Earnings Call: Q2 2019

Aug 15, 2019

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to OI SA's conference call to discuss the Second Quarter of 2019 results. This event is also being broadcast simultaneously on the internet via webcast. Which can be accessed on the company's IR website, www.oi.com.brri together with the respective presentation. We would like to inform that during the company's presentation, all participants will only be able to listen to the call. We will then begin the Q And A session when firms will be given. In case you need any assistance during the conference, please require the operator's help by pressing star 0. We will 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. This conference call may contain some forward looking statements that are subject to known and unknown risks and uncertainties that could cause such a expectations to not materialize or differ materially from those in the forward looking statements. Such statements only as of the date they are made and the company is under no obligation to update them in light of new information or future developments. I will now turn the conference over to Mr. Carlos London, CFO. Please, Mr. Carlos, you may proceed. Good morning, everyone. Thank you for joining our conference call for the second quarter of 2019. I have here with me all the management and IR team. Let us begin our earnings conference call on Slide 3, showing the main highlights for this quarter. As the main pillar of our strategic plan, we accelerated even more the fiber deployment and in July with 2,800,000 homes passed with FTTH. Only in July, we deployed approximately 400,000 Households with fiber. At this pace, we are on track to end 2019 with the target of 4,600,000 homes passed with fiber. Additionally, the pace of connections keeps moving above our expectations. We ended July with 291,000 home connected with FTTH, representing a 10.2% take up on our base of homes passed. In the mobile segment, we posted another quarter with strong performance. We had 33% share of postpaid net adds in this quarter, the largest share in the company's history, which came as a result of our acceleration of our commercial activity focused on simple offers and the prepaid to postpaid migration effort. Driven by the robust performance in net adds of the last quarters, We recorded 11.5 percent annual growth in postpaid revenues, reinforcing our view that personal mobility should record annual revenue growth in 2019. On the corporate segment, IT revenue grew 27% over the previous year, As we have been saying, due to its high added value, IT revenue will be the one of the main drivers to revert the B2B revenue trend. Moving on to Slide 4, let's discuss the residential segment. The annual decline is still significant, mainly due cause of the fall in copper's revenue. However, in the quarter over quarter comparison, we see a clear slowdown with 1.2% decline. It is too early to assume any assumption for this year, but it is definitely positive news and reinforce our fiber growth strategy. To revert to revenue trend, we are investing heavily to accelerate the expansion of our fiber footprint. The fiber results have been very encouraging and have been exceeding our expectations with a fast pace of growth. In July, we've reached 2,800,000 homes passed with fiber in 68 Cities. Our penetration of homes connected achieved 2019,000 clients, an equivalent of 10.2 percent take up rates. On the slide 5, I will show some other positive fiber indicators. As already shown on the previous slide, we reached 2,500,000 homes passed in the end of the second quarter and 2,800,000 in July. Our estimate is to finish 2019 with 4,600,000 homes passed and in 2021, with 16,000,000. For the fiber connected customer base, we expect to reach 15.2 percent a cap with 700,000 customers by the end of 2019, and for 2021, which 25 percent of fiber connected customers over our homes passed base. The equivalent to 4,000,000 customers of fiber. Naturally, we have a big execution challenge to reach these targets. But the granularity of our analysis has allowed us to be much more efficient, not only by prioritizing homes passed construction, but also in connecting with homes. As a result, the new clusters of homes passed deployed have been showing better connection result than older clusters. At the top right of this slide, we show that the homes passed deployed in October 2018 took 7 months to reach 8.1% take up. The same take up rate was achieved in just two months for the home staff deployed in the April 2019. These results show that we have been improving the efficiency of the capital allocation by controlling the execution in a very granular approach. Operating results have been very positive. Our growth sets grew 7% to 9% sequentially, fiber churn is so far 50% smaller than copper churn and the ARPU 38% higher. The next chart is what best reinforce our strategy of placing fiber at the center of our strategy. And why this product has the potential to become a game changer for oil. In the 60 eight cities where we already have 58 viability, our total base of residential customers considering fiber and copper already had reverted the trend recording 1.3% growth from January to June this year. While in the cities where we have not reached with fiber, our base dropped by 6.1% in the same period. Additionally, for the 5th consecutive month, Our fiber is in the 1st place in the net fixed ranking and our advantage for the 2nd place is increasing. Another indicator that we reinforce the superior quality of our product compared to the competition. Moving on to Slide 6, I will give more color on our Remote Bio segment results. As I said in the previous slide, it posted a postpaid net adds share of 33% in this quarter, the highest in the company history. The combination of the acceleration of our commercial activity as simple and more straightforward portfolio offerings and our effort to migrate prepaid customers to postpaid offers where the main driver is responsible for this strong result. As a consequence of this consistent performance in the postpaid segment, we are seeing 1, a solid and a steady growth of our postpaid customer base 2, the consolidation of the revenue growth trend of this product, which reached 11.5 percent in the annual comparison. And 3, the improvement of the revenue mix which since last quarter has a higher rate of postpaid and control compared to prepaid. In the prepaid segment, the positive news is that even in a shrinking market, we have managed to grow market share, which means we still have a lot of opportunity to work with our prepaid customer base for postpaid migration, especially in the Northern And Northeast regions of the country, where we have high market share and where the migration process is not as advanced as in the rest of the country. As a result, our mobile revenue is relatively stable in year over year. But with an upper wire trend, reinforcing our view that by the end of this year, we will see an annual revenue growth. Let's talk about B2B results on Slide 7. As we show in the chart, following the positive trend of the last quarter, The sequential evolution of B2B total revenue presented stabilization this quarter. When we look at the annual comparison, the evaluation will still decline, due to the great exposure to the traditional revenues in the segment such as data and fixed voice, but the trend is clearly improving consistently. Our efforts are to change the composition of this mix, increasing the share of higher value added revenues and reducing the exposure to revenues with China trend. The results have been encouraging. Our IT revenue has grown 27% year over year, and already represents 12% of the corporate total's revenue. Since this is a service with high potential for value generation, IT will be one of the main drivers for growth in this segment and one of the factors responsible for the downward trend improvement in B2B. Another important segment is wholesale. Which through fiber expansion and exploration of our unique infrastructure has enormous potential to become the main national transport network provider and the infrastructure and labor for 5G in Brazil. Moving to Slide 8. The OpEx and EBITDA slide reflects a summary of what we have presented so far. We are accelerating our commercial activity, which naturally puts pressure over sales and marketing expense. These are good expense as they have been supporting the deceleration of the revenue decline in the period, providing a stabilization of the consolidated revenue in sequential comparison and supporting fiber's accelerated growth. However, even with this commercial acceleration, the company managed to reduce costs, The results provided by digital transformation and operational efficiency played a key role in this process. As a result, the company's EBITDA of BRL 1,200,000,000 in this quarter is in line with the guidance for 2019. On that 9, we talk about digitalization as another important tool in waste transformation process, focused on cost efficiency and customer experience. While digital transformation process is gradual and had its 1st initiative in 2016 with isolated projects in specific areas, In 2017, with the creation of the company's digital era, the 1st deliveries of apps and functions such as NIAA, virtual technician began to produce significant results in terms of better experience to our customers and cost reductions for the company. In 2018, we expanded the digital transformation to all areas of the company, integrating and enhancing existing functionalities and developing new ones such as Joyce, our recently launched assistant of artificial intelligence and the machine learning for digital service changes. From 2020 hours, we will start a fully digital enterprise, both in house with cross functional teams process simplification, agile and flexible IT systems as out of the company, with simple product producing a better experience for our customers. With these actions, we expect to expand the results shown in the table on the right of the slides and capture efficiency gains by providing the best experience for our customer and drastically reducing our operating costs. Moving on to Slide 10. We accelerated investment in the 2nd quarter, growing to 80% sequentially and 50% year over year. This acceleration enabled us to reach the 2,800,000 homes passed mark in July. In order to reach the 4,600,000 homes passed plans by the end of the year, we'll need to build, in average, 350,000 HPs per month from August to December. This is the pace that we have been practicing since June, which means that we are on track to deliver the target. We are evaluating the possibility of accelerating the more investments reaching at the end of this year, a CapEx between $7,000,000,000 $7,500,000,000. Moving on to Slide 11, let's discuss the cash and debt balance. The company consumed $1,900,000,000 cash in this quarter, of which $700,000,000 were from timely payments of Airtel fees and the remaining was mostly from the operational and the faster pace of investments. On the debt side, the valuation was BRL495 1,000,000, with an exchange variation having a positive effect in a certain part of the impact of interest and fair value amortization. Naturally, the cash position and the cash consumption will create an additional executive challenge for the CapEx plan. This is the telecom cycle. In the first moment, we have an acceleration of investments in the 2nd stage. There is a commissioner acceleration when we have the increase of expenses then gradually, we move to stage 3 with top line growth and EBITDA improvement. The company is looking closely at the cash and we are very confident that the execution of the sale of non core asset portfolio will generate the necessary funding to keep up with the investment schedule in order not to lose time to market. Moving on to Slide 12. In summary, 2nd quarter results is in line with the company's strategic pillars which we presented to the market 1 month ago. Fabrice, as I said, the core of our strategy, this is where the consumer of the telecom market is headed Data consumption will only be provided with excellence by operators with our robust transmission network and fiber capability. This is precisely our greatest competitive advantage, our own replicable fiber network. We have already started to accelerate our investment plan to potentialize this competitive advantage and maximize value creation. Fiber will play a key role in the company serving all leverage in a cross way. Where in residential with FTTH, offering broadband, IPTV and voice over IP or in the wholesale by positioning the company as the largest national infrastructure provider and 5G neighboring the country. And also in the corporate by providing connectivity, capitalarity to become a digital solutions integrator. The technological inversion from copper to fiber will allow us to reverse the revenue trends with substantial margin improvement given its significant lower maintenance cost and churn rates. Another important strategic pillar is Mobility, which with its excellent recent results, has helping to fund the implementation of the CapEx plan. As presented today, our postpaid revenue has been steadily increasing over the past few quarters and we still have a lot of opportunity to work our prepaid days, migrating customers to postpaid, increasing our product loyalty and ARPU. The growth challenge in mobile is due to our limited investment capacity. Thus, the expansion of our mobile coverage will be rational and selective, prioritizing areas where we have high market share to defend our postpaid base and incentivize prepaid migration through frequency refarming of 1.8 giga to 4g and 4.5g. In addition, we will leverage existing capacity to grow in areas that we have lower occupancy. With this strategy, we expect to keep improving mobile performance. Beside that, naturally, in parallel, we are exploring all the strategic options that could maximize shareholders value. The 3rd transformational pillar is cost efficiency. The migration to a fiber centric business model, underpinned by the digital transformation, will enable the company to simplify operating process improve efficiency and consequently to reduce structural cost significantly and improve customer experience. Finally, the cash pillar. In order to fund this strategy, we will divest non core assets and release cash from nonoperational actions. On the noncore, we are already working in a portfolio of assets, which contains Unitel, mobile towers, data centers, no strategic fiber in Sao Paulo And Real Estate. In parallel, we have already started to use our recently recognized Tax Cribe of PISCOFINS over IFCMS. The combination of these initiatives, together with the capital increase of BRL4 billion at the beginning of the year, have the potential to raise to R12.5 to R14.5 billion dollars of funding to execute this strategy. Which will enable the company to come back to growth with sustainability, maximizing value creation. With this summary, I am the presentation of the earnings results thanking everyone, our shareholders, employees, customers, suppliers, and the stakeholders for the support, commitment and dedication throughout this process of reconstruction of the new way. We will now begin the question Ladies and gentlemen, we will now begin the Q And A session for investors and analysts. Remember that questions should be asking English. So starting with two questions that I will answer in a block from the webcast platform. So first question is, does the company already have an estimated date for the sale of Unitel? The second question is, the company burned R2 $1,000,000,000 in cash this quarter ending June with R4.2 billion dollars in cash. What is the company's strategy in the event of a short term delay in asset sales to maintain CapEx investments? So, starting with, specifically, Unit Health, we have announced in the plan 1 month ago that we expect to to close this deal, in fourth quarter of this year. We are fully on track in this process. We are in a very advantageous stage in the negotiation. And we are very confident that we will deliver a good, information for the market, as we expected and as we guided. On the second question, I would say that it is no surprise on that since we have announced it since the beginning of the plan, that we are investing more than a bit of the company. So we expect to have this cash burn, and it's in line with our plan. We are fully on track with all the assets that you have announced in our certificate review in due in July. So we are fully, confident that we are with the, everything on track to deliver the funding for the investments. But on top of that, as we had in the plan. We have other alternatives that we are also analyzing thoroughly, such as issuing secure debts, a capital raise and vendor financing. It's all part of the judicial recovery plan and it's part of the company's agenda to analyze and to discuss. Mr. Guillermo Aguara from Redejo would like to ask a question. Good morning, and thanks for taking my questions. My first one is related to your FTTH project. We have seen the acceleration in the expansion and also a good progress in your take up rate. And we were just wondering what are your main strategies to to lead to this, this acceleration and take up? I mean, how is the competition with small providers in the cities where you have uncertain fiber? And in summary, what type of fusion can you expect from fiber over the next 12 to 24 months? Hi, good evening. Thanks for the question. I'll ask Bernardo and Gail Boer here who is leading this, the commercial activities on the fiber projects to answer to you. Hi, Guilherme, thanks for the question. The competition in the fiber segment is very intense. However, we are competing against ISPs mainly in some of the areas that we are deploying our network. So the result of this competition usually, is given our strength in the brand and given our commercial activity. Quality of the network and the speed that we're offering to the customers. We are achieving a very good take up rates when we compete against those ISVs. The competition in the major cities and especially in vertical areas, is more intense. And that's why we are prioritizing in our expansion. Suburban areas, non vertical areas, areas where typically we compete against ISVs. Okay. Thanks. Thanks for the answer. And my second question, is related to your OpEx. We have seen a deceleration in the pace of declines from your recurring OpEx And we understand that there is a target in your strategic plan to reach savings over the next good. And we were just wondering if there is any more granularity provide us in terms of where these savings will come from in terms of how much each front you have outlined can contribute to cutting your OpEx? Good, very good question. Thank you for this one. Glenn, again, in the very short term, as you can see, we are with some pressures on the commercial OpEx in order to, deliver the subs that we are now engaging to increase our cover base. But in the near term, as you have announced on the plan, we have a very ambitious cost takeout program that we specs to provide more colors in the next quarter. Mr. Daniel Federley from Credit Suisse would like to ask a question. Hi, good morning, everyone. My first question is regarding the CapEx. We saw the plan of accelerating the deployment of fiber to the home. But I think, you guys mentioned only a little on the CapEx side, the consequence on the CapEx side. So should we assume that the $70,000,000,000 has continues to be the guidance from the company? That's the first question. And the second question, we start to see this recovery on the revenue trends on a quarter over quarter term, however, I remember that the guidance from the company was to see revenues, moving, to the positive revenues growth moving up deposit territory only 2021. So any updates on these fronts? Maybe we can get more positive on revenue trends overall. Thank you. Thank you, Daniel. Regarding the CapEx, this year, we expect to reach more than 7 dealers. We have communicated previously in the beginning of the call. We are targeting around 7,500,000,000 this year, Next year, we are still, planning something like 7,000,000,000. We are discussing Charlie. But, yes, this year, we expect an increase to around MXN 7,500,000,000. And I guess Booker will help me with the question regarding the revenues. Yeah. In regards to the revenue trends, 2 different views, on the mobile side, basically, we've achieved more than half of our revenues on the mobile side on postpaid and hybrid plans. And that's helping us a lot because those two products are growing, and prepaid is declining. So on the mobile side, we can see a consistent trend, moving forward. To stabilize and even grow our revenue. On the residential side, what we see is a deceleration of the downwards trend. And that's mainly because of our fiber progression. Fiber revenues are starting to decline the speed, to reduce the speed of decline, of the residential revenues, but that is something that, will take some time And that's why we are committing to an overall growth in the residential segment only after the fiber has achieved a significant amount in our revenue stream. So right now, fiber is helping us to reduce the declining trend of residential, but we'll still see some, some bumps in this residential revenues, given that we are in the process of transitioning our revenue streams from copper to fiber. Mr. Andre Baju from JP Morgan would like to ask a question. Hi, good morning everyone. So for this year, we are seeing EBITDA going down by 20%. But going forward, you have like guidance of growing EBITDA very quickly 15% to 20%. So what gives you the confidence that you can increase EBITDA levels We have seen in the past, we're promising a lot of EBITDA growth with the difference in management, including its restructuring. Not long time ago. And we never saw this with the difference. So why this time would be different? Thank you for the question, Raju. Specifically regarding our expectations on EBITDA, there is some confidence to answer your question. The first component is a change on the business mix. So part as part of the strategic review, we are now, decelerating, business lines with, poor margins and such as DTH in exchange to business lines with high margins. Such as FTTH and wholesale. So that will be an important driver for a bit the growth, in the short term. On top of that, we have the cost takeout initiatives that I said previously that we expect to provide more colors to the market in the fourth quarter. So the first quarter, sorry. So that's in a nutshell. That's the main, which possibles for the our expectations to the growth of our business without significant growth in revenues. And then just to follow on to this point, like, I understand that fiber has a higher margins, which is great. But still, even the copper has maybe lower, but still positive contribution. So Is it, is it going to be a burden that's, when you will see that copper declining over time, that's, so that the fiber will have to grow a lot? This compensate the decline in Farber in the next 1, 2 years or so before Farber becomes exceed the prevalent technology for the way? Yes. Exactly. That's exactly what we did when we revisited our strategic plan. So we are increasing our targets for homes passed in 60%. So we are now targeting 60,000,000 homes passed by the end of 2021 with a huge acceleration and the penetration of these homes. So, that's where we are very confident to have these results and exchange for the copper declines that is a natural trend in this business. Okay. Thanks a lot, and good luck. Thank you. Bye. Mr. Marcellus from JP Morgan, we'd like to ask a question. Hi, good morning. Thanks for taking my question. My question is regarding lower expenses with Staphones. I think in the release, you mentioned that you saw a sequential decline in network maintenance costs, because of the new PG and U and lower expenses. Have we already reached the run rate for the savings or do you have further savings on payphones that we should expect in the coming quarters? Thank you for the question, Marcelo. No. Actually, in the first half of this year, we have some costs to, to decommission this public funds network. So we expect to, start to capture the gains in the second half and on a fully basis only next year. Perfect. Thank you very much. We have a question from the Portuguese Conference. Hello, Barbara? You. Actually, when we announced the plan, we didn't segment it. There was no significant Anna. And and and that's not a public information. So, unfortunately, I cannot give you more details on how we are and where we are in the negotiation process and the evaluation because it's a very sensitive information for the process. Mr. Carlos Seketa from BTG Pactco would like to ask taking my question. Good morning and thanks for taking my question. Going back to the cash burn that we saw in the quarter, can you, one of the items that pressure cash flows were working capital, right? It was a hit of BRL400 1,000,000. Can you, give us an idea of what happened in quarter and how we should look at working capital going forward, please? Thank you. Regarding our, this quarter impacts on working capital, we have some companies that affected these results one of this is the our acceleration of the CapEx in the by the end of la next last year, So now we are starting to have this impacting negatively, in a in a in a working capital specifically. And on the other hand, we have the the annual payment of the variable compensation of our workforce that takes typically in the second quarter of this year. So we expect improvement in working capital for the next quarters. Thank you. I would like to turn the floor over to the company for the final remarks. I'd like again to thank you very much for participating in the call and supporting the company. So, I expect to, have you all in the third quarter results in November when we'll communicate the market. Thank you very much. This concludes OASA's conference call. We would like to thank you for your participation.