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Edited Transcript of OIBR4.SA earnings conference call or presentation 15-Aug-19 1:00pm GMT

Q2 2019 Oi SA em Recuperacao Judicial Earnings Call

Rio de Janeiro/RJ Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Oi SA em Recuperacao Judicial earnings conference call or presentation Thursday, August 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernardo Kos Winik

Oi S.A. - Chief Commercial Officer & Member of Board of Executive Officers

* Carlos Augusto Machado Pereira de Almeida Brandão

Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers

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Conference Call Participants

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* Andre Baggio

JP Morgan Chase & Co, Research Division - Senior Analyst, Latin America Telecom, Media and Technology

* Barbara Virginia Halberstadt

BofA Merrill Lynch, Research Division - Associate

* Carlos Sequeira

Banco BTG Pactual S.A., Research Division - Head of Research & Analysis and Brazil Strategist

* Daniel Federle

Crédit Suisse AG, Research Division - Research Analyst

* Guilherme Haguiara

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Marcelo Peev dos Santos

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Oi S.A's conference call to discuss the second quarter of 2019 results. This event is also being broadcast simultaneously on the Internet via webcast, which can be accessed on the company's IR website, www.oi.com.br/ir together with the respective presentation. (Operator Instructions) We also would like to inform that the conference call will be conducted in English by the management of the company, and the conference call in Portuguese will be conducted via simultaneous translation.

This conference call may contain some forward-looking statements that are subject to known and unknown risks and uncertainties that could cause such expectations to not materialize or differ materially from those in the forward-looking statements. Such statements speak only as of the date they are made, and the company is under no obligation to update them in light of new information or future developments.

I will now turn the conference over to Mr. Carlos Brandão, CFO. Please, Mr. Carlos, you may proceed

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [2]

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Good morning, everyone. Thank you for joining our conference call for the second quarter of 2019. I have here with me all the management and IR team.

Let us begin our earnings conference call on Slide 3, showing the main highlights for this quarter. As the main pillar of our strategic plan, we accelerated even more to fiber deployment and in July with 2.8 million homes passed with FTTH. Only in July, we deployed approximately 400,000 households with fiber. At this pace, we are on track to end 2019 with a target of 4.6 million homes passed with fiber. Additionally, the pace of connections keeps moving above our expectations. We ended July with 291,000 homes connected with FTTH representing a 10.2% take-up on our base of homes passed.

In the mobile segment, we posted another quarter with strong performance. We had 33% share of postpaid net adds in this quarter, the largest share in the company's history, which came as a result of our acceleration of our commercial activity focused on simple offers and the prepaid to postpaid migration effort. Driven by the robust performance in net adds of the last quarters, we recorded 11.5% annual growth in postpaid revenues, reinforcing our view that Personal Mobility should record annual revenue growth in 2019. On the corporate segment, IT revenue grew 27% over the previous year. As we have been saying, due to its high-added value, IT revenue will be the one of the main drivers to revert the B2B revenue trend.

Moving on to Slide 4. Let's discuss the Residential segment. The annual decline is still significant mainly because of the fall in corporate's revenue. However, in the quarter-over-quarter comparison, we see a clear slowdown with 1.2% decline. It is too early to assume any assumption for this year but it is definitely positive news and reinforce our fiber growth strategy. To revert revenue trend, we are investing heavily to accelerate the expansion of our fiber footprint. The fiber results has been very encouraging and have been exceeding our expectations with the fast pace of growth. In July, we reached 2.8 million homes passed with fiber in 68 cities. Our penetration of homes connected achieved 292,000 (sic) [291,000] clients on equivalent of 10.2% take up rates.

On Slide 5, I will show some other positive fiber indicators. As already shown on the previous slide, we reached 2.5 million homes passed in the end of the second quarter and 2.8 million in July. Our estimate is to finish 2019 with 4.6 million homes passed and in 2021 with 16 million.

For the fiber-connected customer base, we expect to reach 15.2% take-up with 700,000 customers by the end of 2019 and for 2021 with 25% of fiber connected customers over our homes passed base, the equivalent to 4 million customers of fiber.

Naturally, we have a big execution challenge to reach these targets but the granularity of our analysis has allowed us to be much more efficient, not only by prioritizing homes passed construction but also in connecting these homes. As a result, the new clusters of homes passed deployed have been showing better connection result than other clusters.

At the top right of the slide, we show that the homes passed deployed in October 2018 took 7 months to reach 8.1% take-up. The same take-up rate was achieved in just 2 months for the homes passed deployed in the April 2019. These results show that we have been proven the efficiency of the capital allocation by controlling the execution in a very granular approach.

Operating results has been very positive. Our gross adds grew 79% sequentially, fiber churn is so far 50% smaller than corporate churn and the ARPU 38% higher. The next shot is what best reinforce our strategy of placing fiber at the center of our strategy and why this product has the potential to become a game-changer for Oi.

In the 68 cities where we already have FTTH of our ability, our total base of residential customers, considering fiber and copper, already had reverted the trend, recording 1.3% growth from January to June this year, while in the cities where we have not reached with fiber, our base dropped by 6.1% in the same period. Additionally, for the fifth consecutive month, our fiber is in the first place in the Netflix ranking and our advantage for the second place is increasing, another indicator that reinforced the superior quality of our product compared to the competition.

Moving on to Slide 6, I will give more color on our mobile segment results. As I said in the previous slide, we posted a postpaid net add share of 33% in this quarter, the highest in the company's history. The combination of the acceleration of our commercial activity as simpler and more straightforward portfolio of offerings and our effort to migrate prepaid customers to postpaid offers were the main drivers responsible for this strong result. As a consequence of this consistent performance in the postpaid segment, we are seeing; one, a solid and a steady growth of our postpaid customer base; two, the consolidation of the revenue growth trend of this product which reached 11.5% in the annual comparison; and three, the improvement of the revenue mix which since last quarter has a higher rate of postpaid and control compared to prepaid.

In the prepaid segment, the positive news is that even in a shrinking market, we have managed to grow market share, which means we still have a lot of opportunity to work with our prepaid customer base for postpaid migration, especially in the northern and northeast regions of the country where we have high market share and where the migration process is not as advanced as in the rest of the country. As a result, our mobile revenue is relatively stable in year-over-year, but with an upward trend, reinforcing our view that by the end of this year, we will see an annual revenue growth.

Let's talk about B2B results on Slide 7. As we show in the chart, following the positive trend of the last quarters, the sequential evolution of B2B total revenue presented stabilization this quarter. When we look at the annual comparison, the evaluation is still a decline due to the great exposure to the traditional revenues in the segment such as data and fixed voice but the trend is clearly improving constantly.

Our efforts are to change the composition of this mix, increasing the share of higher-value-added revenues and reducing the exposure to revenues with declining trend. The results have been encouraging. Our IT revenue has grown 27% year-over-year and already represents 12% of the corporate total revenue. Since this is a service with high potential for value renovation, IT will be one of the main drivers for growth in this segment and one of the factors responsible for the downward trend improvement in B2B.

Another important segment is wholesale, which, through fiber expansion and exploration of our unique infrastructure, has enormous potential to become the main national transport network provider and the infrastructure enabler for 5G in Brazil.

Moving to Slide 8, the OpEx and EBITDA slide reflects a summary of what we have presented so far. We are accelerating our commercial activity, which naturally puts pressure over sales and marketing expense. These are good expense as they have been supporting the deceleration of the revenue decline in the period, providing a stabilization of the consolidated revenue in the sequential comparison and supporting fiber's accelerated growth. However, even with this commercial acceleration, the company managed to reduce costs. The results provided by digital transformation and operational efficiencies played a key role in this process. As a result, the company's EBITDA of BRL 1.2 billion in this quarter is in line with the guidance for 2019.

On Slide 9, we talk about digitalization as another important tool in Oi's transformation process focused on cost efficiency and customer experience. Oi's digital transformation process is gradual and have its first initiative in 2016 with isolated projects in specific areas.

In 2017, with the creation of the company's digital area, the first deliveries of apps and functions, such as Minha Oi, Virtual Technician begin to produce significant results in terms of better experience to our customers and cost reductions for the company.

In 2018, we expanded the digital transformation to all areas of the company, upgrading and enhancing existing functionalities and developing new ones, such as Joice, our recently launched assistant of artificial intelligence and the machine learning for digital service channels.

From 2020 onwards, we will start a fully digital enterprise both in-house with cross-functional teams, process simplification, agile and flexible IT systems as out of the company with simpler products producing a better experience for our customers. With these actions, we expect to expand the results shown in the table on the right of the slide and capture efficiency gains by providing the best experience for our customer and drastically reducing our operating costs.

Moving on to Slide 10, we accelerated investment in the second quarter, growing 20% sequentially and 50% year-over-year. This acceleration enabled us to reach the 2.8 million homes passed mark in July. In order to reach the 4.6 million homes passed planned by the end of the year, we'll need to build in average 350,000 HPs per month from August to December. This is the pace that we have been practicing since June, which means that we are on track to deliver the target. We are evaluating the possibility of accelerating even more investments, reaching at the end of this year a CapEx between BRL 7 billion and BRL 7.5 billion.

Moving on to Slide 11. Let's discuss the cash and debt balance. The company consumed BRL 1.9 billion cash in this quarter. Of which, BRL 700 million from were from timely payments of ANATEL fees and the remaining was mostly from the operation and the faster pace of investments.

On the debt side, the valuation was BRL 495 million with an exchange variation has a positive effect in offsetting part of the impact of interest and fair value monetization. Naturally, the cash position and the cash consumption will create an additional executive challenge for the CapEx plan.

This is the telecom cycle. In the first moment, we have an acceleration of investments. In the second stage, there is the commercial acceleration when we have the increase of expense. Then, gradually, we move to stage 3 with top line growth and EBITDA improvement. The company is looking closely at the cash and we are very confident that the execution of the sale of noncore asset portfolio will generate the necessary funding to keep up with the investment schedule in order not to lose time to market.

Moving on to Slide 12. In summary, second quarter results is in line with the company strategic pillars, which we presented to the market 1 month ago. Fiber is, as I said, the core of our strategy. This is where the consumer of the telecom market is heading. Data consumption will only be provided with excellence by operators with our robust transmission network and fiber capillarity. This is precisely our greatest competitive advantage, our own applicable fiber network.

We have already started to accelerate our investment plan to potentialize this competitive advantage and maximize value creation. Fiber will play a key role in the company, serving all areas in across way. We're in Residential with FTTH, offering broadband, IPTV and voice over IP or in the wholesale by positioning the company as the largest national infrastructure provider and 5G enabler in the country. And also in the corporate by providing connectivity, capillarity to become a digital-solutions integrator. The technological inversion from copper to fiber will allow us to revert the revenue trend with substantial margin improvement given its significant lower maintenance cost and churn rates.

Another important strategic pillar is mobility, which with its excellent recent result has -- helping to fund the implementation of the CapEx plan. As presented today, our postpaid revenue has been steadily increasing over the past few quarters and we still have a lot of opportunity to work our prepaid base, migrating customers to postpaid, increasing our product loyalty and ARPU. The growth challenge in mobile is due to our limited investment capacity. Thus, the expansion of our mobile coverage will be rational and selective. Prioritizing areas where we have high market share to defend our postpaid base and incentivize prepaid migration through frequency refarming of 1.8 giga to 4G and 4.5G.

In addition, we will leverage existing capacity to grow in areas that we have lower occupancy. With this strategy, we expect to keep improving mobile performance. Beside that, naturally, in parallel, we are exploring all the strategic options that could maximize shareholders' value. The third transformational pillar is cost-efficiency. The migration to our fiber-sensitive business model underpinned by the digital transformation will enable the company to simplify operating process, improve efficiency and consequently to reduce its structural cost significantly and improve customer experience.

Finally, the cash pillar. In order to fund this strategy, we will divest noncore assets and release cash from nonoperational actions. On the noncore, we are already working on our portfolio of assets, which contains Unitel, mobile towers, data centers, nonstrategic fiber in São Paulo in real estate.

In parallel, we have already started to use our recently recognized tax credits of fiscal fees over ICMS.

The combination of these initiatives, together with the capital increase of BRL 4 billion at the beginning of the year, have the potential to raise BRL 12.5 billion to BRL 14.5 billion of funding to execute this strategy, which will enable the company to come back to growth with sustainability maximizing value creation.

With this summary, I end the presentation of the earnings results, thanking everyone, our shareholders, employees, customers, suppliers and the stakeholders for their support, commitment and dedication throughout this process of construction of the new way.

We will now begin the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [2]

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So starting with 2 questions that I will answer in a block from the webcast platform. So first question is, does the company already have an estimated date for the sale of Unitel? The second question is, the company burned BRL 3 billion in cash this quarter and in June with BRL 4.2 billion in cash. What is the company's strategy in the event of a short-term delay in asset sales to maintain CapEx investments?

So starting with specifically Unitel, we have announced in the plan 1 month ago, that we expect to close this deal in the fourth quarter of this year. We are fully on track in this process. We are in a very advanced stage and beginning our negotiation and we are very confident that we will deliver a good permission for the market as we expected and as we guided.

On the second question, I would say that it is no surprise on that since we have announced -- since the beginning of the plan that we are investing more than EBITDA for the company. So we expect to have this cash burn and it's in line with our plan. We are fully on track with all the assets that we have announced in our strategic review in July. So we are fully confident that we are, with everything on track, to deliver the funding for the investments.

But on top of that, as we had in the plan, we have other alternatives that we are also analyzing internally, such as issuing secured debt, a capital raise and vendor financing. It's all part of the additional recovery plan, and it's part of the company agenda to analyze and to discuss.

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Operator [3]

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Mr. Guilherme Haguiara from Bradesco would like to ask a question.

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Guilherme Haguiara, Banco Bradesco BBI S.A., Research Division - Research Analyst [4]

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My first one is related to your FTTH project. We have seen the acceleration in the expansion and also a good progress in your take-up rate. And we were just wondering what are your main strategies to lead to this acceleration in take-up? And how is the competition with small providers in the cities where you have entered in fiber? And in summary, what type of contribution can we expect from fiber over the next 12 to 24 months?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [5]

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Guilherme, thanks for the question. I will ask Bernardo and Guenzburger here who is leading the commercial activities on the fiber projects to answer to you.

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Bernardo Kos Winik, Oi S.A. - Chief Commercial Officer & Member of Board of Executive Officers [6]

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Guilherme, thanks for the question. The competition in the fiber segment is very intense. However, we are competing against ISPs mainly in some of the areas that we are deploying our network. So the result of this competition usually is given our strength in the brand and given our commercial activity, our quality of the network and the speed that we're offering to the customers. We are achieving very good take-up rates when we compete against those ISPs.

The competition in the major cities and especially in vertical areas is more intense and that's why we are prioritizing in our expansion, suburban areas, nonvertical areas, areas where typically we compete against ISPs.

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Guilherme Haguiara, Banco Bradesco BBI S.A., Research Division - Research Analyst [7]

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Okay. And my second question is related to your OpEx. We have seen a deceleration in the pace of declines from your recurring OpEx and we understand that there is a target in your strategic plan to reach savings over the next period. And we were just wondering if there is any more granularity you can provide us in terms of where these savings will come from in terms of how much each front you have outlined can contribute to cutting your OpEx?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [8]

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Good -- very good question. Thank you for this one, Guilherme, again. In the very short term, as you can see, we are with some pressures on the commercial OpEx in order to deliver the service that we are now engaging to increase our subscriber base. But in the mid-term, as we have announced in the plan, we have a very ambitious cost takeout program that we expect to provide more colors in the next quarter.

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Operator [9]

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Mr. Daniel Federle from Crédit Suisse would like to ask a question.

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Daniel Federle, Crédit Suisse AG, Research Division - Research Analyst [10]

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My first question is regarding the CapEx. We saw the plan of accelerating the deployment of fiber-to-the-home but I think you guys mentioned only a little on the CapEx side, the consequence on the CapEx side. So should we assume that the BRL 7 billion continues to be the guidance from the company? That's the first question. And the second question, we start to see this recovery on the revenue trends on a quarter-over-quarter term. However, I remember that the guidance from the company was to see revenues moving to the positive -- revenues moving up to the positive territory only 2021. So any update on these fronts. Maybe we can get more positive on revenue trends overall?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [11]

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Thank you, Daniel. Regarding the CapEx, this year, we expect to reach more than BRL 7 billion as we have communicated previously in the beginning of the call. We are targeting around BRL 7.5 billion this year. Next year, we still planning something like BRL 7 billion. We are discussing internally. But yes, this year, we expect an increase to around BRL 7.5 billion. And I guess, Bernardo, will help you with the question regarding the revenues.

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Bernardo Kos Winik, Oi S.A. - Chief Commercial Officer & Member of Board of Executive Officers [12]

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Yes, in regards to the revenue trends, two different views. On the mobile side, basically, we've achieved more than half of our revenues on the mobile side on postpaid and hybrid plants. And that's helping us a lot because those two products are growing and prepaid is declining. So on the mobile side, we can see a consistent trend moving forward to stabilize and even grow our revenue.

On the Residential side, what we see is a deceleration of the downwards trend. And that's mainly because of our fiber progression. Fiber revenues are starting to decline the speed, reduced the speed of decline of the Residential revenues, but that is something that will take some time. And that's why we are committing to an overall growth in the Residential segment only after the fiber has achieved a significant amount in our revenue stream.

So right now, fiber is helping us to reduce the declining trend of Residential, but we'll still see some bumps in this Residential revenues given that we are in the process of transitioning our revenue streams from corporate to fiber.

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Operator [13]

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Mr. Andre Baggio from JPMorgan would like to ask a question.

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Andre Baggio, JP Morgan Chase & Co, Research Division - Senior Analyst, Latin America Telecom, Media and Technology [14]

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So for this year, we're seeing EBITDA going down by 20%. But going forward, you have a guidance of growing EBITDA very quickly 15% to 20%. So what gives you that confidence that you can increase EBITDA to these levels? We have seen in the past that Oi promising a lot of EBITDA growth with different management, including its restructuring, not long time ago. And we never saw this Oi delivering. So why this time would be different?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [15]

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Thank you for the question, Baggio. Specifically, regarding this, our expectations on EBITDA, there is some components to answer your question. The first component is a change on the business mix. So part -- as part of this strategical review, we are now decelerating business lines with poor margins in copper, such as DTH in exchange to business lines with high margins, such as FTTH and wholesale.

So that will be an important driver for EBITDA growth in the short term. On top of that, we have the cost takeout initiatives that, I said previously, that we expect to provide more colors to the market in the fourth quarter. So -- in the first quarter, sorry. So that's -- in a nutshell, that the main [responsibilities] for the -- our expectations to the growth of our EBITDA without significant growth in revenues.

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Andre Baggio, JP Morgan Chase & Co, Research Division - Senior Analyst, Latin America Telecom, Media and Technology [16]

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And just to follow on this point like a -- I understand that fiber has a higher margins, which is great. But still, even the copper has maybe a lower but still positive contribution. So is it going to be a burden that even you will see that copper is declining over time that's -- so that with fiber will have to grow a lot just to compensate the decline in fiber in the next 1, 2 years or so before fiber becomes a typically prevalent technology for the Oi.

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [17]

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Yes. Exactly. That's exactly what we did when we revisited our strategic plan. So we are increasing our targets for homes passed in 60%. So we are now targeting 60 million homes passed by the end of 2021 with a huge acceleration and the penetration of these homes. So that's where we are very confident to have these results in exchange for the copper declines that is a natural trend in this business.

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Operator [18]

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Mr. Marcelo Santos from JPMorgan would like to ask a question.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [19]

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My question is regarding lower expenses with payphones. I think you -- in the release, you mentioned that you saw a sequential decline in network maintenance costs because of the new PGMU and lower expenses. Have we already reached the run rate for these savings? Or do you further savings on payphones that we should expect in the coming quarters?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [20]

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Thank you for the question, Marcelo. No, actually, in the first half of this year, we have some costs to decommission this public phones network. So we expect to start to capture the gains in the second half and on a fully basis only next year.

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Operator [21]

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We have a question from the Portuguese conference, Ms. Barbara Halberstadt from Bank of America would like to ask question.

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Unidentified Company Representative, [22]

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(foreign language)

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Barbara Virginia Halberstadt, BofA Merrill Lynch, Research Division - Associate [23]

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(foreign language)

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [24]

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Actually, when we announced the plan, we didn't segmented. [Interpreted] And then that's not a public information. So unfortunately, I cannot give you more details on how we are and where we are in the negotiation process and the valuation because that's a very sensitive information for the process.

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Operator [25]

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Mr. Carlos Sequeira from BTG Pactual would like to ask a question.

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Carlos Sequeira, Banco BTG Pactual S.A., Research Division - Head of Research & Analysis and Brazil Strategist [26]

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Going back to the cash burn that we saw in the quarter. Can you -- one of the items that pressure cash flows were working capital, right? It was a hit of BRL 400 million. Can you give us an idea of what happened in the quarter, and how we should look at working capital going forward, please?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [27]

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Yes. Carlos, thank you for the question. Regarding our -- this quarter impact on working capital, we have some components that affected these results. One of this is the -- our acceleration of the CapEx in the -- by the end of next -- last year. So now we are starting to have this impacting negatively in the working capital specifically. And on the other hand, we have the pay -- the annual payment of the evaluator compensation for our workforce that takes typically in the second quarter of this year. So we expect improvement in working capital for the next quarters.

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Operator [28]

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I would like to turn the floor over to the company for the final remarks.

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [29]

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I would like again to thank you very much for participating in the call and supporting the company. So I expect to have you all in the third quarter results in November when we'll communicate the market. Thank you very much.

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Operator [30]

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This includes Oi S.A's conference call. We would like to thank you for your participation. Have a good day.