global emerging markets investor forum june 16-18, 2004

Global Emerging MarketsInvestor Forum

June 16-18, 2004

Global Emerging MarketsInvestor Forum

June 16-18, 2004

2Merrill Lynch – GEM Investor Forum – June/04Merrill Lynch – GEM Investor Forum – June/04www.telemar.com.br/ir

Regulatory Framework 20

Growth Strategy & Revenue Drivers 11

Industry Overview 3

Financial Performance 23

Contents

Company Highlights 2


Goal: Building a fully integrated telecom service provider

Change, adaptation and consolidation Market share gains Selective growth (new markets) Consolidation of investments

Growth in highly competitive markets GSM Mobile Services (Region I) Long Distance (domestic and international) Data & Corporate (nationwide) Contact Center Services (nationwide)

Exploring new opportunities: Broadband Rollout (ADSL) Bundling Services Enhanced Services for high end residential

and SME markets (voice / data)Target: Ensure a sound market and financial

position, with increasing returns to our shareholders

Goal: Building a fully integrated telecom service provider

Change, adaptation and consolidation Market share gains Selective growth (new markets) Consolidation of investments

Growth in highly competitive markets GSM Mobile Services (Region I) Long Distance (domestic and international) Data & Corporate (nationwide) Contact Center Services (nationwide)

Exploring new opportunities: Broadband Rollout (ADSL) Bundling Services Enhanced Services for high end residential

and SME markets (voice / data)Target: Ensure a sound market and financial

position, with increasing returns to our shareholders

Company Highlights

Region I

Fixed-line and GSM Mobile Services

Nationwide

Long Distance, Data Transmission and Contact Center Services


Telecom Industry in Brazil – Growth of Customer Base

* Source:Company´s Information

Fixed-line platform – LIS (million)Fixed-line platform – LIS (million)

Having met universalization goals (1998-2001), fixed-line platform growth tends to rely on the performance of Brazilian GDP.

Penetration

Rate Brazil

(%)

Region I

Brazil

981 99 00 01 02 03 Mar/04

Mobile platform – Subscribers (million)Mobile platform – Subscribers (million)

981 99 00 01 02 03 Mar/04

Since privatization and introduction of competition, mobile growth in Brazil has largely exceed the most optimistic scenarios (over 30% CAGR through 2003).

BrazilPenetration

Rate Brazil

(%)

Region I

1 Privatization (Jul/98).


Telecom Industry in Brazil – Net Revenues

Mobile29%

Fixed Line71%

2002 – R$ 50.6 bn2002 – R$ 50.6 bn

2003 – R$ 57.0 bn2003 – R$ 57.0 bn

Mobile31%

Fixed Line69%

Growth of telecom service revenues in 2003 was ~13% yoy;

Revenue growth was driven by the mobile sector (+18% yoy);

Given stability of fixed-line platform, mobile sector should continue to drive revenue growth in 2004.

1 Net Revenues of Incumbent Telcos (Telemar, Telesp, Brasil Telecom, Embratel) – excluding CTBC, Vesper, Intelig, GVT.

2 Net Revenues of main groups: Vivo, Claro, Oi, TIM and Opportunity, including handset sales (excluding: CTBC, Nextel, Sercomtel, etc.).

1

2

2

1


Telecom Industry in Brazil - Fixed Line Services

Telemar

32%15.1 M

Brasil Telecom

9.7 M 20%

Telefonica

12.2 M 31%

Embratel (DLD & ILD)

17%

2001

37.4

1998

20.0

2003

39.2LIS (million)*

2002

38.8

Mar/04

38.9

Lines in Service

Revenue Share

Fixed Line Incumbents

(R$ 14.6 bi 1Q04)

* Including mirror companies.


Telecom Industry in Brazil - Mobile Services

Subscribers - Mar/04 Brazil: 49.1 m

National Market Share

* Other groups (Opportunity, CTBC, Sercomtel and Nextel)

Vivo (CDMA)

21.9 m 44%

TDMA/GSM / Other*

3.8 m 8%

TIM (TDMA/GSM)

9.1 m 19%

Claro (TDMA/GSM)

10.0 m 20%

Oi (100% GSM)

4.4 m 9%

Startup

(BRP)

Incumbents

Main Groups


TMAR

Others

EMT

TMAR

Others

EMT

TMAR

Others

EMT

TMAR

Others

EMT

61%39%TMAROthersOthers

Fixed Line Market in Brazil – Gross Revenue / Incumbents

2002 – R$ 18.4 bi 2003 – R$ 20.7 biLocal Services (ex-VC1)

2002 – R$ 12.7 bi 2003 – R$ 14.5 bi

Long Distance Services

2002 – R$ 7.0 bi 2003 – R$ 7.9 bi

Fixed to Mobile Services (VC1)

TMAR TMAR TMAR

Average Tariff increase: 12.3% Average Tariff increase: 24%

Average Tariff increase: 8.7%

2002 – R$ 4.4 bi 2003 – R$ 5.1 bi

Data Services1

+12.5%+12.8%

+13.7% +15.9%

Others Others

1 Excludes leased lines to other telecom service providers (EILD).


Telemar is the market share leader in LD calls originated in Region I;

Regional incumbents conquered market share from LD carriers in 2002, as new markets were opened for competition;

Telemar increased its market share from 2000 to 2003, mainly as a result of entry into new markets;

Since 2H03 there has also been a significant contribution of revenues derived from mobile LD calls (SMP);

Challenge: sustaining market share in home market and preserving profitability (avoiding price war/irrational competition).

Telecom Industry in Brazil - Long Distance

(1) Incumbents only (rounding %).Source: Company reports.

Brazil – Revenue Market Share (1)Brazil – Revenue Market Share (1)

2000 2001 2002 2003

Telemar 12% 13% 16% 20%

Embratel 65% 62% 54% 44%

BrT+ Telefonica 23% 25% 30% 36%

Total Revenue R$ Million 9,970 11,773 12,708 14,450

CAGR 13.2%


Vivo

44%

TIM

19%

Others^

8%Claro

20%

Oi

9%

Brazilian mobile subscriber base is growing over 30% annually;

Oi is still the fastest growing player in its home market;

Wireless penetration in Region I (23%) still offers room for growth.

Telecom Industry in Brazil - Mobile Services

^Includes other groups: Opportunity, Nextel, CTBC and Sercomtel.

BrazilBrazil

Region IRegion I Wireless Penetration (%) – April/04Wireless Penetration (%) – April/04

*

*Source: Pyramid Research

Claro

21%

Oi

8%

Vivo

45%

TIM

18%

Others

8%

Dec/03 Mar/04

Dec/03 Mar/04


Telecom Industry in Brazil - Broadband Services

PC Penetration (% of households)PC Penetration (% of households)

**Source: Pyramid Research

** Total households= 41.5 mn (IBGE- PNAD/2002)2003

ADSL represents 82% of total 1.2 mn broadband accesses in Brazil (Dec/03);

Broadband penetration in Brazil expected to reach to 30% of internet users in the next five years;

Broadband subscribers in Brazil expected to increase by 2.5x through 2006*;

Challenge: Develop sales channels to increase offer to SME clients, bundling with other services (LD, wireless).

ADSL represents 82% of total 1.2 mn broadband accesses in Brazil (Dec/03);

Broadband penetration in Brazil expected to reach to 30% of internet users in the next five years;

Broadband subscribers in Brazil expected to increase by 2.5x through 2006*;

Challenge: Develop sales channels to increase offer to SME clients, bundling with other services (LD, wireless).

BrazilBrazil Region IRegion I

Dec/03


WirelineConcession Area

Moderate Growth

Data, Internet & Corporate

High Growth

Wireless

High Growth

DLD / ILD

High Growth

Contact Center

High Growth

Integrated

Strategy

Growth Strategy & Revenue Drivers


(million)

Customer Base Growth

Ability to anticipate wireless growth and traffic migration (F to M);

Capacity to maintain / increase market share in a rapid changing scenario;

Capacity to increase offer of ADSL to our customers and protect our home market;

Keep delivering customer growth;

Developing advanced and segmented services;

Offering innovative and bundled plans.

CAGR 19.5%

Wireline Wireless

19.0

16.4

19.8

21.6

ADSL

0.5 10.3

1Target: 450K ADSL subscribers.


Subscribers (thousand)Subscribers (thousand)

Highly successful GSM rollout

4.4 million subs in 21 months (20% market share;

Market share gains at Oi help to reduce consolidated interconnection costs;

Almost 50% share of all net adds in home market since launching in Jun/02;

Share of total revenues increased from 3% in 2002 to 7% in 2003;

Target: consolidate and increase market share in Region I, reaching # 2 position by 2004 YE, with positive EBITDA margins.

Pre paid

Post paid

1,7222,236

3,893

80%

83%

85%

Mobile Services

6,000

4,408

2,849

80%

78%

+80% yoy

Revenues (R$ million)Revenues (R$ million)


Local Services

6,122

7,0988,119

Local Revenues (ex- VC1) - R$ millionLocal Revenues (ex- VC1) - R$ million

Local Traffic – F to F (billion pulses)Local Traffic – F to F (billion pulses)

21.3 22.9 22.6

2,0931,881

1Q03 1Q04

Local traffic impacted by low GDP growth and F-M traffic migration (to a lesser extent);

Local revenues growing basically in line with tariffs (no real growth expected);

Outstanding performance of mobile, long distance and data services have caused a decrease in the share of local services in total consolidated revenues;

Target: protection of home market leadership / retention of high-end clients (customer care / bundling/ADSL).

44.8% 44.1%

41.8%% of total revenues


Long Distance Services

1,568

2,066

2,963

Revenues - R$ millionRevenues - R$ million

Traffic (billion minutes)Traffic (billion minutes)

7.18.2

9.5

LD revenues growing over 30% yoy, mainly driven by market share gains:New DLD/ ILD markets (Jul/02) and Mobile originated LD calls (Jun/03);

LD Market leadership in Region I and “Top of Mind” carrier in Brazil for two consecutive years;

Over three million customers in loyalty programs;

Targets: increase efficiency & quality, keeping revenue growth (2004 ~20%) preserving profitability.

% of total revenues

11.5%12.8%

15.3%

885

666

1Q03 1Q04


Subscribers (thousands) - EoPSubscribers (thousands) - EoP

Broadband rollout (ADSL)

416

217

33

128

450

Fastest growing subscriber base in Brazil (~37% of all net adds in 2003);

Presence in 110 of the largest cities in Region I (~10x larger than other technologies, including cable);

Revenue growth of almost 4x in 2003 (and still significant room to grow in coming periods);

Target: Increase our broadband penetration in Region I from 2% of LIS to 5% in 2-3 years.


284

59

1Q03 1Q04

69

17

1Q03 1Q04


Data revenues (ex-broadband) growing at a 16% annual rate;

Sustainable real growth driven by relevant long term corporate contracts;

High quality network and services (SLA/ End-to-end);

Target: Increasingly provide

integrated nationwide solutions to top corporate customers in Brazil.

Data Services


Major ClientsMajor Clients

787873

1,056

295255

1Q03 1Q04


Based on full digitalization of our network, VAS revenues are increasing more than 20% annually;

Besides adding to basic fixed line revenues, services like “follow me”, ‘’call forwarding” and “voice mail” help sustain fixed line traffic;

Total services sold increased from 25% of our LIS in 2001 to 40% in 2003;

Target: develop new services to foster penetration traffic and revenues.

Value Added Services (VAS)


258

303

423

11794

1Q041Q03


Focus on profitability: EBITDA positive since inception;

Customized solutions for all areas of customer relationship;

Leverage traffic to Telemar´s network;

Contax customers include major banks, utilities, insurance, media, telecom, retail;

Target: Consolidate #1 position among call center operators in Brazil.

Contact Center Services

7,3374,947

12,907

223146

>15,000

Attendant PositionsAttendant Positions

Net Revenues (R$ million)Net Revenues (R$ million)

421

12,543

8,270

1Q03 1Q04

12582

1Q03 1Q04


Regulatory Framework – Main Issues

2003 • IGP- DI (30.05%) x IPC-A (17.24%)• Tariffs have been adjusted based on IPC-A• Still pending “merit” judgment by the Courts

2004 •Tariff increase most likely based on 12 month IGP-DI (7.97%) and not IPC-A (5.15%)Base for tariff increase: Currently authorized prices (based on Court injunction / 2003)• Productivity factors:

Local Basket – 1%Long Distance Basket – 4.5%Local Interconnection – 17.5%

2005 • Most likely based on IGP-DI

2006 on• Tariff increases based on:

IST – A “Telecom Sector” price index (TBD)“K” – New Productivity factors (TBD)Interconnection:

a) Defined as a % of local tariff (60%-2006; 50%-2007)b) From 2008 on based on a “Long Range Incremental Cost Model” (TBD)

1. Tariffs – Annual Revisions


Regulatory Framework

Reduction of Local Areas

• LD calls between neighboring areas to be considered local calls (local areas from 4,289 to 2,920);

• To be implemented in up to 90 days after June 07, 2004;

• Change already expected: Telemar has been rebalancing its rates = local ~ neighboring.

Fixed to Mobile Interconnection Rate

• Free negotiation scheduled to start as of July, 2004;

• Currently F-M local calls is a non profitable business for Telemar;

• Target:Recover margins on this businessShare the uncollectibles with mobile operators

1. Tariffs

Domestic long distance:

R$ Net of Taxes 2001 2002 2003

Neighboring areas 0.028 0.024 0.022

0 to 50 km 0.16 0.18 0.21

50 to 100 km 0.25 0.26 0.28

100 to 300 Km 0.27 0.28 0.29

Over 300 km 0.30 0.30 0.32


Regulatory Framework

Unbundling• In May 2004, Anatel established the overall conditions for:

a) Line Sharing: setting maximum reference values, such as monthly rental prices, at R$ 15.42 / pair andb) Full unbundling: determining that prices should be set by the incumbents, based on the overall conditions defined by Anatel.

2. Competition

Co-Billing• System already in place between all telecom operators in Brazil

Fixed line Number Portability• To be implemented as of 2006 (TBD)

3. Transparency

Local Traffic in Minutes• Conversion of local traffic billing: Pulses to Minutes(to be implemented as of 2006 / the frame and extension of adjustments) (TBD)


Revenue Growth

Telemar continues delivering real revenue growth in spite of a slowdown in Brazilian economy.

Net Revenue Growth – R$ millionNet Revenue Growth – R$ million

Changes in Revenue MixChanges in Revenue Mix

CAGR 17.7%

Real growth has been driven by competitive and less regulated segments of mobile, long distance and data.

Local

57%

Data

6%

Network

7%

Wireless

7%

LD

15%

Others

8%

Local

64%

Data

6%

LD

12%

Others

7%Network

11%

20032001


Costs & Expenses

Costs & Expenses: R$ million Costs & Expenses: R$ million

Main Cost Items (% of Total Costs)Main Cost Items (% of Total Costs)

After the huge expansion of fixed line platform and installation of our GSM network costs & expenses are being kept under strict control.

In line with the growth of our mobile operations, associated costs, such as handsets and dealer commissions increased their stakes in total costs, as opposed to consolidated interconnection costs.

Intercon.

3rd Party

Headcount

Handsets

Marketing

Bad Debt

2003 2002

6,545 6,5217,782

CAGR 9.0%

2,009

1,733

1Q03 1Q04


(R$ million)

EBITDA

Recurring EBITDA margins have been stable over time, in the mid-forties1;

For 2004 we expect an EBITDA margin of ~43%.

35%

45% 44%

1,6801,486

1Q041Q03 1 EBITDA for 2001 was impacted by extraordinary provisioning.


CAPEX

CAPEX / 2003: c.12% of net revenues (17% in 2002);

Main investments in fixed line network expansion already made;

Total CAPEX since 1998 of R$ 21.3 bn (US$ 10.4 bn);

Target: Stabilize CAPEX at ~15% of sales to support growth in mobile subscribers and in less regulated services.

(R$ billion)10.1

2.0

1.7

Wireline

Wireless

Anatel TargetsMobile License

2.0/2.3

1.1

0.9

1.1

2.8

2.22.5

0.6

60%

40%

2.2

7.9


Operating Cash Flow after Capex

(R$ million)

1999 2000 2001 2002 2003

Given our level of EBITDA generation and strict control over CAPEX, our Free Cash Flow is expected to remain strong in the coming years.


Net Debt Position and Repayment Schedule – Mar/04

% of total

16.7 22.5 27.5 10.0 5.8

Net Debt – R$ billionNet Debt – R$ billion Debt Repayment Schedule R$ billionDebt Repayment Schedule R$ billion

Given our current strong cash generation, we expect to reduce our net debt to around 1x EBITDA by year end 2004.

17.5

Net Debt/EBITDA (x)

~

Total Debt = R$ 12. bn


Cash Position x Short Term Debt

(R$ million)

Our cash position has largely exceeds our short-term debt, giving Telemar a cushion against unfavorable shifts in global financial markets.

Short Term Debt Cash & Equivalents


Net Financial Expenses

Our foreign currency debt is 74% of our total debt (mar/04); Given that 96% of our foreign debt is hedged, we swap our currency exposure to Brazilian interest rates;

Reduction in Brazilian interest rates have helped us reduce our net financial expenses;

Our average cost of debt is 16% (mar/04).

Net Financial Expenses – R$ millionNet Financial Expenses – R$ million

3Q03 4Q03 1Q042Q031Q03

Average Interest Rate (SELIC)Average Interest Rate (SELIC)


Debt Amortization (Cash Expenses)

(R$ million)

1,525

2,9323,094

1,072

Principal Interest


Dividend Payments - 1999/2003

Dividend yield

Dividend**

(R$ million)

Our goal is to provide high cash returns to shareholders* Based on June/04, stock prices

**Includes interest on capital

*


Key Financial Ratios

Net Debt / EBITDANet Debt / EBITDA Amortization*/ EBITDAAmortization*/ EBITDA

Dividends* / EBITDADividends* / EBITDACAPEX / EBITDACAPEX / EBITDA

* Includes interest on capital

(*) 12- Month EBITDA* Principal and interest


Key Financial Ratios

Enterprise Value / EBITDAEnterprise Value / EBITDA Market Cap / EBITDAMarket Cap / EBITDA

EBITDA / Net Financial ExpensesEBITDA / Net Financial Expenses


“Safe Harbor” Statement

This presentation contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements and involve inherent risks and uncertainties. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events

Investor RelationsRua Humberto de Campos, 425 / 8º andar

Leblon

Rio de Janeiro -RJ

Phone: ( 55 21) 3131-1314/1313/1315/1316

Fax: (55 21) 3131-1155

E-mail: [email protected]

Visit our website:

http://www.telemar.com.br/ir

global emerging markets investor forum june 16-18, 2004

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