Earnings Call: Q2 2021

Aug 12, 2021

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Oi S. A. Conference Call to discuss the Q2 2021 results. This event is also being broadcast simultaneously on the Internet via webcast, which can be accessed on the company's IR website, www.ohye.com.brri together with the respective presentation. We would like to inform that during the company's presentation, all participants will be only be able to listen to the call. We will then begin the Q and A session when further instructions will be given. In case you need any assistance during the conference. Please request the operator's help by pressing star 0. We also would like to inform that the conference call will be conducted in English by the management of the company and the conference call in Portuguese will be conducted via simultaneous translation. We will now turn the conference over to Mr. Rodrigo Abreu, CEO. Please, Mr. Rodrigo, you may proceed. The timing for this quarter Call is interesting. We have mostly completed several different milestones of our plan. And now we start a new phase, which will be completely focused on execution. We know and emphasize that the company's results are still in transition as we complete the key operations of our transformation. This quarter marks a very important transition for us as well, which is the fact that fiber overtook copper in both revenues and users our core offer for future growth. And this has been a milestone that we have been planning for since we launched the plan a few years back. So now let's take a look at the key figures starting with Page 2, which provides some of the highlights on the quarter. On Page 2, we can see that the operational execution continues unabated and both residential and SME revenues were growth with some key planned milestones achieved. As has been the case since we launched the new strategy, fiber EUR 5,000,000 and the total homes connected getting close to EUR 2,800,000 in the quarter with 366,000 new Homes Connected in the Q2 2021. This is still with a very high average take up of 24%. So in terms of the key numbers for our plan, which are the fiber numbers. They continue to perform extremely well. And even though overall revenue for the company had a small decline, the residential revenues moved up for the first time in many, many years. We see a 3.5% increase year over year in residential revenues. And on the SME revenues. We see a 2.6% quarter over quarter growth as well also pushed by fiber. On the financial side. We turned positive in net profits, but had a decline in EBITDA year over year and a sequential increase and cash levels continue to be managed to allow for the transition year of 2021. And as for planned milestones, we had several significant ones, including the judicial confirmation of the BTG infraCo proposal, the completion of 2 important financing rounds, the launch of the Vital brand, which is the new name of the Impreco from now on. And finally, as of this week, the signature of the Anantel arbitration term, which is very important for the future of our concession performance. So turning to page 3, let's look at the fiber performance details. In fiber, we set new records. In homes passed, We had strong ARPU growth and we're keeping the base in Homes Connected. So pretty much on track in all metrics. On the Homes Pass, We hit a record quarter with over 500,000 homes passed per month. This is an absolute record and it puts us well on track to deliver the long term guidance, which calls for over 30,000,000 homes passed by 2024 2025. On the Homes Connected, we also We have continued to present a very high number. And in last quarter, the average per month was of 122,000 homes connected. This means that we continue to deliver the highest number of homes connected per month in the entire market ahead of every competitor in fiber. And just to give you an idea, if we just consider the work This means one home connected every 9 seconds. It's a really impressive number And we're very proud of that. In fact, we're so proud that we would like to mention that exactly today, this morning to be more precise, we have just reached the mark of 3,000,000 homes connected in our customer base. So all in all, very strong performance, which continues since we launched the plan and started to make fiber the core of our plan and the focus of our plan from now on. The ARPU also continues to grow as we can see and upselling has been an important driver of this ARPU growth. And in the second quarter, 9.6% of the fiber customer base had speeds over 400 megabits per second And 16% of the net additions were over 400 megabits per second. This has led the ARPU BRL87, which is ahead of the plan when we first announced it. And in terms of fiber revenues, We have got through the number of $691,000,000 in fiber revenues for the quarter, which puts us at an annualized fiber revenue number of close to BRL3 1,000,000,000 and growing. So, obviously, all of the metrics in fiber are doing extremely well. When we look at the residential market in the next page, including pretty much all of the revenues, we can see the power the core of the fiber recovery and how it is allowing us to compensate for the fact that structurally copper and the legacy revenues its success to be an incontinued decline. So when we announced the focus on fiber, it was just a promise to replace the declining legacy revenues. The 2 years after announcement of the strategic plan, fiber now over takes copper and delivers revenue turnaround in the residential segment. We can see that the RGUs for the first time we see here that fiber RGUs are already higher the legacy RGUs both in voice and in broadband combined. And when we look at the residential revenue evolution, We see here that we have been steadily growing and reducing the declines up until last quarter when we pretty much tied with the 0 growth and now we are back to growth in residential revenue with 3.5% of growth. On the residential revenues. Fiber now represents over 50% of our revenues and obviously will keep growing. And this even with a 35% decline on copper revenues, which as I mentioned is a structural decline. This will continue to happen, but now we're more than compensating this decline in copper revenues by the growth in our fiber revenues. The decline of the legacy revenues we must not forget is also a factor in B2B and we can see that on the next page. On B2B, Oi Solutions revenues, which are the large corporates, remained stable sequentially even though with a drop from last year again due to the legacy drops, but we had some large contract wins with higher IT contents, which will help future periods. And on the SME front revenues were back to growth. The number for Oi Solujoins is impacted by both legacy voice and data, Wild Fiber and IT Keep Growing. An example of the growth in IT Solutions and IT Revenues its security area with a nice 14% growth and as of last quarter, winning 1 of the largest contracts of the year for public security in the state of Bahia for over BRL650 1,000,000. This has allowed the security numbers to go up almost 15%. On the S and E segment, fiber has also helped to push the segment returning to growth with a 17% penetration of fiber and this has been growing steadily. This penetration was only 6% of revenues in last year. So on the next page, we can then see our key mobile indicators. Even though mobile has been now classified as discontinued operations due to the sale process. Mobile had some positive indicators last quarter, helping us maintain what we call a very good transition path until completion of the sale process. The strong postpaid recovery on both net adds and revenues that helped even though we had prepaid net adds increasing, but still impacted in terms of overall revenue growth on prepaid. Revenues were slightly down due to prepaid only when while postpaid advanced. And we can see this as we reached the leadership in the share of net adds for proposed paid last quarter ahead of all other operators in Brazil. The recovery also started in net adds prepaid even though the revenues were impacted due to smaller top ups than the previous year with this recovery in the number of net adds. Obviously, we expect this recovery to help us through the end of the year maintaining again a very good balance of operations on the mobile numbers up until completion of the sale process. We talked about core and about mobile, but we should also talk about future revenues. And in the next page, We can see that the future revenue starts to represent something which is a very good start point for us to achieve what we recently announced in our 2024 guidance. Our guidance points to 10% of revenues coming from more than connectivity in 2 to 3 years. And we believe that our existing portfolio allows for a very solid start. It may not be very visible, but we have already over BRL100 1,000,000 of revenues in new areas and some has just been launched or expand it. Based on our extensive list of assets, including customer base, national presence, proprietary field sales networks and payment capabilities. We see a significant growth ahead of us for the new sources of revenue, which again we expect to reach R1.5 billion dollars in revenues by 2024. With all of these components. Let's now look at the entire revenue feature on the next page, page 8. On page 8, we see that the new Oi core revenues start to turn around based on the solid fiber and residential performance growing after 7 years of decline and in spite of all the legacy impacts on B2B. Fiber and IT revenues already represent 35% of total. And on the residential side, B2B is stable sequentially, but there is still a huge space for growth in other revenues in addition to the small growth we had on the residential revenues. On the discontinued operations, we had a small decline in mobile and DTH, but those have been within the range that we have been working with especially considering that we are now in a transition year for those revenues. Now for OpEx and EBITDA on the next page. We have doubled down our efforts on addressing cost This has compensated for some of the costs, which are inflation adjusted and the higher commercial activity that led to marketing expansion. The sequential EBITDA margin showed recovery even though we had a small decline year over year. Again, reduction in the OiX here occurred in most areas for a total of minus 4% and we can see this happening across the board including bad debt, 3rd party expenses, network maintenance, contingencies, personnel, taxes and other. The key components that helped compensate on the plus side was the rent and insurance components in particular for telecom infrastructure, which went up given the inflation adjustments that occurred across the entire first half of the year. On the EBITDA, we have grew our EBITDA margin sequentially and have now got to close to the 30% again. As for the cost reduction program, we announced last quarter a cost reduction program. In the next page, we can see the current estimates based on the We already have over EUR 1,000,000,000 net and starting to be executed in many different fronts, most of them in connection with the simplification we expect for the company following our transitions during 2021. This program, the DCO 2.0 and have mapped out over $1,000,000,000 in cost reduction in preparation for the Schneider company in 2022. And it's worth remembering that most changes will be done by year end due to the current transitions on both the mobile operations and on the infrastructure operations we see now, which are 2 operations that will be deconsolidated from our results by the beginning of next year. But when we look at all of the math initiatives that we have ongoing, we can see that we have initiatives in pretty much all the company's sales, marketing and customer care in reducing the size of our organization and our support activities, in simplifying our IT systems and processes and obviously in addressing all of the network and operations costs in particular with the simplification and the decommissioning of elements in our legacy networks for copper. On the next slide, we can see then the financing activities, investments and cash results. With the completion of the financing initiatives for 2021, this allowed for our sustained fiber investments during this transition period to be completed with cash in from strategic M and As by Q4 this year, Q1 2022. On CapEx, the focus on fiber remains stronger than ever Anna, we should remember that most of these investments will move to detail next year. We achieved in the second quarter a metric of 70% of all investments coming from fiber. Even though we are still investing 11% of the CapEx in legacy operations such as copper, which obviously we are striving to reduce given the transition of copper in the legacy businesses in connection with all of the concession activities. On the cash flow, the cash infotel debentures and of the lead operations of the quarter, brought cash through the end of the quarter BRL3.4 billion level, which is consistent to the levels that we had planned for during 2021. Remembering that for the full picture, it's important to consider that we will have additional cash ins both coming from the divestment program as well as from the funding refinancing operations that we have just completed at the beginning of Q3. And this will bring us an additional cash in coming from mobile, coming from InfraCo, coming from the mobile bridge loan and coming from the refinancing of the the balance sheet of the bonds that we issued last year. In addition to the operating and financial results, it's also important to talk about the additional milestones achieved and we can see this on next page. As of last week, we have announced one important milestone, which was the launch of the Vital brand. And more than just launching the brand for our new infrastructure operation, which will have its control sold to BTG upon completion of all of the regulatory and competitive approvals that we expect by the end of this year. This means and marks the start of an independent operation, so to speak, of the VITAO and InfraGo operations with a separate governance and already operating as a neutral network. This will allow us to make this transition peers ahead of time, so that when the operation is finally approved and can be closed, we have pretty much everything up and running. And also as of this week another very important milestone in our plan took shape, which is the signature of the arbitral term with Anatel. And we have to remember that for addressing all of our concession issues, we have 2 major fronts in addition to all of the operational authorization. This is a process that's still ongoing given the regulatory discussions and definitions that are still going on. And an arbitration that the company opens against Anatel for several issues related to the past of the concession. This arbitration is a key component in addressing the cost of the future of the legacy operation and comprises 4 key areas, ranging from the lack of sustainability of the concession to several events that led to financial economic imbalance of the concession the balances owed to the PG and E programs in the past years. And finally, for some approvals regulatory assets that will need to be compensated given that they're not going to be fully amortized. This arbitration commitment was By Anatel's Board of Directors on August 10, we expect the signature of the term to take place between today and tomorrow. And this means that the scope of the arbitration was fully accepted by Anatel. And now the proceedings will be carried out by the CCI arbitration the arbitration chamber following the term signature. The arbitration will also be critical in addressing the migration discussions in a process that we expect will be carried out until the end of 2022 or potentially beginning of 2023. So how we're executing this transformation in addition to all of the operational results and milestones achieved It's also important. And as the last update, let's talk about our ESG commitments and a view on how employee engagement working around all of our transformation initiatives. So on next slide, on slide 13, we can see that the transformation agenda continues to be sustained by renewed ESG commitments and by our very high employee engagement. On the ESG front, We have established a new ESG Commission and we now have objective KPIs monitored company wide and entering into all the company targets. On 2020, we have published already our annual sustainability report and also the social balance of Oi Futuro, which And also we expect with all of our actions to have an expected improvement in the MSCI ESG ratings the Q3 2021. Finally, we had the Council for 6 Sigma Certification as the 1st company in Brazil to receive the certification for internal employee program. So pretty much moving forward in all ESG metrics. But especially in how we are engaging the team to transform the company this quarter brought additional good news. Our engagement research in the transformation of Oi has now 2 waves of surveys conducted. The last wave was conducted in June with over 6,006 100 participants. And we have a general satisfaction index of close to 97%. This This is one of the highest engagement index in all of the industry in Brazil. And as we can see from all of the metrics here, the trends. We can see that pretty much all of the pillars of our survey have produced very good results engagement including transparency on our alignment, respectful and healthy environment, leadership, attitudes for transformation and agile mindset. And for us the key question that we provided in this wave of research was, I feel engagement contributing to the transformation, which had an astounding 96.9 percent number. So we have the entire company engaged in delivering what we have promised for our transformation. So in closing on the next slide, we again highlight that this is a transition year, but we highlight that we are hitting all of our key milestones as planned and now we can dedicate full focus on the execution. We know that there's still several milestones in front of us in particular on the operational transformation and the cost reduction for the company. But we see us focusing entirely on that in addition the execution for a substantially transformed company in 2022. We already overcome the challenge of the judicial recovery, the challenge of all of the M and A activities, structural M and A activities that needed to be conducted. We our overcoming and have closed all of the funding routes and the funding challenges that we had since we entered into the RJ. And now the full focus is on execution and operational improvement while building the new way. So with that, let's remember that questions should be asked in English. Our first question comes from Marcelo Santos with JPMorgan. Hi, good morning and good afternoon. Actually, thanks for taking my question. I the first is clarification on the CapEx of VITAO. So you mentioned that it's a $30,000,000,000 investments into 2025. Does this include past investments or how does that reconciliate with the evaluation study, which at least if we sum here the CapEx, it will be around $20,000,000,000 Was this revised or I guess that's the first And the second question is regarding the competitive environment on the deployment of fiber. I wanted to understand if are you overlapping fiber of some of the other competitors, especially larger ASPs? And are they doing that? How is that game taking place or each player is going to a different region, different cities and with limited overlap? These are my questions. Thank you, Marcelo. So on the CapEx front, no, the 30,000,000,000 the does not include the past investments. The past investments, oddly, have been all made by Oi and are part of the past results. The $30,000,000,000 actually speaks to several years of high investments to build all the balance to plus the to more than 32,000,000 homes passed and in addition, honestly, to other investments that detail we plan to make in the future. When we look at the reconciliation with the valuation, obviously, this This is a separate discussion because what we have valued so far is the growth potential of the company, but we believe that the valuation of the company will increase significantly over the next 2 to 3 years. So the over the next 2 to 3 years. So the VITAO numbers in terms of expected investments, Obviously, let's remember that VITAO, once the transaction is closed and DTG takes on the control of the company at the end of Here we believe Visa will be a private company. So this doesn't mean any guidance. But it means an expectation of investments. And it was based on the starting points of over €20,000,000 that we have provided added by additional investments that the company will likely make to address other opportunities in the market as well. Just if we just look at the overall HP number, the Homes Pass number and obviously some of the infrastructure for Homes Connected as well, these numbers I cannot go north of what we're doing currently. And if we look at our numbers as a whole, we're talking about over BRL 5,000,000,000 Heyai's investments already this year for fiber loan. So it's again just an expectation of investments for Vidaou when it becomes private. And obviously, it represents the size of the opportunity that both ourselves and now BTG see in the future for VITA. As far as the competitive landscape, Obviously, there is some overlap. We know that in particular in the largest cities, there is some overlap. But let me tell you that we believe that the overlap is minimized as far as new areas because obviously we have been always given preference to areas where there is no fiber builds already, but it's inevitable to have some overlap in particular in the areas the largest cities. But what we believe is that there is space for pretty much everybody and that the overlap overall will be minimal. It tends to be a larger overlap at the beginning and then it tends to die down, especially when we look at the overall number of cities that we expect to cover with fiber. And just a little announcement show that the potential for a number of cities covered with fiber is over 2,000 cities in Brazil. Now Oi and by consequence of the current status of Itau covered close to 200 ks. So there's still a lot of deals to take place. As far as the competition with the large ISPs and the small ISPs, again, we see some overlap by existing, particularly with the large ISPs. The small ISPs, the overlap so far has been minimal. And in areas where there is this overlap, in particular we have been emphasizing our superior quality both of the fiber deployment itself as well as all of the transmission infrastructure and all of the support infrastructure, including transmission data and network management, which is on the backside of that. In particular in some areas where we see competition directly with the small ISPs. We have been faced with cases where even though everybody calls the new deployments fiber, we haven't seen cases where we are competing directly with the extension of Ethernet cables of a mix of fiber and Ethernet of a mix of fiber and copper. So there is still ample space for the pure fiber, the 100 percent fiber deployments to take place. And we don't believe this is going to increase substantially in the future, especially because of the fact of launching VITAO. VITAO will be an open neutral network is already operating as a neutral network. And as that, we expect that VITAO will also serve ISVs, both large and small, in addition obviously to the large key areas. And we have taken a measure of that by the recent contracts that retail has signed. Obviously, we have some nondisclosure components in all the contracts that Huizao has been signing. But suffice to say that we have been signing contracts with ISPs and in some cases including end to end deployment of fiber. So it's not only for the transmission, it's not only for backbone capacity or all capacity, but it's also for a capacity that goes all the way to the consumer homes. And this marks a new mode of operation for the company and we expect that this will also this in many areas duplication of fiber given that we are bringing fiber at a very high quality and at a competitive price we believe. So, yes, again, some overlap, but no, we don't believe that this is going to be an issue in the future. Perfect. Thank you very much. Our next question comes from Andres Salas with UBS. Hi, all. Good afternoon. Thanks for taking my question here. I have 2 as well. The first one is on retail. How are you guys seeing the current demand from clients ordered than Oi for retail services? And the second one is on is regarding mobile segment and how are you seeing competitive environment on this front? Thank you. Thank you, Andre. Just to clarify, your first question was on demand. It It's kind of hard to hear. Yes. It's regarding demand for digital services from clients other than Oi. Okay. Okay. No. And expanding on what I mentioned already in connection with the last response, we did see a start of demand from other carriers from other client calls from other ISPs towards VITAO services for all services as I mentioned, not only for transmission and backbone services, but also for FTTH services. And so we have already closed over 10 contracts with both large and small ISPs across the board. And let's remember that this started to happen even before we launched the brand, even before we announced that the operations are now fully separate from Oi, including a separate governance that makes sure that Oi commercial side doesn't have access to any of the contracts that are taking place with the ISPs or any of the projections that are taking place with the ISPs making this a true neutral network operation. So, Yes, demand has been picking up. In addition to the contracts that we have already signed for FTTH, we also have a lot of contracts for backhaul, backbone capacity, data capacity. And obviously, we have a number of ISPs that rely on VITAO's infrastructure in particular for backhaul and backhaul. And this obviously will continue. We believe that the amount of traffic will only increase and the demand for VITAOS connections and backhaul backbone We'll only increase from now on. And with that, we have been seeing the commercial traction getting up to speed and actually we're very confident that this will be the case even more then what is currently happening when we have the company fully separated by the beginning of next year. As far as mobile, the mobile market has been showing a competitive dynamic, which It resembles what has been happening in the past. We believe that there is not a super aggressive competition. Even though it's a competition as has always been the case. We don't believe it has been a predatory competition. That doesn't make sense. It's just regular competition. And obviously, by our side, what we have been doing is we have been focusing on maintaining the good performance of our postpaid ads in particular to bring in new additional revenue. We have been very successful with that. There was a It appears at the end of last year in which the performance of NatAD dropped following all of the pandemic events. But at the beginning end of this last year, beginning of this year, we resumed on a very good performance on the net adds for postpaid. And now we're trying to do the same on prepaid. Prepaid has become an area of a very strong competition. So every player has launched aggressive plans. It's again not predatory competition, but it's a very aggressive competition. What we have been doing is reformulating some of our plans as well. And with that, we have been showing also very We've seen positive moves in net adds of prepaid in the last quarter in particular. So we expect that this can help us move through the end of the year and up to completion of the transaction with a very positive performance. The next question comes from Marcelo Santos with JPMorgan. Hi, thanks for the follow-up. Just wanted to ask you, would M and A make sense for Vital's expansion, like if you find some the networks already deployed. Would it make sense and would this be included in this BRL30 1,000,000,000 Realis investment. Well, most likely, Marcelo, it will make sense. But again, this This is an answer that should be provided by the new controlling shareholder when it takes hold of the company at the start of next year. But it could make There were some analysis of if this will make sense or not. But there is one important aspect that needs to be considered. VITAO will be a neutral company, will be a neutral network company. And as such, it will not carry on any activities that's touched directly via end customers. So this means that the potential M and A for infrastructure. We'll be focused on infrastructure and not necessarily on achieving on acquiring Homes Connected subscribers so to speak. And it may be the case that there is a space for additional on positions. But obviously, it's something that any company should plan for and Analyze the markets to understand if it makes sense to acquire areas or to grow organically. But again, it's something that will need to the annualized by the new shareholders and we still have some time to be looking at that in the future. The Q and A session is concluded. I would like to turn the floor back over to the company for the final remarks. Well, thank you again for being with us in our Q2 call. And just highlighting what we have previously mentioned, We believe that this is a very strong transition year for the company. We believe that now the focus is fully on execution. We believe we have achieved all milestones. And with that, we believe we are on track to the transformation that we have announced to the market a while ago and we expect it to be completed by the beginning of next year. So lots of work ahead of us, but the company is fully engaged as you the presentation. The management is fully committed and obviously the Board is also fully committed. So let's talk again about our progress in the call for next quarter. This concludes OSA's conference call. We would like to thank you for your participation and have a good