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SECOND QUARTER 2017
July 18, 2017
Peter Nyquist Vice President Investor Relations
SECOND QUARTER 2017
July 18, 2017
This presentation contains forward-looking statements. Such statements are based on our current expectations and are subject to certain risks and uncertainties that could negatively affect our business. Please read our earnings reports and our most recent annual report for a better understanding of these risks and uncertainties.
Börje Ekholm President and CEO
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!"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}~¡¢£¤¥¦§¨©ª«¬®¯°±²³´¶·¸¹º»¼½ÀÁÂÃÄÅÆÇÈËÌÍÎÏÐÑÒÓÔÕÖ×ØÙÚÛÜÝÞßàáâãäåæçèéêëìíîïðñòóôõö÷øùúûüýþÿĀāĂăąĆćĊċČĎďĐđĒĖėĘęĚěĞğĠġĢģĪīĮįİıĶķĹĺĻļĽľŁłŃńŅņŇňŌŐőŒœŔŕŖŗŘřŚśŞşŠšŢţŤťŪūŮůŰűŲųŴŵŶŷŸŹźŻżŽžƒȘșˆˇ˘
˙˚˛˜˝ẀẁẃẄẅỲỳ–—‘’‚“”„†‡•…‰‹›⁄€™ĀĀĂĂĄĄĆĆĊĊČČĎĎĐĐĒĒĖĖĘĘĚĚĞĞĠĠĢĢĪĪĮĮİĶĶĹĹĻĻĽĽŃŃŅŅŇŇŌŌŐŐŔŔŖŖŘŘŚŚŞŞŢŢŤŤŪŪŮŮŰŰŲŲŴŴŶŶŹŹŻŻȘș−≤≥fifl
ΆΈΉΊΌΎΏΐΑΒΓΕΖΗΘΙΚΛΜΝΞΟΠΡΣΤΥΦΧΨΪΫΆΈΉΊΰαβγδεζηθικλνξο
ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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› Significant cost reductions to restore
profitability
– At least SEK 10 b. run rate improvement over 12
months
– Primarily in service delivery and common costs
› Increase pace of innovation and new
business development
› Focused and technology led approach
– Invest in R&D for competitiveness in Networks
– Stabilize IT & Cloud roadmaps and focus on new
portfolio
– Invest in automation and review contracts in
Managed Services
› RAN market estimated to decline high single
digit percentage in 2017
› Increased risk of market and customer project
adjustments
– Estimated negative impact on operating income of
SEK 3-5 b. coming 12 months
Focused business strategy
At least double the 2016 operating margin, excluding restructuring charges, beyond 2018
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˙˚˛˜˝ẀẁẃẄẅỲỳ–—‘’‚“”„†‡•…‰‹›⁄€™ĀĀĂĂĄĄĆĆĊĊČČĎĎĐĐĒĒĖĖĘĘĚĚĞĞĠĠĢĢĪĪĮĮİĶĶĹĹĻĻĽĽŃŃŅŅŇŇŌŌŐŐŔŔŖŖŘŘŚŚŞŞŢŢŤŤŪŪŮŮŰŰŲŲŴŴŶŶŹŹŻŻȘș−≤≥fifl
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ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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› Initial signs of traction in strategy
execution
– Break-through contract with Vodafone UK
– Positive customer feedback on ERS
competitiveness
– Agreement signed to divest Power Modules
– Successful review of Managed Services
contracts – 9 of 42 completed
– Plan in place to improve performance in IT
& Cloud – focus on product roadmaps for
new portfolio and project execution
› Challenging underlying performance
– Sales adjusted for FX -13% YoY
– Networks margin decline due to lower
software sales
– Continued significant losses in IT & Cloud
› Operating cash flow SEK 0.0 (-0.7) b.
Second quarter 2017
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!"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}~¡¢£¤¥¦§¨©ª«¬®¯°±²³´¶·¸¹º»¼½ÀÁÂÃÄÅÆÇÈËÌÍÎÏÐÑÒÓÔÕÖ×ØÙÚÛÜÝÞßàáâãäåæçèéêëìíîïðñòóôõö÷øùúûüýþÿĀāĂăąĆćĊċČĎďĐđĒĖėĘęĚěĞğĠġĢģĪīĮįİıĶķĹĺĻļĽľŁłŃńŅņŇňŌŐőŒœŔŕŖŗŘřŚśŞşŠšŢţŤťŪūŮůŰűŲųŴŵŶŷŸŹźŻżŽžƒȘșˆˇ˘
˙˚˛˜˝ẀẁẃẄẅỲỳ–—‘’‚“”„†‡•…‰‹›⁄€™ĀĀĂĂĄĄĆĆĊĊČČĎĎĐĐĒĒĖĖĘĘĚĚĞĞĠĠĢĢĪĪĮĮİĶĶĹĹĻĻĽĽŃŃŅŅŇŇŌŌŐŐŔŔŖŖŘŘŚŚŞŞŢŢŤŤŪŪŮŮŰŰŲŲŴŴŶŶŹŹŻŻȘș−≤≥fifl
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ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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› Europe and Latin America (-11% YoY)
– Continued reduced mobile broadband investments
– Slowdown in Mexico; growth in Brazil
› Middle East and Africa (-17% YoY)
– Some, still limited, signs of recovery in
macroeconomic environment
› North America (-7% YoY)
– Reduced scope in managed services contract
› North East Asia (-3% YoY)
– Mainland China decline partly offset by growth in
Japan and Korea
› South East Asia, Oceania and India (flat YoY)
– Continued mobile broadband investments in South
East Asia offset decline in services
– Operator consolidations in India
› Other (flat YoY)
– IPR revenues SEK 2.0 (2.2) b.
Q2 Market Area sales
18.5%
13%
27%
29%
12.5%
16Q2 Europe &Latin
America
MiddleEast &Africa
NorthAmerica
NorthEast Asia
SE AsiaOceania &
India
Other 17Q2
SEK 54.1 b.
SEK 49.9 b.
-11%
-17%
-7%
-3% 0% 0%
YoY
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!"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}~¡¢£¤¥¦§¨©ª«¬®¯°±²³´¶·¸¹º»¼½ÀÁÂÃÄÅÆÇÈËÌÍÎÏÐÑÒÓÔÕÖ×ØÙÚÛÜÝÞßàáâãäåæçèéêëìíîïðñòóôõö÷øùúûüýþÿĀāĂăąĆćĊċČĎďĐđĒĖėĘęĚěĞğĠġĢģĪīĮįİıĶķĹĺĻļĽľŁłŃńŅņŇňŌŐőŒœŔŕŖŗŘřŚśŞşŠšŢţŤťŪūŮůŰűŲųŴŵŶŷŸŹźŻżŽžƒȘșˆˇ˘
˙˚˛˜˝ẀẁẃẄẅỲỳ–—‘’‚“”„†‡•…‰‹›⁄€™ĀĀĂĂĄĄĆĆĊĊČČĎĎĐĐĒĒĖĖĘĘĚĚĞĞĠĠĢĢĪĪĮĮİĶĶĹĹĻĻĽĽŃŃŅŅŇŇŌŌŐŐŔŔŖŖŘŘŚŚŞŞŢŢŤŤŪŪŮŮŰŰŲŲŴŴŶŶŹŹŻŻȘș−≤≥fifl
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ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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› Sales adj. for FX -14% YoY ‒ Lower mobile broadband investments
‒ Reduced scope in MS contract
› Op margin 10% (13%) ‒ Lower sales and gross margins
› Focused Radio R&D investments
started
› Ericsson Radio System tracking
towards 100% of deliveries in 2018 ‒ 49% of deliveries YTD
› Sales adj. for FX -11% YoY ‒ Lower legacy products sales
› Op income SEK -0.8 (-0.4) b. ‒ Lower sales
‒ Sequential margin improvement, partly
from cost reductions
‒ Negative impact on OI from net cap dev
expenses, SEK -0.2 b. YoY
› Exploring strategic opportunities
› Sales adj. for FX -10% YoY ‒ Lower legacy product sales
› Op income SEK -2.4 (-1.1) b. ‒ Lower gross margin
‒ Negative impact from net cap dev
expenses, SEK -0.8 b. YoY
› Turn around plan ‒ Stability: Roadmaps, underperforming
projects and scoping
‒ Profitability: Delivery efficiency, R&D
efficiency, reduced G&A
‒ Growth: Scale new SW platforms
Tangible improvements expected 2018
Segment summary
SEK b. 17Q2 16Q2 17Q1
Sales 36.8 40.2 36.2
GM 30% 32% 31%
Op. income 3.5 5.3 4.3
OM 10% 13% 12%
Networks IT & Cloud Other
Numbers exclude provisions, write-downs and restructuring charges in 17Q1. 16Q2 and 17Q2 exclude restructuring.
SEK b. 17Q2 16Q2 17Q1
Sales 10.9 11.5 9.6
GM 28% 36% 28%
Op. income -2.4 -1.1 -2.2
OM -22% -9% -23%
SEK b. 17Q2 16Q2 17Q1
Sales 2.2 2.4 2.0
GM 37% 39% 31%
Op. income -0.8 -0.4 -1.0
OM -38% -17% -51%
Carl Mellander Chief Financial Officer
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ΆΈΉΊΌΎΏΐΑΒΓΕΖΗΘΙΚΛΜΝΞΟΠΡΣΤΥΦΧΨΪΫΆΈΉΊΰαβγδεζηθικλνξο
ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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34% 33%
29% 29%
31% 30%
25%
30%
35%
40%
Q12016
Q2 Q3 Q4 Q12017
Q2
Gross margin
› As anticipated, gross margin declined QoQ following
seasonally stronger software sales in Q1
› YoY gross margin negatively impacted by lower
Networks software sales and by reduced margins in IT
& Cloud
› Un-seasonally strong software sales in the second
quarter last year
› Some negative impact from lower IPR revenues YoY
We will accelerate actions to reduce costs and increase efficiency
17Q1 excludes provisions, write-downs and restructuring charges. Other quarters exclude restructuring.
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3,8
0,3
Q216 excl restructuring
Hedgeimpact
Capitalized R&D Volume Grossmargin
R&Dexpenses
SG&AExpenses
Q217 exclrestructuring
Operating income Q2 YoY
SEK b.
OM 7%
Lower sales, reduced gross margin and less capitalization of R&D main drivers for reduced result
OM 1%
Sales -8% YoY
Gross margin
from 33% to 30%
Hedge loss of
SEK -0.5 b.
in Q216
Hedge gain Q217
SEK 0.5 b.
reported as
financial net
Net impact
Q216 +0.7
Q217 -0.4
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˙˚˛˜˝ẀẁẃẄẅỲỳ–—‘’‚“”„†‡•…‰‹›⁄€™ĀĀĂĂĄĄĆĆĊĊČČĎĎĐĐĒĒĖĖĘĘĚĚĞĞĠĠĢĢĪĪĮĮİĶĶĹĹĻĻĽĽŃŃŅŅŇŇŌŌŐŐŔŔŖŖŘŘŚŚŞŞŢŢŤŤŪŪŮŮŰŰŲŲŴŴŶŶŹŹŻŻȘș−≤≥fifl
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ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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› YoY negatively impacted by FX, appr -2%
› Significant impact from less capitalization of R&D – Driven by focused strategy, technology and portfolio shifts
– No cash impact
› SG&A
– YoY reduced, despite negative FX impact
› R&D – YoY increase with higher investments in Networks
– QoQ increase mainly due to seasonality
– SEK 1.1 b. negative impact from capitalized development
expenses YoY
› Will implement cost savings with an annual run
rate effect of at least SEK 10 b. by mid-2018
* Net of: capitalized and depreciated development expenses, and amortized intangible assets.
This slide contains forward-looking statements. Actual result may be materially different.
6,7 6,7 6,6
7,7 7,1 7,9
-0,5 -0,2
0,4
Q216 Q117** Q217
Operating expenses excl. restr., SEK b.
SG&A underlying R&D underlying Other*
Operating expenses
14.0 13.7
14.8
** 17Q1 exclude provisions, write-downs and restructuring charges. Other quarters exclude restructuring.
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ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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SEK 10 b cost reductions
› At least SEK 10 b. net reduction of annual run rate by
mid 2018
– 50% common costs, 50% service delivery
– Baseline: Current run rate, i.e. annualized Q2 2017
› Reductions in addition to – Supply, i.e. closing manufacturing sites
– Rightsizing due to lower business volumes
– Other strategic opportunities
› Restructuring charges
– 2017 estimated in the higher end of the range SEK 6-8 b.
– 2018 restructuring charges to be communicated
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ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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65,6
-0.8 +1.9 -1.1 -1.0 -0.8
-5.6 -3.3 -0.6
54,3
Gross cash1703A
Net Incomereconciled to
cash
Change Netoperating
assets
Restructuring CAPEX Acquisitions,divestments &
Other
Otherfinancingactivities
Dividend FX on cash Gross cash1706A
Change in gross cash SEK -11.3 b.
Change in Gross cash Q2
Repayment of Eurobond, SEK 5.1 b.
Investing1
-1.8 b
Financing
-8.9 b
FX on cash
-0.6 bb
Operating cash flow
0.0 b
Change in net cash SEK -4.3 b. 1) Excluding Interest-bearing securities
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› Increased risk of market and customer project adjustments
– Focused strategy, current market and company position continued risk assessment
– Estimated negative impact on operating income of SEK 3-5 b. in the coming 12 months • 30% estimated to impact cash
• Payment risks, challenging projects, exit costs
• Estimated to impact all business segments
› Reducing capitalization
– Due to technology & portfolio shifts
– Reducing capitalization of product platform R&D, software release R&D and hardware costs
– Together resulting in net negative impact on operating income of SEK -2.9 (1.3) b. in 2H17,
with no impact on cash
• Total impact on operating income in Q2 was SEK -0.3 (1.2) b.
Additional project risks reducing capitalization
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1. Product platform R&D capitalization
– Example: The new OSS and BSS platforms
– Product platform R&D is capitalized and depreciated over 24-36 months as R&D expenses
– Capitalization is reduced as a consequence of; cyclical product platform development and the focused business
strategy
2. Software release R&D capitalization
– Example: Expenses related to radio software releases 16A and 16B
– Certain R&D expenses, related to specific software releases, are capitalized as inventories and depreciated as cost of
sales over 6 months
– No longer relevant due to more continuous deployment and a differentiated release pace between different
technologies
3. Hardware cost capitalization
– Example: Parts of the Radio portfolio
– A portion of the up-front hardware cost is capitalized as inventories and depreciated over 24 months as cost of sales to
match revenue with cost
– Capitalization levels are adapted to fit the new portfolio, driven by technology and product development, with the
introduction of the Ericsson Radio System
Reducing capitalization – background
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Market related
› RAN equipment market outlook for 2017 estimated at high single-digit percent. Previous estimate: -2% to -6%.
Ericsson focused strategy related
› Addressing low-performing operations in MS and optimizing NRO offering expected to reduce FY19 sales up to SEK 10 b.
› Cost reductions with annual run rate of at least SEK 10 b. by mid-2018, split 50/50 between service delivery and common costs
› The company aims to increase R&D efficiency. However, R&D expenses will increase short term, primarily in Networks
› Less capitalization is expected to result in a net negative impact on operating income of SEK -2.9 (1.3) b. in second half 2017,
with no impact on cash.
› Restructuring charges for 2017 are estimated to be in the higher end of the range of SEK 6-8 b.
› Increased risk of further market and customer project adjustments, with a negative impact on results, estimated to SEK 3-5 b. for
the coming 12 months, of which 30% is estimated to impact cash
Other Ericsson related
› The earlier communicated rescoped managed services contract in North America will impact sales negatively YoY in Q3 2017
› Industry trends and business mix in mobile broadband in 2016 are expected to prevail in 2017
Planning assumptions From the Q2 report
Based on current visibility, assessments and FX rates
This presentation contains forward-looking statements. Such statements are based on our current expectations and are subject to certain risks and uncertainties that could negatively affect our business. Please read our earnings reports and our most recent annual report for a better understanding of these risks and uncertainties.
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cash flow impact
Activity Total cost
SEK b.
Cash impact
SEK b.
Timing
2016 restructuring charges, balance Dec 31 2016 3 3 2017
2017 restructuring charges 6-8 6-8 50% 2017
50% 2018
Q1 2017 provisions and customer project
adjustments
8.4 5.8 Over several
years
Customer and market risks identified in Q2 2017 3-5 30% Over several
years
2018 restructuring charges To be confirmed To be confirmed 2018-2019
Börje Ekholm President and CEO
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˙˚˛˜˝ẀẁẃẄẅỲỳ–—‘’‚“”„†‡•…‰‹›⁄€™ĀĀĂĂĄĄĆĆĊĊČČĎĎĐĐĒĒĖĖĘĘĚĚĞĞĠĠĢĢĪĪĮĮİĶĶĹĹĻĻĽĽŃŃŅŅŇŇŌŌŐŐŔŔŖŖŘŘŚŚŞŞŢŢŤŤŪŪŮŮŰŰŲŲŴŴŶŶŹŹŻŻȘș−≤≥fifl
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ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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› Plan in place – execution started
› Strong commitment across
organization
› Positive response from customers
Focused strategy
At least double the 2016 operating margin, excluding restructuring charges, beyond 2018
Slide title
44 pt
Text and bullet level 1
minimum 24 pt
Bullets level 2-5
minimum 20 pt
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!"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}~¡¢£¤¥¦§¨©ª«¬®¯°±²³´¶·¸¹º»¼½ÀÁÂÃÄÅÆÇÈËÌÍÎÏÐÑÒÓÔÕÖ×ØÙÚÛÜÝÞßàáâãäåæçèéêëìíîïðñòóôõö÷øùúûüýþÿĀāĂăąĆćĊċČĎďĐđĒĖėĘęĚěĞğĠġĢģĪīĮįİıĶķĹĺĻļĽľŁłŃńŅņŇňŌŐőŒœŔŕŖŗŘřŚśŞşŠšŢţŤťŪūŮůŰűŲųŴŵŶŷŸŹźŻżŽžƒȘșˆˇ˘
˙˚˛˜˝ẀẁẃẄẅỲỳ–—‘’‚“”„†‡•…‰‹›⁄€™ĀĀĂĂĄĄĆĆĊĊČČĎĎĐĐĒĒĖĖĘĘĚĚĞĞĠĠĢĢĪĪĮĮİĶĶĹĹĻĻĽĽŃŃŅŅŇŇŌŌŐŐŔŔŖŖŘŘŚŚŞŞŢŢŤŤŪŪŮŮŰŰŲŲŴŴŶŶŹŹŻŻȘș−≤≥fifl
ΆΈΉΊΌΎΏΐΑΒΓΕΖΗΘΙΚΛΜΝΞΟΠΡΣΤΥΦΧΨΪΫΆΈΉΊΰαβγδεζηθικλνξο
ρςΣΤΥΦΧΨΩΪΫΌΎΏ ЁЂЃЄЅІЇЈЉЊЋЌЎЏАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯАБВГДЕЖЗИЙКЛМНОПРСТУФХЦЧШЩЪЫЬЭЮЯЁЂЃЄЅІЇЈЉЊЋЌЎЏѢѢѲ
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