Telefonica Brasil SA (VIV) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to Telesp Celular Participacoes TCP second quarter 2003 conference call. Today we have a simultaneous web cast with a slide presentation on the Internet that could be accessed at the site wwww.vivo-sp.com.br. There will be a replay facility for this call in the website. We inform that all participants will only be able to listen to the conference during the company's presentation. After the company's remarks are over there will be a question and answer session. At that time further instructions will be given. Should any participant need assistance during this conference, please press 'star' '0' for an operator. Before proceeding let me mention that forward-looking statements are being made under the Safe Harbor of the Securities and Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of TCP management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of TCP. They could cause the results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Francisco Padinha, CEO of Telesp Celular Participacoes. Mr. Padinha, you may begin your conference sir.

Thank you very much. Good morning ladies and gentlemen. Thank you for joining us for TCP's second quarter earnings release conference call. This conference call is being simultaneously transmitted over the Internet and you may access a copy of this presentation from our website vivo-sp.com.br Investor Relations section. Here with me today is Fernando Abella, our IR Officer, Erto Nanini (ph), our IR Advisor and our IR team. I will begin by updating you on the recent trends in our operations. After that we will review financial highlights for the second quarter and finally I will take your questions. On slide 3 there are some macroeconomic trends. Sorry in slide 4. Interest rates rose significantly in the past year and happened because of the sharp increase in inflation. However, with inflation under control, the Brazilian Central Bank decided to reduce interest rates by 2% percentage points in July. The main impact will be the relaxation on financial expenses and the [accumulation] of operating costs. Changing now to slide 5, I would like to share with you the announcement of the successful launch of Vivo - the new brand for all of the TCP operators. The strategy was to regularly consolidate the brands through a group based national companion involving cultural event and special promotions for Mother's Day and Valentine's Day in Brazil, which made possible to achieve the Top of Mind leader of the sector just after two months of the launch.

The majority of the expenses related to the launch of the company's new brand Vivo are included in the two quarters that impacts in EBITDA margin was roughly 1.8 points. On slide 6, regarding TCO operations, the acquisition of the controlling stake of TCO was closed on April 25th. The next step was to file the documents for the tender offer of OM shares regarding the tag along with the Brazilian CVM on May 21st.

On June 18th, we have received a request from CVM to give some explanations on the documents filed. We were given 60 days to respond and after that the CVM will have 30 days to approve the operation or ask more requirements if necessary. Once the tender offer is concluded, we will follow the Incorporacao merger of shares. On slide 7, since July 6th, clients calling from a mobile must choose a carrier of their long distance calls. The new operator of choice has been for cellular communications TCP has seen a smooth [Transition]. Through TCP partnership with Telefonica to utilize the Super 15 calls as an initial promotion, Vivo clients have been offered discounts on long distance calls from their cellphones using this special corporate rate we also offered. Moving to slide 8, Vivo operating companies will no longer receive long distance revenues VC2 and VC3. Replaced by interconnection revenues. Instead long distance carriers will have to pay an interconnection fee to the operators for the use of their network on those calls. On the other side, interconnection costs related to LD calls will no longer exist. We estimate the net effect will be a maximum reduction in EBITDA margin of 0.5 percentage point. Now let's move onto the financial highlights of the second quarter. On slide 10 you can see that our client base rose 19% year-on-year and 4% quarter-on-quarter following the launch of the new Vivo brand and special promotions during Mother's Day and Valentine's Day. The Vivo consolidated client base reached 10.9000 subscribers at the end of June - one of the largest subscriber bases in Latin America. That means 29% of the total Brazilian client. I would like to correct that because it is 10.9 million subscribers. It is important to note the TCP's Postpaid client base continued to grow 21.3% year-on-year and 5% quarter-on-quarter, confirming the trend seen over the past two quarters reached 2.6 million.

TCP has maintained its market leadership position as we show in slide 11 in the face of rising competition. While this was helped by the successful promotions I mentioned, we have also continued to aggressively focus on keeping our best client and market share retention strategies. Global Telecom, on the other hand, has seen a sharp increase in market share of 6 percentage points due to strong execution in its carrier operations, being the only operator of A bands to maintain this level of share. Without TCO operations it is important to say that both TCO and NBT focused on profitability, not on growth during 2002. NBT is the only A band with positive bottom line. We can see that TCO maintained a 70% market share. The highest share amount A band operators in Brazil despite increased competition. NBT's market share fell 3 percentage points, reflecting a more competitive environment. Moving to slide 12, total net revenues grew 21% year-on-year totaling [R$1.180m], reflecting higher commercial activity and net revenues grew 52% by inter-commission rates and the client base growth. TCO contributed 22% of total net revenues and of revenues themselves. Slide 15 shows that wireless based services continued to experience significant growth year-on-year over 130%. The focus was a group of nationwide campaigns targeting young audiences that has resulted in increased utilization in the client base of SMS short message and WAP services and new service package for corporate and so clients. Minutes of use were slightly lower for TCO and TCP, while Global Telecom's MOU began to recover. Price reductions on the blended MOUs related to new client lower usage around 20% being Prepaid, being especially offset by the growth of Postpaid MOU. ARPU remained stable despite the reduction of MOU due to the higher integration rates adjusted to 15% on February 10th, 2003 and higher data revenues. Subscriber acquisition costs rose year-on-year for all the operators, reflecting stronger marketing costs and higher subsidies following a more competitive environment and the expenses related to the launch of the new Vivo brand in April. Excluding marketing expenses related to the new brands, GT, subscriber acquisition costs which have reduced 20% year-on-year.

TCP EBITDA grew 7% year-on-year and remained stable compared to first quarter 2003 in spite of increasing competition and the launch of Vivo brand. TCO consolidated grew 25% of the total TCP EBITDA. Margins reduced 4.8% due to an increase in costs related to higher commercial activity. Operating expenses grew 53% and costs of equipment 50% and to higher interconnection rates. Interconnection costs grew 38.4% year-on-year. These costs are partially compensated by a reduction of G&A, personnel and the other expenses as a percentage of the net revenues reaching 12.5% in second quarter 2003 from 9.8% second quarter 2001. Just to remind, margins in the first quarter 2003 reflect the accounting adjustment and the non-recurring income from the CMS backed reversal. As we have a non-recurring income from a high CMS backed reversal of R$58m margins excluding this effect will have reached 56.6% in first quarter 2003. Which should be compared to 35.9% margins in 2000 in second quarter 2003 excluding the non-recurring expense related to the launch of the new brand. Operational cash flow for TCP showed a significant improvement this quarter - 31% year-on-year due to higher EBITDA and lower CAPEX. EBITDA grew 7% and CAPEX decreased 50%. TCO operating cash flow in second quarter 2003 was R$93m and the profit positional growth for TCP of 35% from 31-66%. Moving to net income slide, the company showed a significant improvement in its net loss which was reduced by R$116m 30% year-on-year. Gross debt quarter-on-quarter grew R$210m despite positive operating cash flow to cover the financial needs for the TCO acquisition. 100% of our foreign currency obligations remain hedged as we funded our loan position in Euros in early April. Long-term debt captured during the quarter has allowed TCP to reduce the percentage of current debt from 51% in second quarter 2002 to 43% in second quarter 2003. As far as it concerns debt ratios, TCP reduced 43% its financial leverage year-on-year, reaching 2.34 times net debt to EBITDA. The TCO acquisition allowed TCP to significantly reduce leverage 36% due to a positive cash position. Thank you very much for your attention. I and Fernando would now like to take any questions you may have.

Thank you. The floor is now open for questions. If you do have a question or a comment at this time, please press '1' followed by '4' on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the '#' key. Once again ladies and gentlemen, if you do have a question or a comment at this time, please press '1' followed by '4' on your touch-tone phone. Our first question is coming from Vera Rossi (ph) of Morgan Stanley.

Hello. I have two questions. One is on your margins and the other one is on the company's bylaws. The first one EBITDA margins. I would like to know where do you think the EBITDA margins are going to be in the second half of this year for the consolidated company? And also if you have for TCP and Global Telecom only? The second question that I have is on the corporate bylaws of Telesp. I saw a document you filed on CVM where you want to change the bylaws of the company, specifically the long-term contract between the subsidiaries. I would like to know why the company is making this change? Thank you.

Okay. I will begin. This is Fernando speaking. Related with the bylaws, it is a standby. They are difficult to change the bylaws [inaudible] operations presently in TCP because now we are with a lot of relation with the operation of Telefonica in Brazil. And as we want to sustain growth, really it is a question of agility. Now it is in a standby position. Related with margins, the margins of the quarter are 34% and if you remember the margins at the first quarter excluded adjustment really is 36%. So if we compare that 36% with the margin of the second quarter, excluding the launch of the new brand, really we are more or less in the same level of margin taking into account that the commercial activity in the second quarter is more than 20% higher than in the first quarter.

Yes, but what are the expectations for the second half?

Okay, the guidance our shareholders are giving to the market is that we are going to finish about 40% margin in TCP consolidated and TCP and GT.

So the EBITDA margin?

Accumulated at the end of the year 40%.

So you are saying that your accumulated margins for 2003 will be 40%?

Yes.

So you have 36% in the first half.

Yes. That's our target.

Yes, but now just let me finish. You had 36% in the first half. In order to have 40% for the year, it means that in the second half the margins are going to be above 40%. Is that correct?

Not so correct because we are speaking about 40% accumulated. Now we have more or less 39% because the first quarter was 43.9%. The second quarter is 34% and the accumulated is around 39%. So we have to be as likely above 41% to get a target of 40%.

Okay. So you were including the accounting changes as well. Okay, I understand.

We are expecting a target double.

40%. Okay and one follow up on the bylaws. When I saw these bylaws, the bylaws mentioned that the change in bylaws that you changed the long-term contracts between the subsidiaries. Does it include the probability of increasing management fees because if you are changing like the contracts of long-term between subsidiaries and also the controlling company?

It is not related to that. The bylaws came from the [inaudible] and there have been some changes in the corporate law that allows all the minorities to protect their rights. We are looking only for agility of our operation and nothing else.

But does it increase the probability? I understand what the company wants to do. But does it open ... like increase the risk in the future to implement higher management fees because you are changing the bylaws and you would be able to change all long-term contracts between the subsidiaries and the holding companies?

I don't think so really. I do not have the legal answer to that. But I don't think so. We are allowed to change the management fee in contracts due to these changes in the bylaws. But I don't have the legal answer. I will try to get it and answer to you.

Okay. I would like to follow up with that. Thank you.

Thank you.

Thank you. Our next question is coming from Ricardo Sera (ph) of CPI.

Yes, hi. Good afternoon. Hello. Yes, yes okay. I have a follow up question on EBITDA margin. When you say that in the first half you've already accumulated nearly 39% EBITDA margins. So for the full year reaching 40%, you will actually need to have that much more than 40%. But the thing is that when you look at Q2 actually you have numbers that could be extrapolated for the rest of the year. Which means that you have a larger revenue base and you have an EBITDA that is comparable with the following quarters until the end of the year. And actually what we have here is an impact. Of course you explained it very well with 1.8% that is the launch content of Vivo and how much did that cost to you. But even if you make this adjustment, the margin on Telesp Celular including Global Telecom in Q2 is lower than the 40%. Actually as far as I could understand you will need to have slightly more than 40% to reach the full year 40% mark.

So what is your question?

The question is, given your Q2 EBITDA margin that is lower than the 40% mark, how can you say that you will be able to get in Q3 and Q4 above 40% margin so as to get to the full year 40%?

No, really it is as we have spoke before. We have to get our margin higher than 40% because we have 39% in the first half and the other that we have to get our target is 40%. So the minimum we have to get is around 41% margin.

So yes …sorry.

There are some seasonality on the sales. The second quarter perhaps is the worst in commercial activity. So the third quarter is the best. The third quarter has to be really much better than the rest and the fourth quarter we have to try to get the target as we have.

Is there any dragging on this after the launch campaign of Vivo in Q3 or is it just net of Q2 numbers?

All the costs are included in the Q2.

Okay. Thank you.

Thank you. Our next question is coming from Andrew Campbell (ph) of Credit Suisse First Boston.

Yes hi Fernando. My question is regarding the debt. I was wondering of the R$1.5b or so, which you are paying for the control of [TCO], how much of that is actually reflected in your debt as of the second quarter?

Around R$900m. You will see the reduction in the net debt in slide 21. You see that the net debt grew more or less R$1b. Most of this debt is related to the TCO acquisition. If you remember we paid R$1.5b.

Okay. Have you accrued a liability anywhere else for the remaining R$600m? Is that liability reflected anywhere else on the balance sheet?

It is in the accounts payable.

Accounts payable. Okay. Perfect. Thank you very much.

Thanks. Next question please.

Thank you. Our next question is coming from Mike Malone (ph) of Goldman Sachs.

Thank you. My question relates to the ARPU for TCP, specifically the Prepaid ARPU which I know this was very stronger in the second quarter compared to the first quarter. Could you explain if there were any one-off factors behind that? Specifically I notice that the MOU didn't grow so much in the second quarter. So was it all due to tariff increases, or where there any other factors? Thank you.

I did a footnote in slide 16 that explains to you that the ARPU in the first quarter on 2003 will be around R$43, excluding the accounts adjustment. So really the real evolution of the ARPU will be a little of the second quarter. So there is a growth of around 4.6% quarter-on-quarter.

Thank you. Again ladies and gentlemen I would like to remind you if you do have any further questions or comments, please press '1' followed by '4' on your touch-tone phone at this time.

Our next question is coming from Gene Childs (ph) of JP Morgan.

Yes good morning. Could you provide us maybe with a more detailed account for the acquisition of [TCO] the minority TN shares and also an update on your thinking for the Vivo consolidation? I know that there have been some comments by Portugal Telecom recently indicating that this could be coming fairly soon. Thank you.

Could you repeat your second question please?

Yes, the second question is on the Vivo consolidation. The consolidation of the other Vivo companies of the entire platform. Portugal Telecom made comments today, in fact about three weeks ago, saying that this should be expected relatively soon.

Related with the TCO acquisition, really the acquisition is running well. The only question is that the CVM has requested us for some explanation on the filings that we did for May. We are going to file these explanations the next day. Then the CVM have another 30 days to answer that with okay or to pay for more explanations related to the purchase.

Related with the consolidation of the operations in Brazil. Really is a question more for the stakeholders because the decision is of the Board and really we have no more comments about it.

Do you have any estimates of what kind of synergies could be expected from that consolidation?

We still don't have any figures about it.

Okay. Thank you.

Again ladies and gentlemen, I would like to give you one final chance. If you do have any final questions or comments at this time please press '1' followed by '4' on your touch-tone phone. Ladies and gentlemen there appear to be no further questions from the phone lines. Actually I'm sorry we do have one person that has just come into the queue. We do have Brian Russling (ph) from Cazenove.

Yes good afternoon gentlemen, it's Brian Russling from Cazenove. I've just got a question in relation to the comments in your release on FACs. I have to say I was just a little bit confused because on both Telesp Celular also [Brobal] you talk about the FACs coming down if you reverse out basically the extra marketing for the rebranding. And in both cases you've also got a fall in churn. So I was rather surprised we've seen such a direct move against the margin. Is there any extra granularity you can give us on the FACs? Has there been a change in the mix of the gross editions to be a lot more Prepaid, or contract? Is there any more you can give us on that?

You are speaking about the reduction or the small growth of the FAC of GT compared with the first quarter?

Yes. GT was one, but also it's a similar story that you highlight for Telesp Celular itself. You talk about it actually going down against the first quarter, or being flat against the first quarter, and yet your churn has come down. So I'm trying to understand why there was so much margin pressure?

Really I don't think our churns are coming down. Unfortunately the churn has grown. Only has come down in GT. The other operations have grown. I think this is more a relation between these two arrangements.

Has there not been any movement in the proportion of gross ads coming from Prepaid? Is that a lot higher?

Not really.

Okay. Fernando I might give you a call next week to kind of go over that in a bit more detail because it just looks really odd.

Okay.

Ladies and gentlemen, there appear to be no further questions at this time. I would like to turn the floor back over to Mr. Padinha and the management for any closing remarks.

Thank you very much. Bye.

Ladies and gentlemen, thank you very much for your participation. This does conclude today's TCP conference call. You may disconnect your lines at this time and have a wonderful day.