Earnings Call: Q1 2019

May 14, 2019

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to OI SA's conference call to discuss the first 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 We will then begin the Q And A session, and for instructions will be given. 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 expectations to not materialize or differ materially from those in the forward looking statements. Such statements speak only as the date they are made and that 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 Blundone, CFO. Please, Mr. Carlos, you may proceed. Good morning, everyone. Thank you for joining our conference call for the first quarter of 2019. I have here with me, Rodico Thales, our CEO, Jose Claudio Gonzalez, operation officer, Benado Vinic, commercial officer, Carlos, Vladimir Brothers, Regulatory And Jose Officer, Sylvram Lead, Administrative Officer, Marcelo, and the IR team. We will begin our earnings conference call on Slide 3, which shows the main highlights of the first quarter. We began 2019 with the completion offer the capital increase in the amount of R4 $1,000,000,000, an essential step towards maintaining growing investments present in the judicial reorganization plan. As I am going to explain later, in details, we continue to significantly accelerate the pace of implementation of our CapEx plan, which is focused on popularizing fiber and expanding 4G and 4.5G coverage. As the main drivers of the company's proposition seeking tourism business growth. In the Mobile business, the work started last year with the review of the offering portfolio and intensification of the commercial activity continues to present impressive results. It is worth noting that our market share of net adds of postpaid plus control customers, which accelerated the pace of growth which is 31% in the first quarter. This consistent growth in our customer base translated into a 9.3% year on year growth in postpaid plus control revenues. Regarding the fiber project, which is the heart of our business strategy, we already had important and exciting results. At the end of March, we reached 1,700,000 homes passed with 145,000 connected fiber customers and a take up rate of 8.7% of the homes passed. As you'll see later on, OIS take up rate is outpacing the market rates, especially when analyzing the region's hiccup. Where we achieved 11.2 percent of occupation. In addition, our OI Fiber broadband was ranked 1st in Netflix Internet it ranking for the 3rd consecutive month since joining the index and includes its difference for the 2nd place. This results reinforce the value creation and quality differential of our products in terms of both financial returns and the customer experience with returns for the OI brand. Let us move to Slide 4 with the results and good performance of our mobile segment. The expansion of our commercial activities since the beginning of last year, together with the launch of new offers more aligned to the consumption profile of the customers has been contributing to the robust and consistent performance of the postpaid and control products in the recent quarters. Our postpaid customers base grew 20% year on year, boosted by both the migration of prepaid customers and the acquisition of new clients. In this quarter, we accelerated even further this improvement capturing 30 percent of market share of net adds for the postpaid and control. This continued good performance in RGUs has been translated into acceleration of the postpaid and control customer revenue which posted 9.3% annual growth in this quarter. As a result of this evolution, for the first time ever, the postpaid revenue mix reached 51% becoming the most relevant part of our mobile revenue. In the prepaid, a market that is in the contraction stage, we have been able to grow market share in the annual comparison. Which is a positive sign for the company since we still have a lot of opportunity to work on our prepaid customer base. Gradually migrating the right customers to the postpaid and control plans, supported by postpaid revenue growth total mobile customer revenue is reverting the declining trend as we are reducing the reliance on prepaid revenue which is declining and increasing the share of postpaid revenue. By continuing with the space, we expect to present annual revenue growth in the mobile segment in the coming quarters. Let's move to Slide 5, where I will present our B2B results. We presented revenue decline in B2B, in line with the trend of this market, which is highly dependent on the macro environment and the economic activity levels in the country. However, as we look at the evolution of B2B quarterly revenue, we are beginning to see a trend toward improving the curve. This is happening because 1, in the corporate segment, we are managing to increase their share of IT revenues in the total corporate revenue as this is a high added value service we will accelerate investments even more focusing on enhancing capabilities in cyber data center, IoT security and big data as key pillars to resume corporate and B2B growth. 2, and in the wholesale, we are we have managed to succeed in the transition from regulated to unlimited revenues. As we deploy our private projects, we will also expand wholesale opportunity to become the potential national infrastructure provider leveraging our extensive and non replicable fiber network to support the increasing 4G and 5G traffic demand. Moving on to Slide 6, let's discuss the residential segment. The exposure to declining revenues such as fixed advice and copper broadband has been crucial for the pressure on our residential revenues. The fixed advice has long been suffering from the substitution for the mobile and retail migration to data service. On the corporate broadband side, in the context of increasing demand for higher speed broadband, combined with our underinvestment in the recent years, local internet service providers, ISPs, have been capturing opportunities to offer a competitive product in the market. Today approximately 4000 ISPs operate in the country, mainly informally and has been relatively successful over our copper customer base. To revert this scenario, we are investing heavily to accelerate the expansion of our fiber footprint. With the shots on the right, we showed that in the end of March, we reached 1,700,000 homes passed and we are presenting 38 cities with oil fiber. Likewise, our customer base of oil fiber reached 145 1000 customers and we are with 8.7 percent of take up on their homes passed. Moving on to Slide 7, I will give some colors on the potential of fiber 2a. As I said in the previous slides, the growth of OTT products has created enormous demand for high speed broadband. And in that sense, Oi, with 3 60,000 kilometers of fiber has a unique and more applicable advantage to mass the fiber in the country and capture these opportunities in expanding marked. Fiber in Brazil has low penetration. Only 7% of households are connected with fiber. However, Given the high demand, fiber is currently increasing its share in the house of clients at a CAGR of 53% per year with a presence in 3,600 Municipalities of which 2,300,000 with fiber backhaul or now has twice as much fiber as any other operator. Expanding this popularity to the access We cannot only offer high speed broadband in the households, but also deliver a high speed service to B2B and governments as well as capturing opportunities in the wholesale market as a major transportation infrastructure provider especially considering the evolution to 5g Technology. That reaffirms our view that the fiber projects represent and a strategic umbrella to a cross segment business approach. To accelerate the growth of our fiber, we adapt the reuse approach where we take advantage of the idle capacity in existing network layers. Building only the missing layers substantially reducing our cost of construction and increasing the speed of deployment through the reuse and with unre ticket investment capacity, we have the potential to build $32,000,000 on homes passed. We are now initially focusing on 12 point 5,000,000 HPs, where we need to build only the secondary fiber network and through our strategic review with BCG, We are analyzing alternatives to accelerate even more this deployment. Moving to slide 8. It's on the one hand We are accelerating the expansion of our fiber footprint. On the other hand, we are doing this in the most granular way possible. Trying to maximize the return on invested capital. In this way, we migrate our strategic model of analysis by closer to a tactical model of nuclear analysis looking for neighborhood cell and sensor sector. Instead of analyzing the NPV of 10,000 clusters as we were doing before, we are now analyzing the NPV of 300 22,000 sensors sector. This way we can be much more agile, efficient, and accurate in our fiber deployment strategy. This strategy has generated encouraging results in the 1st cities we implemented where even with a relatively recent deployment, aging over 3 months and fiber coverage in more than 10% of the households, we had already been able to revert or at least smooth the downward trend of broadband customer base. On Slide 9, we will now cease some important indicators of fiber with very positive results. We're showing the first graph the speed of expansion of our house passed growing approximately four times in a year and with more intensity since 4Q results, when we actually started the implementation through the reviews approach. In the second chart, we present the take up on the total base of homes passed, which reached 80.7% in March, and we have good expectation to accelerate penetration even further in the upcoming quarters. This expectation is supported by the 3rd chart where we present a take up only over homes passed via reuse approach through the reuse approach We are more efficient not only in the construction of HPs, but also in selling fiber since our sales team goes to the field together with the operations technicians who are building the HPs. In this view, we already have a take up of 11.2% in 7 months, representing a monthly average of 1.4%. Higher than the market benchmark, which is around 1% per month. Turning to the shots at the bottom of this slide, we show the financial advantage that the reuse approach provides. While in a traditional approach, the CapEx by HPs is approximately 500 Through the reuse, our estimate is around 30% lower. That is approximately 2.60 highs But as we are initiating fiber deployment in regions where we need to build only one network layer, this CapEx has been even lower than expected by approximately 20%. As expected, our gross adds has been growing solidly and consistently and our churn has remained at very low levels. Finally, for the 3rd consecutive month since joining the index Oil fiber is ranked 1st in Netflix ISP's in books and increasing the gap to the 2nd place. This demonstrates the quality differential of our products in front of the others and puts us in the position to offer a better broadband experience to our customers. Moving on to Slide 10. We continue to invest heavily focused on the acceleration of the rollout of fiber. Our CapEx had 53% of annual growth, representing 33.8 percent of our net revenues in 1st Q 2019. The expectation is to end 2019 with 7,000,000,000 in CapEx. This amount of CapEx combined with our capacity and speed of deployment are the factors that will contribute for the acceleration In 2018, our average monthly home space deployment speed was 54,000. When we ended March 2018, with 174,000 HPs deployed 1 month with fewer business days due to the carnival in April We already made more than 200,000 HPs and if we did not have CapEx restriction, we could expand the deployment speed to 500,000 HPS per month. Let us move now to slide 11 to discuss costs and routine EBITDA. In terms of costs, we achieved a nominal annual cost reduction of 5.1%, affecting practically all line of costs. Our routine EBITDA remains relatively in line with the previous quarter, but with an annual decline, mainly driven by the revenue decline, especially in the residential segment. The worsening of the revenue trend reinforce the urgency to accelerate our fiber project, which we believe is the best solution to reverse the scenario. We continue to work and identify opportunities for cost reduction, working mainly in the digitalization fronts and in the simplification of our business process where there are great opportunities for a structured reduction of expenses. Since 2017, we have been enhancing our digitalization service, making recurring deliveries and accelerating the transformational process for an entirely digital company. Moving to Slide 12, where I'll present the company's cash and debt position. We ended March with R6.3 billion dollars in cash position, highlighting: 1, the acceleration of CapEx It is natural to expect a negative cash generation since we are investing more. 2, the capped increase of $3,900,000,000 and 3, the payments of creditors of the RJ with approximately $700,000,000 of bond coupon payment and $450,000,000 of payment for the suppliers. Our gross debt at fair value remained stable at R16.4 billion dollars compared to the fourth quarter of 2018 due to the payment of interest of the bond. As a result, we had a net debt at the end of March of R10.1 billion dollars. Now moving to Slide 13. In the previous quarter, we had talked about the role of 3 consultants, which are working together with the company to support the execution of the strategic plan. Oliver Wyman Involved in the management of fiber deployment at a level of extremely high granularity to capture higher returns. BCG reviewing OE's strategic plan, looking at the company in the long term and drawing up the execution plans to ensure the achievement of our goals and Bank of America working on the sale of non core assets and M and A opportunities, guaranteeing the necessary fund for the implementation of that strategic plan. We are in the end of the process of the strategic review and we expect to disclose the market the results of this revisited model until the mid of June. We will keep the market in front about the next steps. I would like to end today's presentation by making a summary of what we have discussed. In the mobile segment, we recorded market share gains despite the shrinking market, creating a great opportunity for us to work with this base in order to enable a future migration to the postpaid segment. In the postpaid plus control segment, we have been recording excellent results with growth in both customer base and revenues, which has been helping reverse the trend of a total mobile revenues. In B2B, we saw an important improvement on revenue trends, in line with growth in IT revenues in the corporate segment and reduced it defendants on regulated revenues in the wholesale segment. These are signs that the segment is slowly beginning to improve. In residential, we showed that fierce competition in the market from regional broadband providers put impression on our revenues and reinforcing that the fiber expansion strategy as the main alternative to revert this scenario. As a result, we are focusing our efforts and resource to accelerate our fiber expansion plan. We have the capacity with the existing funds to build approximately 250,000 HPs per month and given our reach in popularity access fiber will not only be the driver of growth in the residential segment, but also a very important driver of value creation for beach to be for the provision of high speed service for companies and the government or by being the main provider of infrastructure service with the arrival of the 5G. We are accelerating the project implementation as much as we can, but it is natural for the fiber to take some time to begin producing significant impacts on our financial results. At the same time, we are working to accelerate the company's and deep restructuring of the cost structure. We are thus trying to mitigate the impacts of a declining revenues in the short term as we restructure our business models. Finally, I would like to thank everyone all our shareholders employees, customers, suppliers, and other stakeholders for their commitment and education throughout this process of construction of a new way in first quarter of 2019. Thank you. And those questions sent via webcast will be prioritized. Session. So let's start with the question from our webcast platform. The question is actually there are two questions. That are connected to the revenues. What are the main reasons for this quarter, revenue decline? And the other one is Given the investment the company has been doing, when can we expect to see the reversal of a decline trend to revenue growth? So let's say NAND this answer, so starting with the mobility, as we reported this quarter, the mobility business has delivering important results recently. So we are starting to expect short term growth in the mobility revenues. Since we are now with more than 50% of our revenues, we have a postpaid and we are being very successful in the migration from prepaid to postpaid and with the repositioning of our offerings. So on B2B, B2B has been pressured by 2 main elements. First of all, it's the exposure of our B2B revenues to, declining revenues such as fixed advice and data. And the other one is the negative macroeconomic scenario that is impacting the customers. So to compensate that, we are accelerating and being successful in the growing of our IT revenues which are much more value added. And in another segment on the B2B accelerating the the migration from regulated revenues to unregulated revenues on our wholesale. So, on residential, Residential business has been very impacted by the small local providers' competition. They are taking a division as we said of our lack of investments on the recent years, but we are now accelerating the fiber investments as we demonstrated on our presentation. We are very positive on the perspective to achieving growth again on the revenues of the segment. Of course, it will take some time and we expect on the 2019 to report a decline on a consolidated based on the residential segment But in the next year and so on and the stabilization returning to growth. Another another question we have here is regarding the OpEx, after a long time of cutting costs and there is still significant cost cutting opportunities in the company. And the other for that is that, yes, there are opportunities. We are always focused on optimization of our P and L We continue to accelerate the generalization of our process and business models. And we have important opportunities on the simplification of our cost structure and the business process as together with the improvement in quality and operational efficiency That's an important piece of our we visited an equity story that we will communicate to the market in June. Good morning, and thanks for taking my question. My first one is regarding the mobility segment, and I share your comments on the top line trends you expect. And, following the encouraging postpaid net adds figures, I just want to clarify, when you mentioned that we should see top line growth in the near term, if, we can expect the postpaid revenues to be enough to offset the declines in the interconnection revenue as well. And to what extent can we expect this? And with the growing postpaid subscriber mix, what if we can expect any pressure in terms of bad debt over the coming quarters due to this this change in your portfolio of clients? That will be my first question. Regarding the compensation of the, postpaid revenues, and the Mobility business, regarding the impact on the interconnection. Today, the interconnection rates are so low that the impact on the P and L are not so material anymore. So we expect, yes, by the end of this year, we have a growth on a consolidated basis, specifically on the mobile business. Sorry, what was the on your question? What should be the impact of your growth rate subscribers? Yes. Oh yeah. Well, at this point, we have no indication that we will have some issues with the postpaid. The recent growth that we had had a good performance in terms of payment, and control and postpaid plans. We track this in our weekly results, discussions in the company. And at this point, we have nothing that concerns the company regarding the bad debts. Okay, thanks. And my second question is regarding Unit patients regarding the proceeds from the judicial decision in the case. I mean, is there any timeline in which we could cash coming to the balance sheet? And what is the total value expect to recover considering both the legal decision? Potential divestiture of this asset? At this point, what I can tell about the hotel, let's week, we had the first board meeting with the new board and we have our Managing Director in place in Angola. We don't have this points, a clear view on the perspective of the expectation of the dividends. So that's something that will be much focused in the short term. And as soon as we have more clarity on the process and the timing, we will communicate the market. Okay. Thanks. Mr. Soumit's data from New Street Research would like to ask a question. Hi, Sumit from New Street Research. 2 or 3 questions, please. Firstly, just thinking about CapEx it sounds like you're keen to accelerate the deployment of FTTH where possible And I think CapEx is the main and sort of financial ability seems to be the main kind of constraint there. Can I just check what is your in terms of liquidity? You've got 1,000,000,000 rarei cash on the balance sheet at the moment, what is your kind of threshold, for liquidity, you know, how sort of what is the level you don't really want to drop below? And and just to confirm, it's only really sort of finance, which is impacting that decision or do other factors come into whether you want to accelerate Hi, Sumit. Thank you for the question. Regarding our CapEx spend and the liquidity that we need to fund these investments, We have we are fully funded for this 1st year of CapEx deployment needs with the capital raise of $4,000,000,000 in beginning of the year. We have as we have already communicated the market, our list of assets to be monetized, which we are working some with Bank of America, some with other banks. And we have, on a total basis, around 6 to 7 bps of non core assets to be monetized, and we are, have important progress on that. So we don't need the funds for the short term, and we have the adequate process to monetize these assets in the midterm. Okay. So to follow-up, the plan is in place for this year, but absent any asset sales, you would not be in a position to increase CapEx in 2020. Is that the right interpretation? In our actual plan, which been reviewed with the BCG project. We have R7 $1,000,000,000 of CapEx expected to this year and next year. And with and for this investments and with this asset portfolio, we have more than enough funds to invest in our CapEx plan. Okay, clear. Thank you. And then just a follow-up question, please. Just on fiber, obviously the, from sort of early beginnings, the pace of growth is improving nicely. Can you give us a sense as to the, to the ARPU on those customers you're adding, I think, your residential ARPU is disclosed at 77.5.ai. Are you kind of offering promotions at the moment or are those customers coming on at relatively full price? And how does that compare to the underlying ARPU? Typically, the products of fiber that we are selling right now that has a 20% to 25% ARPU increase regarding the copper products in the same area. So we expect a important increase in ARPU in the mid to long term. As I said, the fiber investments will take some time to have our total revenues. But as I said, the KPIs that we had track it after the first pilots we did in the cities that have more mature of these investments are very encouraging and and give us the sign that we are in the right direction. Mr. Mathew from Barclays would like to ask a question. Sleep. First, if you could maybe characterize a bit the competitive environment you're seeing in Brazil and in fixed mobile, we've seen a few price increases on push paid in mobile. But I think prepaid remains competitive. I was curious to see what is your view on that? And how do you expect the year to shape out? 2nd, you showed a very interesting slide on the fiber take up the cohorts analysis. Was wondering, what is a hand target you think is realistic in terms of pickup of fiber in the areas where you're rolling it? And finally, the apparel question on PLC-seventy nine. I don't know if there's any update or anything you want to share with us on that process. Thank you. Hi, Matilo. Thank you for the question. Regarding the competitive environment on the mobile, we see a more rational environment which is very positive for the whole industry. So we expect a price increase across the board in all operators. In the short term, we have some signs of the market that is been implemented. So in the short term, this year, we expect a positive impact due to this more rational a competitive environment. Regarding the our targets for take up in our fiber project, We expect that in a mature area of our deployment, we expect a take up of 30% to 35%. Regarding PLC said in terms 9 of us, Tadu, to comment his view on the status of the process. Hello, Matthew. We think on the recent news we heard about the PLC 79, we think it's going on on a positive direction. We expect to hear some more good news sooner And but it's hard to predict what's the timeline is going to be in the PLC process at the CCT and then after to go to the plenary of the Senate. Is that still your expectation that it could happen this year? Or is it too hard to say? Well, we think it's a very good chance of happening this year. Yes. Very high probability. But we cannot, assume any timeline because, there is some process to to run inside the CCT, the committee of science and technology of the Senate after at the plenary. Great. Thank you very much. I would like to turn the call over to the company for the final remarks. So I'd like to thank you very much for participating in this call. Looking forward to our communication of the new equity start, which will happen in the very short term. And we will have In this first time, we will communicate the market and the process and how we will it will be communicated. Thank you very much, and have a good day. This concludes Pro USA's conference call. We would like to thank you for your participation. Have a good