Vivendi Management Discusses Q2 2011 Results - Earnings Call Transcript

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 |  About: VIVENDI SA S/ADR (VIVDY)
by: SA Transcripts

Vivendi SA (OTC:VIVDY) Q2 2011 Earnings Call August 31, 2011 3:00 AM ET

Operator

Good morning ladies and gentlemen. Welcome and thank you for joining us today for Vivendi’s First Half 2011 Earnings Meeting. With me today are Jean-Bernard Levy, Chairman of the Management Board and Chief Executive Officer and Philippe Capron Member of the Management Board and Chief Financial Officer.

This meeting is webcast on www.vivendi.com where the slides are available for download. And I would like to remind you to read the legal disclaimer at the end of the presentation on page 51. This meeting will be in English with a simultaneous translation. And as usual we will leave time for the Q&A at the end of the presentation.

The first half 2011 financial report will be available on our website later this afternoon. And you’ll be able to access a replay of this call for 15 days also on our website.

And now, I would like to introduce our CEO, Jean-Bernard Levy. Thank you.

Jean-Bernard Levy

Thank you, Jean-Michel. Welcome, good morning to all of you. I’m happy to be once again reporting our numbers and good numbers. So, I have a smiling face this morning for those who are just listening. Few highlight for the first half of 2011. First, as all of you know I’m sure, we have finally completed simplification of Vivendi. We told, I think in very good conditions, 20% we owned for several years in NBC Universal and we acquired, I believe also a very good condition, 44% of SFR so that today, we have no minority stake and we have full 100% of our major business, major contributor which is SFR.

Our operating numbers are good, while the business environment is obviously very challenging, our sales are up and our profits are up.

Adjusted net income increased 20%, this is a number which is high number. It is driven by very good operating performance especially Activision Blizzard and at GVT in Brazil. But also with tax effect on our earnings which results from the acquisition of 44% of SFR. And we these good operating numbers, we are happy to confirm our full year outlook for 2011.

Obviously this first half has meant very major milestone for Vivendi. We finalized in two steps, end of last year and beginning of this year with disposal of our minority stake in NBC Universal at the multiple of roughly 12 times the EBITDA of 2010. At the same time only a few weeks later, we made a deal with Vodafone to buy the minority with a strong minority of 44% stake they own for many, many years in SFR at a much lower multiple of hardly above six times the 2010 EBITDA.

Basically this one was completed very quickly in the middle of June. It was announced at the beginning of April and as you know, it gives us a lot of benefit in terms of accretion, in terms of full control of our assets, in terms of better access to cash flow and of course with different benefits which stem from more leveraged balance sheet. So, today all our operations are under exclusive control.

Few words about our operating performance. Of course, Philippe will give you a more color on this in a few minutes. Our revenues grow 1.9% as reported and slightly above 2% at constant currency. Our EBITDA grew 3.7% as reported and slightly lower than 5%, 4.6% exactly at constant currency.

Our cash flow excluding NBC contribution and the one off acquisition of spectrum for SFR that we had in the first half of 2010, our cash flow went down by a mere 2.4%. Activision Blizzard and GVT results have fueled with the growth of Vivendi and are clearly above our own expectations. The contribution in EBITDA of Activision Blizzard is up 40% at constant currency and the EBITDA of GVT is up 46% at constant currency rate. So, these are very impressive numbers.

We are very happy with this especially as these are the two very major decisions we’ve made in terms of business investment, new business, new countries of consoled business for video games, getting into the Brazilian telecom landscape a couple of years ago and I think we are rewarded with really astonishing numbers.

Adjusted net income as I said for H1 is up slightly above 20%. This is due to both the strong operating performance and to the positive stack impact of the acquisition of SFR. But, please do not consider that this 20% growth is sustainable in the second half. Some of the tax benefits especially will not be the same and this translates into the guidance.

I’ll say a few words about each business because I believe specially those who are not listed its important. To give you as much as we can to make you familiar with the business and the performance. Starting with video games business and Activision Blizzard, they have already reported the numbers of course in non-GAAP and in GAAP. In IFRS, the contribution in the first half of course, it’s the major part of the contribution for the year is up 34% when compared to last year and this is as you know to the excellent sales of the Christmas season as the end of last year, which translates into profit deferred as per the accounting rules into the next month. And so, this contribution in EBITDA is at 100%, €833 million, quite an important number I’m sure when you think about the video games business of Vivendi was a few years ago.

But, not only did we have the benefit of the strong sales of the Christmas season of 2010, we also had very strong carryover sales into the first half of 2011 and especially with the astonishing performance of the Call of Duty, Map Pack which we sold, we relieved and sold during the first half.

We also expect the second half to be very rich in terms of pipeline of new gains and you have the here the list of what we are expecting for the second half and into 2012 and 2013 and Activision Blizzard is well balanced with fantastic properties and franchises that are giving us recurring profit and also a lot of investment into new properties so that this will fuel like bungee, the like the new Diablo product. It’s more than 10 years since we had the Diablo product that will fuel the profits for the next few years.

With this, we raise the 2011 EBITDA guidance to above 800 million which is more than 100 million above the previous guidance.

GVT; since we acquired GVT about two years ago, we have done all we can to accelerate the growth of GVT by lending money to GVT and helping GVT grow into more regions, more cities and into new services. In the first half of 2011, GVT has opened into five new cities. GVT today covers 102 cities in Brazil.

GVT has added more than 1 million lines during H1. The revenues are up 54%. The EBITDA margin as we said is above 40, it’s even close to 42%. We are going to maintain what we believe is a very strong gap with our competitors by upgrading the broadband speed. Today, our basic offer is a 15 mega bit per second offer and vast majority of our existing customers have more than 10 mega bits delivery.

So, investment is important in terms of coverage but also in terms of bandwidth and bandwidth help you sale as we have our own network with fiber optic almost to the home. We have a huge differentiation gap with our competitors.

On top this, about a year ago close to a year ago we decided to add new services on top of the voice and internet access which we sale to about five million lines today in Brazil and to add for those customers the opportunity to get pay-TV services from us, this is now almost ready. We have a satellite based pay-TV offer, which we are finalizing exactly now and which will be launched in September, which is next month in a few weeks. This will fuel the growth of GVT also for the next few years.

With these excellent numbers, we also raised the guidance of GVT to revenue growth close to 40% and we maintain our 40% EBITDA target.

Few words about SFR. Revenues are not up as you know but as our competitors we also follow what would be the revenue if we didn’t have regulatory decisions which are artificially decreasing the revenues of the industry. As you know, regulators have decided to hit harder operators and although we have very tough competition today and expected in the next few months, our revenues would be up by 2.7%. This is fueled by mobile data sales. We now have 34% of our customers that have a smartphone.

I’m happy to say that SFR has been extremely successful in terms of its commercial results in the first half and especially with the three major partnerships which have been assigned in the last few months. We have La Poste Mobile, which started its operation back in May and the first numbers are very, very successfully and of course it’s very complementary geographical distribution from SFR is more in the cities, the major cities and of course La Poste present absolutely everywhere in France.

We have signed an agreement with Virgin Mobile, which is the largest MVNO which was not a partner to SFR, which now will be. And we also won a tender offer which had been launched by Fnac. We will in a few weeks operator dedicated commercial space in each of the 83 French Fnac stores. So, we will have a better coverage and market share through the distribution into the Fnac stores.

With this, we still believe the relative opportunities at SFR. Obviously, it’s very competitive. It does everywhere in Europe and even more in France. But, there is a huge appetite for broadband services whether it’s on the fixed line or on the mobile handset. There are lots of opportunities in the enterprise segments and also into services which are based on these new technologies and the need for a lot of services from customers, retail, SMEs and larger corporations. So, I think our group SFR is still extremely attractive and for 2011, we confirm the outlook.

Maroc Telecom. I will go quickly as it’s already reported its numbers and there is a major transition on the Moroccan market with the significant price cuts which is not totally but close to offset by an increase in usage. The competitive environment has become very tough and the market penetration is not as strong as what it’s used to be, but, it is still growing.

With these, we have maintained in this tough environment our margin at a very high level of roughly 40% EBITDA margin which is an outstanding number and we are very happy that Maroc Telecom is part of the Vivendi. We also have as promised, very promising results coming from our investment in the four other African countries that Maroc Telecom has invested in over the years and especially in Mali which is company we acquired about two years where the numbers are extremely good. And in this tough environment, we have had to revise as you know our growth outlook for 2011.

Music. There are only few information on this chart. I think the major takeaway. We should think about with the music business is while it’s difficult to claim victory and I will certainly not claim victory. There is a very clear rebound on the U.S. bound since the beginning of the year while the global market remain soft in several countries especially in Europe. We have the U.S. market be up for – since the beginning of the year and according to market surveys it is still true in July and August.

So, for the first time in long time, we are reporting some growth in Q2, some limited growth in revenues a bigger growth in EBITDA ex the restructuring cost and we are in the middle of a very significant reorganization which is being put in place by the new management, the new CEO of Universal Music Group and we are totally on track to have at least €100 million of cost savings achieved by the end of 2011. So, we get the full benefit in 2012 and with this we confirm the outlook for UMG in 2011.

Regarding, Canal+. We have a 2.8% revenue growth. It’s been a very active period regarding content right. I’m sure all of you have followed very closely as a tender offer that was organized by the French Soccer League for the TV rights. We have very successfully bid and won and what we believe is the key to our consumers. We can now give them an offer which is sustained for the next five seasons the one that just started according to the former contract that the next four years into 2015 season.

We have also acquired an extension of our TV rights for the French Rugby Championship, which I think we have helped a lot grow in terms of popularity and quality and also some TV rights. For the soccer games in Poland, where as you know we have a successful subsidiary.

We have also, we already reported that this idea to accelerate the replacement of some old generation set-top box that we can have more interactive services and grow the ARPU and we believe we still have significant growth opportunities in France but also in French speaking overseas territories and in other areas of the world where we have been present or half present like Poland and Vietnam and all in all we confirm the outlook for Canal+.

So, when I look at Vivendi as a whole. We are confirming our guidance for 2011. This includes, these too address net income guidance we’ve given, the first one at the beginning of the year excluding NBC Universal and before we acquired 44% of SFR. We will give you a full report that we intent to show a slight increase in the adjusted net income with this definition. But then, we also have to give you a guidance an outlook for 2011 on the adjusted net income as it is – as Vivendi is today, that means, including the acquisition of the 44% stake in SFR.

We confirm what we said back in April and May, which is that Vivendi’s adjusted net income should be above €3 billion. We obviously upgrade our outlook for both Activision Blizzard and for GVT and we continue to have in mind to propose an increased dividend which will be paid in cash in May 2012.

And to conclude this presentation, Vivendi is very focused on this growth profile. Growth is key to enhance shareholder value. We have limited capital allocation headroom today. But, we will always remain a very much focused on return on capital employed and our priority is to continue to invest. We need a lot of investment into the infrastructure, into the content and into the consumer facing platforms that we operate.

We will continue to do all we can to innovate, to leverage the assets we have as we have a lot of opportunities in new digital services in emerging usage and also in emerging countries and we will continue to scan potential acquisitions. Today, this would only be small or mid size acquisitions. As we think in the long run, we need to continue to rebalance our exposure and move towards fast growing regions and businesses including close to by extending the borders of existing operations.

So, this is the end of my presentation and I’ll give the floor to Philippe for more color on our numbers.

Philippe Capron

Thank you, Jean-Bernard. It’s going to be a green color obviously. Good morning ladies and gentlemen. So, Jean-Bernard already showed you those figures. I would just want to dwell on few of them.

The first thing is that we are showing a very significant adjusted net income increase, as Jean-Bernard mentioned this is due in part to the tax treatment of the SFR acquisition. But, this explains only half of the 20% growth. 10% is really organically driven and this is in spite of the exit of NBCU and not yet taking account of the fundamental accretion derived from the SFR deal because as you remember the SFR deal was closed only mid June and therefore does not have any significant weight on the figures for the first half of the year.

The second interesting figure is of course the net debt which is at 14 billion as expected. This is high point. We should start to see this figure decrease over the coming quarters.

So, where does the increase in EBITDA comes from? Obviously, the main contributor has been Activision Blizzard, who is a very strong performance of more than €200 million increase in EBITDA. This is of course you’re well used to that now largely due to the strong performance in Q4 last year compared to Q4, the previous year because of the deferred EBITDA phenomenon. But, at the same time it’s fair to say that the fundamental performance of Activision has been astounding in the first half.

You remember that their strategy has been to focus on the more profitable games, to streamline the operations at the risk of decreasing their sales. Well, actually their sales on the non-GAAP basis as you’ve seen they reported figures has increased by – have increased by 4%. And of course due to the restructuring taking place, their operating income has grown much more than that. So, that we are able to have this 200 million EBITDA improvement at Activision Blizzard and at the same time, the much of deferred EBITDA which we are pushing forward has actually increased by €60 million over 12 months period. So, this is very sound and healthy growth which we are witnessing there.

Universal, as Jean-Bernard said. It’s still down compared to last year especially after mediocre first quarter, but, the second quarter is very encouraging in the U.S. because there the market seems to be coming back to some growth. It’s too early to say whether it will last. But, at least since the beginning of the year, that’s what we’re witnessing. But also worldwide and of course as we will stop to harvest, the impact of the restructuring we feel we’re in good shape to actually have an improvement of earnings in Music this year which would be the first time for number of years.

If we look at SFR then, SFR is down by 9% in terms of EBITDA. It would be down by only 6% if we are looking at the figures excluding the non-recurring profits we had on the fixed side last year. Overall fixed is growing, but, the EBITDA of mobile is decreasing by about 9%, which is within the guidelines we gave you at the end of Q1 and for the whole year.

We are of course seeing there the impact of more competition in advance of the entry of the new entrant but at the same time, we’re pleased that the everything which we are putting in place in order to prepare for the first entry is working and at the same we’re enjoying the partnerships described by Jean-Bernard, which will bear fruit in the coming quarters. I’m sorry.

Moving down, Maroc Telecom has reported their figures. Of course, they are facing a very challenging year due to this rebalancing described by Jean-Bernard. Lower prices, more usage this was obviously due to come given the difference in the price level between Morocco and some comparable countries. It’s a tough bill to swallow, but, we still feel we are in very good shape there and we should again see some growth in the revenues and earnings overall if only because the African subsidiaries are starting to contribute very significantly. Meanwhile, EBITDA margins we expect to remain very high at around 40% which makes it still one of the world’s most profitable operators.

GVT EBITDA almost doubles. But, it’s fair to say that part of this is driven by currency. Part of this is driven by changes in the accounting treatment. You remember that due to the purchase accounting exercise we did at the time of acquisition, we had to change the duration of some of the amortization or depreciation periods for some equipments so that on a like for like basis, EBITDA growth is only so to speak 64%, which is still of course remarkable and needless to say we’re well pleased with that performance.

On top of this as Jean-Bernard said, pay-TV which is going to be launched in the coming weeks is going to add a further booster to the rocket in the next quarters.

Canal is on track with very steady quarter in terms of revenues and EBITDA increase. This is driven by slight but significant portfolio growth and at the same time by the ability they have to further increase their ARPU by selling more couple subscriptions, selling more options and having some limited price increases which overall help considerable the P&L. And of course as mentioned by Jean-Bernard, the soccer rights have been secured for another four years, which is a critical element.

Adjust net income grows as reported by 20%. This is in spite of the fact that that we do not get any benefit of the equity accounting for NBCU which we disposed. So, this means minus €78 million for us in this first quarter. At the same time, it’s been offset for this year it’s been offset in the first quarter by 70 million exception dividend which we got directly from GE as part of our separation agreement to speak.

Interest payment is down somewhat by 38 million for the first half because as we paid for the – for SFR only in mid June for most of the first half of course we had much less depth than the comparable first half last year. Income, the income tax should increase because we have more EBITDA, but it actually decreases thanks to the BMC tax treatment for SFR for the first half. That contributes almost €140 million through P&L and then, we have less minority which helps with the overall calculation. So, overall we grew by 20%. Again, half of this is driven by just tax treatment of SFR acquisition, half is driven by the fundamentals of the constant perimeter.

If we want to have quick look at net income group share. This also reflects two elements which are not included in the adjusted net income. The first element is of course the Polish transaction whereby we got €1.25 billion from Deutsche Telekom at the very beginning of this year in exchange for giving up on any rights we had on the PTC operator in Poland. And the other one conversely is €400 million loss, mostly – well, actually more than 100% is due to currency on the NBCU disposal. So that overall net income Group share is at €2.5 billion and it almost doubles compared to the previous year.

We continue to have a good cash flow generation. As you know the first half of the year for Vivendi is always a bit weaker than the second half. So, we generate more cash position in the second half. But still, we have a comparable figure compared to the previous year thanks in particular to Activision and GVT and Canal will contribute more than previous year which offset the fact that the telecos SFR and Maroc Telecom contribute a bit less.

In terms of CapEx, as you can see CapEx is about stable. We invest more in GVT of course. But a bit less in Maroc Telecom and SFR, so that 0overall we have a stable CapEx contribution. Therefore, the free cash after CapEx is up by 10%. But, if we in fairness we should neutralize the fact that last year we had spent €300 million in frequencies, in spectrum at SFR. You should neutralize that and at the same time the NBCU cash contribution. The free cash is actually is very slightly down compared to the previous year.

The net debt as of course significantly increased during the first half because of the dividend payments to our own shareholders and for the last time to Vodafone as well as to our other minorities mostly in Morocco. We’ve had no significant investment apart from SFR of course and no specific – no particular disposal apart from the Polish situation and NBCU except the continuation of our buy backs at the level of Activision Blizzard of roughly an average price $11, we continue to buy something like €361 million of shares so that we now stand at 63% ownership of Activision Blizzard.

We’ve been relatively fortunate with the timing of our refinancing. I’m sorry. It’s always a good idea to raise money as soon as you can. And that’s what Dominican best team, have done this time again. It was been enabled as many of you know in the room because I see many bankers who participated in this effort to raised an additional €5 billion of credit lines, at Idea not so attractive conditions but at market conditions. €5 billion of which would, I’ll just refine and seeing a line which would have lapsed early next year. But at the same time, we issued €1.75 billion of new bonds with 4 and 10 year duration so that it filled exactly the gap we had in our, you know, reimbursement schedule.

We’re happy with the fact that we have a very smooth reimbursement schedule. And therefore financing is fully secured for the years to come. We now have €5.7 billion of credit lines available which does not mean of course that we would spend that amount because as mention Jean-Bernard, our headroom with the rating agencies is significantly lower. But still it feels, it feels, in today’s financial environment a very nice and safe situation to be in. We also have a very good balance between bonds and bank lines which is where we want to be.

Overall, if we look at the detailed outlook for the various businesses. As already mentioned, we are further upgrading as the Activision Blizzard guidance in the face of the very good performance of the first half. We are now guiding an EBITDA above €800 million that’s €100 million improvement over the previous guidance. For Universal Music, we continue to conservatively guide on double digit EBITDA margin despite the restructuring charges. But I mean, as you’ve seen, we probably have reasons to be a bit more bullish as to many years of undergoing this transformation than previously.

So, far we continue to guide on a decrease in mobile EBITDA in the context of competition and regulation which is of course very interest to us. And at the same time, on the broadband and fixed, we continue to guide on an increased EBITDA excluding of course in favorable impact we had last year.

Maroc Telecom, we now forecast a slight decline instead of slight growth of sales. But at the same time we feel that EBITDA margin should remain comparable to that of H1 2011 meaning around 40%, which is still a very good level.

GVT, as mentioned by Jean-Bernard, we raised guidance, revenue growth close to 40% that comes from currency versus mid-to-high 30s and an EBITDA margin at around 40% in spite of the initial expenses of the pay-TV launch. Okay. Now, we continue to anticipate a slight increase in EBITDA. So, overall, a year which is unfolding according to our plans, and I would say favorably, we therefore confirm outlook for the full year, meaning a slight in adjusted net income at constant perimeter excluding NBC and before the impact of the SFR acquisition and as to those impacts and adjusted net income above €3 billion, thanks to the SFR acquisition. Consequently we will propose, intent to propose an increased cash dividend, which would be payable next year. So, thank you for your attention.

Okay, thank you. So, we will now have the questions from the room, please, Julien.

Question-and-Answer Session

Unidentified Analyst

Good morning, gentlemen. Good morning Julien.

Jean-Bernard Levy

Good evening.

Unidentified Analyst

Julien, Brock (ph) from (inaudible). First question is if we could have the impact of the change in taxes. If the limit of 60% of tax logs going forward on this year and next year tax rate, it’s my first question. Second question would probably be for PR, if peoples, if priced articles are to be believed and that ELIA is going to launch around €6 for two hours and €30 for unlimited. Do you feel that your tariffs with the new carrier are low enough or do you feel you need to do more cuts there is my second question. And then the third question for Jean-Bernard, you talked about limited capital allocation headroom, could you give us a number and whether you’re looking at anything at the moment? Thank you.

Philippe Capron

Okay. On taxes, I wish I could answer your question. But since, I’m neither the Prime Minister nor the Parliament, I can’t tell you what the law of the land is going to be tax wise by year end. If we assume that there will be some limitation to the capacity we have to offset our current year profit was the past years deficits and let’s say, at 60% it would just mean for us that the deficits we have would be spread for a somewhat longer time, meaning, that instead of starting to pay normal taxes, in 2014 we would make our deficits slashed a bit more. So, it’s just a question of timing. It would have an impact it would mean lesser adjusted net income for the next two years but higher adjusted net incomes for the next year after those. We’re not exactly, plus we have an added difficulty which is we’re not exactly sure how this would play, how this would interact with the BMC. We’re not absolutely sure we would be impacted. So, it’s a very tough question to answer. And today we’re just continuing to forecast with the existing tax low. If we have to change it, we’ll get back to you and give you further information. Well, this is obviously a good question. But again, very premature when considering, you know, legal system we live in. Okay.

Unidentified Analyst

Yes, a little premature.

Pierre Trotot

Yes. We usually do not comment or I can’t really comment discussions. So, we shall wait patiently for the announcement of the tariffs of the new entrant. We think that with our new tariffs that we announced in June, we have initiated more freedom for the customer, more transparency and we are ready to compete no doubt.

Julien Verley

To answer your third question, Julien here, I think it’s very straight forward that after having made payments close to €8 billion, we have limited headroom for capital allocation. And it is also very straight forward that whatever we can do will depend on the profile, what we’re doing, whether it’s the growth profile or cash profile, profit profile and so on. But it is obvious that to me, that it would not be a good management for Vivendi that we would at any time have no opportunity at all to make the right strategic decisions. So, it is always my duty to ensure that if there are opportunities and why should there not be opportunities. We have the ability to do what we believe is right for the business. And in that respect, while there is nothing to be announced today, we addressed reporting our numbers. We have permanently to be looking at how to optimize our capital allocation and this is what I guess, the shareholders and the supervisor or board will question from me.

So, we have a question from…

Conor O’Shea – Kepler Capital Markets

Conor O’Shea, Kepler Capital Markets. I have three questions. So to follow up on the capital allocation question, in terms of the Music business, since you alluded to, recovering the music business in the US in the first half of the year but you know, given the kind of transaction multiples I’m seeing for some of you, competitive in that factor like, Warner music, is it not tempting to consider disposing above business or eloping into that possibility. Second question, two questions on SFR, I wondered if you could give us a little bit more detail on the reaction of your subscriber base to the increased flexibility of the offers that you’ve instituted in the second quarter, have you seen any spin down. What type of color can you give there? And a follow up question, SFR, in the appendix it seems that the retention costs of the percentage of sales have declined in the second quarter and acquisition costs for the percentage of revenues have increased. I thought the emphasis is more on retention than acquisition. Could you just, little bit of color on your strategy retention versus acquisition?

Pierre Trotot

On your first question regarding assets in the area of music. We have not been shy to acknowledge that whatever happens in the music business, we have to be vigilant and maybe active. There was a significant transaction, one of the major company changed ownership a few weeks ago. And it is clear that there was up to a certain level of investment in terms of the financial assets we could do and also in terms of maybe constraints on market share. But there was an interest of Vivendi and I did not, you know, I did acknowledge that if there are, and I would do the same today if there is any other process in, you know, being in sort of shaping up today. We do have to look at whether, within certain constraints which are both financial and market share there is something that would be interesting for Vivendi. At the same time, we have always been open to discuss any valid and well funded and highly priced offer for any asset. And it is not my role to be, you know, keeping assets for the sake of keeping them, whatever would happen. So, we are in an open world.

And then, we have questions about the SFR, which they are, yes. So, two questions, first the reactions from the market to the new offers we launched. It’s too early to draw conclusions because we launched in the June and thinking of July and August, all there week in front of you as you know. But already what we see is the development of sim only offers, which over Q2 already were presented 14% of our growth sales, which is a trend of the market. The evolution of the acquisition cost versus retention cost, the evolution that you mentioned lies in the fact that there is a bas effect versus last year where we spent a lot of in retention and a little bit less this year. But the trend is always to put emphasis on retention. Acquisition cost has increased and it’s – compared to last year of course. And in fact it lies with the enterprise segment where we have been quite successful this first half.

Conor O’Shea – Kepler Capital Markets

Okay. Thank you.

Jean-Bernard Levy

We have a question over there, please, I can’t see your face, but I saw your hand.

Russell Warner – K Street Research

And I thank you. It’s Russell Warner from E-Street Research. And just a very quick question on CapEx at SFR please, maybe if you could just talk about how much you intend to spend on FTTH, could you just give us a reminder, maybe put that in the context of the billing areas that Trotot had talked about in the €2 billion and Philippe talked about? Thank you.

Philippe Capron

So, CapEx for FTTH, we have spent €49 million over H1 and we should spend €130 million for the whole year. As you know, now we are deploying the vertical part of the network in very dense areas. And we are either deploying by our self or acquiring vertical deployed by the other operators. We are receiving positively these vertical networks but it takes time since everybody is rather late in this deployment of vertical.

Total spend over the year, €130 for the full year.

Jean-Bernard Levy

Okay. We have question on the – also from Filippo Lo Franco with JP Morgan, Filippo, good morning.

Filippo Lo Franco – JP Morgan

Thank you for taking the question. I actually have three questions. The first question is on the mobile service revenue, the decline has accelerated in Q2 compared to Q1. And if this is not the case for your competitors and I was wondering how we can, are panicked by this? The second question, I know it’s such a difficult question for Philippe, but he knows very well the videogames. So, the question is that if we can have an idea of what is the contribution from online to call of duty or in general to the BC and Consoles videogames? It’s just to understand also the trend and is this going to impact obviously the deferral of revenues in the future? And the last question is on the music. And I’m one of the few to discuss in this business but I like it a lot. So, I mean, the early rebound that we’re seeing in particular in the US side, I wanted to have a little bit more of information on these in particular to understand if it is coming from a reduction in the piracy which would have been waiting for a long time or it’s just an increase in the favor of the people? Thank you.

Philippe Capron

Yeah, also, I understand on the decline of the revenues which was unfortunately expected. And you are comparing this I guess one of our competitors that’s already announced its results a couple of weeks ago. Comparing with first, there is decline in revenues and then decline in profit and how you transform the revenues into profitability which is different. But I will answer on revenues. Can I have four phenomenon to answer to your question? First, I think that we have been slightly more impacted by the VAT story than as in Orange, not to mention the name. Because we launched our Illimitux for music which had low rate VAT, earlier and with more success than Orange, which now is yummy tariffs after ASOFOM. Second, there is a base effect with the detail which was consolidated last year and that we contributed to Lacoste Mobile and which is no more consolidated since 1st of March this year. Third phenomenon is the one mentioned, I think that we have launched the sim only offers which have an impact on revenues. And last, during the VAT episode, all the operators had benefited from this were of and VNOs, and unfortunately and so far, Orange was much better than we were having the best VNOs as customers. And consequently all the customers that Orange so far and RIG, which migrated to the VNOs has been recaptured by Orange, that’s helping us to maintain the revenue flow, that’s my analyses.

Jean-Bernard Levy

Okay. Very complete answer. Some color on the online revenues for…

Philippe Capron

Call of Duty and application?

Jean-Bernard Levy

Yeah. Basically, we now have, I mean in a quarter like, say first quarter we continued to move – the first half we continued to move boxes of Call but most of our revenue, most of our new non-GAAP revenue is actually online because, all of the World of Warcraft revenues is online. And most of the Call of Duty has been driven by new met packs which are distributed online, this of course creates a very favorable sales mix if you think that the distribution cost on the online component is of course way less than it is on the physical so to speak sales. We are trying to push this further and to have more recurring revenues, we are thinking about on Auction House. Around the Diablo, we have launched a Call of Duty portal where there will be the possibility to subscribe, which will be accessible for all players but you will have added, value added services additionally if you subscribe for an additional fee. So, we’re trying to move a lot of the online component. At the same time, we have to keep some balance in order not to annoy the retailers and to keep their loyalty which is one of the things we will achieve with Skylanders which is going to be the big launch apart from Modern Warfare 3 for the second half of the year. This will be mostly a physical game because most of you know it’s a tie-in with physical characters, collectibles for younger kids. And therefore this will ensure that we continue to have a significant store presence which is agreeable as well.

Okay. Your question with the music business in fact is also a question with the online behavior of consumers which we were discussing right now on the videogames industry and the Connected Consoles. I think it’s, what I would say about the rebound on the US market is first, I want to say again, let’s not claim victory. Second, I do not believe there is a significant reduction in piracy. And I believe maybe we as an industry or maybe the consumers react a bit less negatively to the idea to buy CDs. There is still a big market for sales of CD in the mainstream markets. And of course, this if changed or less, specialized retailers in the music area. But in the end of the day, when you have a good album, it does sell into the store still. And number four, we do see that there is a crossing of the lines. There is still a reduction in the number of CDs that are sold. But we are selling more and more digital tracks.

And even more and quickly full digital albums. And by the way, then we have people who are expecting that because of piracy and digitization of distribution the album as a format would maybe disappear, we do not see that. There is a significant like 15%, 20% growth year-on-year on album downloads. And for some albums we sell almost as many full albums through iTunes and the other digital services as we sell full albums for the physical distribution and the retailers. So, I would say, maybe at last we are seeing the two lines cross and this is in my view the success of the online model as seen by consumers, more diversity in the type of services that people can get, they can get the downloads through systems like I chose in Amazon. But there is also subscription services based on streaming, Stotify and this just launched this summer in the US, of course this is not reflected in our H1 Q2 numbers, it launched only in July. I do not believe it will have a big effect in Q3, maybe not even in Q4. But it is already very successful in the US as it has been shown to be successful in Europe especially in Scandinavia and in the United Kingdom. So I think with the diversity of services provided to the digital consumer, we are seeing some kind of a light. But please, we are still somewhere in the tail, maybe close to the end, seeing the light but we’re still in the tail. So, it’s a rebound which is not the end of our concerns.

Filippo Lo Franco – JP Morgan

Thank you very much.

Jean-Bernard Levy

Thomas Singlehurst for Citigroup who has some questions for us. Please, Thomas.

Thomas Singlehurst – Citigroup

Good morning, everyone, yes, Tom here from Citigroup. I had actually one question on GVT that was all right, the overseas rise guidance which is obviously a good thing. I was wondering whether you could talk in particular about the roll out in Region 3 and also a little bit about the competitive environment since Tim’s purchase of Atmos or so, potential proposed more of a threat in the fixed and on broadband.

Jean-Bernard Levy

Sorry, Thomas, we can hardly hear your question. You may be speaking from a cell phone, is that right?

Thomas Singlehurst – Citigroup

No, no, I’m on, can you hear me now.

Jean-Bernard Levy

Well, yeah, a little better. But it’s on an off.

Thomas Singlehurst – Citigroup

Okay. I will try and speak by loudly. I was going to ask about GVT and the competitive environment in Brazil in particular with Tim’s purchase of Atmos whether there is more of a competitive threat. And I was asking that in the context of the rollout within Sao Paulo?

Jean-Bernard Levy

The competitive environment in Brazil has not basically changed recently. I would say this includes Q3. We do have, I mean, the usual competition we have from MOI and from Telefonica Telesp. We have competition from Natchin which is the cable infrastructure, the cable systems company, which is only present in some areas whereas obviously the incumbent operators, we always have to compete whether it’s OI in some regions or Telefonica in Region 3. I do not believe that at this stage we consider Team Today even after this small size, I mean, it’s a small company it was acquired for a number which I would rather not comment. And that is a very small company, it only has limited backbone capabilities and we do not Team Today to be our competitor. In the retail part of the business, we do not believe this will change. But we do have Team as a competitor on the corporate side of the business because they made an acquisition maybe two, three years ago of a company called Interleague, Interleague which is our competitor and has been our competitor. And maybe these backbones that Team has acquired in these two cities which will help them compete more for this large corporation side of the business. So, there is no major change today.

We do have competition against the cable company which obviously does deliver some high bandwidth as we do, but only at limited presence, we’re in much more cities and much more areas than they are. We do have also competition from Telefonica and from OI. But today, we have a huge advantage in terms of bandwidth because they still have to walk with the Legacy Networks which usually have not been upgraded and in my view it will take a long, long time, a lot of money and a lot of operating performance which has not been there recently from the incumbent to really compete on bandwidth and quality with what GVT can offer. So, I am still very upbeat about GVTs ability. Wherever it is launched, this is through in some bellow state this is through in the cities in the north east, just as it is through in our original region of the south and the west of Brazil. And I’m still very upbeat about GVTs ability to gain a very significant market share everywhere where we open our network. And as you know, it’s old story about more CapEx accelerated growth and it’s a bit of a race against time that if and when there is indeed more ability from the incumbent to replicated the kind of bandwidth and quality we can offer our customer. And in my view this will take many, many years, then we would have built a very significant business, you know, four, five times bigger than what we bought a couple of years ago. And not even speaking about pay-TV which, you know, is another area for growth in the next few years. So, this is how I see the outcome and the competitive situation in Brazil for us.

We have a question from Patrick Kriby, Patrick, Deutsche Bank, please.

Patrick Kirby – Deutsche Bank

I had two questions, firstly on SFR broadband. I’m wondering if you could comment a bit more on the performance there, it looks like the net ads number 31,000 possibly a bit like versus expectations I think by your own admission, Q1 was a bit disappointing. So could you give us a bit more background as to what’s happening here and what you can do to improve that performance in the second half? And then on GVT, just following up, you have maintained your EBITDA margin guidance of 40% for this year including pay-TV costs. Just wondering, can you say for next year whether that 40% margin is sustainable including a full year of pay-TV startup or now that we’re close to pay-TV launch, could you give us a bit more guidance about when you expect that business to breakeven or your investment obeying? Thanks.

Pierre Trotot

Okay, Pierre, for the first question, the evolution of the French broadband market over Q2. So, we have not all the definitive figures also RIG published this morning. But market made growth has been 250,000 which show stability versus same period last year. The only difference is that as opposed to last year ours is back and are more successful than last year. This is due to the single fact that they have trimmed down their tariffs from we had a GAAP versus our tariffs of €13 and now they have a GAAP between €3 and €5. So, they are definitely much more competitive and they are regaining market share. Also they are not at the previous level of 45% market share. RIG is little bit down as we had seen this morning. And Free is back but we should outline that in such small markets as Q2, as a fact to launch very special offers at €3.99 during the last three days of June to achieve the quarter figures might significantly impact our performance and it dooms the spare performance. So, all these accounts for SFR, not fantastic that has but which are equally T-Net has. That’s all.

Jean-Bernard Levy

Okay. On your question about margins for GVT, basically the two lines of business which we will operate from now on are very different. The pay-TV business is a low CapEx business, we are aggregating content, distributing it to our existing customers and we will stop this in the next few weeks. And it’s difficult for us, you know, to predict exactly what will be the customer response, we’ve done market surveys and we’ve studied the market and everything. You can imagine but it’s difficult to predict and we’re not giving you any predictions on this except we do believe from our market surveys that quantitatively for you there is a lot of appetite from our existing GVT customers to add the pay-TV service on top of the internet and voice connections we are selling them. So, it’s difficult to predict the blended EBITDA margin that we will have in the future when we have the telecom business on which there is no reason we cannot achieve a 40% maybe even slightly above 40% EBITDA margin on the telecom line of business blended with this different kind of activity that we are launching right now. So, we will report it separately and we will decide to give you, you know, a very precise or a more vague number for the blended EBITDA margin of GVT going forward. Let’s say at this stage, the major business which is the telecom business we see no reason at all that we cannot achieve in the long run a 40% or slightly about 40% margin in that line of business. And in the pay-TV we will disclose more information after the launch. Because right now we want to base any projections we would give you on true market reaction and not only on surveys. But I can tell you because I don’t want you to, you know, this is a bit quantitative. We do believe the pay-TV business we are launching will also be very, very profitable.

Patrick Kirby – Deutsche Bank

Thank you.

Jean-Bernard Levy

The fixed costs are very minimal, it’s basically the satellite transponders lease, the operation of the terrestrial equipment, the hub and the aggregation of all this. And then, the depreciation of the set-top boxes and all the rest is variable costs. And we believe we can achieve extremely attractive results on capital and operating margins on this new line of business. But no numbers, it’s a bit early.

Philippe Capron

And we’ll break down to numbers in our future reporting, of course for you to follow these better.

Jean-Bernard Levy

Ian Whittaker from Liberum.

Ian Whittaker – Liberum Capital

Hi, thanks very much. Can you hear me?

Jean-Bernard Levy

Yes, absolutely.

Ian Whittaker – Liberum Capital

Okay, good. A few questions, first of all, just come back to your comment that you talked about small to mid-size acquisitions. Can you just give us a little bit of clarity of what do you mean by that because obviously small to mid-size may vary in terms of definition. So, I don’t know what sort of size of deals would be the limit for you? The second thing is just on Activision. You own 63% now. Post the buyback you should probably own close to 70% with the shares. I’m just thinking at what point do you actually buy in the minority that Activision and gain full control over the cash flows? Because it is a cash flow generating machine, and will obviously have your cash flow profile. And the third thing, the third question rather is again just on Activision. If we look at the full year guidance, you’ve got, it implies to the second half of the area is actually there are lost, well, you made I think around 72 million EBITDA profit in the second half of last year and you differed net EBITDA has actually gone up, first half ‘11 as first half ‘10. So, can you just go through why actually you’re not forecasting a larger increase in your guidance for Activision?

Jean-Bernard Levy

I’ll answer maybe your three questions, Ian. On the last one, if you want to imply we have a conservative guidance for H2, and the answer is yes, Activision Blizzard. And you did the math very clearly we have more than EBITDA at June 30 than last year. We did go positive last year, so why should we be negative this year. Yeah, I think you have a good point. I sort of share your view. But we have new launches we want to be cautious about these new launches. And we are going to spend for instance, some money on Diablo and this half year. But we consider there is a bit risk that we cannot launch Diablo 3 in H2 2011, which of course would be a significant change from H2 2010 where Blizzard launched two products, StarCraft 2 and the expansion pack for World of Warcraft. So, we do recognize that we are cautious.

On the buying out o the minor…

Unidentified Company Speaker

We may add that Skylander’s is a big question mark. It’s a very significant investment. Trade acceptance and trade reception has been phenomenal. But, we still have to sell to customers and new franchise. So, it’s a question mark and Modern Warfare 3 is registering preorders which are even above Black Ops but at the same time it’s probably fair to say they are facing more competition from other games. So, yes, we are probably cautious.

Ian Whittaker – Liberum Capital

Okay.

Philippe Capron

On the buying out of the minorities of Activision Blizzard, the last numbers we reported, is at 62 or 63? 63. So, we are at 63. So, we are nowhere close to being in situation where the float would be so limited that it would not be meaningful. We believe there is still a meaningful float. We do see lots of benefits of having Activision Blizzard as a listed entity. When our games business was not listed, it was valued very, very low by all the investors and analysts and we also believe it’s a good currency and it’s a good way to incentivize our managers. So, I’m keen to keep Activision Blizzard as a listed company and you know 63 is just 63 at this stage.

Small and mid size, what does it mean? While it means it’s not big.

Ian Whittaker – Liberum Capital

Can I just ask follow up on…

Philippe Capron

I think there is no magic number. Obviously, we need to keep as I said some headroom for things that are in the 100s of millions range or maybe slightly above a billion or whatever. Obviously, we are not in a position today to make any very large acquisitions. We’re continuing our current balance sheet and our dogmatic philosophy about our BBB rating. I would say also our dogmatic philosophy that it would not make sense for us to use equity at the current value in a significant way if it is not significant because it would be always be discussed in a significant way. Obviously, we would not issuing new shares and it’s been I think we have to be very clear, very clear about this.

Ian Whittaker – Liberum Capital

Can I just ask follow up question?

Jean-Bernard Levy

Okay. We have a question in the room. Please.

Michel Grandscheau

Good morning. Michel Grandscheau (ph) I want as few questions if I may. On the first one refers to your net debt guidance which you perhaps reiterated by having referring the slides we’re looking to about €13.5 billion target for year end and you’re closing H1 at 14. Can you sort of – could you better than this firstly anticipated 13.5. I’d like to know your opinion on that. Second, could you help us quantify how much headroom you have of the forecasted debt before putting at risk your rating commitment, quantify that. Thank you.

And lastly, on the business operations. Could you elaborate a bit regarding Canal+ operations in Poland which seem to be I mean the significant pressure or puts you on very good trends in France operating wise? Thank you.

Philippe Capron

On the net debt. Yes, it’s fair to say that we might have a good surprise and as you know we are always managing for cash, always putting a lot of pressure on managers. Today, what they report to us is that they should be at 13.5 billion. This of course would include the significant and probably accelerated versus H1 buy back effort at Activision Blizzard level, of course, which would be the major investment. We may do a bit better than that. But, today the guidance we want you to keep in mind is 13.5 if we do better, we’ll be happy to report it of course.

So, headroom we have is difficult to quantify. First, because there are two rating agencies. Second, because it really depends what we buy according to whether we buy a business which will absorb a lot of cash because we need to invest in it or conversely, whether we buy a small cash scale. You end up with very different calculations as to what we could get away with within our BBB rating.

But, the order of magnitude is probably the one mentioned by Jean-Bernard. I mean clearly, we are – in this difficult environment we don’t expect the rating agencies to cut us a lot of more slack than they would today. Plus, keep in mind they may – we may or may not participate in the spectrum auctions coming up for SFR, so called 4G. So, we could also rise on our balance sheet.

Jean-Bernard Levy

We have a question from John, sorry Poland.

Philippe Capron

We don’t disclose the specifics in Poland. It’s – I mean we have a very interesting pay-TV position there. It’s been very profitable over the past few years. It’s fair to say that the market is turning more competitive with four players in a relatively small market. Of course, we’re looking at the ways to further improve our profits and to make do is this challenging situation.

Jean-Bernard Levy

So, we have a question from John Karidis. I hope I’m not misreading your name from MF Global. John.

John Karidis – MF Global

Absolutely right. Thank you very much. Good morning to you. I’ve got three questions please. Number one, this time last year you told us what the full year dividend would be and why hasn’t this happened this time around. Secondly, may we please have an update on what’s happening with like Lagardere and Canal+ France and what the timetable is now. And then, thirdly what is the scope for a much closer relationship between your two major assets in France Canal+ and SFR. What are the challenges of bringing this assets closer and what do you think would be the benefit nevertheless. Thank you.

Jean-Bernard Levy

So, on the dividend. Yes, last year we were a bit more precise. But, we had not been the previous years I believe in the current business environment it is safer to wait until as usually what is traditional way to run the company which is to wait for the full year to be finished and for the numbers to be available to decide what will be the dividend. As you know, our policy is that the dividend can only grow or stay flat.

We in the current situation, we have said after the SFR transaction, our intention to grow the dividend. I think it’s right that the management and the board keep flexibility a little longer even if last year they did not already as before they did. Lagardere at Canal+ France, while I’m happy you raised the question to me. But, I’m not the guy speak to. We have a duty to put in place, a listing at the request of Lagardere there. We were very close to achieving this at their request back in was it March or April, I’m not very sure. March apparently this year. Then, as everybody knows the IPO was stopped, it was pulled off at the time of the nuclear events in Japan and effects on stock market.

We will do according to what our friends at Lagardere will decide and just to anticipate because I also get this question we have not had any discussion on potential direct sale of this asset from Canal+ to events I’m sorry from Lagardere to Vivendi. For a long, long time we did entertain some early conversation which showed a very wide gap and so there was no way this we both parties that this gap would be – could be closed. Hence, the IPO, no conversation since and I’m not sure it would be in the best interest of Vivendi today in this current environment that this limited headroom we have considering potential opportunities of which this would be one but that we would sort of consummate a lot of this headroom into this acquisition or maybe we may find more attractive assets. So, it would be – we would be probably more hesitant about whether to do this or whether not to do it today than we were let’s say a year ago.

But, I also want to say at the same time that this is not the agenda for Vivendi or for any Lagardere and Vivendi discussions right now.

Unidentified Company Speaker

Remember, there is zero cash yield associated with that investment.

Jean-Bernard Levy

Needless to say the closer relationships between our two major assets in France is something which is on our agenda as long as we keep the right level of protection of our asset and as long as we keep in line with regulatory and competition authority constraints. This means that it has always been and the level of ownership of Vivendi into Canal+, level of ownership o Vivendi into SFR has nothing to do with it. It has always been our policy to try and have Canal+ as strong as possible in the TV space, which means Canal+ has to be distributed of course by SFR but also by SFR competitors and of course Canal+ does entertain a strong business relationship in terms of distribution which with SFR competitors and this will continue.

Having said this, there are areas of potential cooperation, which has been put in place over the year and there are several areas which are concerned. Some are very visible like the fact that Canal+ offers are available in SFR stores that some Canal+ systems and services have been prepared together with SFR in terms of for instance satellite base offers which SFR is now selling in areas where there is no unbundling available and we’re working on more sort of joint products to be launched and this is a set of very active cooperation that we are putting in place.

Maybe you want to add something Philippe.

Philippe Capron

There is monitoring committee between Canal+ and Lagardere to review all these projects. But, of course keeping the need for both SFR and Canal+ to maximize their respective businesses and consumer reach and consumer reach of course is key.

So, then we have a question from Giasone Salati from Execution. Giasone.

Giasone Salati – Execution

Hi, good morning. Can you hear me?

Philippe Capron

Yeah.

Jean-Bernard Levy

Yeah.

Giasone Salati – Execution

Only couple of questions please. First of all, do you have already visibility on free cash flow growth as GVT CapEx are expected to decline as percentage of sales or at least that could you give us – can you give us – could you confirm that free cash flow is expected to grow faster than adjusted net income.

Secondly, can you give us a little update on the global tax mechanism? Has the decision already been taken in order to extend that for another few years or when will it be taken and what is the potential tax impact on that. And just – I said two questions, in fact three possibly. Just if you could on, in terms of dividend following on from the question on free cash flow. Will dividend be decided over the next years on a P&L basis on a free cash flow basis? Thank you.

Jean-Bernard Levy

I let Philippe answer your question.

Philippe Capron

You are absolutely right. We would expect of course given the fact that GVT, as EBITDA would continue to grow at a very fast clip whereas their CapEx spend will peak this year or next year according to how successful we are in going to the full extent of our planned investment this year. We would expect then free cash flow to stop increasing again. The only moving part there is how much CapEx saving we can achieve at Maroc Telecom and SFR in the present conditions. Those will be the moving parts and I wish I had the answers so that I could pass it on to you.

Concerning the BMC tax regime, we applied for renewal last June. We’ve seen nothing so far in the various tax announcements by the government indicating that this regime would disappear. Therefore, we would expect our agreement to be renewed probably sometimes early next year if we follow the same calendar as three years ago.

Concerning the dividend. It’s of course going to be I guess a mix of the P&L approach and the payout approach and of course the free cash flow approach which will determine the Board’s decisions on the dividend and it would –we have take the payout into account. But perhaps, even more importantly we have of course to be able to afford to distribute the very high dividend which is expected by the shareholders.

Jean-Bernard Levy

The ratio commitment of minimum 50% permanently.

Okay. We have a last question from or set of questions from Matthew Walker at Nomura. Matthew, good morning.

Matthew Walker – Nomura

Good morning everybody. Just two questions please. The first one is can you give us an indication for CapEx for both the Group and for the French Telecom business for this year please. And I guess that probably excluding 4G, if you have a rough idea of 4G that would be helpful or that would be difficult. And the second question is on Canal+, could you just briefly describe the packages that you’ve won and the packages that you haven’t won and tell us if the mobile rights have been won by somebody and also what’s happened to the right to show the league outside France, the overseas rights. Thanks.

Jean-Bernard Levy

Philippe will answer on the CapEx.

Philippe Capron

Actually, I don’t think we’ve announced anything in terms of the amount of CapEx. We plan to spend for SFR between 1.6 and €1.7 billion excluding the acquisition of 4G license.

Jean-Bernard Levy

We will not comment.

Philippe Capron

Which we will not comment. And for the Canal+ offers, I mean we’ll get back to you with more detailed answers. But, mobile rights have not been allocated and basically we got everything we bid for. So, we are very happy with the outcome because for reduced price tag, we feel we have enough football and enough of the best games to feel the antenna and respond to our subscribers demand.

Jean-Bernard Levy

I think to get into the details of that, we don’t that right here and maybe we’ll call you back with the investor relations team, Matthew. Any more.

Matthew Walker – Nomura

Okay. Thank you.

Jean-Bernard Levy

I think this is it. We’ve gone through lots of things as usual and I want to thank you for attending and listening carefully to all of this and wish you a very good day and very successful September. Thank you.

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