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Earnings Transcript for PT - Q2 Fiscal Year 2013

Operator: Greetings, and welcome to the Portugal Telecom 2013 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, Luis Pacheco de Melo, CFO for Portugal Telecom. Thank you sir, you may begin.
Luis Pacheco de Melo: Thank you. Good afternoon ladies and gentlemen, and thank you very much for being on this call. I understand it’s a mid-August call, so some of you might be on holiday and therefore our excuses for that, our apologies for that. I am here with our IR Director, Nuno Vieira, our CFO team, and this time, we are being joined by Zeinal Bava down in Brazil, and he will take you through the operations, both in Brazil and Portugal. I will start the presentation with a brief overview of the first half numbers, Zeinal will then address the operation issues in Portugal and Brazil, and I will finish with a brief overview of the other international investments, and also on our shareholder remuneration policy that we have just put out an announcement on the revision of this remuneration policy. We will then follow with a Q&A session. I will use the presentation that we’ve put out this morning as a reference. So, if we quickly move to slide number 1. I just would like to draw your attention to the usual Safe Harbor notice that will be effective throughout the presentation and the Q&A session as well. So, if we move then to slide number 3, on the financial highlights. In the first half, operating revenues amounted to Euro 3.1 billion, on the second quarter they amounted to Euro 1.54 billion. In the second quarter, the revenues of Portugal Telecom were in a way penalized by the depreciation of the Brazilian real, and to a lesser extent by the Namibian dollar depreciation result. As such, revenues were down 5.5% and ex-real, it was 2%. This revenue growth joining real and international assets almost compensating the decline for Portugal. In Portugal, revenues were down 4.8% as a result of the competitive environment that we have, the challenge in economic dynamics that we are still experiencing, and of course the MTR impact that we’re still seeing the effects of those steps in MTR requirements. Excluding MTR, revenues in Portugal would have increased by 2.6% and they were driven by a stable performance on the consumer business and some one-offs that I will explain on the wholesale trends related to international traffic. Consolidated EBITDA was down 13.8% with Portugal down 9.7% and Oi down in the Euros 19%. Excluding FX, EBITDA was 11.6% due to the decline in the Portuguese business. Net income for the quarter; it stood at Euro 257 million, and these includes the capital gains of the sale of CTM that we concluded the sale at the end of June. The one-off effects related to settlement of certain contractual obligations that we had, and also impacted by additional provisions that we made during the quarter including the one-off costs on the redundancy program that we’ve just announced of approximately 400 employees. I will go to these numbers in more detail later in the presentation. If we now move to slide 4, during the quarter we continued to deliver very solid customer growth with almost 70,000 net adds in the quarter. In Portugal, the growth was basically explained by the continuous success of our Triple-Play offer and also by our new convergent offer that was launched six months ago, which then translated into very strong net adds on the Pay-TV of 22,000, Broadband 17,000 net adds, and especially mobile postpaid net add in excess of 100,000. Total customer base of Portugal Telecom Group grew by 248 million in the quarter, and this already accounts for the sale of the CTM in Macau. If we now move to the financial review on page 5. In the first half, as I mentioned revenues were down 7.5% equivalent to a decline of Euro 252 million. Out of this Euro 252 million, the real depreciations accounted for 173 million, as the currency to real devalued on average vis-à-vis in the first half of last year around 9.5%. As such, on the constant real basis, revenues declined by 2.4% in the first half and 1.9% in the second quarter. The revenue decline is basically explained by the performance in the Portuguese business with revenues down Euro 78 million or 5.8%. This performance was underpinned by improving trends in personal segments, which is leading to a stability on the consumer segments, and the consumer segments is what we call is the combination between personal and residential. So we’re seeing stabilizing trends in these segments. And I think it’s important and noteworthy to highlight that this performance was obtained despite the strong competition, the MTR impact, and of course the declining consumer demand. Just as a reference, consumer demand in Portugal is down 5% and our consumer segment was down 1.8% in the last quarter. We are outperforming our competitors in the market, and we are clearly gaining market share, both in terms of KPIs and also in terms of revenues. At Oi, on the constant currency basis, we continued to see growth across all customer segments. And on the other international assets, we saw also a strong growth in Namibia and Angola, but the growth in Namibia was impacted on the financial terms by the Namibian dollar devaluation. Timor and Cape Verde are experiencing tougher competitive environments, as you know Timor has two new players in the market, and Cape Verde also feeling the tougher regulatory pressure in there. On the proportionally basis, our international assets posted a 5.5% increase in revenues in the quarter. The weight fell proportional in fully consolidated international assets at around 58%. If we now move to slide number 7. On the revenues with different segments, both in Portugal and Brazil, what we can say that residential business revenues were at 1.8% in the first half and 0.5% in the second quarter. Service revenues in these segments were 3.1% in the first half and 2.2% in the second quarter. The slowdown on the growth phase of the residential segment is of course due to higher levels of penetration that now stand at around 80% and is now driven by continuous market share gains in the Pay-TV, Broadband and Triple-Play by Portugal Telecom. On the personal segments, we saw a good improvement in the second quarter with 7.4% decline versus 8.6% in the first quarter and 9.1% in the fourth quarter of last year and 11.2% in the first quarter of last year. So continuous improvement in the personal segment, of course on the back of the mixed sales of M4O, our convergent offer, which Zeinal will take you through in more detail later in the presentation. Service revenues were down 10% as a result of the MTR cut that we’re still feeling the impact of those MTR cuts throughout 2013. Overall, revenues in the personal segment declined by 5.2% in the second quarter, reflecting strong decrease in sales as well. On the enterprise segment, we continued to show reduced – or we continued to see reduced visibility with very strong competitive pricing environment, lower revenues from especially the public admin and the banking sector, which are declining more than the rest of the segments. On the wholesale and other revenues, we benefited from a one-off transit contract, international transit contract in the quarter that we gained during the quarter was a good performance of the wholesale part, but as you know, this type of business carries much lower margins than the normal wholesale business in Portugal. On Oi. Oi’s revenues as presented by Oi on a pro forma basis were R$7.07 billion in the second quarter, up by 2.4%. They were basically driven by customer growth across all segments. So residential were up 4.5%, corporate was up 4.1% and personal was up 1.2%. If we now move to slide 8. On the OpEx side, total OpEx was down 5.8% in the first half, and 1% in the second quarter. In Portugal, we continued to focus on increasing efficiency, and the OpEx was down by 0.7% in the second quarter. Of course, OpEx is being negatively impacted in these first two quarters by the strong commercial activity, and of course the cost associated with the launch of our convergent offer of M4O. Of course, as provision processes of these new services began more streamlined, we would expect the impact of M4O to become less relevant on the coming quarters. OpEx in Portugal also reflects higher direct costs associated basically with the corporate and the wholesale, the wholesale as I just mentioned on the revenue side also has some costs associated with that. And we are seeing also additional efficiency gain, especially on the maintenance and support activities. As we have highlighted, we have decided to proceed with the redundancy plan of around 400 people. And this is basically a result of all the efficiency gains that we have been able to obtain over the past years. That can now be translated in more cost savings for the future. In the coming quarters, we should also expect the benefits of all the investments in our new technologies to continue. So, both on the programming costs, on maintenance costs and other costs, we should continue to see solid improvement on that front as well. At Oi, OpEx was negatively impacted by wage benefits and the inflation adjustments by one-off fixed consideration cut costs, and marketing costs associated with that impact and also by additional provisions for bad debt. If we now move to slide number 9, on EBITDA. EBITDA in Portugal declined by Euro 30 million in the second quarter versus the second quarter of last year or around 9.7% year-on-year. The main reason is basically the decline on the – pressure on the top line. The revenues were down 45% and we were not able to withstand high operating leverage in this business to contemplate all that requirements with additional cost base. Of course EBITDA declined by Euro 30 million, revenues declined by Euro 45 million. So we were able to accommodate part of that with further efficiency gains and cost decline despite the stronger commercial activity and the cost associated with the M4O launch. On Oi, EBITDA decreased by 16.4% on the second quarter to R$1.8 billion with margins up 25.4% as a result of higher OpEx rate explained previously. Other businesses declined by almost Euro 9 million in the first half, and mainly as a result of the devaluation of the Namibian dollar, as we have seen on growth in Namibian business but in local currency and also the real devaluation on our contracts business in Brazil. All in all, so consolidated EBITDA declined by Euro 124 million or 10.9% in the first half, with FX accounting for more or less Euro 45 million out of that total decline of Euro 145 million. Proportionally and fully consolidated international assets already accounts for almost 50% of our EBITDA. If we then move to the net income, I would like to spend some time here on this slide, slide number 10, as there are some one-off effects that I will try to explain in more detail. So the net income was underpinned by one-off and amounted to Euro 284 million in the first half below EBITDA, since I’ve pressed EBITDA line below the EBITDA basically D&A is basically flat with higher D&A in Oi being compensated by the decline on the depreciation of the real and also the decline in Portugal. On curtailments, as I mentioned in order to continue with that, the structure, the new environment and also benefits from all the efficiency gains over the past years, we have decided to incur in the curtailment charge of Euro 128 million that relates to slightly more than Euro 400 million redundancies. On other non-recurrent results; that amounted to Euro 82 million, basically reflects the gains with the settlement of certain contract obligation that PT had one invested in Oi, a gain related to the wireline Concession Agreement that had already been booked in the first quarter. And these two gains were partially compensated by additional provisions that we decided to take in these quarters namely the write-downs in the Yellow Pages contract that we have. Associated lines include the capital gains in the sale of CTM of around Euro 310 million that we booked in this quarter as we concluded the transaction at the end of June. And on the interest costs, they were up Euro 57 million to Euro 292 million, and it’s basically due to higher costs of net debt in Portugal of more or less Euro 31 million and higher average net debt at Oi that was partially offset by the real devaluation, so the combination of two is an increase of almost Euro 22 billion. As a result of these one-offs, our net income increased due to the CTM disposal of course to non-recurrent gains which were basically offset lower EBITDA in Portugal and Brazil, and the curtailment charges and the higher interest expenses. If we now move to slide 11, to address CapEx. Total CapEx now increased by 14.2% to almost Euro 600 million reflecting higher CapEx at Oi, which more or less compensated real devaluation and a decline of the CapEx in Portugal. CapEx in Portugal declining by Euro 10 million and this is despite the increase due to the Data Center construction of more or less Euro 26 million in the first half. Excluding these effects, CapEx would have declined in Portugal by 15%. The Data Center is just for your knowledge, will be inaugurated next September. So we should not continue to see this type of investments post that date. We continue to see – in Portugal, we continue to see a lower CapEx in Portugal i.e. below the Euro 5 million for 2013 and we continue to see that we can further reduce CapEx in 2014. CapEx at Oi is being directed at growth areas, mainly the network capacity, the coverage and the quality, but essentially CapEx is being aligned with focus on the customer lifetime value, which is also important to bear in mind. On slide 12, on the net debt changes in the quarter. Consolidated net debt declined by Euro 163 million in the quarter. From operational perspective, we saw positive cash flow that ex-Brazil was Euro 131 million. On the financial part, interest amounted to Euro 161 million, but just bear in mind that ex-Brazil in the second quarter, they accounted to Euro 88 million, which is a seasonally high number, bear in mind that the total interest to be paid during the course of this year ex-Brazil is Euro 240 million. So, by the end of the first half, in the Portuguese business or ex-Brazil, we had already paid more or less 72% of the total interest that we are supposed pay throughout the year. So, front-loaded site of outflows from the interest perspectives. Then we benefited from the sale of CTM and the impact of the real devaluation. And on the outflow side, PT paid Euro 278 million dividends last May. And then Oi also had legal obligations that needed to be paid, that had an impact on our net debt of approximately Euro 44 million. If we now move to slide 13 and look at our funding positions. Total gross debt ex-Brazil amounted to Euro 7.4 billion and net debt to around Euro 4.6 billion. Ex-Brazil, the cost of the net debt has increased to 5.3%, and this is basically due to lower returns that we’re getting are now on cash, and therefore our net interest cost have increased to 5.3%. As we go from here onwards, we expect that our average cost of net debt should remaining more or less at this level between 5.2% and 5.3%. The average maturities of our debt, now stands at 6.2 years. We are fully funded until basically the end of 2013, and therefore Portugal Telecom enjoys, from our perspective a strong liquidity position. Let me now hand you over to Zeinal to address the Portuguese operation and also the Brazilian operations.
Zeinal Bava: Okay. Thank you very much Luis, and again thank you very to all of you for being on the call. As you know in Portugal, we are organized along business segments; Consumer, basically B2C, which is split between Residential and Personal but increasing we are looking as both together. And we had SMEs, SOHOs and large corporates. Let me start off by discussing first the trends of the B2C segment, starting with the Residential first. First and foremost, I would like to highlight that is on slide 16, is that MEO continues to enjoy one of the highest brand notorieties and brand recalls in Portugal. I have said it plenty of times before in previous calls, it’s not just about notoriety in the telecom sector, MEO today is a Portuguese retail brand and clearly top three retail brand in Portugal. And of course just from a consumer company such as ourselves, it’s absolutely critical. Why? Because as you know, proved sales are a lot cheaper than pushed sales. So, from that standpoint I think what we have been able to do with MEO in the last three years has been absolutely formidable. We launched our convergent offer M4O on the 11 of January of 2013. We indicated at the time of launch that there would be three to four weeks before we were able to stabilize all the processes but never imagined that within six months, we would be able to achieve one million revenue generating units. It is absolutely incredible that we have been able to achieve this one million RGUs, 40% of which are new RGUs. So the Portugal Telecom ecosystem in the domestic market today has an additional 400,000 services that we are billing to customers. We also discussed in the last conference call and in some of the road show meetings that I did, that we believe that convergent should be a standing package, and in fact as we look at the number of SIM cards that we are selling to customers, it just seems to confirm the view that convergent which is based around our fixed and mobile asset agnostic. Therefore from an asset standpoint and offers the advantage of to the family, it can be truly successful. So when you look at the number of SIM cards that we are selling on average, as you can see 47% of our customers have two SIM cards, 24% have three SIM cards, and importantly 29% customers have 4 SIM cards. If you compare it with slides, the one that we showed on the 27 May, and we announced our first quarter results you would see that we are penetrating more and more the families with additional SIM cards which means that Portugal Telecom is beginning to make keynotes in the 15 to 20 growth new segment as well as you know, we are not believing. Slide 18, this is I would say one of my favorite slides in the presentation. It gives you an overview as to how we are performing against the sector. If you think about just RGUs and net adds as you can see in terms of mobility, Portugal Telecom is doing incredibly well compared to the market, on the back of the convergent efforts that we had moved. We’ve indicated to you in the past, that we think network is not a commodity, and the fact that Portugal Telecom has fixed and mobile assets on one hand, ADSL 2+ on the other, 4G coverage which comes for 93% of the population and fiber in 1.6 million homes is a true comparative advantage, and we are now beginning to triangulate this advantage in substantial market share gains, not just in the Residential, segment but also in the Mobility segment. So if you look at the fixed RGUs net adds, once again second quarter we did significantly better than the sector. If you look at customer revenue performance, our revenues in the B2C segments were down 1.8%. Now that compares with the market excluding Portugal Telecom, which was down 7.6%. Even if you look at some of our peer group companies, one of the leading Portuguese cable companies, revenues were down 3.7%. Even if you take into account the fact that there will be consolidation in the Portuguese market and you bring to that, cable with mobile, it’s still much, much better. So as a result, I would like to say that convergent has truly become a significant competitive and comparative advantage for Portugal Telecom, and we will continue to underpin our future strategy in the Portuguese markets by selling more and more M4Os. In light of the demand that we are seeing from our customers, we have now in launch the M4O offer. We now offer M4O not just for IPTV, ADSL, fiber, but we now also offer that to satellite customers, so that we can give today in Portugal in these same convergence experience and advantages to customers whether they are IPTV, a copper and fiber or satellite. In order to also diversify our offer, we have exceptionally created M3O offers, which basically used our customer for those that do not have, if you like both end in some of the more real areas, we can offer them PT’s fixed phone and mobile. Of course, mobile here is DTH, fixed call and mobile, so with that, it becomes a Three-Play package. Looking that we now have a very comprehensive offer of convergence and the challenges that we have going forward is to continue to innovate on top of this with additional services, advantages and also with better back office performance. On that point, I would like to say that what Portugal Telecom has done in terms of back office and operation is absolutely impeccable. We can today install customers D plus 60 [ph]. Of course approach that is one particular area where we need to continue to reduce back office costs, but having said that, from a customer experience standpoint, we can install customers end-to-end with number portability within six days independent of whether you’re talking about M4O, IPTV, copper, fiber or whether you’re talking about M40 including satellite. Now going directly into Residential. We’ve had another good year in terms of Pay-TV and Triple-Play performance. Pay-TV customers were up 9.8%. If you look at Triple-Play, Triple-Play penetration was up 16.7%. So today, Portugal is the market which has about 78.9% Pay-TV penetration. As a result, it’s a pretty stable market. And for those that are MEO customers, all our customer service would simply indicate that people are generally extremely happy with the service that we are offering. And of course, the service that we are offering also includes significant amount of innovation that we have done, particularly in what has to do with interactivity. We continued to be leaders in interactivity in Portugal working very closely with a number of free-to-air TV companies. With home, we are developing special apps, so that people can actually take advantage of the interactive services that we are making available. With regard to market share in Triple-Play, slide 22, our market share was up again. We have 53.2%. We are leaders in Triple-Play and we are consolidating that leadership in the Portuguese market quarter-after-quarter. If you look at TV market share only, we’ve got about 40%, but as you know we are not sellers of 1P of TV. So 1P for TV represents a very, very small percentage of the total numbers of customers. And so I do prefer, our business model is underpinned by our services increasing with Triple-Play and Quadruple-Play. Notwithstanding stabilizing KPIs, penetration of TV, Pay-TVs reaching 80%, we continued to see growth in terms of revenues. The outlook in Portugal from a consumer standpoint as we know is challenging, notwithstanding our revenues were up 2.2% in the second quarter of this year. Moreover, I would like to highlight the fact that when you look at flat-fees, so if you’re thinking about predictability of our business going forward, flat-fees today represents 90.1% of our total revenues, which means that if you take into account that on average, we have loyalties of between 12 and 18 months on average, then this gives you the idea of how sustainable and predictable the revenues are. So it’s not just about growing the 2.2%, it’s also about the quality of the growth that we have posted. Turning now on to Mobile. Mobile remains a big challenge, across the board in Europe. As you know there is significant pricing pressure, regulatory pressure and it is a service that has been commoditized to some extent, if we were thinking about voice and SMS. And therefore it’s not easy to regain market share unless you do something materially different in the markets, which is what we have done with M4O, by bringing together the advantage of you having one supplier for your fixed line and for your mobile services is exactly what is leading us to grow substantially our market share in Portugal in mobility. So, between second quarter of 2012, second quarter of 2013, we have increased market share three percentage points, and we have done this by defending our profitability, so we have not done whilst by being irrational in terms of prices but by asking our customers that’s the valued for money. So those people that are buying convergence in Portugal from Portugal Telecom, they are getting convenience, they have the comfort of getting one customer and with one supplier and of course they are getting savings. And those savings are translated enough being for convergence services in the Portuguese market. In terms of our strategy, as you will have seen on page 26, number portability has doubled, between full-year 2012 and first half of 2013. Moreover, our market share in terms of active SIM cards has also increased. We believe that one of the phenomena of us having launched a service which is convergent, but at the same time offers customers unlimited SMS and voice to all, is also meaning that the number of total SIM cards in the Portuguese market is actually declining. So as a result, we are capturing with additional ARPU which the people who are splitting over two to three SIM cards and this is one of the reasons why we are underpinning our performance in terms of B2C. In terms of our predictability again, as you will have seen also on page 27, percentage of flat-fees in the mobile customers have increased 7.3 percentage points. 37.7% of our customers today in mobility are on flat-fees. Subscriber acquisition retention costs are also declining. They are declining because we are very cautious today on subsidies. We have significantly limited subsidies. We are declining subscriber acquisitions retention costs why, because our brands enjoy very high notorieties and as a result the full channels are selling more. And we are reducing subscriber acquisition retention costs because our digital strategy, whereby we are using our portal to sell more electronically to our customers is also beginning to enjoy significant amounts of success. In terms of customer revenue trends, we saw data revenues pick up, this has a lot to do with the factors, we have been pushing smartphone penetration and also mobile internet. Customer revenues are also showing better performance, and of course if one ignores the MTR, the performance would be even more impressive. In terms of Enterprises, in SMEs about a year ago, we decided that for us the key objectives would be for us to drive convergence in our customers and we are beginning to see the results come through. Our number of customers with convergence services meaning to have fixed and mobile from Portugal Telecom as a percentage of total customers has now grown to 61.7%. It’s also interesting to see that in the first and in the second quarter, our net adds were positive, whether we are talking about landlines, broadband, or Pay-TVs. So this, is in my view a significant achievement and again it has been done on the back of M4O. It’s actually we are thinking about SOHOs and small enterprises, with regards to SOHO as you may also recall, we’ve simplified our offers. To SOHO customers we are offering what we call Residential Plus or Connected Plug offers which essentially means it is the same as the Residential offer, but it has far more aggressive service level agreements in terms of deliveries of the quality of service. With regard to large enterprises, we shared with your last time that this is one particular area for our business which is the undergoing significant pressure, a pressure on the back of the pipeline, pipeline of projects that are being delayed by large corporates in Portugal because of the economic environment, but also because of the pricing pressure. As a result and against this backdrop we’ve taken a number of initiatives to reduce costs to restructure how we operate and we essentially change the equation under which we operate. So rather than working on a basis that it should be costs just margins to separate price we are now basically working on a day to day price minus margin to define the costs and with this, there are new drive within Portugal Telecom as well to continue to reduce costs also by looking at solutions which are simpler for our customers and also establishing broader range of supplier relationships. Now, B2B in Portugal remains under pressure. Revenues were down 11.9%. Obviously more pressure on the corporate segments for the reasons that I mentioned, but this has to be seen against the backdrop where unemployment rate has picked up, private consumption is down. Results come out today in terms of evolution of the Portuguese economy. The economy grew 1.1% in this greater. It would seem that and we would like to believe that the moment we get some tailwinds, the performance of this segment can be improved in the future. So in terms of Portugal, operationally speaking and looking across the three segments, we believe that we are delivering results notwithstanding these macro headwinds and notwithstanding significant pricing pressure, thinking about the quality of the revenues that we have 66% of the revenues of the Residential segment are today non-voice, 34.9% of the Personal segment is non-voice. Enterprises is 52.8%. So overall in Portugal 52.8% of our revenues are non-voice. But when you think about flat-fees, 90% in Residential, 37.7% in Personal. This just basically gives you is the sense of the predictability that we believe that our business has on the back of investments that we built in our network, the technological transformation we have done and also the intellectual transformation that we have now completed. When you look at revenues in Portugal, they were down 4.8% in the second quarter, but if you ignore the pressure from regulation, particularly mobile termination rates, those revenues would have been done only 2.6% which against the backdrop of the economic challenges we have, we believe it’s a very good performance. Obviously, with the outlook in Portugal as it is and of course with the pricing pressure our CFO, myself the CEO of the Portugal Telecom Group, we’re focused in ensuring that we continued to champion the course for being more and more efficient. We are obviously at this stage discussing a lot more aggressively capital allocation. Our CFO mentioned that we will work towards reducing CapEx in the future, partly because we have completed the modernization of the networks of Portugal Telecom. So that efficiency gain is actually meaning that OpEx is down 1.7%. Now of course OpEx would have been down as more if it hadn’t been fore set the launches that we’re doing namely convergence, but also the launch of our own Data Center, a new Data Center on the 23 of September, can we do better than 1.7, yes, I think we can. And of course the Group is continuing to work to see whether we can reduce costs whether it’s marketing and so on and so forth. So the cost discipline in Portugal Telecom would remain very high as it has been in the past. With regards to CapEx, as Luis rightly mentioned, we have completed the modernization of our network, we have completed the intellectual transformation of the company. We would be inaugurating our new Data Center on the 23 of September and therefore, we believe that the scope for us to reduce CapEx in the next few years. Worth also mentioning that one-third of our CapEx is client-related which means that it provides us with a natural hedge towards any decline of demand. Also worth mentioning as you know and we’ve discussed it in the past, that we do significant reconditioning of set-top boxes, so 70% of our set-top boxes are reconditioned. So as a result, we will continue to work bottom-up processes, so that we can continue to improve efficiency of the Portugal Telecom and mitigate any further pressure on the top line with better performance in costs. With regard to Brazil, allow me to start with the pitch on the market. One of the largest global economy, high employment growth, rising middle classes, rising buying power, and penetration of telecom services which is among the lowest in the world. If you look at broadband penetration very low, Pay-TV penetration very low, 3G penetration very low, smartphone penetration very low. And therefore, we continue to believe that Brazil offers scale and significant scope for us to continue to sell telecom services not only because of demographics are strong, there is redistribution of wealth, but also because the penetration of these services remains low. What differentiates Oi in this market is that we are diversified geographically and we are one the of the largest telcos fixed and mobile. Oi is present in 4,000 – in more than 4,800 municipalities and we believe that this gives us a footprint that we can continue to work in the future to drive penetration of broadband and the Pay-TV as well. In Portugal, we’ve done convergence and we’ve always distinguished convergence from bundles. Convergence gives our customers a unique and a seamless experience and it’s underpinned if you like by transformation and operations in IT. We are not at that level yet in the market, not just Oi in this market and therefore in this market clearly the big drive is bundled, bringing together fixed and mobile, bringing together fixed if you like to voice, video, and data. As you will have been in the presentation that we put out on Oi which has a lot more detailed information, we are driving double-play and triple-play. We have a long way to go, broadband penetration in our households is about 43%, Pay-TV penetration in Oi household customers is only 7%. Of course the work has been done already, (inaudible) if we’re talking about TV is beginning to deliver on results. So Residential revenues are up 4.5% and we believe that we can continue to deliver pretty good performance in the segment in the future, not just on the back of the work we’re doing in the Residential segment but also on the work that we’re doing on the mobility segment. When it comes to mobility, we’ve included slide 40 to highlight essentially that it’s not just about some numbers, it’s about recharges. If you think about voice and text clearly, this market is going to move from voice, text to data as we have seen happening in most of the markets in the world. With regard to recharges, July in Oi was one of the best months in the year, and we believe that on the back of the work that we have been doing around business intelligence. Work that we have been doing to do more analytics in terms of customer data, we are now being able to direct our promotions much more effectively to different regions and to different customer bases in order to drive the elasticity of demand and this is beginning to have an impact in terms of recharges which as you know is a lead indicator of how revenues will perform in the future. With regard to postpaid, we also did well. Having said that, in this current economic environment, we have been more cautious. It is also worth mentioning that the loyalty contracts in Brazil up 12 points only and with the requirement that we have to allocate capital more intelligently and more efficiently, we are obviously reducing subsidies and as a result, postpaid is something that we will consider to work towards as a promise offer in our future growth of data in terms of postpaid. So first thinking about data; data grew 60% during the second quarter albeit from a very small base. So we have a long way to go and of course the ability to continue to grow will depend on penetration of smartphones, therefore on the price of smartphones. It will also depend on the coverage that we are able to put in place of 3G. And the 3G coverage is something that we are working on. It’s something that we are committed to, and in the same way that with regard to 4G, we will continue to honor the obligations that we have and continue to work with team around band sharing in 3G, we believe that there is room for us to grow and here we will look to work with suppliers with different models so that we can achieve those objectives without necessarily increasing our CapEx. With regard to the corporate segment. The corporate segment also grew 4%. It’s worth highlighting there is the work that Portugal Telecom and Oi are doing jointly to promote solid offers and listing our inauguration of the Data Center on the 23 of September in Portugal. We also mean that as on 23 of September Oi will be able to sell VAS processing capacity and that’s for also to Brazilian customer and as a result not only broadening the scope of the service that it offers but also include if you like the relevance of those services that it offers whether we’re talking about SMEs or large corporates. So with regard to Brazil, 43, revenue growth across all segments. In terms of Personal, mobility revenues were up 4% overall revenues were up 2.4%. With regard to EBITDA, certainly you saw in the press release that PT put out and Oi has put out, there was some costs that impacted our EBITDA performance in the second quarter, so that I would focus on page 45 and come back to page 44 in a minute but on page 45 as you saw, our EBITDA performance was impacted by bad debt provisions is double. We were in bad debt provisions at about 4.5% of revenue which is very high. It’s clearly one of those cost items that we will have to work towards reducing significantly in the future, and you see ample scope to do that, because of the focus that we have put in churn, in customer lifetime value. Personnel costs are also up, partly because of wage benefits and inflation adjustment of salaries, and of course the cost of in-sourcing that we have done of our internal network maintenance. So in terms of field force. So bottom line, when it comes to EBITDA, it was mainly impacted by some of this one-off in terms of costs, marketing, and we sponsored the Confederation Cup and that’s a one-off cost as well. It’s about R$50 million to R$60 million. So going to page 44, we included the slide only to make it absolutely clear that one of the key objectives at Oi is for us to continue to work our operational excellence. So in a nutshell, our strategy is focused on three things. We would like to correct the cash flow profile of the company. We would like to define a business model and make it far more efficient. The business model if you’re thinking about Residential will be triple, quadruple-play and if you’re thinking about mobility it’ll be a lot of prepaid and there would postpaid of data. And the third area which is absolute critical for us is growth. We continue to believe this is an market where we can grow, but we would like to grow with quality, delivering results and cash flow to our shareholders. And this is why page 44 highlights some of the areas where we need to improve on costs. And clearly running the ratio of 75% of cost and expenses for net revenues is too high. We are clearly not in the business of 25% margins and therefore there is work to be done on IT platforms, networks, field force, customer care, sales, mentioned sales there for you. We would like to focus on lower churn. We need to align if you like, we need to pace the CapEx with sales and the quality of sales that we are doing. So that one initial criteria of correcting the cash flow profile of the company, this is going to be one of the main areas where we’re going to be focusing on. I could talk a lot about the cost initiatives, but here what I would ask you to do is to refer to the work that Portugal Telecom itself has done in some of these areas, not that you can replicate growing from one country to the other, it’s a very different story, different dynamics, also it’s a different input structure, but having said that in terms of concept, in terms of processes we are trying to achieve the same, and therefore we are clearly in this moment making our priorities towards a field force [ph]. Before I hand you over to Luis, I’ll just like to mention one point on CapEx. I mentioned the CapEx in Portugal will also will come down next year, likewise in Oi we expect CapEx to come down next year. This year our guidance is R$6 billion, we think next year it will be lower. And it doesn’t mean that we will invest less. I think we will invest the same but with less money. So what we are now looking to do is to become far more efficient in a way that we acquire our services, so if you think about network, clearly we are focusing increasing in total cost of ownership. We also are wanting to change the model under which we relay to our suppliers moving from a supplier relationship to a more partnerships relationship. There are areas, there are pockets of demand in this market that we can tap, but we can only do that if we can change the way that we have been working with our suppliers in the past. So therefore, the same points that I made with regards to CapEx in Portugal, I’ll make the same points with regards to Brazil. Let me now hand you over to Luis. Thank you.
Luis Pacheco de Melo: Okay, thank you Zeinal. Let us move directly to slide 47 just to address very quickly the other international markets. So we continued to see a very good growth on a proportional basis, both on revenues and EBITDA. This is basically on the back of very strong growth in Namibia and Angola, especially on the data side. Just to remind you they have – these two operations are very good extension and coverage of the 3G network and they have both launched the 4G network as well. On the constant FX basis, the growth is even more substantial with 8.7% in revenues and 9.5% in EBITDA. In Cape Verde and Timor and I mentioned before, we’re experiencing more competition with two new players in the Timor markets and in Cape Verde with a stronger competitor and also from regulatory negative impacts. Let me now address the shareholders – the revision of our shareholder remuneration policy on slide 49. With regards to the shareholder remuneration, we are now in revised policy for the fiscal year of 2013 and 2014, which will now be solely proposed of a cash dividend per share per year paid annually of Euro 0.10. The Board of Directors remain confident on PT’s cash flow generation and clear we want to convey the message of more prudent financial strategy and on strengthening PT’s balance sheet, i.e. de-leveraging. We need to continue investing in the development of our businesses in our core regions, and with the current market environment and also in the current volatile financial market conditions the Board believes that this is the right decision to take at this point. So let me just go very quickly through some final remarks. I would like to highlight that the first half results show on one side continuous customer growth in Portugal, on the back of very successful Triple-Play and the new convergent offers, with clear market share gain on in Portugal. The continuous focus on the cost efficiency and as I’ve gone through the presentation after the initial cost associated with the launch of M4O, we should start seeing further cost decline across Portugal. We should see also further decline in CapEx in Portugal. For 2013, there will be below Euro 500 million and we should continue to see decline out of that number going forward to 2014, we should see further decline so well below Euro 500 million. In Brazil, Oi is taking the steps in the right direction on the operational front in order to explore the significant market potential. On the financial front, Oi now in our understanding is also taking the necessary measures to address its balance sheet and their cash flow. And finally, on PT while the Board remains confident on the cash flow generation of the company, we believe that the decision to adopt a more prudent financial strategy by cutting the dividend to Euro 0.10 is the right one at this time and we will – and that will enable PT to continue investing in its operations and also to de-lever. Thank you very much. And we will now open the floor for question and answers. Thank you.
Operator: Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment please while we poll for questions. Thank you. Our first question comes from the line of Mandeep Singh with Redburn Partners. Please proceed with your questions.
Mandeep Singh: Thank you. Just a quick question on your domestic EBITDA. On the first quarter call, you reiterated that you were comfortable with consensus of about Euro 1.1 billion for domestic EBITDA. I just wanted to hear your thoughts on that again. That would require a significant reduction in the rates of decline year-over-year for the second half against the first half, and if you are comfortable with that consensus, what are the drivers of that reduction in the year-over-year decline in EBITDA?
Luis Pacheco de Melo: Okay, thank you for your question. Just to address directly your question that we reiterate our confidence with the consensus out there is around Euro 1.1 billion. Basically that is on the back of continuous improvement in efficiency on the cost side, and also on the benefits that we’re seeing especially on the Personal segment on the revenue trend over there. Very recently, and as Zeinal mentioned also in July, we’ve seen very good demand for services both on the Personal and on the Residential, so we remain confident that we can deliver on the consensus that is out there.
Mandeep Singh: Thank you very much.
Operator: Thank you. Our next question comes from the line of Luis Prota with Morgan Stanley. Please proceeds with your question.
Luis Prota: Yes, thank you. A couple of questions please. First, in terms of Oi, and now that you are not providing guidance any more, maybe you can comment on consensus estimates for 2013 as you look for Portugal Telecom, and I think that consensus EBITDA for Oi is between 8.6, 8.7 so whether you are happy with that one? The second question would be on the African assets, whether you might consider selling some or all of this assets, further increase balance sheet flexibility? And finally in terms of Oi’s parent company Telamar, whether you have heard from them in terms of potential implications in the dividend cut in terms of potential need to capital injection? Thank you.
Zeinal Bava: Okay, let me just perhaps take the – Luis, thank you again for your third question. With regard to Oi, as we’ve said in the earlier call, we are disposing of certain assets. There is a specific slide in our presentation that gives you if you like detailed inputs on that. There is particular one disposal which is the GlobeNet which is our company that has submarine cables, and that alone will result in about Euro 1.2 billion EBITDA impact. So with regard to this year’s EBITDA which what have been indicated by the company in the past is it seems that we’ve included the recurrent and non-recurrent, so from that standpoint, we are not changing anything that has been said in the past in that regards. With regard to the dividends, what I can say is the following, by taking a view over a full year period of distributing circa R$500 million we have essentially improved substantially the financial flexibility of Oi. This means that rather than us actually distributing R$8 million, we will distribute R$6 million. And that was something which was decided at the Board level and we are very grateful, because it shows that the Board is – it’s committed to actually correcting that if you like the cash flow profile of the company and you also will have seen that we have indicated that we – that the Board will decide regarding an interim payment in October of circa R$500 million. And so therefore that is if you like a package that we have announced today. R$500 million per annum for four years as a minimum within those three criteria that we put out, but in respect to fiscal year 2013, we will have an interim of R$500 million and that of course will be accounted towards what we also pay in 2013. And with regards to Tmar Part, there is nothing else I can say. I cannot add much other than to say that we have an interim dividend, and we believe that this interim dividend will allow of us to actually live up today as to the obligation. Luis Pacheco will probably answer the third question. Thank you.
Operator: Thank you. Our next question comes from the line of James McKenzie with Fidentiis. Please proceed with your question.
James McKenzie: Thank you. Just a couple of questions. Firstly, maybe following up, from a Portugal Telecom point of view, do you see the need to recapitalize the holding companies above Oi and when might we get some news on this? Secondly, you reported a negative tax charge in Q2 in the P&L. I was wondering if you could give us more or less what the extraordinary tax charge or the tax charge on the extraordinary items you reported, so we can get to an underlying EPS figure? And then thirdly, just on domestic net debt. I realized that Oi is a little bit of joker in the pack [ph] at the moment, but on domestic net debt you talked about de-leveraging. Where do you think you might be able to take domestic net debt over let’s say, by the end of this year and in 2014 and 2015?
Operator: Ladies and gentlemen, please standby, your conference will begin momentarily.
Zeinal Bava: Just there was a technical problem in connection with Portugal, so I think they’ll be joining – Luis and his team will be joining in a few minutes, a couple of minutes, okay, so just standby please. Thank you.
James McKenzie: Okay.
Operator: Okay. Mr. McKenzie, please proceed with your questions.
James McKenzie: Yes, sure. Luis, can you hear me?
Luis Pacheco de Melo: Yes, I can.
James McKenzie: Yes, okay. The first question was, I was just following up on Luis’s question, if in Portugal you see a need to recapitalize Tmar Part and the other holding companies that sit above Oi following a dividend cut, and if – when we might get some news on this? Secondly, I was looking at I think that there is a negative tax charge in Q2. And I was trying to get to underlying net income for the second quarter, and I wondered if you could give us what the tax charge on the extraordinary items that you reported might be? And then thirdly, on the domestic net debt, I wonder if you could give us an idea of where you expect that domestic net debt maybe by the end of 2013 and then with de-leveraging in 2014, and 2015?
Luis Pacheco de Melo: Okay, James. Thank you very much for your questions. Sorry for this technical problem. On the recapitalization of the holding company in Tmar Part is also as Zeinal mentioned and went through in the previous question. Basically at this stage, there is no issue on the short-term with the decision by Oi to pay the interim dividend of R$500 million. So that will adjust the interest payments in October at Tmar Part. Of course we will have time to sit down with our partners and see what are the alternatives and that we have at this stage, but just to put it into context, as you know there are R$3 billion with that holding company. We have around 25% of that holding company. So translating that into euros our share of that net debt is around Euro 250 million, but as I mentioned, we are still through that with our different alternatives with our partners and as soon as we have any news, we will of course get back to you.
James McKenzie: What about…
Luis Pacheco de Melo: On the negative tax charges, what I can say that all the capital gains that we had, both on the settlement of the contract and on the sale of CTM, those are non-taxable. CTM is just under small tax of around Euro 2 million because of the – we own part of CTM a domestic company here. So basically that is around – the sum of the two is around Euro 392 million on the net again that were not taxable. On the domestic net debt, we should see some decline both in the third and fourth quarter. Basically due to what I mentioned during the call, one is the interest payments on these two quarters is much lower. Second, normally the third and fourth quarters of our businesses are, I would say either working capital.
James McKenzie: Correct.
Luis Pacheco de Melo: Are zero or negative especially in the fourth quarter. So we should see some generation of cash flow over there. Going forward, of course with the decision that we took today in terms of cutting the dividends and also with the decision of Oi of cutting their own dividend, the net effect is positive on our side, just bear in mind that that part. We should see probably improving trends on the EBITDA front and due to what we are seeing first – both on Residential and on the Personal, we should see further CapEx decline. So basically from an operational point of view, CapEx on a domestic front might be more or less stable for the next year. And therefore we should see some de-leveraging across our financial charges on the commitments to pay dividends have now been reduced. So we should see some de-leveraging both in 2014 and 2015.
James McKenzie: Okay. That’s very good. Thank you.
Operator: Our next question comes from the line of Georgios Ierodiaconou with Citi. Please proceed with your questions.
Georgios Ierodiaconou: Good afternoon. I’ve got a couple of questions. First on, I was wondering if you could comment a bit on – I know there has been a couple earlier around Tmar Part, can you perhaps give us an indication of when is the interest that has to be paid by Tmar Part, I know you’re proportionately consolidate that debt, so I was wondering for example out of your Euro 161 million interest payments in the first half, is that – does that include any payments made by Tmar Part on its interest. And the second question is around Brazilian OpEx. I know during the Oi conference call, Zeinal you mentioned the efforts have been initiated to contain costs, and I am conscious of the fact that there are more costs associated with the process, but if we look on an organic basis given the inflation you have in Brazil, do you think it will be possible for you to maintain the cost base flat or even reduce it or is that the case of managing growth in the cost base trying to keep it under control? Thank you.
Luis Pacheco de Melo: Okay, Georgios, thank you very much for your question. I’ll address the first one and Zeinal will address the second one. On the first one, the interest payments on Tmar Part in October and April, average rate is around 10%. So average round numbers interest payments for the year or each one of the semester is around R$150 million. We have 25% of that. We consolidate 25% of that. So around I would say R$37.5 million which then gets converted into euros. Zeinal?
Zeinal Bava: Okay, thank you. Georgios, a couple of things. Obviously telecom companies have very high fixed costs and this is why we’ve said that we need to continue to grow our top line, because we believe that the translation of this incremental real or dollar in EBITDA is significant compared to be margins that we have today. So that’s why we’re going to have to, if you like to grow our business also to improve our cost ratio, but leaving that one side, we believe that we can reduce cost in the number of areas. And in my call, I mentioned for example field force. We have service providers in the particular area given to whom we pay and we only spend about R$2 million to R$2.5 billion per annum. We believe that if we can increase the productivity of that, one percentage points that could mean a saving of R$20 million for the ecosystem, it doesn’t mean that we will pay R$20 million but there will be a saving of R$20 million. If you were to ask me on top of my head and like I said, don’t hold me – if you like don’t use this against me when we get together, can we improve this 20 percentage points, I think we can. And if we do that, it’s about 400 million that we will if you like crystallize in terms of value in that ecosystem. How that gets split? That’s a different discussion, but we feel that there are significant areas. I mean I mentioned also in my calls today, bad debts are running at 4.5% of revenues. It’s totally unacceptable. We should be running at probably half of that. Now if we are able to do that, we could be talking about an uplift of EBITDA of about R$500 million to R$600 leaving to one side impact that we will have on the cash flow. So I think that we’ve identified all these areas. And when it comes to the field force for example, we are rolling out the three workflow management tools. We have already put a target of increasing the productivity of our own field force of somewhere between 20% to 40%. Now that of course will mean a significant savings for us. If you think about churn, we in some areas, some regions with the country because we were very fast, sometimes in sales and we were using some channels that if you like were slightly I would say on average of worse quality, and we had (inaudible) we are not factoring that. We are reducing that. So I think it’s a multiple of initiatives and I actually would like on the next goal to be ask the question, what exactly have we achieved in these sort of 60, 90 days. So I can respond and I can show to you the specific initiatives that we are taking. So we remain confident that with the understanding that we have of the market, of the business and we can certainly work towards much, much lower OpEx than what it is today, but that in itself will not be enough. We’ve going to have to continue to grow our business. And it’ll be a shame if we don’t take advantage of this growth opportunity, because we are in certain regions where frankly when we install coverage if you like ADSL forward, we can get penetration of 75% within 12 months. So this gives you a sense for the uncapped demand that exists and therefore what we need to do is that we need to discuss allocation of capital, and we need to make sure that we invest in the best profitable way so that we can generate good quality of sales. Thank you.
Operator: Thank you. Ladies and gentlemen, we have time for one more question which comes from the line of Nuno Matias with Espirito Santo Bank. Please proceed with your question.
Nuno Matias: Hi, good afternoon. The first is on Oi. If you do expect any additional assets disposed until year-end especially on (inaudible) or any real estate that you could sell. And secondly, can you give us any expectation of the amount of the dividends that you expect to receive from your other African subsidiaries? And final on there on the Portuguese operation. You mentioned that you made a 400 employee headcount reduction, but looking at your figures it seems to be that the total employee numbers from Q1 to Q2 actually increased in Portugal. Should we expect this 400 number to be reflected in Q3 or did the hiring going in fact higher and then offsetting the layoff of these 400 people? Thank you.
Luis Pacheco de Melo: Okay, so let me address the last two questions. And then I’ll past it to Zeinal to also address the first question. On the last question of our 400 employees, we have decided to take a charge of a future redundancy. So the effects of that reduction will become clear from now onwards, so on the next 12 months, okay. So you will see some personnel decline from here onwards. So, since we have taken the decisions we have to account for the immediate charge on that front. On the dividend front for the remaining part of the year, we should receive additional around Euro 10 million for the remaining part of the year on MTC and the other operations, plus whatever we can receive one Unitel. On the Unitel front, I would like to clarify that out of the Euro 280 million of this spending to be received from Angola, we have received now the confirmation that the Central Bank of Angola has already approved around $94 million. So we should be expecting that inflow in the coming quarters. The remaining part has been approved yet. With regards to Oi. Zeinal, please?
Zeinal Bava: Thank you. Couple of things, I just want to pick up on this curtailments that Luis mentioned and relates to the efforts that are being done in the restructuring our B2B side of the business in Portugal. So, and earlier on I was saying that we are seeing pressure on the B2B. So what measures are being taken to address that pressure and reduce costs, this is clearly one of the if you like, initiatives that is being undertaken, so that we can adjust the cost base for the company in that particular segment to what we think are the headwinds that we are seeing in terms of the prices. With regard to asset disposals, couple of things I would like to mention. First, we put a very significant slide in this presentation so that you can have all the disclosures [ph] and the way we see this is as follows, GlobeNet actually derives an impact, positive impact in EBITDA of about 1.2 billion. And so that has to be factored into the EBITDA numbers for the full year. We clearly think that will be concluded by December – November, December. Second thing, I also would like to highlight is that the way we see these asset disposals is that it gives that access – it enhances our financial flexibility and it gives us access to cheaper funding, so you get longer maturities and you get cheaper funding. And this is why we are not overly concerned about the EBITDA impact and as far as we are concerned we look at the cash flow. So from a cash flow standpoint, it is better for us to actually do these asset disposals than it is to contract debt because that will have shorter maturities and higher costs. And therefore whilst accounting-wise it will be impacted in EBITDA. The way we think about burn is actually a financing costs. Now we will continue to look at assets to sell in the future, of course we are, because we would like to continue – we would like to make our assets swiped a lot more and we want to make sure that we continue to include our financial flexibility, so this is an ongoing process. And you could always speak in the past about selling some real, etcetera, etcetera. So we will continue to look at ways in which we can if you like, crystallize value on our balance sheet and then deploy the capital, particularly to reduce our leverage, increase our financial flexibility, and when needed and if needed to continuously invest in the future development of our business. Thank you very much.
Luis Pacheco de Melo: Thank you, Zeinal. So thank you very much for being on this call. First of all, apologies for the technical problem that we experienced during the call. Before we close this call, I would just like to highlight that we have good customer growth in Portugal and Brazil. We’re taking the right steps both operationally and financial turnaround Oi. From PT’s perspective, we remain confident on the cash flow generation, and we decided to take a more prudent financial strategy. And of course to – and that will enable us to deliver also on the domestic front. Myself and IR Director will be available to take any further questions that you may have. Thank you very much once again to being on the call.
Zeinal Bava: Okay, thank you. Bye-bye.
Operator: Ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time. Thanks for your participation and have a wonderful day.