Oi S.A. (OIBR4) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for joining Oi S.A.'s Conference Call for the First Quarter of 2023. The event will be held in English with simultaneous translation into Portuguese. Please be informed that this video conference is being recorded and it will be available later on the company's Investor Relations website. [Operator Instructions] Now I'll hand over to Mr. Rodrigo Abreu, Oi's CEO. Please, Rodrigo, you can proceed.

Thank you and good morning. Welcome, everybody, to our Q1 2023 call. Again, today, I have with me our CFO, Cristiane Barretto, who will present details on our financial results and who will also be with me in our Q&A session at the end of the call where we will take questions both in English and in Portuguese through the chat session of the call. This call happens at the relatively short interval after our call for our Q4 2022. Given that, we are now looking to resume our regular call schedule for the coming quarters, as we have been advancing significantly in the process of the restructuring discussions with our financial creditors after our presentation of the RJ Plan last month. We will again provide some status update about this process at the last part of our call. After the adjustments we had in the last quarter of last year, we have a regular quarter which reflects the operation of New Oi in Q1. And even though it's still not possible to have a completely direct comparison with Q1 of last year, given we were still carrying the result of Mobile and InfraCo in 2022, we start to standardize the view of our key core metrics to allow for consistency following our operating results. As you'll notice, the structure for this call and the numbers and figures we present are very similar to what we presented when announcing the Q4 '22 results. Before we start looking at the key figures and result details, 1 additional comment I would like to make is that Q1 is normally for us a very seasonal quarter in some respects, in particular those of cash consumption, given the dynamics of working capital with the beginning of the year payments from last year's CapEx, taxes, and other, some restructuring expenses with the reduction of our workforce, and a natural impact of a few last days of invoicing and collections. With that, let's look at the highlights of Q1 by jumping to Slide 3. On Slide 3, let's start by looking again at the progress on the key core metrics, and we can see that the New Oi revenues maintain the trend of growth in Q1 '23 with a 5% year-over-year growth, and the financial discipline also supported another quarter of strong efficiency, both in OpEx as well as CapEx. As occurred in the several last quarters, the New Oi continues to grow, as we can see, at the clip of 4.8% year over year, and both Fiber and B2B are growing strongly, Fiber at almost 21% year over year and B2B with Oi Solucoes at 12.9% year over year. This comes as we surpass the mark of 4 million homes connected and with the ICT revenues remaining a very steady contributor, which now represents 22% of the Oi Solucoes's revenue. At the same time, Legacy continues to be the anchor for faster growth. And without Legacy, the New Oi revenues would have grown 24.8% year over year. On the efficiency front, results also continue to come with a minus 27% year-over-year OpEx and minus 87% CapEx expenditures, results which are even better than the results from Q4 where we had minus 25% and minus 73%, respectively. The 2 key metrics continue also to be the reduction ex InfraCo and the CapEx over sales figures, which we can see there. And now we see that ex InfraCo, the reduction of OpEx would have been and at the clip of minus 42% year over year, while the CapEx over sales figure reaches 8.7%, well in line with all the guidance that we have provided in the past where we said that we should be between the 7% and 9% CapEx over sales for the long run. So let's now look at the consolidated results of the core components of the New Oi in Slide #4. In Q1, we can see that when excluding Legacy, the New Oi revenues were up 25% year over year, and this already represents 76% of the New Oi revenue, so core results now are gradually becoming pretty much the entire component of the New Oi revenues. Legacy this Q1 dropped to 12% of total, down from 15% last quarter. The remaining 11% represents in particular DTH revenues, which remain relatively stable, just a little smaller than in Q4. On New Oi revenues, the Legacy revenues increased [ the rhythm of ] reduction with a 47% decline from 37% decline last quarter, but that continues to be compensated by the growth of Fiber and Oi Solucoes. Oi Solucoes in particular this quarter had an uptick of growth with plus 12.9%. So now let's move to Slide 5 to check the detailed results of the Fiber operation. Our Fiber revenues grew over 20% year over year in Q1 '23, driven again by an expanding homes connected base and an industry-leading ARPU as we continually upsell our broadband speeds and reduce churn. The growth has continued both annually and sequentially as we can see on the left-hand side, albeit with a smaller sequential growth in Q1 of 2.4%. The net additions after a drop from Q4 last year, we continued relatively stable and had a slight uptick in Q1 '23 with 89,000 net adds. But churn continued to drop more than in Q4 with a minus 0.7 percentage points in Q1 '23. And this is absolutely critical to maintain a healthy growth of all of the net additions that we have coming to our homes connected base. The ARPU remained consistently up in what we believe it's close to a sector benchmark of BRL 92, and now we can see there a comparison indicating that it is at least 3% higher than a large player which we compare against. And this comes with the increase in the gross adds average speeds, which are now at the clip of 420 megabits per second. V.tal's network also kept a strong growth pace in Q1 to enable more homes passed and homes connected as we can see on Slide 6. On Slide 6, we see that Oi's homes connected continue to evolve on the back of the V.tal growth and also with the continuation of the improved quality perception from customers. The homes passed by V.tal reached almost 21 million HPs in Q1. On the tail of sizable revenues for the entire V.tal operation in 2022 with circa BRL 4.6 billion revenues. On our homes connected expansion, we continue to sustain market leadership with our Oi Fibra [ cities ] across the country, presenting Oi leadership when compared to all of its direct competitors. And that is consistent with the latest ANATEL results prompting us to reinforce our 'ask to those who have it' Pergunta frequentes campaign, which emphasizes the very good results in the customer perception surveys from ANATEL, which indicates that we have the best fiber experience in 13 states of Brazil. Now moving onto our financial figures, let's hear from our CFO, Cristiane Barretto on the topics of costs, EBITDA, CapEx, and liquidity. Cris?

Thank you, Rodrigo, and good morning, everyone. On Slide 7, we showed that successful implementation of efficient initiatives and leaner cost structure result in a significant 27% year-over-year decrease in routine OpEx, or minus 42% when excluding variable costs associated with the rent and insurance of the fiber network. On the right-hand side of this slide, you can see that recurrent personal expenses fell by 6% year over year despite inflation, reaching BRL 461 million due to the continuity of the headcount program reduction, which resulted in a reduction of around 40% of year over year in the number of employees. Meanwhile, third-party services experienced a notable decline of 24.8% in the first quarter of 2023, driven by efficient measures that reduced expense related to the sales commission, energy, and content acquisition. Rent and insurance expenses, on the other hand, grew by 31% compared with first quarter 2022, with the leasing of fiber capacity from V.tal, which supports the growth of fiber connections in our new operating. Moving to Slide 8, we highlight once again consistency that we had in the last 12 months regarding cost reduction program, leveraged by Oi's operational transformation cost saving initiatives. As you can see, third-party services and network maintenance saw double-digit declines in every quarter of the period, which reflects all of our current efforts to improve Oi's financial performance and to align with the New Oi. Now on Slide 9, we present Oi's EBITDA and CapEx evolution, with EBITDA margin reaching 8% while CapEx to sales totaled 8.7% with Oi's new operating model. When compared with 2022, it is important to focus on operating cash flow, EBITDA minus CapEx, instead of analyzing the EBITDA standalone figures and margins. Compared to the first quarter of 2022, our operating cash flow improved more than BRL 400 million. We closed this quarter EBITDA at BRL 193 million, which within the expected range for the year of 2023 according to the blow out material disclosed last April. The EBITDA projection considers a transition period in which Oi will gradually gain scale to adapt to the new operating model. In addition, it is important to highlight the tough comparison with the figures from the last quarter and the first quarter of 2022, margins are seasonally higher. In the right-hand side of this slide, CapEx closed at BRL 290 million, [ meaning ] a relevant drop associated with the shift in our operating model, lower ONT unitary costs and a strict process to prioritize the most profitable investment projects. All in, Oi improved its operating cash flow in the period up to BRL 160 million quarter over quarter due to lower CapEx intensity. Turning to Slide 10, our cash position in the first quarter totaled BRL 1.8 billion, a decrease of BRL 1.4 billion compared to at end of Q1 of 2022. The reduction was primarily driven by increase in working capital consumption due to seasonally higher CapEx disbursement, severance payments, and fewer business days which led to lower collection. I would also like to point out that the final cash position of BRL 1.8 billion represented a surplus in the quarter compared to the figures disclosed in Our last blow out material, which expected BRL 1.4 billion for this quarter. On Slide 11, we present the evolution of our cash position for the next quarters, highlighting that even though there was a higher cash consumption in the first quarter, especially related to seasonality of working capital, the cash balance for the end of the quarter was BRL 400 million above expectation in our 15-month budget disclosed to the market in April. This surplus was mainly driven by temporary effects from the Judicial Reorganization process. Going forward, the proceeds coming from the sale of towers in the next quarter and the short-term DIP related to support our liquidity for the upcoming months are reinforcing Oi's cash position for the future. The first tranche of the short-term DIP in the amount of $200 million was received in June 7 and the remaining $7 million, which should be received in the next month as we become compliant with the applicable conditions precedent. The new money long term DIP cash is forecasted for the first quarter of 2024 after Judicial Reorganization plan approval and will be used to repay the short-term DIP and to provide liquidity for the company needs for the midterm. Now, I'll hand over again to Rodrigo to continue the presentation.

Thank you, Cris. Before we wrap up, let's provide the latest updates on our ESG initiatives where we continue to advance in all fronts and in particular on the renewable energy, inclusion, and diversity fronts. On the environmental fronts, the key highlight is the solid progress on the renewable energy matrix numbers that we have achieved, which now represents over 65% of the renewable resources as part of our energy matrix, up from 50% that we had approximately last year. On the social fronts, we had key developments, in particular in the education front, both internally and externally, with the launch of Oi educa Plus, the new edition of Oi Exponencial, which is the leadership training in partnership with Fundacao Dom Cabral, and the Oi Futuro qualification of 500 women in the sound and music sector in the second edition of the program for accelerating creative businesses with social impact in Mato Grosso, called MOVE Mato Grosso. And on the G front, we continue to improve on our governance channels and have completely reformulated and simplified our whistleblower channel to allow for easier and more effective communications. So now let's close our presentation by providing with a summary of our status on the 3 key pillars for moving forward with our transformation and all of the challenges and next steps associated with each 1 on Slide 13. So after our big transformations from the last 2 years, I have mentioned that we are now fully focused on the 3 pillars to continue on our recovery journey. And the 3 pillars are: restructuring our debt, addressing our Legacy concession issues, and executing on the New Oi. And each of them is critical for the long-term viability of the company. On the restructuring in JR process, the key update as we had, as Cris already mentioned, was that cash-in of the first tranche of the DIP with the group of creditors that is supporting our Restructuring Support Agreement for the current Judicial Recovery plan. Obviously, we continue to negotiate with this group of creditors and are focused on concluding the negotiations for the signature of the RSA, which should occur by the end of this month or beginning of July, well ahead of the GCM deadline, and we expect to have this as a key condition for the final JR plan approval, which will then prompt the new money cash-in expected for the first quarter of 2024, given then a runway for the company to execute on scaling up its operations and getting back to sustainability on the cash front. On the concession updates and the Legacy equation, the key advancement we had was the arbitration hearing in May, which we consider very positive and which now prompts for partial decisions coming from the tribunal by the second half of 2023. With that, we also put a lot of faith on the advancement of the discussions for migration of the STFC Concession to an authorization model, which has ongoing discussions with the agency. And we also expect the continuation of our discussion of a potential agreement to move now to a phase in which those discussions will be had in addition to the agency with TCU. And on the operating front, the challenges remain the same, but our execution focuses well. We continue to grow our homes connected with fiber. We continue to grow our ICT sales, and also we have to continue scaling this growth for the future. We continue with the implementation of our cost reduction initiatives, as Cris pointed out very well in the explanation of our OpEx reductions. And we continue with the reduced CapEx intensity to approximate the guidelines that we have provided in the past to make viable the whole model for generating cash for the company. On the same front, we know that we do have the challenges of maintaining and scaling the profitable growth in the new fiber model, continuing to adjust the Oi structure to become a lean and agile company, and in particular, minimizing the Legacy impacts on EBITDA and cash flow. As we have been saying all along, we believe there are multiple positive indicators in the results we just presented. But we also acknowledge that there are many challenges ahead still, all of which are very critical for the company's viability and what we can say is that we'll continue to be very committed as a company to addressing them as we progress through this last part of our transformation. With this, I believe we conclude this first part of the call, which is, as I mentioned, continuation of the representations we provided in Q4 2022, and now we can go straight to our Q&A session.

[Operator Instructions] So our first question comes from Mr. Lucas Chaves, sell-side analyst UBS BB. We'll now open your audio for you to ask your question. Please, Mr. Lucas, you can proceed.

Thanks for having my question. I have 2 on my side here. So after the quarterly CapEx reduction, how have you seen this number in 2023? And the second thing is if you can please enter in more details regarding the working capital and the dynamics seen during the quarter.

Lucas, let me address the CapEx 1 and then I'll ask Cris to address the working capital question. On the CapEx front, if you remember, we had been saying all along that our whole intention with the change of model to the structural separation model, that we have now been operating since the middle of last year, is to really address the cash intensity of the CapEx investments that the company had to make otherwise. And our idea was to go to a model where we would stabilize around the 7% -- around 7% of CapEx over sales. And when we look at the 8.7% that we had this quarter, we can see that we're pretty much getting there. Obviously, for this number to continue to drop, not only we have to continue optimizing the CapEx, but let me tell you that we pretty much addressed the optimization of CapEx at this point and most of the CapEx comes from acquiring the ONTs for connecting new customers. And obviously, a small amount, but which is a very efficient, in terms of IT investments that we have to make as a customer-centric company. But also, we expect the revenue to continue growing so we can achieve this reduced CapEx over sales rate for the coming year. We expect to be around the same range. We don't expect any significant upticks in CapEx as I've mentioned. And obviously, this will depend on the progress of the revenue as well, but we believe that we are very, very focused on the reduction and the Initiatives have provided very good results so far. Cris, on the working capital question.

Lucas, we had some specific impacts in this quarter with the higher consumption of working capital. We've been presenting an average of around between BRL 300 million to BRL 400 million, BRL 450 million in the last quarters, and we had some specific impacts in this quarter. So if you normalized for the regular consumption of around BRL 400 million, we had some 3 or 4 impacts that was very important and different in this quarter. We have more severance payments for the BRL 50 million. We had some impacts in EBITDA with noncash effects that had some consumption in working capital, seasonal also. And we also have less collection considering the business days that Rodrigo informed at the beginning of the presentation, and we had less extraordinary collection regarding additional recoveries that we had in the last quarter. And we also have more payments in CapEx due to seasonality of the quarter. Usually, we have the CapEx in the first fourth quarter is higher than the previous quarter, and then we pay in the first quarter. So we've been doing, as you know, of course, some cash management in some quarters. We have been discussing with the creditors since last year, so we've tried to postpone some payments for this year, as we've been doing in the past. But I would say that the regular amount of the working capital is almost half from what we present in this quarter from these 2 -- 3 or 4 impacts, Lucas. We also had some benefits, as we said before, that impacted the cash position regarding the Judicial Reorganization, but it was offset by these other impacts that I just mentioned and the final number was a higher consumption, not regular from forward.

[Operator Instructions] At the end of the call, we'll have an exclusive session for questions and answers in Portuguese. Please write your questions in Portuguese at any time and these will be answered after the Q&A session in English. So I will now hand over to Luis Plaster, IR Director, for questions from the audience.

Now we're going to do an exclusive session in Portuguese, so I'm going to talk in Portuguese and Rodrigo and Cristiane will answer in Portuguese as well. [Foreign Language]

Thank you. That concludes Oi's conference call of the first quarter of 2023. For further information, please access the company's IR website, www.oi.com.br/ri. You can now disconnect. [Foreign Language].