Q4 2016 Oi SA Earnings Call

Mar 23, 2017 AM EDT
OIBR4.SA - Oi SA
Q4 2016 Oi SA Earnings Call
Mar 23, 2017 / 01:00PM GMT 

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Corporate Participants
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   *  Marco Schroeder
      Oi S.A. - CEO
   *  Ricardo Malavazi
      Oi S.A. - CFO & Investor Relations Officer
   *  Bernardo Wink
      Oi S.A. - Retail Officer
   *  Carlos Eduardo Medeiros
      Oi S.A. - Regulation & Institutional Affairs Officer

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Conference Call Participants
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   *  Susana Salaru
      Itau - 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. Welcome to Oi SA conference call to discuss the fourth quarter of 2016 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/ri, and also on the Engage-X platform alongside with the 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. 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 further developments.

 I will now turn the conference over to Mr. Marco Schroeder, CEO. Please Mr. Marco, you may proceed.

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 Marco Schroeder,  Oi S.A. - CEO   [2]
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 Good morning, everyone. Thank you for joining our conference call today.

 I have here with me today Bernardo Wink, the Chief B2C officer; Catia Tokoro, Chief B2B Officer; Maxim, the Chief Customer Relations Officer; Pedro Falcao, Chief IT and Engineering Officer; Jose Claudio Goncalves, the Chief Network Operations Officer; Carlos Eduardo Medeiros, the Chief Regulatory Officer; and our financial team, Ricardo Malavazi, our Chief Financial and Investor Relations Officer; Carlos Brandao, our Chief Administrative Officer; and Marcelo Ferreira with our IR team.

 I would like to start with our presentation on slide 3 highlighting some important results that we achieved in the fourth-quarter 2016. In the fourth quarter we once again generated cash with an increase of BRL708 million. As a result, we closed the year with a cash position of almost BRL8 billion.

 I would like to mention that from the beginning of the judicial reorganization process in June 2016 to December 2016 Oi's operations generated more than BRL2.7 billion. This performance shows the continuous operation improvement of our business.

 It is also worth noting that we increased investments in a year of economic slowdown. Even in a period marked by a reduction of investments by the sector and a challenging macroeconomic environment, and despite the Company's complex judicial reorganization process, investments increased almost 18% between 2015 and 2016 and more than 26% in the fourth quarter compared with the same period last year. This reinforces our commitment to Oi's future and its own judicial reorganization plan.

 From an operational standpoint, we made substantial progress in terms of equality of our service. In addition to increasing investments mostly focused on network and infrastructure, we have worked on several fronts to enhance operational efficiency and improve our customer experience.

 Among these trends I highlight a closer management of field operations and our new customer service quality model based on competition between service providers. We will discuss these examples in further detail later on.

 All these initiatives have led to operational progress reflected in consistent improvement in ANATEL and PROCON, Consumer Protection Agency that is, and JEC, Special Civil Court, quality indicators. Increased operational efficiency, productivity gains and strict cost control all have contributed to a margin improvement.

 In the fourth quarter routine OpEx in Brazilian operations fell 7.3% year on year and 4.8% quarter on quarter. Considering inflation, the real gain in cost came to almost 13% between the fourth-quarter 2015 and the same period in 2016. As a result, the routine EBITDA margin in Brazil reached 77.4% in the fourth quarter, an increase of 0.7% compared with the fourth quarter of 2015 and 2.6% over the previous quarter.

 Pretax loss for 2016 declined 47% compared to 2015, standing at BRL3.2 billion. Net loss after taxes closed the year at BRL7.1 billion impacted by the BRL2.8 billion write-off related to the portion of tax credits and tax loss carryforwards.

 Here it is important to note that this tax credit does not expire and that this write-off is purely accounting. The write-off was carried out to reflect the estimated taxable income projected in the judicial reorganization plan and we have currently disclosed.

 Finally, it is important to mention that the judicial reorganization process which began in June last year has been progressing as expected. Meanwhile, the Company has been generating cash, increasing investment and improving service quality and customer experience, confirming our focus on operations and generation of value.

 Now on to slide 4 where we present the financial highlights for the quarter. Net service revenues closed the fourth quarter at BRL6.1 billion, a year-on-year decline of 6.5%. The performance of service revenues was a direct consequence of the adverse macroeconomic environment in 2016 which mainly affected prepaid and B2B segments. The Company's service revenue were also strongly impacted by the cut in regulated interconnection and fixed mobile tariffs.

 While our revenues were impacted by macroeconomic, environment and regulatory cuts, we were able to substantially reduce our costs thanks to strict cost control and increased operational efficiency. As I have already mentioned, in the fourth-quarter 2016 routine operating costs in Brazil were 7.3% lower in the fourth-quarter 2015 and 4.8% lower than in the third-quarter 2016.

 Our costs fell 2% from 2015 while inflation stood at 6.3% in the last 12 months, representing a substantial real gain of almost 8%. As a consequence of this cost reduction, routine EBITDA totaled BRL1.7 billion in the fourth quarter, 9.2% higher than in the third-quarter 2016. Routine EBITDA margin reached 27.4% in the same period, occurring both in the year-on-year as well as in the quarter-on-quarter comparisons.

 Also as I have already mentioned, we increased our investments. CapEx in Brazilian operations totaled almost BRL1.4 billion in the quarter, reaching BRL4.8 billion in 2016. That's almost 18% higher than in 2015.

 In 2016, CapEx represented 19% of our revenues. As I pointed out, this reinforces our commitment to the transformation and the sustainability of our business.

 Now slide 5. The residential segment continued to present improvement in broadband and pay-TV, noting that our pay-TV had the best market performance in 2016.

 And fixed line, despite the natural downward trend, our base performance improved substantially which was a result of the convergence strategy as we will see on the next slide. The personal mobility and B2B segments are still being affected by the challenging macroeconomic environment, especially in the prepaid and corporate and SME businesses.

 Now on to slide 6. We have a more detailed analysis of our business starting with the residential segment. As in the previous quarters, the residential segment continued to present a solid improvement, supported by sales concentrated in our high-end and convergent offers.

 This strategy combined with customers retention initiatives contributed to an increase in gross additions and to reduce also involuntary churn in the three products of the segment. Pay-TV performed exceptionally well this quarter with an increase of over 39% in gross additions and a reduction of almost 13% in voluntary churn compared with the last quarter of 2015.

 Another important highlight was a substantial reduction of 47.1% in net disconnections in wireline between 2015 and 2016 accompanied by growth in broadband and pay-TV net additions. The concentration of sales in high-end and convergent offers has been helping increase customer profitability.

 The average speed of total broadband base continued to increase consistently, reaching 6.8 meg in the quarter and 24.1%, up over the fourth-quarter 2015. The average speed of gross additions also continued to increase, reaching 9.4 meg in the quarter, almost 26% higher than in the fourth-quarter 2015.

 In the fourth-quarter 2016 almost 35% of broadband sales had speeds equal or higher than 15 meg, a substantial increase of 22.7% over the fourth-quarter 2015. This performance has been driven by the launch of new offers featuring VDSL technology which supported the increase in the average speed of our base and consequently our ARPU broadband.

 Another highlight was the improvement in the share of high-end customers in pay-TV which has been driven consistently which in 27.3% of the total days in the fourth quarter in 2016. As a result, net customer revenues for the residential segment which excludes interconnection have shown a clear upward trend in the last quarters, reversing historical downward trend caused by wireline.

 As you can see on the slide, residential customer revenues moved up by 1.8% year on year and in the fourth quarter versus 2.6% year-on-year decline in the same quarter the year before. We can best see that growth in broadband and pay-TV revenues are more than offsetting the natural decline in fixed line revenues.

 In the full year of 2016, residential customer revenues increased slightly over 2015, once again proving that the reverse of the downward trend observed in the recent years. As a result of the convergence strategy and the initiatives of increase in customer profitability, residential customer ARPU moved up by 7.8% between 2015 and 2016. I would like to highlight of broadband and pay-TV ARPU increases, and that was 7.3% and 19.6% respectively in the same period.

 On slide 7 we will talk about Oi TV, which had the best performance in Brazil's pay-TV market in 2016. Oi was the only operator among the major economic groups in the pay-TV market to record growth in the year, increasing its market share from 6.1% at the end of 2015 to almost 7% at the end of 2016.

 Oi TV has been acting as an important leverage for the convergent strategy in the residential segment and as a result, Oi TV's penetration in the households that have an Oi fixed line continue to grow consistently. Likewise, pay-TV ARPU continued to grow, increasing 15.4% year on year and in the fourth quarter thanks to our focus on the high-end offers and to the strong sales performance of the Oi total, our main convergence offer.

 Regarding Oi total, I would like to highlight that the mark of 1 million customers was reached last month, less than a year after its national launch. This performance shows that the market has seen the value in the offer and had adhered to our competing fully covered solution in the residential segment.

 It is also important to mention that the convergent offers such as Oi total in addition to increasing average revenues per household also have churn rates substantially lower than those in the standalone offers protecting the residential customers base. In the fourth-quarter 2016, for example, the churn rate of customers with the three products in the residential segment was almost 50% lower than the same rate for a customer with only one Oi product, reinforcing the importance of convergence in building customer loyalty.

 Now let's move on to slide 8. It discusses the personal mobility segment. The focus on high-end offers with more extensive data allowance combined with an increase in the penetration of 3G and 4G handsets, which has already reached 76% of the base, has been increasingly encouraging data usage.

 As a consequence, data revenue maintained the upward trend, growing 17% on the year and accounting for 56% total customer revenues in the fourth-quarter 2016 versus 46% in the same period of 2015. The strong performance of data revenues has been fueling mainly the postpaid and control revenues which moved up 7.8% year on year, partially offsetting the decline in prepaid revenues. The prepaid revenue reflects the direct impact of the adverse macroeconomic environment we had in 2016.

 Recharge volume is clearly related to the country's high unemployment rate which is nearly 12%. Despite external impact, we were able to see signs of recovery in recharge volume per business day at the end of the year, which increased 5.3% between November and December 2016.

 On the next slide we will present more details on the B2B segment. The B2B market in Brazil as a whole was severely impacted by the macroeconomic environment in 2016. The economic slowdown was significantly affected the government and companies which reduced costs, reevaluating suppliers' agreements and renegotiating the terms of these agreements or even terminating services.

 Our businesses were no different. It's worth noting that the revenues from the B2B segment were also impacted by the cut in the regulated interconnection MTR and the fixed mobile VC tariffs. However, in line with the Oi strategy of reducing the dependence on segment revenues and voice services, we have concentrated our offers in nontraditional services, aiming the IT and data markets with simple offers and digital services that save time and make customers' lives easier, increasing business management efficiency.

 In this sense, data and IT revenues have been growing and outperforming the market in general. In 2016 data revenues moved up 3.5% over 2015 while the market grew a mere 1%. The segment IT revenues climbed 21.9% in the same period, substantially outpacing the market which grew 11%.

 In 2016 non-voice revenues accounted for more than 60% of total net revenues for the segment, 4.1% higher than in 2015 thanks to the strategy of exploring new products and services. In relation to the B2B customer base, we could also see an upward trend due to operational improvements focused on efficiency and improving quality and customer experience.

 In the corporate segment, sales efforts continue focus on the sale of nontraditional services such as data, IT, value added services, partially offsetting the natural decline in voice services. In the small and medium enterprise segment Oi Mais Empresas already represented 33% of the fixed base and 40% of the mobile base. Customers who acquire this offer benefit from Oi's full digital customer service, the Oi Mais Empresas app which has a high recommendation rate, also known as Net Promoter Score, that was 52%.

 Operating indicators have also been improving sales, for example grew 57.3% in the annual comparison while billing complaints fell 54%. The ARPU or fixed and mobile gross additions also increased in the same period, moving up 8.7% and 13% respectively.

 Moving to slide 10, we will present what we have done from an investment standpoint. Even in a year of economic slowdown and lower market investment, we increased our CapEx in 2016, prioritizing network and infrastructure.

 In the fourth-quarter 2016 investment in Brazilian operations totaled almost BRL1.4 billion, a year-on-year increase of around 27%, representing 22.2% of net revenues in the quarter. In the full year of 2016 investments grew almost 18% over 2015, totaling BRL4.8 billion.

 CapEx represented 18.9% of total net revenues in 2016, an up-turn of 3.6 percentage points over 2015. The CapEx increase followed an efficient investment policy focused on upgrading and expanding the IT and network capacity, ensuring a more efficient operational performance and promoting consistent improvement in service quality and customer experience, thereby creating value for the business. At the end of 2016, we had completed all planned network capacity expansion projects, demonstrating the Company's commitment to network core growth in order to support increasing data traffic and the improvement in fixed mobile and pay-TV services as well as to continue enabling the launch of new offers better suited to current customer needs.

 In mobile segment we successfully completed actions in 3G and 4G access networks and structural actions in the network core, enabling service expansion. In wireline the Company moved forward with the structural infrastructure projects, especially those related to the expansion of the 100 gigabyte optical transporter network, OTN backbone and the modernization of the IP network core and the expansion of its access to the single edge project in addition to other initiatives to upgrade and optimize the access network capacity.

 As a result of these investments in infrastructure, several network quality indicators improved continuously, enabling better customer experience. Data and voice access indicators, for, example have been consistently increasing. Likewise, ANATEL indicators, which measure data connection and data drop rates, have been continuously improving.

 Likewise ANATEL indicators, which can measure connection and data drop rates, have been continuously improving, [as was said]. And the same time Oi's networks have been supporting significant increases in data traffic and ADSL use per user while bottleneck levels have been falling underlying the improved network quality end-user experience.

 Slide 11, as I mentioned in the beginning of the presentation, together with the efforts to improve network quality, we have focused on increasing operational efficiency in order to reduce cost and improve customer experience. In this sense, one of the structural initiatives we carried out during 2016 was the implementation of a management strategy closer to our field operations after the absorption of activities of two network service providers that operate in a large part of the country.

 These companies were facing operational difficulties which directly affected their results and the quality of their services provided by them compromising our operations. The incorporation involved the hiring of large number of these companies' technicians who were also responsible for maintenance, installation and repair operations in our network. So 75% of field technicians became employees of the group Oi companies.

 With a closer management of its workforce Oi has been increasing the focus on network preventative maintenance. This initiative reduced the number of repairs, in turn reducing the volume of network interventions at a customer's request and increasing field staff productivity, thus freeing capacity to operate in a more preventative manner. This virtuous cycle promotes efficiency reducing operating costs.

 As a result of this strategy, we achieved improvements in several internal operational indicators with a direct impact on service quality improvement. For example, the average waiting time to serve a problem fell more than 31% in the fourth-quarter 2016 compared with the same period in 2015.

 Compliance with scheduled visits improved 13% in the same comparison. The average time for the installation of a service fell almost 60% in the annual comparison. All these indicators have helped improve our customers' experience as underlined by the 28% annual reduction in the volume of technical complaints filed with ANATEL.

 Moving forward with operational efficiency plans on slide 12 where we will share with you the initiatives that drove the improvement in customer service during 2016. We implemented our customer service quality model last year. This model is based on the competition between our call center providers for higher traffic shares granted based on proven service quality.

 As a result, competition directly stimulates all players to improve service quality with a positive impact on customer service. As we notice quality improvements, we analyze that these players' best practices use those that stand out as benchmarks, replicating them to the other companies. Therefore, we are able to have more control over the management of processes, directly helping to increase the efficiency of these operations.

 Among the implemented improvement, we would like to mention the new recruitment selection platform support call centers and a more prudent management of the operators levels. Also thanks to the revision of our processes and competencies we have reduced our back office by a to 80%.

 Finally, we are implementing a culture of caring for the customer, which means working to ensure that customers can solve their problem using digital self-service channels or have their problems solved in the first time they contact the call center. As a result of this model, we can see the impacts of operational efficiency in several indicators, such as the optimization of customer care cost which fell 16% in the annual comparison and also the 19% decline in repeated calls in the same period with an increase in customer satisfaction and a 30% reduction in the number of customer service complaints filed with ANATEL for the fourth-quarter 2016 year on year. Therefore, efforts are leading to better quality higher customer satisfaction and lower costs for the Company.

 On slide 13, we can see that all these structural initiatives have generated substantial results. Our concentration initiatives to increase network investment to manage more closely our field operations and implement our customer service scores and model helped improve the customer experience in addition to leading to the quality and operational improvements that we have already mentioned. These improvements became evident in the reduction of customers complaints about Oi which fell substantially in the period.

 In the fourth-quarter 2016 the monthly average number of complaints to ANATEL fell 18% compared with the same period 2015 and the downward trend was maintained in January and February 2017 with a 26% decline year on year. In addition, the monthly average number of complaints to PROCON fell 25% in the quarter compared with the fourth-quarter 2015, while the number of cases filed with the Special Civil Court JEC declined 54% in the sink your code. Also regarding these indicators, we continue to present a forward -- a downward trend in complaints in the first two months of 2017, both in PROCON, 11% down, and in JEC, 56% lower than in the first two months last year.

 I highlighted these improvements and operational indicators related to quality and customer experience reinforce the Company's commitment to operational efficiency and the pursuit of excellence in our service despite still the fickle macroeconomic environment and challenges in the judicial organization. We will continue focusing our efforts on improving our business in order to ensure customer satisfaction and the Company's sustainability.

 I will now have the floor over to Ricardo Malavazi who will present the costs and EBITDA as well as our cash position evolution and the status of our judicial reorganization process.

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 Ricardo Malavazi,  Oi S.A. - CFO & Investor Relations Officer   [3]
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 Thank you, Marco. Good morning, everyone.

 Slide 14 shows the evolution of routine operating costs and expense in our Brazilian operations. It's worth noting that we are still focused on strict cost control, working on several fronts always seeking to optimize our operations and increase our productivity.

 As Marco mentioned on the previous slides, the efficiency plans are in call center services and the closer management of certain network services operations during 2016 among other operational efficiency initiatives supported the year-on-year reduction in our operating cost and expenses in the last 2016. Network maintenance costs, for example, fell BRL134 million in the fourth-quarter 2016 compared with the same period 2015 and BRL359 million between 2015 and 2016. In the fourth-quarter 2016, our costs dropped 7.3% year on year.

 In a period with an annual IPCA inflation 6.3% fiscal response to a decline of almost 13% in real terms in the period. In the sequential comparison costs fell 4.8% and as a result, routine EBITDA from Brazilian operations increased 9.2%, totaling BRL1.7 billion in the fourth quarter. The routine EBITDA margin increased 2.6 percentage points, coming to 27.4% in the quarter.

 Slide 15, it shows the evolution of our cash position in the quarter. The Company closed 2016 with a cash balance of BRL7.8 billion, an increase of BRL708 million quarter on quarter. Operational cash flow routine EBITDA, minus CapEx that is, was a positive BRL318 million in the period.

 Working capital was positive by BRL411 million while judicial deposits and taxes reduced our cash in BRL139 million in the quarter. In addition, thanks to an increased cash position income from financial investments also remained at a higher level.

 It is important to note that the Company has been consistently generating cash since it filed its request for judicial reorganization at the end of the first-half 2016, having accumulated more than BRL2.7 billion in cash in the period. This cash generation is a direct consequence of operational improvements and has been supporting the growth of our investments in network and quality services.

 Our last slide number 16 shows the current status of Oi's judicial organization process. The message we'd like to stress is that despite the complexity of the judicial reorganization process, which is the greatest in the history of our country, Oi has been complying with the procedures required by law. All of our operations in relation with customers' suppliers and partners are being conducted on a business-as-usual basis.

 It's always important to remember that the request for judicial reorganization is designed not only to preserve the continuity of the service provision to our customers, adding the value of Oi companies, but also to ensure adequate liquidity levels, enabling us to discuss the restructuring of our liabilities with our creditors in a structured manner. It is, therefore, clear that the Company has a healthy operation that allows cash generation and increase of investments while promoting improvements in quality and customer experiences.

 I'd like to remind you that Oi's request for judicial reorganization along with six subsidiaries was filed on June 20, 2016 and granted by the Brazilian court right after that, afterwards recognized by the courts in the United States, England and Portugal as well. On July 22, 2016, the request for judicial reorganization was ratified by Oi shareholders at a shareholders meeting. On December 5, 2016, we submitted a judicial reorganization plan to the judge and creditors rigorously within the term established by law.

 On September 20, 2015 we disclosed the first list of creditors and since then the judicial administrator has been reviewing the list. The next steps in the process after judicial administration publishes the second list of creditors, creditors will have 10 business days to present their claim objections to the judicial reorganization judge. Creditors will also have the period of 30 business days as the date of publication of second list creditors to present the objections to the judicial reorganization plan to the judicial reorganization judge. The next step then is to call the creditors meeting to vote on a final judicial reorganization plan to be submitted by the Company.

 Another important highlight in this process is the fact that on February 2, the District Court of Amsterdam denied the request which has been requested by the Dutch judicial administrators for conversion of suspension of payment proceedings into Dutch bankruptcy proceedings of Oi Group's financial vehicles. The victory in the Netherlands reinforces the legitimacy of the continuity of the judicial reorganization process in Brazil, which we have been complying with.

 I will now hand the floor over back to Marco.

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 Marco Schroeder,  Oi S.A. - CEO   [4]
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 Thank you, Malavazi. Just before we go into the question-and-answer session, I'd also like to talk about the fact that was disclosed yesterday after the release. That has to do with our reorganization plan.

 We have had the chance to talk with shareholders and creditors. That had been a concern to always find a solution that will allow the plan to be approved. That solution should be a balanced proposal, be it for the shareholders or for the creditors.

 We have been having several meetings since the plan was filed in September last year. We have been getting feedback from the creditors and we believe that we have taken an important step, or rather we will take in the coming days when the law in Rio de Janeiro accepts the adjustment in the plan.

 In short, out of the four classes we will be keeping what we had proposed for class 1, that is all of the labor issues, there was a six-month period that we had. And also small creditors who also would keep almost immediate payment the Company has been working with the judge to try and create a more expeditious process for payment that are up to BRL50,000, which is to make the judicial reorganization process easier. And the fact we disclosed yesterday was an improvement in the proposal for the creditors.

 The points that you can see in the fact that was disclosed and is available on the website, we have reduced the grace period. If you look at class 2, for example, that is creditors that have a guarantee. The grace period was seven years and that was reduced to four years.

 The payment was 10 and now it's six. The average time went from 12 to 10.3 years.

 Financial creditors were class 3. They also had a reduction from seven to six years in grace period. We changed the interest rate proposal to be more adjusted to the reality we have in the financial market. That's 75% of this [CDGI].

 We also have reduced classes from class 3 seven to six years in grace period. And the main one to six years was reduced.

 Class 3 we understand that it has a part that could be interesting for the conversion. The plan that we had filed in September had BRL10 billion. That's in comparison to the BRL30 billion that we had in debt for the payment in the third year.

 If the payment doesn't take place then the Company would be able to give the capital up to 85%. And the demand from creditors was that they would be Company partners so that they would reap benefits from the Company's valuation that we believe will take place when the debt is restructured and with the legal aspects and we know that all the operating adjustments need to be made.

 We addressed this in this proposal, trying to the from the starting point offer the 75% in shares or maybe a convertible bond, the average is normally three years. That is to be agreed with the judge still. But that would be an agreement with the creditor they would choose that now an option that would be interesting for them, a convertible bond for example.

 Then BRL2.8 billion bond to expire in 10 years and BRL3.9 billion, and that would represent another 17% of the capital. I think that is important progress. That is the proposal that we have disclosed in the fact to be part of the suit now. And when the creditors list is published and everything is prepared, then they would allow the judge to allow the assembly to work as we need it to.

 Now we are going to start the Q&A session. Thank you all for being with me today.

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Operator   [5]
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 We will now begin the Q&A session. The questions sent via webcast will be prioritized.

 (Operator Instructions)

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 Marco Schroeder,  Oi S.A. - CEO   [6]
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 We have the first question coming from several investors. That is from the webcast. Still around the reorganization.

 In summary, that question is if this is the last proposal or if anyone might not be satisfied with the last proposal, the last thing that we proposed. The proposal was approved in the Company's Board. That is a balanced proposal.

 I think it respects the interest and the profile of several types of creditors. We know that creditors and shareholders have differing interests. Some have heard me speak and I say that I will never think that shareholders will say I could give more, I'm giving so little, or that creditors will be thanking for giving more than they have.

 I'd like to believe that the communication process and the media process, that is a natural process. But our demand was to have this equity of 25% and there is the non-liquidation that could be 17%. I still think it is a balanced proposal, that we are going to send it to court and that's going to be voted in the meeting.

 I think that was an important step and that reflects the feedback we have been getting from several meetings and I think that it was a demonstration of flexibility. It helps meet the bank's conditions. We have been very transparent with several groups that have signed NDAs, showing our cash flow.

 I think that all of these groups now understand that the values that we are paying in the 10, 17 years, that's what the Company can pay with our cash. We can't compromise our investment capacity in Oi. I think that would be the shareholders and creditors interest to allow Oi to continue to make investments to grow. Our estimate is to have CapEx still strong in 2017 so that that would be good for shareholders old or new that are going to be receiving the shares in this proposal.

 Another question from the webcast and then we are going to start with telephone questions. What is the risk of intervention? This has to do with the recent news we have had.

 I probably said this not yesterday but earlier, the government, the regulatory body ANATEL, they are ready to deal with if they need to do as they should to continue services. ANATEL has been monitoring Oi because of this organization process for a long period now. They have been sitting in our Board meetings, and I think ANATEL needs to be ready if there is any risk to service continuity.

 It's a national telecommunication service, so the country can't let go of that service. But I'd like to highlight that there is no indication whatsoever of that happening. Much to the contrary.

 All of the indicators that we have from ANATEL, from PROCON and from customers, and I have been meeting with customers myself, is that we have had good progress in our quality indicators. We continue to make investment as we need as I have just mentioned. We had improvements from last year.

 So I believe that it's natural for ANATEL to be prepared should there be necessary because the Oi service continuity is very important. But that's not the case that we have, the scenario that we have in this point.

 Now telephone questions.

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Operator   [7]
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 Susana [Salaru], Itau.

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 Susana Salaru,  Itau - Analyst   [8]
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 Good morning. Thank you for having my question. We have two questions.

 One has to do with image. There has been a course that was established in 2016 to expand the image. And I'd like to know what the drivers would be for image from now on so that we can move on, and if you could explain to us where you hope to get with your EBITDA margins?

 And the second question has to do with the reorganization plan. We have been monitoring what has been disclosed, and we have the official plan from Cedrus and (inaudible) and Cedrus are probably going to be presenting alternative plans as well. If you could please talk a little bit about this dynamic.

 Are we going to have the judge comparing plans from other companies and our Company? Or what is going to be presented in the creditors meeting?

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 Marco Schroeder,  Oi S.A. - CEO   [9]
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 Thank you, Susana. First of all, the operating issue that you mentioned. Cost is a constant focus.

 There is still many initiatives that we are going to use to increase productivity and improve services. I talked a little bit about the PCR and we have been able to reduce cost and improve quality in a very important way around PCR.

 And when we look at contingencies, a lot of the contingency has to do with JEC, the Special Court. And there were many complaints, but there is no financial penalty in reais. There is still things to be done.

 I think we need to keep an eye on our revenue. That is always a concern. The market as a whole has suffered.

 Maybe we have suffered more than other competitors because we have a lot of prepaid costs customers. So the business has felt the impact of the economic situation of the country and the tax crisis. But we think that in the mid or long term we will have the chance to improve revenue and continue addressing costs.

 The alternative plans that you mentioned we have been speaking to all of them. We have been speaking to creditors, I call them investors actually, because many of these proposals that you mentioned they have no connection with the Company at this point. Some of them are not shareholders nor creditors.

 So they see Oi as an opportunity which makes me happy. But there is a business side to it. Of course, any proposal for an alternative plan will have to be good for three audiences.

 Maybe, first of all, would be Oi the Company itself or would the balance be at the end of it is going to be able to reduce resources that also should be balanced for shareholders and creditors, as well. Any proposal that says that the current shareholders are going to go away empty-handed or creditors are going to go away empty-handed is not going to receive any support from these audiences.

 So we can discuss things with these plans and if they bring good ideas and we will take them into account or we will discuss them at least in a meeting. And this Company is listed is listed in the stock market. So we need really to perform as we are expected to perform.

 We have one proposal that we received, a group the [bodies] represent. And that proposal we don't think that beats the current one that we have, the one we presented to our shareholders and creditors already.

 Thank you, Susana.

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Operator   [10]
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 Mathieu Robilliard, Barclays.

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 Mathieu Robilliard,  Barclays Capital - Analyst   [11]
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 We'd like to talk about churn rates. Churn for mobility, is there any impact regarding the past quarters?

 And the second question has to do with the reorganization plan, if we look at creditors what do you think the next actions of the Company are going to be. What is the fastest that you think we can act around this issue? If you could give us an update of how we stand currently, thank you so much.

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 Marco Schroeder,  Oi S.A. - CEO   [12]
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 Thank you. We will start out with the periods that we have for the reorganization. That is the biggest or largest reorganization process that we have had in Brazil.

 We are aware of how difficult it is even looking at the process as well or points that will be raised in the suit. But we really do intend to solve that as soon as possible.

 What we have been discussing with the administrator is to publish the list of creditors in April. And I think that 30 days after that, which is the legal period I think, for any objection to be made to the list then the judge would be able to call the meeting.

 The creditor meeting would be the ones to decide. They are sovereign. That should probably be at the start of the third quarter. I think it is important for the Company to address this issue this year still.

 Now for churn I will ask Bernardo who is here with me to talk about it especially on the prepaid market. He will just give us an overview of how we see the market and what we expect for this year.

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 Bernardo Wink,  Oi S.A. - Retail Officer   [13]
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 Good day. I think that we have to break prepaid mobility.

 Prepaid has an impact from the economic situation, that is a direct impact from unemployment rates that reduces prepaid revenues drastically. And there is a consolidation movement as well. That is not something that only happens to Oi but in the home market.

 This base reduction has been similar with the competition. Of course, operators that depend more on prepaid will have a greater impact on the revenue.

 In 2017 we understand that the consolidation that we will have will continue to take place. There is promotions are showing, so we believe that we are going to have to consolidate even though there has been a slight improvement in the macroeconomic scenario.

 Postpaid has a slight different scenario. We have a slightly different customer base. That should continue to be as is in 2017.

 And the last point by Mathieu was the regulatory issue, right? And the bill of law. And Carlos Eduardo will also address that briefly.

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 Carlos Eduardo Medeiros,  Oi S.A. - Regulation & Institutional Affairs Officer   [14]
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 Hello, Mathieu. The bill that has been discussed by the Senate and in the lower House, it's been approved and gone up and it's pending before the Senate. Oi can't comment on risks in proceedings, but Oi has been watching carefully is anything that could happen around the legal framework if that bill is approved.

 That would change the voice and fixed lines operations and regime and that would change it into a broadband policy. Broadband is lower in Brazil than in the rest of the world. So in the proceedings I think that we need to look at the bill, and if passed how that is going to unfold, so we will need to watch that carefully and see what the events will be.

 Marco has been taking part in some events as well to know how things are going. And once this bill is passed we will see how it takes effect.

 These were the three questions that Mathieu asked, right? Thank you very much.

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Operator   [15]
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 Mauricio Fernandes, Merrill Lynch.

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Operator   [16]
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 (Operator Instructions)

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 Marco Schroeder,  Oi S.A. - CEO   [17]
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 We have a question from the webcast. Why did Oi generate BRL2 billion in the third-quarter 2016 and only BRL700 million? What can we expect from the cash flow? That's the question.

 It's important to say that the second quarter we had the suit starting in Rio. We had the receivables that that we were not receiving, payables that were not paid, so that is closer to a reality for us to look at the EBITDA. It's much more aligned with the fourth quarter, not the third.

 There are seasonality issues and that is part of our reorganization process. We have seen that in January we had negative cash. We will see that it is closer to that reality.

 The increase in our cash should be closer to EBITDA minus CapEx. So even though the third quarter had higher figures because of the reorganization process and the fourth quarter is closer to reality.

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Operator   [18]
------------------------------
 Now Marco will speak for the final comments.

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 Marco Schroeder,  Oi S.A. - CEO   [19]
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 Before I finalize the call I would like to thank you because even though we had all of the slowdown in the macroeconomic region and we had the reorganization as well, I think that we have made good progress in the operating progress. And I think that Oi's future is very promising.

 I'm sure that with the support of our shareholders and creditors we will be able to address the debt issue and we will be a lot stronger at the end of this process. I'd like to confirm our commitment around our operations continuity. As I said today, we are prioritizing efficiency in operations and quality and we want to give our customers the best experience.

 I'd like to thank our staff for all of their efforts every day to try and improve our operations and, of course, thank our customers, we are here for them. And also our partners and creditors and providers that are with us here during this reorganization moment in Oi. Have a good day.

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Operator   [20]
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 This concludes Oi SA conference call. You may now disconnect and have a good day.

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Editor   [21]
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 Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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