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Executives

Zeinal Abedin Mahomed Bava - Chief Executive Officer

Bayard De Paoli Gontijo - Interim Chief Financial Officer, Investor Relations Officer and Treasury Director

Carlos A. de Legarreta Díaz

Analysts

Richard Hamilton Prentiss

Paul Marsh

Vera Rossi - Goldman Sachs Group Inc., Research Division

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

Mathieu Robilliard - Exane BNP Paribas, Research Division

Michel Morin - Morgan Stanley, Research Division

Richard Dineen - HSBC, Research Division

Stanley Martinez

Daniel Federle - Crédit Suisse AG, Research Division

Oi SA (OIBR) Q3 2013 Earnings Call November 13, 2013 8:00 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 third 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 are made, and the company is under no obligation to update them in light of new information or further developments.

I will now turn the conference over to Mr. Zeinal Bava, CEO. Please, Mr. Bava, you may proceed.

Zeinal Abedin Mahomed Bava

Great. Thank you very much. Good morning, ladies and gentlemen. I'm here with our CFO, Bayard; and our IR team as well. First and foremost, I'd like to thank our IR team for this great presentation, which I'll show you in our sites. We are going to be discussing the third quarter results. In the third quarter, Oi's net revenue increased by 8% (sic) [0.8%] year-over-year, totaling BRL 7.1 billion, mainly as a result of higher Personal Mobility service revenue, which was underpinned by prepaid recharges and data growth. I'll talk about this a bit later. Also it was important, the extension that we saw or we continue to see in Pay TV and broadband in the Residential segment. Our EBITDA totaled BRL 2.1 billion in the quarter, increasing 19% sequentially as a result of the first impact from the focus -- from the company's focus on financial discipline and operational efficiency. Worth mentioning here, when comparing to the same period of last year, in particular, bad debt provisions were significantly higher this quarter. Last quarter, third quarter last year, our bad debt provisions were BRL 75 million, which compares to about BRL 201 million now. So -- and during the third quarter of 2012 about 1% of revenues now about 2.6%, 2.7% of revenues. Operational cash flow, measured as EBITDA minus CapEx, amounted to BRL 599 million in the quarter, and this represents a significant year-over-year and sequential improvement as well. Great news was the net debt performance to net debt stood at BRL 29.3 billion, that's a decline of 0.7% when compared to the previous quarter. Revenue-generating units, now turning to the business, grew 3.2% over the third quarter of 2012 and remains stable in the quarter. We now have 74.9 million customers in Oi. Also we'd like to mention to you that just in terms of financial highlights that when it comes to operating costs and expenses, our operating costs and expenses sequentially were down 6%. They were up 2.3% compared to the same period last year. And as I mentioned earlier, provision for bad debt in third quarter 2013 was BRL 201 million whereas in third quarter 2012 was BRL 75 million.

Our EBITDA margin in the third quarter reached 30.1%; our net income, BRL 172 million; and as I mentioned earlier, EBITDA minus CapEx of BRL 599 million with CapEx very much under control and in line with the BRL 6 billion that we've indicated for the full year.

Whilst the slides in the presentation that we put out, I'm using now presentation Slide 4, we are showing you the change in the cash flow profile of the company. At the time of our second quarter results, I indicated to you that we have 3 business [indiscernible] One was to correct the cash flow profile of the company; the second was to consolidate our business model and boost productivity; and the third is to continue to grow in the market where we believe there is still substantial work to be done, particularly in terms of fixed-line broadband, mobile Internet and also Pay TV. It is an achievement for us to report that net debt was down this quarter, something which has not happened in this company in the previous 8 quarters.

Let me now turn it over to this [indiscernible] detailed analysis of the business performance and then operational performance before I hand you over to our CFO.

A pitch on Oi is always a pitch on Brazil. So let me start by talking about Brazil first. We continue to believe that the demographics in this market and the redistribution of wealth, which is leading to this emergence and, if you like to establish middle class will lead to further consumption of telecom and technologies in the future.

We think that there is substantial potential for us to increase pick up of broadband and Pay TV, as I mentioned earlier. We think that the Pay TV penetration is well below where it should be. We also believe that when it comes to mobile Internet, a lot of the numbers that are being reported are on the back of mobile broadband, but we continue to think that mobile Internet in this market can still grow substantially in the future. In [indiscernible] sense, broadband penetration we continue to see ample demand, you will certainly see urban areas with greater speeds. You will see more remote areas simply with lower speeds but I think increasingly what you will see is that household and companies in this company -- in this country will go online sooner rather than later. Now, of course, it's worth mentioning that when one is talking about Brazil, consumption can vary region-by-region and also city-by-city. And this is one of the reasons why in my previous roadshows and analysts presentation, I've been indicating that we need to be granular in the way that we approach this market. Recent studies have indicated that if you want to tap 70% of the Brazilian income, you now need to be or you will need to be in about 500 cities in this country.

In that regard, it is worth mentioning that [indiscernible] is the unique competitive advantage. Right now, just to recall, we are present in 4,800 municipalities in Brazil. This is the biggest footprint in this market. In all these areas we can offer fixed and we can also offer mobile. We can offer voice, we can offer data and we will also be able to offer video using our DTH platform. It's worth mentioning that we cover 7x more municipalities with fixed network than the second largest operator. And with regard to our fiber footprint, [indiscernible] substantial about 1.3x more kilometers of fiber than the second operator as well. So we believe that we have an incredible infrastructure and now what we need to do is unleash, if you like, the imagination of our teams to develop services that actually lead customers to use this technology increasingly in the future.

Page 12. When I mentioned to you consolidate our business model. The game plan is very simple. We would like to sell broadband to those that have fixed line, and we would like to sell TV to those that -- to those customers that have fixed line and broadband. Very similar to what's happening on other markets, this will become a triple play, possibly quadruple play market as well. Now we are making huge amounts of program in terms of broadband, the growth third quarter 2012 -- third quarter 2013 were 7.3% and in terms of Pay TV, the growth was 50.1% (sic) [50.5%]. It's worth mentioning that today, 57% of our household [indiscernible] of customers already have more than one service. Of course, we can do much better than this but it is worth mentioning that this is on our radar screen. Also worth mentioning that ARPU has done in a phenomenally well. We increased our ARPU 7.4% in the course of the last year. I've included some slides here for you, which give you a sense for the kinds of products and services that we are introducing in this market. Here for us convergence means voice, video, data, but also means fixed and mobile.

So let's go maybe to Page 14 it's the service that we launched a couple of days ago. We are offering free sim cards to those fixed line customers or phones for BRL 10 each, and I think this will, in my view, represent a significant enhancement of the value proposition that we have on the fixed line even before we start rolling out TV more aggressively in the future.

In terms of TV, turning to Page 16. We would like to be rational in the way that we go about growing this business. We think we have one of the most expensive channel offers, both in terms of HD but also local channels as well.

Our Pay TV RGUs have increased 50%. April next year, we will be able to, if you like, use this new satellite that we have, worth mentioning that we will have the biggest or the largest satellite capacity in this market. But starting March, April next year, we will be able to roll out a significantly different offer to the one that we have today, including an offer of 3 set top boxes that will allow us, if you like, to tap the market with different household income as well.

Page 17. Yes, it goes very much in line with what we said before to you. Churn is an issue, we need to deal with it, and we are dealing with it. In September this year, our broadband churn was the lowest churn of the last 3 years. Our fixed line churn in September was the lowest churn that we reported this year. So I think things are going clearly in the right direction. Involuntary churn will improve as we improve the quality of the sales that we have been doing. In June, when I took over as CEO, with my team here, we've been working actively to, if you like, restructure all our channels, restructure sales channels, our mix in terms of products and so on and so forth. Good news is that what we are seeing in terms of new subs, we are seeing much more lower involuntary churns. I would expect us to actually stop aligning one with the other before we actually comes even below to what the voluntary churn should be. And this is one of the reasons why our bad debts are actually coming down, and therefore, as a result of provisions as well. All in all, we're still growing 3% in residential. And allow me to say, if you put this against the backdrop of the numbers that have been reported in the Brazilian market, this is a very, very good result. Now we're doing this against the backdrop where we are improving the quality of the sales, where clearly we've taken the view that we need to sell but we need to sell profitably. So good news is that once we put these processes in place, we should be able to unleash our, if you like, footprint, both in terms of infrastructure and sales to start accelerate in sales next year.

In terms of mobility, Page 19, prepaid revenue-generating units were up 3%. Postpaid revenue-generating units were 9.5% up -- growth compared to the third quarter last year. So we're doing well in terms of ARPUs, plus there's still potential to do much better.

Page 20 gives you a sense of what is the market share of Oi in the different states in Brazil, whereas in the north, we are -- we have market shares of somewhere between 20% and 30%. In the south in São Paulo and in interior, we have still a lot of work to do. One of the main changes that we have implemented in our company in the last 3 months is to use a lot more aggressively our active campaign management tool, which allows us to direct promotions, if you like, to those customers that actually value those promotions, but also in those states where we believe we have, if you like, capacity available so that we can offer those promotions with quality of service associated.

Page 21. Our strategy to reposition the company in terms of prepaid is beginning to deliver results. Our recharges were up 8.8%. In fact, if you look at our service revenues, we did extremely well compared to cable companies in Brazil as well. And I believe that in the fourth quarter, with the kinds of campaigns that we are doing at the moment, we should continue to see, I would say, robust performance in terms of recharges. Included here, a couple of examples of recent offers that we put out in this market. One of them is directed to the youth segment from Oi galera. And this is one of the reasons why, if you like, why our interconnection costs are coming down. More and more of our customers are doing more minutes, and more and more of our customers are doing more minutes on net. And as you can imagine, this will continue to reduce our termination cost, and not only because termination rates are coming down, but also because we are doing more traffic within our network rather than off network.

In terms of postpaid, Page 24. As I indicated in my second quarter call, we were working towards, if you like, improving processes in terms of logistics, support, installs and so on and so forth. We haven't -- we will be coming back to this market next year, also because we believe that it's a huge opportunity for us to grow data in the future but we would like to do that with caution, with prudence, especially in a context where as you can imagine the economy is actually doing differently to what it was doing 3 years ago. So postpaid churn is clearly coming under control. We are beefing up our stores now, and hopefully, we will start selling more postpaid sometime next year.

Page 25. Page 25 just gives you a sense for what our 3G and 2G coverage is. Today, with regard to 2G, 93% of urban population is covered. In terms of 3G, 76%. With regards to 4G, we are doing what regulation what we have, if you like, take an arm as a responsibility working very closely with another mobile company in Brazil with whom we're doing run sharing. But I would like to mention the investments we've done in terms of Wi-Fi. By the end of the year, we will have 500,000 Wi-Fi hotspots. If you're thinking about mobile Internet, if you're thinking about smartphone penetration, if you're thinking about broadband, I think they have very, very good reasons why people would want to be customers of Oi in the future.

In terms of Page 26. Clearly, voice has underpinning growth but so is data. From a smaller base, our data revenues were up about 57% this quarter. Having said that, data is only 17% of our total revenues. Peer Group, 1 peer group company in Brazil has about 32% coming from data. We believe that we can certainly do better than 17%, focusing not just on the smartphones and 3Gs but also focusing on future products.

SMEs. With regard to SMEs, we are at the moment doing a major restructuring of our sales channels, commissions and we are also adjusting the portfolio of services that we are making available to SMEs in Brazil. Now, we clearly believe that it is one segment of the market that is critical, it's strategic and it's growing. But at the moment, we need to, if you like, resolve some of these pending issues before we can actually stop selling more aggressively in the segment of the market. So it's work-in-progress in the numbers that we've reported you certainly saw that revenues in the segment were down against the backdrop where corporate continues to do well. Our corporate revenues were up about 3%. Our data revenues within corporate were up about 6%. And you know that, what I've seen in this presentation, as we are moving forward with our Smart Cloud strategy and working together with Portugal Telecom. While working together with Portugal Telecom, we can have one portfolio, we can accelerate our go-to markets and we can leverage the global partnerships of Portugal Telecom in terms of vendors. Now we've recently relaunched our cloud offer. We continue to believe that we are probably one of the best positioned companies through sell data center capacity in this market whether we're talking about housing, whether we're talking about hosting, or simply we're talking about virtual solutions.

In terms of corporate performance, Page 30. I need to mention that when we talk about corporate and SMEs, we're also in there including wholesale revenues. Wholesale revenues are declining in part because of regulator tariff are declining as well. Let me now turn it over very quickly to operations to mention just a few points. First, when it comes to network and infrastructure, investments are being deployed in a smart way. What do I mean by this? I mean that we are being granular in the way that we're approaching for the mark -- we're approaching the market. We are putting investments where we believe we can earn decent returns deploy them more quickly. Why? Because we believe that we need to change the profile of the cash flow of this company, and we need to start deleveraging our balance sheet.

So from that standpoint, yes, we will be there investing in 3G, 4G, but we will also do that with alignment with our suppliers, instrumentally what we are working towards is actually making some of these supplier relationships become partnerships, so that we can share not just the risks but also the rewards. In terms of network operation centers, just one example of, if you like, productivity boosts or efficiency gains we used to run 3 network operation centers in Brazil. We've now consolidated that just into one. We used to have, if you like, 20, 25, where we have field force, so that we could, if you like, do interventions in the event of certain crisis is now, if you like, reduce that to 3 sites, all this means more productivity, a tighter grip on the quality and availability of the network that we are making available in this market.

In terms of field force, page 34. We continue to roll out our workflow management tool. We have already introduced that in the state of Velox but on [indiscernible] and now we are working in Sierra and we hope to get done by the end of the year, also the northern part of the country. By June next year, we will have rolled out this tool, if you like, everywhere in Brazil. And this tool from a quality of service standpoint, what it will allow us to do is to actually ensure that every installation in the customer house is booked in advance. And our, if you like, technicians will become multiskilled as opposed to being -- having just 1 skill, most of them will have skills averaging 3 to 3.5. This means that 1 call on the house of the customer, we will be able to install voice, video and data simultaneously. We also believe that by introducing this workflow management tool, we should be able to improve our productivity by 20% to 40%. These are just some examples that underpin, if you like, the OpEx performance that we reported today.

Our OpEx sequentially was down about 6%, and that has a lot to do with some of these initiatives that are beginning, if you like, to bear fruit.

In terms of ITs [ph]. Another example of, if you like, initiatives to improve productivity. Short-term initiatives have a lot to do with us establishing productivity benchmarks and ensuring that our software, factories are delivering on those benchmarks. Allow me to say that in some cases, we have been able to renegotiate increase in productivity of up to 50%. Long-term, what we would like to do is to standardize our solutions, and, if you like, eliminate a number of applications, which today, just way on our company in terms of cost and, if you like, increase, if you like, our time to market. So on IT, we are developing an IT architecture that we will, if you like to implement over the next 3 to 5 years, but short-term, the focus is productivity of the software factories and also elimination of these applications that as I said, ultimately will enhance our time to market and thus make us a lot more competitive in the market.

Financial discipline. It's something which to date permeates our company, our organization to -- everyone is aware of need for us to improve the quality of sales for us to grow with profitability, investments have to be directed where we can generate decent returns. We need to fight churn, bring it down. Very happy to report the September numbers. So I just want you to understand that this is not just a management thing, which is today a company-wide understanding of these priorities. We've included the slide here for you in terms of asset disposals, Page 40, so that you know exactly what's going on. And how some of these non-recurrings are being reported in our P&L.

Fixed towers have not yet been approved and Globenet has not been approved as well. In both cases, the value of the transaction could amounts to as much as BRL 2.5 billion. Worth mentioning that the estimate that we have here as the total value of the transaction in the case of Globenet is using a U.S. dollar-real exchange rate of BRL 2.267, which means that has seen [indiscernible] to there is clearly a room for upside. In terms of culture, allow me to share with you the enthusiasm right now in our company in terms of our ability to deliver, deliver on results and the commitment of everyone to succeed. Over the last 5 months, I have visited our 9 regions, where we have, if you like, regional companies, and this is something which in my view is not flowing through the organization. We believe we can do more, we can do more with less and clearly, we can deliver, if you like, from those 3 priorities that I have highlighted to you in the beginning, which is we need to correct and we need to change the cash flow profile of the company, we need to sell more data and we need to sell more TV, we need to do more prepaid, and hopefully, in the future, postpaid as well. And last but not the least, we need to start paying down our debt.

On that note, allow me to hand you over to my CFO, Bayard. Bayard? Thank you.

Bayard De Paoli Gontijo

Thank you, Zeinal. Good morning, everyone. Starting with Oi's financial review on Page 44.

Net revenues reached BRL 7.1 billion on third quarter 2013, an increase of 0.8% over the same period of last year with focus on quality growth and prepaid acceleration.

Residential net revenues totaled BRL 2.6 billion, up 3% compared to the third quarter of 2012. The result reflects the continued increase in sales of bundles offers, combining wireline with broadband and TV and the focus on quality of service. In the third quarter of 2013, 57% of Oi's 12.1 million homes are connected [ph] have more than one Oi product, an increase of 5 percentage points against third quarter of 2012. As a result, Residential ARPU reached BRL 70.7, up 7.4% in the same period of last year. Personal Mobility amounted BRL 2.3 billion, increasing 1.1% from third quarter 2012. Net service revenues grew 7.5% based mainly on prepaid acceleration, and data revenue growth, which posted a year-over-year increase of 58%.

On the prepaid segment, gross recharges were up 8.8% in comparison to the same period of last year, the highest level ever for Oi. Important to highlight that given the company's focus on financial discipline and cash generation, the Prepaid segment is strategically important due to its characteristics, such as no relative consumer acquisition costs, no relative insurance or collection costs, the absence of bad debt and the positive impact on working capital. Due to a higher focus on quality of sales supported by a more strict credit policy with revision of sales channels and redemptions and its customer base and regulated wholesale tariffs, business-to-business net revenues decreased 1.3% year-over-year, totaling BRL 2.1 billion on third quarter 2013.

Moving to the next page, 45. We present operating costs and expenses of BRL 5 billion on third quarter, a reduction of 6% as compared to the BRL 5.3 billion of the previous quarter. The main reasons for the improvement were: Personal, 1 point -- BRL 131 million or 80% reduction due to the one-off payment of wage benefits accounted in second quarter 2013; marketing expenses, BRL 94 million based on the consideration of media expenses on previous quarters; provisions for bad debt BRL 122 million or 38% in comparison to the second quarter, underpinned by the current focus on financial business; interconnection, 14.4% or BRL 153 million, down from the past quarter, mainly due to the settlement of agreements with other operators on tariffs and lower off net traffic in SMS and voice; third-party costs increased BRL 32 million from second quarter, impacted by higher Pay TV contract acquisition costs; and finally, other costs and expenses were up BRL 152 million quarter-over-quarter, explaining mainly by the provision reversals of 2012 profit-sharing and losses for labor claims in the previous quarter. In addition to provisions for 2013 profit share recorded on this quarter. On the other hand, on third quarter, the company booked a profit in the amount of BRL 173 million related to the expropriation of real estate by the Minas Gerais state government.

Now on Page 46. Excluding non-recurring events, cost and expenses reduced 5.6% in comparison to the previous quarter show the adequacies of management focus on profitability and financial flexibility. EBITDA totaled BRL 2.1 billion in the quarter, 19% higher than the BRL 1.8 billion presented in the previous quarter. Margins reached 30% in comparison to the 25% of on the first quarter. Excluding the non-recurring impact from the sale of real estate, me and Zeinal already mentioned, the recurring presented a 20.4% sequential improvement based on a higher net revenues and lower cost and expenses as consequently overall of our focus on sustainable growth and operational efficiency.

On Page 47 we'll show consolidated CapEx amounting BRL 4.7 billion on 9 months of 2013. Over 75% investment in network were focused on lowering total cost of ownership throughout the reduction of number of suppliers, higher autonomy of the regional branches on CapEx allocation, improvement of processes, [indiscernible] acquisition, handover to operations and collaborations between PT and Oi on engineering planning. Operational cash flow totaled BRL 600 million in the quarter, 106% and 227% higher than second quarter 2013 and third quarter 2012. Once again, the improvement in the operational cash flow shows management commitment to leverage control and financial discipline.

Moving now to Page 48, net income was affected by higher EBITDA and lower financial expenses, totaling BRL 172 million from a net loss of BRL 124 million in the previous quarter.

On Slide 49, for the first time after 8 quarters, net debt was slightly below previous quarter with BRL 29.3 billion from BRL 29.5 billion. This result was based on a higher deduct underpinned by improved revenues and stronger operational efficiencies. Leverage improvement on third quarter was those were positively impacted by working capital. A reversal of the negative trend on working capital was due to the focus on prepaid efforts to increase the average payment of suppliers and improvements in collecting processes and credit policy. The leverage control is one of the top priorities of management in order to reestablish the financial flexibility needed in the capital and financial industry.

Debt profile on Page 50 show the total debt of BRL 34 billion with a comparative cost of funding and only 0.5% foreign currency exposure. Both hedging interest rates exposure breakdown while balanced with 49% GDI, 26% prefixed rate, 15% BNDES interest rate, 10% linked to inflation.

On next slide, 51, we present liquidity position of BRL 12.7 billion composed by BRL 4.8 billion in cash and BRL 7.9 billion in credit facilities available for divestment at any time. The available liquidity is more than enough to cover debt amortization until mid-2016. Important to highlight that 60% of our gross debt matures after 2016.

Now I'll turn back the presentation to Zeinal for his closing remarks.

Zeinal Abedin Mahomed Bava

Okay. Thank you, Bayard. So before we open up to questions, I just would like to say that our priorities remain as we've indicated in the past, the leverage change the cash flow profile of the company for that we will have to maintain strong cost discipline, financial discipline. We will dispose off certain assets as the way to fund ourselves, if you like, with longer maturity and then cheaper costs. With regards to our business model, we want to continue to, if you like, boost convergence in the company if we're thinking about B2C, but particularly in the residential. In terms of mobility, we believe that there's still opportunity for us to grow in prepaid, not just in voice but also in data. An a 57% increase in data revenues was very encouraging, but we believe that in terms of overall contribution, we can certainly do much better than 17.5%. With regard to corporate, the corporate revenues are growing 3%. Data is growing 6%. So by singing up the cloud in Portugal Telecom, hopefully, we will continue to diversify our portfolio to serve better our corporate customers. With regard to SMEs, work to be done, a number of initiatives are being implemented, as I mentioned. And my view is that it's 2014, if you like, reversal in terms of performance.

With regard to cost, we've discussed that in a lot of detail already. We believe that there's one area where there's work to be done is bad debt. We can certainly bring that BRL 201 million down. Although, like I said before, there will always be some volatility in the number that we report partly because the level of bad debt provisions also depends on the number of customers that we actually brought on board of the last 6 to 12 months although there tends to be some seasonality in that regard.

In terms of the cash flow generation, the working capital performance was robust. We think that we will maintain -- we think we can maintain similar sort of performance in terms of renegotiating our contracts with suppliers and so on and so forth. So by pushing on one hand, if you like, prepaid and on the other making sure that churn comes down; and third, renegotiate contracts in terms of those contract with suppliers, we think that we can continue to use working capital to underpin the cash flow generation in our company.

So in a nutshell, I think we are very happy to report that the net debt was down, cash flow was positive, net income was positive. We've also tried to give you as much detail as we can in our presentation also building up on, if you like, the disclosure that we provided in the second quarter. We will continue to work to continue -- we will continue to work to improve our disclosure in the next few quarters. And my team and I, of course, are available to answer any questions you may have. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is Rich Prentiss , Raymond James.

Richard Hamilton Prentiss

I have Zeinal, a couple of questions, particularly on CapEx and asset sales. The asset disposals of the fixed towers and the Globenet you mentioned waiting for regulatory approval. What is exactly approval do you need? And when do you expect you'd get the approval and be able to close those transactions?

Zeinal Abedin Mahomed Bava

Okay. In the case of the fixed lines, we are awaiting approval by ANATEL. In the case of the submarine cables, we are waiting approval by the SEC. We've indicated that, I think in the second quarter results, that Globenet we think we should be able to get it approved by the end of the year. So that's one trade that we think we should be able to book in our numbers during the course of this year, openings[indiscernible].

Richard Hamilton Prentiss

Okay. And then as far as future asset disposals, Can you tell us how many more of the fixed towers, mobile towers you have and what's your appetite is to further monetize those to improve the long-term profit capital and debt repayment possibilities?

Zeinal Abedin Mahomed Bava

We are looking always at the portfolio of assets that we have as a way for us to, if you like, get access to cheaper funding. So we have fixed mobile towers that we could still dispose off, which are roughly 303,500, fixed line towers, we have about 6,000. So we will continue to monitor options available for us to be able to use these assets, if you like, to get cheaper funding and longer maturities. For us, we showed you, in our presentation, the impact that this is having in our EBITDA. And while to hear people talk about some of the recurrent or nonrecurrent impacts in our EBITDA, I think those people forgot to refer to the fact that our 9 month numbers already were impacted by BRL 40 million of leases in relation to these disposals that we did, which in my personal view is nothing more than funding. We are using these assets to get longer maturities and cheaper funding and this is one way in which we can improve our cash flow and this is what we focused on is on the cash flow. So when we discuss recurrent, nonrecurrent, you should also bear in mind that they are BRL 40 million in the 9 months, which are, if you know, as you can imagine a result of decisions that been taken in the past to beef up our financial flexibility. We also have some real estate portfolio and assets that we may be able to dispose off. The comfort I want to give to you is that myself and my CFO and the board of this company are all focused in making sure that we can sweat whatever assets we have, so that we can start deleveraging the balance sheet sooner rather than later.

Operator

The next question is from Paul Marsh, Berenberg.

Paul Marsh

I have a couple of questions. I just wanted to ask about the Pay TV ads in the quarter. And obviously, you're thinking that they were lot more suspected growth here. And as you said in the press release that there was a more restricted credit policy. So I guess I'm just asking, what are the things that have to happen to get those net Pay TV ads back to the kind of pace that we saw the previous quarters whilst at the same time maintaining that credit quality? I mean, is it waiting, as you said earlier, is it waiting for the new satellite capacity to come on? Or is it other aspects of play? And then also the idea of moving some multiplay or taking single plays, 2 plays, triple play, you think 57% of the households are at over 1% service at the moment. Where do you think that can get to in the medium to longer term?

Zeinal Abedin Mahomed Bava

Okay. Well, thank you very much. With regard to Pay TV, worth mentioning that we've bought satellite capacity and it's new satellite, which means that we will have a different conditional access starting April next year. And our customers will have to redirect, if you like, the additions. And so the reasons why we've, if you like, taken the foot off the accelerator somewhat is not just because of churn that we are trying to bring down but also because we believe that redirecting satellite dishes and changing set-top boxes is a very costly exercise and, therefore, we prefer to, if you like, relaunch our TV service sometime second quarter next year. So that's one of the reasons why you are not seeing us doing a lot more in that path. Having said that and whilst we don't give the disclosure for individual lines of businesses, we have seen a pretty decent contribution in terms of revenues coming from TV. Also mentioning in terms of TV, is the fact that we are renegotiating a number of our content contract. And also worth mentioning in terms of TV is that we are, as we speak, training, if you like, a number of service providers in the art of installing a TV service properly with quality. So we are working, if you like, in the background to make sure that if and when we start pushing aggressively TV, we can do that with a very differentiated offer. We have no wish to compete on price. We prefer to compete on the channel offer that we have and the functionalities that we will make available. And like I said, we are building a new head-end, which will be up and running first quarter next year. We will have the new sort of set-top boxes come in play second quarter next year, 3,000 set-top boxes, a very basic one is Zapper, a hybrid and a more sophisticated PVR, so it will allow us to do segmentation. But most importantly, I think we will have a content offer, which will be very rich not just in terms of HD but also in terms of channels from Global, which, has you know, in this market is a very, very popular content. That's on Pay TV. With regard to 2P, 3P, it is difficult to give you an exact number. I think in Portugal, we are running at 70-plus-percent. So it is difficult at this stage to give you anything more precise other than to say that we've just recently come out with a new offer, which is bringing together fixed and mobile. In fact, for us in Europe, when you talk about bundling, we are always thinking about voice-to-video data. So what comes immediately to mind is voice/video/data rather than fixed-mobile. In Brazil, Oi has been successful with doing a lot of fixed-mobile convergence. So we just 2 days ago launched a new offer whereby if you are a fixed line customer Oi, you will be entitled to buy 3 sim cards, BRL 10 for every sim card. So this, as you can imagine, will improve the value proposition of the residential offers that we have in that regard, and will also assist us in underpinning this increased penetration of services in the households and also in increasing of share of wallet.

Operator

Our next question is Vera Rossi, Goldman Sachs.

Vera Rossi - Goldman Sachs Group Inc., Research Division

Could you talk about your provisions for bad debts? And do you expect your provision to continue to decline as a percentage of revenue in the next quarters at the pace it declined in the third quarter 2013?

Zeinal Abedin Mahomed Bava

Okay. With regard to bad debt provisions, not actually saw that the third quarter last year they amounted to 1% of our total revenues. So to say that bad debt provisions are well above third quarter 2012, that doesn't give you really the right picture because probably first quarter 2012, our bad debt provisions were too low. I'm sure you've done the math, you will have seen that it's about 1% of our total revenue. So as I've indicated, second quarter results, we think that bad debt should run at circuit 2% of revenue, give or take, obviously, as you can imagine this is not in our profile times. So when you compare in your numbers with third quarter 2012, beware that it was only 1% of sales and probably that was below where it should be, whilst at the same time, BRL 201 million, first quarter, is much higher than it should be. So we are working towards reducing churn, improving the quality of our sales. As you can imagine, the rate at which we can improve our bad debt provisions also depend on -- in the rating which we can grow our subscriber base based on this sort of new quality sales that we're doing. So that's one area where we think there is substantial upside for us. If you were to do the run rate of bad debt provisions based on the third quarter, bad debt provisions for full year would've been about BRL 1.2 billion, BRL 1.3 billion. And I indicated to the market that, that should be at least half of what it was implied, so that's where we are working towards. So I don't think next quarter you'll be down to 150 with more or less what it should be. But we will continue working towards reducing that number by doing structural measures. So it's not changing any criteria other than making sure that it's in the DNA of our company that if we are going to sell, we need to sell profitably and we need to sell with quality.

Vera Rossi - Goldman Sachs Group Inc., Research Division

Okay. And I have one other question on your prepaid recharges. Do you expect the rate of growth of 7.5% in mobile service revenue to be sustainable in the next quarter? Or where should we see this growth in mobile revenues as a result of more recharges?

Zeinal Abedin Mahomed Bava

Okay. The -- we indicated in the second quarter that we wanted to change the cash flow profile of this company. And of course, one of the ways in which we can do that is by working, if you like, reducing our working capital investment. And one way in which you can do that is by pushing aggressively prepaid, which is what we've done. And that's why it was, as you can imagine, a big achievement for us to report the numbers that we have put out in terms of mobility. And so actually to put that against the backdrop of what other cable companies have done in Brazil. I see no reason why we should not continue to have a good performance in terms of recharges. And we are using active campaign management tools that we have to direct promotions where it makes business sense for us. Bear in mind that if anything, our performance as we posted is understated in terms of how well we've done. Because as you know, we are not as strong as our peer group companies in São Paulo, which means that if we reported this kind of recharges is because other than São Paulo, we've done extremely well and much better than. So we are working and looking at state-by-state, areas where we can very quickly improve our market share. Prepaid is in the DNA of Oi and, and of course, there's seasonality in this. But I see no reason why with the kind of initiatives that we're implementing, our performance should in terms of recharges change materially from where it is today.

Operator

Our next question, Susana Salaru, Banco Itaú.

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

We have 2 doubts here. First one related to the adjustment term, the so called TAC with ANATEL. How that is evolving? And if you guys have an expectations of waiving some of the fee that you have under discretion, with ANATEL, using these instruments. And the second question, is related to third-party service we saw a good performance speed it was under control. Third question we should continue to see a reduction in design? Or this level is if we do get considered as a stable level going forward?

Zeinal Abedin Mahomed Bava

Okay. With regard to tax and so for those that are not that familiar, it's still the segment called BrTO[ph] essentially it means that one gets to negotiate, if you like, define with a regulator. We are waiting further clarification on the parts of ANATEL, so I'm not going to comment other -- I'm not going to comment more on this process rather than just to say that we are waiting for those rules of engagement, if you like, to be made public, so we can then interact and then we can see how that may or may not impact Oi. Clearly, as you know, we believe that with regard to a number of regulatory issues, there certainly Oi hasn't impacted negatively, and we are working constructively with all the parties to make sure that in the future, Oi can dedicate more, if you like, more of its efforts in terms of building the business and in particular building the Pay TV and the broadband penetration, which we believe in Brazil can be much higher than what it is today. With regard to the third-party, maybe Bayard can give you some insight. But as you know, we have not -- we are not giving you any guidance formerly, so we will not give you, if you like, a detailed view as to whether these numbers may or may not be other than to say that cost is just playing with something which is top on our agenda, and we will continue to work every single line item on the cost side of equation to make sure that we continue to underpin the margin, which instantly was 30%, and I think the highest to report it in the Brazilian market in our sector. Bayard?

Bayard De Paoli Gontijo

Okay, Susana, regarding third-party services, we are down 2.7% from same period last year, mainly due to low expenses and commissions on sales and reducing expenses on consulting as well. So those are other items that reduced the third-party services line.

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

Okay. I mean, my question on that was that if you should trying to continue going forward but I'm understanding from your answer that you're going to pursue that no cost lines not only on the third-party, correct?

Zeinal Abedin Mahomed Bava

Yes, I mean, yes, yes, it's line by line. You saw in the numbers that we posted that we are working in every single cost item. Marketing costs were down in the third quarter compared to the second quarter. Significantly, so we are -- obviously, when you think about rent and insurance and third-parties, don't forget that some of these asset disposals, they are weighed here. So if anything which is understating the effort that we're doing in terms of cost cutting because it's BRL 40 million in 9 months cumulative that's in there. So we will continue to work line-by-line. Personnel was down third quarter compared to the second quarter, 734 became 603. We are addressing issues like cost of extra time and so on and so forth. Bayard mentioned, consultancy, for example, we have reduced this drastically by more than 90% all our consultancy spending as well in this last 3 months. So it's a collective effort of all our teams in every single state, and they need to report every 2 weeks for what they're making in terms of cost cutting. So that our financial team can, if you like, hold them accountable for the delivery on results. Thank you.

Operator

The next question is from Mathieu Robilliard BNP Paribas.

Mathieu Robilliard - Exane BNP Paribas, Research Division

First with regards to your fixed-line strategy in residential where you're pushing more at the moment with our understanding for ADSR roll out in less expense or less competitive areas. I was just curious to understand, if you think over the medium-term this idea sale product could be threatened by the development of mobile broadband product based on 4G. So is that a sustainable investment in your view? And second with regards to Pay TV, you talked about the deal and the content you're going to get from Global. Can you tell us how that is structured? Are you basically buying content at not so fixed cost and then you almost highly prefer a [indiscernible] or is it on the per subscriber basis? A little bit more detail in terms of how this cost can result there?

Zeinal Abedin Mahomed Bava

With regard to the speeds of the offer, we have areas where we are offering 5 to 10 megabits per second. We have some areas where we're offering 2 megabits per second. There are some areas where we are bundling fixed line with 1 megabit per second. Now this is a pretty sizable country as you know. Just to site example of the state of Bahia, it's about 4x the size of France. So just to put things into context, so on average, we're offering 4 megabits per second. Now one of the major constraints that you have in some of these states is the quality of the transport network so and also in some cases redundancy. So we will continue to work towards giving people 4 things: Better coverage, higher speeds, lower liability and more security. This is, if you like, the 4 things that we are looking to offer to our customers and we would like to do that with the greatest possible speed. With regard to mobile broadband, as you are mentioning in 4G, don't forget that we operate with spectrum in 2.5 gigahertz, okay, which is, as you can imagine, makes it a lot more suitable for dense urban areas and with regard to mobile broadband in general, it's worth mentioning, that the backhauling it's still an issue. So I would like to believe that in some of these more remote areas, if you like ADSL, is probably a much, much safer bet albeit that the fees we'll have to continue to improve. And we are working and we are investing to make those improvements. With regard to content, we will have a lot of the global content, which is very popular content. It's a partnership that we like. It's a partnership that we treasure. Having said that, the terms and conditions of the contract are private and confidential. But I can tell you this, generally speaking, contracts tend to have minimum subs that you need to pay for and they tend to have a per set model. And then when you need a certain, if you like, threshold, it becomes a clear channel model. So that -- and this applies to pretty much all the content that you can imagine. As you can imagine for us the TV products is still at an embryonic stage. So right now, if you like minimum subs are weighing a lot more in our performance but still we believe that everyone in March, April, we relaunch our service, we will work towards, hopefully, growing that business much faster than we have done in the past and certainly much faster than our peer group companies have done in Brazil so far.

Operator

Our next question is from Michel Morin from Morgan Stanley.

Michel Morin - Morgan Stanley, Research Division

First on the asset sales so now I just wanted to clarify on the 4G can you clarify how much of cash do you still need to retrieve from all of these transactions? And then secondly, regarding the settlement with the operators, you quantified this at BRL 150 million. How much of this is nonrecurring? And can you explain, please, what this refers to?

Zeinal Abedin Mahomed Bava

Okay. With regard to the asset disposals, the fixed towers that you see here, the 337, those are -- that's in an Escrow, so it's not treated in our net debt number. Likewise, Globenet [ph] is still pending approval. So by the -- let say we get the 2 done by the year-end, that will have an impact of roughly BRL 2.5 billion. But bear in mind that the 1.746 based on the real-dollar exchange rate of 2 3 6 7. Also we'd like to mention that we reported in our numbers the disposal of this real estate as proposed to Telemar which has an impact of 171 that cash has not been received. So our net debt number as reported does not include net cash in. We expect to get that cash during the course of next year. So the net debt number, which is lower than the net debt number we had in the second quarter does not include that. So bear in mind that if you do your numbers and as you know, there are discrepancies in the net debt numbers. The consensus number was BRL 2 billion higher than the number that we reported. So actually, some analysts will have to go out there net debt numbers to BRL 29-something billion, which is where we are. But bear in mind that even that BRL 29.3 billion that we reported does not include debt receivables which we will only get during the course of 2014. With regard to the interconnection, maybe, Bayard, you can provide some clarification?

Bayard De Paoli Gontijo

We have here a drop of BRL 150 million quarter-over-quarter. What explains that it is [indiscernible] , with lot of operators in the range of BRL 84 million. And then lower traffic in terms of SMS and voice regarding the other BRL 116 million. From the total number of BRL 150 million, I would say that around BRL 50 million we can say is non-recurring although I mean, we always discuss with a lot of operators that matters, I mean, I don't know if you can call it recurring or nonrecurring, it is what it is. It's from the business.

Michel Morin - Morgan Stanley, Research Division

And just to clarify on both of those questions. First on the cash and the asset sales, was there anything that you collected actually in the third quarter that helps your cash? And then, Bayard, on the interconnection, the settlement is not related to EILD, right? This is mobile interconnect is what we're talking about?

Bayard De Paoli Gontijo

Well, regarding the interconnection it is under mobile, yes.

Zeinal Abedin Mahomed Bava

Though we did not receive -- we did not receive any cash from any disposals in the third quarter. So surprise for you we have actually been able to reduce our debt on the back of operations. With regard to EILD as you know there is a pending issue with one other operator, likewise, as you know and as and when we sort that out that will have most likely a positive impact in our numbers. But as Bayard said, this is part of the ongoing business of telecom companies. Every now and then we do have discrepancies and we have issues that we need to deal within ourselves. So I'd like to think about this as normal course of business. In some cases we have to pay, in other cases others have to pay us. So on that particular note, on EILD, as one of our competitors I think got after big question on the call that is one pending issue like I said if we kept result it will have a positive impact in the case of Oi.

Michel Morin - Morgan Stanley, Research Division

And then sorry you don't have to follow up on that but is that because you've already provisioned something on EILD?

Zeinal Abedin Mahomed Bava

Sorry, can you repeat?

Michel Morin - Morgan Stanley, Research Division

Is that because you've already made provisions for potential lower tariffs because last time I checked this was BRL 1 billion business for you a couple of years ago. So I know it's been a headwind for TiVo. So if it's going to be positive for you is that because you've already taken some provisions in the P&L?

Zeinal Abedin Mahomed Bava

It's because we have taken some provisions in the P&L, it's because probably we believe that we are owed more than perhaps other operators believe that we owed. So its a combination of both things. But like I say, it's normal course of business because if you're in the telecoms business, we in the normal course of our day, we end up having a lot of discussions within operators between roaming charges and so on so forth. So that is not something that I would like to highlight too much because I think that's the normal behavior within operators and we need to find ways in which we can sort it out. But on that same note, I also would like to mention and I think now that I have you on the call, that this reversal of labor provisions and the reversal of 2012 profit sharing in which benefit was highlighted in our second quarter results we flagged it and it was in the second quarter 2013 and not third quarter 2012, so that we will have the same information.

Michel Morin - Morgan Stanley, Research Division

Yes, thank you. We corrected that already. Thank you, Zeinal.

Zeinal Abedin Mahomed Bava

I appreciate it. And we appreciate you corrected that because I think in our presentation, Page 46, we have that info and I think we'll have the same info in our second quarter results as well. Thank you. but anyway, thank you.

Operator

Our next question is Richard Dineen, HSBC.

Richard Dineen - HSBC, Research Division

Maybe just a quick follow-up to the last question on the settlement. You also mentioned settlement as a partial driver of the increase in rent and insurance cost. I was just wondering if this is the same mobile interconnect settlement with a significant in that particular cost segment in fact we stacked that up against the savings in interconnect on the kind of net expense basis? And secondly, if I may just with regard to your corporate SME restructuring. I guess the restructuring particularly in the SMEs. Just maybe if you can give a little bit of detail in the kind of problems you are facing that? And how we should expect it to result that is going to be that 1 of 2 quarter clean up or should we expect a more kind of gradual rebasing of RGUs and revenues in the SME segment as those contracts, come up for renewal? Some kind of guidance I guess, on how that progresses would be really helpful.

Zeinal Abedin Mahomed Bava

Okay. I think from I understand, [indiscernible] insurance nothing do with interconnection. What we can say on rent and insurance is that on that slide we have on the disposal of assets, which impacted, if you like, 9 months, BRL 40 million, that will appear on rent and insurance. If you go to Page 40 of our presentation, you have in there the impact 9 months operational impact 9 months, which is basically these rentals BRL 40 million. That's in that item [ph]you see there. Okay? And maybe with the describes that properly but that's what it is. That's one of the explanations for that increase in rent and insurance, which again will continue to increase because in the same we are selling if its like Fixed towers and submarine cables these will end up translating into increased rentals as well, which again I believe that those are funding cost rather than OpEx cost, but nonetheless every quarter, we will report that as an OpEx but we will highlight it to you that it includes its rentals because in some cases you may want to if you like reclassify yourselves on us those as interest costs. With regard to SMEs what I'd like to say is the following, the last 12 months, we went back and forth in terms of number of point of sales, number of door-to-door sales and, therefore, we'd have now, if you like, to ask for some time out. So what are we doing? We are adjusting, for example, our portfolio of services that we have available. Simplifying our offer. So if you are a small enterprise or small customer, most likely a residential offer with some service level agreement is more than enough for you. If you are a medium-size teleco, chances are, that you want something which is much more in line with our corporate offer. So essentially what we are doing is we are beginning to derive operational synergies by transforming the segment much more into a channel as opposed to a product factory, okay? so that's one of the things. Now thinking about channels. We have a lot of bad debt. We have a lot of low-quality sales, in the segment. And this is why we reported BRL 201 million of bad debt provisions, and last quarter, over BRL 300 million. But what we're doing right now, we are essentially getting rid of those point of sales that were that has the much, much higher churn that we think is acceptable, of course, if you are in business you want work, you make decision but we need to -- we benchmark this. So for those that were completely off the chart, we are basically getting rid of those channels. We are now contracting new channels as well in the same process. We are using you all have seen in slide 24 service for sales we would like to churn, if like to -- we would like to transform inbound marketing -- rather, inbound calls whether its information or whether its quality of service into sales as well so there's a lot of things that we are across-the-board working on. Now is this going to get resolve is just an issue of taking the right of 1 quarter and then starting afresh, unfortunately, it's not. Because if that was the case we would've done that. I think this is beefing up processes, bottom-up, changing portfolio -- changing the mix of cleaning up services that you offer, beefing up channels, cleaning up channels, cleaning up your customer base. So you're likely to see, hopefully, improvements in the segment next year. Now because we report B2B together, I don't want you to get the wrong impression. Corporate large enterprises are doing well. we're growing revenues roughly 4%, data is growing 6%. And we've come up with a cloud offer as well, which we believe will underpin, if you like, the services that we sell to this very large corporate and increase our share of wallet on one hand and on the other, position us as an innovator in technologically advanced operators. So it's a number of things that we're working on right now but don't expect a major revival in one quarter in this segment. It will take time. And this is why we believe that we need to come out in the open and share with you some of these challenges that we have, so you can monitor how much progress we are making quarter-by-quarter. Thank you.

Richard Dineen - HSBC, Research Division

That's certainly helpful. maybe just if I can just quickly clarify this on the rent and insurance. I'm guessing if you can sense it on Page 12 of your press release, it does mention the settlement agreement twice in that paragraph is it driving factor behind the 12% sequential increase in those costs. So I'm just wondering, what is that? And just some if you can get any further detail on that? I'm guessing its quite small, but it will be helpful.

Zeinal Abedin Mahomed Bava

Just to clarify the English I think we just biass[ph] . Yes, it's related to tower rentals not all agreement with all operators regarding tower rentals, which is common in Brazil, as well as in Europe and Netherland.

Operator

Our next question is Carlos de Legarreta.

Carlos A. de Legarreta Díaz

Two questions actually, if I may. The first one regards to annual increase in personnel expenses. Could give us some more color out there? And for the second one, if you could give us your views on competition for the next year, that would be great.

Carlos A. de Legarreta Díaz

Okay, Bob. We just -- regarding -- we have last year and beginning this year we have inflation just in salaries and wages which is common in Brazil normally happened in December and January year-over-year. So we have that impact less tear around 6% over the day, as well as the in source of the maintenance plants -- general maintenance plant that happened this year and impacted as well that results, so those are the main reasons for the includes in personal.

Carlos A. de Legarreta Díaz

We -- if sorry, should we expect the personal expenses to continue on a flat performance? Or should we expect them to continue up?

Zeinal Abedin Mahomed Bava

As you know, the contracts are being renegotiated I mean, we have ongoing discussions with the unions as we speak? right. If you allow me I prefer not to go in a lot of details other than to say that's when we say that we would like to boost productivity because we would like to do more with less. So clearly the focus is to make sure that we produce more and we lower our unit costs so independence of whatever we may end up agreeing in terms of wage increases we need to continue to boost productivity because clearly when you think about OpEx, that is one addressable cost that we have and we need to align that with the top line performance of the company. With regard to competition next year, we would like to see the following as far as we have concerned, we believe that this is pretty sizeable market and all operators can grow profitably clearly while our margin of 30%. We -- if you compare the margins of telecom operators in Brazil versus operators in Europe, our margins are well below what the industry is producing in Europe, for example. So I think you'll know that we have seen that in the slides that we put out there with regard to our TV strategy we said we would have a rational approach and we prefer to compete based on if you like structural competitive advantage in terms of point of sale in terms of innovation, in terms of technology and in the case of Oi, frankly, we are much more focused in resolving some of our underlying processes and making sure that we can improve our quality of service, we can improve, if you like, our accounts receivable. So I would like to believe that sector will remain rational and that we will all continue to work towards, if you like, improving the cash flow profile of the company, so we can continue to invest because the ample opportunity for us to continue to grow in the future.

Operator

Our next question Stanley Martinez, Legal & General Investment.

Stanley Martinez

If I could just follow up on the last point with respect to networking capital. Is it your expectation because I know that this is been the keen focus for your team. Is it your expectations that in what is the improvement in prepaid recharges in the quarter and potentially other payment incentives with customers and suppliers that you alluded to that networking capital will continue to be a source rather than a use of cash flow for the balance of 2013? And then if I could just address possibly on the debt, how you're thinking may have evolved since the 2 October merger call with respect to the liability management exercises that may be necessary to make Oi antimarket especially across guaranteed with Portugal Telecom? Is the idea here potentially with the tenders? Or potentially consent in order to optimize your interest expense -- what I'm talking about here is really taking some of the earnings power that's trapped in, the BRL 3.2 billion per annum of net interest expense to the bottom line within that category as opposed to just nearly from the ongoing deleveraging that you made some progress on this quarter?

Zeinal Abedin Mahomed Bava

Okay. Let me start with the second part of your question. Prefer to strict out discussion on this call will be third quarter results as we have put out. So any issues in relation to Oi ,[indiscernible] and CorpCo, we prefer that you consult information regarding these transactions in the previous public stages we have made in the filling that are public that we've done with the CVM and the SEC. If you don't mind, we'll just focus on, if you like, the third quarter result or fourth quarter was is...

Stanley Martinez

That's fair enough to know. I appreciate that.

Zeinal Abedin Mahomed Bava

Okay. Thank you for being understanding. With regard to the working capital, I will hand it over to Bayard, but allow me to say this as I've indicated in the past, as we will work towards having a lower CapEx next year. Now this doesn't mean that we will do less. We will be hope to do more with less. So we are you all have seen in the presentation that we put out that we are looking to align risks and rewards between, if you like, suppliers and Oi. This means that it will see ample growth opportunities in this market. I'm sure our suppliers also see the same if they want us to position, if they want us to position to tap the growth opportunity they need to align if you like their interests with ours as well. So it is our firm belief that if we can transform some of this supply relationships into real partnerships where you share risks and rewards, we can do more with less. So CapEx next year will be lower than this year and we remain committed to change the cash flow profile and to continue deleveraging [indiscernible] that's why this quarter we were very excited to see that base on operational stuff, we were able to reduce our debt and thus far I am so glad somebody asked me if we did receive some nonrecurring payment this quarter? No we didn't receive. Okay. We were able to deliver on that net debt performance of our sales which in some cases they almost BRL 2 billion better than what some analysts have, which will[indiscernible] have Bayard please?

Bayard De Paoli Gontijo

Charlie, first, we're not giving guidance's anymore just to highlight that and but as we mentioned already I mean, controlling the leverage of the common is one of our top priorities before working capital is going to be always our focus. This quarter, we explain that variation due to the focus we are putting on our prepaid, which is working capital [indiscernible] We have improvement in terms of credits and collection processes. We had renegotiations with suppliers. So those initiatives will continue to pursue in order to maintain a quality trend in terms of working capital.

Stanley Martinez

If I can just follow up on that last point, Bayard, there's BRL 170 million decline in traditional deposits. And how much of an effect -- did that have in terms of working capital? Or potentially could that have subject to the discussion which you maybe having with ANATEL on that track?

Bayard De Paoli Gontijo

It is -- we as you like I mean, we have the decreasing amount of cash year [indiscernible] to this year from legal disputes but it is not accounted in the [indiscernible] If you go to the press release in the Page 17, it is in the corporate taxes performing, yes we are controlling better I mean, it is in the asset controlling [ph]. We are controlling better judicial deposits that as I mentioned it is not impacting the working capital because it is in a different line.

Operator

Our next question is going to Gonzalo Fernandez Barclays.

Unknown Analyst

Just on the postpaid mobile segment. You're talking about maybe increasing or pushing it in 2014 we've heard most of your competitors also talk about this segment of the market. Maybe you could share how you're looking at this? Or how you're going to differentiate? And then just a quick one on the NPI impact this quarter. And how is that going to evolve with the MPR cut in 2014?

Zeinal Abedin Mahomed Bava

Okay. With regard to mobility, our focus is prepaid, focus is more data and when we think about more data, we are not just thinking about smartphones, we are also thinking about feature phones our data is only 17% of our total data, of our total revenues. And we can certainly do much better than that. So if you were to ask me right now what's top of my agenda its exactly there. Postpaid, we're very happy to see churn come down, we are beefing up if you like processes so that if you do move more into the developing that segment of the market, we can do that with the certainty and the firm belief that we've gone out of our way to make sure that we can sell with quality and that we can sell making sure that that sales doesn't translate into a bad debt provision okay? And now what -- this is a pretty sizable market. As you know, when you are thinking about moving from pre-to postpaid now you can do that by converting the whole customer because you conclude that the profile of consumption of certain customers is better tuned to you actually selling to that at postpaid plan or it can be part, if you like, of a convergence offers as well. I can tell you for example in Portugal, where we've launched a quadruple play offer and is a significant increase in postpaid customers. These are customers that use to be prepaid but because you are selling giving them just one single bill, they are becoming postpaid customers. Ultimately, rather than forking that prepaid and postpaid, therefore I think we need to think about is ARPU. And we need to think about how much share of wallet are we commanding with each individual customer. So I expect us to be rational. Expect us to put profitability top of our agenda when we talk about postpaid, when you talk about TV. Okay because I repeat what I said earlier. We need to be beef up the profitability of Oi very happy to see 30% EBITDA margin. We need to continue to drive cost down so we can enhance our competitive positioning in the market but we need to correct the cash flow profile of the company, start paying down the debt and with this increase financial flexibility, pave the way in the future and for us to grow in some areas in Brazil with perhaps we can derive better returns than others.

Operator

Our next question is Walter [indiscernible] BTI G.

Unknown Analyst

Two questions. First, do you -- can you provide any type of disclosure on what percentage your base has smart phones [indiscernible]?

Zeinal Abedin Mahomed Bava

We don't actually provide that number. I've seen that one of the peer group companies in Brazil just put that out but we don't actually give that kind of disclosure. Sorry.

Unknown Analyst

Okay. And then the second question was on getting back to interconnection expense. I know you said there was a BRL 150 million that BRL 50 million was the I think the settlement and then BRL 116 million you mentioned something about decline SMS. So I was thinking just give us a little bit more detail because if i just check the BRL 116 million divided by your self, divided by 3 it takes BRL 0.75 of I guess cost of ARPU. So should we look at that as if the SMS declining by that much sequentially that the ARPU would've otherwise been BRL 0.75 higher this quarter than normal? Just wanted a little bit more clarity on that BRL 116 million you talked about.

Zeinal Abedin Mahomed Bava

Okay.Let me see if I can be helpful here. Some of these new plans that we are putting out they promote on net traffic as opposed to off net traffic. But basically what that means is that you don't pay interconnections to third parties because you terminate clause and you terminate estimates[ph]in you own network. It tends to be a lot more acute in terms of behavior if you're thinking about the new title okay? So when we launched our Oi Galera for example, Oi Galera is one good example of a segment, which most likely would end up doing 100% or almost 100% of net traffic online. Now don't forget that when it's all on net, it's all on net your margin is 100%. Okay? So with regard to our interconnection cost, you need to also factor in the change, if you like, in the traffic profile of our established customer base. As we grow our market share, chances are, we will have low interconnection cost because it will end up doing a lot more on net and off net okay? So I think, this is something that again we are now trying to take advantage of there are some areas where we already have the market share of 30% if you take CRI [indiscernible] we have almost 30% market share so chances are more people there are doing on net as opposed to off net. Because your most direct relation and friends are most likely going to be holding the same network. ...

Unknown Analyst

I understand. On that I guess that's been something that's been going on for a while or is this something new for Oi? Because your looking network expense which it seems kind of stable and then obviously you have this big drop off this quarter obviously there's that BRL 50 million part and that may or may not come back based on how your further negotiations go, but did you guys just kind of just discover the on net stuff, I mean this was only impacting this quarter and had no impact because couple of years well you go and [ph] other guys were pushing on the traffic?

Zeinal Abedin Mahomed Bava

I don't think we will as you can imagine some of us have 13, 14 years. As you can imagine, we could not discover this. There maybe we were I would say distracted a bit, so I think we are no longer as distracted as we were if you like. And now we are beginning to look at some of these trends more aggressively also because we believe that there is an opportunity out there for us to, if you like, make our customer base more loyal to our own networks. As you know very well as well as I do that on net effect is pretty significant in most markets. This is not a very different market, albeit this is one market where people are perhaps have less problems in terms of changing their numbers. So in terms of portability, this is one market where perhaps people are less sensitive to changing or taking on new numbers but having said that clearly there is lot yet to be done for us to optimize our interconnection Bill okay? So that optimization maybe wasn't being done and this is simply because frankly, we were looking else where, this is a new company that we've launched about [indiscernible] this is a good example where essentially even if you get promotions if you want to use those promotion you're going to have to pay BRL 0.10 a day. So that's one example. Again, it's not rocket science this is just actually trying to read what customers want appreciate and finding ways in which we can save on termination cost business as you know termination rates in Brazil continues to be very high.

Operator

Our final question will take Daniel Federle he Crédit Suisse.

Daniel Federle - Crédit Suisse AG, Research Division

My first question is related to cost. In which cost line do you see major space for reductions. And probably if you could give us more clarity on what could improve inside the other operating cost. And my second question is related to the mobile segment. If the company focus on their prepaid customer could not be threatened by this declining task in charge in Brazil?

Zeinal Abedin Mahomed Bava

Okay. With regard to mobile, just to be clear, its not all prepaid and all postpaid, right? It's a combination of both. The last 3 years we did a lot of postpaid. You certainly saw in the numbers that we put out that we posted a significant growth in postpaid customers, our postpaid revenue generating units was 6 million third quarter 2012, we have 6.6 million today. So its not all postpaid and all prepaid and as you can imagine, the mix and the match and again, we are much more focused in devising higher ARPU on the same customer base so even when you think about recharges, we are essentially more concern about making sure that those recharges get used. So we can translate them into revenue. Okay? So with regard to pre-and post, I will just say that because we had such a unique footprint in this market because, we have been able to beef up our distribution network better than most and because we now have, if you like, more intelligent in the company the way that we are looking at traffic profiles and so and so forth we can direct the motion a lot more efficiently than we've done in the past. And therefore the result our recharges are growing and the results we are seeing these recharges increase even in all of these areas where our market share is like 13% 14%. So its not just in those areas where our market share is 20 plus percent. With regard to costs every single cost item market shares put up a specific shall have to every single cost item summer which is we and we do screening here. So you take the example of slide-- page 11 of our press release interconnection you just look into further explained to 1 investor what we're doing to reduce our interconnection costs. So we're not just waiting for regulated to bring down those costs what we are trying to do is promote on net traffic so we can reduce those costs. That's 1 example. Personal I mentioned earlier that we're looking to boost if you like unit cost. We want to improve unit cost so you have to have certain things that are beyond our control but others are not so we're beefing up processors making people accountable we are measuring and measuring and measuring so that can deliver on a better performance. When you look at third-party supplies likewise. Marketing likewise. So if you line by line okay? So it can be consultancy as the Bayard mentioned earlier, or it can be anything that you can imagine okay? So everything is questionable in our company right now everybody needs to ask 3 questions why are they doing it, what for and what our customers are getting out of this? If you cannot answer the question, what is my customer getting out of this, you better not do it. Okay? Because we are here to serve our customers. So this is the discipline that we are instilling in the company and a good news is on our regional company's in the last 5 months and this is something which you will see across the board in the company today. Whether you are in CRI, vocal in Minas or whether you are in Manaus it doesn't matter you get my 5 guys in my team there and you talk to them and they will tell you.Bad debts, we need to focus on bad debt. We need to focus on accounts receivable we need to focus on cost and we need to find ways in which we can which useful this not because it's a financial exercise is because its strategic and we want to beef up our financial flexibility why because we believe that beefing up our financial flexibility and boosting our productivity, we can be

a lot more competitive in the market out there and we can tap the substantial growth that we see in Brazil in the future.

Operator

And there is seems to be no further questions. I would like to turn the floor over to Mr. Zeinal Bava, for his final remarks.

Zeinal Abedin Mahomed Bava

Okay. Thank you very much. Again for being on this call it's been a pleasure. My team and I of course are available off-line to take any further questions that you may have. I understand the there are some discrepancies in numbers so my IR team is available some analysts have more BRL 2 billion more in terms of net debt, compared to the numbers that we reported. So we can also understand where they need to correct those numbers they can speak to our IR team I saw some comparisons with the bad debts of last year. If you need to clarify that also to speak to my IR team clearly it's wrong to compare bad debt provision of this year with last year because last year it was only 1% of our sales than anybody that understand about retail, he knows that it's too low. With regard to anyone off that we have done in the second quarter, we put up a lot of disclosure. We've repeated that disclosure in the third quarter if any research out there got you confused, please feel free to call our IR team as well and we have more than happy to clarify. It's an pleasure to speak to you. My team and I will be doing some road showing now. We will be at the Morgan Stanley conference in Barcelona next week and I hope to see some of you there and if not we will certainly catch up in London or New York or in Boston. Thank you very much and see you soon take care bye-bye.

Operator

This concludes Oi S.A.'s conference call. You may now disconnect. Have a good day, and thank you.

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