Tele Norte Leste Partricipacoes SA Q4 2008 Earnings Call Transcript

Mar. 6.09 | About: Tele Norte (TNE)

Tele Norte Leste Partricipacoes SA (NYSE:TNE)

Q4 2008 Earnings Call Transcript

March 6, 2009 11:00 am ET

Executives

Lucia Domville – Deputy Managing Director, The Global Consulting Group

Alex Zornig – CFO and Director, IR

Analysts

Peter Lyons – Oscar Gruss

Rizwan Ali – Deutsche Bank

Henry Cobbe – Nevsky

Roger Wilkinson – Newton Investment Management

Mitchell Moniza [ph] – Deutsche Bank

Operator

Good morning, and welcome to Oi's Fourth Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to Lucia Domville. Ma’am, you may begin.

Lucia Domville

Thank you, operator. We would like to thank you for participating in today's conference call to discuss results for the fourth quarter 2008 for Oi Tele Norte Leste.

There is a slide presentation that accompanies today's conference call which has been posted on the website www.oi.com.br. If you do not have a copy of the release or the presentation, please give us a call in New York at 646-284-9416, and we will send you a copy. I would like to remind everyone that any forward-looking comments made during today's call are subject to macroeconomic conditions, market risk, and other factors, and as a result, future performance could differ materially from current expectations.

It is now my pleasure to turn the call over to Mr. Alex Zornig, the company's CFO, who is joining now from Rio along with several members of the Oi’s management team. Mr. Zornig, you may begin.

Alex Zornig

Thank you, Lucia. Good morning and good afternoon for those from Europe, and welcome to Oi’s fourth quarter 2008 conference call, the first since I became Oi’s CFO and also the first since we acquired the control of Brasil Telecom. To begin, I would like to introduce myself. I took the role of Chief Financial Officer on December 1. Before that I have worked in the financial sector for a long period of time. Prior to my role at Oi, I worked in Banco Itau, BankBoston, Brazil and Latin American, and Banco Safra was my last job.

Before we begin analyzing the results for 2008, I want to remind you that the financial statements of Oi and Brasil Telecom and from now on we are going to call Brasil Telecom as BT, as well as the slides of this conference call are available on Oi’s investor relations website, www.oi.com.br and also in BT's, not British Telecom but Brasil Telecom, website www.braziltelecom.com.br. Joining me in Rio are Tarso Rebello, the Treasurer, Mark Schroeder [ph], Controller, Alain Riviere, my colleague, Regulatory Director, and Roberto Terziani, along with the Investor Relations team.

Moving ahead, we will divide this conference call in two parts. First, I will discuss the consolidated results of Oi related to the fourth quarter and full year 2008. And second, I will talk a little bit about the future of new Oi and we will share with you our expectations for the new telecom company.

For those who are following the presentation, let’s move to slide one, which shows that at the end of 2008, the combination of the customers of the two companies sum up approximately 56 million users or revenue generating units of which 40 million came from Oi and 15 million, almost 16 million came from BT. Oi’s performance improved by 7% in the fourth quarter of 2008 and 27% for the full year, while BT rose 2% in the quarter and 12% in the full-year. At Oi, this amounts to the highest net additions ever for the company acquiring 8.7 million new customers in just one year. For both companies, since performance were including by the expansion of the wireless segment and broadband Internet access detailed in the next slide.

Slide numbers two shows that revenue generating units for the two companies together are distributed as follows. 22 million fixed lines in service of which 14 million approximately are from Oi fixed and 8 million from BT; 30 million wireless users of which 6 million at BrT and 24 million for Oi, and almost 4 million broadband users of which 50/50 for both companies.

The performance of the wireline segment in the full-year was relatively stable at both companies. At Oi, the 2% fall reflects the performance seen in the first six months of 2008. Wireline was able to show consecutive growth in the last two quarters of the year. It did register 1.2% growth in 2008 due to increased additions to the Conta Total brand and to (inaudible) the latter being BrT’s convergent plan. In 2008 the number of broadband users grew at Oi by 33%, including the 61,000 users of cable access Oi TV. This performance is the result of the strategic decision to help increase CapEx in the segment, boosting the number of served cities to 451. In December 2007, we offered broadband service in only 286 cities.

At Brasil Telecom, broadband uses totaled 1.8 million, 50% higher than in 2007. Growth was behind that of Oi due to the fact that at this company, this service was more deeply widespread and already accounts for 22% of fixed line service. At Oi, ADSL users made up 14% of fixed line service, and recently competition from other broadband operators is more intensive in region two where BT operates.

The wireless segment was the greatest highlight at both Oi and Brasil Telecom increasing to 52% and 32% in 2008 respectively. The rise in wireless users at Oi results from organic growth of 4.4 million new users in region one, the launch of operations at Sao Paulo at the end of October last year which added about 2 million customers by the end of 2008, and also as a result of the acquisition of Amazônia Celular at the end of 2008 which has 1 million customers. Considering only the organic performance in region one, growth would have reached 34% of basing the Brazilian market, which registered a growth of 25%.

On slide three, next, we can see that the prepaid wireless user base remained the main driver of growth at both companies in 2008, a result of the success of Oi Ligadores campaign and the consequence of the successful growth of the Pula Pula campaign of BT as well and the sale of naked SIM cards reducing significantly the acquisition cost for new customers and unblocking handsets. At Oi, additions in the prepaid segment represented 89% of the total maintaining its participation – sorry, at Oi, additions in the prepaid segment represented 89% of this total, maintaining its participation at 84% of customer base. At BT, the prepaid additions amount to about 91% of the total, and the prepaid base represents 83% of the wireless customers at the end of 2008. When adding, combining the two companies, prepaid customers represented 25 million or 84% of the wireless user base.

In the postpaid segment, both companies had a similar strategy in 2008, which consisted of focusing in marketing convergence products aimed at gaining customer loyalty. The Oi Conta Total plan recorded highest figures since 2005 launch with 524,000 new customers in 2008 alone, and in the year with almost 1 million customers representing almost 28% of the company's postpaid base. For another year, Oi’s consolidated leadership region one with 30% market share. In region three, that is the state of Sao Paulo, the company already had a 5% market share in December, with just a little over 2 million customers in operation.

In region two, BT ended 2008 with 14% market share, registering growth of opportunities despite the fact that the penetration of wireless services in this region is much higher than in Oi’s region. As a result, the wireless segment for the new operator of the combination of wireless customers at Oi and Brasil Telecom already accounts for approximately 20% of national market at the end of 2008.

Now let us move to economical and financial highlights. First, let me comment on Oi's performance and then I will later address the main features for Brasil Telecom. On slide four, we can see that Oi consolidated gross revenue in all of 2008 amounted to 27 billion reals, or 80% above than of 2007. Once more, the main driver for revenue growth was the wireless segment, which expanded 44% in the full-year and already accounts for almost 24% of the total consolidated revenue.

In the wireline segment, revenues were steady in 2008 and we know that the same trend seen for the past few years. Revenues for our local fixed traffic and public phones were significantly affected by the fixed to mobile substitution, mainly by wireless operators promotions offering on net calls at very attractive prices. Revenue from data services was one of the main drivers for growth, adding 580 million reals in the full-year, amounting to 18% growth. In addition, when addressing the wireline segment, we must highlight the gains in revenue from mobile originated long-distance calls, fixed to mobile, local and long-distance, network usage and advanced voice such as 0300 and 0800 service for example.

In the wireless segment, increases in revenues stemmed from four factors. One, 371 million reals came from the subsidiaries Tele Norte Celular Participacoes, which was acquired in April, known as Amazônia Celular; two, greater average customer base which affects both subscription revenues and outgoing calls revenue. Three, higher incoming traffic benefiting network usage revenues given the mobile carriers campaign, which and if you missed 2008 also included minutes to fixed phones. And last, higher revenues from data and SMS due to the increased volume of short message, 3G subscription and membership fees linked to the Oi Ligadores campaign.

On slide five next, with the paid [ph] evolution of operating expense at Oi as a result of the weak economic period. In 2008, consolidated operating expense at Oi rose by 1.6 billion reals, amounting to a 14% increase. However it is important information that this amount includes non-recurring events, totaling almost 1 billion reals, which may comprise between the two periods, this could explain why. Almost 400 million reals in non-recurring expenses in 2008 related to the purchase of BrT, non-recurring positive (inaudible) 107 reals registered in the third quarter of 2007, 200 million reals due to consolidation of Amazônia Celular and 207 million reals due to the start of wireless operations in São Paulo. If we exclude those effects, the increase in operating expense between 2007 and 2008 would have been 6%. This amount is lower than the revenue increase excluding Amazônia Celular, which was 7%. Consolidated EBITDA reached 6 billion, a little bit more than 6 billion reals, amounting to a consolidated EBITDA margin of 32%. Excluding the non-recurring items in 2008, however this amount would have been 6.4 billion reals, resulting in EBITDA margin of 34%. Therefore, it would have been higher than 2007 recovering EBITDA by 2%.

Moving on to slide six, we can see the other items of 2008 results for Oi. In 2008, net financial expenses exceed those of the previous year by about 1 billion reals, mostly due to the factor of the currency devaluation on the under hedged gross debt in foreign currency, and in addition to the higher interest rates currently in Brazil. The higher debt results are related to the (inaudible) of the year to cover CapEx expenses by the company such as third-generation service license for 3G, mobile set up in São Paulo, Oi’s preparation for the acquisition of Brasil Telecom. I will later elaborate a little bit more on the company's debt. The net earnings of Oi amounted to 1.1 billion reals below those in 2007, and were mainly affected by the non-recurring effects that I mentioned previously about.

On slide seven, now let us talk about Brasil Telecom. On slide seven, we detailed consolidated gross revenue in 2008, which grew 6.3% compared with 2007, amounting to 7 billion reals. At this company, the main growth driver was revenue from data service, which increased 35% in the year boosted by the higher ADSL customer base and the migration over to faster plans. Growth in the wireless segment reached 5% in 2008 resulting from service revenues that were 8% higher combined with a 16% fall in handset sales given the strategy of selling SIM cards without handsets. Wireless revenues benefited from higher utilization revenues due to the higher average customer base as well as additional revenues due to the expansion of 3G users.

In the wireline segment, revenues fell slightly when compared with 2007 but the items such as the lease of mean value-added services and interconnection were partially compensated by the mature scene in local servers routed calls are long distance. It is worth mentioning that Oi’s region two fixed servers had been suffering from stiff competition of wireless operators, which offers our net package at very attractive price, spilling out to fixed mobile situations, which affects local traffic both in transitional wireline segment and in public phones.

On slide 8, we present the operating expenses as well as the resulting EBITDA from 3G in 2008. Consolidated operating expense in 2008 amounted to 7.3 billion reals, a little bit higher than 2007. This includes a higher non-recurring positive effect of 176 million reals related to the agreement to end some law suits which permitted traditional control of the company by Oi. Excluding these items, expense would have increased by 3.6%, still below than the rising revenues. The main factor behind the costs was the increase in personnel which rose 40% in the year forced by in-source of the call center only in the end of November 2007. In addition, the compliance with the new call center rule set forth by a decrease law in Brazil. As a result of the above mentioned increase in revenue expense, the consolidated EBITDA at BT amounted it to 3.9 billion reals in 2008, 4% higher than in 2007. The EBITDA margin of 35% in 2008, a little bit higher than 2007.

On slide nine, we can see financial income and net earnings for Brasil Telecom. In 2008, financial expense amounted to just 154 million reals, an excellent performance, considering all the distress [ph] seen in the financial market last year. Financial income stems from the company’s low-level debt even after greater CapEx spending combined with a lower exposure to a foreign currency fluctuation. More details on the company's debt will be shown soon. Net earnings at BT amounted to 782 million reals up 16% from 2007 resulting from a large EBITDA figure and 369 million reals reduction in depreciation due to greater share of totally depreciated assets.

On slide 10, we show the debt position of both companies. At the end of 2008, Oi total consolidated debt amounted to 20.5 billion reals, having 10.7 billion reals of cash, amounting to a net debt of 9.8 billion reals, or 1.5 times the EBITDA at the end of the year. Of the company's total debt, about 20% is linked to foreign currencies. However Oi maturities falling due until 2010 are protected from any foreign exchange relations through hedge contracts and cash balance that is directly invested in dollars. The under hedged amount exposed to foreign-exchange variations amounts to less than $600 million and represents just 6% of the total debt.

During 2008, the average cost of debt was 101% of CDI for local currency and LIBOR plus 2 per annum for foreign currency, which after hedging operations represents a cost of 96% of CDI. However, due to the impact of the currency valuation on the under hedged portion of foreign debt, the average accumulated cost of total debt in the year was approximately 123% of CDI. We did not forget that the local currency devalued 32% last year.

At BT, gross debt totaled 4.8 billion reals, and the cash balance amounted to 3.4 billion reals, resulting in net debt of 1.3 billion, less than 0.5 times EBITDA. Of the total debt, only 6% is held in foreign currency. However, just 8% percent of the total debt are exposed to foreign-exchange variations. Therefore, consolidated debt of the company at the end of 2008 would have a total debt of 20.4 billion reals, a cash balance of 14.2 billion, resulting in a net debt of 11.1 billion. Approximately 21% of the debt is in foreign currency although as I mentioned 7% is really exposed to foreign exchange valuations.

If you go to highlights, however thereafter December, there have already been some important cash disbursement at Oi, 5.4 billion reals for the purchase of shareholder control (inaudible) which occurred in January 8, 1 billion reals for the dividends paid carried on February. In addition, we still expect disbursement of interest on capital rates both in Oi and BT to happen throughout 2008 in addition for the payment of about 3.3 billion reals for the tag along of the minority shareholders. The 4 million after such payment (inaudible) company will move to a higher debt level, slightly higher than two times EBITDA which is expected to reduce below two by the end of 2009 and something close to 1.5 till the end of 2011.

On slide 11, you can see the CapEx expenditure by both companies in 2008. CapEx total amounted 4.6 billion reals of which 43% was fair market for the wireline segment and 57% for the wireless segment – sorry 43% – yes, 57 for mobile segment. This amount is almost twice the average in 2007. We must mention however that this figure includes non-recovery CapEx spending related to the acquisition of 2-G and 3-G license and the compliance of the stations with portability as well as those related to start up of the wireless operations in the state of São Paulo. Therefore the (inaudible) spend in 2008 is not comparable with the previous year.

At BT, 2008 CapEx amounted to 2.6 billion reals of which 57% was in the wireline segment and 43% on the wireless segment. These amounts are 91% above of those of 2007. The high amounts invested in the wireless segment results from regulatory items that is next number portability besides investments in data segments such as expansion of data network and transmission backbone among others. In the wireless segment, the acquisition of 3G license as well as spend on the rolling out the project explain the increase.

Okay. Moving ahead to the second part of our conference call, we will talk about the future. Starting on slide 12, as you are aware, in April 2008, we announced the intention to purchase BT, and in late December 2008, Tele finally approved the acquisition. We acquired the control as explained on January 8, 2009. In January through Telemar we acquired 61% of the holdings shares in Brasil Telecom per se after paying as I mentioned 5.4 billion reals and we assumed debt of almost 1 billion reals at another company we purchased (inaudible). This stake in addition to one third of the free float of the preferred shares already acquired the market and probably recall from last year entitled us to a 44% stake in the total capital of BT Participações.

As for Brasil Telecom, the directorial stake equals to 80% of the total capital. The total amount in these transactions is already equal to 30 billion reals and this can be seen on the slide. 3.3 billion reals spent in 2008 for the acquisition of preferred shares, 5.4 billion reals disbursed in 2009 for the acquisition of control, 1 billion reals of (inaudible) assumed by Oi in January 2009. About 3.3 billion reals will be spent for the purchase of common sense for the minority shareholders to tag along, assuming obviously that all minority shareholders will sell their shares in the public auction for us.

On the next slide, number 13, we present in a summarized pro forma consolidated P&L of both companies in 2008 for a complete alignment of the market as to the reality of the transaction that exists between the companies in 2008. Moving quickly through elimination of the item revenues about 242 million reals (inaudible) companies transactions which amount less than 0.6%. Of this total more than 90% lead to the wireline segment. The consolidated operating expense show a reduction mainly in interconnection costs and telecom infrastructure rental which Oi’s cost is presently is registered as rent insurance.

Moving to slide 14, we’d like to talk about the synergies we foresee in our company for 2009. One, the whole organization has been working to (inaudible) two companies, previously regional companies hoped to size synergies as soon as possible. Since we cannot wait time we must identify quickly among the best practices existing at both companies. The senior management will already define considering the best professionals for both organizations. The plans regarding the operations on CapEx for 2009, we're already approved by the Board Of Directors as well as the targets to be met by the end of the year from the point of view of reducing OpEx and CapEx.

As for operating expense, OpEx, the management of the new Oi established in 2009 target we will save around 600 to 700 million reals already net of the investment that we will spend in order to achieve this amount. This amount is a big amount is between 5 to 6% of the consolidated operating expense of the new company excluding expenses related to revenues, such as interconnections platform (inaudible).

As for CapEx, the size of the new company will lead to a greater bargaining power in negotiations with suppliers. Thus the company aims to reduce debt with the combined FX of two companies by almost 1 billion reals. And following 2009, we expect to spend between 5 billion reals to 6 billion reals in consolidated CapEx. It is worth mentioning that in addition, we will have the possibility of generating synergies in revenue by offering wireless service nation wide by replicating Oi’s winning strategy in Brasil Telecom's region as well as by making available to corporate customers a backbone of national wide coverage.

In addition to that, we will have the benefit of goodwill amortization, initially estimated to be approximately 9 billion reals which will be absorbed by Oi in ten years. Today the company is audited and Brasil Telecom’s auditors are in a due diligence in the BrT; due to regulatory restrictions we were unable to do so before acquisition. Through this process, that goodwill amount to be defined. Both revenue synergy as well as the positive impact of goodwill are not included in amounts that were given so far.

Last I will address the new company’s operation goals for 2009. We work to keep the (inaudible) at around 21 million users. We have achieved expansion of the wireless segment mainly in the BrT region and São Paulo increasing to 30 million presently to 39 million wireless users by the end of the year, therefore adding 9 million new customers. We will keep the growth of broadband Internet users, especially in region one, and we expect to end the year with around 4.5 million users.

Before we move to Q&A session, I would like to highlight some other things. In this process, we're creating the new Oi, we have said that the expansion strategy via convergence, having just one portfolio, one brand, Oi, and one interface with the customers and the corporate business as soon as possible. Obviously, while the companies remains separate legally, we will respect the generation of synergies for both. In other words, no loss would be generated for the shareholders of either company. The goal is to keep growing especially the wireless segment in region two and three, broadband in region one, as well as in new business. For the fulfillment of this guidance, we have consolidated the leadership in the Brazilian telecom market and who knows, we might aim to more daring objectives in the future.

Now let’s finally move to your questions and thank you.

Question-and-Answer Session

Operator

(Operator instructions). Our first question will come from Peter Lyons with Oscar Gruss.

Peter Lyons – Oscar Gruss

Hi, guys. My question is with regards to the churn rate of Oi Mobile in the fourth quarter, the fact that it went up to 10.4% and then also the proportion of net ads in Region I also dropped from the third quarter. So, if you could give us an idea of what's driving some of this churn and then subscriber additions in the fourth quarter versus the third quarter? Thank you.

Alex Zornig

Thank you, Peter. The churn higher in the fourth quarter compared to third quarter was that we did a clean-up in our base for those customers there for total of last three or six months through the fund or who didn't pay the fund. And therefore, we clean-up the base for – to have a more let's say clean base for – to start in 2009.

Peter Lyons – Oscar Gruss

So that was clean-up in the – in your postpaid subscribers, I assume?

Alex Zornig

Yes. Post and Pre, we have both.

Peter Lyons – Oscar Gruss

Okay. So prepaid users who weren't really using their account very much?

Alex Zornig

Yes, prepaid customers that were not recharging their prepaid.

Peter Lyons – Oscar Gruss

And about how much was that clean-up? Roughly –

Alex Zornig

One million customers.

Peter Lyons – Oscar Gruss

One million customers, okay. And I just have a follow-up question on the taxes and discounts of gross revenues in the fourth quarter. It seemed a bit higher than I had expected. If you could just walk me through some of the elements in there and what was driving that number?

Alex Zornig

Sorry, Peter. I didn't hear your question, can you repeat?

Peter Lyons – Oscar Gruss

Sure. In the fourth quarter, taxes and discounts on gross revenue seemed a bit higher than I had expected. If you could just walk us through some of the elements in this line item and what is composed of and why it would be at a higher rate than say the third quarter?

Alex Zornig

Well, honestly, Peter, we will – I think we would need to prepare something for you, specifically, because we are giving discounts may be São Paulo is affecting a little bit to this, because São Paulo as you know, we entered in São Paulo by the beginning of October 2008, okay. And there we gave – of course, to enter in the new market, we give some discounts and some benefits for the new customers in order to gain market share, okay. This is why it is affecting your comparison one quarter to another quarter. But to give you a more – let's say firm answer, I prefer to send to you later after the call, okay.

Peter Lyons – Oscar Gruss

Okay. So, just – we could follow-up after call, but just to confirm that the fourth quarter is driven more by discounts, and taxes didn't really changed that much.

Alex Zornig

No, no taxes are the same.

Peter Lyons – Oscar Gruss

Okay, okay, great. So, we will follow-up after the call. Well, thank you.

Alex Zornig

Okay.

Operator

And our next question comes from Rizwan Ali with Deutsche Bank.

Rizwan Ali – Deutsche Bank

Yes, good morning. My question was regarding accounting practices; have you found significant discrepancies between accounting at TNE and BRP? And I think it's specifically related to margins of wireless business, because margin of BRP GSM is much, much lower than Oi's margin?

Alex Zornig

Okay. Let me start from the last question first then I'll go to the first. The margin of BrT is lower than, you thought in the mobile phone I imagine?

Rizwan Ali – Deutsche Bank

Yes.

Alex Zornig

Yes, okay. The mobile phone is lower than ours. Yes, that's the fact. One reason is because Brasil Telecom enter in this market was the last one to enter in this market in Brazil, okay. We are 3 years – 3.5 years ahead of Brasil Telecom. And this is the one opportunity we have in order to replicate our margins that it's higher, much higher in Oi to their market, okay. That's where – that explains why their margin – not explains, but that's how we see margins for the future.

And just to give you one information, for example, we have in a big state like Rio Grande do Sul, Brasil Telecom has one million customers of mobile phone, while we have a smaller states in the Region I which double of that. Therefore, we have big opportunities to grow up in these states, okay.

Regarding accounting principles, as we explained, we are doing due diligence. And we start doing due diligence in – sooner and after we acquire – we fixed the majority shareholders. And we didn't see big difference between one company and other, what we saw is some estimates – difference of estimates of one company and another, which we will standardize along this process of due diligence, okay.

Operator

Okay. (Operator instructions). Our next question will come from Henry Cobbe with Nevsky.

Henry Cobbe – Nevsky

Thanks so much for the call. Just on the synergies, that's very interesting, and just wanted to find out what the impact would be on your effective tax rate from the different rates of amortization of the goodwill and the P&L and for the fiscal accounts?

Alex Zornig

Okay. There is synergy of R$600 million that we mentioned does not include the tax effects of the goodwill amortization, okay.

Henry Cobbe – Nevsky

How would we calculate the benefit of the bill count for the tax?

Alex Zornig

Okay, on tax I will answer, but just for everybody to be – it's, to be clear for everybody, Henry this R$600 million is in the line of expenses, okay.

Henry Cobbe – Nevsky

Okay.

Alex Zornig

Operating that of the investments we should make in order to achieve this synergies, okay.

Henry Cobbe – Nevsky

Well, not a big number?

Alex Zornig

Yes. Yes, it's big number, big challenge. Now I'll answer you about tax. We will amortize for tax reason in 10 years the goodwill, and benefit of this amortization show-up in the line of tax in the P&L, okay. And we will start doing already in 2009.

Henry Cobbe – Nevsky

But you will also expense on the P&L itself, given the amortization of 650 million per annum, is that correct?

Alex Zornig

8.5 divided by 10 is roughly R$850 million per annum, yes.

Henry Cobbe – Nevsky

So, on the P&L, and how much would you be amortizing?

Alex Zornig

Sorry – for tax reason its 10 years, for P&L its 17 years.

Henry Cobbe – Nevsky

17. So the 10.5 billion over 17 years, is that right?

Alex Zornig

Yes.

Henry Cobbe – Nevsky

Okay. And on a straight line basis?

Alex Zornig

Yes, which is R$500 million.

Henry Cobbe – Nevsky

10.5 over 17, okay. And so the difference between the two probably say 10.5 billion over 17 years?

Alex Zornig

Yes. What happen is in Brazil, you have this – what we call (inaudible), which is the tax in bulk, okay. You have 8.5 divided by 10, so we are going to have $850 million amortization for tax purpose, okay. Sorry, R$850 million, not dollars. So, then you calculate 34% of that which give us, R$290 million that's the tax benefit we will have in – and that's tax reduction we will have on 2009 onwards, okay.

Henry Cobbe – Nevsky

Okay. But that will be also – that will be already after the – that will be for the earnings before tax have already being expensed the 618 or 620 billion per annum?

Alex Zornig

Of the – no, sorry, that's a start again. For tax purposes, we will reduce our tax by at least R$290 million, okay. And then for accounting purpose, we were amortizing 17 years, therefore we will have R$500 million amortization expense on our books, okay.

Henry Cobbe – Nevsky

Okay.

Alex Zornig

The net impact on net profit is R$210 million.

Henry Cobbe – Nevsky

Okay. That was good. Okay, thank you very much indeed.

Alex Zornig

Okay.

Operator

(Operator instructions). Our next question will come from Roger Wilkinson with Newton Investment Management.

Roger Wilkinson – Newton Investment Management

Hi, I was just wondering if you could give a little bit of clarity on the dividend and how you came out with the level you did a – very happy with the level, but wondered whether you look it this sort of percentage of net income or free cash flow and what we should expect going forward?

Alex Zornig

Let me pass this – Roger let me pass this question to Tarso our Treasurer.

Tarso Rebello Dias

Roger, basically, we have a net debt. We follow net debt very closely. We have limits in our debt and our leverage and the numbers are combination of cash available and the level of that leverage that we would be following for the company.

Alex Zornig

One thing important now, Roger, as I mentioned, we started the year with almost R10 billion cash after paid the acquisition of Brasil Telecom, okay. And if we don’t do anything looking at Panama Beach doing nothing by the cash we generate by the (inaudible) we will end the year of 2009 with roughly R3 billion cash, okay.

Roger Wilkinson – Newton Investment Management

Okay.

Alex Zornig

We don’t want to do this because we believe that – it’s not good to end with – 3 billion is a big number, but we would like to end with a higher number, so cash is not an issue for paying dividends. It’s just a question of, as Tarso said, is a combination of net debt cash available dividends, profits, and EBITDA generation, okay. So, as I explained to your colleague a minutes ago, this R290 million tax benefit from the amortization, otherwise… this is cash generation for us that we’ll benefit our cash flow along the year. I don’t know if I answered your question.

Roger Wilkinson – Newton Investment Management

No, no you did. I think one of the auspice issues of the market with TNE has historically been accused to sort of holding cash and have those under levered balance sheet and you’ve obviously corrected that and we’re very grateful for that this year. I just feel that going forward if you gave us sort of firm dividend policy people can use that in their forecast and particularly in these sort of times in global markets, people rely on the dividend.

And I understand you’ll do this sort of measure of looking back at the end of the year. But this sort of the ordinary dividend level if people can have a floor or a guideline in terms of percentage of income it just helps an awful lot in terms of running your company; I think it would be incredibly beneficial for the share price.

Alex Zornig

Roger, unfortunately, I’m nine days here in the company, but unfortunately we don’t have a – not importantly but we don’t have a dividend policy and this is really a Board decision on the year-by-year based on the cash flow, based on their necessity and based on the strategic movements we’ve made through or not in the next year, okay.

But, I’m with you. I understood your point, but we don’t have a dividend policy and unfortunately I cannot say, we will be X or Y and to be honest I don’t see there are few Brazilian listed companies that have a real dividend policy today, okay.

Roger Wilkinson – Newton Investment Management

Yes, I mean, even more recent to have one. I mean, I don’t know, I’d just… well, you’ve heard my point, but I think it would be very beneficial if you did.

Alex Zornig

No, I understand, okay, yes, we’ll pass on and let’s see what happens.

Roger Wilkinson – Newton Investment Management

Okay, thank you.

Operator

Okay, our next question will come from Mitchell Moniza [ph] with Deutsche Bank.

Mitchell Moniza – Deutsche Bank

Hi, good morning. Just a quick question, I think today in the morning that you plan to raise R$3 billion in local bonds, does it mean that you’re not going to pursue the international bond markets anymore?

Alex Zornig

Well, we access any market that make sense… first that has cash and second make sense to… in terms of cost and benefit, okay.

Mitchell Moniza – Deutsche Bank

Okay. So, you remain open then to potentially issue bonds, I think last year you planned $1.5 billion, so that is still on the table?

Alex Zornig

It’s still on the table. We don’t know when. But it’s still on the table and depends on the market. The markets has this windows of opportunity and we’re looking the windows very close.

Mitchell Moniza – Deutsche Bank

Okay, thank you.

Operator

Our next question comes from Rizwan Ali with Deutsche Bank.

Rizwan Ali – Deutsche Bank

Yes, good morning, another question if I may. The cost synergy that you’re talking about for the first quarter 2009 is pretty significant. Should we expect similar cost synergies going forward as well, I’m just trying to figure out the present value of the cost synergies you expect for this measure?

Alex Zornig

I would say, although, I cannot give you guidance for 2010 for regulatory reasons, but I’d say, yes, and we expect that, that… we are… not expected, we hire (inaudible) something firm to help us to analyze not only the integration of both companies, but also this R$600 million are the quick wins, let’s say it this way, okay.

Now we have the apples in the higher… in the three. We need to buy a ladder and go up there and therefore that’s why we hire a company to help us working to capture as much as possible for example, when we need to integrate systems, how much we'll cost, how much we will save. Just to give an idea, Brasil Telecom and Oi has same SAP system for the back office in both companies. The only difference is version. Therefore, I’d say, instead of paying two licenses just pay one and integrate both the things. Let’s see how much we'll cost and how long we will take. So those are the ones I’d say will be done in 2010, 11 onwards. But, yes, you can expect something similar in the next year, although I cannot say how much.

Rizwan Ali – Deutsche Bank

We were getting present value of something like R$2 billion and present value of cost synergies. Do you think that number is reasonable or very high, very low?

Alex Zornig

Well, I’d say, I cannot answer, but I assume this number as good.

Rizwan Ali – Deutsche Bank

Thank you.

Operator

Our next question will come from Peter Lyons with Oscar Gruss.

Peter Lyons – Oscar Gruss

Hi guys. I have a follow-up on the third party operating expenses in the quarter. In your press release you had mentioned that legal in consulting third-party expenses increased by 72 million quarter-over-quarter. And, then you also mentioned that there was a 30 million non-recurring legal expense associated with the acquisition of Brasil Telecom. Just to confirm this 30 million was it booked as a part of that $72 million increase and what can we expect for third-party expenses, first quarter, second quarter, now that the main portion of the acquisition was completed?

Alex Zornig

Okay, Peter. You’re right. The 30 million, it’s related to the acquisition of Brasil Telecom in January, okay, lawyers and professional banking or whatever. And yes, you can expect in the first quarter of 2009, this line to decrease in comparing to fourth quarter, okay.

Peter Lyons – Oscar Gruss

Okay. And just a follow-up, you referenced in the press release, CVM Decision 555/08, if you can just elaborate on this a little bit and tell us what it is and how it’s affecting, how it could potentially affect the bottom-line?

Alex Zornig

Is IFRS… as you know Brasil will adopt IFRS methodology accounting principles for listed companies, okay? And there is a law which is the law 11638, which was issuing in 2007, which changed the other risk accounting the way about financial statements should be prepared, okay. And therefore, CVM, these numbers CVM that you mentioned is just establishing some detailed impacts on the financial statements. Move on to the impacts?

Peter Lyons – Oscar Gruss

Yes.

Alex Zornig

If you look on page 28, on our press release, you have a summary of the impact on the CVM.

Peter Lyons – Oscar Gruss

Okay.

Alex Zornig

That’s why, I think, 335.

Peter Lyons – Oscar Gruss

Okay. And one final thing, just to confirm the first quarter results will be presented and consolidated with the Brasil Telecom?

Alex Zornig

Well, not… yes, it will be consolidated, yes.

Peter Lyons – Oscar Gruss

Okay. Thank you very much.

Alex Zornig

Just one follow-up answer is that this effects although, we should present in the financial statements only be impacting 2011, okay.

Peter Lyons – Oscar Gruss

Okay. Thank you.

Operator

Okay. Your next question will come from Henry Cobbe with Nevsky.

Henry Cobbe – Nevsky

A follow-up question just to add to the comments on dividend policy, and if I transfer my line back to when you were looking at doing the November card adjusting on the original attempt to restructuring. The cash at the end of the process was a dividend policy and reference to TJLP and sovereign yields and minimum move, I think it was 3 billion per annum, which is different company now. But that was the incentive for shareholders to agree to that restructuring process, which never happened in the end.

But, now that you have succeeded in restructuring, I think there was a lot of expectation in the market that the same cart would appear and a consistency policy… even if it’s kind of minimum policy, so would be in place. So, we all know where we stand and I think it’s really important just to say that the minority shareholders in TNE feel that their interest are alliance with the consulting the shareholders, say I’m just reiterating my colleague’s point on that. But I know that we all get something in the future.

Alex Zornig

I’m with you, Henry, and as I said to your colleague I will pass on. But it is important to mention that in accordance with Brazilian laws, at least 25% minimum dividend is guaranteed as long as we have profit, of course, is guaranteed to be distributed, okay.

Henry Cobbe – Nevsky

I understand, yes.

Alex Zornig

Okay. And so, but there are some I would say other things that we need to take into consideration levels that results analyzing… analyze alternatives and products, also strategic moves and things like that. For example, São Paulo; São Paulo was a strategic move and costs some money of course. This is start-up project, but I’m with you and I will pass on, okay.

Henry Cobbe – Nevsky

Could you just summarize any regulatory impositions that were made as a result of the deal? Did ANATEL say anything on having to unbundle your last mile or open access or separation of networks. Does that mean any of that kind of a regulatory?

Alex Zornig

Okay. I will pass your question to my colleague (inaudible) will answer you.

Unidentified Speaker

We had a number of conditions for the acquisition of Brasil Telecom. But almost all of them were related to the relationship with customers. So regulation on relationship with all the operators like functional separation, unbundling or retail will be treated by our ANATEL in fully consultation during the next two years.

So there is no opening of our network linked to the acquisition of Brasil Telecom, but there will be a debate on the next years in Brazil. As a company, we defend that the regulator should avoid the free ride on the op network, it’s important to preserve the investment and infrastructure in a big country Brazil. And, we are confident that the regulator will be prudent on any rule regarding the opening of our network.

Henry Cobbe – Nevsky

Okay. Thank you very much indeed.

Alex Zornig

Thank you.

Operator

(Operator instructions). Okay, our final question will come from Rizwan Ali with Deutsche Bank.

Rizwan Ali – Deutsche Bank

One last question, there was the (inaudible) issued these rules, which suggested that you’d have to pass on some of your cost benefits to the end users, do you think you’ll be forced to do that?

Alex Zornig

There is on the fixed telephony tariff structure, an obligation to transfer 50% of the productivity benefits to the customers. So in Brazil when you increase your tariff on an annual basis, it’s inflation less the productivity factor and this productivity factor is calculated as 50% of the effective productivity gains in the company 50% go to the customer, 50% to the shareholder.

Rizwan Ali – Deutsche Bank

Okay. So in other words, the 600, 700 million you reduced in terms of cost structure, were not going to be passed on as such?

Alex Zornig

No, because this calculation is made only considering the fixed infrastructure. So, we don’t have the numbers today. What is the part of the synergies that will be shared with … on the tariff -on the fixed tariff.

Rizwan Ali – Deutsche Bank

Thank you.

Operator

Okay. Sir, I’ll now turn the call back over to Mr. Zornig for closing remarks.

Alex Zornig

Well, once more thanks for attending this conference call. Our Investor Relations team is at your disposal for any further clarification. Should you have any doubt feel free to contact either me or Terziani and his team directly, now we have new add from Brasil Telecom, Flávia. I hope to have the opportunity to meet you personally soon. Have a good day. Thank you.

Operator

This concludes our teleconference. You may disconnect your lines.

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