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Edited Transcript of OIBR4.SA earnings conference call or presentation 14-May-19 1:00pm GMT

Q1 2019 Oi SA em Recuperacao Judicial Earnings Call

Rio de Janeiro/RJ May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Oi SA em Recuperacao Judicial earnings conference call or presentation Tuesday, May 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Augusto Machado Pereira de Almeida Brandão

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

* Carlos Eduardo Monteiro de Morais Medeiros

Oi S.A. - Regulation & Wholesale Officer and Member of Executive Board

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Conference Call Participants

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* Guilherme Haguiara

* Mathieu Robilliard

Barclays Bank PLC, Research Division - Research Analyst

* Soomit Kumar Datta

New Street Research LLP - Founding Partner & Analyst of Latin America

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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 the Oi S.A.'s conference call to discuss the first 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 first quarter of 2019. I have here with me Eurico Teles, our CEO; José Cláudio Gonçalves, Operational Officer; Bernardo Winik, Commercial Officer; Carlos Eduardo Medeiros, Regulatory and Wholesale Officer; Silvio Almeida, Administrative Chief Officer; Marcelo and the IR them.

We will begin our Earnings Conference Call on Slide 3, which shows the main highlights of the first quarter. We began 2019 with the completion of the capital increase in the amount of BRL 4 billion, an essential step towards maintaining growing investments present in the traditional organization plan.

As I'm going to explain later in details, we continued to significantly accelerate the pace of implementation of our CapEx plan, which is focused on popularizing fiber and expanding 4G and 4.5G coverage as the main drivers of the company's proposition seeking to resume business growth.

In the mobile business, the work started last year with the review of the offering portfolio and in consideration of the commercial activity continues to present impressive results. It is worth noting that our market share of net adds of postpaid plus control customers, which accelerated the pace of growth, which is 31% in the first quarter. This consistent growth in our customer base translated into a 9.3% year-on-year growth in postpaid plus control revenues.

Regarding the fiber project, which is the heart of our business strategy, we already had important and exciting results. At the end of March, we reached 1.7 million homes passed with 145,000 connected fiber customers and a take-up rate of 8.7% of the homes passed. As you will see later on, Oi's take-up rate is outpacing the market rates, especially when analyzing the reuse regional take-up where we achieved 11.2% of occupation.

In addition, our Oi Fiber Broadband was ranked first in Netflix Internet speed ranking for the third consecutive month since joining the index and increased its difference for the second place. These results reinforce the value creation and quality differential of our products in terms of both financial returns and the customer experience with returns for the Oi brand.

Let us move to Slide 4 with the results and good performance of our mobile segment. The expansion of our commercial activities since the beginning of last year together with the launch of new offers more aligned with the consumption profile of the customers has been contributing to the robust and consistent performance of the postpaid and control product in the recent quarters. Our postpaid customer base grew 20% year-on-year, bolstered by both the migration of prepaid customers and the acquisition of new clients.

In this quarter, we accelerated even further this improvement, capturing 30% of market share of net adds for the postpaid and control. This continued good performance in [RGUs] has been translated into acceleration of the postpaid and the control customer revenue, which posted 9.3% annual growth in this quarter. As a result of this evolution, for the first time ever, the postpaid revenue mix reached the 51%, becoming the most relevant part of our mobile revenue.

In the prepaid, a market that is in the contraction stage, we have been able to grow market share in the annual comparison, which is a positive sign for the company since we still have a lot of opportunity to work on our prepaid customer base, gradually migrating the right customers to the postpaid and control plans. Supported by postpaid revenue growth, total mobile customer revenue is reverting the decline in trend, as we are reducing the reliance on prepaid revenue, which has declined and increasing the share of postpaid revenue. By continuing at this pace, we expect to present annual revenue growth in the mobile segment in the coming quarters.

Let's move to Slide 5, where I will present our B2B results. Represented revenue declined in B2B in line with the trend of this market, which is highly dependent on the macro environment and the economic activity levels in the country. However, as we look at the evolution of B2B quarterly revenue, we are beginning to see a trend toward improving the curve. This is happening because, one, in the corporate segment, we are managing to increase their share of IT revenues in the total corporate revenue. As this is a high added value service, we will accelerate investments even more, focusing on enhancing capabilities in cyber data center, IoT, security and big data as key pillars to resume corporate and B2B growth. Two, and in the Wholesale, where we have managed to succeed in the transition from regulated to unregulated revenues. As we deploy our private project, we will also expand wholesale opportunity to become the potential national infrastructure provider, leveraging our extensive and nonapplicable fiber network to support the increasing 4G and 5G traffic demand.

Moving on to Slide 6, let's discuss the Residential segment. The exposure to declining revenues, such as fixed voice and corporate broadband, has been crucial for the pressure on our Residential revenues. The fixed voice has long been suffering from the substitution for the mobile and with the migration to data service.

On the corporate broadband side, in the context of increasing demand for higher-speed broadband, combined with our under-investment in the recent years, local Internet service providers, ISPs, have been capturing opportunities to offer a competitive product in the market. Today, approximately 4,000 ISPs operate in the country mainly informally and has been relatively successful over our corporate customer base. To revert this scenario, we are investing heavily to accelerate the expansion of our fiber footprint.

On the chart on the right, we showed that in the end of March, we reached 1.7 million homes passed, and we are presenting 38 cities with Oi Fiber. Likewise, our customer base of Oi Fiber reached 145,000 customers, and we are with 8.7% of take-up on the homes passed.

Moving on to Slide 7, I will give some colors on the potential of fiber to Oi. As I said on the previous slide, the growth of [OTT] products has created an enormous demand for high-speed broadband. And in that sense, Oi with 360,000 kilometers of fiber has a unique and non-replicable advantage to match the fiber in the country and capture these opportunities in expanding the market. Fiber in Brazil has low penetration. Only 7% of households are connected with fiber. However, given the high demand, fiber is currently increasing its share in the house of clients at a CAGR of 53% per year. With a presence in 3,600 municipalities, of which 2,300 with fiber backhaul, Oi now has twice as much fiber as any other operator. Expanding this capability to the access, we cannot only offer high-speed Broadband in the households but also deliver a high-speed service to B2B in government as well as capturing opportunities in the wholesale market as a major transportation infrastructure provider, especially considering the evolution to 5G technology. That reaffirms our view that the fiber projects will present a strategic umbrella to our cross-segment business approach.

To accelerate the growth of our fiber, we adopt the reuse approach, where we take advantage of the idle capacity in the existing network layers, building only the missing layers, substantially reducing our cost of construction and increasing the speed of deployment. Through the reuse and with unrestricted investment capacity, we have the potential to build to 32 million on homes passed. We are now initially focusing on 12.5 million HPs, where we need to build only the secondary fiber network. And through our strategic review with BCG, we are analyzing alternatives to accelerate even more this deployment.

Moving to Slide 8. If on one hand, we are accelerating the expansion of our fiber footprint, on the other hand we are doing this in the most granular way possible, trying to maximize the return on invested capital. In this way, we migrate our strategic model of analysis by closer to a tactical model of micro-analysis, looking for neighborhood, cell and census sector. Instead of analyzing the NPV of 10,000 clusters, as we were doing before, we are now analyzing the NPV of 322,000 census sectors. This way, we can be much more agile, efficient and accurate in our fiber deployment strategy. This strategy has generated encouraging results in the first cities we implemented, where even with a relatively recent deployment, aging over 3 months in fiber coverage in more than 10% of the households, we have already been able to revert or at least smooth the downward trend of Broadband customer base.

On Slide 9, we will see some important indicators of fiber with very quality results. We're showing the first graph the speed of expansion of our homes passed, growing approximately 4x in a year and with more intensity since 4Q results when we actually started the implementation for the reuse approach. In the second chart, we present the take-up on the total base of homes passed, which reached 80.7% in March, and we had good expectation to accelerate this penetration even further in the upcoming quarters. This expectation is supported by the third chart where we present the take-up only over homes passed via reuse approach. Through the reuse approach, we are more efficient not only in the construction of HPs but also in selling fiber since our sales team goes to the field together with the operations technicians who are building the HPs.

In this view, we already have a take-up of 11.2% in 7 months, representing a monthly average of 1.4%, higher than the market benchmark, which is around 1% per month.

Turning to the chart on the bottom of the slide, we show the financial advantage that the reuse approach provides. While in a traditional approach, the CapEx by HPs is approximately BRL 500. Through the reuse, our estimate is around 30% lower. That is approximately BRL 260, but as we are initiating fiber deployment in regions where we need to build only 1 network layer, this CapEx has been even lower than expected by approximately 20%.

As expected, our gross adds has been growing solidly and consistently, and our churn has remained at very low levels. Finally, for the third consecutive month since joining the index, Oi fiber is ranked first in Netflix's ISPs index and increasing the gap to the second place. This demonstrates the quantity differential of our product in front of the others and puts us in the position to offer a better broadband experience to our customers.

Moving on to Slide 10. We continue to invest heavily, focused on acceleration of the rollout of fiber. Our CapEx had 53% of annual growth, representing 33.8% of our net revenues in first Q, 2019. The expectation is to end 2019 with BRL 7 billion in CapEx. This amount of CapEx, combined with our capacity and speed of deployment, are the factors that will contribute for the acceleration and strength of our fiber footprint.

In 2018, our average monthly homes passed deployment speed was 54,000, where we ended March 2018 with 174,000 HPs deployed, one month with fewer business days due to the Carnival. In April, we already made more than 200,000 HPs, and if we did not have CapEx restriction, we could expand the deployment speed to 500,000 HPs per month.

Let us move now to Slide 11 to discuss costs and routine EBITDA. In terms of cost, we achieved a nominal annual cost reduction of 5.1% affecting practically all lines of cost. Our routine EBITDA remains relatively in line with the previous quarter but with an annual decline, mainly driven by the revenue decline, especially in the Residential segment. The worsening of the revenue trend reinforced the urgency to accelerate our fiber project, which we believe is the best solution to reverse this scenario. We continue to work and identify opportunity for cost reduction, working mainly in the digitalization fronts and in the simplification of our business process where there are great opportunities for structured reduction of expense. Since 2017, we have been enhancing our digitalization service, making recurring delivers and accelerating the transformational process for an entirely digital company.

Moving to Slide 12, where I present the company's cash and debt position. We ended March with BRL 6.3 billion in cash position, highlighting: One, the acceleration of CapEx, it is natural to expect a negative cash generation since we are investing more; two, the cap increase of BRL 3.9 billion; and three, the payments of creditors of the RJ (sic) [JR] with approximately BRL 700 million of bond coupon payment and BRL 450 million of payment for the suppliers.

Our gross debt at fair value remained stable at BRL 16.4 billion compared to the 4Q of 2018 due to the payment of interest of the bond. As a result, we had a net debt at the end of March of BRL 10.1 billion.

Now moving to Slide 13. In the previous quarter, we had talked about the role of 3 consultants, which are working together with the company to support the execution of the strategic plan. Oliver Wyman involved in the management of fiber deployment at the level of extremely high granularity to capture higher returns. BCG reviewing Oi's strategic plan, looking at the company in the long term and drawing up the execution plans to ensure the achievement of our goals. And Bank of America, working on the sale of non-core assets and M&A opportunities, guaranteeing the necessary fund for the implementation of the strategic plan. We are in the end of the process of the strategic review, and we expect to disclose the market the results of these revised model until to the mid of June. We will keep the market informed about the next steps.

I would like to end today's presentation by making a summary of what we have discussed. In the mobile segment, we recorded market share gains despite the shrinking market, creating a great opportunity for us to work with the space in order to enable a future migration to the postpaid segment. In the postpaid plus control segment, we have been recording excellent results with growth in both customer base and revenues, which has been helping reverse the trend of the total mobile revenues. In B2B, we saw important improvement on revenue trends in line with growth in IT revenues in the corporate segment and reduced dependence on regulated revenues in the Wholesale segment. These are signs that the segment is slowly beginning to improve.

In Residential, we showed the fierce competition in the market from regional broadband providers, putting pressure on our revenues and reinforcing that the fiber expansion strategy as the main alternative to revert the scenario. As a result, we are focusing our efforts and resources to accelerate our Fiber Expansion Plan.

We have the capacity with the existing funds to build approximately 250,000 HPs per month. And given our reach and capability access, fiber will not only be the driver of growth in the Residential segment but also a very important driver of value creation for B2B for the provision of high-speed service for the companies and the government or by being the main provider of infrastructure service with the arrival of the 5G. We are accelerating the project implementation as much as we can, but it is natural for the fiber to take some time to begin producing significant impact on our financial results. At the same time, we are working to accelerate the company's digital transformation process, leading the process automation, simplification of our operation and deep restructuring of the cost structure. We are trying to mitigate the impacts of the decline in revenues in the short term as we restructure our business models.

Finally, I would like to thank everyone, all our shareholders, employees, customers, suppliers and other stakeholders for their commitment and dedication throughout this process of construction of a new [way] in the first quarter of 2019. 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 let's start with a question from our webcast platform. The question is -- actually, there are two questions. They are connected to the revenues. What are the main reasons for this quarter revenue decline?

And the other one is, given the investment the company has been doing, when can we expect to see the reversal of the decline trend to revenue growth?

So let's segment this answer. So starting with the mobility. As we reported this quarter, the mobility business has delivering important results recently. So we are starting to expect short-term growth in the mobility revenues since we are now with more than 50% of our revenues with the postpaid, and we are being very successful in the migration from prepaid to postpaid and with the repositioning of our offerings. So on B2B. B2B has been pressured by two main elements, first of all, is the exposure of our B2B revenues to declining revenues, such as fixed voice and data. The other one is the negative macroeconomic scenario that is impacting the customers. So to compensate that, we are accelerating and being successful in the growing of our IT revenues, which are much more value-added. And in another segment on the B2B accelerating the migration from regulated revenues to unregulated revenues on the Wholesale.

So on Residential, Residential business has been very impacted by the small local providers' competition. They are taking advantage, as we've said, of our lack of investment in the recent years, but we are now accelerating the fiber investments as we demonstrated on our presentation. We are very positive on the prospective to achieving growth and again on the revenues of this segment. Of course, it will take some time, and we expect on 2019 to report a decline on a consolidated basis on the Residential segment. But in the next year and so on, the stabilization will turn into growth.

Another one, another question we have here is regarding the OpEx.

After a long time of cutting costs, are there still significant cost-cutting opportunities in the company?

And the answer to that is yes, there are opportunities. We are always focused on the optimization of our P&L. We continue to accelerate the digitalization of our process and business models. And we have important opportunities on the simplification of our cost structure and the business process, as together we have the improvement in quality and operational efficiency. That's an important piece of our revisited equity story that we will communicate to the market in June.

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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, [4]

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My first one is regarding the mobility segment. And I appreciate your comments on the top line trend you expect. And following the encouraging postpaid net adds figures, I just wanted to clarify, when you mentioned that we should see top line growth in the near term, if we can expect the postpaid revenues to be a natural offset to the declines in the interconnection revenue as well and to what extent can we expect this?

And with the growing postpaid subscriber mix, what -- if we can expect any pressure in terms of bad debt over the coming quarters due to this change in your portfolio of clients? That would be my first question.

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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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Thank you, Guilherme. Regarding the compensation of the postpaid revenues and the mobility business, regarding the impact on the interconnection. Today, the interconnection rates are so low that the impact from the P&L are not so material anymore, so we expect yes, by the end of this year, we have a growth on a consolidated basis, basically on the mobile business. Sorry, what was the other question?

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Guilherme Haguiara, [6]

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What should be the impact of your growing postpaid subscribers?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [7]

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The net adds?

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Guilherme Haguiara, [8]

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Yes.

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [9]

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At this point, we have no indication that we will have some issues with the postpaid. The recent growth that we had, had a good performance in terms of payment and control in postpaid plans. We track this in our weekly results discussions in the company and at this point, we have nothing that concerns the company regarding the bad debt.

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Guilherme Haguiara, [10]

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Okay. And my second question is regarding Unitel. If you could share with us an update of your expectations regarding the proceeds from the judicial decision on the case? I mean, is there any time line in which we could see cash coming to the balance sheet? And what is the total value expect to recover considering both the legal decision and a potential divestiture of these assets?

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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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At this point, what I can tell about Unitel, last week, we had the first board meeting with the new board, and we have our Managing Director in place in Angola. We don't have, at this point, a clear view on the perspective of [expectation] of the dividends. So that is something that we will be much focused in the short term, and as soon as we have more clarity on the process and the timing, we will communicate to the market.

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Operator [12]

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We have Soomit Datta from New Street Research would like to ask a question.

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Soomit Kumar Datta, New Street Research LLP - Founding Partner & Analyst of Latin America [13]

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Soomit from New Street Research. Two or three questions, please. Firstly, just thinking about CapEx. It sounds like you are keen to accelerate the deployment of FTTH, where possible. And I think CapEx is the main and sort of financial ability, seems to be the main kind of constraint there. Can I just check what is your -- in terms of liquidity, you've got BRL 6.2 billion of cash on the balance sheet at the moment. What is your kind of your threshold for liquidity? How -- sort of what is the level you don't really want to drop below? And just to confirm, it's only really sort of finance which is impacting that decision or do others factors come into whether you want to accelerate the FTTH deployment. That's the first question, please.

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [14]

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Hi, Soomit. Thank you for the question. Regarding our CapEx plan and the liquidity that we need to fund this investment. We have -- we are fully funded for this first year of CapEx deployment needs with a capital raise of BRL 4 billion at the beginning of the year. We have, as we have already communicated to the market, a list of assets to be monetized, which we're working some with Bank of America, some with other banks. And we have, on a total basis, around BRL 6 billion to BRL 7 billion of noncore assets to be monetized. And we are having important progress on that. So we don't need the funds for the short term, and we have the adequate process to monetize these assets in the mid-term.

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Soomit Kumar Datta, New Street Research LLP - Founding Partner & Analyst of Latin America [15]

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So as a follow-up, the plan is in place for this year but absent any asset sales, you would not be in a position to increase CapEx in 2020. Is that the right interpretation?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [16]

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In our actual plan, which has been reviewed, we have the BCG project. We have BRL 7 billion of CapEx expected for this year and next year. And we can -- for these investments, with this asset portfolio, we have more than enough funds to invest in our CapEx plan.

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Soomit Kumar Datta, New Street Research LLP - Founding Partner & Analyst of Latin America [17]

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Okay clear. And then just a follow-up question please. On fiber, obviously, -- from sort of the early beginnings, the pace of growth is improving nicely. Can you give us a sense as to the ARPU on those customers you're adding? I think your Residential ARPU is disclosed at BRL 77.5? Are you kind of offering promotions at the moment? Or are those customers coming on at relatively full price, and how does that compare to the underlying ARPU?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [18]

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Typically, the products of fiber that we are selling right now that has a 20%, 25% ARPU increase regarding the copper products and in the same area. So we expect important increase in ARPU in the mid- to long term. As I said, the fiber investments will take some time to have help show on our total revenues. But as I said, the KPIs that we had tracking after the first balance we hit we did in the cities that have more mature of these investments are very encouraging and it gives us the sign that we are in the right direction.

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Operator [19]

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Mr. Mathieu Robilliard from Barclays would like to ask a question.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [20]

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I had three questions, please. First, if you could maybe characterize the competitive environment you're seeing in Brazil in fixed mobile, there's been a few price increases on postpaid in mobile but nothing prepaid remains competitive, I was curious to see what is your view on that? And how do you expect the year to shape up?

Secondly, you show a very interesting slide on the fiber take-up, the cohorts' analysis. I was wondering what is a hand target you think is realistic in terms of take-up of fiber in the areas where you're rolling it?

And finally, the eternal question on PLC 79, I don't know if there is any update or anything you want to share with us on that process?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [21]

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Thank you for the question. Regarding the competitive environment in the mobile, we see a more rational environment, which is very positive for the whole industry. So we expect a price increase across the board in all operators. The short term, we have some signs in the market that is being implemented. So the short term this year, we expect positive impact due to this more rational competitive environment.

Regarding the -- our targets for take-up in our fiber project, we expect that in a mature area of our deployment, we expect take-up of 30% to 35%.

Regarding PLC 79, I'll ask Carlos to comment his view on the status of the process.

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Carlos Eduardo Monteiro de Morais Medeiros, Oi S.A. - Regulation & Wholesale Officer and Member of Executive Board [22]

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We think the recent news we heard about the PLC 79, we think it's going on a positive direction. We expect to hear some more good news sooner. And -- but it's hard to predict what the time line is going to be in the PLC process at the CCT and then, after, to go to the plenary of the Senate.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [23]

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Is that still your expectation that it could happen this year or is it too hard to say?

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Carlos Eduardo Monteiro de Morais Medeiros, Oi S.A. - Regulation & Wholesale Officer and Member of Executive Board [24]

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We think it's a very good chance of happening this year. Yes, very high probability, but we cannot assume any time line because there is some process to run inside the CCT, the committee of science and technology of the Senate, and after that, the plenary.

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Operator [25]

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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 [26]

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So we'd like to thank you very much for participating in this call. Looking forward to our communication of the new equity start, which will happen in the very short term. And we will have -- in the short term, we will communicate the market the process and how we will -- it will be communicated. Thank you very much, and have a good day.

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Operator [27]

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