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Portugal Telecom, SGPS SA (NYSE:PT)

Q4 2012 Earnings Call

February 28, 2013 11:00 am ET

Executives

Zeinal Bava – Chief Executive Officer

Luis Pacheco de Melo – Chief Financial Officer

Analysts

Georgios Ierodiaconou – Citi

Jonathan Dann – Barclays Capital

Luigi Minerva – HSBC Bank Plc

Ivon Leal – BBVA Global Markets Research

Mathieu Robilliard – Exane BNP Paribas

Operator

Greetings and welcome to the Portugal Telecom 2012 Full Year Results. At this time, all participant are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Zeinal Bava, CEO of Portugal Telecom. Thank you. Mr. Bava, you may now begin.

Zeinal Bava

Okay, thank you very much. Good afternoon ladies and gentlemen. Thank you for being on this call (inaudible) EBITDA stood at about €2.269 million, our margin reached 34.4% and it was underpinned by the solid margin of the Portuguese telecom businesses, which stood at 45.5%.

In 2012 fully and proportionally consolidated international assets represented 58.4%, I repeat 58.4% of our international assets contribution and 50.4% of EBITDA respectively. So as part of the diversification process of our company, we continue to see the contribution of international assets increased both in terms of revenues and also in terms of EBITDA.

Net income amounted to €230 million and this is equivalent to earnings per share of about €0.27. In 2012, our CapEx amounted to €1.317 million that’s roughly 20% of revenues. Needless to say that we are investing in Brazil but with regard to Portugal, our CapEx in Portugal was down 14.1% as we begin to reach the end of the modernization process of our infrastructure and networks.

My CFO, Luís Pacheco de Melo who is here with me now will take you through the financials later on.

Let me now just focus on the business performance of our businesses not just in Portugal but internationally as well. I will keep it to much shorter than the very long presentation that my IR put on its site this morning, but I will use that as a reference. We are a geographically diversified company, we focused mainly in Portugal and Brazil. We have investments also in Africa. We have gone above the €100 million customer target that we had, and I repeat, we are not just diversified in terms of revenues and EBITDA, but also when it comes to geography, our key focus is Portuguese-speaking countries namely Portugal and Brazil.

We continue to see solid customer growth, in Portugal very much driven by the investments we have made in TV, namely in triple-play, and of course, very strong growth in our international businesses as well. Worth highlighting that in Portugal, despite a severe macroeconomic environment, our number of customers increased 3.4% in 2012.

We pretty much did not lose many fixed lines, broadband saw substantial growth 10.8%, televisions are substantial growth 17.4%, if you think in terms of triple-play, where triple-play customers were up 22.6%, if you think about our FTTH customers our FTTH customers were up almost 50% in 2012. Mobile also posted growth in Brazil, again very happy to report particularly when it comes to residential, we saw growth of 3% in terms of customers when it comes to mobile 7%, and when it comes to business and corporate 14.3%.

Other international businesses, particularly, Africa and East Timor, where we have a very solid business, our number of customers were up about 16%. In terms of financial highlights, what we have seen is the operating revenues were down about 1.2% on a like-for-like basis they were down 0.9%. EBITDA was down 3.8% and if you look at CapEx, CapEx was also down what highlighting is that when it comes to financial performance clearly, we’re seeing growth in Brazil and we are seeing stabilizing trends on that a bit later on in my presentation. Let me start now with Portugal in more detail. We continue to believe that investment in innovation will differentiate our product offering in Portugal, and will allow us to continue to grow our market share of subs and revenues without necessarily having to compete solely based on price. We wish to be always competitive on price, but we would like our customers to see in Portugal Telecom the best value offer in our market independent of the segment that we are talking about.

In terms of business priorities, if we think about B2C, residential, and if you like, personal mobility, clearly the strategic priorities for us are convergence and the cloud. Let me start with residential. We, in the fourth quarter of this year continue to see growth. Having said that, and I saw some comments from analysts that the number of net adds came in slightly lower than the previous quarters, but that has a lot to do with the fact that we, ourselves, took the deliberate decision to become a lot less, if you like, aggressive in terms of the promotions that we did, especially taking into account, if you like, the current economic environment.

We believe that this is a time when we ought to be slightly more conservative, configuring also the costs that we have in connecting customers every time we have one, and we like to see customers pay our bills at the end of the month. Notwithstanding the fact that we have seen substantial growth in pay-TV in Portugal, we continue to believe that this is one particular area where Portugal will continue to see increased penetration. Worth mentioning that this is a market where you have three free-to-air channels, and if you want any zapping experience, you would want to subscribe to a pay-TV service.

Meo is our leading brand. When it comes to triple-play, it is the number one retail brand in top of mind when you think about triple-play, but let me tell you, when it comes to retail segment in general, it’s the second-most notorious brand in the Portuguese market. Our market share is about 39.1% now.

Having said that as you know, we are not in the business of selling TV only. We like to sell triple play. And therefore for us a lot more critical is to look at the market share of Portugal Telecom as a triple play operator as opposed to a single sort of a TV operator.

Let me just add in a couple of comments on FTTH. We invested in FTTH started in 2008. As you know most of modernization investments in Portugal Telecom are pretty much complete. When I see a lot of our peer group companies now discussing whether to invest in fiber or not, or announcing major fiber investments, I would like to bring to your attention that most of our investments are pretty much done. We have 1.6 million homes with fiber that pretty much covers the homes that represents the largest GDP per capita in Portugal and we ‘re very pleased to say that the penetration is now well above 20%.

We have, as you no doubt saw more than 300,000 customers with FTTH, 328,000 to be more exact, and we continue to see significant benefits of having invested in the future-proof network, which allows us to provide to all our customers better quality of service. As a result, if you think about quality of service, OpEx associated with delivering services to this customer, this is clearly underpinning the improvements that you’re seeing in costs in Portugal Telecom.

Furthermore, if you also worth mentioning is that FTTH is one of the key drivers of choice of Meo in Portugal Telecom for your triple offer and in the future quadruple play offer. On the back of the significant progress we have made in pay TV, you saw land lines grow, and most importantly worth mentioning is that the residential customer mix is significantly better than it used to be three, five years ago. More than 40% of all customers are now triple play. We are now, obviously now are working to up-sell to 22.4% of our customers that have double play, and we believe the potential to continue to grow that, it’s pretty significant in the future.

Notwithstanding a difficult economic environment, we posted in the fourth quarter of this year in the residential segment, 4.9% growth in service revenues. We’re very pleased with this performance and we continue to believe that’s notwithstanding the fact that we will be rationale in the way that we position ourselves by way of promotion in the future. We can continue to deliver growth in the residential segment in the next of few quarters, for sure.

Turning now to mobility, challenging macro-economic conditions are obviously leading to changes in consumer behavior. Double SIM card penetration in Portugal was very high also because the opportunity cost of you having a second SIM card was pretty low. Needless to say that in this environment, you’re seeing declining number of double SIM cards and that has a lot to do with the fact that private consumption is coming down and the confidence levels both of people and businesses in general is pretty low, albeit that it seems that it may recover in the next of few quarters.

Moreover and as some of you have already pointed out, we’re seeing commoditization of mobile voice in Portugal and pretty much everywhere in Europe. The ability in these markets for you to command a premium for superior quality of service is much more limited than for example the U.S market. Having said that we believe that going forward especially for those companies that have invested in LTE and in fiber back-hauling, we should be able to command some kind of premium in the future. But for that we need to see some improvements in the economic conditions so that people can actually afford to pay a bit more for more data services, more reliability, better speeds and so on and so forth. So the focus for us when it comes to mobility has been to reposition ourselves in the Youth segment. No doubt you will have seen in the presentation, we put out that we have significantly improved our positioning in the Youth segment and when you look at the Youth segment, in terms of net-adds market share, 1525 peers we now actually getting about 49% of those adds.

Needless to say that social media is again one of those areas that we are very strong as a company in terms of promoting our services and postioning with this very important segment for us but I think these early signs are very encouraging and most importantly our Moche brand for the Youth segment is beginning to gain significant traction.

In terms of the financial performance, you saw sequential improvement in customer revenues, obviously we are not happy with the decline in customer revenues, we’ll continue to see to what extent quadruple play will pave the way for us to reposition our mobility offer and hopefully in the future, reverse these secular trends which appear to subsist in the mobile sector not just in Portugal but in Europe.

We also would like to point out to you the percentage of customers that are on flat fees. That for us, is very important, because it ensures that these customers remain loyal and most importantly they have a lower churn as well.

Data, significant work to be done as well, accounts for about 34.2% of our revenues right now. We continue to push penetration of smartphones in the Portuguese market. We’ve also come out with a B2C cloud offer and B2C cloud offer in our view will allow us to take advantage of the mobility that we are beginning to offer in this market, not just in terms of pictures and so on but also in terms of content. I mentioned to you earlier, Meo. Meo is not only your triple play service at home, but we also have a service called Meo GO, which is 60 channels on the move available, and, again, and therefore we believe that as a result of that, plus the smartphone push we’re making we should be able to continue to grow data revenues in the future.

On one of the slides that we put out, I think slide 20, we also wanted to show to you the negative impact of regulation in terms of performance of mobile companies in Portugal. We have one of the lowest MTRs in Europe right now. Supposedly, other European companies were meant to follow this glide path as a result of the European Union pressure, but it didn’t necessarily happened material overhang when it comes to termination rates and its impact in our financial performance.

When it comes to B2C, as you no doubt we’ll have seen from the announcements we put out, starting January, 11 of January of this year the key focus for us is quadruple play. Having done extensive studies in Portugal, we believe that there is appetite for convergence offers in Portugal, quad play offers, and we also found that Meo, our brand, is the brand of choice for quadruple play.

So on slide 22, 23, you will have some additional information in that regard. Meo for 31% of the customers that we spoke to would be the operator that they would like to receive a quadruple play offer from. We launched our M4O offer, which I actually borrowed this inconvenient term from one of the analyst reports that I saw, M4O is the inconvenient convergent offer right now in our sector very successful why because it gives people what they want. They give, it gives people simplicity, it gives people quality of experience and value for money. We’ve priced it at €8 including VAT, and it includes, also two SIM cards that give you unlimited calls to all operators, and in our view the combination of a simple tariff plan, excellent quality of experience, and if you like savings is responsible very much for the success that we are beginning to see in this market, notwithstanding the fact that the offer was only launched about seven weeks ago.

The marketing campaign started on the 11th of Jan, and on slide 26, you will have seen that we have once again been able to command a significant percentage of top-of-mind recall, and some of the key attributes that, in my view will pave the way for us to continue to enhance our leadership in the future are coming through. So innovation attribute by far the highest ever in our brand and trendsetter, as well.

I will not share with you a lot of details, for obvious reasons. We’ve launched the service only six weeks ago, and also, for commercial reasons, at this stage I prefer to keep the cards very close to my chest but all I’ll say, it’s all going actually better than planned, and as far as we are concerned if other offers are launched in this market to copy what Portugal Telecom has done, if anything we’ll educate customers on the advantages of owning quadruple play, and then I’ve no doubt in my mind that they will prefer to buy our service, because it is the best service in this market.

Let me now turn over to enterprises, focus is on value added services and clearly quality of service three things very important for corporate customers reliability, speed, and, from that standpoint, we believe and coverage. So, on those three points we believe that with investments we’ve made in our network, we are unique not just whether you’re talking about FTTH, LTE, 3G, 2G, HSPA+, you get to choose.

With regard to SMEs the big change we have made, and I think that is beginning to have significant impact in terms of market share gains for us, is that we’ve simplified our offer. So, if you think about SoHo customers, we are basically using our residential customer, plus a service level agreement, and a separate, if you like portfolio of smartphones as well. So that has given significant momentum to our sales force, because it’s simplified our offer, and I hope that in the next few quarters I should be able to share with you substantial market share gains that we believe we should be able to make as a result of this positioning.

If you think about, this is on Page 29, if you think about small enterprises and corporate customers, again were comprehensive offers integrated vertically segmented, and clearly what we are trying to do here is to broaden the scope of services that we offer, so that we can make these relationships a lot more loyal. So from a customer lifetime value standpoint, clearly reduce churn, increase the revenue per subscriber, in this case, per enterprise customer, and we believe as a result of this, we should be able to generate shareholder value.

Cloud, if we’ve done significant improvements and, if you like progress in pushing our B2C cloud, Cloud PT, and we’re doing the same in the enterprise segment as well. And here we have important partnerships with leading companies in the world, Oracle, SAP, Cisco, Fujitsu, EMC, and so on and so forth. So therefore, here Portugal Telecom is not alone. We have an ecosystem of partnerships that is working alongside us to make Portugal Telecom and Portugal a better country for take up of cloud services, so that we can give, if you like our business customers more agility, higher savings, or if you like, allow them and assist them in improving their efficiency by using technology and obviously in the process, save them cost costs as well. New services and these new models that we’re deploying are clearly transforming the revenue mix, and this is not just in the enterprise segment, it's overall for Portugal Telecom. I’m very happy to report, report to you that in page slide 33 that 52% of revenues of Portugal Telecom are now non-voice revenues, I think this basically vouches in favor of the fact that we’re more resilient, we’re more predictable, and we continue to deliver on the vision and on the strategy that we laid out for you a few years ago.

You will have seen, no doubt in our press release that wholesale is a business that is under pressure and clearly, we like the cell capacity but on the other hand, if wholesale revenues come down, it’s also because our competition doesn’t seem to be doing so well. So, from that standpoint, you will have seen that the wholesale revenues and others were down about 20% and like I said, the reverse side of that coin is that we continue to do well in the other segments.

So, we continue to deliver on our strategy, and we will continue to work towards transforming our business model so that we have, if you like a business model that is sustainable then, as and when we get some tailwind, we should be able to take off and produce substantial higher substantially higher growth than we have been reporting in some of these segments. And with this of kind declines in top-line, which again, as we’ve seen in the context of the macro environment that we’re seeing, we remain very cost disciplined. We will take you through a lot of the initiatives that we are doing and you have my commitment that Portugal Telecom will again this year continue to focus in ensuring that we have one of the highest financial and cost discipline in our sector, and that we continue to surprise you by mitigating some of this, if you like, top-line pressure that we have as a result of the environment that we are in with substantial cost savings.

Let me now turn over to Brazil, Oi has already reported its results. We have included a number of slides in our presentations also to show to you that we at Portugal Telecom and one of the controlling shareholders and technological partner to Oi, we are fully committed and behind what the company’s turnaround in the fourth quarter what you saw in the results that we put out, is you saw declining loss, and you saw broadband and pay-TV growth. Pay-TV, although we are starting from a low base, we added 153,000 net adds. It is embryonic. We believe we can do a lot better in the future. Bear in mind that Brazil has 55 million households. So pay-TV penetration remains very low in that market, 23%, and broadband penetration is also very low, about 30%.

We have no doubts in our mind. That’s somewhat the structural changes that we have seen in terms of adoption of new technologies in other markets you will also see the similar trend in the Brazilian market. So good to report page slide 37, that we continued to post good pickup of broadband 127,000 in the fourth quarter. We mitigated, if you like, fixed-line net adds. And pay-TV net adds are growing although we believe, we can do a lot of that in the future.

Turning now to slide 38, this is just to basically give you some information as to where the penetration of broadband and pay-TV is, so that you can have if you like, a sense for the growth opportunity that we believe we have in-depth market and with the right investments and with the right efficiency that we can obtain from those investments, we should be able to translate these opportunities into the top line and good EBITDA performance in the future.

Slide 39, you saw improving revenue trends at Oi. Residential revenues were up. ARPU was up 6.8% and of course, this was underpinned also by a better net add performance, when it comes to mobility, we are investing in building out the 3G network to support the postpaid focus that Oi has had in the last few quarters. Albeit that the mobile sector in brazil continues to be very competitive and we believe that the fact that Oi has been able to beef up its distribution network, pretty substantially in the last 12 months, which was if you like our Achilles heel. We should just on the back of that be able to sustain a premium growth to the sector in Brazil when it comes to mobile, 3G footprint is growing that is clearly one area of investments, 72% of brazils population is now covered with 3G, albeit we believe that we will have to continue to invest in order to live up to our strategy of continuing to grow postpaid in the future.

So one area of CapEx is clearly at 3G mobility, when it comes to own stores network very happy with the network that we have so that is likely to some extent remain where it is right now simply because we believe we now have the right, if you like distribution presence in that market not just with own stores, but also which franchises, agents and also door-to-door sales which is making clearly Oi a sales machine in that market. When it comes to the postpaid you will no doubt have seen in slide 41 Oi posted significant market share gains, this is what underpinned the 14% revenue growth in the fourth quarter of 2012. when it comes to data, there’s clearly, when it comes to enterprises, significant opportunities just to grow on the back of value-added services and data, so it’s pretty much bread and butter, but the demand is that and clearly with investments that we’re doing to beef up our transmission network and our last mile, whether we’re talking about fixed or mobile it should be able to help us sustain the progress we are making in this segment in the future, when it comes to ICT projects this is one typical area where Portugal telecom and Oi will collaborate expensively, so when I was referring earlier to cloud efforts that we are making in Portugal when the enterprise segment it is on the back of those same cloud efforts that we hope that we can also start telling those services in Brazil.

Improving KPIs, revenue trends supported by investment in growth areas and infrastructure that was a story of Oi in 2012. And it is likely to be the story in Oi in 2013, Oi management they will guidance, new service revenues will grow 1.4% in 2013, EBITDA will be between 9 and $9.8, $8.8 billion those reported in 2012, that included about 200 plus of non-recurrence. So basically when you look at the $9.8 if you take the low end of that EBITDA guidance, that is clearly on the back of 3% to 5% growth of the recurrent EBITDA of 2012, CapEx will stay roughly $6 billion, and revenue generating units will continue to grow and therefore we expect to it’s $75 to $76.5 million in Oi our view into 2013, but regard to an international just, which will be flat, which will be flat 46 revenues, if you look at the proportional revenues they were up 22.8%, proportional EBITDA was plus 20% so all of these business that we have in various part of Africa and in Macau and in East Timor, as well, they’re all cash positive, they all generating cash flow and they all seem to be doing pretty again the backdrop where clearly in huge demand in those geographies.

So let me now hand it over to my CFO, Pacheco de Melo, who can give you a lot more details in the financial performance of Portugal Telecom. Thank you.

Luis Pacheco de Melo

Thank you, Zeinal. Good afternoon, ladies and gentlemen. Let me focus on the fourth quarter financial highlights. Please bear in mind that we acquired in the beginning of the second quarter of 2011 and for the fourth quarter comparison between 2012 and 2011 are like for like because they have the same consolidation pyramid.

On slide 54, on the revenue side, total revenues were down by 6.7% in the fourth quarter including 101 million impact of the depreciation of the real against the euro. And that affected basically Oi and other, and the elimination revenue line.

On a like-for-like basis, so, accounting for the depreciation of the real against the euro, consolidated revenues would have declined 1.6% on the fourth quarter. In Portugal, revenues were down 8.1% to $660 million in the quarter within Portugal then also mentioned residential continue to both very solid growth with 3.4% increase, which reflected lower equipment sales but actually reflected some acceleration on the service revenue growth to 4.9% as RGUs and ARPU continue to growth.

In the personal segment, customer revenues were down 9.1% having improved the trend from the third quarter, while revenues were down 11.7% also reflecting the impact of the MTR cuts. Enterprise also reflected some improvement throughout the quarter, reflecting growth on non-connectivity services and market share gains on this segment.

On the wholesales and other segments, revenues declined by 19.9% in the quarter, reflecting a lower access and traffic revenues due to regulative price cuts and also because other operators are building their own networks, and also the impact of the decline of the public pay phones and lower revenues from the directory business. On the Oi side, Oi’s revenue proportionally consolidated in our income statement totaled $747 million in the fourth quarter, a 4.1% decline year-on-year, which basically reflected the devaluation of the real against the euro.

Revenues, as presented by Oi on a proforma basis, totaled BRL7.4 billion, a 6.2% increase. On the proportional basis, other international assets posted a very strong 21% growth in the fourth quarter and the Oi of the international proportional and fully consolidated international assets already represents 58.4% of total revenues in the fourth quarter of 2012.

On the slide 55 on the OpEx side, in the fourth quarter, we continue to be focus on operational efficiency and on the Portuguese operation. OpEx excluding D&A, in Portugal was down 7.5%, reflecting both lower wages and salaries and salaries, and also the positive impact for the rollout of the new technologies and the impact that it has been having on customer support and so on and so forth as we have extensively gone through in our tech day and also in previous quarters announcement.

We also delivered lower direct costs due to the impact of the MTRs. Of course, at an impact on the revenues that also had a positive impact on the cost side. The decline of 14.5% of programming costs per subscriber due to the scale that we have already achieved. Commercial costs were also down 20.8% and which basically reflected lower cost of goods sold, due to lower volumes and lower average cost of the handsets and also lower commissions and lower marketing and publicity costs.

Going forward and as Zeinal also mentioned, PT will continue to implement additional structural cost initiatives, which should continue to translate into additional cost savings. So OpEx at Oi in real, and as reported by Oi, was down by 3.10% consisting of course of one-off tower sales that was included on the OpEs side on, at Oi.

Oi, OpEx at Oi was also favorable effected by the lower interconnection cost and by lower marketing expenses. On the other hand, OpEx adversely influenced by therefore to build mobile broadband, TV services, the logistics of the handset marketing and all the efforts that we’re putting on the growth side of the business. On a consolidated basis, OpEx was down 10.4% reflecting the decline in Portugal and Brazil and the federal impact also here, after real against the euro, which amounted to €63 million in the quarter.

On slide 56, on the EBITDA side, in the fourth quarter consolidated EBITDA was up 1.1% to €540 million, equivalent to 33.4% EBITDA margin. EBITDA in the quarter was negatively impacted €28 million due to the devaluation of the real, on the like-for-like basis EBITDA would have increased by 5.8%. In Portugal EBITDA declined by 8.9% or €28 million and it is despite the decline in revenues of €55 million in the quarter, the decline of revenues minus direct costs of €49 million, which then translated into a EBITDA decline of €28 million, which is a reflection of a good cost management on the domestic business as well. EBITDA, as presented by Oi, was up by 34% including the non-core item of BRL200 million that was booked by Oi above the EBITDA line.

Other EBITDA in the fourth quarter of 2012 versus the fourth quarter of 2011 was impacted by the contract’s performance and the real devaluation, as well as a small detail of the option of free trial in Cape Verde, which had a positive impact in 2011 and negative impact in 2012 and in addition to that the small pickup in the elimination on this specific quarter, which should not be a recurrent pick-up in the quarters going forward.

On the proportional basis, our other international assets posted solid 20% EBITDA growth in the quarter and a contribution to the EBITDA line of the fully consolidated and the proportional consolidated of international assets already accounts to 50.4% in 2012, which is an increase of 7.4% response in the year.

[Zero] EBITDA in the slide 57 DNA costs, decreased by 7.5%, which included lower D&A at Oi, basically a reflection of the revaluation of the real, basically due to the full amortization of the GSM network in the first half of 2011, and therefore on the second half we had effect of that.

Net income accounted for the full year $230 million in 2012, compared to $339 million in 2011, 2011 included certain one-offs, as you might recall, namely the capital gain on our sale of the UOL stake in Brazil of BRL38 million, costs in both the amount in cash that we had in our balance sheet before we invest into Oi in the first quarter of 2011 and also the effect of the tax receivable that was paid in October of 2011, which the combination of the two actually meant an interest revenue of BRL80 million in 2011, which did not happen in 2012.

In 2012, net income includes also some gains related to the compensation of prior year costs supported by PT with the universal service obligation, which were partially offset by certain non-recurring provisions and adjustments, and also again on the tower sale of Oi, as I refer to previously.

Adjusting for these effects, the decline in net income is primarily explained by lower EBITDA in Portugal, and also the higher interest costs due to increase in net debt following the acquisition of Oi and Contax, and also the benefit that we had of the tax receivable in 2011.

On Slide 58 on the CapEx side, total CapEx declined by 18%, reflecting lower CapEx in the Portuguese business. The CapEx decline at Oi reflects mainly the impact of the devaluation of the real, which amounted to BRL22 million and the CapEx in the Portuguese business decreased by almost 25% in the quarter. And we continue to see room for lower CapEx in 2013, which we believe should be below the €500 million, mark for 2013. Other CapEx was stable notwithstanding the investments in this submarine cable by MTC in the Namibia.

On slide 59, the cash flow and changes in net debt consolidated operating cash flow totaled in €875 million, a €309 million decline from the previous year, which is basically 85% explained by the working capital investment both in Portugal and in Brazil in 2012.

Excluding Brazil, operating cash flow stood at €578 million in 2012. Reflecting a €75million investment in working capital which was basically due to the CapEx decline that we saw in the Portuguese business from one year to the other, which impact the negatively the working capital. And also some reduction in the payment cycles to some of our suppliers in this tough economic environment, the €75 million working capital investment basically 50:50 in those two items that I’ve highlighted.

Consolidated free cash flows stood at a negative €255 million excluding Brazil was a positive €250 million. The increasing consolidated net debt reflect slower operating cash flow as I’ve just explained, higher financing costs mainly in Brazil and due to higher debt because of the acquisition of Oi, and also one additional quarter of Oi of the consolidation of Oi interest costs. These coupled with the payments to legal actions and the dividends paid by PT and it’s fully consolidated, subsidiaries, basically explain the change in the net debt for the year. We had a positive impact of the devaluation of the real against the euro, so the proportion of the Oi debt that reconsolidated in our balance sheet, excuse me, the devaluation had a positive impact of $232 million.

On the debt, slide 60, debt profile, net debt, consolidated net debt stood at EUR7.5 billion, which represents more or less 3.3 times EBITDA excluding Brazil, net debt stood at EUR4.56 billion at the end of the year, which this amount includes the positive tax effect, which has been reduced by EUR13 million because we have already used part of that tax effect during the year 2012.

As you know, this year announced the sale of the 28% stake in CTM. The transaction is still pending with some regulatory approvals and is expected and when, if and when it’s concluded, we stand to receive around EUR360 million from these transaction. And therefore our pro forma net debt excluding Brazil should be at around EUR4.2 billion and not the EUR4.56 billion as we’ve reported at the end of the year. In 2012, PT has issued and renewed debt in an amount of Euro 2.25 billion, including commercial paper of Euro 200 million, expansion of the credit facility of Euro 800 million, the issuance of a retail bond of Euro 400 million and the issuance of the Eurobond of Euro 750 million. Excluding the Oi and compact proportional consolidation of net debt, our net cost of debt stood at 3.6%. The gross debt the cost of the gross debt stood at 4.5%, which is a small increase from the previous year and the average maturities stood at 5.6 years. At the end of 2012, cash available and undrawn facilities totaled Euro 3 billion more or less, and as such, our maturities are fully financed until mid-2016.

Let me now hand you over to Zeinal for his final remarks.

Zeinal Bava

Okay. Thank you very much. Before we take your questions, just a few things that I would like to leave as key messages. When it comes to shareholder remuneration policy, Portugal Telecom policy is predictable. We will be paying $32.05. We have ample financial flexibility as indicated by our CFO. We are quite well funded until 2016, and moreover, you should think about our company going forward. We hope and we will work towards increasing our free cash flow on the back half of lower CapEx. In fact, this year, 2013, we would expect CapEx in Portugal Telecom to be Euro 500 million or less.

We will remain very focused on costs in the fourth in 2012. All operating costs were down. Our operating costs were down 5.5% in 2012 if you look at just at the fourth quarter, our operating cost were down 7.5%. Wages and salaries are down 5.9% commercial cost were down 20.8%, direct cost were down 5.2%. Other operating cost on the back of significant improvements we’ve already made in the past.

It is difficult to maintain the kind of momentum we have, but they were also 11.6%. So we will remain very, very much cost conscious. We are think stabilizing revenue trends and enterprises and personal mobility in Portugal.

Not happy, but clearly the macro environment is what it is and we will continue to position both our mobility offer in the personal segment and also in the enterprise segment so as to take advantage of ICT opportunities, data opportunities, and position ourselves were actually leverage any uptick that you may see in the economy going forward.

Residential remains resilient, performance is good we are very happy with the market shares that we have we are leaders in triple play and we have been increasing our leadership consistently over the last three quarters.

We launched our quad play, we surprise the market and we continue to do very well with the software and I am very hopeful that in April and May when we discuss our third quarter numbers we will be able to surprise you on the upside with the performance that we are able to show with the M4O of course, the financial impact of M4O will not be seen in our numbers at probably in the first half of this year, because we’ve had as you know start on the 11th of Jan, but I think the key performance indictors that we will be able to share with you, particularly when it comes to churn and if you like up-sell and cross-sell I am sure that will come as positive news.

With regard to Brazil turnaround is on the way of course, it’s being financed with significant investments we have to make sure that we are allocating capital properly and generating the efficiency that we require, but I would like to highlight that the relationship between Portugal Telecom (inaudible) our two partners in Brazil is as good as it can get. And we continue to collaborate very well with the management team of Oi to ensure that we can deliver on our vision of postioning Oi as leading company in Brazil when it comes to telecoms trying to do a similar change in mix, and if you like the business model that we have done in Portugal also in Oi, over time, bearing in mind that it's a market that is complex, very competitive, much larger, but clearly with significant opportunities when it comes to digital side of the business. Africa and Asia continue to do well, self-funded, growing.

So, in a nutshell, I would like to say that we had another fourth quarter of delivery of numbers ahead of consensus. And of course my team and I are available to answer any questions you may have. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Georgios Ierodiaconou from Citi. Please post your question.

Georgios Ierodiaconou – Citi

Yes, good afternoon. I have a couple of questions. The first one is on Oi, and this is a question I asked in the (inaudible) conference call, and I was wondering if you can give me an answer this time. It’s regarding the guidance for 2013, the BRL9 billion to BRL9.8 billion. My understanding is that exceptionals are included in that guidance, so I wanted to get a feel as to what part of this is organic EBITDA, and what part of the EBITDA concerns sale of non-core assets? And did I understand correctly when you ran through your presentation that that BRL9 billion is more or less minimal for the organic number and any tower sales may come on top of that? And may we also, for the revenue guidance, for 1.5% growth is slower than what you delivered in the fourth quarter. Why would the momentum, which was improving during 2012, reverse or stabilize in 2013 and not be slightly better? And my second question is around working capital. You mentioned that because of the CapEx decline working capital is affected negatively. You are guiding to CapEx decline next year. Would we expect a similar negative move on working capital? And are there any other factors we should bear in mind when we model for 2013? Thank you.

Unidentified Company Representative

Okay, thank you very much, Georgios. With regard to the Oi guidance as I said Oi report to 2012, that it had BRL200 million plus of non-recurring, so the guidance of BRL9 billion starts to the nine and that has insisted, if you like a 3% to 5% EBITDA growth, which is recurring, and of course, any additional delta will be on the back of, if you like non-recurrent event that might occur during the course of 2013. As Oi’s management indicated, also in the conference call Oi will maintain significant financial discipline in 2013. We have provided those guidance, very clear guidance, when it comes to net debt-to-EBITDA of equal or slightly less than three times and of course that will mean that we will have to maintain financial discipline and we’ll have to of course continue to make progress on the disposal of what we call non-core assets, which in some cases may result in, if you like positive impact on EBITDA. So again, in the nutshell that EBITDA with current EBITDA has implicit 3% to 5% EBITDA growth for current and the rest will be very much dependent on, if you like some of these non-core events, which might occur during 2013.

With regard to revenue guidance of 31.5%, 1.4%, I think it’s worth mentioning it’s a full-year guidance. So I think we’ve had, if you like a catch up a significant catch up growth at Oi in 2012 coming from the low base, you’ll no doubt have seen that the growth that we’ve been able to post in personal mobility has been well ahead of what our peer group companies have done in Brazil. But it is a competitive market, it’s a full-year guidance, so we quite comfortable with the guidance that we’ve provided at this stage. And as we continue to report quarterly numbers and no doubt we should be able to address that in the future.

On the working capital, let me hand it over to Luis.

Luis Pacheco de Melo

Georgios, in 2012, we invested in ex-Brazil around $75 million. Of course, part of this was a reflection of the CapEx decline. We’re forecasting some CapEx decline going forward as well as you’re very well pointed out, and therefore there should be still some impact for 2013. But I would say that if the situation in terms of payments, keeps as it is normal as it is right now. I think we should expect to see more or less $50 million capital working capital investment in 2012 and in 2013 sorry.

Operator

Thank you, our next question comes from the Jonathan Dann from Barclays

Jonathan Dann – Barclays Capital

Hi, there. So, on Oi, looking at the trends themselves, would we expect, I guess, the sort of phasing, would we expect sort of a near-term phasing and, perhaps, a sort of second-half re-acceleration, would be my first question. And then second on M4O, I'm looking at Telefonica’s Fusion this morning and clearly that’s driven I guess a strong reduction SAC for Portugal Tel, would you be expecting sort of I guess more subscribers success or combination of subscribers and lower sack.

Unidentified Company Representative

Okay thank you Jonathan, with regard to Oi, I mean we’re not going to the comment on the sort first half, second half quarter-by-quarter I think it chosen up to provide a guidance it’s actually in an environment that is very competitive. We are profitable with the guidance that we have provided. I want to made that clear also in this conference call of Portugal Telecom so, with regard to the numbers that we put out we are, we will be supporting the management team with the number of work that we are doing across number of initiatives across the board and we plus our two partners in Brazil fully behind and therefore, comment with the seasonality and we’d like to say that we are behind that guidance, with regard to M4O I think that’s a very good question actually we are presently surprised with the inbound sales that we are making, we are presently surprised with the sales we are making in own stores. We are very happy to see also the kind of sales that we are doing through our online store as well. So, yes, with the success of our ads campaign, which was able to achieve almost record level of notoriety in the Portuguese market, not just in terms of recall, but also understanding of the product that we are offering. Yes, we are seeing significant pull from customers and as you know the way we have priced this, it's slightly different to other markets.

In our case you buy a bundle, you actually buy an offer which brings together fixed-line voice broadband fibre Oi sales, 80 or 85 TV channels, plus the two SIM cards, two SIM cards with unlimited calls to all network, also SMS and 150 megabytes of data as well. So altogether, I would say that we believe that the success of M4O will not come necessarily on the back of the discount, but we hope that it will allow us to gain market share not just in terms of TV, but also in terms of mobile. So to answer your question in a very straight way, yes we believe that the blended commission will be lower simply because there is a pull effect as opposed to a push effect, a bigger pull effect than we thought that we were expecting. Having said that, in order for us to remain competitive our commissions have to be competitive vis-à-vis our competitors. So ultimately we need to see how our competitors respond to them come back to with some numbers, almost specific numbers.

Thank you.

Jonathan Dann – Barclays Capital

Thank you.

Operator

Thank you. Our next question comes from HSBC.

Luigi Minerva – HSBC Bank Plc

Yes, good afternoon. Just following up on your answer, I was wondering if you can take us through the rationale for offering two SIM cards with the quadruple play product. It’s something that makes your offer different from other operators in Europe. So I was wondering if you can take us through why you do it, any first indication of whether it’s an element of success, and so on. Thanks.

Unidentified Company Representative

We actually give four SIM cards not just two, and we believe that up to four SIM cards that we should be able to make our quadruple play offer a family offer. There’s no reason why, for example, young kids at home wouldn’t want their parents to pay their home bill, so our standard offering includes two SIM cards, but then you get an extra two SIM cards for €7.5 each. So the whole idea for us, in terms of making available up to four SIM cards is that we would like our M4O offer to be a family offer. And to provide you simplicity of tax, so basically you are not surprised with, which you bill at the end of the month, exactly what’s you are going to pay.

And also to make sure that with roughly €95 or €100 its €95 actually, with €95, a family or full will have all of this telecom, plus entertainment needs fulfilled. We believe that’s very comparative not just in the context of the Portuguese market, but also in the context in our view of any European comparisons as well. I also like to call your attention to the fact that believe that one of the key differentiating factors of our offer is also the fact that we are providing unlimited cost to all networks. So if you are am M4O customer you basically do not have to worry about on-net and off-net and I think the ability for us or the fact that we have been able to free the Portuguese customer from having to worry about whether it’s on-net or off-net is also proving to be something which works in the favor of keeping the offer simple, very convenient, but also save cost. Thank you.

Luigi Minerva – HSBC Global Research

Thanks.

Operator

Thank you, our next question comes from Ivon Leal from BBVA.

Ivon Leal – BBVA Global Markets Research

Yes. Hello. Good afternoon, everybody, a couple of questions. The first one, I don't know if you've already commented on that, but our dividends repatriated have decreased a bit to €76 million this year. So, I don't know if you could tell us what level of dividends you expect for the coming years? And the second one, I think in the past you would say that African assets are not for sale. I wonder if you could reconfirm that? And maybe the last one is, on your quadruple play offer, I don't know if you could share some numbers on how that is performing on January and February, whether that is helping migration from prepaid to postpaid in Portugal? Thanks.

Zeinal Bava

Let me take the first two questions and the second and the third question that Luis will answer the first one. And, we are quite happy with our African footprint, we believe that we have a presence in those markets where it makes sense for us to be in, most of them Portuguese-speaking we also have as you know a presence Namibia, and we manage a business in Botswana. But as I mentioned earlier in my presentation, thinking about if you like the challenges that we have from a business standpoint clearly the focus for us right now is Portugal and Brazil.

For Brazil, where we have significant optionality, if you take into account the growth opportunity that exists in that market and a great footprint that Oi has in there furthermore in Portugal, it’s a macro environment. So, we need to be very focused financially and operationally in order to ensure that we can continue to mitigate any topline pressure with cost cutting and be able to take those decisions I have off time to ensure that we continue to obligations with the shareholders but also with the market.

With regard to our quadruple play that’s a very good point actually one of the big changes here is also that we are moving prepaid customers to postpaid customers. And we’re not doing that on the back of subsidiary. So normal market behavior in Portugal is when you move from pre to post usually sign up a three-year contract, and on the back of that, you end up with a mobile phone usually smartphone that is subsidized, and in this particular case, we’re doing number portability, and we are not subsidizing handsets.

But we have made available is the ability for our future our customers to buy smartphones in installments. So I think we are in this particular case being able to migrate prepaid customers to postpaid customers with no subsidiaries.

With regard to M4O, I mean I really would like to give you some more numbers, but at this stage for commercial reasons prefer not to do so. We prefer to continue to make progress as we have been making, we are extremely happy with the way things are coming along and hence for us that doesn’t necessarily mean just half sales that we’re doing, it’s also the customer experience that we are able to provide not forget the complexity associated with selling a quadruple play and imagine if you’re not our TV customer and you’re not our mobile customer.

We need to make sure that we can collect all the papers in one go, we need to make sure that we live up to your expectation that when we agree with you a time, a day to go and install the TV service, we are there, we make it happen, we need to ensure the full coordination of the portability of the numbers, we need to provide you with hard SIM cards. So the back office aspect of it, it is very complex and we launched our service on the 11th of Jan and I’m happy to say that today we are very comfortable with the back office processes that we have in place and when you couple that, and when you couple that with the sales force that we have, we should be able to do much better in the future.

So if you ask me are we right now pushing aggressively all our sales channels the answer is no we are not, why because we needed to fine tune the back office because the customer experience ultimately is what will dictate as choice of customers, I think ultimately people will realize that the quadruple play offer the Portugal Telecom has it is not others are not able to replicate, they might be able to replicate if you like the concept, they might be able to replicate if you like the bundling but they experience I doubt that they will be able to do so in the near future or in the foreseeable future. Thank you, Luis.

Operator

Our last question is coming from…

Unidentified Company Representative

Sorry I still have to answer the dividend. On a normalized basis, we should receive at around €270 million from Oi, CTM, and the smaller African assets. As you know we still have to receive parts of the 2010 and 2011 dividends from Angola. It's, as I've explained in the previous call, it's an issue of the Central Bank of Angola authorizing the FX, and, therefore we're still pending. But if things improve slightly we should be able to receive more detail in the next years and one that we have received this year because we still have substantial amount of pending.

Ivon Leal – BBVA Global Markets Research

Okay, thank you, Luis.

Operator

Thank you. Our last question is coming from Mathieu Robilliard from BNP.

Mathieu Robilliard – Exane BNP Paribas

Good afternoon. Thank you very much. A few questions. First, on the Portuguese market, we focus a lot on quad play, but you've also been quite innovative or, at least, the first to market, with LTE. And I wanted to know if there was anything worthwhile sharing in terms of improvements of ARPU driven by the availability of LTE, if there was any way that you found that could be a differentiating factor against your competitors in the Portuguese market?

Second, coming back to the quad play, you highlighted that it's probably quite difficult for some of your competitors, at least one, to replicate your offer. Are you concerned that maybe at some point if quad play becomes such an important factor in the market the regulator would, one way or another, try to have you open some parts of your offer so that someone else can replicate it? And, finally, on Brazil, in terms of the fixed line competitive environment, about a year ago TIM made quite a bit of noise with a new offer or certainly a new project in Sao Paulo and Rio for broadband. Is that something that has, in one way or another, impacted your business? And, more generally, if you can give us a sense of how competition, both from GVT, Net, Cabo, and maybe also [Telefti] is developing for you on fixed? Thank you.

Unidentified Company Representative

Okay. Thank you, Mathieu. With regards to LTE, we’ve the coverage in place. We have, we cover more than 90% of the Portuguese population. We’re using fiber so all of the back-hauling pretty much is now done, it’s all IP and using fiber. So I think that is one of the key differentiating factors for us. But I would say that ultimately for us, the LTE, until handsets remain expensive as they are, it is, you unlikely to see significant take-out. And therefore the numbers that we’ve, frankly I don’t think they would represent much in terms of analysis of potential impact at LTE, may or may not have in terms of future usage of data and so on as a full, particularly in this environment where people are very price sensitive.

So I would say that for us, the reason why moved forward aggressively with LTE is because we believe that we should be able to give our customers in Portugal a seamless experience of voice, video data at home and outside the home. I don’t think I’ve mentioned in this call, our Meo GO service, I mean that Meo GO service is a one particular service that, again differentiates us from our competitors. You are able to actually carry your TV experience from home to the outside and of course, for those that have LTE, they know that with the kind of speed that we are providing, 50 plus megabits per second, they can enjoy superb video experience at home and on the move. So again, not the ideal market to see major impact of LTE because of the environment. Having said that, it’s a means to an end, as far as we’re concerned, and we’re delighted with investments that we have made because we’re finding that operationally, LTE is delivering on the promise of being efficient in the way that it uses, that it uses spectrum, but also in terms of OpEx.

With regard to the ability to replicate our offer others are able to replicate our offer. The issue is whether you can replicate the experience that we can give you. And there are other offers in the, or they maybe other offers in the Portuguese market in the future. And no doubt because other players will also have the mobile, other players have potential mergers that they may do in the future. So they’ll have mobile and video other than both, and have not been very successful. But so the issue and therefore, I don’t think regulation is an issue, because others can replicate without any problem, the offer.

The issue is can you replicate the experience? Can you actually provide one CRM? Can you actually provide a, if you like a single sign-on? Can you actually provide the coordination of the whole back office process, whereby you installed the fixed line at home, collect the SIM cards, do the portability, and all this thing works efficiently and to your satisfaction. So I think I’ve said this when we did our [tech day] Portugal Telecom has invested in transition network in the last mile, but we’ve also invested in IT. And I think the fact that we have been able to bring all of this together now in one offer that provides our customers with simple tariff plan, very convenient, because you deal with one customer and best value offer in the market, no doubt it will have us differentiate. So we’re not concerned about others launching similar offers in the Portuguese market. If anything, they will help us educate in the good sense the Portuguese consumers on the advantages of having quadruple play and we hope that, in the end, and they will decide that quad-play is better than triple-play and quad play from PT in the best offer in the Portuguese market.

With regards to Brazil, the landscape is always very competitive in that market. So that’s why when earlier Jonathan was asking me to comment on first quarter, second quarter, say, first half, second half, it is very difficult to provide that kind of precision on the guidance, because, as you know, it’s volatile, it’s competitive market and it’s what we are concerned. We’ll continue to see GTV and Net, particularly the two of them in the residential segment as operators that are very aggressive and very competitive.

And worth also mentioning is that they are focused in specific geographies that are of their interest. Oi, from that standpoint, is very different because we have a much broader coverage. So, when it comes Oi, bear in mind that there are certain areas where we are able to compete more effectively than in others. And when you think about the efficiency of the CapEx that we are deploying, we will need to take into account the ability to have high penetration in those areas where we have better competitive conditions than actually fighting some of these guys on those areas where we have weaker competitive conditions. So, with regards to TIM buying into fixed and so on and so forth, we respect all our competitors and we will continue to work together with Oi, ourselves in order to ensure that we can provide better quality of service to our customers in Brazil and take advantage of the digital opportunities, which are immense in that market.

Okay. Thank you very much for being in this call. Appreciate your time. I hope that we have been able to provide you some more color to the numbers that we put out this morning, and as usual, on behalf of my team here, thank you and again my IR Director, my CFO, myself, my team are available to answer any questions you may have offline. Thank you very much and see you next quarter. Bye-bye.

Operator

Thank you, this does concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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