chief financial officer -...
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INVESTOR DAY
David MelconChief Financial Officer
São PauloMarch 15th 2016
R$ 35 billion of Capex, representing 20% of revenues,
with focus on providing outstanding connectivity
GVT acquisition creating unique positioning
Acquiring unrivaled spectrum holdings in 4G (largest band in
2.5GHz + 700 MHz in key metropolitan areas) to support
data traffic growth
Leadership expansion in key customer segments (mobile
postpaid and ultra broadband)
Disciplined financial managementwith high dividend payout ratio (more than R$ 21 Bn, >30% of
market cap) and limited leverage
Well proven and experienced management
For the last 5 years (2011-2015)
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WE HAVE BEEN BUILDING SOLID FOUNDATIONS TO IMPROVE DIFFERENTIATION, GENERATE STRONG RESULTS AND ENHANCE INVESTOR CONFIDENCE
MAIN ECONOMIC HEADWINDS WERE ADDRESSED IN 2015
• 50% of Opex
Exchange Rate2
Inflation2
• Full renegotiation with suppliers with readjustment below inflation for 2016
• Collective agreement with 7% wage readjustment
6.410.7 6.7
2014 2015 2016
IPCA %
Energy costs
• Passing through the increase in cost of handsets
• Negotiation with main providers neutralizing FX impact in 2016
• Debt fully hedged
• Replacement of equipment with short term payback
• Quick wins on efficiency activities
• 8% of Opex
• 32% of Capex
• 16.5% of net debt
ACTIONS TAKENEXPOSURE1 BEFORE
ACTIONS TAKEN
• 3% of Opex
2.7 3.4 4.2
2014 2015 2016
Average R$/US$
2014 2015
Energy Tariff in R$
+40%
1- % on 2015 base. 2- Source: Focus bulletin as of March, 04th 2016.
Bad Debt Rate
• Credit and collecting actions already driving bad debt to the previous year level
• 4% of Opex
263 341 272
2.6% 3.3% 2.5%
2014 9M15 4Q15
R$
Bad Debt Bad debt / net revenue
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Telecom services are perceived as more essential to consumers than energy and water
Large potential in new customers1
What will be less consumed by Brazilians?5
Lunch/Dinner/Snacks out of home 47.7%
Cinema 43.1%
Supermarket 35.4%
Bars and Restaurants 33.7%
Clothes, shoes, accessories 31.6%
Energy, water 20.4%
Beauty Salon 13.5%
Travels 13.4%
Cellphone 13.2%
STILL WE SEE THE SECTOR AS RESILIENT TO SECULAR TRENDS AND SOME ECONOMIC IMPACTS
47 Millionpeople (23% of the
Brazilian population) with less than 14 years old²
51% of population with
mobile data coverage but no usage
1 – GSMA and IBGE. 2- IPC_Maps 2015. 3- Telco sector includes telecommunications, IT, audiovisual, press agencies and News services. 4- AT Kearney Analysis. 5- SPC Brasil (Service of Credit Protection) resource.
Telco sector3 GDP shows resiliency even in recession periods
1Q15 2Q15 3Q15 4Q15
Brazilian GDP GDP-Telco sector/ICT
Brazilians demand more connectivity than in any other country4
51%
13%24% 25% 28%
Brazil Japan UK US Global
% of users that demand permanent connectivity
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VIVO ACHIEVED SOLID REVENUE GROWTH, EBITDA EXPANSION AND STRONG CASH FLOW GENERATION IN 2015
R$ million 2015¹ %YoY
Net Operating Revenue² 42,133.7 4.8
Net Mobile Revenue² 25,136.2 6.2
Net Fixed Revenue 16,997.5 2.7
EBITDA 12,714.2 3.4
EBITDA Margin (%) 30.2% (0.4) p.p.
Capex³ 8,318.8 (0.9)
EBITDA – CAPEX³ 4,395.4 12.6
Key Financial Highlights
Solid EBITDA expansion in the year even with macro effects
Growing OpCF while sustaining solid Capex level
Outperforming the market in Revenue growth
Total revenues• Excluding regulatory effects 2015 revenue grew 5.6%
Mobile• Mobile data representing 51% of MSR in 4Q15
• Capturing 100% of incremental MSR of the sector in 2015
Fixed• Outstanding growth in key revenue lines (FTTX and Pay TV)
• Resuming growth in SP area (ex. GVT)
1 – Considers TEF Brasil + GVT figures as of January, 2014. 2- Includes net handset revenue. 3- Capex excluding licenses. | 5 |
IN REVENUES, GROWING BUSINESSES MORE THAN COMPENSATE FOR THE REDUCTION IN TRADITIONAL ONES
23.7 21.8
16.6 20.4
2014 2015
Revenue per product
(R$ billion)
Products with growth
-8.0%Products with
no growth
23.0%
5.6%
Excluding regulatory effects
+4.8%
Mobile data & VAS
TV UBB
2014
2015
34.1%
27.6% 16.6%
Fixed voice Mobile voice
2014
2015-2.6%
-8.6%
• Continuous delivery of data centric strategy
• Mobile data revenues surpassing mobile voice revenues since 2Q15
• Improved trends in fixed voice due to smart pricing actions and 3P growth
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UPCOMING TERMINATION RATE CUT WILL REDUCE REVENUES WITH LIMITED IMPACT ON EBITDA
Expected Tariffs reduction
YEAR MTR FTR (TU-RL / TU-RIU)
Tariff
R$ centsVar. %
Tariff
R$ centsVar. %
2014 25 -25%
2015 17 -33%
2016 11 -37% 1.1/5 -60% /-37%
2017 7 -47% 0.6/2 -50% /-59%
2018 4 -47% 0.3/0.9 -50% /-59%
2019 2 -50%
TU-RL and TU-RIU new tariffs became effective on February 24, 2016
785500
275
2016 2017 2018
Incremental Impact
190110
20
2016 2017 2018
Incremental Impact
Reduced exposure in EBITDA
Reducing impact on revenues
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Estimated direct Revenue impact
Estimated direct EBITDA impact
R$ million
R$ million
Share of total net revenue1 Share of EBITDA1
IN A HIGHLY COMPETITIVE MARKET VIVO OUTPERFORMS PEERS WITH THE HIGHEST GROWTH IN REVENUE AND LARGEST EBITDA
Vivo records the largest Market growth capturing the largest share of incremental value of the industry
14% 22%30% 34%
Positioned among the companies with highest market value in Brazil, the highest in the telecom sector
17%23% 26%
34%
1- Based on 2015 public information for two main operators. For a 3rd one, based on the rolling 12 months
ended in Sep/15. Does not exclude non recurrent effects. 2 – Includes nominal amounts of net debt
according to the last numbers published by the operators;
293181
66
Itaú UnibancoAmbev
Enterprise value2: Telecom (R$Bn)Mkt cap as of March 10th 2016
Market Cap Ibovespa (R$Bn)March 10th 2016
66
19 1
5
2 37
Tim Oi
Mkt value Net debt
TimVivo Oi
-12.1%
-2.3%
+1.8%+4.8%
2038
693rd position when excluding
financial sector
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Total net revenue
evolution y-o-y
6th
position in Brazil
Vivo
Player 3 Player 1Player 2 Vivo
WE WILL IMPROVE FURTHER OUR PROFITABILITY THROUGH FOUR MAIN LEVERS
Synergies
Capex allocation
Simplification and efficiency
Digitalization
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OPERATIONAL SYNERGIES
Real 2015 2016 2017 2018 2019 2020
EBITDA increase Capex savings and avoidance
Already executed actions in 2015 to secure 30% of total NPV of best case scenario, with increasing EBITDA impact beginning in 2016
Leveraging of combined networks
• Migration of last mile circuits
• Sharing of Backbone Routes
• Fibering of mobile sites
• Avoiding investments in GVT’s fiber footprint in SP
Unification of advertising agencies and advertising budget
• Concluded in 2015
Rightsizing of the organization
• Anticipated from Jan/16 to Sep/15
R$636Millionin 2015
70% ofRun Rate
Full Run Rate
1- Does not include NPV of taxes in the amount of R$4.5 billion in the base case and 5.9 billion in the best case. 2- Includes opex avoidance in the capex | 10 |
Total NPV from R$ 9.6 billion to R$ 16.1 billion1
Revenue
R$ 2.7 bn
R$ 5.5 bn
Opex
R$ 3.9 bn
R$ 6.6 bn
Capex avoidance2
R$ 3.4 bn
Capex savings
R$ 0.7 bn
R$ 1.6 bn
Base Case
Already secured
Best Case
R$ 0.2 bnR$ 2.9 bnR$ 0.2 bn
R$ 3.0 bn
Initiatives accross the board to improve profitability
Consolidation of IT platforms and applications
Portfolio simplification reducing customer care costs
Optimization of network infrastructure / field services
SIMPLIFICATION AND EFFICIENCY
1800
6
Old portfolio Current sales portfolio
B2C Mobile
B2B
4300
8
Old portfolio Current salesportfolio
40% reduction in the number of applications simplifying IT operations
2015 2018
-40%• Insourcing of field services in SP
leading to reduction in non-qualitycosts
• Fixed network simplification with VoIP in FTTH areas
• Unified installation process for 3P additions
• Avoiding copper expenditures
• Network sharing agreement for rural areas
Prepaid offers with simpler structure
Zero waste approach
• Program to achieve efficiency and operational excellence by implementing initiatives to reduce waste and attack performance gaps
• Best in class efficiency rate
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COMMERCIAL BACKOFFICE
DIGITALIZATION AND ANALYTICSCreating the tools and the incentives to transform customer experience and save costs
• Target online bills across
mobile postpaid base
• Vivo Easy (first postpaid plan
as an app in the market)
E-COMMERCE
E-CARE
BIG DATA
• Incentivizing self care through
use of Meu Vivo application
• Improving customer satisfaction
and call center costs
Leveraging on analytics and
big data to transform business
model and cost structure
and maximize revenues
• Accelerating use of virtual
recharges
• Increasing B2B, 3P and mobile
sales through online stores
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Superior capex ratio focused on improving growthCAPEX ALLOCATION
Solid Capex evolution strengthenedby Capex avoidance
8.4 8.39.0
20.9% 19.7%22.0%
8
8
8
8
8
9
9
2014 2015 2015 including Capex
avoidance
Capex % Capex / Net Revenues
R$ Billion
• Synchronize business outcomes with investment requirements
• Critical trade-offs: where we play to win (e.g. larger coverage x quality where it matters)
• Reprioritizing 30% of mobile capex based on big data information (geo localization of higher value customers)
Improving returns with a new methodology to stablish capex trade-offs
To be sustained in 2016 with focus on improving growth
MAIN PROJECTS
• 3G capacity
• 4G coverage
• Backbone and
Backhaul
• FTTX footprint
• FTTC2016 Capex
Commercial
Maintenance/Obligatory
70% of Capex allocated to improve commercial growth and assure quality
• Assessing potential sales of mobile towers to improve efficiency and value generation
Continuous analysis of opportunities in sales of mobile towers
R$ Billion
Max. 8.71
1- Excluding licenses| 13 |
OpCF 2015 Free cash flow 2015
Growth in OpCF driven by EBITDA increase and stable investment level
Solidly converting EBITDA – Capex into free cash flow
DISCIPLINED FINANCIAL MANAGEMENT DRIVING OpCFGROWTH AND STRONG CONVERSION IN FREE CASH FLOW
3.9 4.4
2014 2015
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77%
R$ Billion R$ Billion
1- Free Cash Flow after working capital variation, financial interest and taxes.
4.43.4
Monetizationof OpCF after working capital variation, financial interest and taxes
OpCF (EBITDA-Capex)
1
A SOLID CAPITAL STRUCTURE PROVIDING OPTIONALITY AND FLEXIBILITY FOR THE COMPANY
Net Debt/EBITDAR$ billion
10.2
5.6
4.6
Gross Debt Cash Net Debt
2015
• Low leverage and strong liquidity position with average investment yield (103% of CDI) higher than average cost of debt (93% of CDI)
• Vivo’s solid balance sheet reflected in credit ratings, which persist above Brazil’s rating
2014 2015
0.58 0.36
-22.6%
YOY
-35.9%
YOY
-6.8%
YOY
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AN UNIQUE COMBINATION OF GROWTH AND VALUE DISTRIBUTION
Dividends declared in the amount of more than R$21 billion (>30% of market cap) from 2011-2015
Synergies driving EBITDA growth superior to peers with dividend yield higher than more mature companies
Source: Bloomberg. 1- Europe Average includes Telefónica, Deustche Telekom, Orange, Telecom Italia,
Vodafone, British Telecom, Telenor, KPN, Swisscom, Telia-Sonera, Tele2, Telekom Austria and TDC.
Hig
hLow
HighLow EBITDA CAGR 2015-18
Europe AVG.1
Div
idend
Yie
ld 2
016
Between 0-2% Above 6%
Betw
een 0
-2%
Above 6
%
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REVENUE
PERSPECTIVES2016 - 2018
EBITDA CAPEX
Continued strong growth in key revenue lines (mobile data, UBB and TV) due to our value driven data centric strategy, outperforming the industry
Recurrent margin improvement supported by synergies and efficiency
Capex / revenues of up to 20% to be reassessed in 2017 depending on economic activity and potential optimization due to smart allocation initiative. Capex to descend in 2018
Continued growth in Operating Cash Flow
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FINANCIAL TAKEAWAYS
Vivo stands out in the market with an unique combination of EBITDA
growth, shareholder remuneration and solid capital structure
Unique
Strategy
Unique Capital
Structure
Unique
Positioning
Through sustained investment, M&A and a value driven commercial approach, we
have built a matchless platform, including the right infrastructure, spectrum
portfolio and customer mix to capture market value and evolve to service
convergence
We have a robust plan to transform the company benefitting top line. Efficiency
and simplification initiatives, digitalization and an improved capital allocation
oriented for growth should enhance further our returns
Strong cash flow generation and solid debt position gives the company optionality
and flexibility to chase growth while remunerating shareholders
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DISCLAIMER
These presentations may contain forward-looking statements concerning future prospects
and objectives regarding growth of the subscriber base, a breakdown of the various
services to be offered and their respective results.
The exclusive purpose of such statements is to indicate how we intend to expand our
business and they should therefore not be regarded as guarantees of future performance.
Our actual results may differ materially from those contained in such forward-looking
statements, due to a variety of factors, including Brazilian political and economic factors,
the development of competitive technologies, access to the capital required to achieve
those results, and the emergence of strong competition in the markets in which we
operate.
For a better understanding, we are presenting pro forma numbers combining Telefônica
Brasil and GVT results for all financial and operational indicators for every period as of
January, 2014.
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