Zeinal Bava - CEO
Luís Pacheco de Melo - CFO
Georgios Ierodiaconou - Citi
Luigi Minerva - HSBC
Ivon Leal - BBVA
Tim Boddy - Goldman Sachs
John Daniel - Barclays Capital
Portugal Telecom SGPS SA (PT) Q4 2011 Earnings Call March 30, 2012 9:00 AM ET
Greetings and welcome to the Portugal Telecom 2011 Full Year Results. At this time all participant are in a listen-only mode. A brief 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 Mr. Zeinal Bava, CEO of Portugal Telecom. Thank you. You may begin.
Thank you very much. Good afternoon ladies and gentlemen. On behalf of my team, thank you very much for being on this call. I am here with my CFO, Luís Pacheco de Melo, our IR Director, Nuno Vieira and our finance team as well.
Today, of course we will be discussing our 2011 numbers. In 2011 Portugal Telecom reported consolidated operating revenues of Euro 6.147 million while EBITDA reached Euro 2.188 million. Consolidated EBITDA margin was 35.6% and it was underpinned by solid margin of the Portuguese telecommunication businesses that reached 45.1%, which is an increase of about 1.1% point year-on-year and I will go through that in a lot more detail later on in my presentation.
Net income reached Euro 339 million and our basic earnings per share stood at about Euro 0.39. In 2011 our CapEx amounted to Euro 1.24 million that is about 20% of revenues. It is only a decrease compared to the previous year, very much in line with previous statements we made at the modernization program of Portugal Telecoms network and technology investments are coming to an end.
CapEx in Portuguese telecommunication businesses stood at about 647 million and was primarily directed to the investment in the rollout of new technologies and services mainly our fiber-to-the-home network and our TV service, as well as investments we have made in swapping our 2G network to deploy the LTE network as well and of course customer growth.
In 2011, EBITDA minus CapEx reached Euro 964 million, while EBITDA minus CapEx of the Portuguese businesses is amounted to Euro 659 million. In 2011 operating cash flow stood at Euro 1185 million. Free cash flow adjusted for the investment in Oi and Contax and the last installment that we received from Telefónica in relation to the Vivo transaction about Euro 2 million increased to Euro 533 million in 2011 and that compares with a negative of about 40 million in 2010.
Net debt adjusted for tax effect and so on, amounted to Euro 4.068 million and our cost of debt continues to be very competitive and very attractive, which today stands at about 3.3%. Our cost of gross debt was 4.3%.
The liquidity position of Portugal Telecom continues to be very strong. Cash, underwritten commercial paper lines and facilities was roughly [Euro 5095] million as at December 31, 2011.
Our company as previously stated is fully funded until the end of 2013 and my CFO, Luís Pacheco de Melo will take you through some of the financial information in a lot more detail later on during this call.
Let me now perhaps, still give you an overview of the operational performance at our company and perhaps start off by talking about the way that we are organized as a company, which in my view makes us pretty unique in that we believe that we have built in the last few years an organization structure that is customer-centric and it is well poised to take advantage, not just from the growth opportunities of traditional world but also maximizing synergies.
We are, as you know, organized along business segments. So our customer segment, residential, personal enterprise and with regard to our international footprint, the way Portugal Telecom has been managing this for the last three to four years, ensures that we can leverage our know-how and we can bring to bear the scale to generate benefits not just for Portugal Telecom in Portugal but for all the businesses where we have an investment abroad.
Portugal Telecom today has 93 million customers and we believe that we have a unique global profile. Our strategic focus is Portugal, Brazil and Africa. As you know, Portugal essentially gives us predictability of cash flow, especially now that the investments in the modernization of our network is coming to an end, Brazil gives us scale and Africa, and some of the investments we have in our Asian businesses is also giving us growth. We had in 2011, another year of growth. Our total revenue generating units grew by 9.2%.
As I mentioned, we have over 93 million customers. This is very much in line with our stated objective of having more than 100 million subs. When that objective was defined, of course the business profile of Portugal Telecom was very different and if we were to do the same math with the previous investments we’ve had, namely in Vivo and in Morocco the total number of Portugal Telecoms would have surpassed 100 million subs.
In Portugal across all our businesses we have also seen revenues generating unit growth and as well as in Brazil we have also had very strong RGU performance in Class I enterprises which are compensating for the loss that we are still seeing in the residential business.
Let me now start by discussing Portugal and then of course come back and discuss Brazil and our other international businesses as well. In Portugal, residential revenues were up 5.4%, personal revenues were down. So if we can think about customer revenues, we had a quarter where customer revenues were down 7.7% and enterprise revenues were down 9% and overall Portugal revenues were down 7.4%.
No doubt, you have saw in our press release that the fourth quarter top-line performance in all of our customer segments in Portugal improved, compared to the average yearly performance. In the case of residential, for example at year-end our growth was 5.4%. The fourth quarter was 3.9. I will explain to you why it was 3.9 and not stronger than 5.4% and that has to do in our view, with the fact that we are still seeing significant, competitive pressure, particularly underpinned by price promotions, especially from the cable operators in this market.
In the personal segment it is the customer revenue we are talking about 7.7% down fourth quarter, 8.2% down in the year, which means an improvement in terms of performance compared to the average of the year; likewise, in the enterprise, 6.6% down in the fourth quarter but 9% down in the full year.
Turning now to perhaps what we are seeing in the Portuguese market by way of impact of austerity measures and so on and so forth. We would like to call your attention to the fact that despite challenging economic backdrop and aggressive mobile termination rate and roaming price cuts, we continue to deliver in line with our peer group. We believe that the fact that we have transformed the business model of Portugal Telecom away from its traditional telephony into data and services has made our business model far more resilient and in our view has made our services a must have either we are talking about residential customers or enterprises as well.
Non-voice revenues in the case of Portugal today represent already 46.6% of our total revenues. No doubt you will have seen in our presentation that the contribution of non-voice revenues in every single segment 2010, 2011 has increased substantially. In the residential for example, the non-voice revenue contribution has gone up 7.2 percentage points. In the case of personal, it’s gone up 1.7 percentage points and if we are talking about enterprises, it’s gone up 3 percentage points.
So the investments we’ve made to bring today future technologies into this market is positioning us uniquely to take advantage of ICT opportunities and to transform the business model thus making if you like our financial profile a lot more resilient or if you like a lot more defensive.
Of course, Portugal Telecom is not immune to the economy, but we are taking measures and we have been taking measures in the last 12 to 24 months to basically ensure that we can mitigate any downturn in terms of top-line performance with compensation, in terms of cost and discipline, in terms of cash flow.
Talking a little bit about our CapEx; we’ve been spending CapEx in this company at a rate of about 22% to sales which is countercyclical to the sector. But the good news is that our CapEx program is coming to an end. The modernization of our fixed and mobile access network is pretty much complete, most likely going forward and this is probably 2013 onwards, our CapEx will increasingly will be driven by customer CapEx and of course maintenance and repairs or if you like recurring CapEx which will be much lower than the current 650 that we have reported this year or the 550 that we expect to spend in 2012.
The good news also is the fact that in the context of the Portuguese market, we have been running a market share for investments in new technologies approximately 60%. This means that we believe that once the economy begins to do slightly better than what it is, once we start getting some tailwind, Portugal Telecom is uniquely poised to actually grow and gain market share and essentially grow its share of wallet if we are talking about residential or even enterprises.
The investments we’ve made also position us uniquely to take if you like to deal with the exponential traffic growth that we are seeing not just in our fixed-line network but also in our mobile network. We believe that the, if you like the democratization of access of broadband devices and faster speeds means that we will be facing a data tsunami.
The good news is that Portugal Telecom with investments we’ve made, we are more than ready to deal with it and if you look at some of the data that we’ve put in our own network between 2008 and 2011, we have seen data traffic peak in PT’s wireline network increased 54 folds and if you are talking about mobile, 18 folds, but we are prepared for this and we believe that the investments we’ve made will also ensure that we will have the best quality of service in this market.
Faster networks, we believe will also enable more and better customer experience, independent of the services we’re talking about. If we’re talking about OTT for the residential, we believe that we will be uniquely placed to provide the best service in this market. If we’re talking about enterprise customers as well, it is also what's highlighting the fact that we have 110,000 kilometers of fiber, with connections of up to 100 gigabits per second already.
With regard to the rollout of our FTTH network, we will complete 1.6 million very shortly. Most houses are already under construction may not be fully available for sales, but we expect to be available for sales by June this year. 88% of our base station, if you briefly talk about mobile already connected with fiber and they allow us to deliver commercial speeds of up to 100 megabits per second in 4G without any problems whatsoever.
Last but not the least, we are also investing in the construction of a very large data center in the center of Portugal, which we believe will allow us to underpin our cloud strategy, not just to cater for the needs of Portuguese companies, but also for international companies as well.
Turning now our attention to the residential segment. We have had a very busy year, where we’ve done significant number of launches of channels, of interactive services and I believe that the good news is that the Portuguese consumer is taking advantage of the rich media content offers that we are essentially developing in this market.
Some of the numbers that we have already put out in the press release essentially support the view that people want just more than content. People want to have interactive experiences on top of the content that they like and we believe that the fact that we have fiber to the homes and ADSL2+ across all our country, we should be able to do that and that will be a key differentiator of the services that we offer in this market compared to if you like our cable competitors.
With regard to net adds, we’ve had a very good fourth quarter; 63,000 net adds in pay-TV; 31,000 net ads in broadband and with regard to lines, our residential lines actually grew 3,000 in the fourth quarter. So if you think about unique residential customers, they were up 1% fourth quarter 2011, fourth quarter 2010, and if you think about retail revenue generating unit per access, we’ve also penetrated more our customer base and they were up 9% on the year.
With regard to the financial performance, our residential revenues on the year were up 5.4% in the quarter. They were up 3.9% as I mentioned and that has a lot to do with the fact that we’ve had a lot to do with the fact that we’ve had a fourth quarter with heavy promotions, not just in the pay-TV or triple-pay offer that we have, but also in the triple-pay offer that compete with us in this market.
Residential customers were up; residential ARPU pretty stable at Euros 30.9 and the good news that I would like to also highlight to you is the weight of flat fee revenues; weight of flat fee revenues in our residential segment is up 85% today compared to 76% in the fourth quarter of 2009. What this really does; it makes the financial profile of our residential segment highly predictable and we believe highly reliable because increasingly this market is beginning to understand that their full benefits in buying triple-play and conversion offers because it provides convenience, comfort and of course ultimately discount.
With regard to mobile, again we’ve had our plate full in 2011 with a number of launches that have been extremely successful. One product I would like to call your attention to is TMN drive which is a drive-app and it’s one of the most downloaded drive-apps in Portugal which has been developed by TMN, our wireless commercial brand, but because we don’t believe in walled-gardens, it is also available for downloads for all mobile users in this market. The good news is that it’s done extremely well and today we believe that we have created a core competency in our company to continue to develop more apps in the future.
More connected devices, faster broadband speeds are being of course promoted in this market on the back of comprehensive smartphones and tiered pricing data offers. With regard to smartphones, our market share of smartphones sales is 48%.
The e-plans that I talked about in my last two conference calls continue to do extremely well. These are essentially very simple tariff plans that provide you the voice and data, unlimited, full day or just nights and the simplicity has actually been valorized by our customers and in less than a year, we now have 869,000 customers, actually using these flat fee tariffs, which in my view have higher customer lifetime value, simply because churn is significantly lower.
We've also rolled out our 4G commercial offer as well. We expect to cover more than 80% of the Portuguese population with LTE by the end of April of 2012. By the end of the year we expect to cover more than 90% of the population with LTE. The innovation that we brought to bear, is not just the speed that we are offering but it’s the fact that our 4G data plan can now provide if you like traffic that can be shared between devices.
If you like the sharing of bandwidth across multiple devices is now being enabled by TMN and Portugal Telecom in this market and the good news is that we've had very good feedback from customers, albeit that this is if you like a launch, it’s a soft launch of 4G.
The equipment prices are still very high and therefore we don't necessarily expect to take up 4G to be significant this year, but we are prepared not just for the data tsunami, as I mentioned but also to make sure that whatever products and whatever services that we make available, live up to the expectation of customers and customers are increasingly demanding to share the bandwidth across multiple devices, simply because a large proportion of the customers now have more than one handset.
One particular point that my IR director wanted me also to highlight is the fact that when one talks about SMS, we are less exposed in peer group to SMS revenues. SMS as a percentage of service revenues, in fact the average is about 16%. In the case PT its 9% and therefore the trend that you are seeing in some of the markets may not necessarily apply to the Portuguese market.
With regard to the impact of the economy in terms of customer revenues, clearly revisions of GDP growth for 2011 and of course the talk around possible revisions for 2012 do have an impact in consumer confidence and in private consumption profile as well.
And of course this is having direct impact in customer revenues, not just because people of course controlling spending but simply because they are doing more bargain hunting and as a result they are going after tariff plans, which are the cheapest in this market and of course their willingness to compromise quality or if you like customer care to get lower tariffs has also changed significantly in this market in the last six to twelve months.
Now referring to the enterprises, again, we have had 2011 with a number of launches, particularly and focused on promoting, if you like cloud computing offers because we do believe that these integrated convergent solutions not just for logical operations but for SMEs may promote an efficient economy. Essentially, we believe the technology will allow these companies not just to reduce costs but also to become greener.
With the restructurings we’ve done in the way that we approach the SME market, we’ve become a lot more savvy with regard to approaching our customers with offers. When you look at the commercial contacts that we are now doing on average, every week, compared to the same period last year, it’s up to 82%.
In the case of SMEs, our revenue generating units have been up by 3% and we’re gaining market share across the board, whether we’re talking about fixed line access or mobile access. Portugal Telecom in the SME market is not happy with it’s market share. We believe that we can certainly do a lot more but I think doing more doesn’t mean that we will compete on price.
We believe that doing more here means that we should bring together advantages of cloud computing to reduce the cost of our customers and therefore as opposed to competing on price, we would like to essentially alter the value proposition and ensure that our customers understand, that this value proposition will create value for them as well, long-term.
ICT, we will be improving the growth outlook for large corporates and again, we’re well positioned here to participate in all these opportunities on the back of the significant investments that we have made. If you, no doubt, will have seen in the presentation, in a virtual private service, we’ve seen significant increases in 2011 and 2012.
We think that of course, it’s early days. We’re coming from a small, if you like comparison numbers but I would say that the trends are there. BPO, again, has signed deals, have gone up substantially. But as you know, some of these contract for large corporates and enterprises usually have a lead and a lag time and therefore we have started the year with some good gains of some new contracts but some of these contracts do require, if you like, for us to install infrastructure.
This takes a bit longer and therefore there will be some seasonality in the revenue numbers that we will be posting for 2012, but we believe we remain encouraged by the fact that the service portfolio that we are making available is living up to the expectations of our corporate customers and worth highlighting is the fact that one particular very large financial institution recently chose us to be the prime contractor and I believe that was a substantial gain for us in the Portuguese market.
Again, in enterprises the weighting of non voice revenues is supporting improving revenue trends. I would not encourage you to extrapolate the 6.6% performance that we have had in the fourth quarter for the rest of 2012, because there will be seasonality, but I would say that non-voice revenues now already account for 46.4% and like in the case of residential it is making our business more resilient. In the case of enterprises it will also do the same.
Now turning to Brazil; w we completed the simplification of the corporate structure of Oi as promised. It took a bit longer than we had expected but we have now completed the simplification and we have now moved from having seven share classes to only two share classes.
I have referred in a number of calls earlier the advantages for us having a simple corporate structure. They are financial benefits, they are cost benefits. They are of course, also capital market benefits. Oi will now become an easier company for analysts and investors to review and analyze. We will have just a single balance sheet and we hope that this will lead us to having a better access to capital markets in the future.
With the simplification of the corporate structure we also believe that the management team of Oi with the support of Board of Oi will be able to provide the market with a long-term share holder remuneration policy. In the Oi’s result announcement today, the company has indicated that they will be paying 2 billion Reais of dividends in relation to 2011 financial year. In the conference call today, no doubt you will also hear the management say that in the Investor Day the management will also provide what is the long-term shareholder remuneration policy for Oi. None of this would have been possible if we had not completed successfully the simplification of the corporate structure.
The simplification of the corporate structure will also facilitate the operational turnaround. Now we do have significant operational challenges in Brazil and no doubt the financial performance that we posted today will have indicated to you that there is work to be done across the board, whether we are talking about the residential segment, whether we are talking about the personal segment or the enterprise segment. The fact of the matter is that the three core shareholders of Oi, which includes Portugal Telecom, are collaborating with the management team to ensure that we have all the resources necessary to be able to turnaround that business successfully.
Oi your management team is setting a clear strategy which is focused on customer segmentation and we hope that that will deliver on results. I will not elaborate a lot on this simply because there is an Investor Day that will be held in Rio and in New York in this month of April and I wouldn’t like to steal the thunder of that Investor Day, so therefore I would expect the management to provide you significant amounts of details around the strategy of each of these segments and also on how we see the turnaround of the company being actually executed.
Oi has a national footprint and we continue to believe that it has significant potential to grow as an integrated operator, whilst the mobile voice penetration in Brazil is already very high, we believe that the broadband penetration and pay-TV penetration in Brazil still has significant headway to make.
With regard to the fourth quarter, there were a number of commercial initiatives that were launched and they were aimed at increasing postpaid customers, up-selling and cross-selling by leveraging fixed and mobile convergence. Now of course, all this is meant if you like significant investments.
This is part of the reason why the results that were announced today in my view were below consensus, because a lot of these initiatives had not been incorporated by the market in the thinking and we hope that some of these investments will start providing if you like upside in the future. If you like they all form part of the turnaround plan which the Oi management will be sharing with you during their Investor Day.
Notwithstanding this, in the fourth quarter, Oi saw solid revenue generating unit growth in personal segment which more than compensated the decline in the residential segment. The revenue performance or Oi, again as I mentioned does not reflect the impact of initiatives that were undertaken in the last quarter by Oi’s management and therefore residential revenues were still down 11% compared to the fourth quarter last year, but personal revenues were up 1.6%, total revenues were down 4.7% and as I mentioned, we hope that we can provide a lot more visibility on the future outlook of this business during the Investor Day.
Oi’s financial performance when it comes to fixed-line reflects the secular trends you have seen in another markets. Clearly, the transformation that is required is very similar to what we have seen in other markets. With regard to the net debt, you saw a decline of 12.7% compared to 18% -- compared the net debt at the end of December 2010.
With regard to Africa and our Asian businesses, no doubt you saw that we posted a very healthy customer growth of 21.6% in Angola, 17.1% in MTC, 2.4% in Cabo Verde to 11.2% in São Tomé, 27% in Timor and 15% in Macau. The performance of all our businesses, also financially was very robust. If you look at the proportional consolidation that we’ve made available also in our press release, top-line was up 15%, EBITDA was up 7.7% and equity income was up 4.6%.
We remain focused to cut costs, operational cost discipline in our company continues to be very high. Today, I will be presenting these results also to our first line directors and of course ensuring that we all remain vigilant with regard to everything else that’s happening in this market to ensure that we continue to maintain a high level of discipline so as to mitigate any potential future impact and pressure that we may see on the top-line.
EBITDA margin in Portugal is up to 45.1% about one percentage point increase compared to 2010. We believe that the structural competitive advantage of Portugal Telecom is underpinned not just by the investments we’ve made, but also by the ecosystem of partnerships that we have, international partnerships around technology that is allowing us to provide this market with significant number of innovations which in my view is underpinning market share gains across the board for us.
PT’s investment in fiber-to-the-home is allowing strong customer growth, churn reduction, lower maintenance cost and lower customer CapEx; 21% of our Meo customers are now fiber customers and the good news is that the churn rate that we’re seeing in fiber customers is roughly 6 percentage points lower than the churn rate that we see usually in a copper customer.
I’ve mentioned already to you, 4G for us has to do -- has a lot more – has to mean a lot more than just faster speeds. It has to mean the ability for us to on one hand, make our pay-TV offer an OTT offer and therefore through that ensure that we can accrue additional revenues going forward. But we hope that it will also allow us to if you like underpin growth in mobility by getting involved more and more with education, health and of course entertainment.
The investments we’re making in our datacenter in my view will also differentiate us in the future and finally before I hand you over Luís I also would like to mention that investments we are making in terms of sustainability continue to be a strategic objective of Portugal Telecom. We remain convinced that IT can drive a greener and more efficient economy and in that regards we are very happy to again referring this conference call that we are present in most of the if you like sustainability indices in the world and this for us means that encouragements to continue to do more in this areas in the future.
Let me now hand you over to Luís. Thank you very much.
Luís Pacheco de Melo
Thank you Zeinal and good afternoon and as you know we started consolidating Oi in the second quarter 2011 and therefore quarter-on-quarter and year-on-year comparisons have to be bear in mind. Let me just go very quickly through review line then move to EBITDA and then to the financials, to the net debt and the cash position.
As Zeinal mentioned, revenues were up 82% from the fourth quarter, 64% for the full year and it’s basically due to the consolidation of Oi. In Portugal, they were down 6.7% in the quarter and within Portugal, on the residential business they were up 3.9%, basically backed by solid growth on the residential customers RGUs and even a 3% increase in the ARPU. The ARPU increase is also despite the lower penetration of premium services as expected, due to the economic situation right now in Portugal.
Non-voice revenues as Zeinal mentioned are now up 5.9% points to 60.7% and flat fees represents 85% of our residential revenues. On the personal revenues they decrease 10.7% in the quarter and customer revenues were down 7.7% and the long-term for e-plans had a positive impact but total revenues were severely impacted by the intense competition. Of course the consumer confidence that Zeinal referred to and also by the steep decline on inter connection revenues, which were down almost 32%.
Total revenues on the enterprise segment declined by 6.6%. Despite the economic conditions its impact on both bankruptcies of small medium-sized companies and cost cutting initiatives by most companies, PT was able to sustain the revenue decline in the segment with its integrated and vertical offers and new cloud based services as Zeinal mentioned.
Oi revenues are now appear in our total of Euro 2.4 billion for the nine months, Euro 778 million on the fourth quarter and Reais in the fourth quarter Oi revenues totaled almost Reais 7 billion, 4.7% decline with residential revenues down 11.5%, personal revenues up by 1.6% and the enterprise is down by 1.3%.
Consolidated EBITDA increased by 47% in the fourth quarter, on the back of the consolidation of foreign contacts and in Portugal EBITDA declined by 6.1% to Euro 312 million in the fourth quarter and this is basically due to the 6.7% decline in operating revenues and despite the 7.1% decline in operating cost. EBITDA margins in Portugal stood at a very healthy margin of 43.5%.
Wages and salaries continue to decline at 7.7% as a result of the restructuring plans implemented at the end of 2010, and extra time remunerations and also higher efficiency.
With already significant scale achieved in the pay-TV offer and in our fiber penetration, we have been able to extract already scale benefits both on the content side but importantly on maintenance, repairs and also on the cost in the support services. PT continues to implement additional structural cost initiatives in order to adapt its cost base to the pressured and top-line in some of the areas in Portugal.
[Oi pay-TV] for the full-year, they were down 14.8%, 19.2% in the quarter and basically a result of a top line decline, higher subsidies and [the new] commercial initiative aimed at strengthening it’s sales machine and also some customer support services.
On a proportionally basis, Oi international assets posted a very solid 15.9% increase in EBITDA in the fourth quarter as a result of competitive advantage of all our assets in their respective markets, a strong economic end market dynamic in these geographies, and so as a result of substantial structural initiatives taken over the last two years in all these assets.
G&A costs increased 82% to 381 million in the fourth quarter there was no consolidation of Oi, which accounted with 180 million. These amounts includes 50 million of amortization of the PTA and due to the recognition of the Oi purchase price allocation and the impact of the amortization for the full-year was 47for the nine months and we have to restate that back for the second and for the third quarter. So basically, now we have approximately Euro 15 million amortization of the PTA per quarter.
Excluding in Brazil, D&A in the quarter increased 3.5% and despite a higher depreciation coming from recent investments in future growth technology and on the ATV business.
TRBs increased Euro 18 million in this quarter mainly due to the Euro 31 million gain booked in the fourth quarter last year, due to the regulatory change in the pension form in 2010. Retirement costs reduced to Euro 30 million in a quarter from a Euro 135 million in the previous year. The Euro 30 million relates basically to 130 employees and last year they were 600 for the previous year they were around 630 employees.
Net income time for the full year decrease to Euro 339 million and down from Euro 5.67 billion in 2007, due basically to capital gains on Vivo sales which amounted to Euro 5.5 billion. Oi’s contribution to our net income that was a negative Euro 32 million and this includes the Euro 47 million PPA amortization that I referred to as above.
On the CapEx side CapEx increased 70% to Euro 520 million in the quarter and in Portugal CapEx decreased 3% in the quarter. The expected decline in CapEx supporting our Pay-TV business including the FTTH deployments and terminal equipment was partially offset by higher investments in our mobile networks, basically the swap of the 2G network and also the initial rollout of the 4G network. Going forward, we should expect an important reduction in the CapEx in Portugal. The trend already reflected on our consensus.
In Brazil, Oi’s CapEx in Reais increased to 4 billion in the nine months that's reconsolidated which represents almost 18% of revenues. For the full year, Oi’s CapEx in Reais was around Reais 5 billion. Other CapEx increased 3.3% and this was basically due to the 3G CapEx in Timor.
Cash flow, operating cash flow increased Euro 291 million in the fourth quarter and approximately Euro 1.2 billion for the full year due to favorable working capital during 2011. Excluding Brazil, operating cash flow stood at around Euro 800 million for the full year.
With regards to free cash flow excluding the outflow related to the acquisition of Oi and the inflow from the last installment received from Telefónica and total free cash flow was around Euro 533 million. Excluding these effects and the proportional consolidation of Brazil, free cash flow so on the domestic front was Euro 720 million despite limited dividends coming from Oi last year, but this figure includes the disposal of UOL which amounted to Euro 156 million.
On the financing side, net debt at the end of the year amounted to Euro 6.39 billion and includes the positive tax effects of the pension transfer and these equates to basically 2.6 times EBITDA. The Euro 4.29 billion increase in 2011 was basically result of the Euro 3.73 billion investments in Oi and Contax, the Euro 1.12 billion dividend paid by PT to its shareholders, the proportional consolidation of the net debt of Oi of Euro 2.3 billion.
The free cash flow as I mentioned above was Euro 533 million and of course Euro 2 billion received from Telefónica to the sale of Vivo. Excluding Brazil, net debt stood at Euro 4.1 billion at the end of 2011 and 2011 was also an important year in terms of free financing ex-Brazil; in fact PT was able to raise Euro 2.6 billion in debt at an average spread of 200 basis points with average maturity of 4.2 years. So right now we have all our commitments until the end of 2013 fully financed.
Last, just a few words on the pension, so unfunded pension liabilities after-tax at the end of year stood at Euro 694 million, a reduction from the Euro 711 million in 2010. Salaries to pre-retired and suspended employees represent more or less 85% of this amount. In Brazil, the unfunded pension obligation stood at Euro 52 million at the end of 2011.
I’ll now hand you over to Zeinal for his final remarks.
Okay. Thank you, Luís. So in short, Portugal Telecom has a diversified business profile, with international investments accounting for 60% almost of our revenues. We have scale with more than 93 million subs and we are fully funded until the end of 2013.
We are of course not immune to the Portuguese economy, but the residential segment is doing well. Actually, better than expected and we are trying to compensate pressure on all other segments by maintaining cost discipline.
We will not be competing in this market based on price. The prices in this market in our view are already very low. We think that we can grow share of wallet, but we will be rational. We can grow the share of wallet because we have made not just the right investments in technologies, but we’ve also been able to transform if you like ability of this company to underpin these investments and generate by innovating new services for our customers and therefore we believe that we will continue to gain share across the board in this market in the future.
These are of course uncertain times and whilst we are not immune to the economy, but we think that our business is more predictable and we think that the investments we’re making in broadband, pay-TV and ICT are defensive.
We believe that we’ve done all the right things in terms of investments in technology. It was countercyclical compared to what was going on and what’s going on in our sector, but even if you take in to account the investments we’ve made in 4G, we think that in the future it will underpin also our ability to bank on convergence which in our view will become one of the key differentiating factor of Portugal Telecom in this market.
With regard to Brazil and Oi; Oi’s corporate structure is now simplified. We have a new management team since the 1st of August of last year. The turnaround plan is in-place; Investor Day has been scheduled for April and we will provide significant details about the turnaround plan, but also we’ll establish key milestones so that you can have a confidence that the turnaround is possible and will be delivered upon by Oi and thus will create value for the whole shareholders; Oi’s shareholders, but also Portugal Telecom.
The dividend has been announced Reais 2 billion and we also expect that on the Investor Day the new policy for the next three years will also be announced and this will take your comfort levels about the cash flow generation at Portugal Telecom as well.
Portugal Telecom in Africa and in Asia has also seen all our businesses grow. Those businesses are self funded. They generate and distribute cash as well.
With regard to our dividend in 2011, we have confirmed the Euro 0.65 and the payment, the individual payment of around Euro 43.5 will be paid after our Shareholders Meeting on the 27th of April.
Thank you very much for being on this call. Myself, and Luís Pacheco de Melo, my CFO, my IR Director and my finance team are of course available to answer any questions you may have. Thank you.
We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Georgios Ierodiaconou of Citi. Please proceed with your question.
Georgios Ierodiaconou - Citi
I have two questions please. The first one is on your decision for the dividend. A lot of your peers decided to cut their dividends because they were not getting enough credit from the market. Why didn't you follow that example? And can you share your views around buyback going forward instead of paying a dividend potentially?
And my second question is around the first quarter, given that we are on the last day of the quarter, can you give us some color about how you think it went particularly Portugal? Thank you.
Okay. Thank you very much Georgios for your questions. We've had a long history of delivering a premium shareholders remuneration for the last two mandates. This Board and this management team, we've worked hard to return cash to shareholders, in the form of rising dividends and/or share buybacks. Our current dividend and what we've said in the past about future dividends was solidly based on our expected free cash flow. We continue to believe that the free cash flow of Portugal Telecom underpins our flexibility to pay dividends in line with what the sector is doing and what is expected by if you like the consensus. We are fully funded until the end of 2013.
Having said that, I would like may be to take this opportunity to say that we are of course frustrated with our low share price and we look on the resulting high yield offered by the shares with some dismay. The yield on our shares exceeds that of junk bonds of companies with much less dependable cash flows and less record in delivering strong operating performance. So we have confirmed a 65 cents in line with the promises we have made in the past.
We now have a shareholder’s meeting on the 27th of April that will appoint the new Board of Directors, which pretty much is the same as the current one but we will have a formal, if you like, appointment and I am confident that this new Board of Directors in the future will reflect on the shareholder remuneration strategy when it convenes.
So I prefer not to actually elaborate on this point anymore simply because on 27th we will be appointing a new Board and we should expect the Board to then consider what is the right remuneration strategy, when it convenes, based on like all these other things that I have said earlier.
With regard to the quarter with the first quarter trends, again I will not like to go into lot of details other than to say that as I said in my closing remarks, we are seeing the residential segment robust, strong. We are continuing to see, I would say a solid performance in terms of, if you like key performance indicators around, if you like sales of broadband and pay-TV. So from that standpoint I would say that the trends on the residential segment encouraging.
With regard to mobile and with regard to enterprises, I would say that it is very difficult for us to at this stage get into significant discussions with you, because the changes in the profile of consumption, changes very often week to week and month to month. So I would say that those are the segments will continue to remain under pressure but it is by taking that in to account that we’re maintaining high level of cost discipline in our company. So that we can continue to deliver on the cash flow and with that cash flow, we can continue to honor old commitments that we have made to shareholders and bond holders. Thank you.
Our next question comes from Luigi Minerva of HSBC. Please proceed with your question.
Luigi Minerva - HSBC
Yes. Good afternoon. The first question is on mobile pricing. On page 11, you mentioned about the economy and I was wondering if with the dramatic increasing data the result may lead pressure on the mobile capacity. Would a natural development be some form of pricing power for the operator to reflect the higher demand for data. I was wondering if you can share your views on these where you see some form of evidence with it?
And second point is on happening we are seeing in Spain, Telefónica and partially Vodafone removing handsets subsidies. I was wondering on what are your views on about it and if you believe that an approach that would be applicable to other market like Portugal? Thanks
Okay, thank you Luigi. Let me start with the second question. With regard to handset subsidies, we have no intention of changing our own policies in this market. I think each market has a different story to tell. In this market, we will continue to subsidize the way we have.
Having said that, as you know, in the last few years, the mobile sector in Portugal has become more rational, when it comes to subsides particularly in the prepaid segment of the market and therefore if you look at the subscriber acquisition cost of our mobile business in Portugal, it has been coming down over the last few years in great part because subsidies have come down.
Having said that, we will not be changing our policies and our strategy in that regard and I understand that our competitors in Portugal have also indicated that they have no intention of changing their policies as well. So this market will continue to operate as it has been in the past.
With regard with the date of tsunami two or points. First and foremost we have made all the investments necessary for and part of the benefits of the Portugal Telecom as an integrated operator is that we will be able to offload traffic from mobile to fix using not just, if you like, the routers that we have in the homes of all our customers but also on the back of Wi-Fi hot spots that we have, pretty much in the all the key places here in Lisbon and therefore Portuguese consumers know that if they are clients of Portugal Telecom they stand to benefit.
They stand to benefit not just because we will be able to provide them the best quality of service, because of the ability, if you like off-load between mobile and fixed, but they also know that because we can actually do that and we have such an extensive coverage of Wi-Fi that they will be able to use their mobile traffic when it is really necessary on the move where there is no Wi-Fi coverage. So they are in effect if you like price benefits ass well and through that full customers that are buying wireless broadband from Portugal Telecom. I don’t actually believe that as operators we will have pricing power simply because people are using more services on the move.
Having said that, it is worth highlighting that in this market, the unlimited data plans that do exist are data plans which have fair usage policies and as a result, we believe that when it comes to data this market has been more rational than the sort of average European market.
Having said that, we were very recently surprised by the fact that one of our competitors in the 4G launch subsidized handsets more than they should, we followed suit, because we very clearly indicated to the market here that we are not prepared to lose market share. This is the time when Portugal Telecom has what it takes in order to translate the structural competitive advantage of the investments we have made in technology to gain share.
So we will not lose share based on price, although as I said in my introduction, we will not or we prefer not to compete on price because we frankly believe that customers are beginning to value if you like reliability and quality of service increasingly more and it’s in that plan that we would like to actually differentiate ourselves.
So pricing power I think very limited, but rational behavior by if you like bringing to bear fair usage policies to ensure that the customers that are not have users are not seeing the quality of their service impacted by some irrational usage by other clients. Thank you.
Our next question comes from Ivon Leal of BBVA. Please proceed with your question.
Ivon Leal - BBVA
Just a couple of questions on Brazil, it's a bit ahead of in custody of Oi, but may be you could share with us if there is any clue where you are reversing the fixed-to-mobile substitution price. Actually, it looks there have been acceleration in Brazil for the latest quarter’s instead of decelerating?
And the second one, it looks Oi has already made some significant efforts in fourth quarter in order to recover commercial traction on the mobile. Do you think the company is in a hurry to recover market share even at due to high MTR rates, I guess beyond that traffic is much more attractive for subscribers?
And with regard to mobile, and I think to be very consistent with comments I have made previously, we, Portugal Telecom, believe that in order for an integrated Telco to do well, you need to be strong in mobility.
Also if you look at the range of handsets and devices that are being increasingly bought by customers, they are more and more mobile centric and therefore being number four in mobile as I have said in the past is not in our comfort zone, because we fundamentally believe that in order for you to do well in the future in telecoms, you have to lead the way in terms of convergence, but also of course have an important role in everything that has to do with mobility.
So therefore if you like the focus on mobile has to do fundamentally with a view that you need to do well in mobility in order to do well long-term. And when you think about Brazil, two things worth highlighting is that penetration of mobile is already very high.
Having said that, with the advent of the World Cup and the Olympic Games, we will see some disruption happen in that market, also understanding that 4G is out there now and that market is likely to leapfrog simply because the fixed-line infrastructure from that standpoint has lagged in terms of speeds and so on and so forth.
With regard to fixed-mobile cannibalization and the challenges in Brazil, they are not very dissimilar to what you’ve seen in other markets. We ourselves, for example, in Portugal, went through very similar sort of trends in the past and that’s why today I know I was very pleased in including a slide in our presentation where we showed to you that 85% of our fixed-line or residential if you like revenues coming from flat fees which is making us more immune from if you like voice traffic revenues in terms of the future.
So similar sort of repositioning will be required in that market. This is why most operators in that market are beginning to move from single to double to triple play, so it's not a very dissimilar trend to other markets. It will require investments of course, but more importantly, it will also require a significant change in the DNA of these companies that in the past we used to selling just voice and now moving to if you like a business where they’ll be selling a flat fee triple-play which will be underpinned mainly by the sort of TV experience which they make available to customers.
So, and I don't think you will go right or left simply because there is MTRs and those are falling. It’s a fact of life that that cannibalization that happened in voice will happen also in data in terms of fixed and mobile, unless you are able to evolve and modernize your fixed-line offer. And this is one of the reasons why if you take Portugal Telecom here, we’ve moved from single to triple-play and going forward, we would like to move to quadruple play as well. Thank you.
Our next question comes from Tim Boddy of Goldman Sachs. Please proceed with your question.
Tim Boddy - Goldman Sachs
I have two questions. The first is just around how you think about sort of back-up plan and scenarios for the significant disruption in the Euro-zone and question marks around membership privacy of currency. What are your options to dramatically de-lever and reduce risk for shareholders in that scenario and how does the dividend play into that?
And then secondly, a more operational question, you’ve now managed to get more TV subs than broadband subs broadly overall, can you help us understand the trend looking forward for those businesses; as you keep growing in TV, how many of those are satellites and how many are IPTV and is there a constraint on your growth as a result of that catch-up on TV?
And with regard to your first question, and I think if you like the measures that we’ve taken as a company has already been referred to by our CFO, you know, we are fully funded until 2013. And if you look at the presentation we put out today, we also showed to you that in 2011 we were able to refinance some of the existing credit lines that we have and it also has been very encouraging to see that the Portuguese Republic has been able to fund itself in the market at much, much better or more attractive rates than it used to a few months ago.
So I think all these signs are very encouraging and when you look at the measures that are being taken in that regard, by the Portuguese government to live up to the expectations of whatever the, if you like the refinancing plan was, would seem to be getting good level of support in Europe.
So we would like to think that all that is happening right now on the back of what's being done in this market is encouraging for companies such as ourselves that will have to eventually, not now, not next year, but then maybe the year after next will have to refinance themselves in the international capital market. So the recent events or the events of the recent weeks have been extremely encouraging in that regard.
So the measures we've taken is that we have funded ourselves until the end of 2013. We have increased substantially the scrutiny as to where we spend our money and here we have the benefit of having made significant modernization investments already.
So, therefore contrary to a lot of our peer group companies that are still debating whether to do fiber, when to do LTE, we've done all of that. Or if anything we've positioned ourselves to just increase our share of knowledge. So the day we actually get some tailwind and the day we get the Portuguese economy actually picking up a little bit, we will be there, basically gaining market share across the board in all of these new services that we are developing.
So we have been preparing ourselves for that and of course the cash discipline in our company has never been higher and you will have no doubt seen in two things that in the numbers that we put out today cost discipline, costs were down. And number two that we are projecting that CapEx 2012 will be 100 million lower.
Having said that as you know and just to remind one third of our CapEx is customer driven, which means that we have a natural hedge in our CapEx simply because if we are not, if we don’t sell we are not going to incur that CapEx but we do hope that we do sell, because we think that is the right quality. That is the good quality CapEx that you would like to see in our cash flow because it will be generating revenues for you long-term.
With regards to our TV, our Pay-TV performance, we are absolutely delighted with the rate at which we are gaining share right now. We think we are gaining share at the rate of 0.6%, 0.7% and we have an average one third DTH customers and a bit less, I would say about 25% DTH customers and the rest are either IPTV, ADSL, IPTV fiber customers. So we have gone above the million mark, which for us was a key milestone because of the, if you like the synergies that we have in negotiating content contracts.
The goods news is that today most content providers in this market would like to engage with us actively, also because our platform allows you to underpin the content TV experience with interactive services and therefore we are saying, if you like, we are also developing new models for generating additional revenues mainly for example advertising.
So we have out of the sort of million subs, about 25%-26% DTH subs and we think going forward it is our wish to continue to increase the flat fees that we have in our residential customer segment. We are at 85% right now. If we continue to sell the way, we are doing right now we should be able to increase that.
Now if you know, just also to remind you our DTH customers are also triple play customers or double play customers, because we are preferentially selling DTH to those customers that are our clients that either have our fixed line phones or if they have all fixed line and all broadband.
This first quarter, you are likely to see a better performance of DTH, compared to previous quarters because we’re switching off the analog TV signal and that if you like led to some people actually questioning whether they would want to buy Pay TV at this time and therefore we’re seeing a pickup in DTH, Pay TV sales because of that.
But I would say that this sort of run rate is about 26%, 27% DTH and the rest is IPTV and we’re very happy with the 0.6%, 0.7% that would be gaining because we believe that in certain geographies in Portugal and in certain customer segments in Portugal, we are already either co-leaders or leaders. Thank you.
Our next question comes from the line of John Daniel with Barclays Capital. Please proceed with your question.
John Daniel - Barclays Capital
Hi, there I have three very quick questions. The first one, can you just walk us through a sensible free cash flow estimate for 2012. Secondly, was there a one-off in enterprise revenue in the fourth quarter? And then a final question, I know, you don’t need to choose funding anytime but can you comment on the cost of funding if you were to do it, you know, if you look at funding?
Luís, would like to answer these questions please?
Luís Pacheco de Melo
Thank you. Let's start with the cost of funding. At this stage, I mentioned, we are fully funded. In the way our average cost of debt will tend to go up slightly this year that is basically due to because we have less cash in deposits, which we’re getting a good remuneration vis-à-vis our average cost of debt, as you have seen. We’ve stated that our cost of debt gross was around 4.3% and the average over the net debt is around 3.3%. So with the reduction of cash balances it should come down and average costs should go up slightly.
On the other hand, we have repaid now one of the bonds which have higher costs than the average cost of debt that we have and therefore we also get some benefit from there. But all-in-all, our average cost of debt should go up, but it shouldn't for the full year, it shouldn't reach the 4.3% as our average cost of debt.
In terms of the free cash flow, you would have to pick-up the consensus numbers both on EBITDA and CapEx. In addition to that, in taxes we should have around Euro 30 million for the year; interest something around Euro 200 million for the year; PRBs at around Euro 165 million for the year and dividends coming from international companies, as we’ve seen we will have around Euro 130 million from Oi and around Euro 150 million for the rest of the company. So around Euro 130 million from Oi and an additional Euro 150 million for the remaining companies and from which we received the [dividend].
John Daniel - Barclays Capital
Was there a one-off in enterprise revenues?
There are no further questions at this time. I would like to hand the floor back over to management for closing comments.
Okay, thank you very much. Perhaps just add a couple of things on what Luís just mentioned, with regard to enterprises, there were no one-offs. Having said that, there is some seasonality as I mentioned, because some of these contracts that we win on the enterprises segment usually they do involve installation and therefore sometimes you may see some peaks in one quarter. But I would say that no one-offs, but you can actually expect some seasonality in those revenues.
So I would like to thank very much to you for being on this call. And as usual, my IR Director, my CFO and myself are available to answer any further questions you may have offline. And as I said in my concluding remarks, whilst we believe that the economic environment remains very challenging, the management team and employees of Portugal Telecom remain very committed with the strategy that we have already established for this company. So we know where we are, we know where we have to get to and we do continue to enjoy also significant support from our Board which in this sort of environment is fully backing us.
So we remain, I would say mobilized and we will continue to work to create value for all our shareholders. And again, thank you very much for being on this call. Thank you. Bye-bye.
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.