Q4 2014 Oi SA Earnings Call (English)
Mar 27, 2015 AM EDT
OIBR4.SA - Oi SA
Q4 2014 Oi SA Earnings Call (English)
Mar 27, 2015 / 12:00PM GMT
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Corporate Participants
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* Bayard Gontijo
Oi S.A. - CEO, CFO and IRO
* Pedro Falcao
Oi S.A. - Director, Network Development and Engineering
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Conference Call Participants
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* Jonathan Dann
Royal Bank of Canada - Analyst
* Richard Dineen
UBS - Analyst
* Daniel Federle
Credit Suisse - Analyst
* Soomit Datta
Newstreet Research - Analyst
* Rachel Short
RBS - Analyst
* Walt Piecyk
BTIG - Analyst
* Michel Morin
Morgan Stanley - Analyst
* Pedro Lavera
BTI Investments - Analyst
* Mathieu Robilliard
Barclays Capital - Analyst
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Presentation
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Operator [1]
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Good morning ladies and gentlemen. Thank you for standing by and welcome to Oi SA's conference call to discuss the fourth quarter and year-end of 2014 results.
This event is also being broadcast simultaneously on the Internet via webcast which can be accessed on the Company's IR website www.oi.com.br/ir together with the respective presentation.
(Operator Instructions)
This conference call contains forward-looking statements that are subject to known and unknown risks and uncertainties that could cause the Company's actual results to differ materially from those in the forward-looking statements. Those statements speak only as of the date they are made and the Company is under no obligation to update them in light of new information or future developments.
I will now turn the conference over to Mr. Bayard de Paoli Gontijo, CEO, CFO and Investor Relations officer. Please, Mr. Bayard, you may proceed.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [2]
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Good morning, everyone. I have here with me [Bernard Vinick], B2C Director; Mauricio Vergani, B2B Director; Pedro Falcao, Engineering Director; Jason Inacio, Transformation Officer Director; Jose Claudio Goncalves, Network Operations Director; and our finance team with Flavio Guimaraes, Treasury Director; Nuno Cadima, Controller; Marco Schroeder, CFO of PT Portugal; Bruno Saldanha, Head of Accounting in PT Portugal; and Marcelo Ferreira and the IR team.
Good morning and thanks for joining the call. I'd like to start by making three broad points.
The first is that we are making progress towards the priorities that we laid out at our last set of results; and the second is that this is a better Company than the market thinks and one I am proud to be part of; the third is I appreciate investors that have stuck with us during this difficult times and I want you all to know that we will work hard for all of you. We do not think that our current share price reflects our fair value of our business.
On slide 2 with regard to our four priorities we laid out at the beginning of the year, we are making substantial progress. We said that the third quarter would prove to be an inflection point and we reiterate that to date as well as our guidance for 2015, routine EBITDA in a range of BRL7 billion to BRL7.4 billion and routine EBITDA minus CapEx improvement in a range of BRL1.2 billion to BRL1.8 billion.
This is well above analyst forecasts for our Company. Trends are getting better, practically all aspects of our business, and we are confident that we will deliver the results we have promised this year.
We said that we would work to lighten our balance sheet and while we still have a long way to go our signed SPA with Altice regarding the sale of PT Portugal for EUR7.4 billion reduced the risk of the business and reduced our leverage substantially. Additionally we conclude the negotiation of the covenant waivers for the next 12 months and are continuing to work on other ways to increase our flexibility. It is personally disappointing to me not being able to announce that we have moved to Novo Mercado but approval of the Rio Forte exchange at the shareholder meeting yesterday should allow us to explore other temporary alternatives.
In that sense as we disclosed in the material fact yesterday Oi's management has evaluated and suggested to TmarPart and its shareholders certain temporary share structures to be adopted prior to the listing of the shares on the Novo Mercado which would allow, among other things one, providing the shareholders of Oi various rights to which they would be entitled if the shares were listed to Novo Mercado; two, adopting higher standards of corporate governance including electing the slate of directors of Telemar Partipacoes and the Board of Directors of Oi; three, the diversification of Oi's shareholder base which would no longer have controlling shareholder; four, terminating the current shareholders agreements applicable to both TmarPart and Oi; and five merging the controlling companies of Oi and TmarPart in a manner which will simplify the structure of Oi and allow it to benefit from the resulting financial synergies.
One of the proposed temporary share structures recommended by Oi's management is the voluntary conversion of Oi preferred shares into ordinary shares respecting the exchange ratio of 0.9211 common shares for each preferred share of Oi. We expect to announce the evolution of this process soon.
We have nothing to report with regard to consolidation. In our view there has been much talk about this issue. Views are better done than talked about so I will simply say that we continue to think that consolidation would be beneficial to all operators in Brazil but I would also note that as our business improves our ability to take the kind of role we want in the process we won't improve.
Before I get into the operational details let me clarify some accounting matters on slide 3. As we have disclosed to the market in December we settled an SPA with Altice for the sale of Portuguese business closure of which is pending completion of the regulatory process in Europe that we expect to be complete in the first half of 2015 with funds transferring expected until June. As a result PT Portugal results are presented in December 2014 financial statements as discontinued operations and I won't be discussing those results in this call.
Moving on to slide 4 the net income of Brazilian operations stood at BRL8 million in 2014. However, on an accounting basis and I stress that is on an accounting basis and that the cash we are expecting is unchanged, the discontinuation of PT Portugal generated accounting provisions for losses estimated at BRL4.2 billion. The total amount relates to the difference between the book value of the assets that will be sold and the price we will receive.
It's important to explain that almost two-thirds of the loss can be reversed in the future. As we show in the chart, part of this amount approximately BRL1 billion refers to the exchange variation gains over PT Portugal book value since May 2014 when we acquired the asset. These gains are registered in the shareholders' equity and will be reverted to the net income on the closing of the sale. Therefore, this part of the accounting loss will be reversed.
Additionally, the price negotiated includes an earnout of EUR500 million or BRL1.6 billion that will be received by the Company in the future depending on revenues performance. This amount was excluded from the price; therefore, this part of the accounting loss can also be reversed in the future.
Finally, we had a loss of BRL1.4 billion in the asset which is associated to the increase in PT employees pension fund liabilities and other adjustments usually considered in this nature of transactions. Therefore, despite the operational net income of BRL8 million on Brazilian operations after the accounting impact from PT Portugal discontinuation and the operational losses from PT Portugal business since May 2014 the consolidated net loss in 2014 stood at BRL4.4 billion.
Now let's move to slide 6 and I will discuss the Brazilian results in detail. We have had disclosed already the EBITDA of October and November and obviously December was better again in line with our expectations and generally improving trends in the business.
On this slide you can see sequential improvement across the board as well as improving year-over-year trends. Total revenues improved 4.8% sequentially reaching BRL7 billion, still falling 2% year on year but much better than the third-quarter decline of 5.1%.
The biggest contributor to the improving trend was personal mobility. In particular customer revenues in personal mobility which returned to a positive ground increasing almost 10% sequentially.
Routine EBITDA is still falling too fast but improved 7.4% sequentially. At our last result we said that the third quarter was an inflection point. These results are a small step towards that.
We expect the first quarter to confirm the trend. Routine EBITDA minus CapEx also improved significantly on a sequential basis underpinned by the EBITDA improvement and the first initiatives to control CapEx.
On slide 7 you can see that the customer base is stabilizing as we focus on quality and profitability. Our TV product continues to post strong net adds and improving mix supporting our convergence strategy in the residential and contributing to a lower churn. I'd like to note that the only negative trend on this page is the reduction in prepaid customer as a result of a base cleanup in order to avoid paying taxes on inactive customers.
Slide 9 shows a breakdown in our revenues by segment and I think makes the turning point in service revenue clear. Wireless revenues are growing underpinned by an improved recharges and data. Residential revenues continue to decline but as we will show you later on we are confident that this too should start to improve.
On slide 10 we see that the focus on prepaid and data is delivering results. Volume of recharges improved significantly in the quarter especially in December when we had our historical record in terms of revenues from recharges.
The performance led to a 9.9% sequential increase in customer personal mobility revenues which is above our peers. Data mix has also been increasing and today represents more than one-third of the mobile service revenue was in line with our peers.
Now on slide 11 I want to put some substance behind one of my first three points on this call that Oi is not as weak a company as the market and some of our competitors like to imagine. Based on ANATEL's quality metrics we see that in terms of 3G data drop Oi has always been the operator with the best quality.
Considering 3G data access we presented a substantial recovery in 2014 and today we are very close to the leaders. These indicators are the best proxy possible to access client experience since it measures the network quality end to end.
In slide 12 I want to take a moment to discuss the future of the wireless business in Brazil. The Brazilian market is on its cusp of a material change. Oi has been significantly hurt by Brazil's high MTRs historically while other players have benefited from them and the network effect they create.
Today consumer spend just BRL0.50 to BRL0.75 a date for on-net calling and BRL1.20 a minute to call someone from another network. Last month MTRs fell by 33% and next year they will fall a further 37.5% to just BRL0.10. This change will erode the on-net scale advantage of large operators especially the ones more exposed to prepaid and that is precisely why one of our competitors appealed to ANATEL against the decision to reduce MTRs.
We're happy to say that this appeal was rejected by ANATEL on Tuesday of this week as they specifically noted that the decline in MTRs was intended to reduce the scale advantages and community effect of high MTRs. On the left of this page you can see the planned decline in MTRs in Brazil and on the right you can see the effects of similar changes in euros.
The experience of Europe shows us that the smallest operators benefit while the largest give up marketshare. We think that Oi is well-positioned to take advantage of this opportunity as value for money operator in a market of consumers that will be increasingly concerned about value and convergency.
Moving to residential on slide 13, I'm very proud of our TV product that we think it is the best in the market. Clearly customers agree as we have been the market leader in marketshare of net adds in the last half of 2014. Even better first payment defaults have declined as we have grown reinforcing the high quality of our TV growth and our commitment to profitability.
Our TV is a key pillar on our convergence strategy as it is very clear the benefits of the triple play on customer loyalty. RGUs per household improved 3 percentage points boosting year-over-year ARPU growth to 1.8%. Additionally as you can see on the bottom right of this page, we have repositioned our offers and sales strategy improving the mix of gross adds in-line with our focus on profitability to deliver our guidance for 2015.
Moving to slide 14 we see that our major competitors are slowing their footprint expansion as they will increasingly have to consider overbuild in lower and lower density areas. Oi, what has until now been a negative of vast footprint in lower density areas will start to become positive. As you can see on the right-hand side of this slide we enjoy broadband growth of 6% in areas without our major competitors.
We should note that there are many small-scale competitors in these areas too. These areas should enjoy faster household growth going forward but they should also enjoy faster broadband growth as broadband penetration in these areas is just 14% versus nearly 50% in the denser more competitive regions of the country.
As a result Oi is the only major competitor that will be exposed to what will likely be the fastest-growing part of the broadband market in the next decade. Going forward, we believe that by leveraging pay-TV and multiple play bundles higher cross-sell rates with lower churn we will be able to have positive broadband net adds. With our Oi landline franchisee and distinctive TV offering we are uniquely positioned in the Brazilian market.
Turning now to slide 15, we have two quite distinct businesses in B2B. In corporate we have continued to target greater share of wallet through growth in data revenues, increasing connectivity, cloud data center and ICT sales.
We have increased our non-voice revenues mix by 3.9 percentage points, improving profitability and protecting the business from potential attacks from other players in the market. In SMEs we continue focusing on convergence and cross-selling over our fixed line customers as well as the focus on mobile customers acquisition.
Moving to slide 17 we see that cost increased 2.4% sequentially in the fourth quarter especially reflecting electricity tariffs adjustments as well as TV content and sales commissions related to the improved TV gross adds. However, in the full year of 2014 costs directly associated with the business declined 1.2% despite inflation of 6.4% in the period.
Despite this good result we believe we can deliver more and I reinforce that the management is fully committed to an aggressive cost reduction process in 2015 based on improving efficiency and productivity. It will not be easy but the benefits of these changes should become more obvious in 2015 starting on the first quarter.
On slide 18 EBITDA from Brazil improved 7.4% sequentially turning the trend and confirming that third quarter was the inflection point. EBITDA minus CapEx improved significantly on the back of the improved EBITDA and the control of CapEx with the focus on efficiency and capital allocation.
I'd like to take the opportunity to reiterate our commitment to reduce cash burn going forward based on the operational transformation that we will explore a little more in the next slide. However, I also want to make it clear that we are not starving the business of necessary investment. We are focusing on efficiency and on getting everything we can out of our integrated infrastructure advantage.
Slide 19, in order to deliver the plan for 2015 we set up a transformation program focused on cash generation built around our four main areas of improvement: reduce spent OpEx in CapEx, improve working capital, improve customer profitability and optimize organization structure. Within each of these areas we have identified key levers to drive savings each of which has a working team responsible for generating and executing initiatives that will produce cash impact in 2015 and beyond.
To date around 250 such initiatives have been identified and are in the process of being executed. The transformation office goals are drive the generation of new initiatives, ensure that existing initiatives are pushed as quickly as possible through to execution. The transformation office does this through a running and vigorous weekly routine of meetings assessing execution and risk.
Additionally we implemented weekly multidiscipline committees to control our spendings. This process is supported by a tagteam of internal and external experts. RTS with tools and methodologies focused on execution and cash generation.
Moving on to slide 20, net debt has risen but again as I have laid out above we are committed to our EBITDA guidance and to reduce cash burn going forward. We continue to work on improving working capital and on finding ways to reduce our financial and other cash expenses. This effort will start to show up in 2015.
On slide 21 you see that leverage remains under control with a healthy average maturity of four years. Net debt of Brazilian operations stood at BRL30.5 billion and gross add to EBITDA ratio at 3.21 times. Despite the high debt we have solid liquidity of BRL12.8 billion which is comfortable to address the funding requirements for at least the next two years.
Going forward on slide 22, we show that the conclusion of PT's sale will improve significantly our financial flexibility for the next years with a pro forma liquidity reaching BRL32.5 billion.
Going to slide 24 as you know improving Oi's balance sheet is one of our priorities. To that end progress on the sale of PT assets was an important accomplishment that will improve significantly our liquidity allowing the Company to focus on delivering the turnaround plan.
To recap, we have agreed to sell PT Portugal to Altice for EUR7.4 billion including an earnout of EUR500 million. This is a transaction multiple of more than 7 times EBITDA versus a trading multiple of less than 5 times EBITDA.
All corporate approvals have already been concluded and we expect to close the transaction in the second quarter of 2015 when we expect to receive the cash. As we have already said, the usual procedure will be limited to the leverage Company and participating in a potential consolidation in Brazil.
Additionally, in February 2015 we concluded the process of covenants waivers from our local debenture holders for the next 12 months. With this waiver we have now enough time to access carefully the most efficient way to use the proceeds from PT sale maximizing shareholders' value.
On slide 26 my third priority, corporate governance, yesterday our shareholders approved the Rio Forte exchange. The execution of this transaction will happen in the next couple of days and put an end to speculation on this subject.
As I said at the beginning I am personally disappointed to report that we had not made progress with regard to the migration to Novo Mercado which has been delayed as SEC approval of the PT SGPS 2013 20F is still pending and it is necessary in order to start the process of CorpCo shares registration with SEC. Since we have no visibility, when this regulatory pending will be concluded management together with the Board have been working on alternative temporary structures to deliver on the maximal as possible the benefits of the Novo Mercado to our shareholders.
Now moving to slide 27, to wrap up the four top priorities we announced our last quarter, first the turnaround of the business. We would like to reiterate our 2015 guidance: EBITDA from BRL7 billion to BRL7.4 billion, an EBITDA minus CapEx improvement of BRL1.2 billion to BRL1.8 billion.
Third-quarter results were in fact an inflection point. The set of results represented today shows the evolution against the third-quarter results and we expect the first quarter 2015 to continue that trend.
On the second priority improve our balance sheet profile as the completion of the sale of PT Portugal will increase significantly our financial flexibility. And together with the negotiation of our financial covenant waivers we are doing as promised the improvement of the balance sheet profile of Oi.
On the third priority, the corporate governance, as we've done the press release yesterday we are doing our best effort to achieve or to maximize the benefits of the Novo Mercado while we cannot in fact migrate to Novo Mercado for technical reasons. Therefore, we are improving on that sense as well. Although we are late on the migration with trying to at least promote the benefits to our shareholders and the way this is possible.
And finally the last priority was the consolidation. In that sense I don't want to say more than we continue to believe that this is positive and beneficial to the market in Brazil for all the operators and we continue to work on that sense to promote consolidation in Brazil.
I would like to thank you all for being on the call and I'm available (technical difficulty)
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Questions and Answers
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Operator [1]
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Thank you. (Operator Instructions) Jonathan Dann, Royal Bank of Canada.
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Jonathan Dann, Royal Bank of Canada - Analyst [2]
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Hi there, guys. In light of I guess delays in corporate and consolidation, are you looking at potentially repaying some of the debt earlier or perhaps alternatives?
I think I've asked you in the past about some of your mobile footprint in say Sao Paulo must be lossmaking for you guys but strategically valuable for others. Are you looking at maybe improve the average interest by paying down debts or separately break up Oi?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [3]
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Thank you, Jonathan, and good morning. Well first we expect to receive the cash or the proceeds of the disposal of PT until the end of the second quarter this year. What we still have in mind is to maintain the cash in our hands to take the decisions when it's the right moment.
I think I have mentioned on the call already that the better we do in operations the better we're going to be able to do in terms of consolidation if that's the case. Therefore, again, we would like to maintain the cash at least for the time being to take the right decisions. But we are what we think we are doing the right things in terms of the business and then it will strengthen our position towards consolidation if the market decides to do it.
So for now we are going to maintain a cash. That's our decision.
On the second part of your question if we are analyzing or discussing any breakup of the business we're not, we are a convergent player, we're a national player and that's how we see us in the future. Therefore, there isn't any changes in terms of how we're going to act in the country. We are the national player in Brazil and we will maintain that position.
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Jonathan Dann, Royal Bank of Canada - Analyst [4]
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Can I ask a follow-on? You allude -- you mentioned falling MTRs.
One of the tariff changes that happened in Europe was mobile operators going to call any -- unlimited nationwide voice and SMS tariffs regardless of the network, regardless of the network. Do you see that happening in the next is that sort of two, three years away or do you think that could come sooner?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [5]
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What we have seen since third quarter in Brazil it's a more rational market and I think that behavior will continue at least for this year. We are facing a difficult time here in terms of macroeconomic environment and I don't see this change in the short term.
Therefore, what we do expect here is a market more as I mentioned rational and taking care of cash flow and profitability. Therefore, I do not expect this to happen in the short term in Brazil.
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Jonathan Dann, Royal Bank of Canada - Analyst [6]
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Thank you.
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Operator [7]
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Richard Dineen, UBS.
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Richard Dineen, UBS - Analyst [8]
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Hi, good morning everyone, thanks for taking the question. Just two questions if I may. Firstly Bayard if you could just give us an update on the timing and the expected financial benefits of the tax scheme, the adjustment of conduct scheme with ANATEL, specifically what sort of difference do you think that could make to your future effective CapEx?
Secondly maybe obviously you got a nice boost from the tower sale in the fourth quarter, just wondering if you would give us an update on your thinking of any further Brazilian asset disposals, anything on that would be very helpful. Thank you very much.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [9]
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Good morning, Richard. Thank you for the questions. First regarding the TAC, term of adjustment of conduct, with ANATEL we have until April to file all the projects that we are planning to deploy from 2016 onwards in four years.
The agency will start analyzing the projects in April just after we file all of them and they have until October if I'm not wrong to complete their analysis and to approve or reject our projects. We are doing all the effort to present the best projects that matches with our needs for the next four years (technical difficulty)
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Operator [10]
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Daniel Federle, Credit Suisse.
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Daniel Federle, Credit Suisse - Analyst [11]
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Okay, thank you for taking the question. My first question related to the fixed broadband. I see that you are selling a lot of broadband above the 5 megabits per second.
If indeed I'd like to know in which technology how are you delivering such high speeds with the covenant work if you're improving the network with some technology. That is the first question.
The second question is related to the EBITDA margin that was much better in December than in the first two months of the quarter. I'd like to hear from you if there's a specific reason for that. Thank you.
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Operator [12]
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Please hold the line. We are attempting to reestablish contact with the speakers' location.
Please hold the line. Thank you for standing by.
The speakers' connection has been reestablished. Thank you.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [13]
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Okay, I don't know if you could hear the answer but I will repeat anyway for the sake of for the benefit of all. The first question was regarding timing for the TAC, term of adjustment of conduct, and regarding the TAC we have until April to file all the projects with ANATEL, then from April to October the agency will analyze and decide for the approval or the rejection of those projects. We think this is extremely positive movement here that we are seeing.
It's different dynamics from the past. It is definitely an opportunity for Oi to address past issues with our clients and with the obligations with the regulator exchanging possible contingencies, future contingencies for investments. Therefore, we are working very hard to present good projects in April and as soon as we do it we're going to give more details about our plans to the market.
So April we'll file the projects, October the agency approves or rejects the projects and then from 2016 onwards for the next four years we deploy the investments in exchange for any disputes or contingencies with the agency. So that's how we see the timetable of the TAC.
Regarding the disposal of assets in Brazil, we still have towers to monetize in Brazil, a range of 500 to 1,000 towers that we could monetize. We are evaluating if that's the right time to do it or not but we do have those towers available here and we can monetize those.
In addition to that we have 7,000 properties that we're working on. We see good value on those properties. Definitely this is something we have to get the green light of the regulator because there is always discussion of reverse assets or not.
So we are talking to the agency to discuss in details what are the assets that are reversible that belong to the concession and what are the assets that do not belong to the concession. And therefore, we can monetize if we need.
But I would say that for this quarter and for the first half of the year our ultimate goal was to dispose of PT Portugal that it's underway. We've got all the corporate approvals are ready. We're pending only the regulatory approvals; our expectation is to cash in the proceeds before the end of the second quarter as I mentioned before.
Important to mention as well that we are still working on the disposal of the African assets and hopefully are going to have evolution on this on the second half of the year. So this is pretty much about the disposal of the assets.
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Operator [14]
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Daniel Federle, Credit Suisse. Sir, if you wouldn't mind repeating your question please.
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Daniel Federle, Credit Suisse - Analyst [15]
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So I'll repeat my questions. The first one was related to the broadband, the fixed broadband business that you are selling a lot of plans above 5 megabits per second and 10 megabits per second. I'd like to understand in which technology are you offering such high speeds and if it's possible to offer to all your clients?
And the second question related to the EBITDA margin that was much higher in December than in the average of October and November. I'd like to understand is there any specific reason for this good margin in December? Thank you.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [16]
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Thank you, Daniel. Let me just start by the margin question and then I will pass here to Pedro Falcao, our Engineering Director, to answer your broadband question which I think it's a very good question.
So in regard to the margin I would say that since we announced the third-quarter results we said that that was an inflection point and that we would start working on cost control and to improve our offers. In terms of the quality of the offers, simplifying the offers and trying to sell the most I would say or the intermediate and in the high-value offers than the basic offers and I think this is paying off already.
The market is also more rational. So if you see all the lines of the revenues comparing third quarter to fourth quarter we have evolved, we have improvements.
And then the margin is impacted basically because of this improvement in terms of revenue and this trend back to continue for the first quarter of 2015. So that's pretty much why this margin was higher. So now -- yes?
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Daniel Federle, Credit Suisse - Analyst [17]
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Sorry. Do you believe that those elements started to impact in December, so October and November you were not applying the same methodology, the same commercial approach, is that --
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [18]
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I would say that it's an evolution but definitely we have increased some of our prices late November, beginning December before this has definitely a positive impact on the figures of December. So Pedro.
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Pedro Falcao, Oi S.A. - Director, Network Development and Engineering [19]
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Good morning. With ADSL 2 Plus Oi today can give more than 10 megabits to 40% of its clients.
Today with ADSL 2 Plus we can give more than 15 megabits to approximately 20% of our clients. What we are doing today is improving our xDSL plan towards VDSL and our calculation is that we can offer VDSL services to approximately 18% of our clients.
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Daniel Federle, Credit Suisse - Analyst [20]
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Okay, perfect. Thank you.
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Operator [21]
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Soomit Datta, Newstreet Research.
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Soomit Datta, Newstreet Research - Analyst [22]
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Yes, hi there. Two or three questions please. On the price increases which I think were prepaid mobile data to what extent do you think the other operators have followed?
I gather they have to some degree but they don't appear to have had the same revenue improvement which you saw in your numbers. I just wondered have those prices been followed and how sticky have those prices been in Q1 or what has the volume impact been, has there been any negative volume impact in the first two or three months of the first quarter? That's the first question.
Secondly on mobile and is there any route for you to acquire the 700 megahertz spectrum which you passed on a few months back? I just wondered whether that was -- whether it's something you're considering or whether that is even an option, is there some sort of prevention from you doing that?
Then just finally sorry to go on but just on the cash flow again you touched on this, the working capital and judicial deposits, it was a weak number, again in Q4. I just wondered if you could give us any immediate insights as to how you're looking to improve things there, anything more specific? Thank you.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [23]
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Okay, starting by the price question. I think there is a mix of events here that helped us to improve the figures. First, one of the first things we decided to do back in October was to work on the simplification of the offers and I think we have done a good job here.
We have simplified the offers. It's much clearer to our clients today, to our salespeople to communicate with the market. And I think this is helping us to achieve better results and we will continue to (technical difficulty) the offers (technical difficulty).
The second thing I think that's helped us is the convergence -- the convergent package we have combining fixed with the prepaid and this is also paying off. This is probably one of the only convergent packages combining fixed with the mobile in Brazil and it is a good product (technical difficulty) so it is also (technical difficulty) on better performance.
Third, we have increased prices, not only the mobile business but also in the broadband business and (technical difficulty) business and fixed business. As I mentioned in the third quarter of this year this is a year for profitability, not marketshare, not growth in terms of RDUs. We are concerned about the profitability and the price increases are completely aligned with our goals.
I don't know what our competitors are doing, I don't want to mention what they are doing or not. We are doing consistently we have said in the third quarter (technical difficulty) and we started by the fourth-quarter 2014. And in regard to the pricing I think those are the (technical difficulty).
Second question if I'm not wrong with about the 700 (technical difficulty) last year. I will repeat what we said in the past.
First we recognize that we have (technical difficulty) that was the main reason was to come out of that (technical difficulty). Not only that because the terms and conditions for the auction was not good, then for an asset that we would only get revenues in 2019 not the right decision (technical difficulty) still not the right decision for Oi.
In other terms and conditions we might be (technical difficulty) but we need to know what's going to happen and what are the conditions before. It's hard to say if we would (technical difficulty) willing to do an effort or not. We recognize that this factor and the frequencies is important but there are other opportunities in our view until 2019 to fulfill that gap.
There are other frequencies that might come to the market. There are other ways to capture that frequency. So we believe that was the right decision, the auction and we'll see how this is going to go from here.
Finally the third question I think it was about cash flow. Yes we recognize that we have to improve the cash flow. There is a huge effort within the Company to transform the business.
We have established a transformation office that I mentioned in my speech here to help us to improve that in all respects, not only in terms of judicial deposits, not only regarding the working capital but in fact cutting costs and expenses. You cannot see that yet in the figures of fourth-quarter 2014. That work was planned during fourth-quarter 2014 and it's being executed in 2015.
And I'm confident that we're going to present good figures in terms of cost control and reduction from the first-quarter 2015 onwards. So we are focused on this. This is one of our top priorities and we will deliver on this and I reinforce our guidance for the routine EBITDA of BRL7 billion to BRL7.4 billion, on cost reduction.
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Soomit Datta, Newstreet Research - Analyst [24]
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Okay, thank you very much.
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Operator [25]
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Rachel Short, RBS.
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Rachel Short, RBS - Analyst [26]
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My question has been answered. Thanks.
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Operator [27]
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Walt Piecyk, BTIG.
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Walt Piecyk, BTIG - Analyst [28]
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Thank you. I just want to ask about the CapEx. I don't know, I may have missed this in the first question but I see that it was down 30% in the fourth quarter.
I was wondering if we should expect similar type of reductions in the quarters in 2015? And maybe you could talk about the areas that you reduced in the fourth quarter to deliver that 30% decline?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [29]
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Thank you for the question. The reduction in the CapEx of fourth quarter is completely aligned with the guidance we gave to the market for the full-year EBITDA 2014. The guidance for the full-year EBITDA -- sorry full-year CapEx of 2014 was BRL5 billion, we delivered BRL5 billion; again, we are delivering on the guidance we gave to the market.
We have done during 2014 all the projects we defined on the budget when the budget was discussed. We didn't cut any of our initiatives during the course of the year, so again we delivered on exactly the guidance to the market.
Regarding 2015 and then I'll pass to Pedro to discuss a little bit more and the details of what we're doing but in regard to 2015 we have not yet announced to the market guidance for CapEx. As you know and as I have announced this is a year where we are going to focus on cash generation based on cost reduction and CapEx control.
What I can tell you is that the better we do in terms of cost cutting the more we're going to have to spend in investments. So this is the challenge I gave to the directors here, to the management of Oi to let them have the projects we want for the Company we need again to reduce costs and to execute well the plan we have to transform the business.
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Walt Piecyk, BTIG - Analyst [30]
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Thank you. I assume that with your EBITDA outlook you'll come up with a capital plan that would not require you to access the capital markets but I'm just curious if your operating cash flow maybe doesn't meet your expectations would you ever consider an additional equity offering to put cash on the balance sheet or is that still something that you have ruled out to help to reduce the leverage of the Company?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [31]
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I reinforce that we are comfortable and we are confident that we are going to deliver the BRL7 billion to BRL7.4 billion routine EBITDA. Therefore, we are not planning to do any equity issue, any access to the capital markets at this moment.
We are working to turn around the business and to deliver on results and as mentioned I think first-quarter numbers present an evolution against third-quarter numbers and the first-quarter numbers 2015 will be even better. We are confident that we are going to deliver on our plan and we do not expect to access the markets in this year.
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Walt Piecyk, BTIG - Analyst [32]
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Even better meaning that you're expecting EBITDA to be up sequentially in the first quarter relative to the fourth quarter?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [33]
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We expect to improve. I will pass here to Pedro and then he can add follow-on what we have done during 2014 in terms of CapEx.
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Pedro Falcao, Oi S.A. - Director, Network Development and Engineering [34]
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Since 2013, mid-2013 up to the end of 2014 we did an extensive contract renegotiation of all the network contracts that will allow us to reduce significantly the CapEx related with the transport network and related also with the mobile network. This allowed us during 2014 to accomplish a complete swap of more than 20% of our mobile network increasing more than 260% the 3G capacity and you've seen the results of that action.
We also are during 2015 up to June completing a new technological leapfrog of our transport optical and IT network that will allow us to save more than 40% of the existing CapEx space per megabit in our transport network. And this will allow us to do much more with less CapEx.
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Walt Piecyk, BTIG - Analyst [35]
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Okay, thanks. And just one other follow-up question.
Can you give us a sense, maybe you've given us in the past I don't recall, of the mix of your service revenue, the data revenue that has exposure to the SMS or the messaging business? Has there been any change in how that business may have eroded in the first quarter because of greater adoption of things like WhatsApp or maybe Facebook Messenger and things like that?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [36]
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This is going away but not only to Oi but market, SMS is increasing rapidly and it's not different in our case. The trends continue the same. I don't have the figures here in front of me --
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Walt Piecyk, BTIG - Analyst [37]
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That's fine. But there wasn't anything that was different in the first quarter as far as like an acceleration in that the adoption of those products? It was just the typical trend that you saw in 2014?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [38]
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Definitely the typical trend. But then IR can share with you the specific information.
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Walt Piecyk, BTIG - Analyst [39]
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Okay. And then just lastly I don't know if you can rehash on consolidation if Telefonica is completing its acquisition of GVT and they are willing to participate with the commissario I assume there still is interest that you have in consolidation. I'm just curious what you can do further to try and pursue that and make that happen?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [40]
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As I have mentioned already it is beneficial to all of us and we think this is a positive thing if it happens. As you mentioned Telefonica just concluded their deal with GVT.
Let's see how things evolve. We continue to think consolidation it's good for the market.
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Walt Piecyk, BTIG - Analyst [41]
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And do you suspect that they were held back in participating up to this point because of GVT?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [42]
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You have to ask them.
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Walt Piecyk, BTIG - Analyst [43]
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Okay, thank you. Have a great day.
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Operator [44]
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Tania Gil, Morgan Stanley.
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Michel Morin, Morgan Stanley - Analyst [45]
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Hi, it's Michel Morin here at Morgan Stanley. So two questions, Bayard. The first is on the cost cutting.
Are there any plans to do a more significant cost-cutting initiative? I guess the question is would you have the flexibility if you needed to do more substantial cost cutting in terms of personnel? So that's question one.
Secondly on your slide 21 on the liquidity you flagged there at the BNDS about BRL2.1 billion as well as the revolver about BRL5.2 billion and I'm wondering whether or not there are any strings attached in those two lines? Do you have to be within a certain leverage ratios and liquidity ratios to be able to tap those lines or are you able to tap them right now basically? Thank you.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [46]
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Hi Michel, thank you for the questions. Well regarding the first question which is related to the cost cutting, I mean as I mentioned we have established a new division at Oi which is the transformation office. And within this division we have more than 240 initiatives in terms of cost reduction, so there are good opportunities there.
On the other hand we're talking about 240, therefore I would say that the major risk here is execution. That's why we have established this division and we've run weekly meetings here to make sure we are first analyzing all the lines of the constant expenses and to improve in all respects here.
Personnel is one of those lines. And we continue to analyze our corporate structure and our team how we can improve in that sense. Therefore there are opportunities and again I would like to reinforce that we know the lines of the constant expenses and we will do this work during 2015 and it will be very clear to you investors and analysts that there are good opportunities there and that we are capturing (technical difficulty).
On the second question yes we do have financial covenants to disburse any facility here. As we have announced to the market we have renegotiated those financial covenants. It used to be a ratio 4 times gross debt to EBITDA.
It is now before the disposal of PT 4.5 times gross debt to EBITDA and post the disposal of PT 6 times gross debt to EBITDA and we are in compliance with all the financial covenants. We will maintain that situation and in that situation we are able to disburse any of those facilities.
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Michel Morin, Morgan Stanley - Analyst [47]
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That's great. Thank you very much Bayard.
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Operator [48]
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[Pedro Lavera], BTI Investments.
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Pedro Lavera, BTI Investments - Analyst [49]
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Hi, good morning. Thank you for taking my question.
You confirm that all corporate approvals for the corporate restructuring have been concluded. My question is if you can complete the corporate restructuring even if like change of (inaudible) commercial paper for shares is not concluded? Thank you.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [50]
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Thank you, Pedro. Well yesterday we had an important event here which was the general shareholders meeting of Oi to approve the exchange of the Rio Forte securities by our own shares. That was the last step towards the execution, therefore we will execute the exchange until March 31.
So this is done, in terms of corporate approvals in terms of regulatory approvals it's now a matter of bureaucracy to execute. But we are done with this, so therefore there isn't any risk that we do not exchange the securities for shares from now onwards.
Regarding the corporate restructure or the Novo Mercado, we have announced yesterday that yes, we do have a technical problem there. We cannot migrate to Novo Mercado because of the F4 situation we have with the SEC.
We cannot file therefore if we do not have the green light of the auditors of Oi that we do have and PT SGPS that we do not have. Therefore this is exactly what is going on.
We had this technical issue and we cannot we could not yet migrate to Novo Mercado. But since this was -- comments to the market the management is working with the Board to present other alternatives as they have announced to extend the maximal as possible the benefits of the Novo Mercado to our shareholders and in that sense we expect to have news in the short term. So we will continue to work on that --
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Pedro Lavera, BTI Investments - Analyst [51]
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But you think those two things could be separate, meaning there could be an exchange even if there isn't a clarification on the Novo Mercado issue on the prorate in terms of government?
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [52]
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No there won't be any exchange. What we are doing we are trying to deliver as fast as possible at this moment, again all the promises we have done in the capital increase.
And the Novo Mercado event will be done but for the time being we have to be working on alternative scenarios to benefit our shareholders from voting rights, from tagalong and other things. So we are working on this and we expect to have news on our short notice.
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Pedro Lavera, BTI Investments - Analyst [53]
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Okay, thank you.
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Operator [54]
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(Operator Instructions) Mathieu Robilliard, Barclays.
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Mathieu Robilliard, Barclays Capital - Analyst [55]
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Yes, good afternoon. Thank you very much. I have a few questions. First obviously there is a lot on your plate already.
But I was wondering if you could tell us if you're making any progress or if you are having important discussions with the regulator and the government with regards to your concession terms which obviously penalize you because of your universal service obligation and your (inaudible) player and also with regards to the renewal of the concession 2025 I mean is that a topic at the moment for you?
Second, coming back to the CapEx issue and probably linking it to the comments made by Pedro about what you could have as VDSL coverage I think I got 18%. Could you roll out VDSL to those 18% within your existing CapEx envelope or would that require an increase in CapEx?
And finally with regards to the variation of the Brazilian real against the US dollar and the euro which obviously has depreciated I mean would that have any impact on your cost for CapEx in reais? Thank you.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [56]
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Okay, thank you very much for the two questions. I will answer the first one and the last one and then I will hand it over Pedro here again to talk about the VDSL CapEx.
On the concession, on the renewal of the concession I think we are evolving on the discussions with ANATEL. We have a full agenda with ANATEL that we're working on a weekly basis. We've been discussing with them regularly the TAC which is our main goal at this moment.
We are discussing with them the reversible assets as well, this is extremely important to the Company. And we are discussing two other topics, the renewal of the concession which expires in 2025, before we are discussing if it's positive and if we should engage to anticipate the renewal of the concession. Of course we're going to do this if we see value to our shareholders.
And finally the new national broadband plan that the government is willing to deploy in Brazil and that Oi is I would say the right player to do that together with the government but of course in good terms and conditions for the business. So this is how we are evolving in the regulatory agenda, different topics, constructive discussions, I think we are evolving in terms of the trust of the agency in the Company over those last months and I think we are doing here a good job in that relationship and in the new terms and conditions we're going to have from the business. So let's see how it evolves.
On the third question regarding the FX exposure, so let me start by the leverage. We are running no FX exposure. So if there is any concern or any question about how the FX could impact our balance sheet it won't impact in terms of the leverage.
We are fully hedged in the Oi's foreign-currency debt. Fully hedged.
And on PT that on the euro-denominated leverage from PT we are now fully hedged on the cash in, on the proceeds we're going to get from Altice. Therefore, no FX risk on the financial part of the equation.
On the CapEx we normally negotiate with our suppliers based on caps where we are partially protected by the depreciation of the real. And always there is always the possibility to sit again with the suppliers to discuss terms and conditions in terms of FX.
But we will see how it evolves. It is an extremely volatile moment in Brazil right now in terms of currency, so let's see how this goes for the next month and we are monitoring the situation. But again we have caps established in all our contracts with our suppliers in terms of FX.
On the OpEx the impact we have in terms of currency in the fourth-quarter 2014 was roughly BRL10 million. We are more exposed into TV content there so TV content normally has an FX impact in the lease of the satellites and on the GlobeNet lease as well.
So those are the three lines in terms of OpEx that could be impacted by FX. But again the impact in the fourth-quarter 2014 was only BRL10 million. So we are monitoring this as well.
I will now pass to Pedro here to talk about the CapEx.
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Pedro Falcao, Oi S.A. - Director, Network Development and Engineering [57]
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So the answer to your question is no, there will not be a significant CapEx investment to VDSL because we are talking about surroundings of our central offices. So we will not invest to do this 18% in terms of shortening the loop. We will just take the advantage of the existing copper access network surrounding our central offices.
The other thing is we have negotiated a price for VDSL port that is very close to the ADSL. And we already have close to 10% of our plan equipped with ports that can be either through VDSL or ADSL.
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Mathieu Robilliard, Barclays Capital - Analyst [58]
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Okay. Thank you very much.
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Operator [59]
------------------------------
As there are no further questions I would like to turn the call back over to Mr. Bayard for any final remarks.
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Bayard Gontijo, Oi S.A. - CEO, CFO and IRO [60]
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Well, thank you again for joining us for the call. I'd like to thank also the team that is here with me today, the senior executives of the Company, some of the senior executives of the Company and any further questions or doubts our IR team is here ready to answer. Thank you very much and have a good day.
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Operator [61]
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Thank you. The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect your line. Have a nice day.
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