Oi S.A.
Q1 2022 Earnings Call Transcript

Published: 29 Jun 2022

[Operator:]

[Operator Instructions] The event to take place in English with simultaneous translation into Portuguese. Please be informed that this conference is being recorded and it will be available later on the company’s IR website. [Operator Instructions] Now, I would like to pass the floor to Mr. Rodrigo Abreu, Oi's CEO. Please Rodrigo, you can proceed.

[Rodrigo Abreu:]

Hello, everybody. Welcome to our Q1 2022 Earnings Call. And as you can hear, unfortunately, today, due to a strong laryngitis, I really apologize but I'm unable to present our Q1 results. And as such, our call will be conducted by our Chief Strategy Officer, Mr. Rogelio Pacala; and our CFO, Ms. Cristiane Barretto. Mr. Jose, the floor is yours, and I will be joining them later and trying to answer your questions. Thank you very much, everybody.

[Rogelio Pacala:]

As we start in the name of the company, we want to apologize for the delay in having this call. As we have mentioned in our last results call, the closing of our two large M&A operations in Q2 due to their size and complexity, involving the segregation of assets and results for the so-called discontinued operations, had a significant impact on the auditing works. And as such, we have to postpone our first two calls of this year. By a few weeks, we expect to return to a regular call schedule with our Q2 call next quarter. In order to give the market visibility previously to this call, we have already released some preliminary results. And today, we will go into more details on both our operational and financial results. So moving on to Page 3. We can start by summarizing where we are in our transformation path. For those who are following the story, you know that we are almost at the end of a very long journey on our recovery program. In the last three years, now in July, we're reaching the three years of our transformation plan, we've been working on several steps towards a more sustainable way. We started from reviewing completely our strategic perimeter of business. We decided to focus on the fiber business with the innovative approach of the fiber reuse. Then we went through to the General Creditors' Meeting in order to approve our revised plan and had the approval to sell several of noncore and nonstrategic assets. After that, we successfully sold our four UPIs

[Cristiane Barretto:]

Thank you, Rogerio. Good morning, everyone and thank you, Take, for leading our call today. On our financial results, we start by talking about the routine OpEx which increased 4.4% over last quarter but reduced 3.2% in a yearly comparison or 7.2% on a pro forma basis. Excluding the wholesale infrastructure revenue that as of January 2022, after the operational segregation of V.tal is accounted as revenue and before that was considered as a cost reduction, the routine OpEx reduced 7.2% year-over-year, would represent a real reduction of 18.5% considering inflation of the period. I'll talk a little bit more about OpEx in the next slides. The consolidated routine EBITDA totaled BRL1.2 billion in this quarter with an 18.1% reduction percent compared to the fourth quarter of 2021, an improvement of 8.1% in comparison with the first quarter of 2021. The EBITDA margin increased 2.2 percentage points in a year-over-year comparison, mainly as a result of cost discipline. In the first quarter of 2022, almost 80% of the infrastructure CapEx were force financed by the advance for future capital increase made by BTG as a result of the Lockett Box concept. We demonstrated in this quarter the new level of investment of OE after the segregation of the infrastructure business and the slowdown of mobile CapEx. Moving on the next slide, we can look a little about details on costs. When segregating the blocks of routine OpEx between the cost of growth and other operating costs, it's very important to emphasize the reduction of 80% in the costs linked to revenues and growth in the reduction of 7.6% in the other operating costs. The consistency of the reductions in costs year-over-year demonstrate our discipline in terms of focusing on efficiency to increase profitability on the new Oi. Some examples are directly related to our strong penetration in the digital journey with 71% being penetration in FTTH based, 5 percentage points more than last quarter, an increase of 8 percentage points in collection digital channels, 50% over 40% in the last quarter and a penetration of 86% in digital care in FTT Home. As a result, the cost is printing post and collection reduced 22% year-over-year and the cost of call center reduced 46% year-over-year. Additionally, in this quarter, the decreasing of personnel costs of 10.9% reflects the reduction of 3,500 headcount compared to the same period of last year, a year-over-year reduction of BRL63 million mainly driven this quarter by a strong reduction of commercial mobile activities and the closing of our store as planned. On the next slide, we can see more details on our cost reduction program. On the bottom side, we can see the consistent reduction of routine OpEx year-over-year in the last quarter as a result of our transformation journey with an 18.5% real reduction this quarter considering the inflation of the same period. As we have been disclosing in the last quarters, we described the main actions in this slide that we are focused on our cost reduction program and the main results captured so far that will guide our future and our commitment with simplification of our operating model. The reduction of BRL234 million in this quarter in a year-over-year comparison, represents BRL938 million annualized demonstrate an accomplishment of 94% of our objective of 1 billion reduction in annualized costs. The main cost that supported the reduction were personnel already mentioned with more details in the previous slide. In the box of marketing, digital, IT network efficiency and G&A, we also presented a total reduction of BRL123 million in the quarter, totaling almost BRL500 million annualized basis. We also foresee opportunities related to the legacy turnaround that are already in place within the regulatory agenda. Moving on, we can talk about cash on the next slide. The company ended the quarter with a consolidated cash position of almost BRL2 billion, a reduction of 39% compared to fourth quarter 2021 and 34.5 percentage reduction when compared to the same period of the previous year. Cash flow was positively impacted by the results of operations and working capital, whose dynamic is our leverage for the corporate liquidity management. The legal and noncore lines also contributed to the same direction to a lesser extent due to redemption of register deposits and the sales of properties, respectively. The reduction in cash in the quarter was due to a negative result of financial operations, the combined effect of the reduction in financial income from cash in foreign currency and interest payments with BNDS and mailing the same annual interest payment to the qualified bond and the senior bond. In addition to the less payments of obligation to RJ suppliers provided for in the company's reduced recovery plan which have been now fully completed in this quarter. Next slide, we can see the leverage scenario. After the end of this quarter, with the conclusion of the sale of the UPI mobile assets on April 20 and the conclusion of the sale of UPI InfraCo held on June 9 from the outstanding debt as of March 31, 2022, BRL4.4 billion was already paid by the company. Therefore, the total stand debt of BRL34 billion is already reduced to approximated BRL19 billion. One another important liability to manage an action, on May 31, 2022, the company and Nate entered into an instrument of renegotiation and transaction regarding nontax debt in the amount of BRL20 billion, including applicable fines, charges and late payment interest. This negotiation which covers both the balance on debt, object of the transaction terms signed on November 27, 2020 and the renegotiation of new debts with ANATEL provides for a discount of 55% so that the total debt to be paid for the company is now BRL9.1 billion, from which BRL1.8 billion related to judicial deposits was already converted into income, resulting in a debt balance of BRL7.3 billion, to settle 126 non-mill installments. As a result, the less installment mature in April 233 million, representing a significant expansion of the payment term established in the previous transaction which would end in October 27. Now I will turn the call back to Rogerio so you can make the conclusion [ph].

[Rodrigo Abreu:]

Thank you very much, Chris. As we move to the finished letters point out, the continuation of our ESG efforts which have become, as we have been saying all along our way not only to recognize what we have always done in this front but also of doing what is good for the company and the society. On the environmental front, we've been expanding our investments on renewable energy. In the first quarter alone, we implemented four new solar plants with more than 1.5 megawatts month. This put us on 50% of our energy coming from renewable energy by the end of this quarter but we expect to reach the 80% by the end of this year. On the social front, we look at internally and externally, internally, mainly to our employees and working a lot during this pandemic period to take care of them. More than 2,000 participants engaged on such programs that went from nutritional service to mine phones groups and redrill support group. Also, on the external front, we kept investing on our social endeavors with the IFO Institute [ph], we recently published our social balance. And we keep working on expanding its impact. We have Nave which works on the preparation of the youth generation for new technology already covering more than 1,000 students and we are also starting a new front on the teachers and we believe that will impact several thousands of teachers to engage and learn on new technologies. On the governance, also internal and external, we worked a lot on bringing our employees up to speed and engage with the high governance levels process, both on the privacy front but also on the business continuity management system. We also kept on this quarter as we close to the -- and we reached close to the closing of the V.tal operation, very strict to the implementation of the governance separation issuing V.tal to be independent and neutral. So both people, process and systems have been separated finally by the end of that quarter. Moving to the final slide. I'm not going through all the points, as we mentioned in the beginning. We already did a lot on our recovery program and we are reaching the end of the majority of our steps that we put forward for the end of our registry recovery program. But if we look only to 2022, what we did in this quarter, the first quarter, we managed to have the approval of both CAD and ANATEL the sale of the UPI of mobile. We also merged Oi [indiscernible] into Oi Solucoes which is was a very complex project but also allowed the simplification of the company. We introduced the V.tal Lockbox agreement. If you remember, since the first of January, we are working under the lockbox approach. So all the financial results were already considering as the new controller. We -- as the closing of operation was postponed a little bit in respect to what we initially planned, we managed to secure the funding to keep investing on V.tal to FC with the buyer. On the second quarter, already anticipating what we're going to show in the next earnings release, we managed to close the sale of the mobile UPI. And also together or a little bit a couple of weeks later, we begin the new positioning of Oi after the sale of the mobile operation. We also signed the term ship with Sky for the sale of the TV business and got the approval of ANATEL for the Vital operation. As Chris already mentioned, we managed to secure the multibillion reais transaction agreement with ANATEL and ended up with the UPI of InfraCo V.tal closing. So let's look at the future. If we look at what's going to start from now on in this quarter, one of the points that we would like to emphasize is that the closing of this operation and also the judiciary process will allow the management to be fully focused on the core business, looking for the acceleration of it. We also expect to have the end of the judicial recovery in the few weeks now after the presentation of the final report of the judiciary agent in the beginning of this this week. We expect also in the third and fourth quarter, the conclusion of the final steps of the mobile UPI are certain, there is a retention that will be relieved after the closing of all the process of segregation as well as any assessment for potential adjustment that we do not expect to have any material impact. New Oi Investor Day, we are also planning for this quarter, the third quarter -- during the third quarter to host another Investor Day after the end of all these transactions. So during the pro forma results disclosure, of the new Oi perimeter, allowing investors to better understand the company and also to discuss his perspective with an updated equity story post the M&As that we are already finishing. Finally, the mobile asset transitions. These are a process that will probably take a year a little bit less than a year now that will move all the assets that were sold to the SPs to the buyer that will end our TSA with the team in Claro. And finally, we keep -- we'll keep our project of the arbitration process and that will take a little bit longer but it's absolutely in line with the plan. There have been many, many milestones achieved during this journey and a lot of effort and dedication from everybody in Oi but we're not standing still. And they are now more challenged to overcome with a new company to build remain as for the entire process more committed than ever. Thank you very much.

[A - Marcelo Ferreira:]

Thank you. [Operator Instructions] Our first question comes from Leonardo Olmos sell-side analysts from UBS. Leonardo, can you hear us?

[Leonardo Olmos:]

I have two questions. Number one, can you confirm if Oi's final stake on EBITDA [ph] will be 34.7%, are there any painting factors that can change its percentage for the upside, I mean, because there was the 38.5% in the material effect? That's number one. And number two, can you confirm your expectation of net financial expenses in 2023 and onwards or at least provide a range for us, even if it's a wide one, so we have an idea how the company will run in financial expenses after all the sales and most of the debt repaid?

[Rogelio Pacala:]

Thank you, Leonardo. For now, we don't have any visibility of new adjustments and we have already eliminated potential future adjustments for the ONT. So the 34.7% is the target number. In the long-term, in the 2024, there is the possibility of certain future adjustments that were already forecasted in the agreement with Globe Net to the potential capital raise and some performance metrics, which will depend on how well the company performs. For the second question, I will hand it to Cristiane.

[Cristiane Barretto:]

Yes. Thank you for the question. The net financial expenses in 2023 will depend on the final number of reduction of this year of the banks and see the debt prepayment as well as the exchange rate, but the main component of financial expenses continues to be the interest of our existing bonds in the range of BRL1 billion this year and per year.

[Marcelo Ferreira:]

So our next question comes from [indiscernible] sell-side analysts from inside research.

[Unidentified Analyst:]

My question is related to operational margins for the next month. And if you can provide us, how do you see the profitability margin despite a tough scenario we are facing this year.

[Cristiane Barretto:]

We have mentioned that we're looking for EBITDA margins above 20% and that's our aim for the operational regime. And we firmly believe that we will be there as we can see for the blended results. When talking about operating expenses, we're still ramping them down to the closings. And better to wait for the next quarter to provide with more information that's going to be with the information more clean from the infrastructure business is also mobile. But as we have been highlighting in the last calls, we expect the EBITDA margins above 20% in the long run and between 15% to 20%, while we ramp up to that.

[Marcelo Ferreira:]

Okay. Our next question comes from Oliver Kostorz buy-side analyst from Pala Assets. Oliver, can you hear us?

[Oliver Kostorz:]

I just had the same question as the guy before but maybe to follow up on that one, the BRL345 million in CapEx that you had in Q1. Are those indicative for the coming quarters? And as a second question, your banks and ECA debt, do you expect to repay by the end of the year with the haircut? Or do you believe to extend it? Thank you.

[Rodrigo Abreu:]

Okay. And on the CapEx side, we expect that part of that CapEx, as Cristiane indicated, is already related to some legacy obligations. So we believe that we will keep being a lighter company and the majority of the CapEx that will be related to the rollout of a new coverage of fiber as well as to the connect of customers will be taken by V.tal in their business. So that's the beauty of the new model that -- which is to operate with a neutral network company that allow us to keep the pace of growth, but reduce drastically the cash partner.

[Marcelo Ferreira:]

And can you repeat the second question, please?

[Cristiane Barretto:]

Yes, I got it. I got it. Okay. About the prepayments of banks in sales, we are still working on the final liquidity events to finalize the number of the minimum cash that we need to be, to have in cash in December. And we still need a couple of months to finalize all the discussions with the mobile business that we sold with the UPIs and also the infra company to finalize any of a possible adjustment of prices that will be reduced from our liquidity events to prepaid banks and ECA. So I think that in a couple of months, we have more information about that, okay?

[Marcelo Ferreira:]

So our next question comes from Carlos Sequeira, sell-side analysts from BTG. Carlos, can you hear us?

[Carlos Sequeira:]

Can you hear me well?

[Cristiane Barretto:]

Yes. Yes, Carlos.

[Carlos Sequeira:]

So, I have a couple of questions. One is on the conclusion on the sale of the pay-TV operations to Sky, I was just wondering if the -- if you can elaborate a little more on...

[Rodrigo Abreu:]

We lost you.

[Cristiane Barretto:]

Carlos?

[Rodrigo Abreu:]

Okay. Carol, just to maybe -- I believe the question was related with -- the sale of our TV assets where we stand, we already received, as you know, and we signed a term sheet with Sky for the sale of the assets. We are working within the RJ process in order to ensure that we're going to make this process within the parameters and also with the approval of the judge. So we are in the final discussions of the model of this transaction. In parallel, we're discussing with the – with this guy, the initial documents and procedures but, of course, we are ensuring that we are within the process with the judge and we expect to have a clearance and more visibility in a few weeks. Carlos, I don't know if you return here.

[Marcelo Ferreira:]

So our next question comes from Stefan [ph], sell-side analyst from Bank of America. Stefan, can you hear us?

[Unidentified Analyst:]

Yes? Can you hear me?

[Marcelo Ferreira:]

Yes. You can go ahead.

[Unidentified Analyst:]

My first question is around the impact to EBITDA margins. If you were to shift from a concession to authorization.

[Rodrigo Abreu:]

Okay. Thank you very much for the question. Of course, we are still discussing not only the migration of the construction to authorization as we discussed in the presentation. We are also discussing on the obligations that eventually, as we see there will be already some reliefs in terms of obligations that will help us to be more sustainable. So elimination of unnecessary cost and simplification of the already complex or concession. But moving forward, we -- on the long run, the numbers already considered that we will move from the concession to the authorization, moving from the 15% to the 20%, 25% range in terms of EBITDA impact.

[Marcelo Ferreira:]

Okay. So our next question comes from [indiscernible]. Actually, One works with Cadu, maybe Kadus coming back from BTG. Carlos [ph], can you hear us?

[Unidentified Analyst:]

So Cadu here, I'm sorry about that. Yes. I think I was connected to somebody else's broadband, not voice broadband. That's why the connection fell.

[Cristiane Barretto:]

That's why -- how can you do that.

[Unidentified Analyst:]

Yes, exactly. There was some mobile connection from somebody else in Sao Paulo, sorry. But now I'm connected to the oil fibers, so it's fine. That's great. Okay. So I'm sorry. Again, going back to the question that was related to the PayTV sale. I was just trying to understand if the cash payment that was receiving and how it deals with the contract that we have signed with the satellite providers, the capacity satellite contract that you have, if the payment you're receiving is going to compensate or compensate partially or fully for the contracts? That's one question. And the second one is a more of an overview of the FTTH market in the place in the market where we are, what we're seeing now? I mean, it seems that at some point, a few months ago, the competitive environment was a little tougher with prices under pressure and increased competition and maybe now has changed a little bit for the better. So I was just trying to understand how the market is behaving now?

[Rodrigo Abreu:]

Okay, Carl, regarding the TV operation, as you know very well, the TV business is a tough environment that requires scale, in particular, with the satellite, you also need scale and investment. Since the beginning, our idea and if you recall on our recovery plan, we forecast at BRL20 million which basically was the offset of the satellite costs with this operation in order to neutralize. As we evolved in the transaction and the satellite contract remain with Oi, what we expect from this transaction is that the cash inflow will be enough to neutralize the satellite impact. That was our aim since the beginning, okay? And in terms of the FTTH environment, we keep seeing as a challenging environment and all the investments that were done in fiber across the country brought in several competitors. But we believe that after the closure of the V.tal transaction, we will also be able to resume growth being because of V.tal with a more capitalized balance sheet, we'll be able to keep the base and eventually accelerate the speed of the growth of the homes passed. But as well, in our case, we'll be able to enjoy a superior broadband service but with a much lower cash need for growth that, as you know, are very important part of our investment has been on the growth of the fiber business. Now with the movement to the new business, we believe will be more competitive. In terms of regional competition, we are also seeing that the smaller providers are taking the heat of the macro situation which, of course, we hope will bring a more rational competition to the market.

[Unidentified Analyst:]

Perfect. Can I like a follow-up question. In fact, it's a question that you answered in the previous answer I gave in a previous question but just to make sure, in this process of this operating the old switches, can you now provide -- can you provide fixed-line services using mobile technology in everywhere or is your like binded by the old concession contracts, you have to keep the copper networks operating in these regions?

[Rodrigo Abreu:]

No. Cadu, we are free to provide anywhere. Of course, we are prioritizing areas the movement from copper to the wireless solution we are prioritizing areas where we see -- we have a central office with a very low number of subscribers, therefore, bringing a negative cash flow contribution of that central office to the company. So we are prioritizing moving the subscribers that are in those switches into the wireless in order to allow us to disconnect the empty switches. As we mentioned during the call, this quarter alone, we managed to shut down more than 1,000 central offices.

[Marcelo Ferreira:]

So our next questions come now from Soomit Datta from New Street sell-side analysts from New Street. Soomit, can you hear us?

[Soomit Datta:]

Actually, it is [indiscernible] from sell side sides from a new stream. Can you hear me a?

[Marcelo Ferreira:]

Now I can hear.

[Soomit Datta:]

Yes, technological problems. Just a couple of questions, please. Just first on the fiber business which we've talked around a little bit. I mean, just in simple terms, the run rate for fiber additions has slowed a fair bit again into the first quarter. And again, we've seen the -- I think we've seen the April numbers, ANATEL -- from ANATEL as well. Is this sort of a reasonable run rate for fiber adds going forward, looking at the Q1 number, do we think this is the kind of new normal for the foreseeable future? Or when might that change, please? That would be -- that would be the first question. And I guess, as a follow-up, we're seeing the residential business declining in revenue terms, slightly just 1.8%. And I think it was in the first quarter. Are we likely to see that business return to growth over the course of 2022?

[Rodrigo Abreu:]

Thank you very much for your question, Soomit. We are also expecting not only expecting but we are working on that. The first quarter, we saw a deceleration that was bought not only through the market but we also reduced several internal process as we managed the idea is to have a smarter growth, not a growth just per the growth but a sustainable growth. And of course, that impacted some adjustments on both the distribution channels as well as the rotation programs but we are already seeing an acceleration of both sales and also the reduction of the churn that will impact, of course, positively on the growth speed. On top of our internal adjustments of process, we also expect that it will speed up the deployment of fiber with, of course, help us to have more room for growth.

[Soomit Datta:]

Okay. Thank you. And maybe as a follow-up, just on V.tal, do you know -- or do you have an expectation for the acceleration in growth coming from non Oi retail subscribers in the near term. Are we beginning to see take-up of non-Oi subscribers using that wholesale product. And what is your kind of broad expectation over the course of this year for that.

[Rodrigo Abreu:]

Okay. As we discussed in terms of our governance, we're already working as separate entities. But we already disclosed some internal expectations on the work they are doing. We've seen a stronger take-up rate that with only one tenant tends to reach between 25% and 30% but with more tenants that will allow to -- V.tal to have a more efficient use of the network deployed and the take-up rate can reach levels around 40%. That is the V.tal expectation as of now.

[Marcelo Ferreira:]

So our next question comes from [indiscernible] next buy-side analysts from Knighthead Capital Management. Anton, can you hear us?

[Unidentified Analyst:]

Can you guys hear me?

[Marcelo Ferreira:]

Okay. Go ahead.

[Unidentified Analyst:]

Yes, just sort of an accounting question, curious about the restructured ANATEL obligation if that's going to show up as a financial debt obligation and what the -- what's the present value that we should expect to see on the balance sheet as of June 30 and just with all the various cash puts and takes in the quarter, you gave us a pro forma gross debt number of $19.1 billion. I'm curious what your cash balance is today.

[Cristiane Barretto:]

Okay. Thank you for the question. The transactions with ANATEL is not recorded as a financial obligation. It's accounts payable. The installments that's going to be in the short term. and accounts payment short term and the months that are going to be paid installments after the '23 in the long term. So it's an accounts payable. If you want to -- if you need any information exactly what account and where to find, you can call us -- with our IR team and we can help you to find the information in the balance but it's already there recorded. About cash balance, we prefer to discuss only in the official disclosure. So we can talk about that in the next quarter in the presentation of the June during the second quarter results, okay?

[Unidentified Analyst:]

Okay, fair enough. But just if I were to come up with kind of March 31 pro forma cash given the various asset sales, all of the componentry should be in the deck in the release, right? I should be able to at least solve for you gave us a pro forma debt number but not a net debt number.

[Cristiane Barretto:]

Yes.

[Unidentified Analyst:]

That's what I'm trying to get at.

[Cristiane Barretto:]

Yes, because that depends on the cash. So the cash you prefer to -- we have to disclose in the official disclosures. We just included the pro forma debt. We just got the debt in March 31 and took out what we paid after the close of mobile infra [ph] just to give an idea of what that would be. It's not actually the debt in April and in May and in June because it depend on the accrual finance and other accruals that's not included there. We just put out what we paid after the closing, just to give you an idea, in the additional cash components will stay with Oi other than the payments.

[Marcelo Ferreira:]

Okay. So we are now finishing our Q&A session. Thank you all. And I pass the floor to Rogerio, so that he can do his final remarks. Please, Rogerio, you can move.

[Rodrigo Abreu:]

Thank you, Marcelo. Thank you, everybody, for coming to our call and the interest. As we said in the beginning, from now on, will resume the schedule of the earnings release. And on the side of the management, we keep our high commitment to delivery of the operational acceleration and now the beauty of the new way. Thank you, everybody and have a good day.

[Cristiane Barretto:]

Bye. Thank you very much.