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Portugal Telecom SGPS SA (NYSE:PT)

Q3 2011 Earnings Call

November 03, 2011 11:00 am ET

Executives

Zeinal Bava - CEO

Luis Pacheco de Melo - CFO

Analysts

Robin Bienenstock - Sanford Bernstein

Mathieu Robilliard - Exane

Tim Boddy - Goldman Sachs

Madeleine King - Credit Suisse

Georgios Ierodiaconou - Citigroup

Luis Prota - Morgan Stanley

Nuno Matias - Espirito Santo

Jonathan Dann - Barclays Capital

Operator

Greetings and welcome to the Portugal Telecom 2011 third quarter results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zeinal Bava, CEO for Portugal Telecom. Thank you Mr. Bava, you may begin.

Zeinal Bava

Thank you very much. Good afternoon, ladies and gentlemen. This is Zeinal Bava here. I’m here with my CFO, Luis Pacheco de Melo and also with our financial team and IR Director. I propose to take you through if you like the operational parts of the business and then I’ll hand you over to our CFO, so he can do a deep dive on the financials.

Today, we are going to discuss the results of Portugal Telecom for the third quarter ending in September in nine months 2011. As you know our consolidated operating revenues amounted to roughly €4.416 million. EBITDA reached €1.654 billion as well. Our EBITDA margin consolidated to a profit of 37.5% and with regard to the Portuguese businesses, our margin was 45.7%, which is an increase of 1.3 percentage points. Our net income reached €333 million and basic earnings per share stood at €0.39. Let me perhaps now start just by discussing in more detail how our business is done. As you know Portugal Telecom in 2008 organized itself along business segments.

In addition to organizing ourselves along the business segments in Portugal, residential, personal, SMEs, SOHOs, corporate and wholesale. With regard to our international footprint, we basically have engaged ourselves much more actively in the sort of day-to-day and operational management of those businesses as well. As you know opportunistically, Portugal Telecom has businesses in Africa, but our main investment is actually in Brazil. Furthermore, in the last few years Portugal Telecom has invested significant amounts in innovation and in ensuring that we have best-in-class execution capabilities as well. Our investments have not just been directed towards state-of-the-art or future-proof technologies, but the company has also invested significant amounts in integrating its IT systems to deliver convergence, accelerate transformation, essentially use technology as means to an end which is to improve the quality of services and the breadth of the services we offer to our customers and contribute towards improving the efficiencies of our corporate customers as well. Lots of investments have also been made to improve our customer care in order to provide end-to-end vision in terms of service, not just to us as suppliers, but also to our customers.

Cost discipline in our company continues to run very high across the board, as you no doubt will have seen in these third quarter results. Once again Portugal Telecom delivered on all of its commitments and the numbers came out ahead of consensus across the board. Portugal Telecom in our view has a unique global profile. 58% of our revenues are now being generated outside Portugal, 42% of our revenues are being generated in Portugal. When looking at EBITDA, 52% of our EBITDA is generated in international businesses and 48% is being generated in Portugal. In terms of revenue generating units and customers in general, we had a very strong quarter in the residential segment and we saw improvements also in personal and enterprises as well.

With regard to Oi, Oi continues to grow, also revenue generating units and also had a pretty good and solid performance especially in mobile. Our total number of customers at end of the nine-month period was 89.678 million customers, wireline about 4.7 million. When thinking about Oi, 67 million are coming from Oi and with regard to mobile in Portugal roughly 7 million. So across the board, Portugal Telecom saw its subscribers increase. 89.678 million is total number of customers, that’s an increase of 7.2% compared to the same period last year. With regard to our financial performance, we saw improving revenue trends and I will take you through some of those if you like underlying trends, but generally speaking the residential segment continues to do pretty well, personal is recovering, corporate I think we are now beginning to see better performances because of the end of the drag from the very large internet project we did in the schools last year in Portugal.

Cost reduction remains very high and with regard to free cash flow, our free cash flow increased substantially, not just because of the consolidation of Oi, but also in Portugal when looking at our free cash flow excluding Oi in contacts. Our cash flow has increased from €152 million to €591 million in the nine months of this year, which basically supports the view that we have been passing on to analysts and to investors that we remain very confident about the ability of our company to continue to generate cash, so as to maintain the investments that we have made, but also to deliver on the commitments that we have also made to our shareholders by way of dividends, but also in terms of ensuring the robustness of our balance sheet allows us also to look forward to in terms of the future with significantly high confidence and otherwise.

With regard to Portugal now, our performance is clearly benefiting from what we believe is a strong technical and operational capabilities of our company and clearly the digitalization of the real economy. When you look at revenues in Portugal, non-voice revenues and this is why our revenues in Portugal are much more resilient than perhaps would be your initial reaction considering the challenging economic environment we live in, but when you look at our Portuguese businesses, non-voice revenues today amount to 46.1% of our total revenues. When you look at residential only, our non-voice revenue is up 57.8%.

In mobile, in personal segment for example, our data revenues are in excess of 30%. When you look at enterprise, our non-voice revenue is up 46% and therefore notwithstanding the fact that we are in challenging economic conditions. We believe that the digitalization of the real economy and the investments that Portugal Telecom has made in future-proof technologies, which has allowed us to transform our business model and our business is certainly a good news is terms of the future ability of this company to continue to deliver on its guidance and generally speaking on its financial targets. With regard to the transformation of our business, we have made investments in the network, also in IT and also in re-engineering of processes. When you look at for example, the wireline performance in terms of EBITDA, that improvement in terms of transformation business is coming through. This is a second quarter in a row that we have posted positive evolution in terms of EBITDA year-on-year. We had indicated to the market way back in 2008, that sometime in 2011 we would turn EBITDA positive in terms of growth quarter-on-quarter. This is the second quarter in a row this year that we have been able to deliver on that. And this is not just because we have been able to transform the top line of our wireline business, but also because the financial discipline and cost discipline in our company remains very high.

With regard to mobile, while we continue to see pressure in terms of regulation in mobile termination rates and we also continue to see some contraction of consumer demand as a result of austerity measures, the company continues to reduce costs to deliver best-in-class margins. Our EBITDA margin, cumulative nine months 2011 reached 46.6% that’s an 8.6% if you like better performance than our peer group average.

Turning now to our segments, when you look for example, our residential segment or each segment in terms of trends quarter on quarter, what you see is that we are maintaining residential revenues growing at roughly 5%, which compares very favorably. So actually when you look what’s going on in terms of the cable performance in the Portuguese market. Personal revenues are stabilizing. Having said that and I will talk about this later. The recharges especially in prepaid are improving month-after-month and enterprise values are beginning also to improve as a result of the drag that I mentioned from last year’s significant internet project for schools in Portugal. So when you look at Portugal Telecom revenues in Portugal, those revenues are stabilizing and if anything improving.

In terms of residential segment, one in my meetings with analysts and investors, I get asked the question many times is, how is it that we have become so resilient? We’ve included the slide in our presentation to show that consumer behavior in Portugal has changed substantially over the last three to five years as a result of significant investments that have been made in increasing the connectivity of the overall countries and this is what's underpinning right now, the pick up of broadband.

When you look at for example [EGAS] availability in Portugal, today the percentage of online availability of the top 20 basic public services is 100 compared to the European average of 84. When you look at e-banking usage for example, in Portugal that stands at about 42% compared to 37% in the European Union. When you think about students accessing internet, the percentage in 2010 in the European Union was 60%, in Portugal it is 72%. Thinking about channels, Pay TV, the free-to-air channels available in Portugal are only 4 and that compares with other European markets that have significantly more in offer in terms of free-to-air channels.

And as the result if you are looking for a napping TV experience in Portugal, you need to subscribe to Pay TV. Moreover it's also what’s highlighting at the daily TV average watching time in Portugal is roughly two hours 40 minutes during the week days, four hours weekend and daily internet usage time is roughly five hours, which compares again extremely well with the rest of the our European comparables. This is the reason why broadband market in Portugal is growing and compared, since the first quarter of 2010 up until the third quarter of 2011, the growth has been sustainable at about 3%. And with the regard to the Pay TV market again, it’s been growing roughly 4%. We expect both broadband and Pay TV markets to remain strong in Portugal, mainly as a result of the consumer behavior change that we are seeing in the market.

With regard to mail, we are on track to achieve 1 million customers by yearend. In fact, we believe that we will achieve 1 million subscribers before yearend. We continue to do very well. We had a very strong month in September and we continue to see very positive feedback from our customers, not just because we offer and we make available in Portugal the best TV experience, but we also have the best quality of service as well as significant investments that we have made in providing interactivity to our customers and increasingly taking advantage of the conversions between fixed and mobile. Our market share, we estimate that at the end of the third quarter was roughly 34%. In fact we think our market share may even be slightly higher than this. It just depends on how you actually measure the number of cells in the market.

With regard to the collateral benefits of this IPTV strategy and DTH strategy that we have is the fact that broadband penetration continues to increase. Our broadband performance continues to be very strong. We had a good third quarter with 32,000 net adds. Furthermore line loss is declining and when you just focus alone on the residential segment, actually we are growing in line as opposed to loosing lines and any lines are being lost, those are mainly in the enterprises and they in partly has to do with the fact that there is some technological evolution which is leading to people disconnecting the standard PFDN line and moving to the IP world.

Focusing now on residential, we saw another very solid customer growth, but also equally important or more important, ARPU growth. Our ARPU increased 5% in the third quarter 2011 compared to third quarter 2010. In terms of residential customers our TV customers were up 27%, our broadband customers were up 14% and we did not loose any lines in terms of fixed telephone lines. Our residential revenues were up 5.9% in the first nine months of this year, 58% of our revenues are now non-voice and we expect this percentage to actually continue to increase over the next few quarters.

Which turning now to the personal segment, we believe that we have the most competitive portfolio of wireless broadband plans and smartphones as well. And this is clearly leading to a change in the revenue mix of our personal segment. Today, the contribution from data as a percentage of service revenues is roughly 30.6%. It is also worth highlighting that notwithstanding the fact that in terms of SIM card market shares, our market share is roughly 44% to 45%. Our market share of smartphone sales right now is running at about 49%. And when you look at the penetration of smartphones in our subscriber base, we believe that there’s still a lot of work to be done, which basically augers very well for the future potential for us to continue to increase data revenues in Portugal.

When looking at customer revenues, our customer revenues were down 9.4% in the first quarter, 8.9% in the second quarter, 6.8% in the third quarter. Furthermore, it’s worth highlighting is that the prepaid recharge growth has significantly improved in the last two quarters. So we would expect that as we continue to promote more active usage of our mobile services in Portugal, some of these recharges will actually translate into top line performance and therefore, if we are able to maintain this kind of prepaid recharge growth in this market, chances are that we will see a reversal or continuous improvement in these trends in the next few quarters as well.

In the enterprise market, we are essentially leveraging the investments we have made in new technologies in order to improve the offer we have to enterprises in Portugal, especially I’ve included a couple of slides in the presentation, which would like to bring your attention first is the fact that we have now made available a cloud offer. And we believe that the cloud offer enhances significantly the value propositional PT offers to enterprises as well as providing them with increased flexibility and of course giving them a unique opportunity to reduce costs especially in this environment. We believe that, that those companies that did buy cloud services from Portugal Telecom, we will be able to reduce their costs somewhere between 20% and 25%.

We have engaged in significant marketing activities, one-to-one marketing over the last six months. The initial indication of the market is extremely positive and therefore we believe that Portugal will buck the trends in terms of virtualization. Similar trends are being seen in other more developed markets and we believe that Portugal will be in forefront of that as well. In anticipation of these industry trends and changes in customer behavior, in this case enterprises, we have also decided to invest in the state-of-the-art data center. This state-of-the-art data center is going to significantly improve Portugal Telecom’s existing capacity, both in terms of storage and processing capacity and if also worth highlighting is that this will be a green data center. We expect annual energy consumption to be down 40%.

When thinking about power uses efficiency, we think that we should be somewhere between 1.2 and 1.4, which will certainly enable us to obtain a lead certification of gold and position this data center, not only to serve Portuguese customers, but also to serve international enterprises leveraging the international relationships that Portugal Telecom has namely with companies such as Cisco and Microsoft. In terms of enterprises, we have also transform and we continue to transform our service portfolio. When you look at hosted email, mobile internet, virtual private servers which you will see across the board is that Portugal Telecom continues to do well, continues to increase the penetration of these services in its customer base and as the result notwithstanding the fact that in this environment we are having to extend more discounts to our enterprise customers. Long term, we will also increase the customer lifetime value because the churn will be significantly lower.

In the third quarter, we also posted solid margins as a result of cost discipline. Myself here, my CFO, all of the team of Portugal Telecom remains very committed to ensuring that we will continue to cut costs in order to mitigate additional pressures that we may see on the top line. Our EBITDA margin has actually increased 1.3 percentage points and thinking about Portugal, our EBITDA margin is 45.7%, which as you can imagine considering the fact that we have seen some headwinds in terms of top line. I think the fact that we have been able to reduce our costs 9.9% is a major team achievement.

Turning now to Brazil. We believe and we have said before, Brazil continuous to enjoy very favorable economic trends. The symmetry of wealth distribution is changing. We are witnessing the emergence of a new middle class which essentially means more consumers in that market. And therefore we believe that in part because of the digitalization of the real economy and second because of the increase, if you like buying power of the middle classes, we should be able to see significant future growth in depth market. The competitive dynamics, however in Brazil remained very challenging. OI continues to enjoy from the fact that it has a national footprint and therefore significant potential to grow as an integrated operator plus the secular trends that we are seeing in terms of fixed line in Brazil, very similar that was seen in other markets.

Wireline customer growth was actually negative 6.5%. Fixed broadband continues to grow 10.5% which is good news and as I’ve said earlier we had a very good quarter in terms of mobile customers partly because we were able to deal with churn better than what we have done in the past. Line loss is actually in the third quarter inline with previous quarters, but fixed broadband performance is improving. We’ve saw fixed broadband increase to 10.5%. The Pay TV customers are still low 330,000.

Having said that, we have scaled back our growth plans in the short term, this is because we are redesigning our pay-TV offers in order to accommodate if you like the fact that we have now signed the global-sat channels which I think will significantly improve the quality of the TV channels that we will make available to our customers in Brazil in the future.

In terms of mobile, we have the best performance in gross adds and lower churn. And as a result, we saw mobile gross adds up by 35.3% and mobile net adds up again significantly. As you also know, Oi have been very stringent in the way that the account for customers in our data base not very similar; its not what other operators in Brazil have done, but Oi has to preview that that have to be done; we've done it and of course we are seeing clearly the benefits of the fact that today our growth is a lot more transparent.

Mobile ARPU was up 2.8%, mobile gross revenues were up 8.1%. Oi financial performance is of course suffering from secular wireline trends. CapEx is higher compared to the same period last year as we have preparing the company for broadband growth in the future and as we are preparing the company for the offer of TV also in the future.

In terms of Portugal Telecom’s relationship and strategic investments in Oi, perhaps the update I can give you is that the technology and networks committee is now fully operational, work is progressing extremely well. The relationship of Portugal Telecom with the two Brazilian partners Andrade and La Fonte, is actually going extremely well and as well as we are working very well with the Oi management team and therefore we continue to be very confident that overtime the sharing of best technical and operational practices, the technology alignment of both companies, the ability for us to get together and translate scale to increase volumes and therefore negotiate better prices. And the fact that Portugal Telecom, because of its leadership in innovation we should also be able to ensure that Oi in Brazil has perhaps one of the best portfolio of services to offer.

So we remain, I would say confident about the ability of both companies to work together to create value for all our shareholders. And clearly the signification of the corporate structure is a critical step for the execution of the operational turnaround. And we hope to conclude this transaction as soon as possible, because we believe that this is clearly a stepping stone to ensuring that this can actually transform itself to capture the growth opportunities that exist in Brazil.

In Africa and the rest of the world, we are capturing mobile data growth and subscriber penetration growth opportunities as well, across the board all our businesses have done very well, no doubt that you’ll have seen that in the press release.

Financially, what I can say is that we posted another quarter of solid profitable growth and the financial position of all our investments in Africa and rest of the world is very, very strong and all our companies are self funding, cash flow positive and as a result they are all contributors in terms of dividends to Portugal Telecom.

With regards to our cash flow, no doubt you saw that as a result of the completion of the network modernization investments which are coming to an end and the financial discipline, our free cash flow increased substantially and that will allow us to continue to honor all our commitments in terms of the future.

The fact that we have the best-in-class networks will allow us to as you can imagine manage efficiently coverage and also traffic growth; increasingly in Portugal Telecom, we are technologically agnostic and our essentials if you like ambition in life is to deliver all our services and content in any screen or device anywhere.

I think the promise of convergence in Portugal will be real, sooner rather than later not just because we are technology agnostic, but also because we have made the necessary investments in terms of IT in order to deliver end-to-end vision not just to our customers but also to Portugal Telecom.

And with regard to our future investments, most of our investments have now been done. As you know, Portugal Telecom end of the year will complete its rollout of the FTTH and our FTTH rollout will cover roughly 1.6 million homes. We will be bidding for the spectrum in order to move ahead with the LTE launch.

And therefore, with regard to the future, what I can say to you is that, if you like, with the completion of the modernization investments at Portugal Telecom, our maintenance CapEx will be stable, account for roughly 40% of our total CapEx. Our modernization CapEx which accounts for 30% is probably going to come down.

And last but not the least, 30% of the CapEx is customer related and that will be if you like success base. So therefore the financial flexibility that this company has in order to honor all of its commitments it's actually well above average.

So with regard to the third quarter what I would like to reiterate is that like in Brazil, we are still going to go through a process where a lot of the work between Portugal Telecom and Oi needs to be filtered through and needs to be translated into a strategic plan. In Portugal, we are actually or we have been able to translate the advantage we have in terms of technology to further leverage our position in this market and to deliver a solid operational performance which in turn is also if you like underpinning a good financial performance.

Let me hand you over now to our CFO. Thank you.

Luis Pacheco de Melo

Thank you, Zeinal. Good afternoon, ladies and gentlemen and I’ll start with a very quick overview of our financial performance by business segments and then move into below EBITDA and net debt and liquidity position.

As you have seen this quarter, we changed the way our operating segments are presented. We now present the Telecom Portugal, Telecom Brazil and within Portugal we split revenues by customer segment. We are also presenting financial information under the previous method for your reconciliation and myself and the IR Director, Nuno Vieira will be more than happy to help you reconcile the two methods.

With regards to revenues, revenues are up by 58% due to the consolidation of Oi, from the 1st of April. With regards to Portugal, revenues were down 7.7% year-to-date. Equipment sales of course represents a higher percentage as service revenues were down 6.7%. Within Portugal, residential continues to post very strong revenue growth at 5.9% year-to-date, on the back of a substantial market share gain both on TV and on broadband.

The personal segment revenues declined by 11.3% year-to-date and 10.8% in the third quarter, with a strong impact of the travel plan, VAT increases and MTR cuts. Internet on the mobile have had good and steady performance, whereas interconnect revenues have declined more than 30% year-on-year.

With regards to customer revenues, we are clearly seeing improving trends with revenues in the third quarter declining by 6.8% versus 8.9% in the second quarter and 9.4% in the first quarter. As Zeinal mentioned, recharges on the prepaid have had a steady improvement in the last two quarters.

Enterprise segment is still reflecting that in one-off projects with public administration and the aggressiveness on the mobile side. Revenues are down 9.9% year-to-date and 9% in the third quarter, a slight improve in the trend.

Wholesale and other another operating revenues including inter-Portuguese business eliminations decreased by 13.6% here of course is the decline on the directories business which we don’t manage at $16 million, also lower wholesale revenues of $22 million including ULL revenues and lower capacity sales. Of course, our success in the triple play is affecting our wholesale business as some of our competitors are disconnecting the ULL connections that have from us; that they have from us.

Oi revenues in our P&L in Euros totaled €1.63 billion for the second and third quarter. In Reais year-to-date revenues were down 5.6% and mobile 4.5% up.

With regard to EBITDA, EBITDA increased 46.5% year-to-date and that is on the back of the consolidation of OEM contacts. Excluding OEM contacts, EBITDA would have decreased by 4.9% with the Portuguese wireline continuing to show an EBITDA positive growth of 0.9% in the third quarter.

Total operating costs in Portugal declined by 9.9% despite a very string customer acquisition quarter. And I emphasize this fact so that the third quarter was a strongest quarter in terms of sales that we add and as you know normally that affects our commercial costs in the period.

Portuguese consolidated EBITDA margins improved by 1.3 percentage points to above 45% and that is due to the scale effects on the TV business, the benefits of the fiber, both in terms of cost and the support services and lower maintenance and also the implementation of several transformation initiatives both on the field force and the customer care front.

D&A costs increased by 66% mainly due to Oi, 5.4% excluding Oi; worth highlighting that in the third quarter in itself Portugal D&A is down by 5% and that is basically due to the end of the amortization of our 2G network at TMN.

PRB costs are down 41 million year-to-date and this is basically because we transferred the pension fund at the end of last year to the state.

With regards to net income, net income stood at €333 million and of course last year we had booked the 5.4 billion capital gain on the Vivo sale and this year if we exclude that, net income was up. And this increase was basically due to the consolidation of the net income coming from Oi which amounted more or less to 35 million.

The decrease in the net interest expenses excluding Oi, mainly as a result of the disposal of Vivo and of course high cash balances in our balance sheet and that had a positive contribution of around 90 million, a capital gain of 38 million on the disposal of ULL. And of course last year, we had positive effect last year on the tax; again transaction related to Africatel in the second quarter of last year.

With regards to CapEx; CapEx increased by 43% and decreased 6% excluding Oi. CapEx in Portugal stood at 400 million and we remain committed to stay below last year’s figures in Portugal for the full year 2011.

With regards to cash flow; cash flow from operations increased almost 120%, mainly with the consolidation of Oi contacts. Excluding these impacts, our cash flow increased by almost €190 million year-to-date to €598 million.

In Portugal, as you have seen, we have not done any major or relevant investment in working capital; actually we did investment of 5 million year-to-date in working capital in Portugal. Excluding the investments in Oi in the first quarter and Vivo disposal in the third quarter of 2010, the free cash flow year-to-date to that 498 million as a result of the consolidation of Oi of course, but also the disposable of ULL that's brought cash in of 156 million and the reduction of the net interest ex-Brazil as I explained before.

With regards to financing, the net debt at the end of September and adjusting for the 2 billion that we have just received from Telefónica, stood at 6.3 billion. If we exclude our share of Oi's net debt, our net debt would be 4.15 billion, which is basically a decrease of 140 million in Portugal and 330 million on the consolidated basis in the third quarter.

Net debt-to-EBITDA therefore stood at 2.5 times which is an increase from last year, but last year by this time, we had already sold Vivo and we had not invested in Oi yet, and we haven’t transferred the pension fund also to the state. Average cost of debt excluding Brazil declined from 4.6% to 3.4%. But these 3.4% benefit also from a huge cash balance during the year due to the sale of Vivo so excluding all those effects the cost of debt was basically close to 4.2%.

Average maturity stood at – is now 5.9 years, excluding Oi, total cash available and undrawn facilities stand now at 5.5 billion which covers all our commitment at the end of the 2013. Also worth highlighting that during the third quarter we made further progress in obtaining additional liquidity by contracting some of these notes and credit facility.

On the pension fund front, our unfunded pension supplement and healthcare obligations stood at 54 million. In addition, as you know Portugal Telecom as liabilities from salaries to suspended and pre-retired employees amounting to 824 million.

So overall, we have 878 million after tax they amount to 658 million unfunded pension liabilities and salaries to pre-retired and suspended employees. In addition to that, Brazil has right now an unfunded pension obligation of 51 million.

Let me hand you now to Zeinal for a final remark.

Zeinal Bava

Okay. Thank you very much, Luis. So to conclude, what I perhaps like to just reiterate is that our business strategy basically has a customer at the center and we are focused on benefiting from the growth opportunities of the digital world. I think Portugal Telecom, because of the investments we’ve made and because of our positioning vis-à-vis innovation, we are better positioned the most to actually deliver on the ICT growth opportunities in terms of the future. We have a unique global profile, 42% of revenues are from Portugal, but 58% of our revenues are coming from international.

We are investors and strategic investors in Oi; Oi has a national footprint and significant potential to grow as an integrated operator in Brazil. Financial performance of Oi reflects secular trends in wireline, but we remain confident that PT and Oi will be able to leverage the benefits of the strategic alliance we have to deliver better results in the future.

Africa and rest of the world are posting solid growth and enjoy a sound financial position. In Portugal, we are seeing improving revenue trends, cost reduction and CapEx control are also underpinning free cash flow growth. We are a predictable company, in addition to our track record as management and delivery on all our commitments, our investments in future proof technologies are known and these investments are coming to an end. We have a very solid financial position with maturities and commitments fully funded until the end of 2013.

Last but not the least, our shareholder remuneration is known by the market. We are committed to have very competitive and best-in-class shareholder remuneration as well. As you know, we have indicated it for 2011, we will pay a dividend of $0.65 and we’ve also indicated our intension to look at paying an interim dividend based on PT’s financial performance as well.

We will remain very confident that with the improvements that we are seeing in terms of free cash flow, we should be able to deliver on all our commitments whether we’re talking about shareholders or whether we’re talking about bondholders.

Thank you very much. My team and I are now of course available to answer any questions you may have. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Robin Bienenstock with Sanford Bernstein. Please state your question.

Robin Bienenstock - Sanford Bernstein

I guess I have two questions if I may, the first is, is there any chance of Oi moving eventually to [novo mercado]? And the second is that given that we’ve now had and look at what MTR is likely to look like over the next couple of years in Brazil. Can you tell how you think Oi can get the scale and how indeed Brazil might have a better wireline infrastructure given that the wireline businesses will continue to sub-size the wireless businesses given the regulatory regime there?

Zeinal Bava

With regard to Oi and perhaps just referring to the simplification of the corporate structure that we announced, which we think and we continue to believe is a critical step for the turnaround of the business. We indicated to the market that we have three key principles and one was that team part had to retain control. That was one of the three principles. So with regard to that, your question about the [novo mercado] is just worth mentioning that the principle underlying any future restructuring of the company has to always take into account the fact that team part wants to retain control and that control isn't for sale. With regard to regulation, we believe that clearly in terms of mobile, there is work to be done. They are certainly is the impact from regulation as a result of low MTRs and so on, but equally important is the fact that Oi has to reposition itself in that market, perhaps look at the mobile market differentially to what it has done in the past. In the past Oi has been mainly, if you like a player in the SIM cards markets. We are of course going to bring to bear the fact that Portugal Telecom has extensive experience, not just in Portugal, but also in Brazil to work together with Oi management team, which has been doing an incredible job in the last three months if you like positioning the company in order to evaluate what other things needed to be done and that may include looking at terminal equipment, that may also include the beefing up the number of distribution channels that Oi is using and can be using in order to position itself in that market to improve its performance.

If you look at the third quarter performance of Oi in terms of mobile net adds were encouraging. Having said that, I think there is lot of work to be done and before Oi can start posting a solid performance quarter-after-quarter. So the weight of the wireline is pretty significant, the secular trends, all the trends we are seeing there are very similar to other trends in other markets, in terms of wireline. But we remain very confident that as a result of the strategic partnership, we will bring to bear the plusses of Oi and the plusses of Portugal Telecom and reposition ourselves in that market, particularly in mobile where being number four is clearly not satisfactory..

Operator

Our next question is coming from the line of Mathieu Robilliard with Exane. Please state your question.

Mathieu Robilliard - Exane

I had two questions, first on Portugal, can you give us a little bit of color in terms of fiber-to-the-home or fiber-to-the-basement pick ups from customers you have been giving numbers in the last two quarters. I wanted to know how it is trending in Q3 and possible into Q4? And then going back to Oi, given the importance of the dividend policy of Oi, obviously it’s going to be helpful when we know exactly what the dividend policy is? Can you give us a little bit of color in terms of when we can expect such an announcement?

Zeinal Bava

Let me just start with the second part of your question. As we’ve indicated to the market that as and when we have completed the corporate simplification we will announce the dividend policy for Oi. Clearly we believe that it has to be a competitive dividend policy because it’s a listed entity and it has to provide the market with visibility. And therefore as we’ve indicated, we will certainly come back to the markets with some information on that. Once we have executed the corporate simplification. With regard to fiber in Portugal, I would say that things are progressing according to plans. In the presentation we put out today, I didn't want to put back slides where we were showing the positive impacts of fiber in terms of OpEx, a lot of those slides we have shared with you in the past. If anything we’ve seen the benefits of fiber come through the P&L in terms of fall back certainly. In terms of pick up, we are not giving out exactly all the numbers, but I can say that we have in excess of 200,000 fiber subs already in the Portuguese market. As you know in our case is fiber-to-the-home which is are different to DOCSIS 3.0 that our cable competitor has. They don't have fiber-to-the-home. We have fiber-to-the-home. And I would say that, that pick up continues to be roughly 50% or between 40% and 50% of all the sales that we're doing every single month. So if anything, word of mouth is leading us to sell more than we thought it was possible. And therefore, we believe that as we start rolling out more interactive services, as we bring to light if you like the delivery of services across different screens and anywhere and the advent of LTE, the benefits of Portuguese customers subscribing to fiber will be even greater in the future.

So we believe that if you like in our case the fact that we have already made it public what our investments are and those investments are coming to an end, it’s good news. That's why we like to say that Portugal Telecom is very predictable in terms of its technological option and one of the things that you're certainly going to seen in the future is that more and more of our CapEx will be client related and clearly each fiber customers means investments in terms of client premises. But worth highlighting is that because we've done an RF overlay in our network, the number of set top boxes for fiber customer is also lower. So, on average we are installing less than one set top box per fiber customer compared to two set top boxes for if you like an IPTV customer on the back of ADSL2+. So take up of fiber, very encouraging. Fiber is also allowing us to actually connect all our base stations, not just in terms of serving them with fiber, but also on the back hole. And we believe that as and when LTE is available in our market we should able to translate the fact that we have bandwidth in excess of 100 megs outside your home and inside your home to be an even greater competitive advantage for Portugal Telecom.

Operator

Our next question is coming from the line of Tim Boddy with Goldman Sachs. Please state your question.

Tim Boddy - Goldman Sachs

I’ve interest in your views on the regulation Portugal’s MTR proposals, I guess in October. And whether you think they will enacted and indeed if that 60% plus next year is enacted, what will be the effect in your business? Obviously overall I imagine the impact on profitability will be limited, but is there a risk with then see some sort of spiraling effect which could actually lead to TMN revenue trends worsening once again?

Zeinal Bava

When we discuss TMN revenues, we of course discuss customer revenues and therefore we try and highlight to you what those customer revenues are and what the interconnection revenues are. What the regulator has actually indicated, he has indicated to the market what his views in terms of how interconnection should evolve in Portugal. We think that that decision doesn’t make any sense whatsoever, considering if you like the impact it has in the balance of payments of Portugal. We think it doesn’t make any sense whatsoever considering the fact that operators are going to be asked to invest in spectrum and to rollout the LTE which in my view is perhaps more of a priority in terms of the development of the Portuguese economy in the sector than it is to lower termination rates well in excess of what for example even the European market is doing.

So we as Portugal Telecom have already indicated what our views are. We have asked one extension in order for us to formally present our views in that regard. We think that the indication of what maybe a potential decision by the regulator is disproportionate. It's out of context and in our view it's going to be detrimental for the job creation and investments in our market. We have indicated that in the past, Portugal Telecom will only invest if it's profitable. We are in this business of course to ensure that we maintain to create jobs, but we are also equally committed to creating value for our shareholders. So we believe that the right balance has to be struck between the interest of the citizen and the interest of the consumer. And with this kind of undue pressure in terms of termination rates in Portugal, we think we are going to have to revise a lot of our investments in the future.

Operator

Thank you. Our next question is coming from the line of Madeleine King with Credit Suisse, please state your question.

Madeleine King - Credit Suisse

I noticed earlier that you made a comment about being committed to having a robust balance sheet as well as to shareholder returns, could you just a expand a little bit on exactly what you mean by robust and also could you talk a bit about your credit rating, which is obviously on negative outlook there with the rating agencies and would you consider sacrificing the dividend if you thought that would be sufficient to maintain an investment rate?

Zeinal Bava

Just before that I think in the earlier question I didn’t answer what was potentially the impact of termination rates. I think we will come back to the market as and when we understand what the final decision of the regulator will be at the stage. I think it would be premature to give to the market any guidance as to what the impact will be because we don’t know what the definitive or the final decision of the regulators may end up being in terms of termination rates. With regard to robust, I mean essentially the main message we want to provide you with is that, we deliver on all our commitments at Portugal Telecom. With regard to our dividend policy, as we’ve indicated in the past we are committed to the €0.65 payments and to the announcement we’ve already made.

Of course as you will have seen in our announcement, it is subject to financial conditions and market conditions and so on. But at this stage, based on how our business is progressing, we remain very confident about the ability of our company to continue to honor all of its commitments, whether it is for shareholders or for bondholders?

We are today of course engaged in discussions with rating agencies about how business is performing, but we are also equally very satisfied that we are continuing to deliver on all the financial targets that we had proposed to ourselves and also to outside parties. So when you look at the free cash flow improvement at Portugal Telecom in the third quarter. When you take into account the fact that we have made all our modernization investments already and that next year perhaps we should be able to reduce CapEx further compared to where CapEx was this year. I think you will of course conclude that the company has financial flexibility, not only to continue to deliver on the dividends to shareholders, but also to ensure that all our bondholders actually believe that this company will continue to honor all of its payments as well. We are fully funded, as I indicated and as my CFO indicated up until the end of 2013 with significant financial flexibility either by way of cash, credit facilities and so on and so forth.

So we think that the refinancing decisions taken in our company in the last two to three years were very timely and therefore we continue to see the future, if you like with confidence, with financial flexibility to continue to invest in the business in Portugal and in Brazil particularly, but also to honor all the commitments.

Operator

Our next question is coming from the line of Georgios Ierodiaconou with Citigroup. Please state your question.

Georgios Ierodiaconou - Citigroup

I have got two questions. The first one is a bit technical on the cash flow for the fourth quarter. If I remember correctly last year we had a typically weak 4Q cash flow because of working capital, is it fair to assume that this will not repeated and should we expect positive working capital which was the norm with exception of 2010? And perhaps you could also comment a bit on the CapEx for the full year, whether you think you could get away with investing a bit less than 650 in the Portugal, given the current run rate?

And my second question is on Brazil. You made a comment earlier on the mobile communication termination rate decision, but there’s been a number of decisions coming out in Brazil both in fixed and Pay TV and mobile. Are these decisions broadly in line what you wanted to see earlier in the year and if not can you highlight to us how that may impact your decisions for the investment there?

Luis Pacheco de Melo

With regards to the working capital, what I would say is just remind you what happened last year as you might recall. We had sold Vivo. We had received significant – the first tranche of the payment by Telefónica and as we recall at the end of the year we anticipated some payments to some of the suppliers, some of them also gave us small discount which we thought was a good investment also for our company. So I don’t foresee that this year we’ll have the same trend as last year, so it will be a normal fourth quarter as it used to be before 2009 and 2008.

With regards to CapEx, we’re not changing guidance in terms of CapEx right now. We will see, we’ll keep going on the CapEx front and we will see where we stand. But at this stage, we prefer not to change any guidance in terms of the CapEx at this moment. With regards to MTR Zeinal?

Zeinal Bava

I think with regard to Brazil, and we are broadly inline or let’s look to the slide, we prefer not to speak publicly about how our regulatory agenda if you can imagine for obvious reasons. And what we can say is that clearly there are significant improvements that can be made in that market particularly if one is thinking about broadband penetration and pay-TV penetration compared to where the market is today.

Moreover, even data contribution if you like in terms of mobile can actually improve significantly. We think that a lot of that will be achieved if you like and on the back of the two major sporting events that you will see in that market, which is the World Cup in 2014 and Olympic Games in 2016.

Recently, I was actually in the conference in Brazil and it is our belief the 2014 considering the number of personal devices that are being sold right now and the way that the smartphone penetration is increasing, it will be a World Cup of – video on personal devices, as a result LTE may be an opportunity for all of us. So we will continue to monitor a number of these regulatory decisions.

Suffice it to say that we continue to see Oi's future footprint as a positive for the company. We are very happy with the work that the management team is doing right now. We are fully engaged with our two Brazilian partners and with Oi's management team to deliver on if you like on the operational turnaround. It's going to take a bit of time, because Brazil is a very competitive market. Having said that, I think the two companies together have what it takes to actually make Oi a successful company in the future. Thank you.

Operator

Our next question is coming from the line of Luis Prota with Morgan Stanley. Please state your question.

Luis Prota - Morgan Stanley

I have a question on Brazil on whether the corporate restructuring and whether you are expecting any kind of delay in the process taken into account that independent expert has left the process and also what is the risk of Norte Leste having to pay in cash material amount of money as part of the process and with overwrite taken into account the valuations made by Citi which are published and what would be the implications for T&E CapEx plan financial position and obviously dividend payment? Thank you.

Zeinal Bava

With regard to the time table, you know that we’ve had to appoint a new financial advisor which certainly has impacted the time table a bit, but its part of the process and as far as we are concerned it is very important that Oi, BRT, all shareholders that are part of that structure understand beyond reasonable doubt that this corporate restructuring is absolutely key for us to be able to execute the operational turnaround of the company.

If we are not able to simplify the corporate structure, it will be extremely difficult for the company to deliver on the corporate restructuring that is on the operational turnaround which I think is a priority considering the options that exist for Oi to grow in that market in the future namely in broadband, pay-TV but also in mobile.

With regard to dividend policy, one of the main reasons why we’ve indicated that we will only make that dividend policy public once we’ve got the corporate restructuring done, because some of the things that you just mentioned rightly will have an impact on Oi’s balance sheet. And therefore, as and when we have a simplified structure of the company, a clear view on what the balance sheet is going to look like, we will then come back to the market with a dividend policy, which will be predictable and will be visible.

And therefore we’ll allow you to look beyond just one year and understand what this company will be able to do, not just in terms of its own business development, but also for its shareholders and of course lenders and bond holders.

So I think we just have to allow a bit of time in order for us to come back to the market. We were as you know accounting on getting the restructuring done by year end. It is unlikely that it will be done by year end. But I think that once we have simplified the corporate structure, which I think is a priority, if we are to execute successfully the operational turnaround of the company, we will then come back to the market with further information and of course satisfy some of the questions that you have just posed, which are very material and relevant. But I think we will only be able to answer once we've got the corporate restructuring out of the way. Thank you.

Operator

Our next question is coming from the line of Nuno Matias with Espirito Santo Investment Bank. Please state your question.

Nuno Matias - Espirito Santo

Just going back a little bit to your comments short (inaudible) and looking to your presentation on page 32. And you’re not making an indication of any interim dividend payment this year. So just to clarify what we should expect or if you are still that way I think that possibility for this year?

And on another front in Portugal, in Q3 we saw some improvement in terms of debt revenue performance. So just trying to understand a little bit of trends here, is this related to any roaming effect that say in Q3 is usually higher, or is this an impact of the new tariff plans that you have just launched and basically they are driving this improvement turn of that revenue performance? Thank you.

Zeinal Bava

With regard to our dividend, our dividend commitments, we’ve indicated $0.65 for 2012, and then beyond that dividend policy we’ve also indicated our intension to pay an interim dividend based on PT’s financial performance. Now of course, that is a Board decision. We’ve indicated our intension to pay that dividend in two – if you like in two stages, but you probably are familiar, but for others that are on the call that may not be as familiar as you, in Portugal if you pay an interim dividend, that interim dividend has to be paid on the back of the net income that you have booked, but only half of that net income can actually be used to pay the dividends.

So for argument’s sake, if you have a net income of say a 100 then you can only distribute 50 to shareholders. So the Board will certainly consider the situation and as we indicated, we have the intention to pay an interim dividend. This has not been yet considered by the Board. But we are of course committed to having an interim dividend and therefore we will come back to the market as and when the Board addresses this issue and we have something to report.

With regard to your second part of the question, Luis please.

Luis Pacheco de Melo

If I recall, you have regarding the new roaming tariff or [Euro] tariff on the roaming side. It will have any impact both this year and next year; we haven’t seen a greater impact yet. But it will certainly have an impact because it takes the roaming in and roaming out on those fronts. We are still trying to figure out what could be the impact for next year, but at this stage I think its too early to comment on the full impact. But as soon as we have a better view on what's going to be the impact our IR Director also will comment on that as well.

Operator

Our last question is coming from the Jonathan Dann with Barclays Capital. Please state your question.

Jonathan Dann - Barclays Capital

It's a clarification, so the annual dividend could be 50% of the 333 million nine months earnings and do you think the timing wise you could have the Board meeting approve it and distribute before the end of this year?

Zeinal Bava

The interim dividend has to be paid on the back of the net income of our Portuguese businesses. And end of September, our net income just in the Portuguese businesses alone was 315 million, okay. So lets say if you were to take the 315 million for arguments sake then you could actually distribute half of that amount, okay.

If the Board let's say convenes, say in December, I am just for argument’s sake again, if they were to say convene in September then you could actually look at the net income up to November and if the Board so decided, they could actually distribute or we could distribute half of the net income cumulative until the end of November or if you like until the end of October.

So the Board has not yet decided when it will adjust this issue, but it is our intention to pay an interim dividend and based on our financial performance and therefore as and when the Board decides to discuss this, we will of course make the information available to the market. At this stage, there is nothing on agenda, but the intention to pay an interim dividend is there as stated previously. Thank you.

Okay. Thank you very much for being on this call. My team and I are very grateful and I hope you found the call useful. And of course my IR Director, Nuno Vieira offline and myself or my CFO are available to take any further questions you may have. And I look forward to seeing you in the future, as we are planning to start a Road Show in a couple of weeks and therefore we may come across some of you and hope to take that opportunity to give you further insight as to what Portugal Telecom is doing. And of course, convey the confidence that we have in terms of the future performance of our company. Thank you very much. Bye, bye.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

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