Executives
Alex Zornig – CFO and Head of IR
Analysts
Sean Glickenhaus – HSBC
Victor Selers – BWGI
Martin Pines – Min Capital
Rizwan Ali – Deutsche Bank
Miguel Garcia – Deutsche Bank
Tele Norte Leste Participacoes SA (TNE) Q1 2011 Earnings Call April 29, 2011 10:30 AM ET
Operator
Good morning, ladies and gentlemen, and thank you for standing by and welcome to Oi’s Conference Call to discuss the First Quarter of 2011 Results of Oi and its direct and indirect subsidiaries. This event is also being broadcasted 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 and the earnings release.
We would like to inform that during the company’s presentation all participants will be only be able to listen to the call. We will then begin the question-and-answer session when further instructions will be given. (Operator Instructions)
This conference call contains forward-looking statements that are subject to known and unknown risks and uncertainties that could cause the company’s actual results to differ materially from those in the forward-looking statements. Such statements speak only as of the date they’re made and the company is under no obligation to update them in light of new information or future developments.
I will now turn the conference over to Mr. Alex Zornig, Investor Relations Officer. Please, Mr. Alex, you may proceed.
Alex Zornig
Thank you. Good morning, everyone. Welcome to the conference all of Oi’s consolidated first quarter 2011 results. The presentation is already available in our website. I like to announce the change that we have made in the financial department of the company. Mark Schroeder, who was the Controller, left to assume a position as a CFO of ConsX.
Therefore to take his place was appoint Tarso Rabello, the previous Treasurer of the company, which will be replaced by Biar Contege, currently Director of IR. Biar will maintain both jobs, IR and Treasury today with me are the Director of Marketing, Regulation, Treasury, Controlling and IR team. Okay, starting with slide number one, Wireless, we have a good news, we had almost 2.2 million clients in Q1 ‘11 almost 30% of our net additions in Brazil was with Oi. As you can see we reached 41.5 million mobile subscribers by the end of March, which is an increase of almost 6% comparing to 2010 and 13% one year. Our churn also decreased, and decreased to 2.6% and I explained in net additions reached 2.2 million customers.
Next slide wireless there alignment of the offers of course resulting in increased market share but lower ARPU. As we add the customers before and then we generate the revenue afterwards, that’s normal processing any mobile company. Therefore the ARPU decreased from R$23.5 to R$21 almost. Our market share as a whole in Region I increased to 24%, in Region II maintained 15% and the Region III we have a very good news that we reached 15.1%, which is almost State of São Paulo is only size of the whole Region II.
In the capital São Paulo, the great São Paulo we reached 20% market share in two years and a half and the market share growth as a result of new offer of prepaid plans and reduction in the price on mix SIM card.
The capital also maintained stable at R$39. Other good news is the broadband and the fixed broadband 4.5 million plus mobile broadband 666,000 and customers’ amount 5.2 million clients. Broadband subscribers increased 4% comparing to December ‘10 and 9% comparing to last year. In one quarter we had more than the whole year in 2010. We cover already its more than 4,400 cities in Brazil. The total cities in Brazil is around 5,000 something and the average speed we have is 2 mega. If you see in another box, we have fixed broadband subscribers with more than 4 mega there is almost 14% of our base.
Next is what is not good news, which is the wireline in Pay TV. The wireline I mean greater sales efforts in Pay TV increased a bit by 13% in Q1 and 95% of the sales went to Oi fixed client. So, we are – as we always say, we are trying to avoid that of or to avoid the speed of that of the wireline by trying to protect the fixed client by selling broadband, by selling television, and this is a proof that we’re showing this box that from the 311,000 customers of Pay TV, 95% are our fixed line customers. We offer already Pay TV in 14 states including the Capital of Brazil.
Financial performance, we have growth of service mobile, and they now represent 46% of Oi’s revenue.
Consolidated revenue, gross service mobile and they now represent 46% of Oi’s total revenue. The consolidated gross revenue decreased 5% in Q1 ‘11 comparing to Q4 ‘10. But if you look in the box right hand side, the biggest beauty of our decrease in our revenue is the voice wireline.
In the wireless, we had 61 million reais of revenue. Although we had 2.2 million in new customers, but that’s on the process as I explained before, we have the customer before and then we try to get this revenue after. The consolidated net revenue reached 7 billion reais in Q1 ‘11.
Next page, we have the consolidated expenses. We have a stable cost and expense in the quarter, despite a high inflation in the period. So cost is under control includes already all the synergies that we had in the stage when we acquired Brazil Telecom.
Next page. It’s more detailed consolidated expense. The company’s most import expense are third-party service interconnection and personnel. If you like third-party service, we have a decrease of 4% comparing to Q4. That was a result of what we did by consolidated vendors. Interconnection as we decreased the traffic in the wireline business of course interconnection also decreased. Personnel increased for one year of 8.2% basically is the increase of our mandatory salary increase we have. Other operation expenses were stable compared to one quarter till now.
On next page, EBITDA financial income, EBITDA has non-recurring effects of R$100 million, basically we – and at this quarter the integration of the labor contingency system of Brasil Telecom with Telemar labor contingency system. Doing that, we have to standardize the contingency of provision methods of both companies. So, we have non-recurring adjustments for labor in EBITDA of R$100 million.
And now looking on the net financial expenses, we have three major non-recurring effects. One is R$220 million, which is the monitor for our ratio of the tax provision related to difference of approach between us and IIRS, exclude PAES and this is a very old dispute between us and the tax authority in Brazil, and we decide to resolve this R$220 million now, because our lawyers believe that we have a risk to lose that.
Then we have another R$200 million, which is we ended this quarter two, the reconciliation between the old judicial deposits we had in the company with the statements of the banks, cash currency and others and that generate an adjustment of R$200 million. This adjustment of R$200 looks high, but comparing with the total amount of deposits we have, which is around R$7 billion, we talk about less than 3%.
And the last one is the monetary correction of the labor contingencies that we adjust in EBITDA, because labor contingencies in Brazil are restated every month by inflation plus 1% a month, and therefore, as you adjust R$100 million you need to adjust the monetary correction too, but they go in different lines of income statement.
So, summarizing, these 500, almost R$500 million of adjustments in financial expense are non-recurring and we hopefully they are not going to occur in the following quarters.
The next page is the net earnings and of course the net earnings is the consequence of all these adjustments that we talked. So it’s the declining EBITDA combined with a higher net financial expense led to, for us to present, a loss in the quarter. So the loss still was R$400 million. As you can see the type of explanation in the box in the right side, basically is the GAAP in the revenue on the whiter line plus the adjustments on net financial expenses that’s the best effect. That, those are the good news or too. We – the cash increase result in R$6 billion which reduced our net debt EBITDA ratio to 1.5 times. Our gross debt which is been R$8.4 billion and our net debt R$14.4 billion which is the lowest for the last three years after we acquire Brasil Telecom. So I would say that is not the news for anymore in Telemar.
Consolidated CapEx, 71% of the CapEx was allocated to growth business and if you look in the left hand side bottom, we reach R$800 million which represents 12% of our net revenues will be low market, but we are going to there and from this R$829 million 23% for wireless and 50% for data and broadband.
And those are this is the summary of our Q1, 2011. Now, I open for Q&A.
Question-and-Answer Session
Operator
Thank you (Operator Instructions) Our first question comes from Sean Glickenhaus of HSBC.
Sean Glickenhaus – HSBC
Hi, good morning. I’ve just two quick questions, one, can you talk a little bit about the detail on the pay TV revenues or ARPU? Second, just wanted to see in terms of the CapEx, in terms of fiber, I know you are focusing on another end of consumers, but if you can talk a little bit about fiber investments that would be great? Thank you.
Alex Zornig
Hi, Sean. Regarding the pay TV, revenues and ARPU, we add – important to say that we – that the 311,000 customers we have, 95% of them are fixed line customer too. So, we are not selling this type of product to outside of our fixed line base. Why that? Because as we said like in the other calls, our approach is to have a share of wallets of our customers not stuck their products by television, mobile, broadband and wireline, because we want our customer, we treat the customer whatever is the products that he requires, so the total revenue of our pay TV is regarding, well let me find here the revenue, R$103 million per quarter and the ARPU is R$40 per customer, on top of what he pays already on the wireline. So our pay TV is a complementary to the wireline thing.
Regarding the CapEx, we are going to invest this year $1 billion on improving the broadband capacity. We don’t need to invest in terms of back bond because we have already back bond. What we need to do, invest on the quality of the back bone in order to offer higher speeds. 14% of our broadband base already has – is higher than 4Mega. And we want to achieve 25 to 30% by the end of this year with 4Mega up. Why that, in order for me to compete with my attackers like UVT and other. Otherwise I’m going to be left behind them.
Sean Glickenhaus – HSBC
Great. Thank you. Thank you very much.
Operator
Our next question comes from Victor Selers from BWGI.
Victor Selers – BWGI
Hello. I have a couple of questions. First, you’ve been decreasing revenues to gain consumers and resume growth. My question is, when will this payout, I mean when will we see revenues? When do you expect us to see revenues stop decreasing and how long do you think this investment is going to payout? And are the discounts only for new customers or for customers that departing in terms for client retention and/or are you giving them some existing base too? And the second question is on the CapEx to sales, to cover, to bring the coverage of over 4Megas, 25% to 30% by the end of this year, do you think you will be able to achieve that within 11% or 12% CapEx to sales? Thank you. These are the questions.
Alex Zornig
Okay. I will talk for the last question. Then I pass to my colleague I’ll back Ginsberg the word for our market. Regarding the CapEx yes we believe that 12% of our revenue we are something about R$5 billion roughly 5 to – it’s more than 12%, because R$5 billion is 16% something like that. So we believe that, with that level of CapEx yes, we are able to achieve what we budget. Not only that, for example, the price we are dealing are cheaper much cheaper with our vendors and much cheaper than two years ago. So we can buy with the same amount of reais more than we use to buy two years ago. And regarding your question on market I will pass on to Hobert.
Unidentified Company Representative
Okay. Hi everybody. Regarding the decreasing on our revenues I think it’s important to mention that our strategy is a little bit different than the competition. When we start to sell a lot on the mobile part of the business, instead of having more cost acquisition with subsidies our revenues are more impacted because our strategy is not based on subsidies, it’s based more on traffic and on revenue discounts.
Now when will this strategy pay off? We believe that it will pay off in the end and that’s why we are pursuing it. But this year that will be a little bit of blood, sweat and tears because investments on – in telecom including customer acquisitions are not for the short term. The discounts are valid for new customers and they are valid for current customers as well they sometimes have to pay a fee to – to these discounts. But, so they will offer the benefit in the gross ads and in the churn. However, in this we have seen on this quarter our gross ads increase in the mobility and in the broadband as well and our churn rates go down. However, the churn rates may not continue to be so beneficial to us in the next quarters. So, we are not pursuing a strategy to lead the market share at all cost because our strategy is based on a healthy customer base not on achieving our market share figure.
Victor Selers – BWGI
Okay. And I’ve a follow up question if we use 16% CapEx to sales in this quarter the cash flow generation would have been zero. At the same time you’ve just made an investment, a long-term investment in Portugal Telecom. Would you see eventually if revenue doesn’t pick up would you see a need to do an additional capital increase or do you think this level is adequate?
Alex Zornig
Well, capital increase I don’t anticipate any capital increase further in the company why we need because we are – our debt ratio is very low now it’s 1.5, was 2.4 a year ago. So we don’t need that. Then regarding the CapEx, it is important to say that CapEx is a – we have a lot of capitals that are rollover of last year. If you look our last quarter of 2010 our CapEx was R$1.5 billion was very big. So it’s a rollover that help us to have the base to sell. It’s just a question now to go back to sell because we have already the, this level of earnings for the fiber installed and the 3G capacity stall. So regarding the cash flow I don’t think the numbers you – we don’t really do this free cash flow you’ll talk about we believe is higher but I cannot give now because we can give later when we have the second quarter and the third quarter announced.
Victor Selers – BWGI
Okay, great. Thank you very much.
Operator
Our next question comes from Martin Pines of Min Capital
Martin Pines – Min Capital
Hey, Alex. Just wanted to ask a question on your capital expenditures given the strength of the Reais against the Dollars since you announced your budget do you think we could see any favorable impact of the foreign exchange? Thank you.
Alex Zornig
Of course, it’s a good question. That’s why well another reason why we’re able to buy more with the same amount quantity of reais. Now we’re in a country the hot currency and can you believe that.
Martin Pines – Min Capital
Thanks Alex.
Operator
Our next question is from Rizwan Ali of Deutsche Bank.
Rizwan Ali – Deutsche Bank
Good morning. My question is related to uses of cash. It was my understanding that with the R$6 billion capitation fees, you would be using about R$2 billion to reduce your debt. I’m just wondering whether you’ve done that or not? Second thing is how much more, how much of BG shares have you bought and how much more you plan to buy rest of the year?
Alex Zornig
Okay, regarding the – yes, you are right, we are going to – in April we prepaid R$2.2 billion of banking loans. These bank loans were due to 2014 and the cost was higher. So we prepaid that. We are looking other – into Portuguese version, someone asked me regarding the 3G license, we are looking on that because this is a little bit expensive the cost of funding that thing. And your question regarding the acquisition of PT, we announced already the acquisition up to 7% – 4% additional to our April now and we have until the end of the year to acquire further 3%, why we need to acquire further 3 because there is spec well in Portugal where if you don’t have more than 10% you pay holding tax on dividends.
Rizwan Ali – Deutsche Bank
One other question if I may, I mean annuity as you mentioned it is expanding quite rapidly and have you seen more recently them becoming aggressive and have again any market share or have you entered BO or part of BO so far?
Alex Zornig
No, I mean they have a 2% I think total revenue of the market they have 2% and I don’t – they are aggressive on pricing of course like not only them Net is aggressive, everybody, but can’t see they are more aggressing in São Paulo and so I think this question is to be addressed to telephonic.
Rizwan Ali – Deutsche Bank
Thank you very much.
Operator
(Operator Instructions). We do have a follow up question from Rizwan Ali of Deutsche Bank.
Rizwan Ali – Deutsche Bank
One more question. So if it’s on selling at least last year when you had the Analyst Day here at New York, I know your strategy for gaining market share in wireless and broadband will be more geared towards burning of services and rolling out telecom in the south it appears that you have embarked on a pretty aggressive tariff reduction strategy. Is that correct and do you think why is it that you begin so aggressive in tariff reductions. That’s very harder to gain market share.
Alex Zornig
Okay. I will pass this question to Hobart please.
Unidentified Company Representative
Okay. Our strategy continues to be bundling of services on the fixed side especially bundling with broadband, bundling with mobile in the Total. In the pre-paid side, we are selling more that’s a number one point, and that strategy is based both on traffic and based on a reduction of the price over chip that was being sold at a higher price than the competitors. This has increased significantly our sales, and our gross sales in the mobile side.
In the churn side, we are seeing better results in the post-paid side, and we are seeing better results in the pre-paid side, but as I mentioned before the reduction of churn is not necessarily going to be repeated in the next quarters, because the churn that we are envisaging to practice. It is a trend level that we’ll maintain a healthy customer base on pre-paid, while a healthy customer base on pre-paid means is that our customer base that is paying at least our fist out charges that on a sales of extra mass and customer that is recharging in a – on a frequent basis.
Operator
Our next question comes from Miguel Garcia of Deutsche Bank.
Miguel Garcia – Deutsche Bank
Thank you. My question is regarding consolidated EBITDA margin this year just for Europe for the non – for the extraordinary item, we get a margin of about 30% plus here you have about 34% and I think the guidance was – would be stable, but it was a little lower. What kind of – you see this year, can we see that – should we consider the first quarter as to the percentage of where we can expect for the rest of the year or we can see a recovery getting to some point between yearend or the first quarter? Thanks.
Alex Zornig
We didn’t give margin guidance, maybe it is a medium stand. But anyway, every time you accelerate machine and of course your margin decrease as – there was the question of everything before and of course there is a profit in margins and then we recover as this new customers generated revenue that we expect. So if you ask me, is the margin 30% recurring I would say. If we could choose growing in the same speed for the time being yes, but if not, of course that our goal is to increase margins as any other competitor.
Miguel Garcia – Deutsche Bank
Okay, thank you.
Operator
(Operator Instructions). Since there seemed to be no further questions, I would like to turn the floor to Mr. Alex Zornig for his final remarks.
Alex Zornig
Thank you. Our IR team is at your disposal to clarify any additional doubts, do not hesitate to contact us. Have a good day.
Operator
This concludes the conference call. You may now disconnect and have a good day.
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