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

Good morning, ladies and gentlemen, and thank you for participating in Oi SA's conference call for the Third Quarter of 2024. The original audio of this conference will be in Portuguese with simultaneous interpretation into English. [Operator Instructions] We also remind you that this meeting is being recorded and will be available later on the company's Investor Relations website. [Operator Instructions] I will now hand over to Mr. Mateus Bandeira, CEO of Oi. Mr. Mateus, over to you.

Good morning. Welcome to our conference call for the third quarter of 2024. I have here Cristiane Barretto, our CFO; Rogerio Takayanagi, or Taka, our Director of Strategy and Transformation. And as usual, I'm going to use these initial moments to explain a little the evolution of the company, some of its transformation pillars. And next, we can move on to the traditional presentation for Q3, and then we open for questions at the end. For those following us, let me go straight to Slide #4. The company is evolving in its transformation pillars, specifically about the restructuring process. It's important to emphasize once again that we reduced by 60% our net debt fair value, besides a strong reduction in credit with our suppliers, take-or-pay. Recently, we concluded a critical phase, the approval by the Board after ANATEL's consent to increase capital. There is just a tax compliance to be concluded so that we can deliver the shares and the implementation of the new governance. I'll give you further details on the next slide. As for asset sales, we concluded the second round of the process. The V.tal offer worth BRL 5.7 billion was deemed the winning offer following the creditor's decision and also the ruling of the court. The offer entails a combination of debt settlement through credit and the issuance of new V.tal shares without no cash component, unlike what we had predicted in the economic viability study that 100% was supposed to be in cash with a part to be retained by the company. So this has an impact in the company and our cash flow. However, we will continue our efforts to support the implementation of this transaction and to sign the sales and purchasing contract and to obtain the approval. As for the legacy business, we are finalizing the procedures to complete the consensual solution and sign the authorization term, which will enable the regime migration. And we will then implement the obligations related to the migration, such as the maintenance of services in COLR areas where Oi is the only viable telephone service and to seek compensation for historical imbalances of the concession. Moving on to Slide #5. I would like to give you more details about our timeline and shareholding structure. Following the issuance of common shares for credit capitalization in line with the approval by the court on November 4, last Monday, we received ANATEL's consent subject to compliance with commonly established conditions. Once compliance is verified, we will proceed with the issuance and delivery of local shares and ADRs to creditors and shareholders who exercise their preemptive rights. We will then proceed with the implementation of the new governance in accordance with the terms of the plan by convening an extraordinary general meeting to establish the new composition of the company's Board of Directors to be elected by the majority of shareholders. Should that happen in the next few days, we will call the assembly and the new governance can be established in the beginning or in mid-December. We have completed the issuance of new common shares, and we are now delivering those shares to creditors, be it in the form of local shares at the local stock exchange or ADRs in the U.S. over-the-counter market. And with that, those shares now represent 80% of the new total the creditors under option 1 become the largest shareholders of Oi. They will hold about 79% of capital while the remaining 1% was allocated to shareholders who exercised their preemptive rights. In this context, as publicly disclosed on October 28, PIMCO, SC Lowy, Ashmore will become significant shareholders of Oi with holding over 5% of the total capital. I'll speak a little about the highlights of this quarter's results on Slide 7 now. In the third quarter of this year, the revenue growth was significantly impacted by the accelerated decline in legacy services in all business, B2C and B2B, and also because of a more rational approach, especially in the bidding process for new contracts with corporations and governments, resulting in positive impacts on profitability in detriment of revenue. So we had revenue of BRL 2.1 billion, accounting for a drop of 14% compared to the previous years, especially due to the reduction of the so-called noncore revenue, copper and DTH. If we disregard that, the drop was 8.5% with a growth of 0.8% Oi Fibra and even so the core revenue was BRL 8.5 billion or BRL 1.5 billion, reaching 75% of our total revenue. Fiber revenue totaled BRL 1.1 billion, remaining nearly in line with the previous year compared to last quarter, it recorded a 2.8% increase with fiber ARPU up 3% quarter-over-quarter. The connected home base remained stable, and that reaffirms the positive effect of our strategy focusing on quality and maximizing customer base profitability. As for Oi Solutions, in addition to the significant decrease in revenue coming from our traditional telecom services, Oi maintains its commercial strategy concentrated on margins, especially in higher value-added segments. Approximately 30% of B2B revenue already comes from IT services, which are increasingly relevant to customers with a greater growth potential. As for efficiency, the implementation of new initiatives with cost discipline internally. We had a 20% reduction in expenses and investments this quarter, excluding fiber infrastructure and rentals with an important reduction in all manageable OpEx lines. I now turn it over to Taka Rogerio, who will discuss the evolution of Oi Fibra and Oi Solucoes operations.

Thank you, Mateus. Slide 8, the evolution of our revenue. The consolidated net revenue had a decline of 14.4% when compared to Q3 2023 last year. The result, again, was impacted by the dynamics of the noncore services because of legacy copper, microwave, satellite, et cetera. On the positive side, new services, better outlook of fiber already account for 75% of the total revenue. Speaking of core revenue, they had a drop of 8.5% compared to last year. The decline reflects a commercial strategy focused on profitability, quality of new sales and active management of B2B and B2C, aiming at healthier margins to the company as we will see later. On the next slide, #9, we have the results of Oi Fibra this quarter. Here, we highlight the steady revenue performance, which showed slight annual growth, 2.8% quarter-over-quarter, almost 3% increase, reverting the downward trend observed in recent quarters. The connected homes remained stable due to the optimization of the customer base that contributed with greater penetration with more profitable customers. Because of a commercial active initiative, we focused on regions that showed greater profitability and lower delinquency that helped us reduce churn rate, delinquency, especially involuntary churn and even the rationalization of acquisition efforts. Now Fibra's ARPU grew 0.8% as compared to the previous year and 3.1% quarter-over-quarter, reflecting the quality of the commercial process, improved process for acquisition and retention offers. Now on Slide 10, we highlight the performance of Oi Solucoes. Revenues have been influenced by the ongoing decline in demand for copper-based services and legacy systems. Part of our contract with our customers are served by copper-based services where fiber is not present. So a strategy with a more selective approach with contract renewals and new competitive processes focused on profitability impacted our commercial results. Total revenue for Oi Solucoes decreased by 26.6% compared to the previous year. The telecom line, which include more commoditized connectivity services, had a 20% reduction, while the other line, which includes copper-based services, declined 38%. On the right of this slide, we can see some IT items, a solid growth of 8% compared to the previous year. UCNC and IoT grew 60% and 5%, respectively. Information and Communication Technology revenues represented approximately 29% of Oi Solutions total revenue in the third quarter of '24. In spite of the results that were not on par of what we wanted, we believe that this more rational approach to competitive process and bids will focus on our efforts to boost sales. This is offsetting the negative impact on revenue. So we've been able to boost our growth and we have implemented specific actions to expand the sales funnel. Now I'll hand over to Cristiane Barretto, our CFO, to present the slides on our cost structure and financial performance.

Thank you, Rogerio. Good morning, everyone. Moving on to Slide 11. I would like to highlight that this quarter, efficiency initiatives generated considerable savings on a year-over-year basis with reduction across all manageable cost lines. Routine operating expenses totaled BRL 2.4 billion, reflecting 10.6% reduction compared to same period last year. Excluding rent and insurance costs, which reflects the current dynamics of the fiber operational model, routine costs and expenses showed a year-over-year reduction of 17.2%. On the right side of the slide, we show that this reduction was supported by 3 main areas. Commercial area, we decided to adopt a strategy focused on quality and profitability, rationalizing commercial spending by adjusting policies and restructuring channels, promoting more quality on customer acquisition and intensifying digital channels. This approach reduced billing, sales and customer relationship expenses, advertising and marketing costs and delinquency levels. On the legacy front, we achieved efficiencies with a new management initiative within the limits established by regulatory requirements, which led to 25% reduction in network maintenance expenses compared to previous year. We also engaged in an intense effort to renegotiate content acquisition contracts, especially those that relate to legacy technologies such as DTH. These initiatives resulted in annual reductions of 25% to 30% in this expense throughout all quarters of 2024. It also impacted the client base. And we also focused on achieving a leaner, simpler and more agile organizational structure in response to ongoing transformations. We recorded an annual reduction of approximately 19% in total headcount in the last 2 quarters, an approximate 13% reduction in personnel expenses in the same period. We continue to maintain strict cost control to eliminate nonessential expenses, leading to significant decreases, for example, in the specialized services line. Moving on to Slide 12. I'd like to underscore the efficiency opportunities due to imminent migration from the concession model and its impact that delays in completing this process are having on our planned scenario. At the bottom of the slide, the legacy operation currently represents a high cash consumption for Oi due to accelerated revenue decline and lack of flexibility in proportionally reducing costs. This has not been taken into account in our GRP. Most of these costs reduced, so our CapEx reduced to 39% in the current quarter, showing the imbalance between the revenue and cost reductions. Most of these costs could have been reduced as we migrate customers from legacy technologies to other technologies and disable unused infrastructure. Additionally, Oi continues to incur penalty payments in line with current regulations, also as disposed on our GRP. Plan also includes the sale of Oi's real estate assets, 7,900 properties mainland and buildings throughout Brazil. Such sales could be accelerated with the effective regime migration. Our legacy service, especially those that are connected with the copper line, as stated, as [ we really ] mentioned, are in line with the previous quarter when we exclude the nonrecurring effects of the 2Q '24, mainly related to the surplus of the pension plan and the restructuring effects of the take-or-pay contracts. Looking ahead, we see significant opportunities to improve profitability through additional cost reduction initiatives related to legacy services as we transition to the authorization regimen and resize operations following the sales of Oi Fibra, reducing operational costs. On the right side of the slide, third quarter CapEx totaled BRL 109 million, representing 5% of revenue, decreasing 3.1 percentage points year-over-year. This substantial reduction was driven by the gradual implementation of efficiency initiatives and optimization and investment allocation in line with a more selective and profitability centered approach. Slide 14. We highlight our cash position on the third quarter of '24, BRL 1.3 billion at the end of the period, 30% decrease over the quarter. Operational consumption, partially offset by disbursement of new financial with V.tal in August. Third quarter CapEx reflects the OA new phase, transitioning to a business model with a lower CapEx. This reduction reached 46% with 91% in total directed towards core operations. Working capital consumption was primarily due to payments to creditors and partner suppliers as provided for in our judicial reorganization plan, JRP. Payments of interest-bearing liabilities were reduced by 14% due to newly negotiated terms of the plan with satellite suppliers under take-or-pay agreements. Noncore operations consumed BRL 351 million, primarily due to payments of obligations to ANATEL in the amount of BRL 102 million, in addition to expenses related to compliance and implementation of the GRP. I'll turn over to Bandeira now, Mr. Mateus Bandeira, our CEO, for final remarks.

Thank you, Cris. As we've said, we have moved forward significantly, both in our GRP as well in other fronts. And as main challenges now we have, first, to conclude our [ region ] migration process. And also, we would like to resume our arbitral procedures to mitigate the cash flow impact. We also have the closing of the [indiscernible] and face of the lack of a cash position and the winning bid and the higher costs that were not foreseen in our GRP. In the operational front, we are focused on recovering revenues in the B2C and B2B fronts. Also, we have other initiatives coming with a new governance that will be led by the company's creditors that will now be our main shareholders. Thank you very much. We will now open to our Q&A session.

[Operator Instructions] Our first question comes from [ Ramon ] from UBS.

I have 2 questions. First, in your presentation, you mentioned the delay in the necessary approvals to migrate to the new concession regimen. Can you please quantify in financial terms, the impact of such delays for Oi? Second, with regards to the V.tal offer for the Fibra line acquisition, since they don't have a cash flow component, what are the implications for Oi?

Thank you for both of your questions. With regards to the first one, as I've said, we did not forecast in our JPR, the approval until the first quarter. We were not forecasting paying any fines from the transition from the previous model. So that has consumed BRL 160 million from our cash flow. And also, we have an estimate of delay in the raising of resources of BRL 350 million due to the delay in such model migration that would have been offset by moving copper to other technologies. That also impacts the selling of real estate. We had a bold plan to start selling the real estate. Some of them were still reversible. So with the delay in the migration, we are hampered from maximizing that value raising through the sale of real estate. As it is a public knowledge in our JPR, we had 2 alternatives to send client. One was with the cash flow round that has supported our initial plan, forecasting a BRL 7.3 billion sales with a retention of BRL 1.5 billion and a payment of BRL 1.4 billion. So that is a negative impact of almost BRL 2 billion comparing to the accrual scenario, the actual scenario. As also disposed of in our JRP, should we move on to the second option, we have the forecast of BRL 1.5 billion being acquired according to the JRP.

I will now turn over to Mr. Luis Plaster, our Investor Relations Director for questions from the audience.

Thank you, Rodrigo. We received a few questions on the platform. And I'll mention them. First from Guilherme [ Borges ], an investor. His question is to Mateus. Could you give us some more color about the net value that Oi expects to obtain from arbitration and when arbitration would be concluded?

Thank you for the question, Guilherme. On the arbitration amount, the estimated amount in today's term is about BRL 60 billion as we reported previously in our earnings call of Q2. So the estimated amount of what has been requested is about BRL 60 billion. But the final amount will depend on the arbitration decision that will depend on an audit. We can guess the amount, but about BRL 60 billion, and we're going to wait until the audit is concluded and the decision, and we hope to have that as soon as possible, perhaps in a short period of time, we might have a preliminary decision to determine a range for that amount.

Thank you, Mateus. Thank you. I have here 2 more questions from Guilherme. The first also goes to Mateus. Can creditors sell shares in the market when they receive those shares, if you think that will happen? And the second question is when new shares will be able to be freely negotiated in the market?

Thank you, Guilherme. I can't speak on behalf of creditors. What I can say is that once those conditions are solved, we need 3 working days to deliver those shares. And to your first question, there is no lockup of those shares. They can sell freely those shares. Obviously, to exercise their political rights they must have them. But should they wish, they can sell them immediately and freely. But there is no way I can answer that question in the name of creditors.

Thank you, Mateus. The next question comes from Revisson Bonfim. What is your expected cash use in Q4? And what is Oi doing to protect its cash position?

Thank you very much for your question. We are still adopting strong practices to reduce costs to reduce the cash impact in Q4. We will continue that. And we are trying to recover amounts in arrear. We still have a number of activities of additional liquidity, the transfer of rights, and we are discussing additional deadlines to protect cash until the cash situation is normalized over next year.

Thank you very much, Cris. The next question comes from Anton. The question is in English, but we will answer that in Portuguese, and we have simultaneous interpretation. But can you explain where things stand with ANATEL's authorization migration? What is the updated time line? And how much did we pay in fines during Q3 to ANATEL?

Thank you, Anton. On the authorization, we've already obtained all authorizations, the confirmation of AGU and the migration document. It's with ANATEL. And it's just one last obligation of the company, which is the release of collaterals to cover those obligations we take on, which is to provide services in COLR areas. Those collaterals were given through a mandatory deposit boost and that deposit withdrawal will depend on the Minister of the Supreme Court. So we must comply with the formality that was already part of the plan. That collateral has been accepted by ANATEL and AGU that is likely to happen in the next few days. Maybe today, we do not know, but we depend on a decision by the Supreme Court for that collateral. As soon as that happen, the authorization consent will be issued.

Perfect. Thank you, Mateus. A second part of the question, which was how much fine did we pay until the AGU ratifies?

BRL 160 million were paid that were predicted in the plan.

Thank you. If I may add on the regulatory scenario. If arbitration had been resumed, I'm going to ask Mateus to clarify the arbitration question.

Thank you for the question. I don't know who asked it. But arbitration was not resumed on October 1. It will be resumed 5 days after the efficacy of the terms that will depend on the compliance of the last condition, which is preventing the migration consent, the collaterals to cover the COLR. So the migration term will be approved and 5 days after arbitration will be resumed.

Carlos Eduardo Gabriel had asked that question. Thank you, Carlos. We have a question from Douglas. The question goes to Rogerio. After Oi Fibra clients are sold to V.tal, what will be the company's strategy? Will the company still sell broadband plans? What will happen after those clients are sold to V.tal?

Thank you, Douglas. The Fibra unit we are selling is a retail unit with small businesses. After that sale, Oi Solucoes will continue. It will be our main focus. Oi Solucoes sells a complete portfolio, even Internet access, but focused on large accounts. We will keep on selling, but no longer with that focus on retail, but large corporate accounts instead.

Thank you. Taka, another question on operations from Michael. Is there any partnership between Oi Solucoes and V.tal? And what will that relationship look like after the sale of ClientCo?

As our infrastructure was built based on Fibra that we sold to V.tal, a relevant part of the infrastructure will continue in that commercial relationship, but a commercial relationship like any other. V.tal has a very robust and broad network countrywide, the main supplier of neutral network. Oi Solucoes uses V.tal's network, not exclusively. We must hire third-party links to supplement our infrastructure. A major client normally has access spread throughout the country where V.tal is present because of their competitiveness. We prefer to use them whenever they are present because of the delivery speed, and we supplement the network with third-party networks.

Thank you. We have 2 questions here. The 2 final questions from Revisson Bonfim from StoneX. Do you intend to raise more capital, more debt? One second question about the expected fines yet to be paid by Oi in Q4? And how far would those fines go?

Thank you for the question, Revisson. As I mentioned, the plan already anticipated if we didn't have cash, a possibility to raise BRL 1.5 billion. So we are studying the need over next year based on the company's cash flow. Since in our economic assessment, we had that possibility of raising BRL 1.5 to meet our migration requirements. On fines, no, the term negotiation has eliminated. We are not likely to pay ANATEL any fine, only those BRL 170 million that we already paid.

Thank you, Cris. With that, we've covered the main questions. Some topics were recurring. We are available in our Investor Relations area, and I turn over to Mateus for his final thoughts. Thank you.

Thank you. I just would like to thank you all for being with us during this earnings call. I would like to thank you for your questions as well as Plaster said, we are here for you if you have any further questions. Thank you all so much.

Thank you. This concludes our third quarter of 2024 Oi earnings presentation. For more information, please check the company's IR website, www.oi.com.br/ri. You can disconnect. [Statements in English on this transcript were spoken by an interpreter present on the live call.]