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Edited Transcript of ETB.BG earnings conference call or presentation 29-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Empresa de Telecomunicaciones de Bogota SA ESP Earnings Call

Apr 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Empresa de Telecomunicaciones de Bogota SA ESP earnings conference call or presentation Wednesday, March 29, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eugenia Londono Vallejo

Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer

* Jorge Castellanos

Empresa de Telecomunicaciones de Bogota SA ESP - CEO

* Diana Baron Quiroga

Empresa de Telecomunicaciones de Bogota SA ESP - VP, Finance

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Presentation

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [1]

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Good morning, everybody, and welcome, everybody, to the presentation of results of the fourth quarter 2016. It is 11:00 AM and we are starting with this presentation. Thank you all for your participation and for connecting yourselves.

Coming up, I'm going to read the agenda for today. Today we have the CEO, Jorge Castellanos, and the CFO, Diana Baron Quiroga. The three points to perform today are first, strategic spread for 2016 in charge of CEO Jorge Castellanos. And the second point, financial results for the fourth quarter 2016 in charge of Diana Baron Quiroga.

And the third point is Q&A session. And we expect to have enough time of around 30 minutes to be able to answer the questions that can emerge from this presentation.

So next, I would like to give the floor to Jorge Castellanos so that he can talk to us about the strategic results of 2016.

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Jorge Castellanos, Empresa de Telecomunicaciones de Bogota SA ESP - CEO [2]

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Thank you very much, Eugenia, and good morning, everybody. We are doing the presentation of our results of the fourth quarter and therefore the results of 2016. We are going to split it, as Eugenia mentioned, in a more strategic part, more about a trend, more about where the entity is going to.

More about what trends were being consolidated at the moment at the end of 2016 and at the beginning of this year. And later on, we will get more into more specific details about how this has been given through the ETB accounts.

Just to put you into context, as you well know, ETB was a telephone company with tradition. It was created in 1884, and up until 1940, it became a private property. In 1940 is that it will be part -- owned by the District of Bogota. And in more in 132 years of history, it has been public.

So due to the competitors and the competition at the end of last year, ETB started to have a loss of market share in fixed telephone service, traditional voice through copper service, and also in low-speed Internet that was used with that copper technology. So there you can see in the graph that we have the evolution of a market share in these two products. And that market participation got accelerated from 2012 to 2015.

In 2016, we are still decreasing our traditional users of voice service and copper network service, but we have improved the quality in levels of 4.5% compared to last year's to levels on around 1% in the last year. And then what's referring to Internet that we are going to explain more into details, the drop of copper Internet has been compensated by a growth in the new products and with new technologies. That we'll show you more into details to -- so that you can know what the results about these are.

And also to put into context, some of the comments I will mention later is to talk about the operational evolution measured as EBITDA in absolute terms as well as in margin terms. And there you can appreciate that the five first years of this decades -- of the last decade, the entity was in a shrinking process. But still it was an incredibly profitable Company with EBITDA margins higher than a 50%. Probably the best performance in these terms of the great telecommunications operators.

And then for some reasons, we will -- we got into an expansion in strategic investments. The EBITDA margin was decreased and to -- even dropped to a 28% last year, which is around half of what it was 4 years ago. And the greatest part of our effort last year was to stabilize the entity and to take it into a growth in its operational parameters. Especially in EBITDA and cash flow, which will see more into detail on how they have performed.

As the entity had been profitable, but it has been shrinking, we made the decision in 2012 to purchase a series of capabilities and technology advancements, especially TV, fiber optic, and mobile service. Additionally, other accessories in the network spread and expansion in order to support this process of harmonization and stabilization of the Company.

Besides, we purchased another company and we started to participate in other sectors. So that actually represents a CapEx in these last two years to some COP2.3 billion that -- to put you into context is more than half of our assets.

So in a summary, we could actually say that we invested more than -- or we spent more than half of the assets in the last three years. And that naturally put the Company into a very delicate situation. Because in the process of funding those great investments, it was necessary to get into debt. And in 2013, it was of COP530,000 million. It was necessary to sell the nonstrategic reserves as a order or as a [fourth of] mobile assets that we sold COP432,000 million.

But to 2015, that amount was decreased in the high EBITDAs and that cash flow was reducing COP1.5 billion to COP600,000. That was a great drop that actually put us into great challenges to a new administration. Also have it into account that in the first quarter of 2016, because of a trend -- because of a moment that these investments were having in the pending payments, there was a meaningful reduction in cash flow in the first quarter.

That actually took us in 2016 to do a classical turnaround of the entity, emphasizing those two variances -- those two variables that I just mentioned and trying to reverse them. So outcomes that I am going to present or that we are going to present to you, I would like to mention that they are higher than the expectations that we had set for ourselves at that moment.

And essentially, they allow us to get to that stabilization process in the change of trends that I mentioned, which were the main objectives. And some specific results that probably I will mention that allowed us to get to some higher levels of accomplishments and compliance to the ones that we had at the beginning of the year.

So in that sense, we are very satisfied about what has happened. And obviously, you are going to see the context of our figures and the total integrated losses that still we have a long way to run. And I will also go deeper into these points.

How did we implement this change? So we did do a strategic refocus of the entity to focus in three objectives of commercial efforts, expense control, and improvement of our customer service. That, by simplicity, we have made it into an acronym: SAS, which actually sales, austerity, and services. And thus, the focus of the entity at this moment. And I will go to explain now how we did last year in each one of these specific points.

In regards to sales, in conceptual terms, we went from expansion of our networks -- of having a lot of fiber optics in Bogota of -- and to try to link and subscribe the most amount of clients for these products. So in a few words, going from having fiber to selling fiber.

So there you can see the growth of our customers in the three products -- in the three main new products: fiber optic, which includes Internet and fiber optic telephone service; TV service; and mobile service. We had growth in order of 70% -- 87%, 70%, and 79%, higher than the goals that we had set ourselves at the beginning.

So I would like to remind you that to get to the levels of closing of 2015, it was necessary to make a commercial effort, depending on the accumulated product line of 1.5 to 3 years. So a one year to be able to grow, and these rates, which are all higher than 70%, will actually put us in a very good situation.

Why was this growth done? Structurally within the entity, we have gone in the last two years to privilege the sale of new products. When starting 2015, we were selling 70% of new services in copper and only 30% in fiber optics. That ratio of -- by the closing of 2016 was inverted. That's what happening and what has to do with commercial efforts. We are focusing any new products that have a nice future, and on the other hand, we are recognizing the importance that our cash flow has.

But also, it is natural shrinking as any fixed or home or landline telephone service company, as it is natural. We are trying to decrease the drop in the copper fiber or in the copper service, but the privilege and the focus is in the new products.

That is noticed already in the makeup of the revenue. Therefore, our financial analysts -- I think it's clear that we have accomplished a diversification of income. And in 2016, the new products represented 21% of income of revenue, since in the previous years, it was responsible for only 1%. So that's the trend that we are working on to try to deepen and especially to make it -- to solidify this.

The second element is austerity and expense. That actually covers investments in CapEx as well as operational expense, which is OpEx. In the last years prior to 2016 -- I mean, 2012 to 2015 -- CapEx as well as OpEx were in a permanent growth trend. So for instance, CapEx, which in 2012 decreased in levels of only 16%, is way below the investments of our competitors' parameters for the industry in order of 20% of the revenue.

And what is it with this entity that was incredibly profitable? Did [a wandering] next year. Instead of duplicate itself, it got results of almost triple. So those are very accelerated and great advancements that we have gotten in order to improve and get to a point in which it affected the sustainability and obviously the functioning and performance of the Company in terms of cash flow. Our main results of last year was to accomplish or to get to decrease in absolute terms as well as in proportion about the income to practically have in that indicator.

That helps us stabilize our cash flow. And as I will show you later on, to refocus the content and the priorities within our investments and within our CapEx. And they dropped to some levels that we considered that are manageable and according to what we have.

So still, they are at levels of 31% of revenue, which is way higher the parameters of the industry. But that is a way -- that's an investment that we can manage to the future. And is very -- giving us very good insights about what I'm going to mention.

In the other part, the OpEx or the operational expenses, in 2015, most part of the expenses was committed. And it was drawing in accumulated terms monthly compared to the prior year 2015 to rates of 29%.

And a very great effort was to try to decrease these operational expenses. And we could actually finally get to the closing of the year to take them to a decrease in absolute terms, not adjusted by inflation, but in nominal terms. So we [exlocate] it to a decrease of 2% compared to the accumulated expenses of 2015.

So for ourselves, that's essential, that small decrease of 2% yearly. And really that's the outcome of many efforts and many techniques in order to make the expense offices with most -- with more austerity and more clean about the expenses. So these are the aspects that have to deal with austerity, and I believe we can also show that in part of the results.

And I want to close this part of austerity mentioning that CapEx different from the prior years that in most part consisted of expansion of network CapEx towards new products. Now we have a focus in an 84% in what we call a commercial CapEx.

Simply to explain it, starting from a point of having a possible connectable user, our fiber optic networks get to a few meters away from a door house or from the department -- or from the apartments, getting from a connectable expense to make it connectable, to make it a dual service, telephone and Internet. And normally, that requires us to invest an equal or even higher amounts to actually get that fiber optic to the scope of that client -- to the hands of that client -- that customer.

Because actually acquiring that customer implies some commercial expenses, some installation expenses, and practically paying for the investments in what has to do with modems and routers and other devices that are necessary to provide what the service. And then naturally are not recovered in the following months because of a service charge.

So if in the other hand instead of selling a dual service to that customer, we sell a triple play service that includes -- TV will actually -- the investment will get tripled. So that's the challenge that we have ahead in some adjusted and challenging conditions to try to keep our focus and the commercial spread or expansion of the Company.

And finally, I'm not going to talk too much into detail about this issue, but we believe that our main comparative advantage in terms of competence in [setting] our main competitors is to provide with a better service to our users. This is area where we had great improvement possibilities, because it was not part of ETB's tradition coming as a monopoly probably telephone company or eventually as a company focused in other kinds of priorities in the prior years or in the previous years.

So the main concept points of greatest part of our customers has to do with the care that we give through our call centers and through the stores. And those services essentially for more than 13 years, we provided them through only one company, where we had gotten to a level of stability in the relationship. And that made it very difficult to improve parameters so that we could actually get at the level of what these call centers fields have been evolving with.

And to make it short, we made a public tender -- a public contest that was very participated, taking advantage of the presses and a greater importance of competitors of a global level, where we had a participation of 17 out of them. And we get to a new scheme or we went to a new scheme where the care through call centers and through stores is not given through only one vendor, but it is given through 16 vendors. Through 6 vendors, I'm sorry.

But what's most important and what has to do with provision of services is that we have two competitors providing the same service, and a competitive and permanent scheme, which actually means that by the end of every quarter, we see the quality indicators. And that who had the greatest score in that matter will be the win receiving a higher flow calls and customer care.

But we're still controlling the access of customers through a system. That has been a little bit traumatic through the first quarter of a year, because that has been assisted by -- or also joined by some changes introduced by the tax reform of December 29 of last year that actually made the customer curve very challenging.

But we expect the change has been implemented already and that our customers start to receive a clearly differenced care compared to the rest of the industry at around half of a year or by the middle of a year.

And this has -- represents particularly by half of a year a very definition of internal processes that made the customer care a little bit more complicated. In that way, we can simplify more into care from our call centers executive. Before they had to open many computer tabs, many computer windows, and we have worked a lot in reengineering those processes. And as I said, we expect by half of a year or by the middle of this year, that is manifested or expressed.

So let me show you the results, and that way I can put you more into context again. Talking about the journey of the EBITDA. It was in a permanent drop or decrease in the last four years. And last year as the first time in five years, it could actually go up again.

So that actually represents a good value for the entity, particularly because our main shareholder has indicated its intention to sell its shares and to readdress that sale into social investment in the city. That is -- could be as a base of an investment bank that has been higher -- a bank that has been higher for this. And as you can see or have seen reflected in the prices of stock market, it depends essentially on the trend of the operational margins of EBITDA in this case.

That, joined by the CapEx control. Again, two levels. Very close to a sustainable long-term standards. There you can see that it actually gave raise to a great reverse in cash flow and the operational cash flow that we presented to you.

Since 2012, it had dropped in levels of more than COP400,000 million positive to less than COP400,000 millions negative. And last year, we could stabilize it and to get it to the balance point. We still have a long way to go through, but the trend is clearly of a bending point compared to what we just said. And that's why we recognize our efforts and the great challenges that we still have.

So just to wrap up, let me talk about some issues. One of the results of the previous year -- or to explain a little bit better the structure of what is operational and what -- and we are really -- lays the value of our shares. It could be the stock market or it could be through a great transaction. And what is accounting according to the regulations that we have for depreciation and for other calculations?

So let's start by comparing 2015 and 2016. And the local reality I would like to show you is that when this entity opens its doors at the beginning of a year, it had an income of around COP600,000 million accounts in pesos for non-manageable charges of depreciations, amortizations, and provisions, which have to do with past investments. And those are not charges that imply a decrease in the cash flow.

But there an accounting charge that we still have to overpass generating a greater cash inflow, a greater operational margin, and a greater EBITDA margin throughout the year. And after having charges of COP600,000 million and COP640,000 million of last year, we see that the EBITDA went from COP403,000 to having a growth of [86%] and getting to COP425,000 million.

Nonetheless, when we see those two figures, anyway we see an operational loss of COP252,000 million, that in 2016 became COP216,000 million of losses. So there was a decrease of COP37,000 million, which represents 15%.

Again, there is a lot to improve, but we are in the right trend. And in that change of trend, we'll actually confirm as in the policies that we are actually carrying out. And after that, we have the completely accounting charges that have to do with operation, but they are not terribly difficult to predict starting a year because of many reasons.

The first one of all is the deferred taxes, which are clearly related to losses that would not have been registered before. So in 2015, in the greatest level because of the beginning of the IFRS international regulations, where there was a structural change. The deferred tax results was extraordinarily positive. That was of around COP209,000 million. And in 2016, it was still positive, but naturally not as high as the first year -- approximately less than it -- a fourth part of what is compared to their first year.

In the other hand, something that was predictable at the beginning of the year had to do with the increasing of the financial cost, which was from COP255,000 million in 2015 and it went to minus COP262,000 million in 2016. So that differs in a greater financial cost is that in 2015, because of the liquidity situation and because of greater liquidity portfolio -- or investment portfolio, that actually decreases the net financial cost of the entity, which is actually given in a smaller level in 2016.

And finally, by the closing of last year, there was an adjustment of actuarial or actuary calculation that actually gave an increasing of the actuarial calculation of more than COP360,000 million. And the greatest part led to the depreciation of a present net value.

And there was a trend through -- there was a medical care and other healthcare supports that those families -- extended families and for those employees that we still have and for the retired people that we have. So that's actually about a salary structure and a conventional structure that we have. And because of that, that makes us go through those kinds of issues.

So that has actually taken us to some years as -- in 2015, where the actuarial fees or amounts were in favor, but in 2016, it was opposed. But with expense control, we are actually introducing and we are affirming way more the pricing is for long term. The net results of these variables throughout the time that is going to be tending to be removed or eliminated.

On the other hand, we had a loss of COP230,000 million in 2015 to an integrated loss of COP255,000 in 2016. Accountability is way higher in terms of -- or compared to the previous year, but really backed up internally by an improvement of the operational fronts or offices. And with that, we're going to repeat our objective of involving more our customers to be a more profitable enterprise and the operational part as well as the integrated parts and to having a greater discipline in all the expenses.

All expenses that we have to execute and we have to focus a lot in our goal -- in our targets. And it's to use the working capital -- the human capital that we have available to strengthen the Company to ratify its value in the sale process as well as any markets.

Finally, to wrap up this part, we have left for your consideration the evolution of a price of sharing the markets expressed in absolute terms as well as related to its net value. And we see that by the beginning of 2014, the price of a share had dropped in levels of -- I'm sorry, at levels of COP390 by the end of 2013. And around for those same dates, that represented a ratio of a price in euros of around half.

So since then, we have started to go through an improvement period which has accelerated in the last 15 months at the beginning of 2016 and to the closing of March of 2017, where the value of the entity. And according to its market capitalization and market share, it has gone from levels of COP1.8 billion to around COP2.3 billion.

So in this, we see that the market is confirming two elements. The first one of them is that the outcome of the strategic results make the operational profits and the valuation of the Company as a discount of cash flow to grow in an accelerated way. And that we have seen it particularly in the last five or six months as these results were known.

And in the other hand, the element that strengthens these types of improvements in the share price is the expectation of a possible sale and of a possible improvement of the Company in more accelerated terms under a new owner that has more capabilities to capitalize it and to improve it in terms of fiber optic, TV service, and mobile service.

And with this, I'm closing and I'm going to give the floor to my colleague Diana Baron so that she can explain the financial results -- financial statements more into details. Thank you very much.

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Diana Baron Quiroga, Empresa de Telecomunicaciones de Bogota SA ESP - VP, Finance [3]

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Good morning. Next I'm going to explain the financial outcomes for 2016 as well as the bands of liabilities and assets of the Company.

I would like to start by the state of results. Mentioning that the total values of COP1.46 billion were constant compared to the previous year. The income of the operation growth in COP25,222 million, which is actually a 2% compared to 2015 with an internal change. And a composition, which was about traditional services, we could call it long-distance phone service, bandwidth, Internet, among others.

And this, a little less market share compared to new services, which actually means those based in fiber optic and in mobile service. Later on, I will refer more to details about the behavior of operational income.

About costs and expenses, as I have mentioned before, we have accomplished a decrease of a 2% between 2016 and 2015, and it represents almost COP24,000 million. With this in 2016, we get a EBITDA result of COP424,787 million, which actually represents a growth compared to last year of COP22,000 million and a yearly growth of 6%. It's worth highlighting that this is the first year of growth after four years of a constant drop. And since the beginning of last year, the financial goal was into stopping this progressive deterioration.

Now I'm going to explain the depreciation, amortizations, and provisions, which are the non-manageable expenses that were mentioned before. In 2016, they increased to COP640,000 million. Out of these expenses, more than COP540,000 million are the accounting reflection of the investments done in the last years in the entity, which, as I repeat, they totalized COP2.43 million in the last 4 years.

This item of depreciation and amortizations of COP540,000 million will be reflected in the financial statements of the last years, independently on the outcome of these investments. And what has to do with provisions, which is a difference of almost COP100,000 million in what we are showing of non-manageables, we have the portfolio management and the legal contingencies.

Out of legal contingencies, it is worth highlighting that COP34,000 million corresponding to the updates of provisions of suits against the Company or legal suits against the Company.

I'm going to explain now the recurring operational income, which is the EBITDA minus the precision, amortizations, and provisions. That is a negative value of minus COP216,000 million pesos, which anyways has an improvement compared to 2015. And a growth of around 15% in the outcome.

In the other hand, the financial outcome that includes a net of financial expenses -- the financial cost and the difference in exchange is of minus COP61,647 million. That compared to the minus COP25,000 of last year. It represents a decrease of minus COP36,000 million, a say lower liquidity levels, reduced meaningfully between one year and the other, explained as evolution.

The outcome before taxes by 2016 is practically equal to the outcome of 2015. It's a very similar figure that are based in one hand to the EBITDA growth and in the other hand to the decrease in the financial net.

Now I'm going to explain the provision of income tax and CRE. And this provision, as it was explained before, we have registered a recovery of deferred tax. Last year, we had a positive net charge and extraordinary for a value of almost COP109,000 million. This year, that impact was not given in the same level.

However, there was a positive impact value for around COP51,000 million. The outcome of the exercise before integrated results or comprehensive results, it was a loss of COP226,000 million, that compared to the last year was reduced in income by deferred tax.

The integrated results, which includes the losses that correspond to a valuation of the actuarial calculations in charge of the Company recorded a loss of COP28,422 million, which actually represents an impact of the actuarial calculations. And they correspond to medical healthcare for family members of the employees and retired people. That actually represents an integrated result of the exercise of minus COP254,686 million.

And about last year, I would like to highlight what are those variances between one year and the other. And for that in the presentation or in the slides that we share with you, you can see that it is highlighted from the outcome of last year, which is negative of minus COP36,000 million, and the positive impacts that are in green, which actually correspond to the EBITDA and to the depreciations, amortizations, and provisions that were lower of COP14,500 million.

And the three negative impacts. First of all, the impacts of a lower liquidity that actually produced a variation compared to last year of minus COP36,000 million. The second one, which probably was the greatest impact that has to do with a lower deferred positive tax for value of minus COP158,000 million.

And finally, the impact compared to last year of the actuarial charge or calculation for a cost or value of minus COP60,000 million. So in this way, we are showing the differences between one year and the other. And would like to highlight that great part of this difference corresponds that we did not have the positive impact of extraordinary incomes as last year. And that helped us correct the negative operational impact.

Now I'm going to explain the operational income of revenues, highlighting one of the great accomplishments of last year, which was to consolidate the diversification of new services, fiber optic, and mobile service.

By the closing of 2016, fiber optic services, phone lines, and Internet and TV services that are given through fiber optic as well as mobile services represented a 10% of the total revenue. In 2015, thanks to the strategy of a greater focus and of our greater commercial impact or growth, we went from having -- we went to have a total of income from 21% in new services. 5% came from fiber optic services and 9% came from mobile services.

So this growth in the income of new products is a growth that actually pays off the drop of traditional lines, including services as long distances. As it is well known, it's got a trend for the country as well as global-wide for a constant decrease, for a constant drop.

Now I'm going to explain the variances of expenses and how the adjustment of expenses was done during year to date, with the aim of explaining the specific behavior of EBITDA in the last quarter. So the green line, which is in the graph that we share with you, represents the yearly growth of the expense.

And as you could observe, during the first months of the year, the expense growth compared to 2015 was of around 30%. Due to this fact, in the first quarter, if we add to that the behavior of revenues, we had a EBITDA that was decreasing at levels of a 30% [also].

And as the year went by, we were able to do the adjustments in costs and expenses that was carried out in all levels of the entity. The main savings and optimizations were accomplished thanks to the reduction or decrease of administrative expenses, especially concepts as advisory, IT service fees, administration expense, stationary expenses, and general maintenance.

And the second item of a meaningful contribution in decrease of expenses corresponds to the maintenance of networks and platforms. This decrease was done thanks to a renegotiation of the contractual conditions. And to the organized -- demanding -- or demand of vendors and to the demand. And additional to the application of inverse logistic practices to decrease stock and inventory.

So all these measures were reflected step-by-step in the financial statements. And that's how by September, we finally got to have an expense level to be balanced with the revenue levels and therefore to grow in a rate of a 3% in EBITDA margin. And in October, November, and December, the savings I have mentioned got deepened, and we could close the year with a decrease of expenses of minus 2%, and obviously an EBITDA growth of a 6%, aligned with the very ambitious goals that we had set ourselves at the beginning of 2016.

In the next graph, I will make a comparison again of the evolution of EBITDA of the first, second, third, and fourth quarters, highlighting that effectively in the first quarter, we have accomplished a EBITDA margin of 33%. And in the fourth quarter, we could accomplish a margin of a 35%, pooled, obviously, by the expense behavior and by the impact and of revenues from new products.

Now I would like to explain the behavior of the assets in 2016. By the closing of December, ETB closes with assets of around COP4.3 billion. That was an increase of more than COP1.5 billion compared to last year.

This decrease in the assets is explained by practically in a 100% by the decrease of the available of cash flow, since at the beginning of 2016, the available cash flow was decreased to phase those accounts payable that were executed of expenses and investments executed in 2015.

Once we started out our margins of recovery -- our actions of recovery and of EBITDA growth, we have been able to stop the deterioration of the cash flow. However, the outcome is that we have great less liquidity than the one that we had in the exercise of 2015.

Now going to liabilities. In liabilities, their current position, there we can observe how the decrease has been done. And that decrease of accounts payable for vendors, national vendors, as well as other liabilities. And also the payment done last year of other accounts payable.

There we can highlight dividends that had been decreted (sic) in previous years, which payments should have been done by the beginning of last year or that were done by the beginning of last year. To wrap up, the equity decreases from one year to the other from COP2.2 million to almost COP2.2 million, so it was a decrease of COP82,000 million that was explained by the loss of -- by the loss that I just showed to you.

So with this, I am finishing the session where we explain the results of financial statements as well as the balances. And now we will start the Q&A session.

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Questions and Answers

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [1]

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Pretty good. So now we are going to go to point number three. Now we are going to start with the Q&A session. I would like to remind you that the questions may be done or can be made through the [tet] that we have available in our webpage following the link of the streaming platform of the presentation.

So we are going to start answering the questions in the order in which we receive them. So here we've got a first question from [Pedro Palma] and he says the following. Good morning. What is your investment forecast, having into account your VAS plan and the share behavior?

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Unidentified Company Representative [2]

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My pleasure. The answer in short terms is we would expect to have similar CapEx level in absolute terms to the ones that we have had in 2016. And it's a ratio of income is to converge gradually towards those industry parameters as the revenues start -- continues growing. And VAS gets with more solidity.

And the other answer is that in a more strategic way and a more simplified way is that we have great install capabilities at these moments that we had not been taking advantage of. And our investments actions should be to subscribe the most amount of customers that the commercial (technical difficulty) working capital conditions will allow us.

So in a nutshell, they will take us to have these similar levels as long as the space to continue investments -- or continue investing -- help us grow to attract more customers to the entity.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [3]

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The following is not a question, it's a suggestion of [Ray's]. He mentions an issue in slide number 20. He says that the years are opposite or backwards and they are not correct. So okay, yes, we are going to correct that and once we have it all corrected it, we will upload the correction to the presentation. Where we have 2016, actually corresponds to the year 2015 and vice versa.

Then the next question that we have is from [la bretot]. It says good morning. Is my understanding that if we increase the EBITDA margin, there is some kind of bonuses for the Company's administration. If we apply the austerity policy, are we still going to pay this bonus? This bonification or these bonuses?

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Unidentified Company Representative [4]

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The Company, as any telecommunication company in this very competitive context, has fixed fees and variable fees. That's for all the base for executives as well as for conventional staff of this entity.

For obvious reasons, as this is a private -- sorry, a majority public capital or equity, the payments, especially for executive sector and at the higher levels, have some disadvantages compared to the levels of our competitors, especially our main competitors in telecommunications.

And also those competitors have a fixed proportion and a variable proportion. That variable proportion of ETB is lower in absolute terms as well as in relative terms to the total of the compensation compared to our industry competitors.

But as long as some indicators are compliant with, not talking about EBITDA margin, but other indicators that have to do with operational income or operational profitability, all payments or all commissions or all payments to our staff will have a variable payments or a variable --.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [5]

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Okay. So now I would like to make a question -- or I'm going to make a question of raise again question about EBITDA. The EBITDA figures that you are giving in ETB, are they different from the ones of reports from [each] rating? Do you know why this difference is given?

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Diana Baron Quiroga, Empresa de Telecomunicaciones de Bogota SA ESP - VP, Finance [6]

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Let me tell you what Fitch says in ETB's figures about last year. The Company's EBITDA margin is lighter than 21 and a lower revenue growth. So there is -- yes. Definitely Fitch has its own methodology for EBITDA calculations. For instance, it considers some of the expenses that as we consider our expenses of networks rental, Fitch considers that as an asset and it deducts that.

So I would like to request to you to review Fitch reports, having into account that those are different methodologies. And among other things, Fitch explains very clearly what things are different. But from a greatest top or issues that are remembered is this -- specifically this treatment of some rental costs that they treated as a financial assets.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [7]

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All right, so next, I'm going to make a question for Steffania Mosquera. She actually says thanks a lot for the presentation and congrats for the results. She is asking how is the Company doing in terms of fiber optic infrastructure, home phones or home service, and connectables.

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Unidentified Company Representative [8]

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In what has to do with households, we cover more than half of the households of Bogota. We got around 1.3 million households. In connectable homes, we have kept, especially last year, a ratio of 2 to 1.

So at these moments, there is an order of 640,000 connectable homes, out of which we already have connected more than 200,000 by the end of 2016, which actually give us a greater growth space of around 400,000 homes ahead or towards the future.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [9]

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Again, Steffania Mosquera from Credicorp Capital. She is asking do you expect the EBITDA margin obtaining that quarter to be sustainable?

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Jorge Castellanos, Empresa de Telecomunicaciones de Bogota SA ESP - CEO [10]

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Our main goal is to make the operational profitability of entity grow, which is actually where it gives value to the entity, and that helps us take advantage of a great capability that we have at the moment.

And I would like to take advantage to mention about the points that my colleague Diana mentioned a moment ago about the difference between the way -- how in absolute terms certain market analysts measure EBITDA and how other analysts measure it.

So what's important is the comparison between the business opportunity and the industry that we have. Our EBITDA, as I mentioned at the beginning, it is a shrinking company. It is a very gradual shrinking. And the EBITDA margins at that moment was of around 50%. And that decreased in 2015 to only a 28%, which is way below the levels of our competitors.

Not only the main competitors in Colombia, but firms of a similar size, of a similar evolution, of a similar product in all Latin America have indicators that range between 22% and 25% of EBITDA measured the way we measure it. The comparison is the same one if we do it with those centers. The absolute amount of that margin will be different, but the proportions will be kept -- will be the same.

So we see a opportunity towards the future. So we improve the EBITDA margin particularly. And last year, we could actually get it from 28% or 29%. And we are very reliable that we can keep the trend, a growing trend, as an average for a whole year.

The last quarter of last year was a particularly profitable quarter for us, where we accomplished a 35% of EBITDA margin, which medium term we would like to accomplish. And I would like to get really close to that amount or to that percentage by the closing of 2017.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [11]

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Diego Buitrago from Valores Bancolombia is asking us -- or is telling us thank you for your presentation. And what guidance can you give us about taxes for 2017?

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Diana Baron Quiroga, Empresa de Telecomunicaciones de Bogota SA ESP - VP, Finance [12]

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Really we are expecting for the closing of 2017 something very similar to what we had in 2016. And effectively, we are not expecting that extraordinary revenues as the ones that we had in 2016 -- I'm sorry, in 2015.

In general terms, the [creators'] income by deferred tax is given by the fiscal losses. And we will continue to experience those, among other things, due to the application of the agreement of legal stability that ETB has. And still we are going to have way more time to take advantage of that.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [13]

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So next, a question from [Louis]. He is asking us can you explain a little bit more the usage or can you broaden more the cash flow usage by 2016. There is austerity policies, lower CapEx, more commercial aggressiveness, and I see that there is a growth of COP22 million. So could you explain to us a little bit more deep in the cash flow usage and the need of that debt of COP22,000 million short term? Thank you very much.

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Diana Baron Quiroga, Empresa de Telecomunicaciones de Bogota SA ESP - VP, Finance [14]

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Well Lewis, thank you for your question because that gives us the opportunity to explain a little bit more how evolution of last year was in terms of cash flow. First of all, and as I mentioned already, great part of the decrease between 2015 to 2016, we had it in the first quarter and almost until May. And it was basically responding to liabilities of expenses and investments that we had done in 2015.

As you might understand, great part of this exercise of austerity decrease and optimization of investments, it is not given overnight. So actually, around June, we took COP40,000 million pesos to solve those temporary differences at the moment in which we did the investments, focused as [scientists] to connect new customers. And at the moment in which those customers start to provide with some income to some profitability.

So at the end of the year, we could get to pay COP22,000 million. That was half of this with COP20,000 million. So that was half of this indebting. So the Company decided to respond in a way that we started to see it or to notice it in the second quarter.

So I want to mention that at some point, we were thinking that it was going to be necessary to take way more money. But the outcomes of the entity and the way it behaved, they allowed us to decrease this cash exercise.

To make it more simple, most of it -- if not 80% of the cash flow that was spent last year, it was spent during the first two quarters of the year. And now, it spent several months in general terms with a cash flow that is not decreasing, but that is strengthening itself.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [15]

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Now before the next question from Louis, I'm going to read a question from Diego Buitrago. I think it's very aligned with what is referring to cash. We already answered it, but just to confirm. Diego is asking us what expectations do you have for the cash flow in 2017. If it continues to be negative, do you consider it necessary to appeal to indebtedness?

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Diana Baron Quiroga, Empresa de Telecomunicaciones de Bogota SA ESP - VP, Finance [16]

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Diego, well, first of all, we are not talking about a negative cash flow. As we have mentioned, we have accomplished -- or we have gotten to level up the cash flow and not to get it more deteriorated. But obviously we're going to appeal to a greater indebtedness as long as the investments that we make have some recovery time. This differences in the cash flow have to be covered with more debt.

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Jorge Castellanos, Empresa de Telecomunicaciones de Bogota SA ESP - CEO [17]

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Yes. And to add something to that topic and to put you more into context and has to do with evolution of indebtedness is that at the beginning of 2016, we started only with a financial indebtedness of COP530,000 million that were consisting of bonuses that were -- or bonds that were issued in 2013.

By the end of the year, we closed with a total financial indebtedness of COP550,000 million, which actually means a growth in the whole year in terms of stock and inventory of financial liabilities for a little bit more than 3%. And that give us opportunity for the future that as long as the commercial activity to be expressed themselves, so that we can fund the cost of subscribing those new customers.

And I would like to repeat that our opportunity as [it was] mentioning in the CapEx decrease of 84%, and will have to do with commercial CapEx to subscribe clients is to take advantage of those great opportunities that we have ahead.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [18]

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Next, we have another question from Louis. He is asking us what percentage of the potential market of users in Bogota is covered or is subscriber fiber optic? What is the plan for covering the rest of them or is it frozen because of a possible sale?

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Jorge Castellanos, Empresa de Telecomunicaciones de Bogota SA ESP - CEO [19]

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No. Nothing is frozen because of a sale. Our role as managers of an institution is to increase the value of the entity. The sale process is a decision of a majority shareholder which manages it through its instances, particularly through Secretary of Finance.

So our greatest effort is to give the greatest value toward all the shareholders and to all the owners and to all the society. So that take us to make the best possible decisions in the context of our financial realities. And of a growth potential of the entity, I want to be more specific about this.

For instance, we mentioned that at this moment, we have around 1.3 million households connected or to be connected. That is around half of households in Bogota. And part of Bogota where we would expect to take advantage and exploit commercially the prices that those high-quality services carry out. That way, we could actually exploit or take advantage of those capabilities.

Last year, it grew on a little bit more than 1.2 million to 1.3 million households. And the next variable, which is the critics in terms of a potentiality that we have of creating new customers, which went from 610,000 this year. And now this year, they exceeded 640,000.

What is a connectable home? It is a home where fiber optic does not only go through the streets, but it goes from a street, it goes to the building, and it gets to a basement, and it goes to the different floors, being finally available there in case it is necessary. It is right next to the elevator. But the customer still is not our customer.

The network that we have obviously has many buildings that are potentially profitable and commercially profitable, but that they are still not connected sometimes. Or in some opportunities, because the administration is not facilitating the actions to the building. Or in some cases, because it's some old buildings, physically it's difficult to use. The [docksafi] or apartments or the pipeline of the apartments to be able to take these kind of fiber optics. So those are realities of a business that any company who installs fiber optic has to face.

We have refined a process of choosing where we are going to make a household to be connected to make it a connectable home so that it can be taken advantage of short term. And as I was saying, by the closing of 2016, we had more than 640,000 connectable homes growing.

We made important investments, and it is quite costly to connect each one of these buildings. We spread the connectable base, which is the most important one, and still we have not had -- from those 640,000, we have more than 400,000 that could become connectables.

And we are naturally -- we will use the available effect or -- effectively for cash resources in a very effective way. Not just installing the network, but it is more that -- because that's more like an approximation, but we are going to do it more punctual, more specific, and more focused commercially.

So I would like to close, repeating that the investments is not decreased. It is simply more focused into its commercial potential, and way less in the physical geographic process of going through the city.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [20]

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Next we have a question of [Jen Silva]. Can we have an approximate of the value of the Company and possible interested -- possible buyers?

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Jorge Castellanos, Empresa de Telecomunicaciones de Bogota SA ESP - CEO [21]

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Well, I would like to repeat that those -- these are questions that first of all should be answered by the Secretary of Treasury, which is the one doing some detailed status with the support from international investment banks and some other consultants of a first level.

Simply to present some orientation basis, the activity that the price of a share, particularly for all the shareholders, of minority shareholders who have some or a few shares is -- that is what is in in the stock markets. That's where the market -- stock market says what is valuation for non-controller actions. That is what is estimated how much the entity is valued on.

But I would say that's an approximation to value. Beyond that approximation to the value, we have naturally the technical concept of a control premium that we and the entity, besides seeing the values in the stock markets that will actually give us a good point to start, we do not look at that control line.

So that's why in a possible self presence where the majority shareholder in process of selling the entity has to estimate it on top of those estimations in the stock markets. And that is part of the actions of the Secretary of Treasury, in which we do not participate in the practicalities of this topic, besides just contributing necessary information they require is going to obtain through the hiring of these international advisors of this first level.

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Eugenia Londono Vallejo, Empresa de Telecomunicaciones de Bogota SA ESP - IR Officer [22]

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And with this last answer, we conclude the presentation of results and that we conclude the time that we have estimated from 11 AM to 12 noon. And whoever has more questions, we would like to thank you to send them to the email inversionistas@etb.com.co or directly to my email eugenia@etb.com.co and we will be very pleased to answer them for you.

So thank you all for connecting today for joining us. And we would like to remind you that in our webpage, you have all information available about today's presentation and the financial statements by closing 2017 -- 2016, I'm sorry. Thank you very much.