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Edited Transcript of OIBR4.SA earnings conference call or presentation 14-Nov-18 5:00pm GMT

Q3 2018 Oi SA em Recuperacao Judicial Earnings Call

Rio de Janeiro/RJ Dec 11, 2018 (Thomson StreetEvents) -- Edited Transcript of Oi SA em Recuperacao Judicial earnings conference call or presentation Wednesday, November 14, 2018 at 5:00:00pm 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

* Eurico de Jesus Teles Neto

Oi S.A. - CEO, Chief Legal Officer & Member of Board of Executive Officers

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Conference Call Participants

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* Maria Tereza Azevedo

UBS Investment Bank, Research Division - Director and Research Analyst

* Vitor Tomita

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to Oi S.A.'s conference call to discuss the third quarter of 2018 results. This event is also being broadcast simultaneously on the Internet via webcast, which can be accessed on the company's IR website at www.oi.com.br/ir, along with the respective presentation. (Operator Instructions)

We 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. Eurico Teles, CEO. Please, Mr. Eurico, you may proceed.

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Eurico de Jesus Teles Neto, Oi S.A. - CEO, Chief Legal Officer & Member of Board of Executive Officers [2]

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Good morning, everyone. Thank you for joining our conference call for the third quarter 2018. I have here with me José Cláudio Gonçalves, Chief Operating Officer; Bernardo Winik, Chief B2C Officer; Carlos Eduardo Medeiros, Chief Regulatory Officer; Silvio Almeida, Chief Administrative Officer; Carlos Brandão, Chief Financial and Investor Relations Officer; and Marcelo Ferreira and the IR team.

2018 has been a year marked by delivering. All the stages of Oi Judicial Reorganization Plan, approved at the end of last year, have been completed within the established deadline. At the end of July, we completed the conversion of debt into shares and novated the debt. In September, we held the Extraordinary Shareholders' Meeting to elect the new members of the Board of Directors, all of whom are independent, in line with the highest corporate governance levels. And now we're working hard on the capital increase of BRL 4 billion.

With these new funds, Oi will implement the incremental CapEx plan for the coming years which will allow the company to resume growth, both in terms of market share and revenues, ensuring high-quality services to our customers and value creation for our shareholders.

I'd like to point out that this quarter, even before receiving the proceeds of the capital increase, Oi had already started the investment cycle set forth in the incremental CapEx plan. Our goal is to make our network more robust and to increase capillarity in order to expand the high-speed broadband taking fiber to customers' home and increasing our 4G and 4.5G coverage as well as preparing ourselves for 5G.

This strategy will be discussed in further detail later on by our CFO, Carlos Brandão. But I would like to say that by the end of October, we had already reached our internal target for 2018, with 25 cities with FTTH.

I reaffirm our commitment with the responsibility for the company's financial health. We continue working towards strict cost control, operating efficiency, business strategy to boost revenue and to improve daily cash management.

As a result, routine EBITDA from Brazilian operations totaled BRL 1.5 billion in the third quarter of 2018, and remained in line with the Judicial Reorganization Plan as well as our cash and debt.

I now give the floor to our CFO, Carlos Brandão, who will present the financial and operating results for the third quarter.

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [3]

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Thank you, Eurico. Good morning, everyone. Let us begin on Slide 4. We have some significant highlights in the third quarter. The first one, referring to revenue is the sequential growth of 1.9% in mobile customer revenue. This is important trend reversal, which I will explore more in the next slides. Also important to remind that the year-on-year revenue, the variation is affected by the tariff readjustments we've made in July 2017 for all postpaid products, both in mobile and residential segments which distorts the annual comparison.

The second highlight is the 8% annual reduction in costs. In the period, we reached accumulative 12-month inflation was 4.5% reaffirming our commitment to keep delivering operational efficiency.

The third one is the combination of the 2. We ended the third quarter with a routine EBITDA of BRL 1,454,000,000 in line with the routine EBITDA for the end of the year projected in the Judicial Reorganizational plan.

Finally, the fourth highlight is the CapEx, which increased substantially, both sequentially and annually. The message we want to give here is that we are accelerating our investments, anticipating the beginning of the incremental CapEx spend implementation. In that sense, we plan to reach around BRL 6 billion in CapEx by the end of 2018.

Please move on to Slide 5, where we will discuss our customer base. In the Residential segment, the Pay TV base continued to grow above the market, helping to offset part of the Fixed Line decline, which is a market trend. On the other hand, fixed broadband presented a deceleration in the decline in trend.

As you will see moreover, we are now accelerated the fiber-to-the-home rollout, which we believe will be the main driver to resume Residential growth.

In Personal Mobility, the postpaid customer base keeps showing positive trend since the second quarter, mainly driven by the new offers and increased sales activity. As a result, postpaid base grew both annually and sequentially.

The B2B remains stable with mobile and TV growth offsetting Fixed Line loss.

Moving to Slide 6. In the third quarter, the Residential segment showed a slowdown in revenue decline to minus 1.5% in the sequential comparison. The fixed voice revenue maintains its natural tendency of reduction. This is a market trend with revenue migrating from voice to data. The curve of decline in our fixed voice revenue is in line with the market despite the fact that we are the largest incumbent company and thus, more exposed to losses. In the third quarter, fixed voice revenues dropped 2.6% sequentially.

In broadband, we intensified our commercial activity, acting with a different approach and price politics by region. As a result, we started to see improving trends with the revenue decline decelerating to 1.7% sequentially. On the other hand, our Pay TV revenue continues to grow above the market. In the sequential comparison, the TV revenue rose 1.8%. In the year accumulated, the revenue of Pay TV already shows growth of 14.6% year-on-year. As I said before, we believe that the turnaround in the Residential revenue will come on the back of the fiber.

Moving to Slide 7, I give more details on the deployment of this product. We are accelerating the deployment of fiber, as you'll see later in the details of the CapEx slides. We ended the month of September with presence in 19 cities offering FTTH and with 720,000 homes passed of which approximately 52,000 connected. Though it's too small when compared to our just over 5 million broadband customers, the fiber customer base grew more than 100% over the first quarter of this year, demonstrating the potential of this product.

Moreover, sales are growing fast. In October, we sold almost twice the monthly average FTTH net sales of the third quarter. Although the absolute number are not yet that significant, this result show the success of this deployment model guided by demand.

We believe that the fiber rollout with the reuse approach is transformation and will guide the company to turn around the Residential segment. We will explore more the reuse approach in the next CapEx slides.

Moving on to Slide 8, we will talk about the good results of the Mobile segment. This was a positive quarter. We accelerated the sequential growth in both prepaid and postpaid, presenting the best performance of the mobile market considering the sequential comparison. Our total mobile revenues from clients presented a 1.9% sequential growth. In postpaid and control, the intensification of our commercial activity aligned to the marketing regionalized strategies translated into the acceleration of net adds in the last month and now are resulting in revenue growth. Postpaid and control revenues, combined, increased 2.8% compared to the previous quarter.

On the other hand, the prepaid market in general has been suffering. Even with this context, our prepaid revenue has been showing good resilience and represented a 1.2% sequential growth. We credit this to the unique advantages of our prepaid plans, which offer total freedom to let our customers to manage the use of data and minutes of their credits.

In addition, recently, we have launched a new prepaid offer with unlimited use of WhatsApp and Facebook Messenger. That new offer allows the clients to stay connected almost longer, breaking the logic of the weekly model offers that we normally see in the market. The first results have been positive and we believe this offer has the potential to help the segment's revenue.

We will now present our B2B results on Slide 9. B2B revenue is comprised of the combination of 3 segments: the corporate with accounts of approximately 50% of the total; the small and medium enterprise segment, which accounts for approximately 30%; and the wholesale, with approximately 20%. In this quarter, B2B revenue decreased 7.6% year-on-year and 3.3% compared to the previous quarter. The company has been acting with strategies to reverse this trend in a competitive environment that has been extremely challenging.

In corporate, we are expanding our commercial capillarity and intensifying our commercial activity, increasing the number of regionals and growing the sales team. We are also working to mitigate the impacts of falling demand for traditional segments, becoming providers of digital and IT solutions. We have been successful in closing new contracts that will translate in revenues in the future.

In the SMEs, we are adopting the corporate strategy for medium enterprise and the B2C strategy for small companies, given their similarity. We are regionalizing the offers and intensifying our commercial actions in conjunction with reuse approach.

And for wholesale, the strategy has been to increase the share of unregulated revenues of the total, aiming to optimize the value creation with the existing infrastructure.

Moving on to Slide 10. In this quarter, we reaffirmed our commitment to a rational and restructuring cost efficiency, with a saving of BRL 344 million, representing an 8% decrease when compared to the same period of last year.

We have reduced costs across almost all lines and this process is based on 3 main pillars: one, greater efficiency and productivity on our field operations; two, quality improvements; and three, the digital transformation of our business. These actions resulted in several operational improvements, some of them demonstrated in the graph on the right of this slide. These improvements has been driving our cost savings, especially in the lines of third-party service, network maintenance service and provision for contingencies.

This performance in cost efficiency has also sustained our level of EBITDA, which ended up the quarter at $1.45 billion. The EBITDA accumulated until September accounted to $4.6 billion keeping us on track to end up 2018 in line with the BRL 6.1 billion projected in the Judicial Reorganization Plan.

Let us move now to Slide 11 to discuss in details our CapEx plan. As a result of the discussions of Oi's recovery plan, the company prepared an investment plan for the coming years on which the objective is to promote the turnaround in the company's revenues, increasing competitiveness and generating shareholder value.

The plan is based on 3 basic assumptions: one, to protect the existing customer base; two, to serve the customer with products of differentiated quality, improving their experience; and three, to capture growth opportunities in the market.

The focus of these incremental CapEx is in the access to improve the offer of high-speed broadband with fiber in the fixed business and with 4G and 4.5G coverage on the mobile by refarming the 1.8 giga frequency and gradually, the 2.1 giga frequency also.

For fixed business, we divide the country in more than 9,000 clusters and generated a business plan for each one of these clusters, observing premises such as competition, existing infrastructure and demand. Then we segregated the clusters that generated positive NPV and we prioritized the ones with the highest NPV-to-IPV ratio, which measures the best return on invested capital.

As a result, we chose 4,000 clusters to invest in fiber and deliver FTTH and FTTC, which we expect to generate a positive NPV of BRL 9.1 billion. The same prioritization model was developed for mobile. But instead of clusters, we analyze it by city where Oi is present with mobile coverage. We prioritized the investment in 1,100 cities where we will invest in mobile access by refarming the 1.8 giga and the 2.1 giga frequency for 4.5G. The expectation is that these mobile projects will generate a positive NPV of BRL 6.6 billion for Oi.

Moving to Slide 12, we present how we will implement the CapEx plan. To execute this strategy, we are working on 5 big pillars: core, mobile access, fixed access, contracts with suppliers and lead time. The main objective of the CapEx plan for the next years is to invest in fixed and mobile access. However, these investments is only possible because in recent years, we have directed our investments to strengthen the robustness of our core and transport net. Today, our network is 1 year ahead of the expected data traffic. The goal is to increase this capacity to be 3 years ahead, strengthening even more this competitive advantage.

In the mobile access, the investment will take place via modernization of our sites with [electronics] of the 4.5G and already preparing for the 5G. Additionally, the fiber network deployment, we will also help the mobile segment and it will ensure that flow of heavy mobile data traffic from this technology especially 5G in the future.

In the fixed access, this unique and nonreplicable network of more than 350,000 kilometers of fiber will enable us through the reuse approach to expand the number of homes passed with FTTH at a much faster pace, with a deployment cost averaging 30% lower than the traditional approach. In addition, with this approach, we are able to capture better growth opportunities, guiding the deployment by the commercial demand. We'll detail more of this reuse strategy in the next slide.

As a fourth pillar, we are negotiating new contracts with the strategic suppliers, which will support the company on the deployment of this CapEx plan. Finally, in parallel, we are improving internally our planning, control and production process to reduce the lead time of execution in order to improve the time to market.

As you can see on Slide 13, with the implementation of the planning and control of production model, we have been reducing the lead time of execution, increasing significantly our deployment capacity and improving the efficiency and cost control of the CapEx plan execution. Now, in November, we already have capacity to deliver more than 150,000 homes passed with FTTH monthly using the network reuse approach. In addition, by the beginning of next year, we expect to be able to activate more than 500 new mobile sites with 4.5G functionalities per month.

Moving to Slide 14 on the network reuse approach. We've taken advantage of our existing infrastructure and install only the access electronics and the last mile of fiber that we will pass in the customer's home. This step we will be taking, guided by demand, thus minimizing the need for a high number of homes passed. This is only possible because in many cities, we already have the major part of the network already deployed, from the transport network to the metropolitan rings of fiber.

The capillarity of these metropolitan rings inside the municipalities allow us to take the fiber to the house with much more agility and at much lower cost. This is only possible because in many cities, we already have the major part of the network already deployed, from the transport network to the metropolitan rings of fiber. The capillarity of these metropolitan rings inside the municipalities allow us to take the fiber to the house with much more agility and at much lower cost.

In the Slide 15, we show that, supported by the strategies we have just discussed, we are accelerating the investments and anticipating this new cycle of CapEx. We ended the third quarter with a CapEx of BRL 1.5 billion, a growth of 12% annually and 10%, sequentially. CapEx accumulated in the 9 months of 2018 is BRL 4 billion. We expect to close this year with around BRL 6 billion. We also ended September in 19 cities with FTTH, with 700,000 homes passed. In October, we reached 25 cities, anticipating the goal for the year-end.

As stated in the previous slide, we expect to deliver more than 1 million HPs by the end of this year. Again, mobile, we have already done the refarming of the 1.8 giga frequency in almost 800 sites, located in 23 cities, enabling the company to offer 4.5G. We expect to increase this number to more than 1,000 sites by the end of 2018.

Let's go now to Slide 16, where we present the company cash, debt and new shareholding structure. Cash position of September was BRL 5.2 billion, almost flat when compared to June. In the third quarter, EBITDA was fully offset by CapEx, mainly due the early execution of investments. On the other hand, working capital was positive in BRL 380 million since the payment terms for CapEx is usually longer. We also incurred in BRL 234 million in taxes and costs related to debt restructuring and paid BRL 70 million to labor creditors as part of the payment scheduled established in the RJ plan (sic) [JR plan]. The graph in the bottom shows Oi's gross debt, which increased BRL 916 million from June figures, mainly due to interest accrual, amortization of fair value adjustment and exchange rate valuation. Approximately 50% of the company's fair value debt is denominated in foreign currency, mostly in U.S. dollars with maturities essentially concentrated in the long term. The company is actively monitoring the market in order to seize windows of opportunities to reduce FX exposure, focusing on minimizing potential impacts on cash flow.

Now, I'll give the floor back to Eurico for his final remarks.

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Eurico de Jesus Teles Neto, Oi S.A. - CEO, Chief Legal Officer & Member of Board of Executive Officers [4]

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Thank you, Brandão. And I would like to conclude the call by pointing out that we are moving towards the last stage of the Judicial Reorganization Plan, which is the capital increase. This is a very important step since it will fund the company's growth plan. For more information on the capital increase process, including its terms and conditions, please access the prospectus that Oi recently filed with SEC.

From a business standpoint, we're still facing challenges, but we are committed to overcoming them. We believe that a successful implementation of our CapEx plan will boost our competitive advantage, which is rather our network robustness and capillarity and will thus put Oi back on track for sustainable growth. We are almost there but not quite yet. We continue working so that after the capital increase, we can finally begin a new phase with the company, 100% focused on the business evolution.

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 building a new Oi.

We'll 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) Our first question comes from Vitor Tomita with Itau.

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Vitor Tomita, [2]

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We have 2 questions on our side. First, if you could elaborate on which way you believe Oi could benefit from a general economic recovery in Brazil? And what -- do you see any initial signs of improvement in prepaid recharges, which tend to be very sensitive to the economy and to disposable income? And another question is if you see any potential benefits for Oi of the new spectrum cap regulation that Canada has approved, and is that along with the potential approval of [PLC] 79 could help in some way, for example, in allowing for spectrum monetization or are there other ways to unlock value for Oi?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [3]

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Vitor, thank you very much for your question. So starting with the question regarding the economics growth in Brazil. Yes, we -- good opportunity to see in these results. We are showing -- starting to show improvement on the prepaid, including dialogue in the peers. I think that's an initial sign of recovery in Brazil. However, the prepaid market is very sensitive for economic growth and employment rates. So I think, yes, we are showing some improvement and that starts to show impacts on our results. We also -- it's clear that there's a repressed demand for fiber products in Brazil, so we are very positive on the potential growth on our FTTH service as we are improving our capillarity. So these 2 factors combined, certainly, the country growth and the potential, the repressed demand, will probably, in the short term, bring positive impacts on our subscriber base, especially in FTTH service. And the second question regarding the spectrum cap regulation in the [PLC], I think that's important to move for the industry. We are now approaching to be closer to benchmarks of the spectrum treatment in the telecom service. So it's important to have a secondary market of spectrum and it opens windows for a possible consolidation in Brazil. So in our perspective, it's very positive. And the PLC , as we have discussed that sometimes, brings also positive impacts for the industry, first of all is to reduce the uncertainty of the long term because in 2025, we expect to have the end of the concession, so that will bring clarity what happens in the long term in the industry and in the company.

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Operator [4]

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Our next question comes from Maria Tereza Azevedo with UBS.

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Maria Tereza Azevedo, UBS Investment Bank, Research Division - Director and Research Analyst [5]

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My first question would be on your expectations around regulation. I mean, you commented on the spectrum cap, but do you have any visibility on the pending telecom approval? And how -- and what would be the upside that you see both in OpEx, CapEx and potential asset sale if that happens? And if you please, as a follow-up question, could comment on what do you think would be your sustainable long-term CapEx needs to really do all the upgrade in your network and to continuously deploy FTTH?

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Carlos Augusto Machado Pereira de Almeida Brandão, Oi S.A. - CFO, IR Officer & Member of Board of Executive Officers [6]

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Thank you, Maria Tereza. So starting with the regulatory question. So I think as I said to Vitor, the one important achievement with the approval of the law is that it removes some uncertainty for the long term, it's very important for all investors and for the companies. In terms of direct economic impact, it's hard to say right now because the detailment of the law will be performed after the approval, so it's not clear exactly the terms and the exchange and obligation and the treatment of reversible assets. So it's not clear at this moment what will be a specific impact for the P&L and the cash flows. But we are very positive that we'll be able to give much more rationale than the existing concession regulation, so that will be certainly very positive. And then in terms for CapEx needs, we -- in the past years, we are very -- since we had some limitations on investments, we focused on the core and the transport networks. So now, the main focus is investment on our access network as we are detailing in our presentation on FTTH deployment and on mobile coverage with the 4G and 4.5G deployment that we are performing right now. So in that sense, I think we are in a very positive momentum, where we are increasing the CapEx, starting to deploy the CapEx plan and we start to show important results in the next year.

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Operator [7]

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The next question comes from [Abigail Abdelardo] with [BDDA].

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Unidentified Analyst, [8]

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Actually, I also have the same question regarding regulations. Do you think, with the new congress, the mobile ley will pass? That's all.

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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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Excuse me, I don't think we got your point here. Can you please repeat?

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Unidentified Analyst, [10]

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Yes. I was wondering if you believe that with the new congress, your mobile ley telecom will pass this year -- I mean, next year?

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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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Well, first, it's very hard to say because it will be a discussion on the Senate. We have a positive expectation on that, but we cannot say that it will be or not be approved in the short and the long term.

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Operator [12]

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The next question comes from [Haverson Bomfing] with [Tissot]

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Unidentified Analyst, [13]

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Forgive me if the question has been asked, but going back to the telecom reform in Brazil, obviously, one of the major issues that the company had in the past was the amount of volumes that they accumulated by not complying with some of the concession rules. Is it expected that there'll be additional fines? Are you going to continue to get fines up until the time when the telecom reform takes place, if it takes place? That's one question. And what happens if the telecom reform does not pass and the same concession rules remain in place? How do you operate in that situation?

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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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Regarding the fines, I think for the question, regarding the fines, we are, in the last years, investing a lot in the improvement of quality of the service. And then that addressed a significant part of the past fines that we have from ANATEL and the incremental fine that we have today, it's marginal. So in terms of new fines, we are in a very controlled space here. And then again in terms of the change in the law -- sorry about that. In terms of changing the law, as I said, it's uncertain that new terms. So we are definitely positive that it will be very positive for the industry. Probably specifically regarding the fines, there will be minor impact on that, but that's not our concern since we are improving the quality and addressed the amount of fines with that. A part of that, ANATEL have developed a much more rational methodology to apply the fines. So that, together with our improvement, reduce significantly the new fine that we are now getting.

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Unidentified Analyst, [15]

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Great. And a follow-up, can you talk about the sector consolidation? Obviously, Nextel Brazil is up for sale. There was some news that TIM had gotten a board approval to make a nonbinding offer. But then its -- the CEO of Telecom Italy was ousted this week, so we don't know what will happen with Nextel Brazil. But if you can just talk in general about your views on consolidation? And what impact that may be if Nextel is acquired or not?

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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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Regarding are there any concerns, we are not able to have any comment since we are now quite good. And what I can say about that is we are focused on our implementation of the CapEx plan and that's what we had to say about that.

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Operator [17]

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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 [18]

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We just got here a question from the webcast regarding the fiscal fees. On that aspect, what generally we can say is that we have legal process with the Supreme Court regarding these issues. We have BRL 3 billion in discussion, that's very significant. Regarding our market cap, it's not being shared at this point. In terms of expectation, since we have a peer of ours in this sector, he is being judged recently, and we expect that our case might be judged in the short term.

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Operator [19]

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The next question comes from [Thomas Bright] with [Fictional]

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Unidentified Analyst, [20]

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Sorry, I got on late. Just wondering the timing and maturity of the equity -- the new equity coming into the company by the end of the year and what that amount will likely be?

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Eurico de Jesus Teles Neto, Oi S.A. - CEO, Chief Legal Officer & Member of Board of Executive Officers [21]

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Regarding the offering, we are not able to have any comments. I suggest you should take a look on the prospectus. We launched the offering yesterday and it's on track and related in our time line.

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Operator [22]

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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 [23]

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Thank you very much. Thank you for being us -- with us in our third quarter conference call. Looking forward to seeing you in the fourth quarter. Thank you.

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Operator [24]

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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.