Earnings Call: Q3 2018

Nov 14, 2018

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to OASA's 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.o.com.brir. 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 And A session when further instructions will be given. Questions from the webcast will be prioritized. 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 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 of the day today are made, and the company is under no obligation to update them in light of new information or future developments. I'll now turn the conference over to Mr. Oristepelli, CEO Please, Mr. Arico. You may proceed. Good morning, everyone. Thank you for joining our conference call for the third quarter of 2018. I am here with me today, Claudio Gonzalez, Chief Operating Officer Bernardo Winnick, Chief B2C Officer Carlos Eduardo Mendeiro's Chief Regulatory Officer, Filthy Almeida, Chief Administrative Officer Carlos Prendell, Chief Financial And Investor Relations Officer, and Marcelo Ferreira, and the IR team. 2018 has been a year marked by delivery. All the stages of our judicial organization plan approved at the end of shares and no VAT of 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. And now when working hard on the capital increase of 4,000,000,000 reals. For these new funds, Oi will implement the incremental CapEx plan 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, or it has already started the investment cycle set forth in the incremental capital plan. Our goal is to make our network more robust and to increase popularity 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 discussing further detail later on by Alice, CFO, Carlos Verdham, but 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 our commitment with the 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 EBITDA from Brazilian operations totaled BRL1.5 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 Wendell, who will present the financial and operating results for the third quarter. We have some significant highlights in the 3rd part. 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 slide. Also, important to remind that the year on year revenue valuation is affected by the tariff adjustment we've made in July 2017 for all postpaid products, both in mobile and residential segments, which distort the annual comparison. The second highlight is the 80% annual reduction in costs in the period in which a cumulative 12 months inflation was 4.5%. We are fearing our commitment to keep delivering operational efficiency, The third one is the combination of the 2. We ended the 3rd quarter with a routine EBITDA of BRL 1,454,000,000 in line with the working EBITDA for the end of the year projected in the judicial reorganization plan. Finally, the 4th highlight is the CapEx, which increases substantially both sequentially and annually. The message we want to give here is that we are accelerating our investments anticipate in the beginning of the incremental CapEx planning presentation. In that sense, we plan to reach around R6 $1,000,000,000 in CapEx by the end of 2018. Please move on to Slide 5, where we will discuss our customer base. In the residential segment, the pay TV days 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 we will see moreover, are now accelerating the funding to their home rollouts, 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 days grew both annually and sequentially. The B2B remained stable with mobile NPV growth offsetting fixed line loss. Moving to Slide 6, In the third quarter, the residential segment showed a slowdown in revenue decline to minus 1.5% in the sequential comparison the fixed device 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 In the third quarter, fixed advice revenues dropped at 2.6% sequentially. In broadband, we intensified our commercial activity acting with a different approach and price politics by region. As a result, we started to see improving trends with the regular decline decelerating to 1.7% sequentially. On the other hand, our pay TV revenue continues to grow above the mark. 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 front. Moving to Slide 7, I give more details on the deployment of the product. We are accelerating the deployment of fiber as you'll 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 tested. Of which approximately 52,000 connected, though it's too small when compared to our just over 5,000,000 broadband customers. The fiber customer base grew more than 100% over the first quarter of this year, demonstrating the potential of this product. Is our growing fast. In October, we sold almost twice the monthly average FTTH net sales of the third quarter. Although the absolute number are not yet that significant, these results show the success of this deployment model guided by demand. We believe that the fiber rollouts with the reuse approach is transformation and we will guide the company turn around the residential segment. We will explore more that we use approach in the next CapEx slide. Moving on to Slide 8, 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 than this indication of our commercial activity allied to the marketing regionalized strategies translated into the acceleration of methods 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, prepaid revenue has been showing good resilience and we presented a 1.2% sequential growth. We credit this to the unique advantages of our prepaid plan, which offer total freedom to that our customers to manage the use of data and the 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, Amos, the clients to stay connected almost longer 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 9. B2B revenue is comprised of the combination of 3 segments, The corporates with accounts of approximately 50 percent of the total, the small and medium enterprise segments, 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 strategy to reverse this trend, in a competitive environment that has been extremely challenging. Incorporates, we are expanding our commercial popularity and intensifying our commercial activity, increasing the number of regionalized and growing the sales team. We are also working to mitigate the impact of falling demand for traditional service, becoming providers of digital and IT solutions. We have been successful in closing new content that we 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 the other stimuli. We are regionalizing the offers and intensifying our commercial actions in conjunction with reuse approach. And 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 restructure. Moving on to Xikan. In this quarter, we reaffirmed our commitment to our rational and restructuring cost efficient with a saving of BRL344 1,000,000, 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 3 main pillars: 1, greater efficiency and productivity on our field operations. 2, quality improvements and 3, the digital transformation of our business. These actions resulted in several operational improvements Some of them demonstrated in the graphs on the rights of the slides. This improvement has been driving our cost savings especially in the lines of 3rd party service, network maintenance service and provision for contingencies. This performance in cost efficiency has also paid our level of EBITDA, which ended up the quarter at MXN 1,450,000,000. The EBITDA accumulated until September accounted to R4.6 billion dollars, keeping us on track to end up 2018, in line with the R6.1 billion dollars projected in the judicial reorganization plan. Let us move now to Slide 11 to discuss in details of our CapEx plan. As a result, of the discussions on OA's recovery plan. The company prepared an investment plan for the calendars 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 3 basic assumptions. 1, to protect the existing customer base 2, to serve the customer with products of differentiated quality, improving their experience and 3 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 gigahertz frequency also. For fixed business, we divide the country in more than 9000 clusters and generated a business plan for each one of disclosures of serving premises such as competition existing infrastructure and demand. Then we segregated the clusters that generated positive NPV and we prioritized the ones with the highest NPV to IPV ratio. Which measures the best return on invested capital. As a result, we chose 4000 clusters to invest in fiber and deliver FTTH and FTTC, which we expect to generate a positive NPV of BRL9.1 billion. The same per iteration model was developed for mobile, but instead of clusters, we analyze it by city where OI is present with mobile coverage. We prioritized the investment in 1.1000 Cities where we will invest in mobile access by refiling the 1.8 giga and the 2.1 giga frequency for 4.5 giga. The expectation is that these mobile projects, we generated a positive NPV of CHF 6,600,000,000 high school rate. Moving to Slide 12, we present how we will implement the CapEx plan. To execute this strategy, we are working on 5 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. However, this investment is only possible because recent years, we have directed our investments to strengthen the robustness of our core and transport network. Today, our network is 1 year ahead of the expected dollar processing. The goal is to increase this capacity to be 3 years ahead, strengthening even more this competitive advantage. In the mobile access, the investment will take place via modernization of our sites with the electronics of the 4.5 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 6 of access, there's unique and non replicable network of more than 350,000 kilometers of fiber will enable us through the reuse approach to expand the approach. In addition, with this approach, we are able to capture better growth opportunities, guiding the deployment by the commercial demand. We would detail more this reuse strategy in the next slide. As a 4th 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 the 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 control of the CapEx plan execution. Now in November, we already have capacity to deliver more than 150,000 homes passed with FTTH mostly 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, on the network reuse approach, we take advantage of our existing infrastructure and install only the access electronics and best model of fiber that will pass in the customer's home. This step will be taken guided by demand, just minimizing the need for a high number of home states. 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 ring of fiber. The popularity of these metropolitan rings inside the Munoz Perrigas allow us to take the fiber to the house with much more agility and at much lower costs. 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 capitalized of these metropolitan rings inside the municipalities, LOS to take the fiber to the house with much more agility and at much lower costs. In the Slide 15, we show that supported by the strategies we have just discussed, we are accelerating the investments and anticipating this new cycle of CapEx. We ended the 3rd quarter with a CapEx of R1.5 billion dollars, a growth of 12% annually and 10% sequentially, CapEx accumulated in the 9 months of 2018 is R4 $1,000,000,000, we expect to close this year with around BRL6 1,000,000,000. We lost an end of September in 19 cities with FTTH with 700,000 home staff. 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 1,000,000 HPs by the end of this year. Gemobile, we have already done the refining of the 1.8 giga frequency in almost eight hundred sites. Located in 23 Cities, enabling the company to offer 4.5G. We expect to increase this number to more than one thousand sites by the end of 2018. Let's go now to Slide 16 where we present the company cash debt and new shareholding structure. Cash position of September was R5.2 billion dollars, 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 R380 $1,000,000 since the payment terms for CapEx is usually longer. We also incurred in BRL234 1,000,000 in taxes and costs related to debt restructuring and paid R70 $1,000,000 to labor credits as part of the payment schedule established in the RJ plan. The graph in the bottle shows OIS gross debt which increased R916 $916,000,000 from June figures, mainly due to interest accrue 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 U. S. 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. Now I'll give the floor back to Rick for his final remarks. Thank you, Brendan. And 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 OE recently filed with SEC. From a business standpoint, we're still facing challenges, but we are committed to overcoming them. We believe that the successful implementation of our CapEx plan will boost our competitive advantage, which is rather our network robustness and capitalarity and will thus put OI back on track for sustainable growth. We are almost there, but 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 boy. We'll now begin the question and answer session. Thank you. Excuse me, ladies and gentlemen, we will now begin the Q And A session for investors and analysts Remember that questions should be asked in English and those questions sent via webcast will be prioritized. You. Session. Our first question comes from Mr. Tomita with Itau. Hi, good afternoon. We have two questions on our side. First, you could elaborate on which ways that Vivoire 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. And another question is, if you should see any potential benefits far away of the new spectrum cap regulations that Hanatel has approved And if that's along with the potential approval of TLC79 could help in some way, for example, and allowing for spectrum monetization or other ways to unlock value thoroughly. And that's it on our side. Hi, Victor. Thank you very much for your question. So starting with the the question regarding the economic growth in Brazil. Yes, we as we could to see in these results. We are showing starting to show improvement on the prepaid, including Barrett and the peers I think that's an initial sign of recovery in Brazil because the prepaid market very sensitive for economic growth and unemployment rates. So I think, yes, we are showing some improvement and that starts to show impacts on our results. We also it's clear that there's a repressed demand for fiber products in Brazil. So we are very positive on the growth on our FTTH service, as we are, improving our popularity. So these two factors combining certainly, the quality growth and the potential that we're processing in hand, we will probably, in the short term, and bring bolstering packs on our subscriber base, especially in FTTH service. And the second question regarding the tax spectrum cash regulation and the PLC. I think that's important to move for the industry. We are now approaching to be closer to benchmarks of this package for treatment in the telecom service. So it's important to have my secondary market of spectrum. It's the open windows for possible consolidation in Brazil. So in our perspective, it's very positive. And the PLC, as we have discussed it, sometimes, It 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 so that we will bring clarity what happens in the long term in the industry and the company. Our next question Hi, thanks for the question. My first question would be on your expectations around regulation. I mean, your function on the spectrum kept it, do you have any visibility on the pending telecom view approval And how and what would be the upside that you see both in OpEx, CapEx and potential asset sales if that happens? And 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 upgrades in your network and to continue to deploy FTTH? Thank you. So starting with the regulatory question. So I think that as I said to Victor, the one important achievement with the proof 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, hard to say right now because the curtailment under, the law will be performed after the approval. So it's not clear exactly the terms and the exchange and obligations and the treatment of reversible assets. So it's not clear at this moment. What will be a specific impact for the P and L and the cash flows, but we are very positive that it will be much more rational than the existing costation regulation. So that would be very, very positive. And then in terms of CapEx needs, we in the past years, we are very we since we had some limitations on investments, we focused on the core the transport network. So now the main focus is to invest in our access network as we are, detailing in our presentation on FTTH deployment and on, mobile coverage. No, I'm mobile coverage with the 4G and 4.5G, department that we are performing right now. So, 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. The next question comes from Abegail Abilardo with BDDA. Oh, hi. Actually, I just had, can I have the same question regarding Relations are specific to this new Congress? The Novalei will pass. Excuse me, 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 Nobel Lake Telecom will pass this deal and in next year? Well, for us, it's very hard to say because, it will be, discussing on the senate. We have a positive expectation on that, but we cannot say that it will be or not to be approved in the short of the long term. Okay. Thank you. The next question comes from Harrison Bonsin with Stifel. Hi, guys. Thank you for the call. Forgive me if the question had been asked. But going back to the telecom reform in Brazil, obviously, one of the major issues that the company had in the past was the amount of fines that he accumulated by not complying with some of the concession rules. Is it expected that there'll be additional fines or you're going to continue to get fines up until the time when the telecom reform takes place. If it takes place, That's one question. And 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, I think for the question. Let me define, we are in the last years, investing a lot in the improvement of quality of the service. And then, that addresses the significant part of the past funds that we have, from Anatel and, and the incremental funds that we have today, it's marginal. So in terms of new finds, we are in a very controlled, space here. And then, again, in terms of the change in the law 52111 is not a valid extension. Sorry, but in terms of the change in the law, it's, as I said, it's uncertain that the the new terms. So 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 of that, Anatel, developed a much more rational, methodology to apply to fines. So that, together with our improvement to reduce significantly, the new fund that we are now, are getting. Great. And then the follow-up, can you talk about the sector consolidation. Obviously, Nextel Brazil is up for sale. There were some news that Tim had gotten a board approval to make a non binding offer But then it's the CEO of Telecom Italy, was ousted this week. So we don't know what will happen with Nextel Brazil. But if you can just talk in general about your views on consolidation, and what impact that may be if Nextel is acquired or not? A group. We are not able to have any comments since we are now occupied period. And what can I say about that? We are focused on our implementation of the CapEx plan, and that's what we had to say about it. We just got here a question regarding from the webcast regarding the PISCO fees, on that aspect, what agreement we can say is that, we have legal process, with the Supreme Court regarding these issues. We have R3 billion dollars 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 this sector, case being just received recently. We expect that our case might be just in the short term. The next question comes from Thomas Bright with Sorry, I got on late. I'm just wondering the timing and the surety of the the equity, 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. We launched the offering yesterday, and it's still tracking related in our timeline. Yep. Thank you. I would like to turn the floor over to the company for the final remarks. Thank you very much. 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 OASA's conference call. We would like to thank you your participation.