Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Tele Norte Leste Participacoes SA. (TNE)

Q3 2009 Earnings Call

October 23, 2009 11:06 AM ET

Executives

Alex Waldemar Zornig - Chief Financial Officer & Director of Investor Relations

Flavia Menezes de Oliveira - IR

Analysts

Michele Morin - Barclays Capital

Melissa Suarez - Costa Investments

Peter Lyons - Oscar Gruss

[Isabella Alaho] -PRT Investments

Henry Cobbe - Nevsky Capital

Rizwan Ali - Deutsche Bank

Efrain Chavez - Artha Capital

Miguel Garcia - Deutsche Bank

Operator

Welcome to the Tele Norte Leste Participacoes SA third quarter consolidated results. (Operator Instructions). Please Mr. Alex, you may proceed.

Alex Waldemar Zornig

Thank you. Good morning everyone and welcome to another conference call to present and analyze the Third Quarter 2009 consolidated results for Oi and it’s subsidies.

I would like to remind you that the slides presented today are available at the investor relations website of both, Oi and Brazil telecom.

With me here today, are Claudia Bitinkur our marketing director, Paolo Marcus our new regulatory director, Tarso Rebello, our treasury director and Roberto Terziani, and his IR team.

Before we begin I’d like to remember that in order to provide you a better understanding of the collusion of our results we are presenting the pro forma figures for the third quarter of 2008.

Before we move on to the analysis of the quarterly earnings, I will start by giving you an update on our progress regarding the integration of Oi and Brazil telecom up to the end of September.

Slide 2, shows the main areas of progress relating to the integration of the two companies. First 100% of mobile service sales during the third quarter in the retail segment, region two, came from the new portfolio that was launched between the middle of May.

This week we launched in region II, the Oi6, our wire line service and Oi (inaudible), our broadband internet service and last, our bundle (inaudible) for the first quarter of 2010.

The distribution channel model in Region II was completely adapted to focus on small retailers and spend our virtual recharging for prepaid plans. We also stepped up our handset unlocking strategy in Region II and the extension on stores are already migrated to voice franchise model.

Other initiatives were implemented to increase the profitability of our distribution channels. We are now offering the right products through the most appropriate channel in order stimulates sales. In the corporate market, we consolidate our nationwide operations to ensure our leadership in this segment.

Moving on to the operational front, we consolidate the network-operating center allowing an integrated view on management of all the new voice networks throughout Brazil. We have implemented a single supplier internal plant service models in Regions I and III, generating higher financial and operating gains and ensuring a more efficient supplier managing capability.

We also integrated network conception, planning and operating activity. We have moved ahead with our cost cutting measures as a result of the merger of the two companies, which include review of all of our company's logistic models, a reduction in the cost of goods sold, replicating the naked SIM card sales strategy in Brazil Telecom's region and the reduction in roaming costs, booking under the interconnection cost among others.

We have concluded third and last stage of our administrative restructuring plan now fully centralizing regional and personnel rationalization process.

Our CapEx has declined as a result of the consolidation of the two company supplier after the revision of outsourcing agreements and other minor initiatives.

Our latest analysis shows that we are on the same path as outlined during our previous results conference call. We said then that we would save between R$400 and R$500 million in 2009 and that CapEx could be reducing around R$1 billion as a result of synergies-related to integration of the two companies.

Moving ahead to Slide 3. We show the current status of the integration between the two companies from the statutory standpoint. After the conclusion of the tag along tender offering in June when we saved almost R$1 billion in cash, we began to simplify the group’s corporate structure.

At the end of July, we incorporated the intermediate companies indirect control by Telemar Norte Leste, as well as those created for the specific purpose of Brasil Telecom’s acquisition, namely Invitel, Solpar, Copart 1 and Copart 2.

By the end of September, BrTP, the holding company was incorporated into BrTO. This was the most important stage of the process since it will lead to the efficient use of goodwill amortization starting of 2009.

We expect BrTP shareholders to receive their BrTO shares by mid-November. After the exercise of redemption rights (inaudible) concludes for the common shareholders. As a result, BrTP shares will no longer be traded at the stock exchange in Sao Paulo (inaudible).

BrTP’s ADR holders will receive BrTO shares divided amongst preferred and common shares as we announced in the market. Probably by the end of the first quarter of 2010, BrTO shareholders will have to convert their shares into Telemar shares, which will then be traded at the Bovespa, New York stock exchange.

Moving forward to the analysis of our consolidated operating results on Slide 4 we can see the increase in the group’s revenue generate units, which at the end of September achieved 60.5 million users of which 21.5 million correspond to fixed line, 4.1 million wireline broadband users, and 35 million mobile customers.

In major source have explained this quarters decline in fixed line sales was related to the clean up done among Region II client base, where the company disconnect prepaid fixed lines and other lines linked to the former (inaudible) plan, which were also impacting the callers broadband additions in that region.

However and in spite of region II broadband disconnections, broadband service and mobile telephony continued to be the company’s main source of growth.

During the past 12 months, around 460,000 new clients have subscribed to our fixed broadband plan and another 360,000 new clients have adhered to 3G mobile technology of which 310,00 did so through (inaudible).

In September, we launched Oi Conta Plus Recife in the state of Pernambuco. This product enhanced the Internet accesses fees and expands it to 100 megabytes per second. We are currently upgrading our broadband network in 10 other cities in Region 1 and II to offer the same service to the new and existing clients.

Mobile services still the group’s main source of growth. We’ve a 7.7 million year-over-year increase in the number of clients, which we would discuss in further detail on Slide 5. Most of the mobile growth relates to the startup of operations in Sao Paulo state where Oi already has almost 4.5 million clients and a market share of over 10%.

Although additions in the Region II was slightly lower than those in Region I in absolute terms, we should stress that since the launch Oi News mobile portfolio, our average monthly net additions that region were almost twice as high as in the same period of last year. We have now around 16% markets share in Region II and we intend to further increase this ratio.

In Region I where we have the market share of approximately 30%, we are focusing on increasing probability and consolidate our leadership position. On the national wise level, we closed the quarter with a market share of around 21%.

Once again, I would like to draw your attention to Oi Conta Total shares, which at the end of September amounts to almost 1.5 million mobile clients, more than 700,000 plans, way above 37% of postpaid users in Region I.

As I have already mentioned, the launch of this Bundle products in Brazil Telecoms region is scheduled to begin early next year.

On Slide 6, we analysis the company’s financial results. During the third quarter consolidated gross revenue amounted to R$11.6 billion, 3.6% higher than in 2008 third quarter mainly due to the performance of mobile telephone services, which increased by 15% year-over-year.

The higher average postpaid client base especially Oi Conta Total had a positive impact in our subscription revenue and at the same time in the total average customer base benefitting our network users revenue.

It is also important to highlight the increasing revenue from data and value added services proved by the growth in the number of 3G clients.

Wireline revenue grew slightly benefiting from the performance of data transmission service and advanced voice service and additional service. However, in comparison with the previous quarter almost all of the revenue items recorded an improvement.

Most of the Brazilian mobile companies once again included calls to wireline phones in the client's minutes bonus, which will certainly continue to benefit our network uses revenues in the coming year.

On slide 7 we analyze our consolidated operating cost and expense. As well as the resulting consolidated recurring EBITDA. In this quarter we recorded non-recurring costs and expenses of R$290 million comprising non-cash expense for the amortization of amounts related to postpaid handset subsidies, administrative restructuring and other expenses related to the acquisition and integration of Brasil Telecom, other expenses relating to write-off of assets whose recovery was considered uncertain by the company.

In addition there were items of around R$200 million in 3Q '09 whose nature was only partially registered in 3Q '08. That mainly stems from the lines of Sao Paulo mobile operations.

The consolidate recovery EBITDA amounted to R$2.6 billion accompanied by recovering margin of 35.1% which was a 110 basis points above the same during last year's period.

It’s important to mention that although our mobile operations in Sao Paulo have not yet reached break-even point, they have improved during 2009. We expect EBITDA from these operations in Sao Paulo to reach break-even in the first quarter of 2010.

Slide 8 features other result items. Despite the year-over-year increase in net debt, net financial expenses in the third quarter benefit from the appreciation of local currency. The year-over-year variation depreciation amortization was mainly related to beginning of the amortization goodwill from the acquisition of Brasil Telecom. Consolidated net income amounted R$64 million.

It's important to note that this result was key despite the negative impact of our Sao Paulo operations as mentioned previously along with the continuation of the tax distortion also observed in previous quarters.

As you know the company did not make full use it’s tax benefit related goodwill, which is not yet fully recognized by BRTO. As mentioned only a small portion of the goodwill was registered in BRTO resulting from the corporation (inaudible) at the end of July, which brought tax benefits.

This situation will be eliminated completely in the fourth quarter. As a result the goodwill will be fully recognized by the operational company thereby generated tax benefits for the whole group. The slide 9 shows the company debt trends.

As the result of most in schedule total debt fell by a little more than R$1 billion closing the third quarter at R$28.5 billion. Net debt in turn fell by around R$500 million representing 2.1 times adjusted EBITDA in the last 12 months.

These reductions occurred despite the payments of around R$260 million in interest on acquisition to BRTO and BRTP’s shareholders. In addition only 180 basis points of total debt equivalent around R$500 million is exposed to foreign exchange rate.

The total effective cost of debt including hedge transaction was 9.5% versus 11.5% in the previous quarter equivalent to a 109% of the period CDI.

On slide 10 we present a breakdown of Oi's consolidated investment, which amounted to R$1.3 billion. 46% of which were allocated to mobile segment and 54% to wireline segment. It is also important to say that around 77% of the quarter's CapEx was allocated to the growth source of our business, that is data transmission service or mobile telephone service.

As a result, investments amounted R$3.2 billion in the first nine months and should reach R$5 billion to R$6 billion by the end of the year. This represents around 14% of the consolidated net revenue in the period.

However if we consider the reduction of almost R$1 billion in 2009 CapEx due to the synergies, the real CapEx would represent almost 17% of the consolidated net revenue in the period.

In the wireline segment, most of the investments were allocated to increasing coverage and expanding broadband network transmission capacity in places like Recife, where we are now offering Internet access speeds of up to 100 megabytes. In the mobile segment, we focus on expansion and improving network quality.

Now let's move on to the question and answer session. Thank you all very much.

Question-and-Answer Session

Operator

Your first question comes from Michele Morin - Barclays Capital.

Michele Morin - Barclays Capital

Just wanted to see if you could quantify the clean up of the mobile and fixed line subscriber bases and specific to mobile, what kind of impact that had on R II?

And then secondly, I think in the Portuguese call this morning, someone asked about your use of cash and you responded dividends and investments. I just wanted to know if you could give us a sense of how we should think about where the dividends will be paid from, at which entity they will be coming from?

Alex Waldemar Zornig

Thank you, Mike. Regarding the clean up, we cleaned up around 230,000 customers in Region II and in terms of mobile it was around 275,000 customers in all three regions.

If that (inaudible) we had, but we don’t know exactly how much, but not very much because we talk about 37 million customers, so the amount of clean up is not big enough to affect dramatically the output.

Michele Morin - Barclays Capital

Then on the stick side, is this something that should be a one-time done or could this happen again potentially?

Alex Waldemar Zornig

No, that’s one time done and I would say from now on, the Region II fixed line; we are half of the base in order to grow again. And the other question regarding how much we are going to pay and which entity, unfortunately I cannot by regulatory reasons tell you.

Michele Morin - Barclays Capital

Okay. And then if I may, a separate question, on the topic of goodwill and intangible amortization, will the remaining transactions impact the current run rate that you are expensing in the P&L? In other words, when we plan for 2010, should we anticipate that we will see a significant increase in amortization of intangible slow through the P&L?

Alex Waldemar Zornig

No, the amount you have up to now that’s what will remain in the next year.

Operator

Our next question comes from Melissa Suarez - Costa Investments.

Melissa Suarez - Costa Investments

Could the recurring margin of 35% that you disclosed be taken as a level you expect to be obtained in 2010 provided it's a typical year with no extraordinary events?

Alex Waldemar Zornig

I would say that as I said in the Portuguese call, if our competitors avoid doing anything funny in terms of giving telephones away free and things like that we believe that the margins will continue to be growing not of course I cannot say this is a peak, but yes we believe that 35 is something that, as I said if we don't have a competitor doing anything funny we, will be the one that we are going to seen in 2010.

Operator

Our next question comes from Peter Lyons - Oscar Gruss.

Peter Lyons - Oscar Gruss

My question was on the non-recurring expenses in the quarter. You mentioned the deferral of subsidies, some consulting and integration expenses and also the write down of assets. I believe we only have the number for the write down of the assets, which was the R$152 million.

Could you quantify the other items with regards to the deferral of subsidies, if I'm not mistaken that's an accounting change that should continue into the future. So I'm wondering how exactly it's on recurring?

Alex Waldemar Zornig

Starting from the handset to begin. It's a non-recurring write-off of the asset because we write-off the stock we have okay?

Peter Lyons - Oscar Gruss

That's for the handsets?

Alex Waldemar Zornig

Therefore we won't have it next year because then we finish with the amortization in 2009 and then we are in running rate normal as it was, okay?

So what I mean, we in order to equalize the accounting principles between Brasil Telecom and Oi, we decided to write-off along the year 2009, the opening balance at the end of 2008.Therefore as we write off completely in 2009, in 2010 we won't have this affect anymore.

Peter Lyons - Oscar Gruss

That's for the write down on the handsets?

Alex Waldemar Zornig

Yes. As for the number, the number including the R$152 million, it's R$300 million for the quarter, okay?

Peter Lyons - Oscar Gruss

Do you have a breakdown of each item for instance the deferral handset subsidies?

Alex Waldemar Zornig

Integration with Brasil Telecom is around R$100 million plus R$152 and remaining R$44 million is the write down of the deferment as we said.

Peter Lyons - Oscar Gruss

That’s 42?

Alex Waldemar Zornig

44.

Peter Lyons - Oscar Gruss

44?

Alex Waldemar Zornig

And 10 million bucks is other things.

Peter Lyons - Oscar Gruss

So with regard to the 44 million for the end of the deferral on handset subsidies. After 2009, that’s no longer going o be the practice to, are you going to resume differing those subsidies? I'm just trying to understand how it's on recurring?

Alex Waldemar Zornig

Okay. Because you have two FX in 2009. The clients that up to 2008, we differed, that’s what we are right now and the clients that in 2009, we are charging to expensing to P&L as we go forward in 2010 onwards.

So the big impact is that opening balance in 2008, which we are writing down in 2009. I don’t know if you followed?

Operator

Our next question comes from [Isabella Alaho] -PRT Investments.

Unidentified Analyst

Hi, Alex, I was wondering, according to your speech, Oi's launch in Sao Paulo repeats the performance of Oi's mobile launch in 2002. Wherein only a few months were able to capture a large share of the market, right.

And now less than one year to reach 10% of market share. So I wanted to know what are your expectations through the end of your market share in 2009 and 2010?

Alex Waldemar Zornig

Our expectation is that we have already very positive results of the synergies, half of the integration of Oi and Brasil Telecom.

I think the number we are going to book this year of synergies is around R$400, R$450 million and of course because this is -it happened along the year, you won't get the full amount of synergies in 2010. Therefore you start in January already zero balance okay?

For the fourth quarter of 2009 we expect to have additional synergies mainly in the internal plants maintenance, which we in region one and three which we it's a big contract we close with Nokia with Siemens and also some logistic, the logistic model we changed for both regions also we're going to have some benefit in the last quarter, but the big benefit the full amount of benefit we will be having in 2010.

Operator

Our next question comes from Henry Cobbe - Nevsky Capital.

Henry Cobbe - Nevsky Capital

A few question first on the synergies, you mentioned the R$450 million is that year-to-date or is that for the full year and if for the full year what is the year-to-date number. And second question is just on the CapEx and could you just give us guidance for CapEx for 2009 and 2010.

And last question is on the deduction of sequential revenue. Could you explain a little bit more about why the deductions sequential revenue is being higher than they a year ago and if that recurring thing or is it something which will normalize?

Alex Waldemar Zornig

Regarding the synergies 450 is for the full year.

Henry Cobbe -Nevsky Capital

Year-to-date.

Alex Waldemar Zornig

The year-to-date R$313 million. Next, the cost of we have by having these synergies, okay, right. Regarding the CapEx, we believe the CapEx for 2009 will be around R$5 billion, R$5.3 billion. And for 2010 we cannot say yet.

Regarding the discount, what happened is in order, again to equalize the procedures of Brasil Telecom and Oi, some of discounts given to the sellers at sales point in Brasil Telecom -- it used to classified as an expense instead of detecting the gross revenue.

So we changed that procedure in 2009 that’s why you see an increase in the gross revenue but almost flat in the net revenue.

Your question is, is that the number we should work for now on? Yes, unless the Brazilian government reduce the taxation on our revenue, which we don't believe in the short term. That’s the number you need to work for our next year.

Henry Cobbe - Nevsky Capital

Wasn't in the second quarter? Wasn't there some additional discount included in the detection that you could ship out?

Alex Waldemar Zornig

(inaudible) was included in the first quarter of 2009.

Henry Cobbe - Nevsky Capital

And how much was that again?

Alex Waldemar Zornig

How much was the adjustment?

Henry Cobbe - Nevsky Capital

Yes.

Alex Waldemar Zornig

Up to 2009, around R$400 million.

Henry Cobbe - Nevsky Capital

Looking at the third quarter it seems like -

Alex Waldemar Zornig

The quarter only -- the quarter was around R$200 million.

Henry Cobbe - Nevsky Capital

What was 200 million?

Alex Waldemar Zornig

R$200 million.

Henry Cobbe - Nevsky Capital

So you're saying this continued level of kind of 35% of growth revenue is the recurring figure, is it?

Alex Waldemar Zornig

Yes.

Henry Cobbe - Nevsky Capital

And could you just give us an update on the head count for the fixed and mobile operations, how many employees?

Alex Waldemar Zornig

Well, we don't split fixed and mobile, but we can tell you that we have 28000 employees in the company as a whole, and of which 15000 are related to the call center.

Henry Cobbe - Nevsky Capital

And also you gave your net foreign exchange losses I think about R$8 million. Could you give us the credit position? What was the credit gain and the credit loss and what’s your exposure to the Yen at the moment?

Alex Waldemar Zornig

You said we have R$8 million of foreign exchange loss?

Henry Cobbe - Nevsky Capital

Yeah, I think so.

Alex Waldemar Zornig

Where do you see that? Can you help us?

Henry Cobbe - Nevsky Capital

In the TNLP result on --

Alex Waldemar Zornig

Page? I see, I have found it. It’s page 14 of the press release. How much was it well it was very difficult to say because how we book this. As we are almost fully hedged and only 2% of our foreign currency debt is not hedged.

So this line goes total the gross amount of the fluctuation of the foreign exchange, and most of the benefit or the market-to-market of the hedging instruments that we use. In order for us to open that, I need to ask to ask (inaudible) to open that and send to you later.

Henry Cobbe - Nevsky Capital

And just on the net EBITDA, what's your expectations of how quickly would it get down to a comfortable level of gearing like 1.5 times that EBITDA?

Alex Waldemar Zornig

1.5 times, forget it.

Henry Cobbe - Nevsky Capital

What level?

Alex Waldemar Zornig

No, we are not this level, a company of this size, we are CapEx intensive. It won't be like that. But 1.7 by the end of 2012. That’s our expectation.

Henry Cobbe - Nevsky Capital

But that implies that your CapEx must be, if you are analyzing that your discount EBITDA including 11 billion (inaudible) EBITDA, that must mean you are budgeting about 5 billion of CapEx random.

Alex Waldemar Zornig

Well you're saying, unfortunately I cannot say that there's any (inaudible) here because I cannot say numbers, future numbers yet.

Henry Cobbe - Nevsky Capital

And lastly just on the goodwill amortization again, will that come down a little bit in the fourth quarter just because of the reclassification of the goodwill?

Alex Waldemar Zornig

No, what is going down is not the amortization, it is the tax effect on that. So we're going to benefit tax on the amortization of good will.

Henry Cobbe - Nevsky Capital

Okay and just coming back to the deductions, are there any non-cash items in the deduction?

Alex Waldemar Zornig

Deductions of the revenue?

Henry Cobbe - Nevsky Capital

Yeah.

Alex Waldemar Zornig

No. Though unfortunately all cash.

Henry Cobbe - Nevsky Capital

Okay. And say what was the increase in tax that drives the deductions high up? Which tax was it?

Alex Waldemar Zornig

No, it was not an increase in tax. It was the re-class of the discounts we give to sales points in Brasil Telecom Foreign Ex offsetting revenue.

Henry Cobbe - Nevsky Capital

This isn't just a temporary adjustment, this is structural change?

Alex Waldemar Zornig

That’s structural change.

Operator

Our next question comes from Rizwan Ali - Deutsche Bank.

Rizwan Ali - Deutsche Bank

My question was that your ADSL growth has slowed down a bit and I guess a large chunk of it was going towards wireless broadband, is this is a cautious decision on your part towards wireless broadband?

And second thing is I just wanted to know roughly, from what we hear is wireless broadband's profitability is pretty low, so if you're pushing it are you doing it just because there's no cannibalization by other operators or is this a strategy on your part?

Alex Waldemar Zornig

No, was a clean up in Region II, if you remember in the beginning I said we cleaned up 230,000 customers in the fixed line in Region II, we clean up also the broadband linked to those customers.

For example as a matter of fact Region II broadband is increasing compared to previous quarter but that’s via looking the math, it looks that we’re not. We just launched in (inaudible) in Northeast of Brazil, the authorized speed, very high speed broadband. In one month we got 7000 new customers, so we’re offering up to a 100-megabyte speed there.

And now we’re going to replicate that in 10 cities in Region II in south of Brazil and west of Brazil, and we believe it's going to be very successful as well.

Rizwan Ali - Deutsche Bank

In regards to the wireless broadband, I mean is there cautious effort not to push wireless broadband because it’s going some ways can rely ADSL operations?

Alex Waldemar Zornig

Our approach in what we learned after a year in Brazilian market, not only with us but other three operators signing 3G. That 3G is not a replacement in Brazil I'm talking about.

Replacement of the fixed line broadband, what the customer wants, he wants mobility, he doesn’t to want to replace because the speed he can get in the fixed line is much better and higher and also more reliable than in 3G.

Therefore what is going to be approach not for the last quarter next year regarding 3G except for São Paulo, is that complimentary of service to our broadband fixed line? São Paulo is a different story because we don’t have fixed line in São Paulo, therefore we are going to, and there we are going to offer as a package with our mobile service.

Rizwan Ali - Deutsche Bank

One of the question I mean, I had noted that your wireless churn went up to about 3.8% in the quarter. I'm assuming that’s largely because of the clean up of mobile network that you did.

In terms of clean up, where was mostly clean up, and was it in region three in São Paulo?

Alex Waldemar Zornig

Well, all regions about 80% on region 2.

Operator

Your next question comes from Henry Cobbe - Nevsky Capital.

Henry Cobbe - Nevsky Capital

Just on the personnel costs. You mentioned in the text of the release that the personnel costs include some restructuring or sort of layoff costs. Could you quantify that for us please?

Alex Waldemar Zornig

How much is the cost you are talking about?

Henry Cobbe -Nevsky Capital

Yes, in the personnel costs, how much of that personnel cost is for payoffs?

Alex Waldemar Zornig

In the quarter, it is R$3 million.

Henry Cobbe -Nevsky Capital

Okay. And the headcount of 28,000 that you referred to including the contact. Am I right to give that comparison to the second quarter of 31,000?

Alex Waldemar Zornig

First, it does include contacts that include our cost center again. And your question is, it’s compared to what?

Henry Cobbe -Nevsky Capital

Well, in the second quarter your headcount was 31,000. So, excluding contacts, I am interested to know if you have actually lost 3,000 people?

Alex Waldemar Zornig

We laid off 3,000 people, yes, the whole year.

Henry Cobbe -Nevsky Capital

During the whole year~?

Alex Waldemar Zornig

Yes

Henry Cobbe -Nevsky Capital

Is it 28,000 as of the third quarter.

Alex Waldemar Zornig

Yes

Henry Cobbe -Nevsky Capital

Okay. And what was the cost of that layoff program?

Alex Waldemar Zornig

Regarding the layoff, you mean the whole year, R$125 million.

Henry Cobbe -Nevsky Capital

Okay. And how much do you think it will save you next year in terms of average personnel.

Alex Waldemar Zornig

R$450 million.

Henry Cobbe -Nevsky Capital

So, off your R$450 million synergies half of that is just from head count?

Alex Waldemar Zornig

Half of that, no 25% of that, next year it was going to be R$1 billion synergies.

Henry Cobbe - Nevsky Capital

Cumulative on an incremental basis, part of this head count?

Alex Waldemar Zornig

Incremental base, if you look at incremental base if I spend R$150 to get R$250, so you talk about R$100 next year, incremental marginal.

Operator

Our next question comes from Efrain Chavez - Artha Capital.

Efrain Chavez - Artha Capital

Just a quick clarification, in your prepared remarks you talked about the synergies and also in terms of CapEx savings from the combined entity and I thought I heard you say that the combined savings could be up to a R$1 billion in terms of CapEx.

Is that correct? And if that's the case, then should we assume that the 2009 level which you're kind of indicating that some of 25 and 5.3 (inaudible) should we think about the CapEx a billion less for 2010?

Alex Waldemar Zornig

Yes, you're right. So far we achieved R$810 million CapEx savings or synergies okay? Of course some of this CapEx savings, depending if we're going to continue to invest for example in the mobile in the same level we invest in the last year are recurring.

Otherwise it's not something that we repeat because we are not investing in whatever is the base for this savings okay? But you're right I mean the purchasing power of our CapEx next year. And along this year, it's much higher than when we had the two companies separately.

Efrain Chavez - Artha Capital

Okay. So thus far you have already gained savings of approximately, in terms of CapEx, you said R$900 million?

Alex Waldemar Zornig

800.

Efrain Chavez - Artha Capital

800, okay. So those are not savings that are to come from this point forward. The billion mark that you mentioned is not going from this point on. You've already kind of gained that job, the cost advantage. So when we think about next year, its not a R$4 billion level, its to be somewhere between 4 and 5, I guess?

Alex Waldemar Zornig

Well, it depends. If we are going to repeat the same type of assessments we are going to look like, broadband, we have CapEx savings and also the mobile. If we are going to have the same strategy in terms of CapEx, you are right. We will have R$1 billion left regarding these items, lower than this year.

But depending which direction we go next year and for sure, next year is the year of broadband. This year it was mobile, next year it's broadband. I would say we are going to have part of this savings in our CapEx next year anyway.

Operator

Our next question comes from Michele Morin - Barclays Capital.

Michele Morin - Barclays Capital

I think you gave a number earlier in terms of the impact of the São Paulo start-up in the third quarter. I think if I got it right, you said R$53 million. Could you give us what the trend was in the first and then in the second quarter?

Alex Waldemar Zornig

All right. São Paulo, as the whole year is going to impact us R$400 million. And next year it will be a break even in the end of first quarter. The trend is of course it was higher in the first quarters and going down for the fourth quarter.

Michele Morin - Barclays Capital

That number was correct; it was 53 in the third quarter?

Alex Waldemar Zornig

Yes, you're correct.

Operator

Our next question is from Miguel Garcia - Deutsche Bank.

Miguel Garcia - Deutsche Bank

Regarding your data in terms of recurring margin of 35% you said these depending on the competition being rational, what are you seeing in the last couple of months in terms of wireless competition in Brazil?

Have you seen that companies being more satisfied with their current subscriber base or you think that could be strong competition still going forward especially now that we’re approaching our Christmas season?

Alex Waldemar Zornig

I want to pass this question to Flavia I think she's better prepared than me to answer.

Flavia Menezes de Oliveira

If we compare the first six months of the year to the six-month of the end of the year, we’re seeing much competition in mobile. It began with TIM and now what we see is Vivo going in the same direction. So (inaudible) put really competitive offers, let's see what it's going to happen for the Christmas.

But what we’re seeing right now is, it shouldn't be month of great offers but Vivo is bringing the market in that direction. So I think we need to wait a little bit more and see what’s going to happen in November.

Miguel Garcia - Deutsche Bank

Do you see this competition focusing more on a rates in a sense or just handset subsidy?

Flavia Menezes de Oliveira

No, no offers, offers, given a lot of traffic on that. Not so much in the handset this is something different that's happened this year and the last years we haven't seen a lot of competition in handset prices, but now the competition is growing in (inaudible) and a lot of (inaudible). So it's kind of different this year.

This is something that only Oi was doing Oi was subsidizing handsets was giving a lot of bonus on that and now we have the competitors going the same way.

Operator

Our next question comes from Rizwan Ali - Deutsche Bank.

Rizwan Ali - Deutsche Bank

Yeah, I just want to clarify that for next year, you're’ saying cost synergies over R$1 billion, that's this only Opex there is no cost included from CapEx?

Alex Waldemar Zornig

If I'm correct the number is the same. We expect to save this year R$1 billion on CapEx and next year as we have the full year of synergies in the OpEx, it’s R$1 billion too.

Operator

There appear to be no more of questions. So, I would like to turn the floor back over to Mr. Alex Waldemar Zornig for his final remarks.

Alex Waldemar Zornig

Thank you very much for attending the call. I would like to thank once again our investor relation team for the great job they have done and they are available to answer any additional questions you might have. Please do not hesitate to contact us if you have any questions. And thank you and have a nice day.

Operator

Thank you. This concludes Oi’s conference call. You may now disconnect your lines and have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tele Norte Leste Participacoes SA Q3 Earnings Call Transcript
This Transcript
All Transcripts