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Portugal Telecom (NYSE:PT)

Q2 2012 Earnings Call

August 2, 2012 11:00 AM ET

Executives

Zeinal Bava – CEO

Luís Pacheco de Melo – CFO

Analysts

Paul Marsch – Berenberg Bank

Ivón Leal – BBVA Research

Georgios Ierodiaconou – Citi

Frederic Boulan – Nomura

James McKenzie – Fidentiis

Mathieu Robilliard – Exane BNP Paribas

Operator

Greetings and welcome to the Portugal Telecom 2012 First Half Results Conference call. At this time, all participants 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 for Portugal Telecom. Thank you. You may begin.

Zeinal Bava

Okay, thank you very much. Good afternoon, ladies and gentlemen. Thank you very much for being on this call. I’m here with our CFO, Luís Pacheco de Melo, and our financial team as well our IR Director, Nuno Vieira.

We are here today because of the announcement of Portugal Telecom’s First Half Results. Our first half 2012 results, consolidated operating revenues amounted to EUR3,345 million while EBITDA reached EUR1,141 million. Consolidated EBITDA margin stood at about 34.1% and that was underpinned very much by the solid margin of the Portuguese telecoms businesses, which reported margins in excess of 45%.

Net income reached EUR125 million and basic earnings per share stood at EUR0.15. In the first half of 2012, our consolidated CapEx amounted to EUR522 million, that’s equivalent to 15.6% of revenues. In the first half as well, EBITDA minus CapEx amounted to EUR619 million, while EBITDA minus CapEx of the Portuguese businesses amounted to EUR377 million. In the first half of 2012, operating cash flow amounted to EUR287 million.

Free cash flow as you know that will have seen in the press release were impacted by a number of events which my CFO Luís will take you through in a lot more detail. Maybe now perhaps use the presentation that we put out this morning to take you through some of the highlights of the business in the first half of this year and then hand it over to my CFO for much more detailed information on the financials of the company.

Second quarter of this year with Portugal Telecom ended up with 97 million customers and we saw very strong RGU, revenue generating unit growth across all our businesses. In Portugal, RGUs went up by about 3%, in Brazil 9.7% and in Africa and rest of the world we had a phenomenal growth of about 20.2%.

Let me start off by focusing on Portugal. In Portugal as we had indicated in the first quarter of this year, the key focus was to just make sure that the trends, especially top line trends were either stabilizing or improving in the numbers that we have reported to you this morning. What you saw was acceleration in top line performance in Residential. Residential revenues were up 5.1% compared to 4.6% in the first quarter of this year. This has no doubt to do with the fact that Meo has not only reinforced its triple-play leadership in this market, but clearly we are going through a process where the fact that we’ve transformed ourselves into a company away from standard telecoms offering just voice telephony into triple-play has made our services far more resilient.

In the case of mobile, we reported Personal customer revenues down about 8%, that’s a slight improvement compared to the first quarter performance amongst the macro environment which continues to be very adverse and whereas you know mobile because of the bias towards prepaid tends to have in recharges and lead indicators, so things are not improving a lot but clearly have stabilized in the context of other mobile operators in Portugal, I think our performance if anything was better.

In the case of Enterprises, we also saw an improvement in terms of top line performance. Revenues were down 8.8% compared to 9.8%. In this 8.8%, it’s what highlighting is that in the corporate segment, large corporate enterprises actually the improvement has been more and better than in SMEs and SOHOs where we are still being impacted by increasing number of insolvencies. So when you look at Portugal, top line was down 6.5% and the delta compared to the 5.2% that we reported in the first half had a lot more to do with wholesale and other which my CFO will explain to you in more detail later on.

One of the major transformations that we have gone through at Portugal Telecom on the back of the investments we’ve made in modern technologies is to actually move away from selling to our customers whether we’re talking about Residential, Personal or Enterprise, just standard if you like voice services. So I am very happy to report to you that first time ever Portugal Telecom today has non-voice revenues accounting for more than 50% of our total revenues. No doubt, you’ll have seen in the slide, page number five.

And in the case of Residential, the data contribution rather the non-voice contribution is already 63.4% in the case of mobile 33.2% and this is against the backdrop where SMSs in this market are pretty much free nowadays. And if you think about Enterprises, we are very close to 50% as well in terms of non-voice contribution. What this does, is that it makes our business a lot more resilient. What it does, it increases our not only pricing power in this market but also it allows us to continue to explore new business models so that we can increase the depth of the services and the breadth of the services that we offer to our customers, whether we’re talking about Residential customers or Enterprises.

We continue to believe that this transformation away from standard telecoms into a digital Telco, or an ICT player. If we’re thinking about Enterprises, we’ll increase substantially addressable market and as and when we get tailwinds in terms of the economic performance in the country, we should be able to translate that into superior top line performance and market share gains.

In terms of CapEx, contrary to a lot of the sector and cable companies, Portugal Telecom has invested significant amounts in the last few years in upgrading our technology and in investing in what we think are future proof networks. We have already pretty much completed the FTTH rollout. We have covered today 1.6 million homes in fiber. 90% of our mobile base stations are now connected with fiber. 4G has been rolled out. We already have more than 80% of the Portuguese population covered.

The backbone network today has significant capacity for us to be able to withstand if you like, significant pickup in traffic and in addition to that, we are already working with high speeds mainly 100 gigabit per second interfaces and we are in the process of and this is working program of investing in a world class data center. So what this really means is that CapEx as we have indicated to you in the past, our country will continue to decline network CapEx is clearly coming down so whereas a few years ago, in the last three years at least we were operating with CapEx to sales in excess of 20%, in the first half of this year, CapEx to sales is now down to 17.5% and we expect it to come down to further in the next few years.

Worth highlighting also is the quality of the CapEx of Portugal Telecom, we are not only investing in the modernization of our network, in IT transformation but more and more of our CapEx is customer related CapEx which means that against the backdrop where there is a slowdown in the economy, we have a natural hedge in that regards.

Focusing now on the Residential segment. In the first quarter – end of first quarter, we announced to the market that our triple-play service Meo achieved leadership in Portugal. This is four years after we had launched this service. The good news in the second quarter is that our market share in terms of leadership in triple-play has widened even more. We continue to do well in terms of selling our TV service, broadband but also PSTN. Now a number of analysts and investors have asked us how come that in this environment you continued to do so well in selling triple-play? I think in slide number eight in our presentation, we made an attempt to try to explain what makes Portugal unique in that regard.

First and foremost, if you think about FTA channels, the number of FTA channels available in Portugal is only four which is very distinguishing factor in the context of a number of other countries in Europe. And in that regard, I would say that if you are looking for a zapping experience in this market, you would want to have if you like Pay-TV. Furthermore, when you look at the triple-play costs which is very competitive in a market – in our market as a percentage of household income, we only account for about 1.2% of household budget. It needs to be analyzed in the context of how popular our services are.

So if you were to run a survey to establish the preferences of our services in the households, you would find that we would rank in the top three or top five. So if you like the asymmetry between preference and costs means that we continue to believe that the next few quarters we should be able to maintain similar performance to what we have seen apart from any force majeure event that could potentially happen. Also worth highlighting is that we are giving people more value for money.

If you look at the maximum speeds available in retail Residential offers, where two or three years ago the starting speeds were about 8 megabits per second. Today for the same price, we are giving our customers 24 megabits per second. We have also brought to bear the fact that we are an integrated the Telco to further if you like to differentiate our offering in triple-play in Portugal. We are the leading mobile operator and we are also the leading fixed-line operator. So in that regards, we are now beginning to offer our triple-play service outside the home, taking advantage not only of our Wi-Fi network but also 3G and 4G.

Slide number nine, the main message for you there is that there are synergies in being an integrated operator in this market. We are looking to take advantage of that. So for example if you are a Residential customer of Portugal Telecom, triple-play Residential customer, you can actually carry your TV experience outside the home and the mobile data traffic that you would do in try to access if you like the TV channels you want to watch is actually free of charge.

Now as we have indicated to you in the past, we have no desire to compete on price, we believe that we provide a service which is a different service to our competitors in Portugal, not only because we have popular Portuguese content but most importantly we have invested in making available advanced functionalities, non-linearity vis-à-vis the on-demand towards reached our TV, interactivity and apps. And interactivity and apps here for us is a key differentiating factor not only because we have Fiber-To-The-Home but also because we have the leading Portuguese portal SAPO plus with not the least we are offering this experience on the multiple streams.

So if on interactive features and on functionalities we already have the lead in this market. In the last four weeks, we have signed up four different, if you like, agreements with content producers in Portugal which now will make our Meo offer even more compelling for Portuguese customers in the future. We signed up with SIC Noticias, with TVI Ficção, with Bola TV, Correio da Manhã TV and these are all if you like very popular Portuguese content which will be exclusive and therefore as a result, Portuguese customers will have one more reason to buy our services and we believe that if we had able to translate technology to superior advantage on functionalities, we are now going to bring to bear the fact that we have leadership and scale to also differentiate ourselves in terms of content.

What you saw in this quarter is continued increased sales and penetration of Pay TV, broadband and also fixed-line. Fixed-lines in the Residential segment actually went up 3,000. We’ll continue to have a good performance in broadband 24,000 net adds, and TV was also very strong. Worth mentioning is that compared to the first quarter, you have some impact here from the disconnection of analog and the switch to digital, but notwithstanding that it’s worth highlighting is that the revenue generating units per unique customers actually went up about 9.3%.

Moreover residential ARPU is up 11.9% compared to first quarter 2010 and 3.1% compared to the same period last year. And this is what is underpinning Residential revenues, growth of 5.1%. So we are gaining market share. We are increasing revenue generating units and we are of course being able to translate that into some pricing power as well. In terms of mobile, we believe that the future leadership in this segment will very much depend on you having made the right investments in terms of technology because if you like, the mass availability of data heavy devices is going to increase substantially in the future and as a result, we are if you like strategically well positioned in that regards.

We continue still to account for about 45% of all smartphone sales and mobile broadband sales in our market. Data as a percentage of service revenues have done very well, 33.2% already, and as I mentioned earlier against the backdrop where SMSs in our market are free. The revenue trends have improved, they’ve stabilized, some improvement. We believe that in the future improvements will very much depend if you like on our ability to continue to drive the penetration of data particularly mobile internet and also some pickup in the economy.

With regard to LTE, as I mentioned not only we have now 80% of the Portuguese population covered, we’ve also in April this year launched very innovative and new share data plans which basically allow our customers to share the data allowance for multiple devices. If you like, we are giving – we are making steps in the right direction to ensure that we can make the convergence if you like offer available to our customers sooner rather than later.

We are again banking on the innovation and the investment we’ve made in the high performance networks, not only to give better quality of service and better customer experience to people but also because we are able to unleash new business models, pull your attention page 16 where we have launched a number of new services be it Meo Kanal, which is the user generated content on TV; spotyad, which is targeted mobile advertising and also SAPO discount vouchers, which you can access not only from a fixed-line service but also from mobile as well.

Again also you will have seen that we are investing significant amounts in driving the penetration of flat rates as well, not just voice but also data. We believe that the experience for customers in buying voice and data bundle is better than buying separately. And as a result, we are going to continue to drive that not only because we believe it reduced the churn but also because it makes our business a lot more predictable.

In terms of performance revenues, you will have seen that’s it’s stabilized. Personal revenues – actually customer revenues stabilized. Personal revenues actually improved minus 9.8% first quarter became as minus 9%. The recharges are lead indicator, I would say that we need to continue to monitor this going forward, but again as and when we get some tailwinds we should be able to improve our performance substantially. Having said that, right now it’s worth mentioning that in the context of the European mobile market, Portuguese ARPUs are now among the lowest in Europe.

In fact, you will have no doubt seeing page 20 of our presentation, our mobile ARPU not only because termination rates have come down substantially but also because of aggressive promotion from operators, especially in the last 18 months has meant that we are today – we today have one of the lowest outflows in Europe and as a result we think that these ARPUs cannot fall much, much lower from where they are today, also because we believe that the sustainability of the business model will become questionable and this will continue – and this will not have impact in our ability to maintain investments in the future in mobile.

Turning now to Enterprises. We are – again moving into an ICT territory here, non-connectivity revenue contribution is increasing, albeit it’s still small. We believe that the fact that we have launched the cloud offer in Portugal, it will allow us to grow substantially in this particular area, not only because we believe that cloud offers the opportunity to customers to significantly reduce their cost but also because it allows us to actually start providing our Enterprise customers with integrated solutions. But as you know, there is some lumpiness in some of these very large corporate project. Having said that, the performance has improved, we’ve gone from minus 9.8% decline in revenues first quarter to minus 8.8%.

We included here in page 23 just two data points for you to keep at the back of your mind, insolvencies have picked up in this market and of course for example banking branches are being shutdown. So as a result, there is some pressure on the downside, especially with corporate customers becoming a lot more disciplined on how they spend the money. Having said that, we believe the technology is a means to an end. It will certainly be an avenue that people will have to pursue to improve their own efficiency in the future, and in that regard I think once we get the data center up and running as well, we should be able to become even more I would say competitive in this regard banking if you like, virtualization much more than we have done in the past.

Turning now to Brazil. Oi announced results yesterday. EBITDA of about 2.14 billion reals in the second quarter, increasing by almost 7% in the quarterly comparison and margin improvement 31% and this compares with 29.6% in the first quarter. The performance in terms of top line in particular was explained by RGU growth, 72.3 million RGUs now. Net revenue growth, driven mainly by the reversal of trends in residential segments and the cost discipline as well.

If you look at the Residential segment, the take up of bundles particularly double and triple-pay has accelerated. Fixed-line, broadband, TV and mobility have all done very well, particularly broadband very strong and ARPU in Residential was up 2.3%. One of the – I would say effective numbers that I think Oi put out yesterday in terms of the network availability that 27% of broadband customers now have speeds, internet access speeds of 5 megabits per second and of these, 60% have speeds higher than 10 megabits per second if you like. This is the first step in the right direction for us to be able to offer to these people TV in the future mainly using IPTV.

The TV net adds were also up, we did 6,000 net adds in the fourth quarter of last year and it’s up now to 91,000 in the second quarter, particularly the satellite offer has been beefed up substantially not just with if you like, high definition channels but also with very popular local channels particularly for mobile. We think Oi’s competitive – Oi’s in the entry package which is Oi TV Mais [ph] is very competitive because not only it offers you 56 channels, lots of HD but the Enterprise of 39.9 reals is extremely competitive and as you know this promotion lasts for three months.

Residential has about 17.8 million revenue generating units. You saw 187,000 net additions versus 40,000 in the first quarter of 2012. So if you like, we’re making progress in the turnaround particularly if you like in the low hanging fruit which is to ensure that all the sales channels are up and running so that we are in the point of sale and if we are in the point of sale, we are sure to make the sale as well.

In terms of mobility, clearly the focus has been on postpaid and profitability of prepaid as you know, Oi has been cleaning out some of its database. Postpaid was up 4% reaching about 5.8 million customers and prepaid still accounts for about 30% of personal mobility – sorry postpaid accounts with 30% of personal mobility and that’s why the progress we’re making in this regard is very important especially if you take into account that Oi is now also getting into the business of subsidizing handsets and signing up loyalty contracts.

Oi was leader in postpaid additions in the first half of 2012. Oi also has as you know 19 owned stores. We are improving sales channels and not only we are investing in our own network, but we are also signing up a lot of franchisees. So what you think about the business segments, business corporate segments, 8.4 million RGUs and a growth of 3.2% as you know, that will have heard yesterday in the conference call we have about 4,300 specialized consultants. We are launching portfolio of products and services, there is a lot of work that’s happening here within Oi and Portugal Telecom, particularly in everything that has to do with virtualization namely SmartCloud. And we continue to believe that there is work that needs to be done and plus take advantage of.

I think the recent experience in the Rio +20, as you know Oi was the official sponsor of the UN Conference was a good example of how Oi is beginning to develop expertise to be up to the sort of challenges that these events adds command. With regard to the financial performance, Q1 second quarter this year versus first quarter you saw 1.6% net revenue growth. You saw stable OpEx, clearly one has to keep costs under control and maintain that discipline but one also has to bear in mind that there is cost inflation in Brazil, very much in line with the kind of situations you’re seeing in other markets that are growing at the rate that Brazil is growing.

CapEx in the second quarter was 1.4 billion reals increasing 28% and as we have indicated a lot of the CapEx is being directed towards if you like beefing up our broadband coverage both in terms of availability and also speed and also 3G coverage. As the CFO of Oi announced yesterday, we continue to believe that 6 billion CapEx number is something that we are comfortable with and that also includes the acquisition of 4G licenses.

The increase in net debt was due to withdrawal rights of former TNL and TMAR shareholders. Special dividends to pay out to shareholders, payments of dividend in May 2012 CapEx and financial expenses as well as judicial deposits related to disputes with Anatel. That very much explains the delta versus first quarter of 2012 and perhaps differences that existed between the numbers we’ve reported and what the consensus had.

Turning now to Africa and rest of the world, solid performance across the Board. We did very well with customer growth in all strategic areas. Revenues were up about 22.4%, EBITDA was up 19% and we continued to operate the margins which continued to in our view be extremely competitive and extremely attractive. And in that regard, Africa will be a core area of interest of Portugal Telecom in the future, where we would like to bring to bear if you like our expertise in management of businesses which in my view needs operators that not only come on technology but also are very cost conscious.

On that point, let me hand you over to Luís, so he can take you through the work we’re doing on the cost side and also to take you through some of the details of our financial performance in the first quarter. Thank you very much.

Luís Pacheco de Melo

Thank you, Zeinal. Good afternoon ladies and gentlemen. After Zeinal’s comprehensive presentation on our operations, let me focus on the main financial highlights of the quarter. On the revenues side, total revenues were down by 9.4% including the 85 million impact of the depreciation of the reals in our accounts. In Portugal, revenues were down 6.5% to EUR678 million in the second quarter.

As Zeinal was going through the segment performance in great detail, let me go straight to the wholesale and other, also say something else on Oi and the other international operations. On wholesale and other in the second quarter, revenues declined by 14.3% reflecting mainly lower access and traffic revenues, mainly coming from value-added calls and also from incoming international mobile calls that we traffic and we terminate in Portugal which are also being impacted by lower MTRs as we all know and also lower revenues on our pay phones, also the decline on ULL revenues basically because ULL access has declined by 25% since the same – vis-à-vis the same quarter of last year and also our directories business which we only have a financial stake, which is struggling a little bit in terms of the revenues side.

On Oi, revenues for personal consolidated that we account here, they totaled EUR754 million in the second quarter in reals on the pro-forma basis, they declined by 2.4% to 6.5 billion reals. Residential revenues on Oi declined by 7.6% in the second quarter, having improved vis-à-vis the 11.5% of the first quarter while Personal revenues were up by 6.7% in the quarter and then Enterprise revenues increased by 2.5%.

On the proportional basis, our other international assets posted a 22.7% increase in revenues. On the other and elimination revenues, they declined by EUR40 million and it’s basically due to above average inter-group eliminations. Also the impact of the reals evaluation that we saw in Oi, this year also on other elimination. And as you might recall last year, we fully consolidated for two months of the Dedic and GPTI, our ex-owned call centers which then were also related to merge into Contax which we now only account for 40%, we only proportionally consolidate 40%.

So last year we are two full months accounting in revenues for these businesses which now we only have 40% of the equivalent business. On the EBITDA front, consolidated EBITDA in the second quarter was down by 11.4% to EUR569 million. Equivalent was 35% margin. EBITDA performance in the quarter was negatively impacted in 23 million by the evaluation of the reals against the euro. And excluding Brazil, EBITDA would have declined by 6.2%, the result of the decline in Portugal which in a way was partially compensated by the strong EBITDA performance of the fully consolidated African business that I referred to.

In Portugal, EBITDA declined by 7.5% to EUR307 million in the second quarter, however I would like to highlight the sequentially EBITDA was broadly flat. EBITDA margins stood at a very healthy 45.3% supported by the cost reduction across the entire business in Portugal. On the cost side, we saw continued progress as I mentioned. On the commercial costs, they were down by 9.9% in the second quarter, reflecting both lower churn in Meo, as a result of the fiber rollout and the increasing weight of fiber clients in our overall Residential clients.

Lower SARC also on the mobile side which is a result of a strict commercial discipline on the personal segment. On the direct costs, they were down by 5.3%, both as a result of MTR but also on the continuous decline of the programming cost per subscriber and after having reached a critical mass on our Pay TV business. Wages and salaries were down also by 3.9% as a result of slower costs per employee finally due to lower overtime and variable remunerations and notwithstanding the investments that we’re making in regenerating PTs work for us having no curtailments and in other operating costs, they were down by 4.2% due basically to lower maintenance and repair and also due to increased efficiency of our sales force.

Moving forward, PT will continue to implement additional structural cost initiatives, which should continue to translate into cost savings on our domestic business. EBITDA as presented by Oi on the pro-forma basis was down by 13.5% in the quarter, but they were at 6.4% in sequential terms from first quarter to the second quarter and margins stood at 31%. On a proportional basis, our other international assets, posted a very solid 19.8% EBITDA growth in the second quarter.

On D&A cost, they decreased by 12.1%, reflecting lower D&A at Oi which also includes the impact of the evaluation of the reals against the euro but mainly due to lower D&A in the Portuguese telecommunications business as we fully amortized our GSM network in the first half of last year. On net other costs and gains, we registered a EUR26.6 million gain in the second quarter which is basically and finally as a result of looking a net compensation for prior year and costs supported by PT, we did Universal Service Obligation under the concession agreement.

This gain was partially offset by non-recurring provisions and adjustments in certain assets that we booked also on the second quarter. Our net income, it amounted to EUR69 million in the quarter compared to EUR82 million last year and it is mainly due to lower income appropriation from Brazil reflecting lower, both EBITDA and higher interest costs in Brazil. And they were partially offset by higher net income in the Portuguese business as the lower EBITDA and higher taxes were more than offset by lower D&A and the other gains stood in the second quarter that I just referred to.

CapEx in the quarter declined 11% year-on-year to EUR263 million reflecting both lower CapEx in Portugal and in Oi. CapEx in the Portuguese business decreased by 17.4% and is a result of disciplined spending we focus on profitability. Other CapEx increased by EUR13 million in the quarter and is basically due to the investments in submarine cables in MTC [ph]. If we exclude that, they were – CapEx and other business was actually down.

On the cash flow front, operating cash flow on the first half totaled EUR287 million as a result of the EUR411 million investments in working capital. In Portugal, operating cash flows stood at EUR202 million for the first half, reflecting EUR186 million investment in working capital. Working capital in the Portuguese business as usual is seasonally weak in the first half and in the second half we will tend to – normally tends to recover significantly from the levels of the first half.

Operating cash flow in Brazil amounted to 42 million reflecting as well the higher CapEx as Zeinal referred to and also higher working capital investments. On the financing side, on the balance sheet consolidated net debt stood at 7.65 billion including the positive tax effect of the pension transfer to state and that translated basically into 3.3 times the consolidated EBITDA of the Group. The increase in EUR1.3 billion from the end of last year is mainly explained by the dividends that we paid that amounted to EUR556 million.

The payments of the first installments of the LTE license and the negative free cash flow for the Group that we booked in the first half. Excluding Brazil, total net debt stood at 4.7 from the 4.44 billion in the first quarter reflecting mainly the second installment in the dividends that we paid in May this year. In 2012, until now we have issued or renewed debt amounting to 1.5 billion, that includes the extension of the EUR200 million commercial paper program, expansion of the credit facility that now amounts to EUR800 million till June 2016 and the issuance of the EUR400 million four year retail bonds in Portugal. These retail bonds was the biggest ever issued in the Portuguese retail market.

The original amount of EUR250 million was then revised to EUR400 million and was placed at the interest rate of 6.25%. Total cost of debt stands now at 3.9%. That’s the net debt – cost of net debt. Gross debt stands cost at 4.3%. The average maturity of our debt portfolio now stands at 5.8 years. The cash available on the undrawn facilities now stand at EUR3 billion already including the EUR400 million retail bond issued that we just finalized now in July.

Let me now hand you over to Zeinal for a comment on our shareholder remuneration and his final remarks.

Zeinal Bava

Thank you very much. So before we answer questions you may have and we’ll be delighted to do that, just a recap, in the case of Portugal I would say the performance was better than most analysts and investors had expected. Our residential segment is proving to be a lot more resilient, top line actually accelerated. You’ve seen some recovery in the personal segment. You are seeing stabilization in the corporate enterprises segment, albeit as I mentioned, more pressure on the SMEs perhaps slightly better performance in corporate and there is some lumpiness in some of those contracts as well.

We are maintaining costs very much under control as you will have no doubt seeing, costs were once again down in our company and we will continue to maintain that discipline. Also focus is on cash flow generation because we would like to continue to enhance our financial flexibility and de-leverage the balance sheet. Oi’s turnaround, its working progress. Africa and Asia, robust. And as you no doubt what have seen, we have not only secured funding in Portugal Telecom so that we have no refinancing risk in our company until June 2016. That compares with end of 2013 where we were three months ago, which means that Portugal Telecom’s credit continues to be perceived well and generally speaking by the market we just recently completed the retail offer of EUR400 million as well in Portugal.

So we are funded until June 2016 and we continue to believe that whilst we have revised our dividend policy, it continues to be an attractive remuneration for shareholders in the context both of the market and also the sector. Thank you very much and of course my team and I are now available to answer any questions you may have.

Question-and-Answer Session

Operator

We’ll now be conducting a question-and-answer session. (Operator Instructions) One moment while we poll for questions. Our first question comes from the line of Paul Marsch with Berenberg Bank. Please proceed with your question.

Paul Marsch – Berenberg Bank

Yes, thanks. I hope you can hear me. Firstly on the OpEx in Portugal, all the keys OpEx segments were down nicely in the quarter compared to last year, any particular influences on those four main OpEx items through the second half that might change that trajectory? Secondly, maybe you could comment on the Angola dividend and the likely timing of that? And then finally, what interest rates are you seeing on your cash deposits? You got EUR2 billion of cash on the balance sheet, just wondering what you’re receiving on those deposits at the moment? Thanks.

Zeinal Bava

Okay, thank you very much Paul for your question. With regard to OpEx, we are – I think we will continue to benefit from low churn. In the next quarter we’ll come back to a more detailed discussion on the churn because we would like to have a little – few more months under our belts before we can share what I think very good numbers of churn in our TV service in particular. So I think churn will continue to have a positive impact in commercial costs going forward because clearly the net adds will come through much, much faster without necessarily pushing commercial costs aggressively and this is one of the reasons why we have scaled back a number of promotions because we think they are not necessarily very – I would say appropriate in this current environment.

So clearly churn I would say is something will that be a very proud of in terms of the – as an achievement and I hope next quarter, we can come back to on that. But I think mobile subscriber acquisition, retention costs are likely to remain low as well, partly because one of the shift that you are seeing in this market is that people are buying less handsets, people are actually spending if you like more in voice minutes or are prepared to spend more in voice minutes than data rather than actually buying handsets, so I think you are beginning to see and you are likely to see subscriber acquisition retention costs particularly on the subsidy side to be very much under control.

If you think about programming costs for customer, I would say that those are going to be stabilize, also because we’ve take into view that we needed to invest a bit more that start differentiating our TV service even more from the competitive in Portugal because we believe that we are in the tipping point where having done all the work around if you like apps and interactivity and advanced functionality that we can now bring to bear popular Portuguese content also as a differentiator we will be able to further extend our lead in Pay TV. So I will say that on the programming costs are likely to stable going forward but on everything that has to do with wages and salaries and everything that has to do with us doing more work internally as opposed to externally, we will continue to put a lot of focus on that, because we believe that we need to translate if you like productivity gains into lower cash costs for our company.

So as I’ve indicated to you in the past, that we are not taking the easy way out which is to launch significant or if you like massive redundancy plans, we are at this stage, much, much more focused in retaining our employee base as it is today and taking advantage of the fact that we have good talent within our company and we have taken productivity up so that we can do more things internally and this is why in page 31 of our presentation I included this – indicated for you which is the percentage are prepared, executed by Portugal Telecom technical people that’s gone up from 35% to 46% and we would like to see that percentage go up.

And this is one of the reasons why we believe that this is not the time for us to reduce staffing levels quite contrary it is a time for us to actually maintain employment but try and do more things internally with our own people because we believe that they’ll certainly end up doing a much better job than us of buying some of the services on service providers. With regard to Angola dividend, as you know, there are some, if you like repatriation delays which are normal course of business, in fact you saw in the first half of this year in our cash flow that the dividend that we received from our foreign subsidiaries was perhaps lower than expected, but that has to do with the fact that simply there are some issues there that usually get sorted out overtime, so we continue to enjoy very good relationship with our Angola partners.

We are very impressed and very happy with the performance of Unitel. The management team is doing a remarkable job taking advantage of the growth opportunities in a market which is not only growing economically, but also from if you like population standpoint that has significant future potential growth associated, not sure if you’re aware but the population is growing somewhere between 3% and 5%. It is expected that Angola will have about 40 million pops by 2015 and half of the population is less than 18 years old which means that these are savvy users of data and internet and so on and so forth. So in that regard, I think we are very pleased with the work that’s being done in Unitel. With regard to interest from Portuguese banks et cetera maybe Luís can answer that question.

Luís Pacheco de Melo

Basically 70% of our cash is outside Portugal at this stage. And on average, we’re getting around slightly above 2.5% on our deposits.

Paul Marsch – Berenberg Bank

Great, thank you.

Zeinal Bava

Thank you, Paul.

Operator

Our next question comes from the line of Ivón Leal with BBVA. Please proceed with your question.

Ivón Leal – BBVA Research

Yes, good afternoon. Maybe just couple of questions, first on the broadband side in Portugal. I don’t know if you could share with us if there has been any change or strategy from Cabovisão? And on the other side, on your Pay TV business, now I think that the 65% of the fixed-line customers has Pay TV. What’s the target? What’s the ceiling for that penetration? Is it 90% or 80%, because that’s driving a large part of your growth, so interesting to know that. And then final one your credit facilities, any of your commercial paper or credit facilities or the cost of that is subject to sustaining current credit ratings?

Zeinal Bava

Luís, why you don’t answer the third and then I’ll come back to the rest of the questions.

Luís Pacheco de Melo

So none of our facilities are linked to obtaining certain credit ratings. So at this stage, the facilities there and the commercial paper neither of them have any triggers in terms of the ratings in terms of being forced to repay those credits.

Zeinal Bava

With regard to broadband, as you might have seen in slide eight, we have invested in ensuring that we have more availability than anyone of our competitors and that we have yet to see when you look at Portugal Telecom to offer what you will see that we are at this stage offering speed that’s about 24 megabit per second all the way to 400 megabits per second if you are a fiber customer. Our fiber customers today have a standard offer of 100 megabits per second.

So I think that in our view that is a big differentiator of our service offering in those markets. The other big differentiator is the fact that we are pushing triple-play aggressively because we think that it offers our customers convenience. It offers them the comfort of having just one supplier to deal with and of course it offers them the best value for money. So in that regard I would say that we are very pleased with the way that in the last four years Portugal Telecom has made a significant come back in terms of our market share in broadband, underpin to begin with, with our TV offer but increasingly as you move forward internet is becoming to be – certainly becoming one of the key attributes that our customers want to buy if you like triple-plays.

So it’s not just about TV any more. It’s also about the quality of your broadband connections simply because interactivity has become extremely important in the decision making of the people. It is worth mentioning here that 50% of our Meo customers are active users of what they call the red button, the green button and the blue button. These are the buttons on your remote control and actually open out if you like widgets, applications and they allow you to interact directly with certain programs that we are showing also in partnership with free to air channels.

With regard to Pay TV, there are three million TV customers in Portugal. As you know we still have a lot of room to grow, our market share we just think TV only is about 35%, 36%. In triple-play we are leaders, but I think we still extensive room to continue to grow also because we believe that particularly when it comes to fiber, if you take into account the fact that we have 1.6 million homes and maybe about 300,000 customers with fiber, we still have 1.3 million homes to whom we can offer fiber that are not customers of Portugal Telecom.

Those homes will one day wake up to the reality that the fiber offer that Portugal Telecom has these are far superior quality than anything else in the market. So we still believe that we can grow penetration particularly on the fiber side taking advantage of the fact that our stock increased 100 megs and as you can imagine we can serve nine TVs simultaneously and I think this again was giving you almost 60, 70, 80 megabits per second guaranteed speeds and as you know we have for every single – for every 32 homes about 1.5 gigabits per second of bandwidth which means that everyone simultaneously uses a broadband we can give them 80 megabits per second. This is a key differentiator for us in terms of the future, not only because we can guarantee about 80 megs right now.

If we do another splitting which is easy I think can be done outside the premises of the customer, we could take it down to 16 meaning that we can guarantee 160 megabits per second in the future. This is why we believe that we have invested in future proof technologies that the competitive advantage we have to structural and this is one of the reasons why we are not looking to compete with price, but increasingly on quality of service, customer experience and functionalities. Thank you.

Ivón Leal – BBVA Research

Thank you.

Operator

Our next question comes from Mr. Georgios Ierodiaconou from Citi. Please proceed with your question.

Georgios Ierodiaconou – Citi

Good afternoon. I’ve got a couple of questions. Firstly on mobile, Vodafone and Sonaecom reported deterioration in their service revenues and Sonaecom during their conference call was talking about there is tough macro environmental model. So a bit surprised by A, the numbers you reported but also opportunities around the turning point in mobile. So if you could share some more data points around the recharging patterns or anything else that could explain the difference between your performance and your competitors will be clearly appreciated. My second question is on the timing of the buyback. Should we assume that EUR200 million would be evenly spread over the next 2.5 years or would there be possibly backend loaded so it gives you enough time to have visibility on the credit side or maybe front-end loaded for other reasons? And perhaps third, a question on commercial costs, which were down comparatively in the second quarter. Any reasons for us to be concerned about growth additional going into the second half from the lower expenses? Thanks.

Zeinal Bava

Thank you, Georgios. With regard to the mobile trend, as I think I mentioned to a number of analysts and investors in my recent road show, large operators such as Portugal Telecom, we are leaders in this market. We have as you know some impact from back door of customers in this environment, actually if you like moving on to tariff plans which are if you like, more price competitive. So that watch through have been happening in the case of the larger operators. In the sector, so this is not just specific to Portugal, it’s actually in the sector and that has been happening for quite some time.

So I am not surprised that some of our competitors actually catching up with our revenue performance because that impact was most severe on us than on others simply because we are the larger operator. What we are seeing is on the back of much, much more targeted pricing campaign, we are having better performance of recharges particularly in the month of July.

Now its early days, as you know there is seasonality. A quarter has three months but I would say that the month of July we clearly saw the improvements of recharges in the case of Portugal Telecom, but as I mentioned a lot of it, it has been achieved on the back one to one marketing as we have been doing increasingly using if you like, tool that we developed within our own innovation companies (inaudible) what we call active campaign manager which allows us to do a targeting almost to a sort of one to one basis with promotions.

So I think July from debt standpoint was better than particularly in the personal segment, so specifically for the personal segment, but it’s still early days and we will maintain if you like active promotion and one to one because we believe it’s the best way that we can offer people value for money. In fact recent studies undertaken around each of their mobile brands in Portugal are beginning to indicate that when it comes to best value of money TMM’s positioning in the context of the sector has been improving month after month and I think that has a lot to do with the fact that we are using our phone active campaign management tool.

With regard to the buyback, as we mentioned at the time of the announcement, our key priority right now is to be prudent in a way that we manage our balance sheet. We would like to at this stage maintain financial flexibility in an environment which is very volatile and therefore we will be prudent in a way that we manage our liquidity. And we are fully financed until June of 2016. We think that in a context of the sector that makes us pretty unique notwithstanding the fact that we are in Southern Europe, but as and when we think that market conditions as such that we are feeling if you like less concerned about the environment, we will look to execute that buyback.

So we’re not committing if you like to any specific program or pay, financial flexibility and prudent management of the balance sheet will always be a priority but we continue to believe that the Portugal Telecom shares are not reflecting the fundamentals of our business, in fact we believe that it is right now perhaps affecting much more the view that people have on the sovereign risk associated with us having about 40% of our business in Portugal.

With regard to commercial costs, I would say that tendency in this market is for when I was mentioning earlier the earlier question that handset sales have come down, I would be very surprised if that is unique to Portugal Telecom only that is probably a consumer behavior that others are also if you like experiencing. So I would not believe or as I’ve said before we will not lose market share simply because we would like to maintain profitability. We’ve always looked at the long-term profitability of our business. So when it comes to price, we will always be very aggressive, we will always have best value for money.

In Portugal, we are not going to lose market share, but I don’t believe in this environment us being disciplined in a way if manage subscriber acquisition costs will come at any cost of our market position because we think that the consumer trends are changing and other operators going through a similar process as well. Thank you.

Operator

Our next question comes from the line of Frederic Boulan from Nomura. Please proceed with your question.

Zeinal Bava

Yes.

Frederic Boulan – Nomura

Hi good afternoon. I’ve got two questions on Brazil if I may, they were asked already on the call yesterday, but I’d been keen to get your take on them. First of all in terms of slowdown in the market, the entire industry sort of very significant step down in terms of gross level and Oi in particular grew revenues 3.6% to 11.3%. So even if a bit of that about 2.2% in MTR that leaves in the line target around six points. Can you share a little bit your analysis of that and how things could evolve going forward? And secondly, the implications for financial guidance, so you make a point about sequential growth but if we look at on the revenue side to reach your full-year guidance you need about 9% growth in H2 versus minus 2% in H1 and at the EBITDA level it’s a similar improvement about 8% growth in H2 versus minus 7% in H1. So can you tell us a little bit more what are the drivers that means your confidence in reaching this target? Thank you very much.

Zeinal Bava

Okay, thank you. Yesterday in Oi’s conference call, I think a number of asks were asked to the CEO and the CFO, Francisco Valim and Alex about the impact of the economy. And as was indicated, so far Oi hasn’t really felt the impacts on the economy, and I think yesterday the guidance of about 28.9 billion reals of revenues for the full-year was actually reinforced as well as if you like EBITDA guidance and the CapEx guidance as well.

It’s worth mentioning here couple of things. First, that there was a lot of low hanging fruits in terms of the performance at Oi that needed to be fixed and so I think we could take advantage of that and no doubts you will have discussed this also directly with Oi that for example we have very limited presence in point of sales, we didn’t have a significant for example, sales effort when it came to talk to door to door sales. And when you think about availability of broadband and also speeds that were being offered, again they had a significant disadvantage vis-à-vis the competition.

So I would say that in the case Oi, one needs to differentiate a little bit about the economy versus good execution, operational execution and as was indicated yesterday, and I think in no uncertain terms Oi’s management is confident about the delivery on the numbers and even in the case of mobile – that mobile is growing in line with the plan.

So I think with regard to the economy of course that has the direct impact in consumer behavior and we being a consumer company will lot of our revenues being consumer driven revenues, we get impacted, but these if you like turnaround opportunities for Oi that would look to fix if you like what is our natural share of ads and I think that can be done not substandard to fact that the economy may or may not change and that can be done if we invest properly and if we invest to actually give customers what they want and I think I pointed out in my presentation that one interesting data point that Oi provided yesterday was that 27% of the broadband customers now have speeds of 5 megabits per second, I would emphasize that because that was one key if you like competitive disadvantage that we had and I think it’s being fixed simply because we of course beginning to be invest a lot more in our network.

With regard to your point on mobile, I also have a discussion today with Oi’s CFO and he will be looking to reconcile the numbers on the mobile if you like on the personal mobility side of the business. I think Paul yesterday asked a similar question as well and he has agreed to actually do the reconciliation and come back to the market with his own analysis so that he can take you through if you like in some of these numbers in more details so you can understand that structural if you like benefits of the turnaround that’s being executed are actually coming through.

And so that you can also feel more comfortable with company’s confidence that those numbers will be delivered on. Thank you.

Frederic Boulan – Nomura

Okay. That’s very useful. Thank you very much.

Operator

Our next question comes from the line of James McKenzie with Fidentiis. Please proceed with your question.

James McKenzie – Fidentiis

Hi, thanks for taking the questions. Just a couple of questions on your levels, domestic debt and your client de-leverage. You always a lot of liquidity, you got no net maturities and no net maturities until mid 2016. I wonder could you give us slightly if you would to pay the maturities that come up over the next 2.5 years with your cash flow – with your credit lines, what would happen to your interest costs which are currently look back at very low of below 4%. If you have an idea where your interest costs may go to? And then secondly on your cash flow statement in the first half of the year, there were couple of items which are included as other but are quite material the first being a payment of EUR225 million and then in the net debt reconciliation a EUR160 million. Could you give us just any idea if possible what they are and whether they will revert or continue in the second half of the year?

Luís Pacheco de Melo

Okay, so with regards to your question in terms of the possible impact on the interest cost of using part of those maturities. Basically the bond and the converts, they are basically with interest rate of one of them almost 6% than the convert 35%.

James McKenzie – Fidentiis

Okay.

Luís Pacheco de Melo

And so there won’t be a significant impact in terms of interest cost reduction on that front, okay. And the cost of our net debt right now is at 3.9%. The cost of gross debt that we have now is at 4.3%.

James McKenzie – Fidentiis

Okay.

Luís Pacheco de Melo

So that shouldn’t be a significant difference between costs and the other.

James McKenzie – Fidentiis

Okay, very good.

Luís Pacheco de Melo

Can you please repeat your last question?

James McKenzie – Fidentiis

Yes, there were two if you like cash outflows, one is in your cash flow statement which is in the other line which is $225 million of negative cash flows and then in the net debt reconciliation between the two quarters, there is – once again a cash outflow under the heading of other which are EUR150 million or EUR159 million of outflow both in the first half of the year. And I was just wondering, one, these outflows that are going to continue in the second half of the year of extraordinary is it something that could reverse just little bit more on the nature of those because they are quite material.

Luís Pacheco de Melo

Okay, thank you. With regards to the EUR224 million, the net (inaudible) which is the EUR40 million in Oi, okay. In addition to that basically we saw the judicial deposits that Oi needs to do.

James McKenzie – Fidentiis

Okay, right.

Luís Pacheco de Melo

Okay.

James McKenzie – Fidentiis

But that’s on the free cash flow statement, yes?

Luís Pacheco de Melo

Yes. On the changes in net debt to reconciliation part of EUR26 million, EUR27 million is our LTE payment, the 4G payment, okay and the other part is the normal one. So actually yes, there is this one-off otherwise it should have been basically stable vis-à-vis the previous years.

James McKenzie – Fidentiis

Okay.

Luís Pacheco de Melo

So again that’s right, EUR86 million in this one that shouldn’t have occurred in the second half of the year.

James McKenzie – Fidentiis

Okay, that’s really helpful. Thank you very much.

Operator

Our last question comes from the line of Mathieu Robilliard with BNP Paribas. Please proceed with your question.

Mathieu Robilliard – Exane BNP Paribas

Yes, good afternoon, thank you very much. A question on FTTH, if you could just confirm that we heard that you have around 300,000 customers now and on that, can you share with us some data about what kind of downloads these customers do as compared to more traditional ADSL customers. Are you seeing a very sharp increase in the quantity of data downloaded? And then eventually would you consider in traditional tiered pricing on fix to monetize that. That’s the first question and the second question with regards to the net profit line that was linked to the USO and I just wanted to know if there was (inaudible) that has been cached up in – cut up in that number and what should we expect for the future in terms of USO contribution to your P&L? Thank you.

Zeinal Bava

Okay, thank you. I think with regard to fiber, thank you actually very much for asking that question. We have like I mentioned 1.6 million homes. I said we had roughly 300,000 to be more exact, the right number is 250,000 fiber customers. I would say that right now it is not a great concern for us in terms of how much the traffic they are actually doing because clearly we’re still a long way from if you like a level where we have to be concerned about that, but you’ve got to ability to monetize if you like, better quality of service going forward, I think you will see that about half of the traffic increasingly that’s being done on the network is actually video. And when it comes to video, people do demand if you like quality of service and I think that this will become a key differentiator of the FTTH value proposition compared to any other technology that exists out there and claims to be a next generation network.

So overtime I believe that the business model will evolve in that direction. I think at this stage we’re still not there because I think at this stage clearly the key focus for us is to ensure that people understand that fiber allows us to deliver a superior quality of service in the TV offer that we have with if you like up to nine TVs that we can serve if indeed most of them in HD without any significant constrains. So I think maybe when we meet in our Technology Day which is we have scheduled for the 29th and 30th of October, we will share with you a lot more detailed information in that regard and maybe by then we will have more data points that allow us to share with you how we think this business model should evolve.

At this stage, we frankly believe that the perception is far more important that reality also because if you can imagine with the kind of bandwidth that we have, the quality of service isn’t an issue at all, it’s quite contrary, in fact as you know they complaints and the calls that we have from fiber customers are much lower and the complaints we have any other customer from any other type of technology be DTH or be say if you like copper. So right now no major issue.

With regard to Universal Service Obligation, the value that you saw as reporting covers the period from 2007 to 2011 or at least it’s our guestimate of where it should be with regards to starting in 2007, this is clearly an indication we’ve had for the regulators and simply the period from which we should be to entitled to receive a compensation. So that’s the period that we have already incorporated in our reported accounts. Thank you.

Thank you very much for being on this call. My team and I of course are available to answer any questions you may have through Nuno Vieira or directly by email. As I mentioned, we’ve indicated to Oi as well that we needed to clarify some of the issues that you guys raised yesterday on the conference call and the CFO will be forthcoming with that info. As I mentioned earlier we are doing a Technology Day on the 29th and the 30th of Lisbon. The program will be made available shortly and we hope to see you and we hope that we can actually show what Portugal Telecom is doing with technology to deliver on its ideal that it’s a means to an end through the quality of life of people and make companies more efficient.

So we hope that in that one day if you like, invest one day technology event, we can share with you if you like the vision but also how we are doing, I would say innovative things in technology, not just ourself directly but also with our partners, so that we can always have a time to market advantage and that we can continue to differentiate ourselves not pay some price to pay some of the services that we offer to our customers, let you also know in the context of the relationships we have with Oi. We have significant collaboration in areas of innovation if you like. We will be looking to rollout new services in Portugal and looking to scale them in Brazil as part of the partnership that we have with Oi which as you is strategic, important to us and that we will continue to support as well.

I hope to speak to you on our next call or if it means on my next road show. And like I said Nuno we are very happy to take any emails from you with follow-on questions you may have. Thank you. Bye-bye.

Operator

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

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