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Portugal Telecom (



Q4 2010 Earnings Call

February 24, 2011 11:00 AM ET


Zeinal Bava – CEO

Luis Pacheco de Melo – CFO


Georgios Ierodiaconou – Citi

Jonathan (ph) – Barclays

Tim Boddy – Goldman Sachs

Mathieu Robilliard – BNP Paribas

Roshan Ranjit – Nomura

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Greetings and welcome to the Portugal Telecom 2010 Full Year Results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

Your host for today from Portugal Telecom are Mr. Zeinal Bava, Chief Executive Officer, and Luis Pacheco de Melo, Chief Financial Officer. Mr. Bava, you may now begin.

Zeinal Bava

Okay. Thank you very much. Good afternoon, ladies and gentlemen. Thank you very much for being on this call. My team and I are here and we would like to take you through the fourth quarter full year results announcement of Portugal Telecom. In 2010, consolidated operating revenues amounted to EUR3,742 million, that’s up by 0.2% year-on-year. While EBITDA reached EUR1,492 million, down 4.2% year-on-year.

Consolidated EBITDA margin stood at 39.9%. Net income amounted to EUR5,672 million. And basic earnings per share reached EUR648, impacted by the capital gain of the transaction which as you all recall in vow of the acquisition of PT’s investment in Brazil sell by Telefonica.

In 2010, CapEx decreased by 5.9% year-on-year to EUR798 million equivalent to 21.3% of revenues, and was primarily directed to the investment in the rollout of new technologies and services namely our fiber to the home network (


) and TV service, as well as two investments in 3G and 3.5G in mobile. In 2010, EBITDA minus CapEx reached EUR693, that’s a slight decrease year-on-year. However, in 4Q 2010, EBITDA minus CapEx was up 9.9% year-on-year. In 2010, operating cash flow stood at about EUR406 million. Our free cash flow was of course impacted by the Vivo transaction and reached EUR5,486 million in 2010. At the end of December 2010, our net debt amounted to EUR2.1 billion in euros. And reflecting of course the free cash flow we generated in 2010, but also the liability is recognized in connection with the transfer of the pension liabilities and associated pension funds of the Portuguese state. And of course, it is also what highlighting is that this number doesn’t reflects the investment that we will be making in Oi, know that it reflects the receivable of 2 billion which is still outstanding from Telefonica.

With the announcement of the Oi transaction, PT’s exposure to high growth markets remains intact. And we – as a result of the Vivo transaction enjoy a very solid financial position.

Portugal Telecom, if you take into account Oi, on a pro forma basis would have about 55.5% contribution from international assets in terms of operating revenues. And about 48% in terms of EBITDA. We would also be accompanied with 84 million customers.

Allow me now to take you through some of – just highlights of the financials before Luis takes you through the financials in a lot more detail. And then focus on some of these strategic issues relating to our business.

In terms of domestic performance, our financial performance was impacted by intense competition in mobile, particularly in the youth segment. But Wireline recovery continues to be robust, and most importantly the cash flow that we generate in our domestic business continues to be stable. In Wireline, you will know that have seen that we have felt the pressure from the macro outlooks, particularly in the corporate segment of the business. But when it comes to the residential segment, we continue to do extremely well. The revenue performance in our Portuguese business was driven by solid execution, both in Wireline and of course Wireless, notwithstanding the very aggressive nature of competition that we are seeing, but also international businesses. EBITDA performance was of course impacted by the top line at TMN, but also the continued investment we have been making in customer growth in Wireline.

Once we have ended 2010, with over 830,000 pay-TV subscribers, we continue to believe that we need to strive to achieve leadership in this market, benefits for our company, and it will certainly be a meaning for us to increase shareholder value.

Let me focus on CapEx just very lightly. CapEx in terms that they haven’t driven by our Fibre-to-the-Home project and the male customer growth. However, two things, CapEx is being directed to new technologies Fibre-to-the-Home, 3G and 3.5 G and upgrade in our mobile network. Also what’s highlighting is that increasingly more and more of our CapEx is becoming variable, so customer-driven. In our view, these two things first, investment in feasible technologies and more variable CapEx will increase our financial flexibility and our strategic flexibility in the future.

With regards to our international businesses, we have seen solid revenue growth about 6.4%. If you were to do the analysis on a proportionate basis, our EBITDA was up only 1%. Just have to do also with the fact that we have seen some evaluation of currencies in some of the absence of the half, but also I would say regulatory pressure in some markets, where clearly we have a dominant position.

Let me now focus on some of the more strategic issues. We organized our company along business segments in 2000 – end of 2007, early 2008. We organized by business segments, residential, personal, SMEs, SOHOs and Corporate. And with regard to our international investments, we have – we used to have an exposure in Brazil and we also present in Africa in some selected markets and also in Asia, namely in Eskimo and in Macau.

With regards to our Portuguese business, our focus in the last three years has been to develop what we call the TV experience of the future. The good news is that we continue to do fairly well. In certainly three months, we have built a market share of 30% based on the public and available numbers. And based on that on the back of the service, which continues to distinguish ourselves in the market, is being the best TV service in Portugal. We have content, we have more than 120 channels, a number HD channels and a very successful video demand service. Content is available, but it’s very expensive and we continue to be penalized by the grip that our competitor has and a dominant position that he has in the control of what we call essential content namely football and cinema.

Notwithstanding that, we have the best offer in content. It’s costing us money at this stage, but we assured that once we achieved more than 1 million subs, we will be able to meet the benefits of scale and reduce those costs in the future. We have also invested significant amounts in taking advantage of the modern network that we have. For example, we have launched a number of personalized ridges, functionalities for total control with interactivity in a number of very popular channels. And also we have launched a multiscreen strategy, which is beginning to have a meaningful impact in terms of consumer perception and authorized daily. We now offer the on-demand on multiple screen mobile TV offer has more than 40 channels and soon we will also be announcing video streaming lots of channels also on your PC, so that particularly in our DTH clients they can have an increasingly more multi-type experience like the one you have with IPTV platform.

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