Telefônica Brasil S.A. (VIVT3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil conference call recording the acquisition of Oi's mobile assets. Today with this, representing the management of Telefónica Brasil, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. João Pedro Carneiro, IR Director. We also have a simultaneous webcast with slide presentation on the internet that can be accessed at the site www.telefonica.com.br/ir. There will be a replay facility for this call on the website. After the company's remarks are over, there will be a question-and-answer session. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. João Pedro Carneiro, Investor Relations Director of Telefónica Brasil. Mr. Carneiro, please proceed.

Good morning, everyone, and welcome to Telefónica Brasil's call regarding the acquisition of Oi's mobile assets, where we will share more information about the value of the transaction, the assets being acquired, synergies and finally, the next steps of the integration. Our call will be divided as follows: our CEO, Christian Gebara will offer more detail on the transaction structure, the assets themselves and our CFO, David Melcon, will discuss synergies and next steps. I now hand the call over to Christian.

Thank you, João. Good morning, everyone, and thank you for joining us to discuss this very important transaction for the Brazilian telecom sector and our society as a whole. On April 20, we finally signed the long-awaited closing of the position of our portion of Oi's mobile assets. As you all know, this operation will benefit you by driven by generating synergies arising from cost and CapEx optimization that is improving the overall profitability of our business. Moreover, the operation is positive for all Brazilians as it will broadly improve the quality of telecommunications service nationwide, contribute to accelerated digitalization of the country for sustained investment in both infrastructure and innovation. Let me start on Slide 3, where we go through the main highlights of the deal in terms of the assets being acquired and the corresponding costs. Through this acquisition, we will add 43 megahertz to Vivo's spectrum portfolio in the 1,800, 2,100 and 900 megahertz frequencies; 12.5 million mobile access, of which 37% in postpaid and 63% in prepaid; and 2,700 mobile sites, [ offers ] around how we will divest to address antitrust revenues. Moving to the right-hand side of the slide, you can see that the transaction totaled BRL 5.4 billion, 100% funded with Vivo's solid cash position, of which 90% or BRL 4.8 billion were paid out to Oi on the closing date. The remaining 10% or BRL 488 million are retained for a period of up to 120 days after the closing with its partial or total outflow being dependent on eventual adjustments to the contract. Moreover, we committed to an earn-out of up to BRL 150 million payable over the next 12 months, conditional to the accomplishment of certain goals establishing the deal. Furthermore, we entered into additional contracts with Oi, the first related to the network and customer transaction service to be rendered by the letter to Vivo over the next 12 months, amounting to BRL 148 million, and the second related to the transmission of data for a period of 10 years' worth BRL 179 million in NPV. All things considered, these key assets will bring relevant upside for us by strengthening our mobile leadership, improving our network capacity and enabling us to reduce future capital OpEx as we'll show you in the next slide. Moving to Slide 4. Here, you can see that we are consolidating ourselves as the largest access base in Latin America after incorporating 12.5 million customers coming from Oi. This stake in our mobile base to 97 million access, of which 56% are on postpaid contracts. Adding our fixed asset to this number takes Vivo to a stunning 112 million access base. The potential of selling not only telecom, but additionally, digital services to this very broad user base is of great relevance and it will be intensively explored by Vivo going forward. After incorporating these customers, we'll be mobile market share leader in 5 new states in Brazil, all of which in the Northeast region of the country, where we historically had lower shares despite having all network spectrum and customer service assets available. As a result, we are now leading 17 out of the 27 states of Brazil, which together represent 66% of country's GDP and 67% of the population. All in, we are now holders of 38% of all mobile access in Brazil or 40% when considering only postpaid. Moving to Slide 5. The mobile customers coming from Oi, we have the variable benefits of being able to be served by Vivo's unique asset base, which enables us to provide a second-to-none experience in Brazil in terms of capacity, quality and customer care. In the area codes where we're acquiring Oi's user base, incoming customers will have access to 350 of Vivo's owned stores plus exclusive dealers, a reach that is comparable to Brazil's largest retailers. Moreover, complementing our omnichannel strategy, our Vivo app will serve as a centerpiece in how these new users interact with us as it allows for simple, hassle-free contact in the company. Having the most complete and well-designed customer service and sales channels among Brazilian telcos allows us to be on the forefront when it comes to customer satisfaction. In addition, being able to have access to our robust 4G, 4.5G and 5G networks, we will give incoming customers a differentiated mobile experience, vis-à-vis what they are used to potentially driving higher consumption. To complement this enhanced data experience, our fast-evolving digital ecosystem, which comprise of solutions related to financial services, health, education and content among others, can enable us to increase their value capture from the acquired user base while providing to these very same users the most complete portfolio of solutions, to meet their connectivity and digital service demands. Furthermore, we believe fixed mobile convergence can be a very useful tool to extend the lifetime value of mobile users after a market consolidation movement. In this sense, we are very well positioned to execute on this strategy, being the only mobile operator with nationwide process in terms of fiber broadband. Our recently launched Vivo Total, which is a plan that truly bundles mobile postpaid with FTTH broadband will be the driving force behind this movement. Now going to Slide 6. Apart from adding a very relevant number of new mobile users to our base, this transaction allowed us to afford 46% of the frequencies Oi had available. This complements our recently acquired holdings into 2300 and 3.5 gigahertz frequencies, both of which will enable us to roll out 5G technology. Vivo incorporates spectrum coming from Oi in the 1800, 2100 and 900 megahertz bands on a nationwide basis, allowing us to free up future capacity constraints in the regions where we see most traffic demand. This new portfolio composition is key not only to further differentiate our customer experience but also to optimize our CapEx deployment and returns on investment. I now hand the call over to David to go through the planned synergies capture, then the next steps to integrate the assets.

Thank you, Christian, and good morning, everyone. Now moving to Slide 7, preliminary preclosing calculation guide to a potential value creation coming from the capture of network, spectrum, commercial and other synergies in net present value of around BRL 5.4 billion. This amount is net of integration costs and already takes into consideration the operating and capital expenditures required to prepare ourselves to receive the incoming assets, a considerable portion for which has already been [ covered ]. Now to telling the synergy buckets, starting with network in which we expect to capture an NPV of around BRL 1.8 billion over time. Here, we will be able to be even more efficient in managing our network by avoiding investments to expand coverage and capacity and by saving costs with 4G and 5G deployment, personnel and sites. Regarding the sites being incorporated, we expect to invest around half of it, complying with antitrust regulation, while the remaining ones could generate additional potential future savings if we manage to negotiate leasing terms with providers. Moving over to spectrum synergies which awards an NPV of around BRL 1.7 billion, we see the gains are mainly connected to the OpEx and CapEx avoidance related to our new spectrum holdings, since our enhanced position will alleviate pressure for network performance in areas with growing demand for capacity. The calculation of the value of the spectrum synergies consider auctions that took place in the past to acquire similar frequencies. Meanwhile, in the commercial front, the consolidation of asset platforms, customer support and advertising structures have the potential to generate us an NPV of around BRL 1 billion in OpEx savings as we will leverage in our existing capabilities, personnel, digital platforms and brand equity to sell our products and serve our customers. Finally, we see a potential value generation of some BRL 0.9 billion related to benefits coming from the goodwill arising from this transaction as well as the purchase price allocation of spectrum and customers. Therefore, as you can see, at this moment we are not considering any revenue synergies in our numbers as we believe it's important to first get a better understanding of consumption patterns and credit profile from coming users, something that will only be achieved as time goes by. And then focus on cross-selling and upselling activities that could potentially generate en masse gains to Vivo. Regarding the financials of the business we are acquiring in March 2022, we saw a monthly net revenue generation of BRL 135 million coming from our portion of Oi's mobile business. As these assets are being incorporated with limited additional cost attached to it, we believe that on a run rate basis, we will be able to attract a 70% plus EBITDA and operating capital margin from these revenues, thus boosting our consolidated profitability going forward. Finally, on a Slide 8, we disclose the next steps we have ahead in order to integrate the assets. During 2021, we accelerated investments in some specific regions to accommodate incremental traffic that will come from Oi's mobile customers in the next months. Over the coming weeks, we will start customers roaming-like migration as well as the release of the spectrum we acquired and customizing of sites to enable our usage. We expect to complete these 3 steps by the end of the third quarter of 2022. In the meanwhile, over the next few weeks, we will start to proceed with the full customer base migration when users coming from Oi will be fully integrated in our network and systems. This migration will be done gradually, as to be completed by the end of the first quarter of 2023. Lastly, as we do a drill down of synergies over the next months to assess the full potential of value creation coming from this succession, we will keep you updated during our quarterly results, reports and calls. This concludes our presentation today. And now we can move to the Q&A.

[Operator Instructions] Our first question comes from Leonardo Olmos, UBS.

I have a couple of questions. Number one, can you provide more color about the clients coming from Oi in terms of region and profile? And also about the 70% margin on this operation, what are the costs implied in these margins?

That's the only question, Leo, you want to ask the second one?

Okay. Christian, I'll ask the second one. The second one, in case you can sell the towers, what's the plan B? You mentioned the benefit is on the network part of the synergies. Can you discuss it a bit more, maybe explain what's the size of your tower overlap with Oi?

Okay, Leo. So to the first question, that -- they are mainly in the Northeast. So we are talking about all the states of Northeast except Bahia and Sergipe. We have 2 area code in Parana and one more area code in the state of São Paulo, okay? But it's mainly at Northeast. So it's all the regions or all the area codes where Vivo had the lowest market share. Also in the Northeast, as you know, except Bahia and Sergipe, Vivo arrived later, now during the last decade through the process of the cell industry development in Brazil, and we had the lowest market share. What is interesting here to highlight and then maybe is part of the synergy that we will discuss, although we have the lowest market share, we have the largest mobile network, though in data related. Because we had many obligations that were derived from previous auctions that made us deploy a lot of infrastructure in this region. So we're going to capture these customers, already have the capacity available to serve them. So as we had a low -- very low market share, now we're going to be able to serve these customers with a good quality and capacity, not only network but in channel, and that's where some of the synergies are coming from. The structure of the customers, I think I was also describing before 12.5 million, as you know -- as we know at the moment, 37% are postpaid. We believe most of them are hybrid and 63% are prepaid. So that's the composition of what we are gaining. And the 70% is based on what I just described. And we're going to serve these customers with the capacity already deployed, both in infrastructure, also in channel and in customer care. So we already have the stores, 350 stores in all these regions that we are capturing these customers with capacity to serve them. We have the call center already prepared to serve them. We have also the billing capability to bill these customers, and we have the infrastructure, as I said, because we deployed the largest 3G, 4G, 4.5G network in Northeast that will be good and more than enough to serve these customers. So what is remaining here, maybe is additional marginal cost to serve them. That's why we are positive about the 70% operating cash flow and EBITDA margin for serving these customers. Can I go to the second?

Yes, very clear.

Okay. So in the sale of the tower, it's important to explain, I think, now the question is we have a remedy coming from the antitrust that in 8 months, we may divest the electronic related to the sites. So in 8 months, we need to sell equipment. Now -- so that's what we're going to do. And that's our work for the next 8 months. The sites by itself, they are all rented. So the assets that we bought, they don't include ownership of any size. What it includes is the ownership of the electronic that is used in the site. Electronics will be sold, and we try to sell it during the next 8 months. The contract and the lease contract that we have in the sites, it's part of the optimization that we may do in the future. This optimization is related to overlap, as you said. But maybe we may have some needs for the future for 5G deployment that may make sense to have more sites than we previously imagined. So that's another discussion that I can give you more clarity over the next years, but we don't have the urgency right now to terminate any of the lease contracts. While we have the urgency to define is the sale of electronic, and that we will do following the antitrust requirements.

Our next question comes from Bernardo Guttmann, XP.

Congrats on the deal closing. I had one question related to revenue synergies. What can we expect in terms of speed? Where do you expect to see some new trends such as increasing of sales, churn reduction and other market return elements. That's it.

Bernardo, thank you for the question. As you could see in our synergies, we didn't include revenues, okay? It's too early to consider what's going to be the benefit going forward. Okay? We are positive about our ability to cross-sell to the customer base that we will get. I think as you know, these customers will be what they were served by Oi in the regions that I described without 4G and 700. So here, there is opportunity first to give them a better experience in internet, mobile internet because we have a much better infrastructure in these regions. I don't have details about their digital services offering, but I'm positive that we have more to serve these customers, especially these customers that are considered the prepaid to hybrid. We've been investing a lot in financial services in Vivo Money and Vivo Pay. We've been deploying a lot of entertainment partnerships with many of the video OTTs and music. So we see the opportunity to cross-sell to these customers. And of course, moving forward, also upselling them from prepaid to hybrid and in the future, depending on the profile, also being able to offer a convergence. It's very soon to say when you're going to see any trend. We have 12 months to migrate the customers to our customer base. During these 12 months, these customers have 2 options, either they continue with Oi, and [ we already have ] here. Also giving the detail about the number that we are paying Oi to serve these customers or we can accelerate the portability to our base. We're going to do that. Of course, once these customers start to be in contact with us, we're going to offer them the opportunity to come to Vivo changing -- [ porting in ] instead of waiting for the full migration that we're going to do along the 12 months. So we've been -- we want just to wait and to see what's going to be the impact in revenue. So far, we consider synergies in OpEx and CapEx as disclosed here in this call.

Our next question comes from Carlos Sequeira, BTG Pactual.

My question goes along the lines of Bernardo's question before. So it's clear that you didn't include -- especially one thing that to me seems to be a potential gain, which is a churn reduction over time now that you have one less player in the market. And even though, I guess, you are not in a position to give guidance on that metric. Can you just maybe talk a little bit about what we should expect happening over the next years now that the market has one less player? Please, especially regarding churn rates.

We are getting like 63% of our base is prepaid. So I don't know if that discussion here is about the preference that they may have over like the 3 players rather than 4 players. So that's here, it's much more the movement of the prepaid market that we understand. So there is no churn here. But in the other part, it's hybrid and it's very few pure postpaid. To be honest, it's difficult for us at the moment to give a number. Now, there's going to be churn reduction. As you know, Oi has been facing a difficult competitive position over the last years. So it's not that we were like competing with the same level of competitors when we face TIM and Claro compared to when we face Oi. So it's difficult for us to imagine that it's going to change so much in the situation. I believe there is upside much more in the ability of over these 40 million customers that we had together, the customers coming from Oi to the 3 different players. Their possibility of offering more service to these customers rather than giving them or to the whole customer base of the 3 operators, less reasons of churn. I think the churn of our customer base or even TIM and Claro were much more related to the option of changing to one of the other 2 rather than changing to Oi. I think our affordability was always very positive over the Oi over the last years. And I don't see a big change on that. I think the benefit will be much more in the ability to serve better these customers and giving them not only a better quality of service, maybe a better lifetime cycle with us because we're going to be able to offer more and more over time rather than reducing the whole churn off by customer base. So that's why we didn't disclose this number because I don't have elements to give you a number that will be very positive in the sense.

[Operator Instructions] Our next question comes from Marcelo Santos, JPMorgan.

The first would be, how can we think of Vivo's CapEx going forward following CapEx to revenues, specifically following this acquisition? And the second one is just a clarification. What happens to the lease contracts of the towers if you eventually sell the electronics that are in there? Just wanted to understand how things play out.

Marcelo, I'm going to go to the second first. If we sell out -- imagine, if I sell out electronic to another operator, I will try to -- also to -- try to give together the lease contract and we will need to negotiate. It's very early for me to tell you. So if I sell the electronic of a site and the owner of the site, and the person or the company buying the electronic wants to have the site also leased, I will try to transfer the contract to the new owner. I don't know if there is a new owner or if we're going to sell the electronics to someone that wants to operate a new mobile network. But the first movement that we try to do is selling the electronic, try to transfer the lease contract. I don't know it's going to be possible or not. But I can sell the electronic and keep the lease contract. And I think then will be a negotiation between Vivo and the tower company because most likely, we have different contracts with different sites, not only the ones that we are acquiring from Oi assets, and then we need to negotiate the overall contract. So early to discuss what's going to be the outcome but there are many options. Either I sell the electronic and I try to transfer the lease contract to someone, the person buying or the company buying wants to operate. Or I sell the electronic and I need to negotiate the lease contract, if I don't use the site, for instance, for 5G. I guess for the electronic, 3G electronic and still keep the site for a 5G deployment. So there are many scenarios that we're going to be negotiating and analyzing in the next months. Discussion about CapEx on revenues, we're all been giving guidance about CapEx. Our CapEx of the year is going to be more or less what we disclosed in the past. We included in the CapEx, the CapEx that we already invested for the incorporation of these customers coming from Oi. We may have some additional ones, also to incorporate in IT and network, and revenues would be higher, now a little bit higher as we disclosed here. If you consider demarked figures of Oi that in our case, it was BRL 135 million net revenues. So not big change due to this operation, our CapEx will be much more related to the 5G deployment that we have going forward and our fiber strategy.

Our next question comes from [ Feni Canumiri ], HSBC.

So my first question is regarding the ARPU. So if I'm calculating it right, the ARPU from the voice subscribers based on your disclosures coming at BRL 11 per share. So in [ all considering ] that seems a bit low. What is Vivo's strategy? And if Vivo mandated to provide a similar plan that is different or [ subscribers alone ]. Second question is related to lease costs for the 2.7K sites that you have, what is your annual cash outflow that you have?

This is Christian. the ARPU, yes, we are not just -- we are still understanding customers that we are getting. Here it like - it's maybe used like a very back of envelope calculation of the revenues per customers. Of course, the customers -- the ARPU are lower than ours, they have a totally different mix of customers. They are mostly prepaid, low-end prepaid and hybrid. So we are much more blended in pure postpaid, high-value hybrid and all the types of prepaid customers. So the first thing that we need to keep here is that we need to ensure that customers, the 12.5 million customers that keeps the plan that they have today with Oi, we're going to do that. Of course, when they come to our environment, they're going to be able to be approached by different type of services that may interest them. So I'm sure that all these customers prepaid, hybrid or even the pure postpaid will be benefited by digital service that we sell, data experience in 4G that most of them may not have the same way they may have with Vivo, and that will increase their consumption of data and they may be upselling via plan, cross-sell of fixed services if it comes to areas where we have fiber deployment. So there are many different strategies that I cannot share in it's all detail, but we are very positive. The opportunity of being a Vivo customer gives us opportunity also to sell much more services than the current stages of these customers in Oi's customer base. So going forward, we believe the possibility is there, the opportunity is there, and it's not accessed in this number that we gave. So before we all talking about revenues, that's a part of our strategy. And we believe that we're going to be able to do some. I just cannot give you a final number of how much is going to contribute to the synergy that we just presented. To the other one, I think that David can comment.

[ Feni ], let me take the second one. Regarding the lease contracts, as we expected in one [ the first is like ] the net percent value of the liabilities is BRL 1.4 billion. So regarding what is the monthly amount -- is a monthly fee below BRL 25 million per month. But as Christian stated, we -- I mean we'll need to renegotiate, we have different scenarios. And could be an additional upside coming from these negotiations as Telefónica Brasil, we have a significant amount of towers that we need to put it together and renegotiate [ monthly ] fees, even though we end up having and keeping all of that. So potential upsides additional to what we are showing here.

Just one more quick question from my end. So in your NPV calculations, if you can disclose what is the VAT in the terminal growth rate that use facilities?

Sorry, [ Feni ] but that information, we are not providing. We're doing -- we are using average rates that we use for this kind of perception, but we cannot disclose.

Our next question comes from Luca [indiscernible], Bank of America.

Question is regarding the EBITDA margin, the synergies, if you are already considering the reduction in ICMS taxes for 2024 or this 70% still -- that doesn't consider that?

Luca, thank you for the question. Look, we are not considering any potential ICMS reduction, and this will be -- will take place just starting the first of January 2024. So this is something that we are considering, just starting almost from now on, so haven't included. So the cost that we have here as Christian commented at the beginning, is mainly interconnection cost, FISTEL cost and also, we have the transition service agreement with Oi that will last 12 months, which is in total something like BRL 147 million. So you divide it by 12, which is monthly -- the monthly fee we are talking about around -- it's only more than BRL 10 million per month. Now -- so at the end of the day, these end up having a total cost that give us a margin of 70%, not only EBITDA, but also operating capital, which is very important, no?

This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Christian Gebara for any closing remarks.

So thank you, everyone, for participating. As you know, we are like very happy with the closing of this operation. We believe it's going to be of great benefit, not only for the operators but also for the country. We are giving more opportunities for customers, especially the BRL 12.5 million that is being incorporated in our customer base, to have a much better network infrastructure and the possibility of expanding the connectivity and digital service portfolio and being much more with [ a live ], much more digitalized than they were so far. So we presented synergies in OpEx and CapEx. Of course, we believe the potential of having more revenues going forward. But at the moment, we are very sure about the numbers that we are presenting and the value of going forward with this operation. So if you have any other questions, we are here all available to answer them, and we meet again in a few weeks in our first quarter results calls. Thank you.

Thank you.

Thank you. This concludes today's Telefónica Brasil conference call. You may disconnect your lines now. Have a nice day. Thank you.