Oi S.A.

Zeinal Abedin Mahomed Bava - Chief Executive Officer Bayard De Paoli Gontijo - Interim Chief Financial Officer, Investor Relations Officer and Treasury Director

Richard Hamilton Prentiss Andrew T. Campbell - Crédit Suisse AG, Research Division Michel Morin - Morgan Stanley, Research Division Timothy Boddy - Goldman Sachs Group Inc., Research Division Valder Nogueira - Santander, Equity Research Stanley Martinez Roger Oey - Espirito Santo Investment Bank, Research Division Jonathan Dann - Barclays Capital, Research Division Scott Schiffman

Okay. Thank you very much.

Good morning, ladies and gentlemen. Oi, today, discloses its results for the second quarter of 2013.

And no doubt you will have seen from the press release that in the second quarter of 2013, Oi's net revenues increased 2.4% year-on-year, totaling about BRL 7.1 billion, and that was on the back of expansion of Pay TV, broadband and a strong performance not just of the Residential segment but also of the Mobility segment and as well as Corporate segment. EBITDA totaled BRL 1.8 billion in the quarter and as again you will have seen was impacted by higher provisions for bad debt, increased marketing cost and personnel expenses.

Having said that, revenue-generating units grew 3.3% and remained stable in the quarter, totaling 74.8 million revenue-generating units at the end of June of 2013. I will now use the presentation that we posted in our site to provide you some more highlights in terms of Oi and its business performance.

With regard to customer growth, we believe that in this quarter, we posted solid customer growth. Total number of customer is 74.7 million.

We added about 2.4 million customers. Residential posted a pretty good performance.

RGUs grew 401,000. The fixed line loss is stabilizing, and we continue to post pretty solid growth in terms of broadband and Pay TV.

Personal Mobility was up 1.698 million, again, similar performance in terms of growth to the other segments. Again, pre-paid, up 2.1%; and post-paid, 15%.

I'll come back to this a bit later in my presentation. Corporate and SMEs.

RGUs were up about 4.6% with a lot of work being done around broadband and mobility as well. Turning now just to the financial highlights.

Revenue grew about 2.4%, underpinned by Residential, which increased 4.5%. Personal Mobility service revenues were up 4%.

Overall, we're up about 1.2%. That's -- the main impact was the fixed mobile termination rates here -- sorry, mobile termination rates, sorry.

Corporate/SMEs was up 4.1%. But on operating costs and expenses, those were up about 10.8%.

We highlighted to you 3 particular costs that we will discuss later on. My CFO, Bayard, who's here on the call with me will take you through provision for bad debt, which is very high at the moment and in our view should come down substantially in the next few quarters.

Personnel. There are some one-offs there that is worth mentioning.

And of course, marketing had an uplift of about -- again, as a result of the Confederations Cup, which we were official sponsors of. EBIT was down particularly because depreciation and amortization increased substantially on the back of the significant investments that were undertaken in the last couple of years.

And of course, net income was impacted exactly because of that and also because net financial expense were also up about 25.9% because of higher debt and also higher interest rates. CapEx came in at about BRL 1.5 billion.

We continue to believe that this year, we will do about BRL 6 billion in line with the guidance that we have provided in the future. Before I take you through Oi in particular, allow me to spend just a few minutes talking a little bit about -- make the pitch for Brazil.

With regard to the macro environment, worth mentioning, it is 1 of the largest global economies. The macro fundamentals are changing.

Having said that, this market continues to have strong demographics. And we believe that the rising middle class with higher purchasing power, the higher employment and the increase in the average monthly household will, no doubt, contribute to people wanting to buy more telecom services in the future.

When one looks at the telecom services, one realizes that the penetration of broadband in Brazil is significantly below any other comparisons that you might make worldwide. Pay TV penetration likewise is pretty low.

3G penetration has a long way to go. And likewise, smartphone penetration is also pretty low.

So if one is thinking about mobile Internet, again, significant growth. If one is thinking about bundling of double, triple play and quadruple play, thinking forward, I think this is one of those markets where we can expect to see substantial growth in the future.

With regard to Oi, perhaps 1 of the key highlights is our strong geographical coverage. Oi is present in 4,800 municipalities.

And in these municipalities, we have both fixed line and mobile access. So if one is thinking about the future in terms of the business model on the back of convergence, then I think we will be probably uniquely placed to be able to offer exactly that convergence to our customers in over 4,800 municipalities.

Turning now to the Residential segment. Declining line loss stabilized, penetration of broadband increasing and Pay TV net adds as well.

I would mention the following with regard to broadband. The trends are getting better and are looking good in our view, but we can certainly do more in the future simply because the penetration of broadband in Oi households stands only at 43%.

Worth also mentioning that on the back of the investments that we have made in capacity and in the transmission network, today, we can offer to 1/2 of our customers somewhere between 5 and 10 megabits per second and to about half of our customers more than 10 megabits a second in terms of speed. Furthermore, it is worth mentioning that we are also increasingly focusing in bundle offerings that I will mention a bit later.

I mentioned bundled and not convergence simply because, from a customer experience standpoint, we are still only just providing, if you like, quantity discounts. I think we will get to a point where we will be able to offer a unique customer experience only when we have a new IT architecture in place.

In terms of Pay TV, early days, solid first steps. DTH is the main Pay TV platform for us.

Having said that, we are working actively to ensure that we have the best HD offering in this market. We have bought more satellite capacity.

Right now, Oi is the company, which has the highest satellite capacity in Brazil. We are investing in a new head-end, which will be operational in first quarter next year.

We are also investing substantial amounts right now of time and of money in training our staff, so that we can do proper implementation and we can do proper installation when customers buy our services. Worth mentioning that Pay TV customers grew 84.8%.

Having said that, it's still at the embryonic stage, a long way to go, also because Oi household penetration stands only at 7%. We included a couple of slides on bundled offerings.

Again, this is just for you to get a sense that, in terms of the business model, we will continue to push double and triple play going forward and hopefully, over time, also quadruple play. Bundled offerings, we believe, will help us mitigate fixed line attrition.

Bundle offerings usually have much more churn, and churn is clearly a priority for us. We would like to work towards reducing churn significantly from where it stands today.

So when one thinks about 1P penetration, 2P penetration, we believe that there's substantial work here to be done. And clearly, this differentiated offer that we will have with DTH will allow us to increase the penetration of triple and quadruple play as well.

Against this backdrop, worth mentioning that the revenue in the Residential segment grew 4.5%, a still pretty healthy growth. Thinking about Mobility -- if you think about mobility, you, no doubt, will have followed that, in the Brazilian market, most operators have done cleanup of databases as well as -- rather than focusing on absolute numbers of customers.

Perhaps, I would like to mention that, on one hand, service revenues are increasing 4%. But also on the other hand, that the recharges are actually doing pretty well.

And the recharges, for example, in the month of July, were well ahead of our own estimates, and we've had one of the best months ever in July in terms of recharges. And I think this goes to show that we are beginning to utilize far more efficiently, if you like, some of these new tools that we put in place that allow us to do one-to-one marketing as opposed to one-to-many marketing and, as such, direct promotions by regional market and direct promotions to those customers that believe and see value in those promotions.

With regard to postpaid, we are clearly taking into account the current economic environment. In the current economic environment, we believe that we need to be more prudent.

If we are looking to reduce bad debt, we need to be even more prudent. And so as a result, we're focusing a lot on prepaid.

And with regard to postpaid, what we would like really to do is pave the way for us to have an installed base that allows us, in the future, to invest more in data and grow more data. You will have seen, no doubt, the numbers that we posted that we've had a pretty good performance in terms of data from a small base, but still a long way to go.

But those data revenues were up about 60.2%. So this is one area where work has to be done, and this is one of the reasons why we are beefing up our 3G coverage.

And we hope that over, over, over the next few quarters, you will see our 3G coverage not only improve, but also you will see our data revenues do even better. With regard to 4G, just that 1 slide, which is Slide 18, just to say -- mention 3 things.

First, we are cooperating with TIM, and I think this shows that we are very much in favor of network sharing. We believe that we need to be rational in the way that we deploy our capital.

The relationship in that regard is going pretty well. We are doing joint network planning, and we have an independent PMO.

We are also living up to all of the requirements from a regulatory standpoint. Also worth mentioning that it's still very early days to have any conclusions on the impact of 4G.

Having said that, we believe traffic per device 3G/4G will continue to grow. And with regard to 4G, we expect it to be complementary to fixed line also because of the spectrum constraints that exist.

With regard to Corporate and SMEs, those revenues were up 4.1%. They were underpinned by significant revenue-generating units growth of digital trunks, VPN network and Internet access.

It's also worth mentioning that we've done pretty well in terms of mobile postpaid revenues. Again, from a low base, a healthy growth, long way to go.

But we are also continuing to innovate our offer, so that we can broaden the scope of the services that we offer to both our large Corporates and also SMEs. In this regard, it's worth mentioning that we're working very closely with Portugal Telecom to implement a number of cloud offers in the fourth quarter of this year.

These cloud offers will be launched and will provide value-added IT solutions to our customers and also differentiate our positioning vis-à-vis our direct competitors in the Brazilian market. So in a nutshell, what I would say is that solid customer growth; top line coming through; some surprises in terms of costs that Bayard will now take you through; prudent financial approach in terms of the management of our balance sheet and of our financial flexibility.

So I'll hand you over to Bayard. And then, I will do some final conclusions.

Thank you, Bayard.

Thank you, Zeinal. Turning now to Oi's financial results on Slide 22.

On revenues, as you can see all segments presented revenue growth year-over-year. Residential segment grew 4.5% if compared to the same period of last year, boosted mainly by the effect of bundled offers, combining wireline, broadband and Pay TV services.

Personal Mobility net revenue growth reached 1.2%, while service revenue growth totaled 4%, possibly impacted by a higher customer base on pre- and post-paid, data and higher recharges. The Corporate and SME segment revenue growth achieved 4.1% on a yearly basis based on fixed line data broadband and IT services.

Overall, consolidated net revenues totaled BRL 7.1 billion, representing a growth of 2.4% year-on-year. Going to Slide 23.

EBITDA was impacted by higher costs and expenses, amounting BRL 1.8 billion in comparison to BRL 2.1 billion at the same period of last year. Total costs reached BRL 5.3 billion, impacted mainly by personnel expenses of BRL 219 million based on an one-off wage benefit expended to employees and on inflation adjustment and maintenance network insourcing.

Marketing was BRL 66 million higher due to the advertisement campaigns of the Confederations Cup. It is important to notice that Oi is one of the official sponsors of the 2014 World Cup.

Provisions for bad debt, BRL 159 million higher than the second quarter of 2012 due to the strong commercial activity of the previous quarters and the deterioration of macroeconomic environment. In this respect, credit policies, prices and offers are being revised to bring bad debt to acceptable levels in the near future.

Finally, I would like to highlight the positive impact of the reversal of provisions for losses on labor claims accounted this quarter. This reversal was decided after a deep analysis of Oi historical losses in comparison to the statistical model used as base for the provisions.

On page 24, the improved margins. Oi is committed to achieve operational excellence throughout the following initiatives: IT platform, implement best practice IT architecture to improve time-to-market and efficiency; networks, focused on network management, infrastructure sharing and benefits of convergence; field force, improve installation time, technician productivity, redo rates and prevent customer calls and truck rolls; customer care, self-care, improve service and collection cost per customer; sales, focus on lower churn and customer lifetime; G&A, leaner structure and internal culture of cost and financial discipline.

On this respect, then I will return to those factors when we conclude the presentation. Now flipping to Slide #25.

Lower EBIT and higher financial costs impacted net income. Financial results were affected by higher average net debt and interest rates.

Foreign exchange devaluation on the exposed portion of the debt and mark-to-market of the hedging book totaling BRL 871 million. This impact, together with BRL 1.1 billion of depreciation and amortization in the period, lead net income to a loss of BRL 124 million.

Beginning this quarter, we decided to provide also a reconciliation of the accounting to the cash basis financial results, where the main differences are: On the net financial revenues, other net financial revenues of BRL 124 million, mainly based on interest on provisions and judicial deposits; and construction in progress interest of BRL 37 million capitalized. The fourth, the accounting financial expenses of BRL 871 million are equivalent to the cash financial expense of BRL 1 billion.

Slide 26. Investments reached BRL 1.5 billion in the quarter and BRL 3.2 billion in the first half of the year, supporting growth in customer base and higher future recurring revenues.

Investments were directed mainly to broadband, Pay TV, 3G and 4G coverage and capacity. CapEx to revenues of 21% in comparison to 20% in the same period of last year.

Slide 27 shows Oi's debt profile. Gross debt reached BRL 33.6 billion; and net debt, BRL 29.5 billion.

With a competitive cost only 1% of the total that's exposed to foreign currency and a well-diversified exposure to different interest rates, the company shows its focus on financial flexibility and discipline. Now moving to Slide 28.

We present the average debt maturity with 4.7 years. We have a well-distributed and sustainable debt amortization strategy for the upcoming years, where 60% of the gross debt matures after 2016.

Additionally, on top of the cash position of BRL 4 billion, Oi has available around BRL 8 billion of credit lines for immediate disbursement totaling BRL 12 billion of liquidity position. On Slide 29, we present change in net debt in the quarter.

The increase of BRL 2 billion explain mainly to the seasonal payment of mobile licenses, Fistel Fees and Concession Fees that amounted BRL 1.7 billion. Regarding Fistel Fee, usually, this is due first part of the year.

Specifically, in 2013, the payment date occurred in April. And to the Concession Fee, it is a biannual payment.

Therefore, next amortization will occur in 2015. Now on Slide 30.

We present the impacts of the asset disposals announced to the market. Starting by the mobile towers sold in December 2012, the total value of the transaction was BRL 516 million.

We have a sale profit of BRL 200 million already booked. Rights of usage for the fixed towers sold in April and July amounted BRL 1.8 billion, with not meaningful impact on P&L.

The first trench of 3 sold was already approved by the regulator. Globenet sold in July 13 for BRL 1.7 billion, we have an expected positive impact in the result of roughly BRL 1.2 billion.

This is still in the process of regulatory approvals. On a consolidated basis, the implicit costs assuming OpEx, CapEx and tax effect is in the range of 8% to 9% per year.

And the estimated impact in 2014 EBITDA is around BRL 550 million. Those initiatives show the commitment of Oi's.

We have a strict financial discipline, where asset disposals will maintain the company's leverage under control and reduce its financial expenses. Now I would like to pass the call back to Zeinal, who will present Oi's new dividend policy and the closing remarks.

Thank you very much.

Okay. Thanks, Bayard.

Just before I take you through the new dividend policy, perhaps, allow me to go back on a couple of points that I would like to reinforce. The first has to do with CapEx.

CapEx was about BRL 1.5 billion in the second quarter. As we indicated to you in the past, we expect to see our CapEx to be roughly BRL 6 billion.

Having said that, I would like to basically leave a very clear message here that, in the future, CapEx will be aligned with our focus on dealing with churn and also making sure that we have an attractive customer lifetime value. Bottom line, what we would like to do is we would like to make sure that we invest in quality, that we invest by ensuring that our suppliers increasingly become our partners and test different models of relationship with us.

And therefore, as a result, we would expect CapEx in the future -- next year in Oi to be lower than BRL 6 billion. That doesn't mean that we will do less, it will mainly mean that we will have to discuss internally capital allocation a lot more aggressively and that we will also have to make sure that the suppliers are living up to their promise of being partners to Oi by providing us attractive terms and conditions.

With regard to operational excellence, we've included here a number of initiatives. I could actually double the number of initiatives that we have here or triple.

We just wanted you to get a sense that working towards making our business model more efficient is a priority for our company. So if you take, for example, networks and engineering; if you take, for example, field force and IT, those are clearly 3 very important priorities.

We think IT is an enabler of efficiency, and we need to put in place a new architecture. Having said that, this will be done over time.

But short term, we believe that with the profound changes we're doing in IT and a lot of those have to do with us killing a number of apps that are not necessarily relevant for our business in the future, we will certainly not just increase our efficiency, but also improve our time-to-market. With regard to networks, for example, when we say that we will be focusing increasingly on total cost of ownership, it's because we are looking at CapEx and OpEx together.

We do not want to engage in relationships where we basically overlook OpEx versus CapEx. So this year will be a big change, and we believe that the focus on the benefits of convergence will also mean that we will not be making redundant investments independent of access.

Field force, we are installing a new workforce management app in Oi. We're now rolling that out right now in Minas Gerais.

We will then do that -- the same thing in Recife. Bottom line, we believe that in all of our regional companies, we will have this new workflow management tool up and running by June next year, and we believe that, that will allow us to underpin substantial productivity gains in the works that we're doing.

And this could potentially mean 20% to 40% uplift in terms of productivity, but also substantially improve the quality of service that we provide to our customers. Why?

Because we believe we will get it right the first time and therefore we will have less redo rates and then we will have less customer calls. And as a result, we will also have less truck rolls.

Now we've done that in other places. I think we can certainly do that here.

So I just want to make sure that it's clear to everyone that operating costs and expenses are running at a level that we think are unacceptable. We need bring those down, and we have a number of initiatives that we are implementing to ensure that we can make that happen.

And I would hope that, in the next few calls, we will come back to you with a lot more flavor and detail as to what exactly we're doing in each of those initiatives. With regard to the new dividend policy, we put that out today.

So the Board of Oi for fiscal year 2013 to 2016 approved a dividend on the following criteria: That the dividend should be the minimum amount necessary to currently meet the following objectives: Pay dividends in the amount equivalent to the greatest of: 25% of adjusted income for the year; 3% of shareholders' equity; and 6% of the capital stock. We also would like to make sure that there's an equitable pay between pieces of preferred and common shares.

We estimate currently that, if we were to follow this criteria, the dividends would amount to roughly BRL 500 million. The Board also reserves the right to decide on the payment of intermediate -- or interim dividend.

And of course, this will be all subject to market conditions, Oi's prevailing financial condition and other factors that the Board may consider relevant. In the same, if you like, criteria, we provided the market with a 4-year predictability on our dividend policy.

Exceptionally, in October this year, the Board of Directors be deciding on the payment of an interim dividend, and that interim dividend could be in the amount of BRL 500 million. And that BRL 500 million that we may potentially pay and again it's the Board decision that will be taken will be considered as part of the dividend for 2013 fiscal year.

So to conclude, what I would like to say is that we are focused on execution. We clearly -- in terms of strategy, we are clearly looking at, if you like, 3 areas that will be priority for us.

The first is to increase our financial flexibility, reduce financial risks associated with running the business. Second is to consolidate the business model.

So if you're thinking about the residential market, it's to move from single to double, double to triple play and then to quadruple play, focus also in improving the efficiency of our business model. And last but not least, continue to grow the business.

We continue to see that was really the market where penetration of broadband, penetration of Pay TV, penetration of mobile Internet will increase substantially in the future, and we would like to take advantage of that growth also because we believe that $1 of incremental revenue will have a disproportionate leverage in terms of EBITDA. And as a result, those will be the 3 guidelines that we will follow.

And we hope that we can deliver on those results in the next few quarters and, surprise you on the positive. So my team and I are very grateful for you being in this call.

And of course, we are very happy to take any questions you may have. Thank you.

My question is on your 3G and 4G coverage. I think you mentioned you wanted to beef up 3G coverage in the coming quarters.

In particular, as you think about your CapEx guidance or thoughts that you just gave, what are your thoughts as far as how much 3G coverage you can achieve over the next coming quarters? And then how much 4G do you need to have in place?

Let me start with 4G. With 4G, we are working together with TIM.

I think this allows us, this network operation is allowing both companies to optimize CapEx. And I mentioned, it's going pretty well and therefore, objectives with regard to 4G is to actually live up to the requirements of the license, okay?

So there, we will continue to do that. And as I also said in the presentation, we think it's too early to make any conclusion on the impact of 4G because as you know, while it is a great technology because it uses spectrum far more efficiently and it adds more capacity and frankly gives the customer a great experience.

It is also dependent on the availability of devices and the price of devices. So as a result, we think that here, we will live up to the requirement and we will continue to work 4G, aligned with 3G.

And by the way, something which I did not mention, our WiFi coverage. I think something unique that Oi has is that we have presence in 4,500 spots with WiFi.

And that WiFi not only allows us to give our customers a better quality of service in terms of mobile Internet but also, it allows us to offload traffic so that we can, of course, continue to reduce our network costs. With regard to 3G, we, today, cover 76% of the urban population.

Of course, we look at our peer group companies, and we believe that we can certainly -- or we will need to do more than that. But let me put your mind to rest with regard to one thing.

This doesn't mean additional CapEx for us. This means essentially us directing CapEx to where we think it makes business sense.

So minutes of usage in terms of 2G, it's already pretty high in Brazil. We believe that today, the usage in itself is quite high.

So therefore any investments you may do in 2G is because we would like to increase our capacity so we can provide better, if you like, service to our customers. But in terms of expansion of coverage, the cash is being directed to 3G.

This doesn't mean that we will go beyond the BRL 6 billion that we mentioned in terms of CapEx, and it doesn't necessarily mean that we will not bring CapEx down next year. We will bring CapEx down next year.

But what we will do it is that we will seek to put in place different relationship models with our suppliers and make sure that they co-invest with us in those areas where it makes business sense also for them.

Makes sense. And then device prices are obviously critical as well.

As you mentioned, what is the cost curve right now on 3G handsets and 4G handsets that you're seeing?

The 4G handsets are very, very expensive. And by the way, one of the other issues worth mentioning is that we are keeping subsidies low in Brazil.

Generally speaking, I think the industry is Oi's in the same camp, loyalty contracts here, only 1 for 12 months. And therefore, we believe that we need to be more prudent in that regard and this is why you will see us with regard to postpaid being far more selective in the future in terms of how much we want to grow and where we want to grow.

This should not be construed as us not being aggressive. Quite the contrary, we will continue to be aggressive because we believe that the substantial share of revenues that we can still gain, but we will try and do that in a way that also results in better returns for us.

But prices are very high, as you know, for a lot of -- or a big chunk of the handsets in Brazil are feature phones. And I think that you will need to get those smartphone prices to somewhere between $50 and $75 in order for you to get a significant penetration.

I think that will happen. I think the World Cup next year is an incredible, if you like, opportunity for us to actually make, I would say, improve the perception of value of mobile Internet with our customers.

So this will be one area where I am personally focused on this year.

I was hoping just to dig a little bit deeper into the cost side of the equation. Because as you mentioned, there were some elements that were nonrecurring in the quarter.

But it's kind of kind of difficult for us to actually quantify those or to strip them out. So for example, for bad debt, there was an element that seems to be nonrecurring because of the change in policy, but there was also apparently a recurring component because of the weakness of the economy.

And I guess with personnel, it was somewhat the same because some of this unforeseen was perhaps recurring. But apparently, there was a onetime wage benefit as well so anything -- if you could help us to understand what the cost structure would have looked like with the margin have been similar to what we had in the first quarter?

Or what was really kind of the recurring nature of the margin?

Okay. I'll ask Bayard to take you through in more detail.

But let me just -- a little bit about bad debt. I think bad debt is still running right now at about 4.5% to revenues.

Too high. That's costing us about BRL 100 million a month.

Ideally, we would like to see that number closer to BRL 50 million. If you just take that alone, one could be talking about BRL 600 million impact in EBITDA.

Now can that be done short-term? Probably not.

Can that be done medium term? Yes, we think so.

If we are a lot more selective in terms of where we sell, how we well, and the control processes that we have in place. So that is one example that I would like to leave with you because we think that 4.5% of bad debt in terms of revenues is just way too high.

And therefore churn, bad debt management -- okay, accounts receivable? These are areas where we are 100% focused on, okay?

Now with regard to other non-core, let me hand you over to Bayard.

Andrew, well, additionally to what Zeinal has just said about bad debt, I mean, we have the impact of the expenses related to the Confederations Cup of BRL 50 million. We had also the wage benefit impact, and the results of the quarter there was a 1 shot back that normally provision bonuses every month.

But this year, specifically, the impact was totally on the second quarter of the year. So I would say that in addition to the BRL 150 million of the bad debt provisions, we also have this wage benefit and the market expenses for the Confederations Cup.

In terms of the wages benefit, the one-off component, because I guess there was also an increase -- salary adjustment during the period. So is it possible to separate and how much of the increase was one-off?

Wage benefit totaled roughly BRL 100 million, and the adjustment brought by the inflation is roughly 6% of the previous year personnel expenses.

Just a follow-up on that last question. Bayard, was there any severance or even provisions made for potential future actions?

I'm assuming that when you talked about lifting productivity, you're assuming being able to do more with less. So are we assuming that there could be some layoffs in the future and are you provisioning ahead of that?

And then secondly, so now, what's the right level of debt for this business?

2 very good questions, instantly. But that -- yes, there are some severance costs in that wages and salaries number that we put out.

And what we've not done is that we have not provided for, if you like more redundancies, if that was the implication of your question. What we have done, however, is the following, is that we have frozen in the company any further recruitments so we've become a lot more restrictive as we have a national churn of about 3%, 4%.

Chances are that we will see a wash-through of some of these costs as a result of the measures we've taken. Now this doesn't mean that we are not hiring because as you know, we have internalized our Field Force -- out of our Field Force and that meant the company has taken on board about 4,600 people.

So part of that, what we have become is a lot more selective and what we are trying to promote internally is mobility. So that if we need people in the different areas of our business, then we can actually use the people internally but at the same time, give them the opportunity to grow within our company.

So I'm not going to provide you the detail of how much is severance, how much is not. But just to be absolutely clear, we're not providing for any future people leaving in the company, quite the contrary, what we've already taken the view that we should give internal people the opportunities so that they can grow within the organization and what we've done is become far more selective.

And we have frozen any additional recruitments unless it is absolutely necessary or exceptional. With regard to your question on the right level of the debt.

As you know, that answer is very different depending on market conditions and in different markets. As you know very well, the sector a few years ago had a very different view as to what the right level of the debt was.

Today, it has a very different view. I'm not sure whether 1 year or 2 years from a, it could be materially different from where we are today.

Nonetheless, I would like to make sure that you all understand that clearly, one of the priorities we have is to fix, if you like, the cash flow profile of this company and the decision that we've taken in connection with the dividend and the guidance I'm already giving you already in connection with the CapEx for next year. And also, the resolve and the focus that we're going to have in the cost makes it very clear that we want to run this business with less debt.

Makes it very clear that we would like to run this business with a lot more financial flexibility. So I cannot be precise and don't get me wrong, I'm not going to tell you what is the right net debt-to-EBITDA because again, it depends market to market.

But clearly, the direction that which we are moving is in the direction where we will have less debt going forward and more financial flexibility.

I wanted just to ask a bit about the same point on debt levels. If I did some simple math, if I take this course as run rate of EBITDA, multiply it by 4, take off the BRL 0.5 billion drag from the set of the fiber assets, you've got significantly less than BRL 7 billion of EBITDA, which obviously is just current net debt is in the region of 4x.

First I'd like to check that's correct. And then if that is the case, can you just help us understand where you're covenant sits, whether you expect to keep an investment grade credit rating and if you don't, what the impact on your financial situation would be?

And then whether you have scope for further asset sales because just on a back-of-the-envelope basis, I'm finding it difficult to see how the group can delever below that 4x level, given the weight of the interest payments.

A couple of things. One has to be careful about annualizing on the basis of this quarter because as we mentioned to you, there are some one-offs and therefore, I would be cautious in terms of just doing back of the envelope on the basis of the BRL 1.8 billion EBITDA that we posted in the second quarter.

Second thing I would like to mention to you is that we have a specific slide, I think it's the first time we've given this kind of disclosure in this presentation. I think it was something that one analyst had actually raised in the previous call last year -- in the first quarter call.

We've given you significant visibility on the disposal of assets and you will know that has seen that Globenet will have an impact of about BRL 1.3 billion in EBITDA. So in the numbers that you're doing, you should certainly take that into account, we will hope to get that transaction done by November, December this year.

So you would need to factor that into your thinking when you're doing your financial ratios. And I think you had another point which was...

I think it's important to highlight the debt profile of the organization. I mean, the average tenure of the debt is 4.7 years.

Our company has a liquidity position of roughly BRL 12 billion currently. So I think those things, they show the financial discipline that we are going after.

And I think it's important to take this into consideration as well.

And if you look at the dividend policy, what we've really announced is that we've gone from what was the previous dividend policy of BRL 8 billion in 4 years to BRL 2 billion in 4 years. And also, we've guided you now to lower CapEx in BRL 6 billion next year as well and lower, hopefully, work towards achieving operational excellence which we hope results in lower unit costs, okay?

Because obviously, the overall cost will depend in the volumes. Clearly, low unit costs.

So I think that all those things should be taken into account, and I hope that the explanation we've given you can redo your math.

That is very helpful. So I guess it was just to understanding where your covenant sits because -- whether a loss of investment grade rating would reduce your access to liquidity?

We have -- I think this is a public info. I think you can find this is in the documents that we've already filed.

The terms and conditions of the different debts that we have out there and issues. But again, I think that for the numbers and the math you should do, it was taking into account that -- it's not as simple as you actually doing back of envelope on the second quarter.

And I think we can catch up on this, if you like, on the next quarter call. And if you want to -- Bayard can send to you some additional information which is public so you can get a better sense as to what the conditions are on each, if you like, debenture issuance on and so forth that we have out there.

We like the prudent tone that you have shown and first, what could be done on the operational front by taking a nuts-and-bolts approach to the business, especially now that you have mentioned all over the, call it, churn game that we are playing; second, in adapting the shoulder remuneration to the reality of the company; and third, as you just mentioned in the previous call, how you set shareholder management remuneration vis-a-vis to what we had in the past to one that is more reality-based on the company how it is today. The question that I have is your board seems to have given you a full support to be that prudent and more efficiently in all those ends.

But how do they see the reduction in their remuneration, given that you are reducing the amount of dividend and given that the mother company, the controlling company, is a still highly leveraged?

With regard to your question, you will have seen that we have agreed or rather, the board has indicated that it will decide on the payment of this intermediate or interim dividend of BRL 500 million. And this BRL 500 million will be paid by October and that this BRL 500 million will be considered as part of the dividends for the 2013 fiscal year.

So I cannot discuss any other matter other than this because this is what we have, we've put out. And this is what should be held responsible for.

So with regard to Oi in itself, we believe that having a 4-year dividend policy, which is much more compatible and aligned with the cash flow profile and the prudent and financial approach you want to take in life is something that gives the market, we hope, a floor as to how they should be thinking about the dividends in this company in the future. It means that we will improve our cash flow profile BRL 6 billion.

It also puts on us the responsibility to achieve that operational excellence and to reduce cost because clearly, this is a commitment on the part of the board that we can deliver. So with regard to this, this is all I can say at this point, that we will be in October, as and when the work board design, we will be paying the BRL 500 million.

So now, could you elaborate on some of these improvements in the service delivery model at Oi? Because they do seem quite similar to what you did successfully the last 6 or 7 years at Portugal Telecom along with your colleagues.

And specifically, I'm thinking about Oi's use of outside contractors rather than in-house staff for installations because I've seen that over the years as something which has led to higher costs, led to more use of working capital for judicial deposits, client dissatisfaction. And should I think about you mentioning on Slide 24 the focus on field force migration, reducing redo and structural costs.

I guess my question to you is how much of the asset sale proceeds and the reduction in dividend do you need to reinvest in areas to maybe terminate some of the outside contract relationships, reinvest in personnel, reduce some of these failure costs within Oi's BRL 19.3 billion of annual OpEx in order to gain some permanent improvement in operating margins and cash flow efficiencies. Or maybe you reinvested in another area like IT, which is something you did at PT, or seek a new settlement with ANATEL on judicial deposits.

I mean how do you look at balancing the internal investments versus the proceeds that you've received from some of the actions that you've announced today?

The -- let me tell you the following. The way we look at the disposal of the assets is that it gives us more financial flexibility and cheaper funding.

It has an impact on EBITDA but the way, frankly, we look at it, is that it could potentially be classified as a financing cost, okay? And it's cheaper financing for us.

So we look at the cash flow, and when I look at the cash flow and I have the option to sell some of these assets and actually -- and maintain, if you like, the use of those assets at a cost which is much lower than us borrowing in the market. Then I want to take that deal.

And this is what we've done. So you saw that we -- in those disposals, we indicated that the implicit cost if you take into account the cost of OpEx avoidance, CapEx avoidance and taxes, is somewhere in 89%.

That compares very favorably with our cost of funding. And so not only gives us longer term funding, but also at a very attractive price.

So yes, it will be booked above EBITDA, but it could well be booked below EBITDA because what really matters to us is the cash flow impacts. It actually improves the cost of funding of the company.

With regard to some of these efficiency initiatives, you very rightly pointed out that we've done it before. And that's why when someone was asking me, "what will be different this time?"

I think what will be different this time is that first, we're not making bogus promises to the market. What we are really doing is that we are taking on responsibility with some initiatives that we put out here that we hope to make clearer in the next few quarters to you.

So you can actually see the tangible impact of what we are proposing to do. But I think what makes it very different is we know exactly what we want to do.

We want to correct the cash flow profile of the company. We want to change the business model, make it more efficient and we want to continue to grow.

Now in that regard, you mentioned the work we did with Field Force in Portugal. What we're going to do with Field Force here?

We are implementing management, it's called Click, and 2 objectives that I've already put out to my Field Force guys. First is we want to increase our productivity from 20% to 40%.

Second, we would like to increase the number of successful installations to 7 out of 10. Now this can be done.

We've done it before. And by the way, 7 out of 10 is not overly ambitious.

Of course, we will have to invest in training. So your point about how we're going to redeploy capital, yes, of course, we will be redeploying some of the capital in training staff so they can become multi-skilled.

We cannot achieve these productivity gains unless they become multiskilled, and by the way, we need them to become multiskilled, because going forward, our business model envisages us selling, not single play, not double play but quadruple play. So that's one area.

IT? IT architecture, I'll give you one example.

We use a lot of software factories. All of our analysis would seem to indicate that the productivity of those software factories can improve substantially.

We've done benchmarks. We've hired Gartner.

We've gone through those specific studies, and we think the improvement in the productivity that is required out of those software factories that we are using, that are external, it's not 20%, 30%, it's multiples of 20% and 30%. Can we do that overnight?

No, we cannot. That will also mean that we have to change the way that we work at Oi.

We need to be much better at planning ahead of time. So that we can actually give some of these suppliers more predictability so that they themselves can invest or co-invest with us.

These are 2 small examples. Networks, when we mention TCO, total cost of ownership, we cannot separate CapEx from OpEx.

We need to ensure that when we negotiate with our suppliers, we are negotiating what we call CopEx, CapEx and OpEx together. So do we see savings in that?

Yes we do, yes we do. So when I guide you to lower CapEx next year to where it is today, it's not that we are proposing to do less.

It's that we are proposing to do the same with less money. And we think it can be done.

Now we've done it before, so what changes, in my view, is that we have, I would say, significant operational experience so we can deliver on execution. I'm not sure if I answered your question, but thank you anyway.

, I just want to ask you 2 brief follow-ups. First, within the BRL 19.3 billion OpEx that Oi spends now, and add the BRL 6 million of annualized CapEx, how much do you think your actual cost of failures are in terms of having to do re-truck rolls, customer dissatisfaction, involuntary churn, all of that stuff.

And secondly, based on the experience, because if you mentioned you have done this before at PT, how fast do you think this investment phase is? When do we start to see the return on investment?

Is it a 2-year, a 3-year process?

Not a 2-, 3-year process, it's not a 6-month process either. I think we're rolling out the workflow management as we speak right now in Mina Gerais.

We will do Reciconex. And then we will carry on with Brasília and so on.

We hope that we will have trained our staff, our Field Force guys, by the summer of next year. So 12 to 18 month, yes, you will certainly see those improvements.

And those improvements will be -- by the way, they will be quantitative and they will be qualitative. Having said that, as you know, the ecosystem needs to survive.

I mean, being more objective, how much do we spend with service providers? How much we spend with service provider per annum?

Somewhere between BRL 2 billion and BRL 2.2 billion per annum. Just that alone.

So when we're dealing with Field Force here, we're talking about an addressable cost base of at least BRL 2 billion to BRL 2.2 billion.

I just want to understand in terms of revenues, where do you see that new revenues will come from. Because the market is growing at a slower pace compared to the past.

And I wonder, if you see the company taking more from the current clients so it's selling more services to the same base? Or do you see the space to get revenues from competitors and particularly, what segment do you see more revenues coming from the company for the coming years?

If you think about mobility, let's say, we are talking -- as we've showed in our presentation, it's about mobile Internet. Of course, that is conditional on us being able to drive penetration of smartphones, beefing up 3G coverage and of course beefing up capacity overall.

But clearly, mobile Internet, data revenues were up 60% in the second quarter, but still, if you look at the overall weight of data revenues, it's still well below where it should be compared to our peer group companies. That's one area.

If you're thinking about Residential segment, Residential segment, clearly, the focus will be moving from 2B to 3B. So only 43% of households of Oi have landlines and broadband from us.

We need to be able to do much better than 43%. If you think about triple-play, we've just given our first solid steps in DTH.

Pay TV is still at an embryonic stage, only 7% penetration of existing households that we serve as a company. So those are just some highlights for you, if you're thinking about B2C.

B2B, we think that large corporates, there's work to be done, particularly in terms of broadening the scope of the services that we offer. So for example, Cloud, as I said, in my presentation here with Bayard, in the fourth quarter, we expect to launch cloud offers, directed towards not just large corporates but also SMEs.

We will look to leverage, if you like, the data center capacity that Portugal Telecom is building in order to sell a number of services here in the Brazilian market without us necessarily having to make investments. As you know, not every single service needs to be in real time.

Of course, you have latency issues, if you're are thinking about submarine cables and so on and so forth, but there's a lot of stuff you can do in batch. And therefore, just think about it.

Back-up as a service. You don't necessarily need to worry about latency.

So there are synergies that we will look to take advantage of by working with Portugal Telecom and likewise, Portugal Telecom will take advantage of the fact that this is a very large market that is craving for new services, particularly if you think about SMEs. If you think about large corporates, they will be wanting to use technology to improve their own efficiency.

So these are just some of the areas where we are looking to grow revenues. Having said that, we believe that we need to work towards enhancing ARPU.

We have profitability issues. So we would like to work collaboratively in this market.

We would like to ensure that this market has a profitability that allows all of those to continue to invest in the future.

If you could allow me a follow up. How do you see Oi in the competitive landscape?

So is Oi capable of, as I said, within 6 to 12 months, to be more aggressive and capture postpaid, could you capture postpaid or even increase that base, the Pay TV, as I said, is still very small. But would you penetrate more towards the residential clients you have?

Would you like to have more from the competitors so that's a little bit not clear for me yet.

Brazil has very good telecom operators. I think we compete against very good companies in this market with some of them we do infrastructure sharing.

So therefore, we have huge amounts of respect for all of our competitors. But what distinguishes us I would say, one principal thing, is that we are present in 4,800 municipalities.

So if you're thinking about capillarity, we are present in 4,800 municipalities where we have fixed line and mobile access. And I think this is one of the key distinction factors that we have.

Second, we have a regional structure that we need to leverage on. So one of the main corporate changes that we're doing here at Oi is that we are empowering our regional teams so they can respond faster, okay, much faster and more adequately to the demands of the customers in each region.

As you know very well, to talk about Brazil, just as one big country, it's not right. Brazil needs a granular approach, the challenges in each market are very different.

And this is how we plan to approach. So bottom line, we need homework to do.

43% of our households, only 43% of our households have broadband. With those households, what we need to do is improve quality of service, improve the quality of our relationship, so we can sell more.

So what we would like to do is we would like to grow with quality and with profitability in the future.

Two questions really. Could you just on the mobile side, do you think, I mean, it looks to me like you didn't quite grow as fast as some of the others in Brazil.

Is that a residential -- is there a specific segment that you think needs more focus? And then second, back to the, I suppose underlying organic cash flow predisposals.

Could you just walk us through in big, sort of big digits? How much do you expect your working capital to be next year, tax, interest?

Because I guess like others, I'm struggling. I sort of understand EBITDA minus CapEx.

I guess I'm struggling to see that the rest is below, is a smaller figure than EBITDA minus CapEx.

Jonathan, our view is that we have actually done better than some of our peer group companies, Brasil probably one, in terms of mobility. In fact, if you look at our service revenues, they were up 4%, and I think that compares favorably, I think, with all of our competitors except, like I said, for 1.

If you look at the overall Oi performance, we actually compare very well with all the integrated operators in this market because our revenues were up 2.4%. So with regard to mobile, as I mentioned earlier, we are actively now using tools so we can do 1:1 marketing.

I think this is one of the reasons why recharges are doing better than we had expected. As opposed to doing one to many promotions, we're are doing 1:1 and increasingly more directed towards the needs and the context in each region.

So therefore, much more aligned with the capacity, the coverage that we have in each region. So in this way, we are doing smarter promotions and ones that actually are very good for our customers but at the same time, are good for us.

So therefore do not necessarily command us making substantial investments. So we will look at regions where we have capacity available and in those regions, of course we will tend to do more, rather than less.

With regard to your question in terms of cash flow and EBITDA for next year, as you know, we've put out no guidance policy today. The only thing that we will probably end up guiding you is towards CapEx which we have, in quantitative terms, done already.

We think that CapEx next year will be less than BRL 6 billion. And with regard to the cash flow, what we can do is that we can take you through one of the slides that we've already put out in the presentation.

Bayard, maybe you can do that and explain.

Yes, sure. Well, we had BRL 2 billion increase on the net debt in the year, mainly impacted by the payment of historic concession fees, roughly BRL 900 million, and the 3G and 4G licenses.

Those are nonrecurring events. I mean, 4G, we just amortized the whole license acquired last year.

For the FISTEL and the concession fee, FISTEL normally is paid on the first quarter of this year. This year specifically, we have the payment on April.

And for the concession fee, it is a biannual payment that now will happen only in 2015. So those impacts will not happen again next quarter.

Therefore, working capital will be significantly different from the numbers we presented this quarter.

Understanding your desire to run the business with lower debt, and you don't want to give the markets a specific debt-to-EBITDA target. But many of your bondholders are concerned about whether you desire to maintain an investment grade rating.

So can you maybe just provide us with your philosophy on your credit ratings? Are you willing to operate as a higher weighted company?

Or will you take the necessary steps to keep your IG ratings?

We take ratings very seriously. And what we would like to say is the following: Is that we will -- we actually proposed to the board that we take this prudent approach.

Because we believe that the business needs to deleverage and that we need to correct the cash flow profile of the company. So that's why the turnaround will be underpinned by 3 events; correct the cash flow profile, business model, more efficiency and growth.

So the comfort I can give you is that the decision to go from BRL 8 billion of dividends to BRL 2 billion, the decision to guide you to a lower CapEx next year. The decision to actually include a commitment to have operational excellence in our company so that we can reduce cost and the commitment for us to actually tackle and align, if you like, CapEx with churn and so on and so forth.

I hope all this gives you the necessary comfort that we will do what it takes, okay, to ensure that stakeholders in our company feel comfortable in working with us. So whether it's a shareholder, a bondholder, a client, regulation whatever, our competitors.

I mean we look at the ecosystem. So we hope that the process that we've started in the last few months will mean that we will continue to do the right thing for the business long term but at the same time, honor our obligations with all our stakeholders.

With regard to giving you a specific guidance, we took the view not to give you guidance so we can have the flexibility to do the things that we think are right and I hope that by the decision the board took yesterday gives you the comfort that this board is up to taking difficult decisions and decisions that have the long-term interest of our company in their hearts.

Okay. Thank you very much for being in this call.

Also, I'd like to thank my team, Bayard, and the IR and the Finance team. It's our first call together as a team and I'm very impressed with the work that's been done.

We've put out releases and presentations that give you a lot of information. We hope that with a lot more disclosure than we've done in the past, we'll work, we will continue to work to improve the disclosure.

We would like to maintain a very transparent relationship with the market, with everyone, with our clients and so on. We hope to see you soon in our roadshow.

I've asked Bayard to arrange some roadshows so we can get together and discuss in a lot more detail the work that's being done. And I would finalize by just telling you the 3 priorities for us.

One is to correct the cash flow profile; second is to make sure that we are comfortable with the business model, work towards improving the efficiency of that business model and last but not least, because we believe that ultimately, Oi is a [indiscernible] on Brazil that we can to continue to grow and we are uniquely positioned to do that because we are present in 4,800 municipalities. We have a clear view as to what our business model should be and now I believe, with the recent decisions taken on the dividend, we now have more financial flexibility so we can continue to execute our, if you like, strategy with lower financial and lower operational risk.

Thank you very much and see you soon. Thank you.

Bye-bye.