Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to Oi S.A. conference call to discuss the third quarter of 2018 results. This event is also being broadcast simultaneously on the internet via webcast, which can be accessed on the company's IR website at www.oi.com.br/ir, along 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&A session when further instructions will be given. Questions sent via webcast will be prioritized. In case you need any assistance during the conference, please request the operator's assistance by pressing star zero. We 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 statement. Such statements speak 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 development. I'll now turn the conference over to Mr. Eurico Teles, CEO. Please, Mr. Eurico, you may proceed.
Good morning, everyone. Thank you for joining our conference call for the third quarter 2018. I have here with me José Claudio Moreira Gonçalves, Chief Operating Officer, Bernardo Winik, Chief B2C Officer, Carlos Eduardo Medeiros, Chief Regulatory Officer, José Bento de Almeida, Chief Administrative Officer, Carlos Brandão, Chief Financial and Investor Relations Officer, and Marcelo Pereira and the IR team. 2018 has been a year marked by delivery.
All the stages of Oi's judicial reorganization plan approved at the end of last year have been completed within the established deadline. At the end of July, we completed the conversion of debt into shares and novated the debt. In September, we held the extraordinary shareholders meeting to elect the new members of the board of directors, all of whom are independent, in line with the highest corporate governance levels. Now we're working hard on the capital increase of BRL 4 billion.
With these new funds, Oi will implement the incremental CapEx plans for the coming years, which will allow the company to resume growth both in terms of market share and revenues, ensuring high-quality services to our customers and value creation for our shareholders.
I'd like to point out that this quarter, even before receiving the proceeds of the capital increase, Oi has already started the investment cycle set forth in the incremental CapEx plan. Our goal is to make our network more robust and to increase capillarity in order to expand the high-speed broadband, taking fiber to customers' home and increasing our 4G and 4.5G coverage, as well as preparing ourselves for 5G.
This strategy will be discussed in further detail later on by our CFO, Carlos Brandão. I would like to say that by the end of October, we had already reached our internal target for 2018 with 25 cities with FTTH. I reaffirm my commitment with responsibility for the company's financial health. We continue working towards strict cost control, operating efficiency, business strategy to boost revenue and to improve daily cash management.
As a result, routine EBITDA from Brazilian operations totaled $ 1.5 billion in the third quarter of 2018 and remained in line with the Judicial Reorganization Plan, as well as our cash and debt. I now give the floor to our CFO, Carlos Brandão, who will present the financial and operating results for the third quarter.
Thank you, Eurico. Good morning, everyone. Let us begin on slide four. We have some significant highlights in the third quarter. The first one, referring to revenue, is the sequential growth of 1.9% in mobile customer revenue. This is important trend reversal, which I will explore more in the next slides. Also important to remind that the year-on-year revenue variation is affected by the tariff readjustment we have made in July 2017 for all postpaid products, both in mobile and residential segments, which distorts the annual comparison.
The second highlight is the 8% annual reduction in costs in a period in which a cumulative 12-month inflation was 4.5%. We are firm in our commitment to keep delivering operational efficiency. The third one is the combination of the two.
We ended the third quarter with a routine EBITDA of BRL 1.454 billion, in line with the routine EBITDA for the end of the year projected in the Judicial Reorganization Plan. Finally, the fourth highlight is the CapEx, which increased substantially, both sequentially and annually. The message we want to give here is that we are accelerating our investments, anticipating the beginning of the incremental CapEx plan implementation. In that sense, we plan to reach around BRL 6 billion in CapEx by the end of 2018.
Please move on to slide five, where we will discuss our customer base. In the residential segment, the pay-TV base continued to grow above the market. Helping to offset part of the fixed line decline, which is a market trend. On the other hand, fixed broadband presented a deceleration in the declining trend.
As you will see, moreover, we are now accelerating the fiber-to-the-home rollout, which we believe will be the main driver to resume residential growth. In personal mobility, the postpaid customer base keeps showing positive trends since the second quarter, mainly driven by the new offers and increased sales activity. As a result, postpaid base grew both annually and sequentially.
The B2B remained stable, with mobile M2M growth offsetting fixed line loss. Moving to slide six. In the third quarter, the residential segment showed a slowdown revenue decline to -1.5% in the sequential comparison. The fixed-voice revenue maintains its natural tendency of reduction. This is a market trend with revenue migrating from voice to data. The curve of decline in our fixed voice revenue is in line with the market, despite the fact that we are the largest incumbent company and thus more exposed to losses.
In the third quarter, fixed-voice revenues dropped 2.6% sequentially. In broadband, we intensified our commercial activity, acting with a different approach and price policies by region. As a result, we started to see improving trends with the revenue decline decelerating to 1.7% sequentially. On the other hand, our pay-TV revenue continues to grow above the market.
In the sequential comparison, the TV revenue rose 1.8%. In the year-accumulated, the revenue of pay-TV already shows growth of 14.6% year-on-year. As I said before, we believe that the turnaround in the residential revenue will come on the back of the fiber. Moving to slide seven, I give more details on the deployment of this product. We are accelerating the deployment of fiber, as you will see later in the details of the CapEx slides.
We ended the month of September with presence in 19 cities offering FTTH and with 720,000 homes passed, of which approximately 52,000 connected. Though it is still small when compared to our just over five million broadband customers, the fiber customer base grew more than 100% over the first quarter of this year, demonstrating the potential of this product.
Moreover, we are growing fast. In October, we sold almost twice the monthly average FTTH net sales of the third quarter. Although the absolute numbers are not yet that significant, these results show the success of this deployment model guided by demand. We believe that the fiber rollout with the reuse approach is transformative and will guide the company to turn around the residential segment. We will explore more the reuse approach in the next CapEx slides. Moving on to slide eight, we will talk about the good results of the mobile segment.
This was a positive quarter. We accelerated the sequential growth in both prepaid and postpaid, presenting the best performance of the mobile market considering the sequential comparison. Our total mobile revenues from clients presented a 1.9% sequential growth. In postpaid and control, the intensification of our commercial activity allied to the marketing regionalized strategies translated into the acceleration of net adds in the last months and now are resulting in revenue growth.
Postpaid and control revenues combined increased 2.8% compared to the previous quarter. On the other hand, the prepaid market, in general, has been suffering. Even with this context, our prepaid revenue has been showing good resilience and represented a 1.2% sequential growth. We credit this to the unique advantages of our prepaid plan, which offer total freedom to get our customers to manage the use of data and minutes of their credits.
In addition, recently, we have launched a new prepaid offer with unlimited use of WhatsApp and Facebook Messenger. That new offer allows the clients to stay connected all month long, breaking the logic of the weekly model offers that we normally see in the market. The first results have been positive, and we believe this offer has the potential to help the segment's revenue.
We will now present our B2B results on slide nine. B2B revenue is comprised of the combination of three segments. The corporate, which accounts for approximately 50% of the total, the small and medium enterprise segment, which accounts for approximately 30%, and the wholesale with approximately 20%. In this quarter, B2B revenue decreased 7.6% year-on-year and 3.3% compared to the previous quarter. The company has been acting with the strategies to reverse this trend in a competitive environment that has been extremely challenging.
In corporate, we are expanding our commercial capillarity and intensifying our commercial activity, increasing the number of regionals and growing the sales team. We are also working to mitigate the impacts of falling demand for traditional service, becoming providers of digital and IT solutions. We have been successful in closing new contracts that will translate in revenues in the future.
In the SMEs, we are adopting the corporate strategy for medium enterprise and the B2C strategy for a small company, given they are similar. We are regionalizing the offers and intensifying our commercial actions in conjunction with reuse approach. For wholesale, the strategy has been to increase the share of unregulated revenues of the total, aiming to optimize the value creation with the existing infrastructure. Moving on to slide 10.
In this quarter, we reaffirmed our commitment to a rational and restructuring cost efficiency with a saving of BRL 344 million, representing an 8% decrease when compared to the same period of last year. We have reduced costs across almost all lines, and this process is based on three main pillars. One, greater efficiency and productivity on our field operations. Two, quality improvements. Three, the digital transformation of our business. These actions resulted in several operational improvements, some of them demonstrated in the graphs on the right of this slide.
These improvements have been driving our cost savings, especially in the lines of third-party service, network maintenance service, and provision for contingencies. This performance in cost efficiency has also sustained our level of EBITDA, which ended up the quarter at BRL 1.45 billion.
The EBITDA accumulated until September accounted to BRL 4.6 billion, keeping us on track to end up 2018 in line with the BRL 6.1 billion projected in the Judicial Reorganization plan. Let us move now to slide 11 to discuss in details our CapEx plan. As a result of the discussions on Oi's recovery plan, the company prepared an investment plan for the coming years, on which the objective is to promote the turnaround in the company's revenues, increasing competitiveness, and generating shareholder value.
The plan is based on three basic assumptions. One, to protect the existing customer base. Two, to serve the customer with products of differentiated quality, improving their experience. Three, to capture growth opportunities in the market.
The focus of this incremental CapEx is in the access to improve the offer of high-speed broadband with fiber in the fixed business and with 4G and 4.5G coverage on the mobile by refining the 1.8 giga frequency and gradually, the 2.1 giga frequency also.
For fixed business, we divide the country in more than 9,000 clusters and generated a business plan for each one of these clusters, observing premises such as competition, existing infrastructure, and demand.
We segregated the clusters that generated positive NPV, and we prioritized the ones with the highest NPV to IRR ratio, which measures the best return on invested capital. As a result, we chose 4,000 clusters to invest in fiber and deliver FTTH and FTTC, which we expect to generate a positive NPV of BRL 9.1 billion. The same prioritization model was developed for mobile.
Instead of clusters, we analyzed by city where Oi is present with mobile coverage. We prioritized the investment in 1,100 cities where we will invest in mobile access by refining the 1.8 giga and the 2.1 giga frequency for 4.5G. The expectation is that these mobile projects will generate a positive NPV of BRL 6.6 billion for Oi.
Moving to slide 12, we present how we will implement the CapEx plan. To execute this strategy, we are working on five big pillars: core, mobile access, fixed access, contracts with suppliers, and lead time. The main objective of the CapEx plan for the next years is to invest in fixed and mobile access. This investment is only possible because in recent years, we have directed our investments to strengthen the robustness of our core and transport network.
Today, our network is one year ahead of the expected data traffic. The goal is to increase this capacity to be three years ahead, strengthening even more this competitive advantage. In the mobile access, the investment will take place via modernization of our sites with electronics of the 4.5G and already preparing for the 5G.
Additionally, the fiber network deployment will also help the mobile segment, and it will ensure that flow of heavy mobile data traffic from these technologies, especially 5G in the future. In the fixed access, this unique and non-replicable network of more than 350,000 kilometers of fiber will enable us, through the reuse approach, to expand the number of homes passed with FTTH at a much faster pace with a deployment cost averaging 30% lower than the traditional approach.
In addition, with this approach, we are able to capture better growth opportunities, guiding the deployment by the commercial demand. We will detail more this reuse strategy in the next slide. As a fourth pillar, we are negotiating new contracts with the strategic suppliers, which will support the company on the deployment of this CapEx plan.
Finally, in parallel, we are improving internally our planning, control, and production process to reduce the lead time of execution in order to improve the time to market.
As you can see in slide 13, with the implementation of the planning and control of production model, we have been reducing the lead time of execution, increasing significantly our deployment capacity, and improving the efficiency and cost control of the CapEx plan execution.
Now in November, we already have capacity to deliver more than 150,000 homes passed with FTTH monthly using the network reuse approach. In addition, by the beginning of next year, we expect to be able to activate more than 500 new mobile sites with 4.5G functionalities per month.
Moving to slide 14, in the network reuse approach, we take advantage of our existing infrastructure and install only the access electronics and last mile of fiber that will pass in the customer's home. This step will be taken guided by demand, thus minimizing the need for a high number of homes passed. This is only possible because in many cities, we already have the major part of the network already deployed, from the transport network to the metropolitan rings of fiber.
The capillarity of these metropolitan rings inside the municipalities allow us to take the fiber to the house with much more agility and at much lower cost. This is only possible because in many cities, we already have the major part of the network already deployed, from the transport network to the metropolitan rings of fiber.
The capillarity of these metropolitan rings inside the municipalities allow us to take the fiber to the house with much more agility and at much lower cost. In slide 15, we show that supported by the strategies we have just discussed, we are accelerating the investment and anticipating this new cycle of CapEx.
We ended the third quarter with a CapEx of BRL 1.5 billion, a growth of 12% annually and 10% sequentially. CapEx accumulated in the nine months of 2018 is BRL 4 billion. We expect to close this year with around BRL 6 billion. We also ended September in 19 cities with FTTH, with 700,000 homes passed. In October, we reached 25 cities, anticipating the goal for the year-end.
As stated in the previous slide, we expect to deliver more than 1 million HPs by the end of this year. In mobile, we have already done the refining of the 1.8 giga frequency in almost 800 sites located in 23 cities, enabling the company to offer 4.5G. We expect to increase this number to more than 1,000 sites by the end of 2018.
Let's go now to slide 16, where we will present the company cash debt and new shareholding structure. Cash position of September was BRL 5.2 billion, almost flat when compared to June. In the third quarter, EBITDA was fully offset by CapEx, mainly due to the early execution of investments. On the other hand, working capital was positive in BRL 380 million since the payment terms for CapEx is usually longer.
We also incurred in BRL 234 million in taxes and costs related to debt restructuring, and paid BRL 70 million to labor creditors as part of their payment schedule established in the RJ plan. The graph in the bottom shows Oi's gross debt, which increased BRL 960 million from June figures, mainly due to interest accrual, amortization of fair value adjustment, and exchange rate variation.
Approximately 50% of the company's fair value debt is denominated in foreign currency, mostly in US dollars, with maturities essentially concentrated in the long term. The company is actively monitoring the market in order to seize windows of opportunities to reduce FX exposure, focusing on minimizing potential impacts on cash flow. I'll give the floor back to Eurico for his final remarks.
Thank you, Brandão. I would like to conclude the call by pointing out that we are moving towards the last stage of the judicial reorganization plan, which is the capital increase. This is a very important step since it will fund the company's growth plan.
For more information on the capital increase process, including its terms and conditions, please access the prospectus that Oi recently filed with CVM. From a business standpoint, we're still facing challenges, we are committed to overcoming them. We believe that a successful implementation of our CapEx plan will boost our competitive advantage, which is rather our network robustness and capillarity, will thus put Oi back on track for sustainable growth. We are almost there, not quite yet.
We continue working so that after the capital increase, we can finally begin a new phase with the company, 100% focused on the business evolution. Finally, I would like to thank everyone, all of our shareholders, employees, customers, suppliers, and other stakeholders for their commitment and dedication throughout this process of building a new Oi. We will now begin the question and answer session. Thank you.
Excuse me, ladies and gentlemen. We will now begin the Q&A session for investors and analysts. Remember that questions should be asked in English, and those questions sent by webcast will be prioritized.
If you would like to ask a question by the telephone, please press star one. If at any point your question has been answered, you may remove your question from the queue by pressing star two. Our first question comes from Victor Tomita with Itaú.
Hi, good afternoon, all. We have two questions on our side. First, if you could elaborate on which way you believe Oi could benefit from a general economic recovery in Brazil, and whether you see any initial signs of improvement in prepaid recharges, which tend to be very sensitive to the economy and to disposable income.
Another question is, if you see any potential benefits for Oi of the new spectrum cap regulations that Anatel has approved, and if that, along with the potential approval of PLC 79, could help in some way, for example, in allowing for spectrum monetization or other ways to unlock value for Oi. That's it on our side.
Hi, Victor. Thank you very much for your question. Starting with the question regarding the economic growth in Brazil. Yes, as we got the opportunity to see in these results, we are starting to show improvement on the prepaid, including better than the peers. I think that's an initial sign of recovery in Brazil, because the prepaid market is very sensitive for economic growth and unemployment rates. I think, yes, we are showing some improvement, and that starts to show impacts on our results.
Also, it's clear that there's a repressed demand for other products in Brazil. We are very positive on the potential growth of our FTTH service as we are improving our capillarity. These two factors combined, certainly the economy growth and the potential repressed demand, will probably, in the short term, bring positive impacts on our subscriber base, especially in FTTH service.
The second question regarding the spectrum cap regulations and the PLC. I think that's important move for the industry. We are now approaching closer to benchmarks of a spectrum treatment in the telecom service. It's important to have a secondary market of spectrum. It opens windows for possible consolidation in Brazil. In our perspective, it's very positive.
The PLC, as we have discussed sometimes, brings lots of positive impacts from the industry. First of all, is to reduce the uncertainty of the long term, because in 2025, we expect to have the end of the concession. That will bring clarity what happens in the long term in the industry and in the company.
Thank you all. Very clear.
Our next question comes from Maria Teresa Azevedo with UBS.
Hi, thanks for the question. My first question would be on your expectations around regulation. When you comment on the spectrum cap, do you have any visibility on the pending telecom bill approval? What would be the upside that you see both in OPEX, CapEx, and potential asset sales if that happens? If you please, as a follow-up question, could comment on what you think would be your sustainable long-term CapEx needs to really do all the upgrade in your network and to continue to deploy FTTH. Thank you.
Thank you, Maria Teresa. Starting with the regulatory question. I think as I said to Victor, the one important achievement with the approval of the law is that it removes some uncertainty for the long term. It's very important for all investors and for the companies.
In terms of direct economic impact, it's hard to say right now, because the detail of the law will be performed after the approval. It's not clear exactly the terms and the exchange and obligations and the treatment of reversible assets. It's not clear at this moment what would be a specific impact for the P&L and the cash flows. We are very positive that we will be able to be much more rational than the existing concession regulation. That would certainly be very positive.
In terms of CapEx needs, in the past years, since we had some limitations on investments, we focused on the core and the transport network. Now the main focus is to invest on our access network as we are detailing in our presentation on FTTH deployment and on mobile coverage with the 4G and 4.5G deployment that we are performing right now. In that sense, I think we are in a very positive momentum where we are increasing the CapEx, starting to deploy the CapEx plan, and we expect to show important results in the next year.
Perfect. Thank you very much.
The next question comes from Susana Salaru with Itaú BBA .
Oh, hi. Actually, I had the same question regarding regulations. Do you think with this new Congress, the Nova Lei will pass? That's all. Thank you.
Susana, I don't think we got your point here. Can you please repeat?
Yeah. I was wondering if you believe that with the new Congress, your Nova Lei telecom will pass this year? I mean, next year.
Well, for us, it's very hard to say because it will be a discussion on the Senate. We have a positive expectation on that, but we cannot say that it will be or not be approved in the short or the long- term.
Okay, thank you.
The next question comes from Harrison Bonson with T. Rowe.
Hi, guys. Thank you for the call. Forgive me if the question had been asked, but going back to the telecom reform in Brazil, and obviously one of the major issues that the company had in the past was the amount of fines that you accumulated by not complying with some of the concession rules. Is it expected that there will be additional fines, or are you going to continue to get fines up until the time when the telecom reform takes place, if it takes place? That's one question. What happens if the telecom reform does not pass and the same concession rules remain in place? How do you operate in that situation?
Regarding the fines, thank you for the question. Regarding the fines, we are, in the last years, investing a lot in the improvement of quality of the service. That addresses a significant part of the past fines that we have from Anatel, and the incremental fine that we have today is marginal. In terms of new fines, we are in a very controlled space here.
In terms of the change in the law, as I said, it's uncertain, the new terms. We are definitely positive that it will be very positive for the industry. Probably specifically regarding the fines, there will be minor impact on that, but that's not our concern since we are improving the quality and addressing the amount of fines with that.
Apart from that, Anatel developed a much more rational methodology to apply the fines. That together with our improvement, reduced significantly the new fine that we are now getting.
Great. A follow-up, can you talk about the sector consolidation? Obviously, Nextel Brazil is up for sale. There was some news that TIM had gotten a board approval to make a non-binding offer. The CEO of Telecom Italia was ousted this week. We don't know what will happen with Nextel Brazil. If you can just talk in general about your views on consolidation and what impact there may be if Nextel is acquired or not.
Regarding any consolidation move, we are not able to have any comments since we are now in a quiet period. What can I say about that? We are focused on our implementation of the CapEx plan, that's what we have to say about it.
As a reminder, if you'd like to pose a question, please press star one.
We just got here a question regarding from the webcast regarding the Fistel fees. On that aspect, what we can say is that we have legal process with the Supreme Court regarding these issues. We have BRL 3 billion in discussion. That's very significant regarding our market cap. It's not being judged at this point. In terms of expectations, since we have a peer of ours in the sector case being judged recently, we expect that our case might be judged in the short-term.
The next question comes from Thomas Bright with Fiction Novel.
Sorry, I got on late. I'm just wondering the timing and the surety of the new equity coming into the company by the end of the year, and what that amount will likely be.
Regarding the offering, we are not able to have any comments. I suggest you to take a look in the prospectus. It's on track and related in our timeline.
Thank you.
Thank you. I would like to turn the floor over to the company for the final remarks.
Thank you for being with us in our third quarter conference call. Looking forward to seeing you in the fourth quarter. Thank you.
This concludes Oi S.A.'s conference call. We would like to thank you for your participation. Have a good day.