood it completely, but I would say that when you say diverge, I don't know if you mean diverging it to -- go ahead.

Tuna N. Amobi - S&P Equity Research

Net adds, the outlook.

Bruce B. Churchill

Well, you mean -- oh, I see what you're saying. Look, I think the advantage of being in the portfolio countries, if you will, is that over the long haul, there's going to be some where they have ups and others have downs. But overall, they tend to wash each other out. So yes, it's true, we had a very strong quarter in PanAmericana this year. And yes, it's true, a lot of it was driven by the prepaid middle market products. But I would say that this does not mean just because in this fourth quarter, net -- sales were flat year-on-year in Brazil, that Brazil is in any way played out. I still think, as I mentioned, that there's a lot of growth left in Brazil. I think, for us, what you'll see is that the -- we're trying to broaden even the HD offering and offer more price points in HD so that we can get an even larger base of advanced products and HD subscribers. And that there's still a lot going on in the Brazil market that makes it very dynamic and still a very attractive market. At the same time, PanAmericana is enjoying, I think, some real success with a lot of the work that we've done in terms of -- I think we talked about repositioning the prepaid product in our Investor Day, and then I've also talked a lot in the past year about the investments we've made in terms of customer service and those sorts of things, which are beginning to pay dividends in terms of more sales and reduced churn. So they're divergent in the sense that the dynamics may be different, but in general, I think both platforms have a lot of running room ahead of them.

Michael D. White

In terms of the movie buy rates in the U.S., look, this was a conscious strategy that we started, I think, 3 years ago. And with our kind of new user interface, with the pictures and the cast and crew descriptions and the ability to navigate and pick, we really have seen a change in our movie business overall. And frankly, now, this is the second consecutive year where we've seen about 20% growth in movie revenues. So we're pleased with that, and we expect to continue to drive above average growth out of movie revenues in the future, x adult movies, which has been soft for years now. So...

Operator

And next, from Wunderlich Securities, we'll hear from Matthew Harrigan.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Are you seeing any competitive implications in those markets where Verizon Wireless and Comcast, in particular, are posting the TV Everywhere apps pretty hard in the wireless stores? I mean, they're certainly pretty facile on the marketing side there. And then secondly, at CES, I mean, 4K TV was everywhere. Everyone expects it's going to be very late decade. But as everyone knows, the product cycles, marketing cycles are compressing. And some of the CE companies seem pretty desperate to get it going pretty fast. You're in a competitive advantage in implementing that relative to the MSOs. Do you think the development could be a little bit faster there than people think?

Michael D. White

So Matthew, I guess on your first question, I mean, certainly, you'd probably be better to talk to Comcast, in particular, or Time Warner Cable on their specific experience in selling in the stores. But I can't say from our side that we've seen a dramatic shift one way or the other. The trends by market are pretty consistent. What's probably more coloring our gross add trends has more to do with our decisions on discounting and pricing than anything else. And as I said, we've got our own TV Everywhere app, which we are aggressively expanding, and you'll see more on that this year. So I really couldn't comment on it beyond that other than to say I don't -- it hasn't really impacted our market share in a material way anywhere that we've seen. In terms of 4K, look, I don't want to get into the details on our longer-term product strategies on the call here, but certainly, DIRECTV has a heritage of wanting to have the best sound and picture and is recognized for having the best sound and picture. And we are continuing to invest in the next generation of both sound and picture. And I did go to CES, saw some of those television sets. But keep in mind, you've got a massive legacy infrastructure in the U.S., so it's going to take a while. You also -- to really see the 4K, it's got to be shot in 4K, although there is some software that I saw being tested that kind of can convert stuff that's not 4K and can up convert that looked interesting. So, again, I think you're probably a couple of years out, even though you'll see some television sets at $7,000, I think, this spring for 65 inches. But, again, my guess is it's a little further out than that. But it's a very exciting technology, and frankly, we're very interested in kind of how fast it'll expend with consumers and certainly taking that into consideration in our longer-term product plans.

Operator

Amy Yong from Macquarie has the next question.

Amy Yong - Macquarie Research

You talked about net add growth for next year. Can you just talk about whether -- what that assumes in terms of housing and then also competition, I guess, specifically from U-verse and Charter? And then also, when you talk about less discounting, can you talk also about how much you plan on spending on the retention front?

Michael D. White

Sure. Amy, on the first question, I guess I would say, first, in terms of housing, I'm still optimistic that it's coming, but I can't say that we've seen it in our gross adds in a meaningful way. A lot of the housing, at least the last year or so, has been more rental housing, which isn't our -- isn't an area of strength for us. But I do think there is some healing of the housing market, and that could be an upside, to be honest with you. We plan conservatively. Everything I see, as I look at the overall economic outlook, I think the recovery is still quite fragile, especially for middle income consumers. And therefore, we're being cautious in our plans in terms of what we expect. In terms, Pat, in terms of the retention credits, again, on all of our credits, we've been pretty -- we've really kind of for the last 3 years been very deliberate but very careful in meaningfully reducing the growth rates step by step by step, and that applies to both new acquisitions, as well as to retention credits. So the money that we were talking about in our upgrade and retention budget that we've put in is not so much for credits as it is for a new equipment upgrade strategy and a new enhanced protection plan that will be kind of rolling out later this year for long-term loyal customers. And we'll have more to say about that when we're ready to kind of launch the program. But it's more around kind of an equipment upgrade strategy than it is around retention credits.

Operator

And ladies and gentlemen, we have time for 1 more question that will come from Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Just snuck it in. So Bruce, are you taking any notable efforts to offset the currency issues you're facing this year? I mean, are you holding back on costs or investments? Or is the numbers you suggested just happened to be where budgets fall out?

Bruce B. Churchill

Well, look, we're obviously always looking for opportunities to improve the performance of our business. Having said that, I think we've been pretty consistent for a number of years now about how enthusiastic we are about the opportunity in Latin America. And if you look at the growth opportunities there and if you look back at some of the IRRs that we showed you in our Investor Day, which still hold true today, we still believe it's a great place to be investing for our shareholders. So I guess to some extent, those numbers, yes, that's what they reflect in sort of our current thinking, but that's not to mean that we're just standing on the sidelines, sort of accepting it. I think the other thing I would point out is that as I've mentioned in my prepared remarks, we have for a number of years now managed the Venezuela business to be self-funding, and it's very much driven, as I mentioned, by our ability to get funds out of the country to reinvest. From a use of cash perspective, I think it's the best way to run the country. It's still a great market. We're the #1 player in the market. We have over a 40 share in the market. It's not always -- the market is not always going to be this problematic. And as long as we can take the funds that are there and continue to reinvest them and it doesn't take away from the resources on the rest of the company, I think it's absolutely the best strategy. And that's something that we'll continue to do. I still think Venezuela, as I said, is a very strong market for us. It's a very good market, it's a very favorable competitive environment for us and it's something that, long term, will create value for the shareholders.

Michael D. White

Yes, I'll just echo as well. Doug, as Bruce said, I mean, we've always managed Venezuela to be self-funding. So that's kind of more of the same. The biggest capital investments that really impact all of DTVLA tend to be satellite decisions and broadcast infrastructure, and those are big, strategic decisions that kind of we've made that we certainly wouldn't pull back on. So from that standpoint, I would say that's probably a little bit of what you're seeing there. The other thing to keep in mind is that we're very conservative in the way we account for the prepaid strategy, which is most of what runs through PanAmericana. We expense that fully when we do it as opposed to even capitalizing any of those boxes when we put them out there. So we're quite comfortable that the returns on investment with that strategy are still very attractive.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And let me just confirm, I'm sure this is the case. But when you're seeing the IRRs are still -- which you outlined at the Investor Analyst Day, that's U.S. dollars coming back into U.S. banks, right? So not inflated by any local currency. That's sort of U.S. cash and cash returns?

Bruce B. Churchill

Yes, I mean, actually, we manage PanAmericana in dollars in effect, anyway. I mean, Brazil is a little different because it's such a big country and the reais is a bit more stable. But, yes.

Operator

Ladies and gentlemen, that is all the time we have for questions today. Thank you. This does conclude today's DIRECTV Group's Fourth Quarter 2012 Earnings Conference Call. You may now disconnect. Have a great day.

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