Q3 2015 Oi SA Earnings Call
Nov 12, 2015 AM EST
OIBR4.SA - Oi SA
Q3 2015 Oi SA Earnings Call
Nov 12, 2015 / 01:00PM GMT
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Corporate Participants
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* Bayard Gontijo
Oi SA - CEO
* Flavio Nicolay Guimaraes
Oi SA - CFO
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Conference Call Participants
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* Jonathan Dann
Royal Bank of Canada - Analyst
* Susana Salaru
Itau BBA - Analyst
* Mathieu Robilliard
Barclays - Analyst
* Daniel Federle
Credit Suisse - Analyst
* Andre Baggio
JP Morgan - Analyst
* Soomit Datta
Newstreet Research - Analyst
* Walter Piecyk
BTIG - Analyst
* Simon Cooke
Insight Investment - Analyst
* Alex Hooper-Greenhill
Societe Generale - Analyst
* Michel Morin
Morgan Stanley - Analyst
* Eriko Ross
Barclays - Analyst
* Sonny Kushwaha
Claren Road - 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 third quarter of 2015 results.
This event is also being broadcast simultaneously on the Internet via webcast, which can be accessed from the Company's IR website, www.oi.com.br/ir, together with the respective presentation. We'd like to inform that during the Company's presentation all participants will be only able to listen to the call. We'll then begin the Q&A session when further instructions will be given.
(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. Such 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. Please, Mr. Bayard, you may proceed.
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Bayard Gontijo, Oi SA - CEO [2]
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Good morning, everyone. I have here with me, Bernardo Winik, B2C Director; Mauricio Vergani, B2B Director; Pedro Falcao, CTO; Jose Claudio Goncalves, Network Operations Director; Jason Inacio, Transformation Office Director; Carlos Aragao, Regulatory Director; and our financial team with Flavio Guimaraes, CFO and Investors Relations Director; Marco Schroeder, Administrative and Financial Director; and Marcelo Ferreira and the IR team.
Thanks for joining this conference call. A little over a year ago, Oi's Board of Directors expressed its trust in me to assume the leadership of the Company and embrace the important challenge that lay ahead. At the time our results did not seem very promising and the market hardly knew what to expect in the future. Despite the unfavorable retrospect I accepted the challenge since I have always believed in Oi's potential and the capacity and ability of our employees.
At that time we established our four strategic priorities that will lead to renewed sustainable growth and reposition Oi in the Brazilian telecom market. One year later here we are quarter-after-quarter, presenting to our stakeholders the progress made in relation to our strategic priorities in these last 12 months.
I will start then with slide 2 of our earnings presentation. We continue to focus on the operational turnaround to transforming our business and improving our infrastructure. You will see further ahead that we have maintained our strict control on costs and optimized allocation of our investments associated with an improvement in our revenues.
Looking over results from the first nine months of the year, EBITDA and operational cash flow in Brazil remain on track to achieve our 2015 guidance. We are delivering exactly what we have promised to the market and we are more and more confident in the success of our plan to transform the business.
In this context we launched in the beginning of this month the Oi Livre offer which is a very disruptive model of offer in Brazil. This offer's aim to change the way mobile customers communicate, challenging the current mindset where consumers purchase SIM cards from different operators or even restrict their communication by using data in order to avoid paying very high rates for off-net calls.
With Oi Livre, Oi takes a strategic step forward and follows a global trend by adopting a model widely used in markets such as United States and Europe. Furthermore, increasing the data limit with no restrictions meets the growing demand of customers for unlimited access to millions of apps available for their smartphones.
Another important step was preparing for the launch of our multiproduct service. With this new model of offer known as Oi Total which combines fixed line, broadband, TV and mobile services customers will have an integrated customer service and installation of different services in only one visit in addition to being charged in one single bill. As a result we expend expertise of our technicians, leverage their productivity, generate savings and provide a better customer experience.
Also as part of our transformation plan we have been focusing on the efficient allocation of our investments with resulting improvements in our infrastructure. With a lower CapEx we have been able to deliver more with more quality, which you will see later on when we talk about network efficiency and improvement initiatives.
One of our biggest challenges is to improve the profile of our balance sheet. As a result of the sale of PT Portugal in June this year, we improved substantially our liquidity position and with that we are able to focus on refinancing and debt payment in order to improve our debt profile. From the regulatory standpoint we have had many discussions with the government and Anatel about developing and building a more positive environment.
We are optimistic about the progress on TAC and the discussions regarding the concession. Regarding the TAC, as everyone knows, in April we filed the list of projects of corrective measures and since then Anatel following its formal procedures has been evaluating and discussing adjustments in our proposal aiming to reach a more efficient agreement for both parties and the market in general.
The negotiating process is in its final stage and we hope to conclude the agreement in the coming months. As far as the concession we understand that the current telecom concession model is worn out and needs to be modernized. This model is outdated and carries a regulatory symmetry which harms competition and creates structural disadvantages for incumbents.
Just to give you an idea, other countries such as Spain and Portugal for instance use concessions as a temporary stage, unlike Brazil which has been under this stage model for over 16 years. According to a study by the International Telecommunications Union, broadband services developed more quickly in countries with fixed voice service authorization model rather than a concession model. I'd like to point out that Oi is the natural player to lead the expansion of this service throughout Brazil.
Therefore, we have an unprecedented window of opportunity. We must seize this moment in which we are revisiting the concession terms to make a profound reform of the sector in order to meet the growing demand of the society as other countries have already done.
At the end of September, the government structured a working group composed of members from the ministry of communications and Anatel in order to reevaluate and propose alternatives to improve the current regulatory model. We are very confident in the evolution of this process.
With respect to our governance, about a month ago, we completed the last stage of the operation to migrate to the highest corporate governance standards in Brazil. Two thirds of our preferred shares were converted into common shares and we concluded the corporate simplification. Thus creating a company with no controlling shareholders with a new independent Board of Directors and new bylaws that reflect the governance standards of Novo Mercado.
Lastly, we have signed an exclusivity agreement with the firm LetterOne for a period of seven months in order to structure a proposal for deconsolidation of the Brazilian telecommunications industry. We are currently working on alternatives to structure with BTG and the firm LetterOne. Therefore, as you can see, we have made consistent progress on all of our strategic priorities.
Moving on to slide 4, for one more quarter we show improvement in our operational turnaround. As you can see the continuous focus on cost efficiency associated with the profitability of our existing customer base has brought significant results over the year. The third quarter presented an annual reduction of 7.5% in routine costs, which represents a real gain of 16% due to inflation of 9.5% in the period.
The routine EBITDA from Brazil grew 10.6% year-over-year in the third quarter with 26.7% of margin. For the year-to-date Brazilian routine EBITDA reached BRL5.5 billion with an 11.4% annual growth and 27.5% of margin, an improvement of 3.6 percentage points compared to the same period last year.
As with costs we maintained our focus on optimizing the location of our investments. Structural investments have improved our main network quality indicators. As we shall see later on, the engineering initiatives and projects have resulted in a higher level of delivery with lower investments and verified improvement of customer experience.
We have already addressed the modernization of the network war, now we are working to improve the access. We have no doubts that with the work that we have done, modernizing the transmission and transport infrastructure, Oi is very well positioned to take advantage of the market migration from voice to data.
The operational cash flow in Brazil jumped to BRL790 million in the third quarter, an increase of over 450% year over year. On year-to-date we already reached 177% of annual growth in the operational cash flow. In other words, there has been an improvement so far of BRL1.6 billion which gives us confidence to deliver our 2015 guidance.
Total net service revenues in Brazil, which excludes handset revenues totaled BRL6.5 billion this quarter, only 1% lower than in the same quarter last year despite a more challenging macroeconomic environment. We'll discuss the revenues performance later on.
I would like to stress once again that we are not only cutting costs and investments but actually transforming Oi to make it a more efficient and sustainable company. The operational turnaround continues to be on the right track and we are reiterating our guidance for this year.
Slide 5 shows our customer base trends with a 4.3% year-on-year decline. As we have been saying this year, the strategy for 2015 is directed towards quality and profitability of our existing customer base with the respective improvement of their users experience. We have continued to focus our efforts on retention and profitability as a way to reduce churn and improve the quality of the active base.
At the same time, we have resized the mix of channels optimizing our sales cost, which combined with a more restricted credit [policy] improved the quality of our sales. In addition, we have kept our restrictive basis connection policy in the mobility in order to maintain a profitability base to avoid paying unnecessary fees on inactive customers.
Moving on to slide 6, we will show you our revenues breakdown. Total customer revenues grew 0.9% as opposed to the 1.1% decline in the last quarter. Despite the poor macroeconomic environment, Oi has improved its revenues strength in every segment. As I mentioned earlier, total net service revenues only fell 1% this quarter compared to 3.3% annual drop in the last quarter.
I would like to highlight here the annual growth of almost 1% in the personal mobility service revenues. In this case, the 33% cut in the mobile interconnection tariffs was offset by the 8.1% growth in customer revenues of the segment underpinned mainly by data as we will show later in more details.
Another important highlight is the consistent improvement in the revenues trend of the residential segment, as a result of the profitability of the existing base and the sales quality improvement as you will also see in the coming slides. It's important to remember however that the country is experiencing a macroeconomic environment of recession and yet Oi has consistently improved its performance since the last quarter of 2014. Therefore it is natural that the challenge of maintaining this trend in revenues increases going forward.
Moving on to slide 7, the demand for data continues to drive recharges and ARPU in the personal mobility segment. The growth in mobile customer revenues is due to the continuous and solid growth in data revenues which for yet another quarter posted over 50% increase year-on-year reporting BRL764 million this quarter and accounting for 43% of the total customer revenues.
This increase in data has been driven by the penetration of 3G and 4G handsets in our base at 56% this quarter and the migration of 2G users to our 3G network which has more capacity to meet the growing demand for data and provide our customers with a better experience. We also continue to maximize the profitability of our base through this strategy to obtain higher value-added customers combined with increased data use.
All of this lead to substantial increase of 23% in ARPU of the gross in the postpaid segment excluding MTR and a growth of the prepaid recharges even in a more challenging macroeconomic environment. It is very clear to us that the customer wants data and total freedom to use the service the way they see fit.
In this context, I would like to move to slide 8 to present our new offer. I have already been saying for some time that the fall of the MTR would create an opportunity for structural change in the dynamics of the Brazilian market. Taking the advantage of this movement, we lead the market by launching offers that put an end to the community effect and give more freedom to customers.
From an extensive research program which interacted with over 5,000 customers we developed throughout 2015 new mobile offers in order to meet customer needs for more independence to talk and surf freely. Our mobile value position is to offer this freedom to customers to talk to whoever they want, wherever they want, eliminating the community barrier combined with a better data usage experience through higher allowances of usage and no user restriction by simple offers and no tricks.
This innovative positioning covers the entire mobile portfolio from prepaid to postpaid and Controle and from the first quarter 2016 it will also include the convergent products. This transformation began on October the 30th with the launch of the media campaign of Oi Livre, Oi's new prepaid which offers calls to all customers of all operators and more data with no user restrictions, an offer that mobilize all the companies and our retail partners. We will be launching this offer for postpaid and Controle plans at the end of this month.
The expectations with the new positioning is to concentrate the prepaid customer spending with Oi, reducing the need for multi SIM card use and to increase our postpaid mix.
Going on to slide 9, about the residential segment, we continue to improve the profitability of our residential customer base in all products. Residential ARPU increased 8.3% year-on-year reporting nearly BRL80 in the quarter, owing to the positive ARPU performances of the three products. Improvement in the sales mix with a focus on higher value-added offerings together with the up-selling and cross-selling initiatives has been supporting the profitability strategy of the segment.
I would like to highlight that this quarter, we reversed the trend of increased net disconnections as a result of high gross combined with stable churn rates reflecting better sales quality and the resumption of our commercial activity sustained by the positive effects of profitability and gross revenues in the segment have been demonstrating a resilient recovery trend as already shown in slide 6.
I would like to point out the growing average speed trend for broadband customer base which exceed 5 mega this quarter representing a growth of 25% year-on-year and 7% sequentially. This quarter 53% of our gross sets have speeds equal or higher than 10 mega. As a result of this consistent progress our broadband base with speeds equal or higher than 10 mega grew 40% year-on-year reaching approximately 30% of the total base. We recently launched a higher speed [VDSL] broadband with offers ranging from 15 to 35 mega and we expect this product to make even further progress.
As you can see on slide 10, during the third quarter of 2015 two releases strengthened Oi's performance in the residential segment. The Oi Play platform and the new broadband speeds via VDSL. These releases boost the resumption of our commercial activity meeting a growing demand for data and TV consumption in nonlinear format and multi devices. These movements also reaffirm our position with focus on simplified products and offers.
On slide 11, the B2B segment is being primarily affected by the microeconomic slowdown, but we are carrying on with our strategy of improving based profitability and sales quality.
In the corporate segment we have reduced our dependence on voice services by increasing the offer of data services, IT and VAS such as managed services, security solutions, cloud services, ICT, datacenter and machine-to-machine. As a result, we have grown our corporate data revenues higher than the market average.
(Inaudible) prices segment in order to reduce cost, optimize processes and improve margins we have worked on structuring measures such as high share of channels with lower cost in the sales mix.
Portfolio simplification for greater efficiency and quality in the product chain. Review of the post-sales structure to better manage deliveries, repairs and views and of handset subsidies.
Now, moving to slide 12, we continue to control costs consistently even in an environment of rising inflation, exchange rate pressure and high electricity tariffs. As I mentioned in the last quarter, we are sparing no efforts to reduce costs and transform the way we do business. This is a mantra here at Oi nowadays.
We have worked relentlessly to pursue operational efficiency and business sustainability and we are definitely not going to stop now. Excluding the effects of MTR cuts, leaseback from assets sold and handset costs, our costs and operating expenses were 4.1% lower year-on-year totaling BRL4.8 billion.
In the same period inflation climbed to almost 10%. Energy tariffs increased substantially and the dollar appreciation put pressure on certain expenses. This serves to prove the resilience of our efforts to control the Company's cost, particularly if you consider the 13% real decrease in the year.
As you can see, reductions are occurring in practically every area of our business. Year-to-date, we delivered a 5.5% reduction in OpEx, excluding MTR cuts, leasebacks from assets sold and handset costs, which represents a real drop of around 14% in the first nine months of 2015. And we will continue to work since we still see tremendous opportunities in our business, mainly in structuring projects that ensure Oi's processes efficiency.
Moving on to slide 13, the focus of the transformation office during the second half of this year has been seek cost savings through end to end initiatives. Focusing on processes optimization, operational productivity and improving customer experience.
We already have examples of the impact from these projects to the Company. In order to enhance the end to end experience for the customers, we launched the forum of quality. This forum coordinates the efforts of the Company's critical areas to improve our customers experience and it has managed to reduce by 7% the number of calls to the call center and by 13% the average time of repair.
We also work in processes that can generate revenue loss. We have launched a project that ensures that all customer downgrade requests are treated by a specialized call center unit, thus minimizing the ARPU reduction.
In addition, we have deeply reviewed the procedure and [adherence] of customer compliant processes in order to ensure that we assign the correct and fair value to the customer when the bill is contested. These are just some examples, but this work is ongoing and we are convinced that there are still several opportunities to enhance the Company's operational efficiency.
Going now to slide 14. The focus on quality and profitability of the customer base, cost control and efficiency and CapEx optimization have provided continuous evolution of Oi's operational cash flow. Brazil routine EBITDA grew 10.6% year-over-year and routine EBITDA minus CapEx, increased by 455% in the same period.
Year-to-date, the routine EBITDA from Brazilian operations reached BRL5.5 billion with annual growth of over 11%. And routine EBITDA minus CapEx reached BRL2.5 billion, an increase of 177% versus the same period last year. So we remain firmly on track to deliver our guidance.
As I've also been saying for some time, we are not sacrificing the future of this Company for the turnaround process. We clearly have limited resources, but as we shall see next we have managed to do more with less through several efficiency initiatives in the allocation of CapEx and the results in terms of improved network and quality of customer experience are visible.
We have prioritized infrastructure projects and have been able to deliver them very efficiently. Below, we discuss in more details this progress.
On slide 15, for the mobile network we continue our strategy of constant improvement of all network layers from core to access and in particular to the 3G access network, making it possible to further stimulate the migration of 2G customers to the 3G network. At this point, almost all of our customers who have a 3G handset are already able to use 3G network and yet with a better data usage experience.
Also, we have recently completed a renegotiation on the mobile network based on the Single-RAN strategy. And it will allow us to have at the end of the quarter a total of approximately 75% of our sites with a single supplier.
In addition, we continue our network sharing strategy. These actions, combined with the contractual renegotiation scaled out between 2014 and 2015 have enabled the optimization of our investments while improving our network quality indicators.
Moving to slide 16. On the fixed and broadband network combined with the contractual gains from past negotiations and the fiber swap initiatives, we maintained the strategy of restructuring our transport backbone with execution of projects 100 giga OTN and Single EDGE. Thus we continue with the growing progress of our customers quality experience while maintaining an annual growth of around 43% in IP traffic and 45% in customer average bandwidth.
In addition to that, we have a 40% annual growth in our customer base above 10 megabits per second and reduced by 17% year-on-year the volume of our customers potentially affected by network congestion.
This strategy has also allowed us to launch the VDSL technology where speeds up to 35 mega and the GPON corporate for our B2B customers.
I will now let Flavio take the floor to present our balance sheet and liquidity figures.
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Flavio Nicolay Guimaraes, Oi SA - CFO [3]
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Thank you Bayard and good morning everyone. Moving on to slide 18, as Bayard mentioned at the beginning of this presentation, we maintained our focus on debt payment and refinancing aiming to improve the Company's debt profile.
This quarter we paid nearly BRL5 billion between amortization and prepayments. In October, we signed an MOU with China Development Bank for a credit line of $1.2 billion in order to refinance short-term debt and finance purchase of equipment and services from Huawei. We expect to sign the definitive agreement in December.
The gross debt at the end of September stood at BRL53.7 billion and was heavily impacted in the quarter by the foreign exchange rate fluctuation and the accounting effect of the mark-to-market of derivatives.
First of all, I'd like to point out that the Company maintains a conservative approach to foreign exchange risk and our debt denominated in foreign currency is fully hedged through swaps, NDFs and [offshore] cash. The impact of the exchange variation mainly refers to the portion of debt hedged with cash as we kept the proceeds from the sales of PT Portugal in Euros in order to hedge Portugal Telecom's legacy debt. Therefore, this impact was offset by the gains from the exchange variation of the cash in foreign currency.
Regarding the accounts effect of the derivatives, it is important to remember that for accounting purpose the borrowing and financing in foreign currency are recorded at a concept of accrual and the derivates are recorded at market value. Especially this quarter, we observed an unusual volatility on the interest rate in dollars traded at BM&FBovespa, which increased around 284 basis points in the period. This rate is used as a discount factor for mark-to-market calculation of the derivatives resulting in a negative impact of BRL1.5 billion.
As we can see in the slide, this effect is registered every quarter, although not producing significant impact on the debt. In October for instance, much of this effect has already been reverted. This effect is accounting and temporary with no cash impact. And it is a result from the mismatch between the market value and the accrual of the derivatives. I emphasize that the difference between the market value and the accrual of the derivatives tended to converge in the end of the contract, therefore offsetting this effect.
It is important to mention that as the Company adopts the hedge accounting, this accounting effect is recorded directly in the shareholder's equity with not impact on the P&L.
On slide 19, we continued to have a solid liquidity position with the ability to meet our short-term needs. At the end of September, our cash position was BRL16.4 billion. Our total liquidity position, which constituted of cash and available credit lines came to BRL20.1 billion enabling us to safely and comfortably, keep focus and the transformation of our business.
Slide 20 shows the net debt variation of the quarter. As you can see, we presented a positive operating cash flow of around BRL686 million, after many quarters registering cash consumption. This performance reflects how efforts from the Company to improve operational efficiency. And it partially offsets the negative impact of the financial results and the effect of mark-to-market account of derivatives on the net debt which closed September at BRL37.2 billion.
Going to slide 22, after two long years, we have [managed] to complete the operation of migrating to the highest standard of corporate governance in the country. We recently approved in a shareholders meeting the incorporation of Telemont Participacoes, the election of the new Board of Directors composed of independent members and the new bylaws with the requisites of Novo Mercado.
Last month, we also finished the conversion of two thirds of preferred shares into common shares, thus we have delivered to the market what we promised. A company with no controlling shareholders, an independent Board, and the highest standards of corporate governance.
Now, I will let Bayard take over again.
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Bayard Gontijo, Oi SA - CEO [4]
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Thanks, Flavio. Lastly, in slide 23, in summary, we continue moving forward on all fronts of our strategic priorities, and quarter-by-quarter, delivering everything that we had proposed to the market one year ago. The business transformation is happening and there is no turning back.
In this respect, I take this opportunity to thank all our employees for their relentless efforts to transform Oi. There are still many challenges that lie ahead of us but I'm proud to say that much has been accomplished. I am convinced that we are on the right path to resume sustainable growth and create value for all of our stakeholders.
Now I'd like to open for questions. Thank you very much.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Jonathan Dann, Royal Bank of Canada
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Jonathan Dann, Royal Bank of Canada - Analyst [2]
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I've got a couple of questions. The first was can you just tell us when do the derivatives mature?
And then secondly, on slide 16 you walked through some of the prices per unit for various cost items. Could you just give us an idea given that units I assume are growing very rapidly, well, how much you're saving in millions of reais, or if the million of reais cost is still growing because of the volume growth?
And then a final very easy one hopefully. I see you've changed the Oi Livre tariff, have you done anything on any of these per month type tariffs in mobile?
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Bayard Gontijo, Oi SA - CEO [3]
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Hi Jonathan, good morning. Let me start by the last question. Then I will turn to Flavio to talk about derivatives and the maturity of it and I will ask you to do the second question again because I couldn't get it. But starting by the last question, the Oi Livre for us is a disruptive offer in our view. It will definitely change the way the market and the consumers they communicate in Brazil.
We are doing very well in our view at the beginning of this offer especially in the prepaid. We have all the models available to our customers. We have per minute offers, we have per day offers, we have weekly offers and monthly offers. So we have all the portfolio available for our customers and by the end of this month we're going to launch the Oi Controle in the same structure as well as the postpaid.
Our offer is extremely, I would say interesting when we talk about data. I think the main I would say desire of the market today it's not voice, it's more towards data and in that sense we are very confident about the availability of our offers in the upcoming months. So this is pretty much I think the last question. I will now turn to Flavio, he will explain about derivatives.
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Flavio Nicolay Guimaraes, Oi SA - CFO [4]
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Hi Jonathan. Most of the derivatives are perfectly matched with the low ones and the bonds. So you can expect that the duration of the portfolio will be closer to the duration of our debt. There is a small mismatch, but I'd say the duration of the portfolio, it's around a little bit above three years.
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Jonathan Dann, Royal Bank of Canada - Analyst [5]
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Excellent. And then my third question was you have some slides on the cost per unit? And I guess the -- I guess if your cost per unit is falling, call it 30% to 40% based on the charts, I guess the volumes are also growing at 30% to 40%. So have you been able to actually reduce the monetary value of the contracts and the costs?
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Flavio Nicolay Guimaraes, Oi SA - CFO [6]
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Yes, that's exactly what we are doing. We are going after these flyers and discussing terms and conditions (inaudible). And what we see here is a substantial saving in terms of CapEx. So I think that the main point here, Jonathan, is that yes, we are doing a large CapEx than the market expected. We were (technical difficulty) CapEx from the previous year. The most important metric for us is the quality of the network, is our ability to render data and to improve quality of the services we provide to our customers. And this is clearly what is going -- it's happening.
I was just before the call here, talking to Pedro Falcao, who is here with me about the Netflix quality, Netflix measures the quality of the networks from the telecom providers for the clients, right. And we've been able to improve our metrics consistently month-after-month. So this is what matters to us, not the absolute number, it is how this CapEx is impacting the quality of our services.
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Jonathan Dann, Royal Bank of Canada - Analyst [7]
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Oh, excellent, thanks a lot.
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Operator [8]
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Susana Salaru, Itau.
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Susana Salaru, Itau BBA - Analyst [9]
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We have two questions here, first on the comparative dynamic we saw that there was a start in the flexi plans in the market, if we expect the other companies to follow through and if you believe that there will be some rationality or if we may start to see some price war going forward, that will be the first question.
And the second question is related to the RGU world, the performance going forward. When should we expect that -- the performance to stabilize or to start growing maybe next year? Thank you.
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Bayard Gontijo, Oi SA - CEO [10]
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Thank you, Susana. Let's see, I think we have already been followed. I think we launched the very disruptive offer here. On the 30th we had our advertisement on TV, on the newspapers, on the magazines; on the 3rd we had a full film available with price and everything else to our customers. And now we're seeing already some followers on the TV as well. So some other companies doing the same.
What I would like to highlight here is that again our offer differs from our competitors, because it gives core data, and again that's what from what we could see from the research we did in the past 10 --I don't know, 10 months where we were discussing the new offer, it is the desire of the market and we're offering more than our competitors.
Besides that this is not a war price for us. We are the smaller player in the mobile, it's a natural move for us. It will only improve our market share and our profitability. I cannot say if that's the same case for our competitors. For Oi, it's not a war price, it is a natural movement.
So this is pretty much about the offer and as I mentioned we will, by the end of this month, launch as well the Controle and postpaid and we are very confident about the quality of the offer and the impact in the margin.
Regarding RGUs, I think this is very important because this new offer shows that our intention in terms of commercial approach is changing, I mean until now we were, we can say organizing things improving efficiency, productivity and now we believe we are able to go back to the market, with more aggressive offers, such as Oi Livre, and the pipeline continues. I mean we are going to have other campaigns to launch in the upcoming months and with that we believe we are going to be able to stabilize and then start growing RGUs for next year.
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Susana Salaru, Itau BBA - Analyst [11]
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Perfect, thank you.
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Operator [12]
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Mathieu Robilliard, Barclays.
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Mathieu Robilliard, Barclays - Analyst [13]
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First with regards to the TAC and the concession in terms of potential change, any sense of a timing for both of these events and should we still assume that they're unrelated or they're not being put together?
Second with regards to the agreement you signed with LetterOne, could you clarify that the commitment is for up to $4 billion or for full $4 billion if you guys find an agreement on the other parts of the deal?
And then finally on mobile, service revenues for the residential segment, clearly a very good performance in Q3 compared to peers. There is to some extent either -- it will be a of an easy comp element and I was wondering how that plays out in Q4? Do you still think you can grow in Q4 in mobile service revenue growth, or you think that the comps make it a bit tougher, thank you very much.
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Bayard Gontijo, Oi SA - CEO [14]
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Thank you, Mathieu, for your questions. Let's start by the TAC and concession. Those are not related subjects, I mean, they are two different discussions. And on -- one is the TAC, the term of adjustment and another one, which is relating to the regulations in special concession.
And in that sense in terms of the TAC, Anatel publicly said they want to have some of the tax approved until the end of this year. So we expect this would happen in the next couple of months. But of course it depends on Anatel, they are doing their work. If we work in during this year, we've only three Board of Directors, I've -- now they have the two of the Board of Directors here. So (inaudible) believe at the end of this year according to what they have said publically. And we are confident that our TAC will be approved as filed.
In regard to the concession agreement well, last month I was in Futurecom, which is the most important telecom event in Latin America. And my speech was basically about the concession terms. Concession terms in Brazil are old-fashioned, I mean, normally a concession lasts, in average four years. In Brazil it has been here for six years or more and it's time to change that.
Last, I think fifteen days ago, it was established, a group with representatives of Anatel and the Ministry of Telecommunications and they are working on this new model to be presented to the market, within the next, I don't know, now probably 75 days, right.
So we are (technical difficulty) them using all the, I mean, benchmarks and all the information we believe are important for them to analyze and to present something to the market to see how it goes. But I think its evolving and hopefully, it should evolve in this next 75 days for something that is much more aligned with dependencies and with (inaudible) of the current market. This is for the backend and the concession.
Regarding LetterOne, the proposal exclusivity limit we have with LetterOne is an exclusivity agreement, where their investment would be up to $4 billion, but this is how it has to be, because if we do a capital increase, we have to give preferential rights to the current shareholders of the Company. It is up to because we need to know from the current shareholders of O, who would be willing to participate or not, so that's the simple answer to that question.
In terms of the mobile, I mean, we are facing a very, I would say, challenging macroeconomic environment in Brazil, so it's very hard to predict the future and how this is going to impact the performance of the Company.
What I can tell you is that we are confident regarding delivering on the guidance as we gave to the market. Therefore, the routine EBITDA from BRL7.1 billion to BRL7.4 billion in Brazil, we are confident we are going to deliver on this. And the routine EBITDA minus CapEx improvement of BRL1.2 billion to BRL1.8 billion, will be achieved as well.
So again, it's hard to predict specifically in service how it will be the impact, how will be the evolution but we are using all the tools we have in order to deliver on the guidance we gave to the market.
------------------------------
Mathieu Robilliard, Barclays - Analyst [15]
------------------------------
Thank you very much.
------------------------------
Operator [16]
------------------------------
Daniel Federle, Credit Suisse
------------------------------
Daniel Federle, Credit Suisse - Analyst [17]
------------------------------
My first question is related to the fixed line concession. What would be the best format for Oi for this new fixed line concession (inaudible). And if Anatel and the minister are in talks with the companies, they are allowing the companies to contribute to the new format of the fixed line concession, this is the first part. The second part is, if you believe it's possible to present a proposal for Tim, for a merger before a final rule in terms of the concession?
And my second question is related to the new plans. I would like some understand if you believe the new plans, they are financially positive as of now or in the first moment you go capture market share, and probably in 2016-2017, when [emit] charge will be much lower, then -- then you'll become profitable, thank you.
------------------------------
Bayard Gontijo, Oi SA - CEO [18]
------------------------------
Thank you, Daniel, let's start by the fixed line concession. What we are doing here and we don't have to be invited to contribute about that. We are, since I started as CEO of the Company October last year, we have been talking to Anatel, to the Telecommunications Ministry about what, we believe is the correct format for the concession in Brazil.
So we have regular discussions about what we think is the right way. In the last month, we were not only Oi was going there to say what Oi thinks about it, but all the concessionaires in Brazil were working together to present to the government, what we believe it is the right thing to be done for the country, for the society, for the Company.
So now we have a group that Telefonica, Algar, ourselves may represent what we think is the adequate regulatory framework for the future of the sector in Brazil. So the format we believe is the format where (inaudible) enter into an authorization where the companies will be able to (technical difficulty) freely. There is enough competition is Brazil and the universalization has (technical difficulty).
We don't need any more obligations to fulfill or any reversible assets, what we do need is freedom to deliver to the customers and the society what they want. And clearly we have benchmarks about that in markets with concessions for instance broadband develops in a low -- in a say lower pace than markets with full authorization because of course resources are limited. And if we do have obligations, we cannot direct those resources where demand is.
What we want here is the freedom to compete, freedom to deliver to the market what the market wants. So this is about the fixed line concession.
On the proposal for Telecom Italia regarding consolidation in Brazil. We're working, and two things, I mean one is presenting a proposal that is feasible, that is good for all the parties involved, together with LetterOne, and we hope to be able to deliver a proposal sooner rather than later.
On the other hand we continue to work very hard on the concession terms. As I have mentioned in the previous questions this Group that is working on this has established a deadline of 90 days now 75 days to present something concrete about concession. So things are evolving together in our view and (technical difficulty) proposal. And of course it can be accepted or not depending on regulations but things are evolving [now] together.
Finally, about the financial sustainability or the profitability of the new offer. We are the smaller player in the mobile business. We are the player that doesn't have community. Therefore we -- in that sense as I mentioned this is not a war price for us, (technical difficulty). What we're going to have out of this in our view is market share and profitability. Therefore, I cannot talk about our competitors if they will be cannibalized about something like this or not, but in our case, no, in our case what we believe is that we're going to have positive results in terms of market share and profitability.
------------------------------
Daniel Federle, Credit Suisse - Analyst [19]
------------------------------
Okay. Thank you very much Bayard.
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Operator [20]
------------------------------
Andre Baggio, JPMorgan.
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Andre Baggio, JP Morgan - Analyst [21]
------------------------------
So Bayard you have been doing a very good job of improving revenue trends and also cost trends. But how can we view the evolution of net debt which is a concern that I have and we saw this impact from derivatives that's -- you said it's a one-off. Can we see next quarter, in fact, a reduction in the net debt levels?
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Bayard Gontijo, Oi SA - CEO [22]
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Baggio, thank you for the question. We have to separate clearly the operational results from the capital structure of the Company. We do know that we do have to fit the capital structure of the Company. This is something we will approach by selling assets as we have mentioned and by consolidation with that we believe the capital structure will be addressed. Therefore the net debt evolution depends a lot on those things.
In terms of assets, we still have assets to sell. We still have the African assets, we still have mobile towers to sell, we still have some companies that are not in the core business of telecom that we can monetize as well. Therefore, I mean that's how we're going to approach the net debt.
Regarding operations as you have mentioned, I mean we are confident we're going to deliver on the guidances. We have improved revenue results. We have been able to maintain the focus and the results in terms of cost control.
Working capital has improved this quarter. So we are happy about the operational results and dealing with the leverage with that -- those tools I told you. So the agreement with LetterOne to pursue consolidation in Brazil can address that issue together with disposal of some assets that we still have to do in the upcoming quarters.
Regarding derivatives, I'll let Flavio -- he will answer, I just take the easy questions.
------------------------------
Flavio Nicolay Guimaraes, Oi SA - CFO [23]
------------------------------
The portfolio of derivatives covering 100% of our FX denominated debt. So the impact we saw last quarter was due do a volatility that usually happens once every -- again couple of years. So I do not expect to see that volatility again, but you know market conditions are kind of difficult. So again this is something that we cannot manage, but what I can tell is that in October we could observe the rates going down and a portion, BRL1 billion from that impact being reverted. So again life's going back to normal. So we do not expect to see a huge impact like that.
------------------------------
Andre Baggio, JP Morgan - Analyst [24]
------------------------------
Okay. Thank you. And then just a follow on question, sorry another question. Bayard, there's a mention that there is a exclusive agreement with LetterOne for seven months, but I also understand that any agreements to LetterOne depends on our consolidation with the [team] that also depends on a change in concession terms. Is seven months any reasonable timeframe for to expect any changes in Brazil, because I understand that change in concession depends on the approval of the Minister, of the Anatel, of the Congress and many other people (inaudible) also. So, is seven months a bit realistic for a change in regulation?
------------------------------
Bayard Gontijo, Oi SA - CEO [25]
------------------------------
Baggio, I cannot answer that. It does not depend only on Oi, I mean, what we will see during those seven months is that, first there's work that's now being done by this new group (technical difficulty) rules for the sector, are they accepted or not. If they are, I mean check one last thing to deal with the rules on a sector, and are good for sector and are good for the incumbents.
If that happens we'll see; maybe, I don't know a couple of months is enough to go congress and to have this approved. Maybe not, but I mean this is something we're going to monitor and we're going to see the evolution according to the two outcomes from this first (inaudible) . I think the most -- it is extremely important this work that it's being now done by this group and let's see how this (technical difficulty) and the next steps.
------------------------------
Andre Baggio, JP Morgan - Analyst [26]
------------------------------
Okay. Thanks a lot Bayard.
------------------------------
Operator [27]
------------------------------
Soomit Datta, Newstreet Research
------------------------------
Soomit Datta, Newstreet Research - Analyst [28]
------------------------------
Yes. Hi, couple of questions please. One on liability management. I think you mentioned you have paid around BRL5.5 billion in amortization and prepayments. Do you have any more detail on the prepayments and more generally what have you got out of that process in terms of covenant easing? And can you any give any thoughts on that process in the next two or three months would be helpful, please.
And then secondly, just on the Controle plans, you started to disconnect some of the Controle subs which I was slightly surprised by. I generally was under the impression they were slightly higher quality subs. So what kind of ARPU were those subscribers on, and what was the rationale exactly for disconnecting those subscribers? Thank you.
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Bayard Gontijo, Oi SA - CEO [29]
------------------------------
Okay Soomit, I'll start by the second question then I'll turn here to Flavio to talk about the -- on that liability. Well, I mean we've been maintaining strict policy of disconnections and the Controle was exactly the situation. I mean what we see here is that this is going to become less and less important since we now have this new Oi Livre plan it's natural that chips will go away. And probably we'll see in the next month reductions in terms of chips and RGUs for the mobile market in Brazil, that's what we expect.
So I think the most important metric here is profitability of the current base, increasing ARPUs. And in terms of growth for the postpaid, the ARPU increased year-over-year 23%. So this is pretty much what we expect from the base.
This is an additional cleanup of the base we've done in the Controle and would continue to do that, because it only makes sense to us to have clients in our base, if they are active, because we want to avoid any possible taxes that are not being funded by the clients. I'll now turn to Flavio here to --
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Flavio Nicolay Guimaraes, Oi SA - CFO [30]
------------------------------
Hi Soomit. Actually, since we received the proceeds from the sale of PT we have prepaid or amortized roughly BRL8 billion. So there was a combination of different transactions, bonds, debentures, some development banks, bilaterals but we tried to combine FX plus short term maturity, and then a combination of pretty much all of the lines available were paid; some more, some less, but again, we have paid BRL8 billion so far.
Now we're going to wait and see what would make sense for the Company to get back to the size and look in that. We have some maturities in the beginning of next year, bonds in Euros, in the second half of the year, bonds in reais and Euros, so I believe that those will be the targets for the Company to keep reducing the gross debt.
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Soomit Datta, Newstreet Research - Analyst [31]
------------------------------
Okay, thanks.
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Operator [32]
------------------------------
Walter Piecyk, BTIG
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Walter Piecyk, BTIG - Analyst [33]
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Bayard, what's the plan to return the Company to wireless service revenue growth and how long do you think that will take?
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Bayard Gontijo, Oi SA - CEO [34]
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Thank you, Walter. In terms of the client service revenue, we had 8.1% increase year-over-year, and also quarter-over-quarter increase as well. So In terms of if we exclude MTR impact and handsets, we're growing fast and strong and I think this is extremely important and that was our goal.
We -- in terms of the total revenue of the mobile, yes, we are being -- still being impacted by MTR, but since MTRs will go down next year again and the year after, we expect this to be addressed over the next season. Again, I think the most important metric [for us] client revenue, because that's the one we have to manage currently and this --
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Walter Piecyk, BTIG - Analyst [35]
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Why do you think the most important metric is being able to generate free cash flow at which point you actually revenue even with the MTR cuts to actually go up. I mean there's only so much you can cut. I'm just curious with the MTR outlook which you know, when will wireless service revenue return to growth?
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Bayard Gontijo, Oi SA - CEO [36]
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Let me tell you something. Routine EBITDA minus CapEx this month reached BRL700,000 plus, BRL1 million; (technical difficulty) increase over last year. That's our goal, that's what we are doing.
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Walter Piecyk, BTIG - Analyst [37]
------------------------------
So you have no outlook for return to revenue growth for the Company?
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Bayard Gontijo, Oi SA - CEO [38]
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Yes, we do have, yes, we do have.
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Walter Piecyk, BTIG - Analyst [39]
------------------------------
Okay.
------------------------------
Walter Piecyk, BTIG - Analyst [40]
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When is it?
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Bayard Gontijo, Oi SA - CEO [41]
------------------------------
For own targets here -- no, no and we're not disclosing this, there's no guidance.
------------------------------
Walter Piecyk, BTIG - Analyst [42]
------------------------------
One last question, can you -- would you consider selling the wireless business away from the Company as opposed to selling the entire Company or buying all of Tim? You're talking about selling assets as a way to stop the reduction in net debt, at some point you just sell the wireless business and the fixed business remains for shareholders?
------------------------------
Bayard Gontijo, Oi SA - CEO [43]
------------------------------
No.
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Walter Piecyk, BTIG - Analyst [44]
------------------------------
Okay, thank you.
------------------------------
Operator [45]
------------------------------
Simon Cooke, Insight Investment.
------------------------------
Simon Cooke, Insight Investment - Analyst [46]
------------------------------
Thanks. I've three questions, if I can, all on the balance sheet side of things. In terms of covenant waivers based on numbers even if they have mark-to-market reverses, you're still going to be over five and half times gross levered for your covenant calculation and obviously the covenant resets four times next year. Have you had any progress discussing covenant waivers with your lenders?
Secondly, in terms of China Development Bank line, is that replacing existing facilities or is it a wholly new facility?
And lastly, I guess, lots of Street research over the last couple of months has said, you should consider doing a debt restructuring. Could you just talk through your thoughts on that and whether that is something you would consider absent M&A in Brazil? Thanks.
------------------------------
Bayard Gontijo, Oi SA - CEO [47]
------------------------------
Thanks for the questions. Regarding covenants, not yet. What we've been doing here is a consistent, I would say operational work. (Technical difficulty) -- ability to sit with banks and discuss this before March, as we've done this year, but we have not yet started the discussions.
Regarding CDB and the other question I'll ask Flavio here.
------------------------------
Flavio Nicolay Guimaraes, Oi SA - CFO [48]
------------------------------
Regarding the CDB that's a wholly new facility. The way we're structuring with them 50% of the facility will be used for debt refinancing and 50% of the facility will be used for funding the purchase of equipment and services from Huawei.
The terms are really good for a company considering our ratings. They're a long term facility. So far we prefer not to disclose the cost, but I'll say, it's really competitive cost and we expect to that -- to get that signed by the beginning of December. And then once you get that signed we are free to draw the refinancing facility and that's as long as we are purchasing equipment and services from Huawei, one of our main suppliers, then we can draw under the purchase equipments range.
Regarding the other question, what Bayard mentioned, we have exclusivity agreement with LetterOne in Brazil (technical difficulty). In Brazil, we are working to deliver the turnaround and so far we have been able to deliver it. So there is no discussion or there's no plan for debt restructuring.
------------------------------
Operator [49]
------------------------------
Alex Hooper-Greenhill, Societe Generale.
------------------------------
Alex Hooper-Greenhill, Societe Generale - Analyst [50]
------------------------------
Thank you for taking my call. Just another couple of questions on your balance sheet. Are there any repayments you need to make for the rest of the year that where your debt doesn't have the covenant waivers I think in particularly of your revolver?
Then also, there has been some rumors that you are perhaps buying back bonds. Can you confirm those if you are or say about having any intention to buyback bonds?
And then lastly, just on your own working Group can you just confirm that (inaudible) quite here, whether Anatel is involved in your working group or you have the working group and then you take the proposal to Anatel and then on to the government?
------------------------------
Bayard Gontijo, Oi SA - CEO [51]
------------------------------
Thank you, Alex, for the question. I'll have the second one and then Flavio will answer about the leverage. It's not our working group, just to make it clear. It's a working group that was created by [Goff] Telecommunication, have three (technical difficulty) and Anatel has three representative there as well, so it's a group of six. Three from Anatel, three from the Telecommunications Ministry, now Flavio please.
------------------------------
Flavio Nicolay Guimaraes, Oi SA - CFO [52]
------------------------------
Thank you for the question. We have BRL500 million that means through the end of this year, and regarding the bonds buybacks the Company's has had market opportunities and we need to reduce our debt. Actually we have been doing that, as I mentioned in the previous questions. We paid so far since the sale of PT BRL8 billion in debt. There was a combination of amortization and debt repayments.
The focus of the Company [is to] retire short-term debt. Again, actually we bought some of the bonds, short-term bonds, and we're in the process of cancelling some of them and the focus will be always in the short-term.
At this point we believe that will be the strategy to minimize any refinance risk for the Company and therefore looking forward to buyback debt, short-term debt in general.
------------------------------
Alex Hooper-Greenhill, Societe Generale - Analyst [53]
------------------------------
Great. Thank you very much.
------------------------------
Operator [54]
------------------------------
Diago Aragao, Morgan Stanley
------------------------------
Michel Morin, Morgan Stanley - Analyst [55]
------------------------------
Hi, good morning, it's actually Michel Morin at Morgan Stanley. First of all Bayard, congratulations on hitting the guidance, you know we were skeptical but (technical difficulty) you're going to pull it through. So congratulations to you and your team on that. I have two questions, the first is on the balance sheet. You have some assets for sale for about I think BRL10 billion; that's up from the second quarter. So I was wondering if you can explain why it's up about BRL1.5 billion so what's behind that?
And then secondly regarding the LetterOne discussions; how are you thinking and I'm sure you can't share any specifics but just philosophically how do you think about potential transactions and potential agreements also involving the creditors at large in terms of them taking on additional risk as part of a broader debt restructuring. Thank you.
------------------------------
Bayard Gontijo, Oi SA - CEO [56]
------------------------------
The impact on the assets are mainly FX, it's mainly the impact of the currency. And then regarding how that would play a role in the consolidation, I mean, we do not expect to use that as a tool to -- for the consolidation. We have an agreement with LetterOne. This agreement is an agreement where they're willing to invest up to $4 billion within Oi, to combine Oi with a competitor in Brazil. And that would put us in a sustainable and very I would say comfortable position in terms of leverage. Therefore, I mean it's how we see it.
------------------------------
Michel Morin, Morgan Stanley - Analyst [57]
------------------------------
Okay. And I also -- just on the first question so you're saying the assets I'm assuming it's the Africa assets, you're valuing those in euros or dollars as opposed to in local African currencies -- which because those have also devaluated significantly in many countries.
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Bayard Gontijo, Oi SA - CEO [58]
------------------------------
We value them in their local currency. And then we have the impact of the volatility of that currency when we translate this to reais. So that's pretty much the impact we have, Diego (sic - "Michel"). In every single country, the local currency, and then translating this to reais.
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Michel Morin, Morgan Stanley - Analyst [59]
------------------------------
Right, and there was no impact on the income statement given the total held for sale.
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Bayard Gontijo, Oi SA - CEO [60]
------------------------------
The income statement is an average. So I mean, it's only the average.
------------------------------
Michel Morin, Morgan Stanley - Analyst [61]
------------------------------
All right, thank you.
------------------------------
Operator [62]
------------------------------
Eriko Ross, Barclays
------------------------------
Eriko Ross, Barclays - Analyst [63]
------------------------------
Hi there good morning. Thanks for taking the questions and congratulations on the operational results. I had a couple of questions more on the financing side. So you've obviously disclosed some information around the Chinese Development Bank's financing line. Can you tell us whether those are secured and what kind of quantum of debt we're talking about there.
And then I wanted to also gauge a sense of what your ability is to roll some of the short term debt with your existing banks and whether you think that's something that you might be able do?
You obviously mentioned on the covenant side that you haven't started renegotiations, but I was wondering whether you managed to secure a waiver yet for the BNDES facility which I believe you're on breach of covenant of at the moment? And then perhaps also you can give us a quick update on disposals since you mentioned that was one way to address some of the maturities.
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Flavio Nicolay Guimaraes, Oi SA - CFO [64]
------------------------------
So first we are not in breach of the covenants with BNDES. We already got the waiver actually, we've got a couple of months ago. Regarding the waiver for March actually as Bayard mentioned, so far we are not discussing with the banks. But if we believe that's important for the Company, for strategy of the Company, we don't foresee any problem in discussing with the banks an extension of the waiver granted this year -- the beginning of this year. So to be honest, I don't see that as a problem.
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Eriko Ross, Barclays - Analyst [65]
------------------------------
Okay.
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Flavio Nicolay Guimaraes, Oi SA - CFO [66]
------------------------------
Regarding the CDB, actually the facilities support the purchase of equipment and then that's network 3G and 4G electronics and then plus services.
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Bayard Gontijo, Oi SA - CEO [67]
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And there is no guarantees on --
------------------------------
Flavio Nicolay Guimaraes, Oi SA - CFO [68]
------------------------------
Yes, there is no guarantee at all it's fully unsecured, long-term in a very competitive terms I can assure you.
------------------------------
Eriko Ross, Barclays - Analyst [69]
------------------------------
And what's the size of that facility?
------------------------------
Flavio Nicolay Guimaraes, Oi SA - CFO [70]
------------------------------
$1.2 billion, $600 million to fund the acquisition of electronic equipment and services and $600 million to refinance debt.
------------------------------
Eriko Ross, Barclays - Analyst [71]
------------------------------
Okay, good. And then what do you think your ability is to perhaps roll some of the short term debt that you have with your existing banks?
------------------------------
Flavio Nicolay Guimaraes, Oi SA - CFO [72]
------------------------------
First the Company today has a huge liquidity position. We have considering the cash in hand plus the committed facility we have roughly BRL20 billion which is more than enough to walk through for 2016; 2015-2016, so we are in a very good position in terms of liquidity.
Of course, if we manage it to access the market or have conversations with our bankers to refinance part of maturities in 2016. If the conditions are good, the same way we are doing with CDB, then why not, then I think we should pursue that definitely. If not then we use the cash to prepay the debt.
------------------------------
Eriko Ross, Barclays - Analyst [73]
------------------------------
Yes, I guess the concern for investors is whilst obviously you do have a pretty healthy cash balance as it currently stands, obviously you are facing material maturities coming in June 2016 and then also in 2017. So I guess the question is what ability do you have to really push those out particularly given the free cash flow is likely to be negative?
------------------------------
Flavio Nicolay Guimaraes, Oi SA - CFO [74]
------------------------------
I would say in June we issued EUR600 million bonds. So again now we are just about to sign agreement with CDB a $1.2 billion agreement. So I think that shows the market that yes we can find a ways to refinance our debt. And once you see the levels that we're discussing with CDB you'll see that it's very good terms. So if there is a good condition for the Company, the terms are good, then we'll definitely refinance some portion of the debt, especially the BRL ones.
If not, then we can use the cash in hand to walk through this volatility times. And once the market is back, is open in very good terms, then we can access and refinance. But again I think the CDB facility is a strong demonstration to the market that the Company has ways to refinance the short term debt and we'll keep pursuing transactions like that.
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Eriko Ross, Barclays - Analyst [75]
------------------------------
Okay, that's helpful. And perhaps I can ask one final question in that case on the potential renegotiation of these concessions. You mentioned that you're hoping the [Wazn] Group is going to come to some conclusion of appraisal within the next 75 days. I guess can you perhaps outline potential timeframe beyond that. So after the 75 days and they come to some conclusion about what the potential changes should be for that concession? How long does it then take perhaps for them to then formalize that and go to I guess Congress with something?
Is that something that we should expect at the beginning of next year or could you see something getting tabled at the end of this year?
------------------------------
Bayard Gontijo, Oi SA - CEO [76]
------------------------------
No I don't think we're going to have something concrete in terms of changes through the end of this year. We do expect to have concrete news on next year hopefully in the first half of the year.
------------------------------
Eriko Ross, Barclays - Analyst [77]
------------------------------
Okay, that's very helpful. Thanks very much for taking the questions.
------------------------------
Operator [78]
------------------------------
Sonny Kushwaha, Claren Road.
------------------------------
Sonny Kushwaha, Claren Road - Analyst [79]
------------------------------
I've got few questions, one just on your OpEx. If can you tell us how much of that is linked to FX. I think you commented that your rent insurance was up primarily [in terms] of exchange rate. So I was just curious of on overall OpEx how much was linked to the FX.
And then looking at OpEx customer [broadly], do you see much more potential, because I think quarter-over-quarter your routine OpEx hasn't really changed much. So I'm wondering have most (inaudible) or do you think there's still -- there's still more to go.
And then on your derivatives, I know you've already answered a few questions on this so sorry if you've already answered this, but so you attribute the mark-to-market loss to I think, you call it atypical volatility in the curve. I'm wondering if you can tell us what exactly caused that volatility and if it was just linked to the kind of steep increase or see increase in the depreciation recurrency or if it was something else that caused that volatility.
And then just finally, you said that a good chunk of your cash is in FX. I assume that's on euros I think you said that as well but just to confirm that's primarily in euros and not in USD. Thank you.
------------------------------
Bayard Gontijo, Oi SA - CEO [80]
------------------------------
Thank you, Sonny for your questions. I'll start by OpEx in U.S. dollars, I mean the OpEx is not significant. It's very small portion of it. It's mainly TV content. Some infrastructure capacity in terms of the submarine cable that we sold last year and that's just the -- and satellites, they were (inaudible) about the satellites here. So that's pretty much what we have in terms of OpEx linked to [business] dollars and that is not significant.
In terms of the trend in OpEx, I, mean we've been able to maintain the OpEx in very low levels. We continue to work in the transportation offers to improve processes, to improve productivity, to improve efficiency of business. Of course with the macroeconomic environment in Brazil with inflation going up, inflation in Brazil is running, I don't know 9% to 10%, [plus] the challenging increases. But we've been able to maintain that OpEx control. And we have here initiatives on the deployment to address that issue and to continue to capture savings on that. Then I'll turn here to Flavio to talk about the dollar volatility and the cash in foreign currency.
------------------------------
Flavio Nicolay Guimaraes, Oi SA - CFO [81]
------------------------------
Thank you, Sonny, first the cash actually it is currently in euros, so it's matching our debt denominated in euros. In regards to the volatility is [M2M], so what we saw in September was a huge volatility in the market the dollar-real went from BRL3.70, BRL3.82 to BRL4.20, I think that was. So of course when you have such a volatility that will impact all the firm and the cupom cambial, which is the interest rates in dollars negotiated in BM&FBovespa there was impact.
And why they need almost 300 basis. So that was the effect of that caused this BRL1.5 billion. So we usually do not see such a spike in just couple of weeks and that's what happened. That's why now that things are come here at this points and life's going back to normal then we saw the reversal of BRL1 billion out of the BRL1.5 billion that was pretty much this market condition.
------------------------------
Sonny Kushwaha, Claren Road - Analyst [82]
------------------------------
Okay great thank you.
------------------------------
Operator [83]
------------------------------
Thank you. And since I see no further questions, I would like to turn call back over to Mr. Bayard for his final remarks.
------------------------------
Bayard Gontijo, Oi SA - CEO [84]
------------------------------
Well, thank you very much for being in the conference call with us. I would like take the opportunity again to thank the employees of Oi for the terrific job done in this quarter. And we hope to see you again in the next quarter results conference call. Thank you, very much.
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Operator [85]
------------------------------
Thank you. This does conclude Oi SA's conference call. You may now disconnect and have a good day.
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