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Tele Norte Leste Participações S.A. (NYSE:TNE)

Q4 2011 Earnings Call

March 30, 2012 10:30 am ET

Executives

Alex Zornig - CFO and IR Officer

Francisco Valim - CEO

Tarso Rebello - Controller

Eduardo Aspesi - Chief Marketing Officer

Biar Contege - Treasurer and IR Officer

Analysts

Michel Morin - Morgan Stanley

Rizwan Ali - Deutsche Bank

Andrew Campbell - Credit Suisse

Operator

Good morning ladies and gentlemen. Thank you for standing by and welcome to Oi’s conference call to discuss the fourth quarter and year of 2011 results of Oi and its direct and indirect subsidiaries. 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 their respective presentation and the earnings release.

We would like to inform that during the company's presentation all participants will only be able to listen to the conference. We will then begin the Q&A 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 are made and the company is under no obligation to update them in light of new information or future developments.

I will now like to turn the conference call over to Mr. Alex Zornig, CFO and IR officer. Please Mr. Alex, you may proceed.

Alex Zornig

Thank you. Good morning everyone. Welcome to the conference call to discuss Oi’s results for 2011. The presentation is already available on our website. With me today are Francisco Valim, CEO of the company; Tarso Rebello, the Controller; and [Brad Borges], the new Chief Regulations Officer. Paulo Márcio, the previous one, left the company, two weeks ago; Eduardo Aspesi, the Chief Marketing Officer; Biar Contege, Treasurer and IR Officer and his team. Before talking about 2011 I wish to mention that with the approval of the corporate restructuring TNL and Coari have become extinct and TMAR has become a wholly owned subsidiary of OI SA

Consequently the results presented in this conference pertain to OISA. The surviving company the new name for Brazil Oi S.A., as at the end of the December 2011 when the results of the other three companies have not yet been consolidated.

Meanwhile to help you understand the business, we have presented a consolidated pro-forma results equivalent to the previous number of TNL consolidate, of the break in numbers revenue cost and expenses, EBITDA, debt, CapEx and cash flows, as if the merger has taken place on December 31, 2011. The results presented at a consolidated OI SA already correspond to the previous numbers of Brazil Telecom.

Moreover, based on the strategic differential rising from the integration of the companies at the end of 2011, the company changed the way it conducts its business. Now, adapting an approach segment by applying, residential, corporate and personal mobility and no longer by private. This is aimed to increase Oi’s service share of total conception telecom service by clients, placing the company as a provider of end-to-end service.

Moving onto the 2011 results. Slide number 5 or page number 5. RGUs grew 9% in 2011 with an increase of 5.7 million clients in the year driven by the positive performance of the personal mobility and corporate segment and by the lower decline in the residential segment especially in 4Q, 2011. The company ended the year 2011 with almost 70 million clients, of which 43.3 million were in the personal mobile segment, 80 million in the residential segment and eight million in the corporate segment.

The next slide; I the residential segment the company ended the year with 17.8 million RGUs in 13 million residences. As the first results of OI new market sizes, we highlight the performance on 4Q11, in which residential RGUs dropped by 0.4% showing a significant low decline in comparison with the previous quarter. One factor for this performance was the number of residence with three or more triple play service, TP, which grew 10% in the quarter.

Being sure of loyalty of our client base, we continue to expand the high speed broadband offering. December 2011 average speed reached 2.5 megabytes, 44% faster than in December 2010. With 24% of the client base already using speeds over five megabytes and 11% over 10 megabytes.

Believing in fresher potential of this service in 2011, the company continues to expand a coverage of [all], which reached more than 4.6 thousand cities, with the largest active network in the company.

With regard to PNBL, we added 2011 offering the service in, 450 cities. Today we offer this service in more than a thousand cities. OIC PNBL has a growth opportunity and according to the agreement, 4,800 cities in each area of Brazil be covered by 2015.

In November, we launched Oi Internet, which brings the complete broadband solution to the client. In the regions where it is offered, it already accounts for 15% of its sales. Also in order to increase the number of Oi products in the clients’ residence, the company focuses on its efforts on growing the Oi TV brands, as well as in fine tuning its products portfolio and redesigning its plans. This month we will launch our new offerings, even bundling them with residential conversion products.

Corporate; the corporate segment closed the year with 7.8 million RGUs, 7.6% than 2010. Mobile users in the corporate segment amounted to 2.2 million in the fourth quarter of 2011, a 45% increase over 2010.

Slide seven, Mobile Telephone Base; mobile telephone base, grew 16% in the year amounting 45.5 million in December 2011 of which personal mobility amounted for a 3.3 million or 95%. [Gross additions] amounted $44 million in 2011 a record since 2008 and 6.5 million in the quarter look due to the new policy of disconnecting clients the positive performance gross ads was not reflected in that net add.

We used to reach the rate that the company’s main goal is to expand the base in the qualitative and even profitable way. Net additions totaled 2.6 million in the quarter and market share at the end of 2011 was 19%. Mobile net ARPU in 4Q11 was R$22.3, and growth of almost 1% in the quarter.

Next slide; pro-forma net revenue in 2011 amounted to R$7.9 billion. Pro-forma net revenue of 4Q11 was R$7 billion, a 0.3% growth over 3Q’11 driven by the growth in revenue by the personal mobility and corporate segment, which offset the drop in revenue from the residential segment.

Net revenues in the residential segment was R$2.5 billion in 4Q’11 down 2% in the quarter reflecting the decline in revenue from fixed telephones voice service.

Personal Mobility amounted to R$2.2 billion in 4Q’11, 3.2% more than in the previous quarter and 1.6% more than in 4Q of ’10 mainly driven by the increase in revenues from voice and interconnection.

Next slide, as a reflection of the early initiatives under the strategic plan, we noted an increasing cost expense especially in personnel, COGS and third-party service in connection with interactive sales efforts, the focus on service product.

Third-party service amounted R$2 billion, a 10% increase over the previous quarter. In order to improve clients’ perception of quality, Oi increased its spending on plant maintenance. At the same time, the company reviewed its sales commission policy in order for adjusting incentives in the sales channels with the objective of offering increasing comprehensive solutions of its clients.

Personnel costs increased 17% in the quarter to reach R$537 million. This increase reflects the measures taken to intensify the sales efforts and strengthening of the sales channels. Among the key measures are the opening of 60 owned store with the hiring of around 700 employees as well as the creation of regional commercial office.

Cost of goods sold; 75% growth in the quarter. We think this intensification of the sales initiatives is in line with strategic plans. The company includes subsidies for modems for Oi Velox and smartphones for postpaid clients. Moreover the weakest phase of prepaid increase the volume of [chips sold].

Slide 12, EBITDA in 2011 was R$8.8 billion with margin of 31.4%. As described in previous slides, despite the good performance of revenue in comparison with the previous quarter, EBITDA in 4Q’11 reflects increasing costs related to the early initiatives under strategic plan.

Next slide, net income 2011, Oi S.A. ended 2011 with the net income of R$1 billion of which R$141 million were in 4Q’11. Once again I wish to highlight that with the approval of the corporate restructuring process on February 27, the net income that will be used as the base for calculating the dividends relating to 2011 will be that of Oi S.A., which now has all of the Group’s shareholders.

Next slide, gross debt grew R$2 billion in 4Q’11 due to the BNDES loan and the debenture issue. Net debt/EBITDA ratio stood at 1.9 times in 2011 compared to 1.8 times in 2010. Only 1% of the total debt is exposure to foreign exchange variations. Effective cost of debt stood at 96.4% of the interbank rate, CDI, compared to 106% in 2010. The average tenure increased 4.5 years against 3.8 in 2010.

CapEx in 2011 was R$5 billion equivalent to 18% of net revenues in line with the expectations and 6% higher than 2010. 17% of the CapEx was allocated to network, extension of coverage and capacity of the mobile network which includes 3G in State of São Paulo and the broadband infrastructure. 6% of the CapEx in 2011 went to IT.

Let’s now move to Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michel Morin from Morgan Stanley. Please go ahead with your question.

Michel Morin - Morgan Stanley

First on the dividends, Alex, I was wondering if you could just confirm that the legal reserve will be zero, I think for the new consolidated entity. So I think theoretically that means that going forward, dividends would be capped at a maximum of 95% of net income in any given year. Is that correct?

Alex Zornig

No, we’re not. We are obliged to calculate 5% anyhow.

Michel Morin - Morgan Stanley

Okay. And the dividend is 100% in cash, is that correct?

Alex Zornig

Yes.

Michel Morin - Morgan Stanley

And then for the BRTO3 shares that will be in treasury, I think you said on the Portuguese call that you are not planning on selling any of those. If you were to pay those out as dividends or distribute those out as dividends, would that impair your ability to pay cash dividends at year-end, you know, dividends out of 2012 earnings?

Alex Zornig

Mike, we’re analyzing these options, but so far we don’t have a radar screen.

Michel Morin - Morgan Stanley

And if I may on the cost front….?

Francisco Valim

Sorry, to interrupt you, Francisco Valim here, just I would like you to know that the only option that we have ruled out is the option of selling back in to the market.

Michel Morin - Morgan Stanley

Okay. Thank you. That’s very clear. Regarding on the cost side, I think that that’s where may be there was a little bit of a surprise, significant cost because of the strategic plan and the investing you’re doing.

I was wondering, looking forward, are you still, the first quarter has basically ended now, can you tell us a little bit more about what you’ve done so far in terms of opening additional stores so far year-to-date, how many more employees you’ve been hiring and whether or not there has been an impact also from the minimum wage which went up 14% I believe in January? Thank you.

Alex Zornig

All the shops that we are suppose to open, we reopen in December in the last quarter of 2011 and we now are spreading out the new openings along 2012 so you won’t have a big impact in the first quarter of 2012 relating to opening of shops and hiring of sales force.

And as I said in the Portuguese version is, we are assuming that what we spend in the last quarter of 2011, we will recall for through the increase in the revenue in the next quarters. So of course I cannot give you guidance for the quarter answering much, but what we can assure is that this drop in our EBITDA in the last quarter of 2011 is not going to repeat in 2012.

Michel Morin - Morgan Stanley

And regarding the minimum wage, is that something that would impact you perhaps in the third-party services line and or elsewhere at all?

Alex Zornig

No, minimum wage is on the opposites, because you have the minimum wage increase but also I don’t know if you are aware, but it is a tax benefit for call centers in Brazil now which reduce the social security cost, so they are wash, wash, okay.

Operator

Our next question comes from Andrew Campbell from Credit Suisse. Please go ahead with your question.

Andrew Campbell - Credit Suisse

I was wondering, you mentioned in the press release that the quarter was the quarter in which you had the smallest number of disconnections on the fixed-line sides, since I believe it was 2Q 2010. Would it possible to get the new total number of fixed-lines at the end of the fourth quarter.

Alex Zornig

We can ask our IR team to fetch along too, Andrew.

Andrew Campbell - Credit Suisse

Okay, thank you. And just regarding the dividend can you confirm what the record date will be, in other words exactly, which shareholders would be eligible to receive the dividend.

Alex Zornig

The dividends would be paid on May 8.

Andrew Campbell - Credit Suisse

Okay. They will be paid on the 8th but are the…

Alex Zornig

It will go on May 2nd.

Operator

Our next question comes from [Sumit Dada from New Street Research]. Please go ahead with your question.

Unidentified Analyst

Hi, there, just a quick question on your balance sheet please. Post the dividend being paid out, and post my assumption for the withdrawal rates, I calculate your net debt to EBITDA was in the range of 2.3 to 2.4 times at the end of 2012. Can you talk a little bit about the pressure of obviously trying to grow your revenue base or improve the revenue trends as well as any pressure to lower the debt on a consolidated basis? Thank you.

Francisco Valim

Its Francisco Valim here, Sumit. The way we are anticipating moving forward is to make sure that we generate enough cash to satisfy all of our needs including the CapEx that we think is needed to be able to develop and deploy network and services that will provide us with additional revenue and more clients in the future. We will have a more detailed presentation and analysis of that when we have Oi Investor Day in New York on the 19 of April.

But as of now what I can say is that the way we see this moving even though we have what you said around two point something net debt to EBITDA, we are also focusing not only on generating more cash from operations but there are potentially other non-core initiatives that could generate additional cash. So it is a point of attention. It is not a point of concern at this stage.

Unidentified Analyst

Okay, thank you. Just a quick follow up. I saw a couple of Bloomberg headlines, but could you just give any guidance on if you are seeing in the level of withdrawal right, so what your expectations are for that and cash payments at this stage?

Francisco Valim

Alex will give you the details of that.

Alex Zornig

In total, this is a preliminary figure but given by us, in total withdrawal rate is amounting of R$2 billion of which R$600 million relates to TNE and R$1.4 billion relates to [Tele Norte].

Unidentified Analyst

Good, okay thank you.

Francisco Valim

That represents roughly 50% of the base.

Operator

Our next question comes from [Jacob Steinfeld] from JPMorgan. Please go ahead with your question.

Unidentified Analyst

Hi, good morning. One of questions was already asked but I was wondering if you are providing any guidance in terms of CapEx for this year?

Alex Zornig

We will on the Oi Investor Day, but you can work with a number of bit in the range of R$5 billion to R$6 billion.

Operator

Our next question comes from Rizwan Ali from Deutsche Bank.

Rizwan Ali - Deutsche Bank

So you mentioned that your margins should start improving as you start driving revenues from all the initiatives you’ve taken. I mean do you think the revenue growth that will be coming from higher ARPUs or high number of subscribers or both; can you specify?

And also, I mean what is a reasonable target for you to achieve margins this year, given that, overall competition has remained pretty difficult especially on the broadband and wireless side, which are the two segment you want to penetrate more?

Francisco Valim

We will give you more guidance on the Oi Investor Day in a couple weeks time. But as for what is the strategy, I think we have both ends of the spectrum covered, meaning we will try to increase ARPUs especially on pre-paid, post-paid and in the residential, we would like to increase our telecom share of the overall household expenditure. So, even as the ARPU increase on both ends, but we also are working towards increasing the subscriber base of all of those products as well. So it is a two-fold strategy.

Rizwan Ali - Deutsche Bank

One last question, can you update us on the MTR issue; in the North it’s not been changed whereas in South and São Paulo it has changed and if any court case that you will file against it?

Francisco Valim

There are two different clarities that we have to consider here. The mobile has changed and will change moving forward. We have not litigated against that. It was regulated by ANATEL [Agência Nacional de Telecomunicações]. Late last year, it went into full enforcement in February 24th and since then we have reduced mobile-to-mobile tariffs.

From a fixed-line perspective, fixed-mobile calls, mobile fixed calls, we have been entitled by the law and also by the contract that we have signed with the government to have annual adjustment of the prices and that’s why we are litigating against.

We think we are entitled to some sort of increase; it’s a small percentage, it’s less than 3%, but we think that is something that has to be done or agreed with the government, because it is part of our contract and it is part of law even. And that’s why we are litigating against it. But there is a minor increase, but we think there is lot of myriad in the discussion.

Rizwan Ali - Deutsche Bank

So mobile to mobile has gone down everywhere throughout the country right?

Francisco Valim

Yes, to all operators.

Rizwan Ali - Deutsche Bank

And the fixed mobile is not adjusted at all?

Francisco Valim

The mobile fixed was not adjusted, yes. The fixed mobile was adjusted because it’s the same as mobile, mobile.

Operator

(Operator Instructions) And we do have one additional follow-up question from Michel Morin from Morgan Stanley.

Michel Morin - Morgan Stanley

Just to follow-up on the withdrawals Alex, can you confirm that none of the controlling shareholders exercised any withdrawal rights on any of their shares?

Alex Zornig

I confirm.

Operator

And since there seem to be no further questions, I would now like to turn the floor back over 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

Gentlemen, thank you for attending today’s conference call. It has now concluded. You may now disconnect your telephone lines.

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