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Executives

Alex Waldemar Zornig - Chief Financial Officer and Investor Relations Officer

André Borges

Analysts

Dan Kwiatkowski - UBS Investment Bank, Research Division

Soomit Datta - New Street Research LLP

Susana Salaru - Itaú Corretora de Valores S.A., Research Division

Mathew Berns

Jonathan Dann - Barclays Capital, Research Division

Kartik Nehru - Emerging Sovereign Group, LLC

Josephine Shea

Luis Fernando Azevedo - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

Oi SA (OIBR) Q1 2013 Earnings Call April 30, 2013 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Oi SA's conference call to discuss the 2013 first quarter results. This event is also being broadcast simultaneously on the Internet via webcast, which can be accessed on the company's IR website, www.oi.com.br/ir together with the respective presentation.

[Operator Instructions]

This conference call contains forward-looking statements that are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those in the forward-looking statements. Such statements speak only as of the date they're made, and the company is under no obligation to update them in light of new information or further developments.

I would now turn the conference over to Mr. Alex Zornig, CFO. Please, Mr. Zornig, you may proceed.

Alex Waldemar Zornig

Good morning, and thank you for participating in today's conference call. I would discuss the first quarter results and how they align with our stated strategy for profitable growth across our key markets. Then, we will be available to answer your questions.

I would like to start by reaffirming that the company is successfully executing its strategy announced in April of 2012, by focusing on the convergence of our service in the residential market, building a high-end customer base and more profitable customer base in Personal Mobility, and delivering IT service and complete telecom solutions to our B2B clients. In order to better serve the market, Oi is continuously investing in its network, redesigning its offerings and products, and improving its sales channel. We recognize that in order to grow in a competitive market, it's essential to have better products and service based on innovation, a commitment to continually improving the customer experience and the capacity to offer high-value convergence service.

Our first quarter results were in line with our expectations and with the annual guidance we provided when we released the fourth quarter 2012 results, namely that the RGUs will range from 75 million to 76.5 million, net service revenues would be between BRL 28 billion and BRL 29 billion, and EBITDA would range from BRL 9 billion to BRL 9.8 billion. Slide 2 is a snapshot of the key elements of our growth strategy in the Residential segment. We continue to remain focused on delivering a complete array of converging products capable of fulfilling the residential customers needs. In wireline, the emphasis continues to be on retention efforts and the cross-selling of bundled products that fit the customer profile and incentivize households to add more service. As a result, our customers have been selecting more flat-fee plans that give them a value package for a fixed price. This is a win-win as the customer knows what the cost will be, is less likely to switch carriers, and the company gains recurring subscription revenues. In addition, we have been able to motivate customers to add other services, such as broadband and Pay TV, and the number of households with multiple services provided by Oi continues to grow. In broadband, the investments we have made to expand and improve our network quality resulted in first quarter year-over-year growth of 10 percentage points in the number of Oi Velox customers with connections of more than 5 megs. These customers represent 34% of the broadband base in the first quarter. Along with other retention and loyalty programs, these investments resulted in a reduction of our churn rate for this segment. We currently offer the most complete entry-level package in the market for our TV subscribers. In order to increase the sales of convergence offerings while maintaining a responsible credit policy, Oi gives special discounts to those households that already use Oi's broadband and make automatic payments. Also one of our differentials is that the basic TV package includes HD channels. In the first quarter, we added new HD channels to this package, which has now 15 channels, up from 11 at the end of last year. Consequently, 100% of our new customers subscribe to plans with the HD package. These initiatives resulted in Oi ending the first quarter with 12.4 million fixed lines, 5.3 million broadband connections and almost 840,000 Pay TV subscribers, adding up to a total of 18.5 million residential RGUs, a 3.5% increase over the comparable period of last year.

Now on Slide 3, our growth in RGU is a result of the reduced attrition in fixed lines, which, in the last 12 months, was less than half of the connections that we experienced in the same period 1 year ago; the ongoing expansion of our broadband customer base, which has been increasing at the rate of 55,000 households a month; the accelerated growth in net additions for Pay TV that, for the last 12 months, has resulted in an increase of over 400,000 and doubling of the customer base. The total net additions in the Residential segment have been trending well every quarter and amount to more than 600,000 net RGUs addition over the last 12 months. At the end of this year's first quarter, the percentage of households with more than 1 Oi product was 55%, representing growth of almost 8 percentage points compared to the end of 2012 first quarter.

On Slide 4, we are executing our strategy of building our base of high-end customers in Personal Mobility. Oi continues to offer its portfolio of postpaid plans because they are well understood by customers and offer more transparency for the user. The company has basically 3 plans: the Oi Conta, which offers unlimited on-net calls including fixed line, data package, SMS package and Oi Wi-Fi; the Oi Smartphone offers the benefits of Oi Conta plus discounts on a smartphone purchase; and the Oi Conta Total, which combines mobile, fixed-line and broadband, which is considered our main bundled product. Customers can make this bundle a quadruple-play by adding TV subscription.

In addition to the communication and transparency aspects of the offering, loyalty programs have been an important factor in the growth of postpaid, as they reduce churn and enabled the company to increase its competitiveness. The customer has the option of taking a 12-month contract with a monthly discount or a contract with no ties with the operator. Sales of contract plans have grown significantly and account for 90% of Oi Conta and Oi Conta Total sales in the year's first quarter. Compared to the first quarter of last year, voluntary churn was down approximately 30% in the Oi Conta Total, based in almost 50% postpaid with only one product. All that I mentioned has resulted in the continued growth of postpaid client base, as you can see on Slide 5. At the end of first quarter, Oi had 6.7 million customers in this segment, representing a year-on-year growth of 20%, and 3% on sequential base. Postpaid customers represent 44% of net additions in Personal Mobility over the last 12 months and account for 14.3% of our base, up 2 percentage points from the last year's level. The growth of 3G coverage contributed to our increasing success in gaining postpaid customers. In the last 12 months, 3G coverage almost tripled, and we ended the quarter with a presence in more than 700 cities covering 74% of the urban population of Brazil. Oi has expanded 4G coverage in the 6 cities that will host FIFA's Confederations Cup in June 2013. Additionally, we completed a networking share agreement with TIM, which was approved by CADE and ANATEL. The 4G technology will enhance our portfolio of service and our broadband offering. The rollout of our initiatives to build a high value customer base has changed our revenue profile in Personal Mobility, which now relies less on revenue from prepaid and interconnections and more on postpaid, data and value-added service.

On Slide 6, you can see that Oi maintained its bonus multiply offering in the prepaid segment. This gives the customer a daily bonus equal to the recharge value or twice the recharge value, depending on the region. The customer can use the bonus for all net local and long-distance calls or SMS. It's important to mention the growth of usage of data by prepaid clients. In the first quarter, revenue from prepaid SMS increased 40% from last year's first quarter, while the data package almost doubled in this period. At the same time, we kept our mobile Internet offers for tablets and computers. The strategy behind these initiatives had been to increase the profitability of the prepaid base, reflected in the volume of gross recharge that has been increasing steadily along the customer base. Considering the prepaid and postpaid base, the company ended March 2013 with 46.6 million RGUs, a growth of almost 6% compared to first quarter of 2012 base.

Slide 7 shows the main results from Business and Corporate segment. In the Business segment, the expansion of sales channels ongoing client retention programs led to RGUs growth in fixed line and data service. The continued growth in our digital trunking resulted from charts [ph] to our sales force to our offerings, illustrated by our decision to increase the minimum traffic requirements of our entry plans. In dedicated IT service, investments in the network and change to our offerings allow us to sell higher-speed service. Oi's Smart Cloud, our cloud computer offering for the business segment has met with a very positive market response and has strengthened the company's presence in telecom IT service. In the Corporate segment, we maintained the strategy of offering complete package with telecom IT service that build sales and increase our profitability.

In the Mobile segment, it's important to highlight that the South East region of Brazil doubled its base in the last 12 months. Regarding fixed products, digital trunking base grew considerably while the VPN network and IP Internet access were the operational highlights of the segment during the quarter. At the end of first quarter, we had approximately 9 million RGUs in the Business/Corporate segment, which represents a 10% increase over the same period last year. The revenues from this segment, however, declined 1.5%, primarily due to provisions related to regulatory reductions in wholesale tariffs.

The financial results starts to be presented on Slide 8. Net revenue reached BRL 7 billion for the quarter, up 3.5% compared to last year's first quarter. The growth is mainly due to our building strategy and our success in attracting high-value customers. As you know, there is a traditional seasonality in the telecom service business. The first quarter has fewer working days, which can be seen in voice and data traffic, while the fourth quarter is impacted by Christmas sales and higher traffic due to the end year holidays. Therefore, sequential comparisons are generally only relevant when looking at subscriber metrics. I'm pleased to mention here that the revenue from our Residential segment increased 5% compared to last year's first quarter, which is the second consecutive quarter of higher year-over-year comparisons after 2 years of declining results.

Slide 9 illustrates that costs remain under control and below inflation. It shows that both cost and expense were managed efficiently. It's important to highlight that those costs and expenses that increased were the ones directly linked to the greater scope of our business and develop our future revenue growth. Costs as a percent of revenues stayed under 70% in the quarter, which speaks to our ability to maintain our operating margins while growing revenues and RGUs.

Slide 10 shows that the EBITDA in the first quarter grew almost 7% year-over-year, reaching BRL 2.2 billion. This increase resulted from higher revenues and efficient management of costs and expenses.

On Slide 11, the company was pleased to receive CVM approval to eliminate the effect of fair value of the BrT acquisition on the net income. We are able to report a quarter net income of BRL 260 million or $0.06 per share. Net income figures are not compared with the previous year due to the corporate reorganization, which was completed beginning of March 2012.

On Slide 12, our gross debt amounted to BRL 33.6 billion at the end of the first quarter, an increase of BRL 608 million for year end 2012 levels due to interest rate accrued in the period. Funds raised in the period, especially a local debenture in the amount of BRL 1.5 billion and disbursements by ECAs, were partially offset by the amortization and maturity in the period. Also, a credit line of BRL 5.4 billion was approved by BNDES at the end of last year, and Oi has USD 375 million approved credit lines from international development banks. Net debt reached BRL 27.5 billion at the end of the quarter, in line with Oi's expectations. Keep in mind that Oi paid its second dividend related to 2012 performance at the end of March.

At the end of the first quarter, Oi net debt-to-EBITDA ratio was 3.05x, slightly ahead of the compensation policy stated threshold for the payment of dividends. The next payment scheduled for August of this year, will be based upon net debt levels of June 30, 2013.

We believe it's important to mention that the company and its board are committed to maintain a policy of shareholder remuneration, and that we expect to conclude non-core asset sales that will bring down this ratio below 3x at the near term. At the end of the quarter, cost of debt remains stable and the average term was approximately 5 years. 6% of our debt will expire in 2017 onwards. Despite around 4% of total debt being valued in foreign currency, only 1% is under-hedged.

On Slide 13, you can see the net debt variation. In the first quarter, Oi made significant investments of BRL 1.12 [ph] billion in CapEx, paid dividends related to 2012 performance and the Fistel. In addition, the payment of tax, judicial deposits, working capital costs and financial expenses contributed to the increase in the net debt. This increase is in line with our expectations, given that no asset sales were concluded during the period. However, as I mentioned, we are close to completing certain asset transactions which will bring down our leverage and optimize our capital structure.

In the Slide 14, we show the capital investments made in the first quarter. Oi invest BRL 1.7 billion in the expansion of 3G network, implementation of 4G network and improving the capacity and capillarity of its wireline and broadband network. 78% of our CapEx during this quarter was used to improve the network. We also invested in the optimization of our IT systems and the growth of company-owned stores. This year, our CapEx is front-loaded, with the goal to advance future subscribers and recurring revenue growth. However, we continue to expect full year 2013 CapEx to be BRL 6 billion.

This is the end of the formal part of today's presentation. We are pleased to answer your questions. And remind you that the objective of today's call is to discuss Oi's first quarter 2013 financial and operational results, and we would appreciate your keeping your questions to these topics. I would now like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is Dan Kwiatkowski from UBS.

Dan Kwiatkowski - UBS Investment Bank, Research Division

A couple of questions on your operating costs. You reversed the provision of BRL 173 million in the quarter related to employee profit-sharing. I take it that is nonrecurring and related to 2012? That's the first question.

Alex Waldemar Zornig

Okay. First, I will like to just mention before I answer you that James Meaney, our COO, is not today with us because he is traveling abroad. Then, I have here Bernard Vinik [ph], he is the director in charge of our retail operations and sales channels; and André Borges, who is our Regulatory Director.

To answer you, Dan, it's nonrecurring. Well, we reserved this bonus every month last year and part of -- partially the bonus was paid and another part was not paid due to we establish several targets, metrics, and some of them were not achieved. And therefore, we reversed part of this bonus because we are not going to pay. So there's not only an EBITDA effect but also a cash effect.

Dan Kwiatkowski - UBS Investment Bank, Research Division

Right. Okay. The second question is on -- in the fourth quarter results you had a line called materials, which no longer seems to be in the operating expenses. And that was BRL 46 million in the fourth quarter. Can you just explain where that line has gone? Has that gone into other operating expenses or is there -- I'm just concerned where it is?

Alex Waldemar Zornig

Materials, there's several materials that we use among cable TV and also, for example, some of the handsets which are not capitalized, we charge in this line of materials.

Dan Kwiatkowski - UBS Investment Bank, Research Division

It's just that the material line has actually disappeared, you're not reporting it anymore.

Alex Waldemar Zornig

No, no, we are reporting it as other operating. We just reclass.

Operator

Our next question is from Soomit Datta, New Street Research.

Soomit Datta - New Street Research LLP

A couple of questions, please. Firstly, on working capital, there was another reasonably big negative move in Q1. Do you mind just explaining what that's related to in a little bit more detail and can you give any guidance for how that might trend over the remaining 3 quarters, particularly maybe in Q2, as we approach the dividend payment? Secondly, there was some talk in the Q4 numbers about looking to improve the situation regarding judicial deposits and I think hoping to have to make lower payments to escrow. Could you give us an update as to how that process has trended over the last 2 or 3 quarters, please? And then a final question, do you mind just confirming when you applied the termination rate cut? And was it in Q1 or did that happen after the quarter closed?

Alex Waldemar Zornig

All right. The first question regarding working capital. Our working capital has been influenced by new customer profile, mainly the postpaid and the cable TV, which focus more on high-end service like postpaid mobile, TV and broadband, as compared to the previous profile that's largely dependent on prepaid business. So we are changing the profile of Oi and therefore, that's why you have some impact in our working capital. Besides that, we are -- we paid the Fistel tax in March, which is a big number. And also on the other hand, we are negotiating with some of our suppliers to extend the payment dates from -- which average today is 90 days, to 120 days. So you will see some of the working capital improvement in the next following month, following quarters, because of this movement that we are doing with also with our suppliers. In terms of escrow deposits, if you compare the -- our chart on Page 25 of our press release, you will see that this quarter was lowest compared to the last 5, 6 quarters in terms of cash out on escrow accounts, okay? It was BRL 174 million. If you multiply it by 4, it's going to be half of last year's amount. What we are doing. We are acting several lines. One is there is a public hearing that ANATEL issued 30 days ago and is do it for the next 30 days, where they want to reach an agreement with all operators, not only Oi, where instead of fining us -- and then when they fine, we don't agree with the fine. We go to the court and then the judge ask us to deposit money on the escrow account. We are going to have an agreement with them and say, instead of fining, let's get the balance of escrow account and partially of that money will be released to us and the other part is going to be used for future CapEx to improve quality and things like that. That's one scenario. The other scenario, we are working with other targets, like we have the biggest amount of escrow deposits, the expansion plan in the south of Brazil, I don't know if you remember that, which is -- we have -- we got from Brasil Telecom. And there, we have BRL 5 billion deposit. And there, we are negotiating case-by-case to reach an agreement to have a discount, then we release the money, and we release part of the money to us, part for the other side. Otherwise, the person can wait 5, 7 years to get the money, and we never know if he's going to get the money. So it's better that you pay -- reach an agreement in advance in order to release the money, okay? And your other question, I forgot the third one.

Soomit Datta - New Street Research LLP

Yes, the third question was...

Alex Waldemar Zornig

Yes, the MTR cuts we are using already since March, we apply, but we have one region of Brazil we have a judicial decision in our favor, which we are not applying the reduction, but we are reserving anyway. So there will be no EBITDA impact on that.

Soomit Datta - New Street Research LLP

Okay. And maybe just a quick follow-up on the escrow payments, the BRL 174 million in Q1. Should we expect that to continue to trend down, or is that a good sort of run rate for the rest of the year?

Alex Waldemar Zornig

I suppose, coming down, I don't think. But we are managing in order to keep it at the same level for the next quarters.

Operator

Our next question is Susana Salaru, Itau Bank.

Susana Salaru - Itaú Corretora de Valores S.A., Research Division

Just want to talk a little bit about the effective cost of debt of Oi and if you will expect that going forward with the new source of funding, this effective cost of debt may reduce a little bit?

Alex Waldemar Zornig

Thank you, Susana. The effective cost of debt today of our debt is around 105% of CDI. So if we have Brazil CDI today at 7.5, we are talking about 7.75, something like that for the year. And we don't expect to come down sharply, but also we don't expect to go up, okay? Due to the credit lines that was approved by not only BNDES but other banks that we have.

Operator

Our next question is Fabian Sentin [ph], CMO Capital.

Unknown Analyst

What's your total value for your operating lease of balance sheet?

Alex Waldemar Zornig

We don't have -- operating lease is not material. But I don't have this number now. Fabian, we can send to you later.

Unknown Analyst

The other question is in regards to the letters of credit. Do you see any risk of IFRS requiring you to report that as a debt, because I realize that you went up BRL 1.3 billion from December '12 to BRL 13.5 billion.

Alex Waldemar Zornig

No, we don't see any risk. The revolving, I think, you are talking about, and to be used as a debt. First, because we are not using it, I mean, it's there, but we didn't use the money. Second, we don't see any risk.

Unknown Analyst

And this is related to the judicial deposits also?

Alex Waldemar Zornig

That's -- you're talking about guarantees on judicial deposits, yes?

Unknown Analyst

Yes, yes.

Alex Waldemar Zornig

Yes.

Operator

Our next question is Matt Berns, Artha Capital.

Mathew Berns

I had a quick follow-up question to one of the earlier questions. Actually, 2 follow-up questions. In your results the -- your Q4 EBITDA number was revised up from what you reported last quarter by about BRL 50 million. So I just wanted to understand why it got revised up and whether or not you're using this revised number in EBITDA calculation? And then my second question goes back to the materials expense, just kind of looking through the breakdown of operating costs and expenses, everything looks exactly the same for Q4, that you reported this quarter versus last quarter, except the materials expense is gone and your other operating expenses were -- I know you guys said it was reclassified to there, it's actually lower this quarter than last quarter. So I'm just trying to understand what is -- what's happening on that piece?

Alex Waldemar Zornig

So let's talk first, with the BRL 50 million adjustment you are talking about relates -- let me try to explain. The CVM just ruled in our favor regarding the step up of when we acquired Brasil Telecom. We reversed to write off the step up reserve, and the additional amount to that, we book it as assets when we acquired Brasil Telecom. I don't know, Matt, do you follow us -- do you follow this issue with us or not?

Mathew Berns

Does that affect EBITDA?

Alex Waldemar Zornig

Affect EBITDA because when you -- the write-off of assets, we need to readjust in order -- because as you write off the step up, so the amount comparing the profit or the loss, when you do a write off of your assets, needs to be adjusted as well. Because the amount, the historical amount would be lower or higher, normally will be lower, comparing to what you book it when you sold that, and at that time you didn't have the decision of CVM. We're talking about restatement of 2012 that we should do for IFRS and for SEC and the CVM.

Mathew Berns

Okay. Did you -- I guess, with the guidance, when you gave that last quarter, did that include that BRL 50 million -- I guess it's going to be an incremental BRL 200 million over the year, did your guidance include that?

Alex Waldemar Zornig

Of course not because we didn't know that CVM will rule on our favor or not. Our guidance for last year -- you're talking about last year?

Mathew Berns

No, for this year.

Alex Waldemar Zornig

This year doesn't include any of this effect.

Mathew Berns

Okay. So should we add an extra BRL 200 million or so to the EBITDA guidance given that you have this extra EBITDA step up?

Alex Waldemar Zornig

No, no. Because unless I sell something this year in terms of assets, that's -- or doing some write off, my guidance is still firm between BRL 9 billion to BRL 9.8 billion, that's the range we are going to stop -- stuck for 2013.

Operator

[Operator Instructions] Our next question is Jonathan Dann from Barclays.

Jonathan Dann - Barclays Capital, Research Division

It's a follow-up from your last statements. Could you just -- so basically, you're organically on track to get inside that guidance or sort of organically plus the proceeds from non-core asset disposals? And secondly, if you could just -- are you still confident of the tower sales and those various things?

Alex Waldemar Zornig

Thank you, Jonathan. For us to reach BRL 9 billion to BRL 9.8 billion guidance of EBITDA, the BRL 9 billion, we don't -- of course, we expect not to use none of non-core profits to reach that number. For BRL 9.8 billion, maybe we will need to use some of that in order to reach the BRL 9.8 billion, okay? And regarding the -- what's your second question is?

Jonathan Dann - Barclays Capital, Research Division

Are the tower sales, non-core asset sales on track?

Alex Waldemar Zornig

We just filed the 20-F on the SEC today. And there, you will see a subsequent event, which states that we sold rights of use of 4,000 fixed line towers, because we -- as a recession -- a concession, sorry, we cannot sell fixed towers because it doesn't belong to us. But we can sell the right of use, explore the fixed towers, okay? And, yes, we sold that in April, 4,000. And the money, which is around BRL 1 billion, is coming in the next 2 months -- the following 2 months after March 13.

Operator

Our next question is Kartik Nehru, ESG.

Kartik Nehru - Emerging Sovereign Group, LLC

I just had a quick question on, outside of the fixed towers, which we saw on your 20-F, are there other -- I understand you're still selling real estate assets, but are there other mobile towers that you could still monetize? That's my first question. And the second question has to do with what exactly is your maintenance CapEx? And after you get through your current CapEx plan and spending about BRL 6 billion a year for the next few years, when do you think you're going to be free cash flow positive?

Alex Waldemar Zornig

All right. Okay. Yes, we do have mobile towers. We have lots of mobile towers, more than 6,000 towers, okay? And just to make clear, there was, what I just mentioned, our fixed line towers, nothing to do with mobile, okay? Yes, I have other assets to sell. And it's going to be occurring along the next quarters. Your question regarding the maintenance, CapEx maintenance represents today 10% of our total CapEx, so roughly BRL 600 million. And your last question was?

Kartik Nehru - Emerging Sovereign Group, LLC

Just when are you going to be free cash flow positive?

Alex Waldemar Zornig

Free cash flow positive. This company with this CapEx and with the capital structure we have, we believe that when we reach BRL 11 billion, BRL 11.5 billion, BRL 12 billion EBITDA, we are going to be positive cash flow. Where and when we intend to reach this -- that number, that corresponds [ph] with our strategic plan, by 2015.

Operator

Our next question, Josephine Shea, Hartford Investment Management.

Josephine Shea

I wanted to ask whether you have any financing needs going forward and whether you might go and access the capital market?

Alex Waldemar Zornig

Josephine, if we do need financing, well, in terms -- if you look at our press release, you see that we don't have liquidity issues. This year, we have BRL 2.3 billion of loans that are due -- of debt, not loans, debt that are due. We don't -- so far, the banks are very willing to renew it. They don't want us to pay them, but there's some managing of asset and liability management of us. So basically, no, we don't need further financing because, as I explained to your colleague before, we have a lot of non-core assets that we can sell and make cash that can replace any financing necessity. So the following, if you -- Oi, for example, financing necessity in the next quarters, will be to or expand the tenures of our debt or to replace something that are due today in order to lengthen the tenures as well.

Josephine Shea

And your dividend policy, that will remain the same in case you do need -- your costs are higher and your free cash flow is lower than expected?

Alex Waldemar Zornig

My dividend policy is unchanged as long as we keep the 3x net debt-to-EBITDA.

Josephine Shea

Okay. Obviously in the market, there's some concern about your costs and spending being high in order to get the turnaround, and I guess the market is concerned that the cost will remain too high, so the ROI on the turnaround might not be high enough. Can you give a little bit of feedback on those statements in the market?

Alex Waldemar Zornig

One of our brothers, operators, is going to release their numbers today. And our cost is much better than them. Our margin is 31%, theirs is 25%. And I think, yes, there is a cost to do the turnaround, but our cost is within the strategic plan that we established and we present to the market in April 2012. I think -- I don't think Oi has an operating problem to reach the turnaround. We may have, as everybody knows, we are leveraged company, we don't have liquidity issues. It's just managing our leverage in order to continue to, first, pay dividend, invest in CapEx and pay interest and pay taxes, and that's it. And so far, this is our 5th quarter, since the strategic plan was announced to the market, that we deliver what we promised. And we are still stuck with the guidance for 2013 that we announced to the market in the beginning of this year.

Josephine Shea

No, I have to admit that you have done a remarkable top line turnaround, and I think that's against market expectations. So you've done quite well. I guess the remaining question is how expensive is it going to be to keep being successful. By year end and also the end of 2014, where do you think your gross leverage will be? To all intents and purposes, you just said we will be free cash flow positive only in 2015. So do you have any feeling for where your gross leverage, or just total debt-to-EBITDA might be by the end of 2014?

Alex Waldemar Zornig

Josephine, I can't talk about my guidance for 2013(sic)[ 2014 ]. As you know by law, I cannot give numbers for 2014 yet. So I would say, for 2013, the guidance that we gave to the market is what we expect to deliver. As one of our colleagues asked, we may need some non-core sales in order to maybe to reach the top line of our EBITDA. But I think we are on the right track, and unfortunately, I cannot give you the numbers for 2014.

Josephine Shea

So can you remind me what gross leverage is by year end 2013, then?

Alex Waldemar Zornig

Which line, revenue, EBITDA...

Josephine Shea

No, so total debt over EBITDA by the end of 2013.

Alex Waldemar Zornig

3x. Net debt-to-EBITDA will be 3x, below 3x.

Operator

Our next question, Luis Azevedo from Bradesco.

Luis Fernando Azevedo - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

Just about the EBITDA guidance, I'd like to have a better color about the impact of the sale of non-core assets in the EBITDA. So considering that there are still some results pending from fourth quarter real estate asset sales, that is pending for ANATEL, right? And the sale of fixed line towers. How much it would be already the impact of -- in EBITDA that you should see probably in the next few quarters?

Alex Waldemar Zornig

Regarding, first, the sales of the right of use of fixed towers, fixed line towers, you don't generate profit or loss in the transaction because you are not selling anything, okay? The impact of the EBITDA depends, first, if we are successful on selling whatever we want to sell. And second is the net between the operational expense that, depending the way we -- for example, if we sell a tower, a mobile tower, where you have OpEx higher than you expect because you need to pay the rental, less the profit you generate by the sales of the tower. So my answer to you is the following. For the BRL 9 billion lower EBITDA, we don't need any -- we don't see any effect of the non-core. For BRL 9.8 billion, we will see some effect, and you will know at the due course of the quarters as the operations happen.

Luis Fernando Azevedo - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

And they froze off the right of usage in the towers that you are doing now in the second quarter, so there is no effect in the results. So when we achieve the BRL 9.8 billion EBITDA guidance, without this result of this rights of use of any fixed telephone tower, right?

Alex Waldemar Zornig

If you are just relating to the fixed telephone towers, you are right.

Luis Fernando Azevedo - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

So the inflow of non-core assets could be much higher, of course?

Alex Waldemar Zornig

Yes, the impact of other non-core asset, depending which one we are talking about, can be impacted on the BRL 9.8 billion.

Operator

The next question is Jonathan Dann, Barclays.

Jonathan Dann - Barclays Capital, Research Division

A question not on the results. But I think you're the first of the Brazilians to hold a conference call. Have you -- can you update us with what's happening with the 700 megahertz auctions? I think there's some debates about rollout commitments instead of upfront license fees?

Alex Waldemar Zornig

I want to pass your question, Jonathan, to André Borges, our Regulatory Director, who is involved with that.

André Borges

Okay. ANATEL is still in the process of discussing what the terms for the auction will be. And, yes, we know that there should be some higher requirements in terms of targets to reach rather than price paid. But it's still pretty early to know exactly in terms of what the values will be, what the effective obligations will be and how you sort everything out.

Jonathan Dann - Barclays Capital, Research Division

And presumably this 700 auction was sort of outside of your guidance or do you think it's inside your guidance?

Alex Waldemar Zornig

This 700? It's outside our guidance because we don't expect that to happen in 2013.

Operator

There seems to be no further questions. I would like to turn the floor over to Mr. Alex Zornig for his final remarks.

Alex Waldemar Zornig

Before we finish, I just -- regarding the non-core assets, it's important to mention that we still have a lot of non-core assets to realize and to release. And the market will know. As long as it happens, we are going to inform the market, okay? Thank you for your participation in today's earnings call. Our performance is in line with our stated goals of achieving sustainable, profitable growth. We are building our profitability and consolidate our position as a market leader in Brazil. First quarter 2013 puts us on track to reach our guidance for the year. Our IR team is available to answer any further questions you may have. Do not hesitate to contact us. Have a nice day.

Operator

Thank you. This concludes Oi SA's conference call. You may now disconnect and have a good day.

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