Operator: Greetings, and welcome to the Portugal Telecom 2013 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Zeinal Bava, CEO for Portugal Telecom. Thank you, Mr. Bava. You may begin.
Zeinal Bava - CEO: Good afternoon, ladies and gentlemen. Thank you very much for being on this call. I'm here with my CFO, Luis Pacheco de Melo; our IR Director, Nuno Vieira; and the finance team as well.
We are going to take you through the first quarter numbers. As you will have seen this morning our consolidated operating revenues amounted to EUR1,553 million. Consolidated EBITDA stood at EUR526 million. Our margins reached 33.9%. It was underpinned by the solid margin of the Portuguese businesses which posted a margin of 42.8%. Oi's EBITDA margin also improved and it reached 30.5% in the first quarter. As you know Oi has already their results earlier in April.
In the first quarter 2013, our fully and proportionally consolidated international assets represented 58.7% and 52% of PT's consolidated revenues and EBITDA. This is very much in line with our strategy to diversify our international presence, and as a result it's very good to see that about almost (60%) of our business is now done outside Portugal.
In the first quarter of 2013, our CapEx amounted to EUR287 million. This is equivalent to 18.5% of revenues. The CapEx from Portuguese telecom businesses stood at EUR99 million. It was down 13.7%, and this is very much in line with the fact that most of the modernization investment in Portugal telecom is pretty much done and completed. Overall, our CapEx to sales was 15.6%.
In the first quarter of 2013, EBITDA minus CapEx reached EUR240 million, while EBITDA minus CapEx of the Portuguese telecom businesses stood at about to EUR172 million.
My CFO will take you through the operating cash flow. Allow me also to say just a one final comment on the financials regarding our net debt.
Our net debt, adjusted for news tax credit amounted to 7.9 billion and excluding the proportional consolidation of Oi and Contax it amounted to 4.6 billion. My CFO will take you through these numbers in a lot more detail later in the call. It is worth mentioning however that the cost of net debt excluding the proportional consolidation of Oi reached 5.3% and the cost of gross debt stood at 4.9% with an average maturity of 6.3 years which takes already into account the recent bond issue which we did. I think these are very competitive terms and this shows how robust our funding position is and Portugal Telecom is fully funded until the end of 2017, and we can therefore continue to look at our business always with the mindset of medium to long-term.
I will now take you through the presentation which we put out today, discussing some of the business trends before I hand you over to my CFO. So, Page 3, essentially, we have another quarter of very solid customer growth. Total number of customers, Portugal Telecom today, 101 million. It was up, 6.1% compared to the same period last year. We saw growth in Portugal, 3.2%, in Brazil 5.5% and in other international as well, across all our businesses that are strategic, Portugal Telecom in this quarter posted strong customer growth.
Looking at revenues and EBITDA, operating revenues were down 9.5%, but like-for-like, adjusting obviously for exchange rates, they were down 2.8%. EBITDA was down 7.9%, like-for-like 2.3%. As you know, there were some one off impacts in our numbers in the first quarter mainly related to number of working days and also the weather conditions in Portugal in the launch of the M4O in the first quarter of this year. The CFO will take you through that in a lot more detail.
Let me now take you through the business trends in the Portuguese market, starting with the residential side of our business. Notwithstanding the fact that the Portuguese economy remains very challenging and that private consumption is coming down about 5% to 6%, we had another quarter of robust performance in residential on the back of the MEO offer which we have. We have the best TV offer in this market. We have the best triple-play offer in this market. As a result, our pay-TV and 3G customers increased about 12.3%. We now have 1.248 million customers out of which 862,000 are triple-play. Triple-play customers have increased 18.5% since the first quarter of this year. Notwithstanding the fact that pay-TV penetration is about 78.3% we continue to believe that we can grow our TV business not just by driving this penetration further but also by gaining more market share.
You certainly will have seen in the presentation we put out today that we are leaders in triple-play in Portugal, but we continue to reinforce this leadership quarter-after-quarter. Compared to the fourth quarter this year, our market share in terms of 3P leadership increased another 0.6 percentage points. Having said that, the pay-TV market share is still 40%. We think we can grow this. Moreover, which is perhaps one of the most important information we put in the Slide number 9 is that when we look at our unique customer 41.9% have triple-play, 58.1% are still non-triple-play. We think that there is still substantial upsell potential and we will continue to work very hard at converting these customers to the advantage of us having not just three-play but four-play in the future.
Looking at the revenue performance in residential; notwithstanding economic conditions, our revenue was up 4% when you compare us with the other peer group company in Portugal there revenues were down in the same period 1.8%, which means we continue to gain customer share-- market share and customers, but we're also gaining market share in revenues as well.
Important to highlight that in the first quarter of this year, we posted an ARPU of EUR31.9 that compares with EUR31.6 in the fourth quarter and EUR31.5 in the first quarter of 2012. Thinking about visibility and predictability of this business, it's worth mentioning that 88.4% of our revenues are coming from flat fees. This means that our business is increasingly more robust and more predictable.
As we now take you through some of the trends in our mobile business. On the back of the quadruple play launch which we did on the 11 of January of this year, we have seen already important impact and particularly on the mobile side of our business. In the mobile side of our business the revenue generating units in the first quarter were up 49,000. This is against the backdrop where our direct competitors saw revenue generating units come down.
We saw a substantial increase in our postpaid net adds 99,000. Customer mix has also changed. In the first quarter of 2012 81.7% of our customers were prepaid and now it's down to 80.4%. So, we continue to migrate customers from prepaid to postpaid and with the quadruple play service that we launched we're doing this without recourse to subsidies and I'll mention that a bit later, later on in my presentation.
I also use this presentation to share with you something which for us has been a significant achievement. Portugal Telecom was not leader in the used segment in Portugal. When we think about the used segment we're talking about 10 to 14 years, 15 to 24 we're not leaders yet in the 15 to 24. Having said that in the 10 to 14 year old segment Portugal Telecom has recouped leadership away from our most direct competitor in the segment in the Portuguese market. We think this augurs very well for the future and more over I would like to think that this also positions us uniquely to continue to drive the penetration of four-play in the homes and with the families here in Portugal.
In the mobile business we continue to be impacted still a lot by exogenous factors. One of them is mobile termination rates. Portugal Telecom – Portugal actually as a country took the unprecedented decision to lower termination rates to a level which are among the lowest in Europe. Termination rates at the end of December in Portugal were EUR1.03. It is worth mentioning that in Europe the average termination rate is EUR2.04. So termination rates in Portugal are 90% below the European average.
In the first quarter across all the industry in Europe you have heard lot of (peers) talk about calendar effects. Of course this quarter we had less three working days in terms of doing business and that has significantly impacted us as well. These are a couple of exogenous factors that I wanted to mention. Notwithstanding this the good news is that customer revenue performance in our personal segment has improved and is improving. Our customer revenues were down 9.1% in the fourth quarter and now they are down 8.6%.
We continue to believe that we can do better than this, assuming that we are successful with the quadruple play offer that we launched. Notwithstanding that it is also worth mentioning that there is work be done when it comes to data revenues. Mobile Internet still has substantial scope to grow in Portugal. Having said that, of course we will see churn pick up when it comes to mobile broadband, why, because simply in these market conditions people are substituting mobile broadband for Wi-Fi, not just at home but also in public places and we do have pretty good coverage of Wi-Fi outside the homes as well.
Notwithstanding all this, we'll continue to push smartphone penetration in order to prepare ourselves for this big data growth that we expect to see as and when market conditions and economic conditions in Portugal improve. So, when it comes to the personal segments the trends are improving and we expect this improvement to continue on the back of the success of our quadruple-play service.
Talking now, of course about the quadruple-play launch that we did on the 11th of January, we are extremely happy with the performance that we've had in the last 100 days considering that we just launched this on the 11th of January. I would like to spend a few minutes on this so that you can understand the approach we took which is very different to what other peer group companies are doing in Europe.
First we went out there and we asked the consumers whether they will buy off an integrated service, and they said yes, 81% said yes, we would like to have an integrated offer. Then we asked them, which brand, which retail, which telecom brand in Portugal would survive the test of being able to convince them to buy an integrated offer and the answer for 31.4% was MEO. MEO is clearly the consumer choice of brand for convergence. We then did not want to do a bundle like others are doing in the Portuguese market and like others are doing in Europe. We wanted to do true convergence. This is not about technological convergence. We've done that about a year ago. You can use our TV service at home outside the home. Today, with the quality of the network that we have in Portugal, we can provide unique and seamless experience of voice, video data in the home and outside the home. We've already gone above the technological convergence challenge on the back of the investments that we did in the last few years. What we wanted to make sure is that each customer that bought our quadruple-play felt like he was a single customer of Portugal Telecom independent of whether he was using fixed or mobile technology or voice, video or data service. That's why we have included the slide here, Slide 18 in the presentation that basically shows how we have put this puzzle together.
On the back of the future-proof networks that we have today in Portugal, the investments we have done in IT, I have no doubt in my mind to say that MEO is uniquely positioned to deliver the best convergence experience in Portugal. We can offer our customers speed, reliability, very good coverage and of course, security.
We then on the 11th of January launched our quadruple-play offer. It comprises 90 TV channels, 18 very good channels – you could actually add them all up, add them together like our competition does and say, we have 108 channel – internet up to 100 megabits per second, fixed phone and mobile phone. Our mobile phone offer comprises two SIM cards, unlimited calls to all networks as well as 200 megabits of data per SIM card. You can actually buy an additional two SIM cards. So, the positioning of our M4O offer, convergence offer, was for the family, for the Portuguese families.
We launched a significant marketing campaign and MEO last year was already one of the most successful retail brands, not telecom brands only, retail brands. We actually underpinned the success of last year and today up to now I can tell you we continue to be the leading retail brand in Portugal achieving a very, very high – almost record high brand (neutrality). So, the good thing about this is that our pool channels are performing extremely well in the sale of our product. Our pool channel, as you know command a lower – cost us a lower commission than the push channel.
Now we have – up until now, we have sold 600,000 revenue-generating units. On average, as you know, each customer minimum has to buy five RGUs, which means that by now we have at least 120,000 customers that have bought M4O.
Out of the 600,000 revenue-generating units, 40% are new RGUs. Now, these could be RGUs from existing Portugal customers – Portugal telecom customers, or these are RGUs from new customers that we have been able to get into the service either on the mobile side, on the fixed side, or on the fixed and mobile side. So this is much better than we had ever anticipated ourselves. This is way better than we have thought we could achieve. And I think it just goes to show that this market has been well educated to understand the benefits of actually buying an integrated service, because you tend to get, if you like, the simplicity in terms of tariff, the convenience of just having to deal with one supplier, and of course, cost savings.
In an economic environment that Portugal Telecom is going – Portugal is going at the moment, savings are very important. Out of the analysis that we have done of the customers that bought our quadruple play service in February, those customers are saving right now 18.5%. Now, of course, this is a blend of new customers, existing customers. These are surveys that we have done outbound as well, but this is what leads me to believe that we will continue to be successful with M4O. Why? Because we provide a simple tariff plan. It's convenient for you to deal with just one supplier and by the way we will give you an 18.5% savings.
Now as 40% of our revenue generating units are new large use we are also seeing ARPU enhancements and I have no doubt in my mind that these ARPU enhancements that we're seeing coupled with the sales that we're doing, we should be able to continue to work to reverse the trends especially that we're seeing in the B2C segment.
So, it's still early days. It's been about 120 days that we have launched M4O service. Of course, the first 30, 40 days were difficult days in order for us to get the back office up and running to what would be expected. Right now, we're promising our customers installation within six days and that includes number portability as well.
So, from a back office standpoint this is an absolute of you like reference for the sector, if you are to buy somewhat a TV service, coupled with mobile including portability in 95% of the cases we will install that within six days.
So, we're very confident that with the best back office around the convergence product and with the appeal in terms of value for money that is people actually can also benefit from savings of at least 18.5%, we believe that we will not just be leaders in triple-play in Portugal, but we will also be leaders in quadruple play as well.
Let me talk to you a little bit about our Enterprise business. We as you know and you will have seen in this presentation and other presentations that we have made available to you in the past, we have a comprehensive service offering.
We have diversified geographically as a company, but we've also diversified the services that we make available to our customers, independent of whether you're talking about SMEs or corporate customers. These are vertical solutions in some cases. In some cases these arte cloud solutions, IT consultancy, etcetera. So, we are continuing towards adjacent markets in order to increase our shelf wallet with the enterprise customers in Portugal. We've made significant investments in cloud, in cloud offers. We're building one of the most modern data centers in the world two hours from Lisbon. We are very confident that as and when we inaugurate this data center, not only we will be able to understand the cloud business in Portugal, but we will also be able to generate revenues from doing similar business elsewhere as well, by leveraging the processing and storage capacity that we will have in Portugal.
In the Enterprise segment, you have two different stories. First is SMEs, SMEs, as you will have seen, we saw important RGU growth, whether we're talking about broadband, whether we're talking about pay-TV or whether we're talking about landline. In fact, you will have seen in the slide, that this has been our best quarter in the last five quarters. This has been underpinned of course by our quadruple-play offer, which meets the requirements of servers and in some cases, small enterprises as well. It is worth mentioning, in this case, thinking about SMEs, we have substantial market share today. Portugal Telecom's market share in this segment is likely to be around 52%, 53%.
So here, we have substantial market share gain, furthermore, when you think about convergent customers, we believe that we can do much better than the current 59.3%. So, the focus is convergence, convergence, convergence, also, when you're thinking about SME. With regard to the large segments, the story is slightly different. The current economic conditions have led large corporate customers of Portugal Telecom which includes the state as well in some cases to delayed projects, freezed project and as a result we are seeing pressure in terms of top line performance in this sector.
On the back of this and because Portugal Telecom is very disciplined when it comes costs, we are continuing to drive costs down. So, it's not just an issue of driving costs down, but we will also have to transform the business model in the large corporate segment by offering our customers cheaper alternatives than we have done in the past. As a result, this is one area where I think we're going to have to dedicate a lot of management time and chances are that this will remain under pressure for most of the year. But I'm confident that with the restructurings that we are putting in place and the launch of our data center in September this year, we will probably end up having better news independent of whether the economy improves or not.
So, when you look at the enterprise segment, revenues were down 10.5% in the first quarter of this year and obviously, we will continue to work the cost base short-term and expect that at some stage economy will improve and then we will be able to reverse some of these trends.
So, one final word about Portugal, before I can discuss Brazil; our strategy is delivering results. We have transformed the revenue mix of Portugal Telecom profoundly in the last few years. When I look at the Slide 30 of the presentation, what I see here is that 65% of the residential revenues are now non-voice. This makes our business a lot more predictable. When I look at the weight of the flat fees in Portugal whether it's residential or personal, you see them grow quarter-after-quarter. What this means is that our business is becoming more predictable, more visible and with the investments we have made in the network, more future-proof.
So, we are confident that we are well-poised to gain and to continue gain market share not just of subscribers but also revenues in the future. And in this endeavor the launch of M4O will certainly be a very important – will play a very important role and I am sure that when we speak again when we announce our second quarter results or in the road show that we are planning to do after – in the next few weeks. We will go into a lot more detail, but I am sure that we will be able to convince you that M4O will help us of some of the secular trends particularly in the B2C segment of the market.
With regard to Brazil, Oi has already announced results, and you will have seen that line loss is declining. You will have seen that we continue to post solid broadband and pay-TV growth. In fact, from an operational standpoint, the Company continues to deliver the net adds independent of whether we're talking about voice, video, or data.
The revenue trends are – residential revenue trends have also been improving. Our ARPU has picked up 9% compared to the first quarter of last year. When it comes to mobility, the focus has been on postpaid. Having said that, we are becoming increasingly more stringent on credit control when it comes to postpaid, and as a result, in the next few months, we will certainly be paying a lot more attention to that, and we will pay more attention to that than actually continue to drive the growth as we have done in the past.
Having said that, postpaid weight in Personal Mobility customers has gone up from 12.6% to 14.3%, and this goes to show that we still have a long way to go when it comes to mobility. And the fact that Oi has a significant presence in the Brazilian market, we should be able to leverage that significant regional presence in significant market share gains in the future. But before we actually move in that direction, we also need to make sure that the logistics, the back offices (since on) are all up and running as efficiently as we would expect them.
We will continue to also pay a lot of attention to the prepaid market, and therefore recharges is clearly one lead indicator that we will continue to monitor. And the good news is that in Brazil people are still savvy users of technology and mobile users as well, and therefore recharges continue to post, I would say, a very encouraging performance. In terms of mobility, we saw significant postpaid market share gains and that is what's actually underpinning the 10% revenue growth in terms of personal mobility revenues. Prepaid customers were up 3.6%, postpaid customers were up 19.6%, as a result personal mobility revenues were also up.
Having said that, we believe that there is a long way to go before we can capture the full potential of the Brazilian market when it comes to value added services and data. Value added services and data is still a lot SMS driven. We think when it comes to mobile internet and mobile broadband there's still a lot more to be done and I am sure the experience that Portugal Telecom has in the Portuguese market coupled with the strength that Oi has in the Brazilian market and its management team we should be able to bring to bear that and improve our performance in the future as well.
So in a nutshell when it comes to Brazil we are seeing an improving performance. The investments we are doing in the network (uplifting) as well as for the future, having said that, clearly one of the big challenges that we have is to take full advantage of the synergies that exist in Oi and Brazil – Oi and Portugal Telecom in order to make sure that we reduce the execution risk of our strategy.
Well last word on international; on international revenues were up 3%. If you exclude the Forex impacts revenues were up 5.1%. When it comes to EBITDA, proportional EBITDA was up 3.7% and excluding Forex was 5.8%. When it comes to customer growth you will have seen we saw strong growth across the board. But worth mentioning when it comes to Timor and (indiscernible) Telecom we have seen an increase cost in the competition in this market and that's why as a result in the next few quarters we will have to as we have always done in the past maintain a rational approach to the market but always make sure that we command the leading position in those markets as well because we think leadership commands the premium and as a result, we should maintain that leadership.
Let me now hand you over to my CFO and then we will do some wrap-up and Q&A. Thank you.
Luis Pacheco de Melo - CFO: Thank you, Zeinal. Good afternoon, ladies and gentlemen. Let me focus on the main financial highlights and I'll be using Slides 42 to 50 as a reference for my presentation.
So, on Slide 42, total revenues were down 9.5% in the first quarter or EUR163 million. Out of this EUR163 million the real devaluation accounted for EUR116 million as currency devalued on average 13.8% from the first quarter last year to the first quarter of this year. As such, on a constant real FX basis revenues actually declined by 2.8% and that is mainly due to the reduction of revenues in Portugal.
In Portugal, as Zeinal mentioned, our revenues were down 6.8% or EUR46 million. This represents, however, an improvement when compared to the 8.1% decline in the fourth quarter last year and it's very much supported by a continuous growth on the residential and also the improvement on the Personal segment as Zeinal mentioned.
Revenues on the Residential segment in Portugal continued to show very sustained growth with service revenues up by 4.1%. On the Personal segment, customer revenues were down 8.6%, which is an improved trend from fourth quarter last year and third quarter of last year, which had shown a 9.1% decline and an 11.2% group decline.
Notwithstanding having observed an improved trend service revenues were down 11.4% and that's because interconnection rates were down by 40% in the first quarter vis-a-vis first quarter of last year. However, going forward in 2013 this trend should improve as you will see average out of the impact of the MTR and of course, you will start seeing the benefit of the success of our convergence offer launch in the beginning of the first quarter this year.
Overall, revenues on the Personal segment were down 7.7%, also reflecting strong equipment sales in the quarter. Enterprises, as we have seen, there are two segments. The revenues continue to deteriorate in the quarter basically as a result of a very competitive pricing environment. Also, on the corporate side, as Zeinal mentioned, due to the cancellation and postponement of some of the projects that normally big corporates have and all this decline was despite the very strong commercial activity on the SME segment.
Wholesale and other revenues declined by 13.6%, reflecting lower access and traffic revenues due to the regulated price cut and also due to the wholesale volumes as other operators continue to build their own network. Public pay phones and also directories business saw revenues declining. Nonetheless, the trends improved throughout the first quarter.
In addition, let me highlight that the first quarter of this year was finalized by 2012 being a leap year and also by the fact that the Easter took place in the first quarter. As a result, we have three less working days in the quarter, which basically translated into lower revenues of around EUR5 million in the first quarter. And, of course, one needs to bear in mind that the negative impact of the regulatory adverse decisions amounting to EUR14 million in the first quarter, which by itself accounts for 2.2 percentage point decline on our revenues in Portugal.
On the Oi's side, revenues proportionally consolidated in net income totaled EUR724 million, a 8.2% decline or a EUR64 million decline. This is basically a result of the impact of the real devaluation which was approximately EUR100 million in the first quarter.
On a proportional basis, the other international assets posted a 3% revenue growth. But on this 3%, we also had negative impact of the devaluation of the Namibian dollar which was also around – that had an impact of almost EUR3 million in the first quarter.
The weight of the international – sorry, the weight of our proportional and fully consolidated international assets on the revenues increased to 58.7% in the first quarter of this year.
On Slide 43, in the first quarter we continued to focus on operational efficiency of our Portuguese operation. Nevertheless, our first quarter performance was impacted by the two off effects, one was the extreme rainfall that we had and the second was all the costs associated with the launch of convergent offer and also the rebranding of the MEO.
Our OpEx excluding D&A came down by 2.6% penalized by higher wages and salaries which is a result of higher rainfall and which then resulted in higher overtime remuneration on the maintenance activities. Programming costs were down whereas by 1.1% but despite a substantial increase in our customer base. So on a per customer base programming costs were down 11%. Commercial costs were down by 16.7%. (Further) OpEx was probably stable as improved efficiencies (of serving the past quarters) compensated the increase of maintenance and different activities performed by external providers as a result of the weather condition. Adjusting for the two non-recurring and/or unusual events OpEx would have fallen by 4.1%.
On Slide 44 we have highlighted the impact of the heavy rainfall. As you can see the rainfall observed in this quarter was 7 times higher than last year and 2.4 times higher than the average of 2010 and '11. As a result of that truck rolls increased by 23% and mainly on the corporate side as fiber is normally not affected by the rainfall.
On Slide 45, I would also like to highlight that (why we saw) EBITDA continues to be impacted by the decline of certain service revenues which carry high margins and also by increasing rate of VAS and IT/IS revenues that also have higher direct costs associated, we continue to focus on improving efficiency. In the first quarter, we decreased operating expenses, including direct cost by EUR6 million, despite the negative impact of EUR6 million of the two extraordinary events that I mentioned before. EBITDA in Portugal stood at EUR272 million, an 11.7% decline and if we were to exclude these two events, our EBITDA would have been about EUR280 million.
On Slide 46, consolidated EBITDA, in the first quarter was down 7.9% or EUR45 million, equivalent to a 33.9% margin. The real FX evaluation represented EUR33 million out of the EUR45 million decline in consolidated EBITDA. So, excluding this effect consolidated EBITDA decreased by 2.3%.
On Slide 47, CapEx, Portugal CapEx in the quarter was up 10.7%, reflecting higher CapEx on Oi, which more than compensated the positive impact of the real devaluation and the decline in CapEx in the Portuguese business. So, in Oi, the 55% increase in CapEx in Oi is being directed to growth areas, namely network capacity, coverage and quality. CapEx in Portugal continued to decline by 13.7% in the quarter and we see room for lower CapEx in Portugal, which we believe should stay below EUR500 million for the full year 2013. Other CapEx was favorable at EUR23 million and this is a mix of higher CapEx in Namibia but lower CapEx in Cape Verde and Sao Tome because we have finished the rollout of the submarine cables in these two countries.
On Slide 48, on the financing side, as we have seen already in May PT issued a EUR1 billion seven-year bond at 4.625%. We received orders in excess of EUR5 billion from multiple geographies. This transaction is a first Portuguese benchmark issue this year and was the longest EUR1 billion transactions in Portugal since 2009. With this transaction we have extended our maturities to 6.2 years.
On Slide 49, the strong funding position that Portugal Telecom is in. Consolidated net debt amounted to EUR7.9 billion at the end of the first quarter. Excluding Brazil it's at EUR4.6 billion which is basically stable from the end of 2012. As, you know, PT announced the sale of 28% stake in CTM. This transaction is still pending some final regulatory approvals.
PT is expected to receive depending on the final cash at the day of closing and also on the FX around EUR340 million. In the meantime, we have already received EUR25 million in dividends in the first quarter and therefore, our pro forma net debt after the sale of CTM now stands at EUR4.27 billion.
Excluding the proportional consolidation of Oi and Contax, PT cost of gross debt stands at 4.9%, a 50 basis points increase year-on-year from last year.
On Slide 50, on the cash flow front and changes on net debt, consolidated operating cash flow in the first quarter totaled EUR58 million, reflecting a seasonally high working capital investment quarter, both in Portugal and in Brazil. The decline of EUR56 million from the first quarter of last year is basically due to higher CapEx at Oi and lower EBITDA minus CapEx in Portugal. Of course, part of this decline was compensated by lower working capital ex-Brazil, and excluding Brazil, operating cash flow was broadly stable at EUR76 million in the first quarter, with lower working capital investment compensating the decline of EBITDA minus CapEx in the period.
Consolidated free cash flow stood at a negative EUR186 million, impacted by higher net interest cost, which was basically due to higher debt at Oi and also higher taxes paid by our international subsidiaries.
With regard to net debt, we saw an increase of EUR390 million in the first quarter, of which EUR164 million relates to real appreciation, and therefore, the conversion into euros in our balance sheet of Oi net debt, and also explained by the negative free cash flow generated in Brazil and the dividend paid by our consolidated subsidiaries through other minority shareholders.
Let me now hand you over to our CEO, Zeinal Bava, for his final remarks.
Zeinal Bava - CEO: Thank you very much, Luis. Perhaps what we can do is that we can go straight to Q&A and thank you once again for being on this call and very happy to take any questions that you may have with the team here.
Operator: Georgios Ierodiaconou, Citi.
Georgios Ierodiaconou - Citi: If I could start with one of your initial remarks around the fact that now you are now fully funded until the end of '17 and therefore you will be (looking out) in the medium to long term prospects of the business. What's to stop you now from looking at an extension of the fiber coverage in Portugal? Is there any operational reason why it makes sense to wait or given the funding position that you are in now would it make sense to (front load) the investment and get the maximum benefit over the next four, five years? My second question is around SME and the impact of M4O in the ARPU of the SME customer that you have. Have you seen any migration into these parties and does that cannibalize the ARPU or if not kindly explain how far you tried to manage the migration? If I could also ask a quick question on Brazil, you mentioned the need to improve the (indiscernible) in order to be more active on mobile data. Is it similar for pay-TV and would we have to wait a few quarters before we see some improvement in the pay-TV growth and the broadband growth in the fixed division?
Zeinal Bava - CEO: As you know, we have 1.6 million homes adds, and against this current economic backdrop, of course, we look at cash flow generation and therefore we are going to stick to the guidance that we have given off our CapEx of $500 million or less. We are quite happy with the 1.6 million fiber plan that we have. Having said that, we are monitoring very closely how the Competition Authority will look at with this next generation network footprint that ZON has in the context of the review that they're doing of the Portuguese market. It is worth emphasizing that they cover about 2.6 million homes, with DOCSIS 3.0, whilst it's not the same thing as fiber-to-the-home, it does allow them to provide customers with significantly higher feed. So, I think we will continue to keep a watchful eye on how the regulator will decide in connection with that footprint which they have, which in some cases is almost monopolistic, because it's the only fast speed broadband service that's available, before we take any views regarding this. We are quite happy with the penetration that we are reaching in terms of fiber. You certainly will have seen in the presentation that we put out, how little we have to spend in terms of maintenance repairs or customer care because of the heavy rains with those customers that have fiber. So, I mean, fiber business case stands also against any scrutiny when it comes to OpEx and I have – put it this way, we will go in that direction. But before that we need predictability and in particular, we need to see how the competitive authority will look at the existing transaction that they are reviewing in that particular regard. With regard to the SMEs, clearly, M4O is mainly for – I don't see medium-sized enterprises buying M4O and certainly, what I see is SOHO customers and very small enterprise customers buying M4O. We only – obviously when it comes to SMEs or SOHOs, let put it to you this way, it's much more a pull effort as opposed to a push effort. I think we've only stopped addressing that segment of the market about six, seven weeks ago, about two months ago, put it to you this way. So, I think it's early days for me to tell you what impact it may or may not have when it stabilizes in terms of ARPU, but the ARPU enhancement number that we have made available to you is for the mix of the M4O customers that we have and that as we can imagine, includes residential customers, SOHOs as well as small enterprises. So, I would say that 10% is pretty good even if you take into account the mix that I mentioned. And again it's worth emphasizing that the average savings that some of these customers are getting is about 18.5% which in my view is a lot more robust as an argument for them to stay with us two years than just the signing of the contract in itself. With regard to the comment on Brazil, just to say that we're in the business of selling but also invoicing and generating cash flow on the back of the sales that we make. So, whilst we are very eager to capture more market share in Brazil when it comes to mobile, when it comes to postpaid in mobile, convergence, broadband, TV, we need to make sure that the back office processes are in place, so that we can sell those services with the level of comfort that allows us to believe that we're not taking any unnecessary risks on our books. So, sometimes one needs to go slower to go faster and this is why we are putting a bit more scrutiny in that. The Oi CEO, James Meaney is dedicating part of his time exactly to make sure that we are comfortable with all the channels that we have and so on and so forth. So what you are likely to see us in Brazil is also to take a very similar approach. We need to invest where it makes sense and need to invest in line with the ability of this Company to generate cash flow so that we can honor all of our obligations. Thank you.
Operator: Paul Marsh, Berenberg.
Paul Marsh - Berenberg: I have a couple of questions, although I'm reluctant to detract from some of the encouraging trends in the domestic market I really feel that the dynamics around the Oi share price and the concerns over the Oi dividend are also important here. I just wonder, what you're thinking about that situation, as the Oi stock price continues to weaken, so reflecting I believe concerns about the sustainability of the Oi dividend. Then secondly, if I look at the Oi balance sheet I see R$35 billion of gross book value of buildings, real estate, infrastructure, and other assets on the consolidated balance sheet I am talking about. You have talked or Oi has talked about potential for non-core disposals. I just wondered, if you are able to give us what proportion of that gross book value or even net book value might be potentially disposable on non-core?
Zeinal Bava - CEO: With regard to the Oi share price obviously we look at it in fact differently because we are long term investors and we are strategic shareholders of Oi and of course we believe that Brazil continues to as a market offer significant growth potential for the future. Not to forget that there are 200 million POPS, 55 million households and a penetration of even the most basic services like broadband, pay-TV is well below what its full potential is in that market. Oi has an incredible position in that market because they are 50% of the territory we are either operating alone or have just one competitor. So I think the key challenge is to make sure that the capital is allocated where it makes business sense and where it generates the highest returns for the Company. So we continue to see Brazil as a market which provides Portugal Telecom with scale, provides Portugal Telecom with optionality and provides Portugal Telecom with a unique opportunity to bring to bear if you like the expertise that we have so that we can align that with Oi's potential in that – growth potential in that market to actually to do something unique and something that creates value for all shareholders in the future. With regard to dividends and the balance sheet structure and so on, I think our CFO in Oi has provided the market with a number of answers in that regard, either in this conference call or in road show meetings that he's done recently. If I recall what he said, the dividend decision is a decision of the Board, and obviously, when it comes to Oi; Oi, is actually diligently doing an exercise to sell non-core assets. Now, of course selling non-core assets and the timing of that sale is very much dependent on third parties, so, it is very difficult for him or for anyone to actually commit to a particular date, but as a philosophy, let me share with you. We are all in favor of and I think this reflects the position of controlling shareholders of Oi. We are all in favor of offloading non-core assets so that we can put the, if you like, capital to work, where it makes business sense and where it generates higher returns for us. So, you will see and you will have seen that we are in the process of selling a number of real estate properties we have. We are in the process of doing a number of other trades and so, bear with us, we are committed. We have a team that's fully committed to making sure that these deals happen sooner, rather than later. This team is, if you like, a joint team of Oi and some of the best individuals that we have in all of our (indiscernible) and Portugal Telecom. So, we remain very confident that we will be able disclose of some of these non-core assets and use that to reduce our debt. In fact, even with regard to Portugal, I can tell you that we are waiting for the final decision, if you like authorizations on the CTM sale that we did and we will use the CTM cash also to reduce our debt level. So, I think both here in Portugal and in Brazil, we would like to pursue a more prudent approach to the management of our balance sheet. This is one of the reasons why we have been extending maturities and this is the reason why we recently did that bond issue that has actually made us in Portugal for example a lot – has put us in a lot more comfortable position in terms of funding position. With regards to specific numbers I will liaise with the Oi finance team and we will see whether we can – in one of the next meetings, roadshows we can provide you with something a lot more specific than we have done in the past. So leave that with me and we will come back to you.
Operator: Giles Thorne, Jefferies.
Giles Thorne - Jefferies: Three please, all on the subject of quad-play. Firstly, if I bring together PT's first quarter fixed net adds resilient postpaid performance from Optimus and Vodafone that we have seen and a weak prepaid net adds but strong postpaid net adds performance for PT. This sends me the strong message that the impact of M4O in the first quarter has really been limited to migrating existing mobile customers on to M4O. Is that a fair read and if it is can you give us a sense of the average ARPU impact on those customers is? Your 10% number suggests that you are offsetting them which feels remarkable too in the current economic environment. Second question is, as a follow-up to that it appears that adoption for M4O has accelerated into the second quarter with perhaps your acquisition of new customers beginning to come through. I'm referring here to the 40% of the 120 current (indiscernible) new use customers. Certainly if I look at Slide 21 this tells me that early existing adopters have probably trailed off while the new customers have decided to come in, again is that a fair read? Are those customers coming through as new – were they new mobile customers or new triple-play customers? Lastly we have seen ZON come to the market with a core play product. I'd be interested to hear your thoughts on that product. It seems to me that it's not price disruptive and so just certainly in the short-term a fairly rational competitive environment. I'd be interest to hear kind of how you see your product being better or worse.
Zeinal Bava - CEO: If you look at the first quarter, revenue generating units in the Portuguese market, let's take fixed revenue generating units. Portugal Telecom increased its RGUs by 38,400 and the market increased by 26,500. So, we actually added more RGUs in the fixed line than the market did and it's a pretty significant different. We're talking about almost 12,000 out of roughly 60,000. That's about 20% more. If you look at mobile net adds, we had 48.7, and the market saw a decline of 191,000. Now, the 48.7 is 99,000 positive postpaid and then of course, the negative on the pre-paid and that's because, as you know it's the hangover from the Christmas campaign, which is the normal seasonal wash through in the first quarter. So, when you look at the overall net adds in terms of revenue generating units, fixed and mobile, in Portugal, in the first quarter, the market was minus 164,600 and Portugal Telecom was positive 87,100. So, what this is really telling you is that we are gaining substantial market share, whether we're talking about mobile, whether we're talking about pay-TV, broadband and when it comes to the landline, we've virtually eliminated landline loss, and if there is any loss some of that has to do with our own technological migrations to Voice over IP particularly for medium sized enterprises and large corporates as well. So, we are delighted with this performance. So, when we look at the trends in terms of net adds, we think that this is going in the right direction. Of course, when you think about mobile it's not just about M4O, it's also the fact that we have committed ourselves to drive smartphone penetration and to drive unlimited plans in this market. So, this also has of course some positive impact in that regard. When I look at the service revenues, what do I see? I see that our cable competitor saw revenues decline 1.8%, our residential revenues were up 4.1%. What we saw when it came to our mobile competitors, one of them had a decline of revenues of 10.7% and the other 7.2%. Portugal Telecom saw a decline of 11.4%, but bear in mind that we are much more impacted by termination rates than they are because of our size and furthermore if you look at the trend, we have improved our performance compared to the third quarter, fourth quarter and first. So the first quarter was better than the fourth and the third quarter and especially third quarter was particularly a weak quarter for Portugal Telecom. So, the trends in terms of mobile have improved. When you look at overall Portugal Telecom and this is also including wholesale by the way, which I don't fully agree that it should be included in the analysis. So, even including wholesale, our revenues were down 6.7%, the market was down 6.9%. So, this is just to say that when it comes to revenue generating units we've done much better than the market. When it comes to service revenues, by the way including wholesale, okay, we have also improved significantly our trends compared to the fourth quarter and the third quarter last year. And bear in mind that we had three less working days in this first quarter. Now, with regard to M4O, I have refrained myself from saying how many new customers we are getting. But what I can say is that 40% of the RGUs that we have increased in the sort of four months of M4O, these are new RGUs to our Company. These are new people. These are people that were not customers of Portugal Telecom. Furthermore, I'd like to say that yes, some of our customers are taking advantage of this rate package that we've made available to them. But the good news is, the revenue generating units that these guys used to have with us compared to what they have now has increased. This is why because – the reason is because they are adding more SIM cards, okay. So, they are adding their family members to the same package. So, when you look at today at M4O and you look at, for example, our mobile card distribution, 60% of our customers have two SIM cards, 20% of our customers have three SIM cards, 20% of our customers have four SIM cards. So, this is a true family offer. So, when we say there was an ARPU enhancement of 10% that includes everything. And by the way, if anything, we are being, if you like, we are understating the impact. I don't want to sound overly optimistic about this, but we are understating the impact because this 10% was calculated on the back of those people that bought our service in February and as you know, like most new services the early adopters of these services are usually the people that have the most advantaged in actually adopting this new service. With regard to other quadruple-play offers that have been launched in the Portuguese market we are not talking about the same thing. In their case, we're talking about bundles. In that case as we're talking about bundles; in our case we're talking about a true convergence. If you call one of our call centers, if you go to one of our stores, you are treated as one customer independent of whether you're talking about voice video data, fixed or mobile. It is true convergence. So the experience that Portugal Telecom can deliver in convergence is unique. And then unique not just because we have future-proof network, but also because we've invested enough money in IT transformation to be able to say that today in this whole Company we have one CRM. Furthermore, when you think about installation operations, we will connect 95% of our customers within fixed date. And this is a customer who wants to buy a new TV service from us, and it's a customer who's actually migrating, okay, via the SIM cards from one of our competitors to us, whilst maintaining the number. So, I think that the ability for us to make the back office as efficient as it is right now, moreover with this one convergent offer with one unique seamless experience across the board, I tell you, it is something which makes us pretty special. Having said that, they have replicated the offer, they have from a bundle standpoint a very similar offer, and I take your point that we're all being rational about it, it's about time, because as you know, the under and against this economic background it is important that we the industry make sure that we have a sustainable business model so that we can continue to invest in the modernization of our network so that we can make Portugal, if you like, a better case of the best the technology can offer in the world.
Giles Thorne - Jefferies: Can I just ask a follow-up please, and it's a bit more of a closed question. The new customers that you're generating, new PT customers you are generating from M4O, can you not give a split or a sense of weighting of how they're split by? Are they coming in as new mobile or new fixed?
Zeinal Bava - CEO: Let me tell you this. You've already been able to get from me some additional numbers that I did not put in my presentation, so well done you; I wasn't going to give you that much info. But let me tell you this. Clearly, the quick wins that we have are with those customers that have the MEO TV service at home and don't have our mobile service. So, for anyone that's hearing – that's on the phone here that has MEO at home and doesn't have (My Mobile) service at home, you shouldn't miss the opportunity to buy our service because it's very quick and it will give you significant savings, okay. So, that's why you are seeing an immediate impact in the number of postpaid cards and that's why we post 99,000 new postpaid customers in mobile. So those are, if you like, the quick wins. Having said that, I have no doubt in my mind that those customers in Portugal that don't have our TV service and our mobile service or have our mobile service and don't our TV service, I think that once they've heard the announcement that we made today that we are giving people savings of 18% to 20%, I am sure that they'll be calling our call center this evening to subscribe to the service. So, what I can tell you is that some of the comments that were made by the analysts that you are already beginning to see some impact in mobile, absolutely right. When it comes to SMEs though, you'll have seen in numbers as well, the impact is being felt more on the fixed side. So you are getting more mobile migration on the residential and you're getting more fixed migration in the SMEs. And I have already said too much. Thank you.
Operator: Nuno Matias, Espirito Santo Investment Bank.
Nuno Matias - Espirito Santo: I got all questions on M4O. Firstly, just to clarify but, can you give us an idea of do you allocate the revenues for M4O? Is it simple breakdown of fixed service are booked into the Residential or the Enterprise segment and the mobile on the Personal segment? Secondly, looking at your words, it seems as though that the quick wins are coming from the mobile side, and I would be inclined to say that that EUR0.10 based on ARPU that you are getting is basically coming from the mobile side? So, is it fair to think that especially on the second half of this year we're going to have a very substantial improvement on mobile service revenue trends on the back of this ARPU uplift that you are getting on the back of M4O?
Zeinal Bava - CEO: I think your first question, just – it's actually very timely, because we've been having internal discussions as to how we should be presenting our numbers to the market. And we believe that as we have already converged our technologies here and we are no longer thinking along the lines of fixed and mobile, and increasingly we're thinking about B2C and B2B, we think that going forward it is worth analyzing increasingly how we are performing when it comes to B2C as opposed to Residential and mobile. The reason I also say that is because you tend to compare us with peer group companies here in Portugal and they have both fixed and mobile. So when you compare sometimes our Personal segment numbers with our peer group companies here, sometimes it's slightly misleading. So, there's work to be done in this area. So, I don't think it is – I frankly don't think it's worth us spending a lot of time discussing how we split those revenues. But you know that we have a price for triple play in Portugal which is EUR45 to EUR50, and therefore we are selling our triple play for EUR79.99. So, if you were to take a very simple cut at this, you'd probably allocate EUR50 to fixed and you would allocate EUR30 and of course these are including VAT by the way, so you would allocate EUR30 to mobile. Now don't forget that we're selling the third and the fourth SIM cards at a marginal – at a much lower price. So, it's EUR7.5 for the third SIM card and EUR7.5 for the fourth SIM card, and if you are coming from our competitors, you are most welcome, and furthermore, you will also get an additional EUR5 discount in the third and the fourth SIM card. So, very simple approach. If it's 5 RGUs it will be (50.30) including VAT. If it's more than 5 RGUs, then the bias will be towards mobile as opposed to fixed. Your second question was about – oh, I think, it's early days to say how things will evolve. I think we've launched the service ahead of our competition. As I mentioned earlier, M4O is a – it's a different customer experience and we're very encouraged by the take-up. We are very grateful to our customers therefore to support, but I think at this stage it would be premature for me to say what the medium-term impact of M4O will be. So I think we should continue to talk to each other, and second, third quarter, hopefully things will have stabilized a bit more and then we will be able to give you a better guidance for the future. Thank you.
Operator: Mandeep Singh, Redburn Partners.
Mandeep Singh - Redburn Partners: I'd like to bring the question to domestic EBITDA. I know there were some one-off factors you referred to, working days, weather and so on. But the decline was close to 12% year-over-year. My understanding of full year consensus for the domestic business has declined around 6% to 7%. Do you think you're going to see some sequential improvement over the rest of the year and the rate of decline and as such, are you comfortable with the full year consensus EBITDA for domestic?
Luis Pacheco de Melo - CFO: It's Luis Pacheco answering. Yes, we still – well, given the performance that we've seen, also the one-off that we've seen on the first quarter, we're still confident with the consensus out there for the EBITDA.
Mandeep Singh - Redburn Partners: Are you able to give us some understanding of what you think the domestic consensus is please?
Luis Pacheco de Melo - CFO: It's around EUR1.1 billion.
Zeinal Bava - CEO: Okay. Thank you very much for being on this call. And as usual, my team and I are available to take any further questions that you may have offline. I would like to thank my IR Director, Nuno Vieira, for the great presentation that he put on the site today and like I said, we are very excited with the transformation of the business model we're doing in Portugal. We are equally very confident that Oi has a game plan that we will be able to make the turnaround successful in the future. And as I mentioned, Portugal Telecom has the optionality of being in a market which gives us scale but also ample growth opportunity in the future, and as Luis mentioned many times during his presentation, we maintain high level of prudence in the way that we manage our Company financially. Thank you very much and I hope to see you soon. Take care, bye-bye.
Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.