Opportunities in Peru

Opportunities in Peru

Global Strategist Jacek Dzierwa has just returned from another research trip to Latin America where he visited Peru, Chile and Brazil. Travel is important for our tacit knowledge because many of the world best opportunities aren discovered behind a Bloomberg terminal or an earnings report. We venture to visit as many companies as possible before investing in them.

This was Jacek first trip to Peru and the country to the upside. Another beneficiary of higher commodity prices, Peru has seen a massive improvement in its standard of living in recent years.

The poverty level has declined from a staggering 55 percent in 2001 to 35 percent this year and is expected to fall to 25 percent by 2015. However, there is still much progress to be made. Roughly 71 percent of Peru population works in an informal economy, which means they pay no taxes, have no bank accounts and have no access to credit. The size of this informal economy is second only to Bolivia (80 percent) in Latin America.

Peru progress is on display in Lima, the country capital and largest city. The bustling metropolitan city is home to South America main Pacific port (Port of Callao) and several thousand factories and manufacturing plants. Recent growth has pushed the greater Lima population over 9 million people.

One annoying side effect of this progress is heavy traffic. According to some estimates, the number of vehicles in Peru today is five times greater than it was a decade ago. That means that there are now 10 cars vying for space on the same roadways where there used to be two. Numerous Asian manufacturers from Korea and China have been big beneficiaries of this growth in demand for cars.

But there is relief on the way. The Peruvian government recently announced a $24 billion infrastructure overhaul over the next three years that should help the country meet its rapidly growing demand. One beneficiary of this infrastructure spending is likely to be Grana y Montero a Peru based construction and engineering company that Jacek uncovered during the trip. The firm is highly profitable with its EBITDA (earnings before interest, taxes, depreciation and amortization) margin in the last three years ranging from 16 20 percent. This is way above average for construction projects where EBITDA margins of 6 8 percent are considered good. Much of Peru retail market is dominated by Chilean owned companies such as Cencosud (OTC:CSUDF), which purchased the popular Wong (pictured) chain of stores back in 2008. The Wong family started the company, which is a supermarket grocery story, in their garage and developed it into a great retail business. Many Chinese emigrated from Macau as laborers in the 19th Century and today Peru boasts a one million Chinese population (total country population of 28 million) that has been active in its entrepreneurial efforts such as the Wong family.

In Santiago, Jacek met with large retailers Falabella and Cencosud. counterparts, which partly explains their current hefty valuations. Cencosud aims to have checkout lines no more than three deep one outlet Jacek visited had 67 cash registers open and each was busy.

Over in Brazil, Jacek made his third trip to the country in the past 12 months. Unfortunately, Jacek experience at S Paulo Guarulhos Airport was similar to the one we detailed a year ago On the Ground in Brazil.

The unconfirmed word on the street is that FIFA has warned Brazil that they need to get their act together and improve the country infrastructure before the 2014 World Cup or the games will be moved somewhere else. Just a rumor at this point, but it may be the motivation Brazil needs to get going.

Brazil equity market has been a major underperformer this year. One reason is the large number of equity offerings coming out of the country, with the largest being the recent $25 billion offering from state oil company Petrobras (PBR).

Brazil also faces an overvalued currency, which puts exporters at a disadvantage. Jacek snapped this photo as an example of how the overvalued Brazilian real affects retailers. for some name brands.

Inside Brazil Retail Sector

On the other hand, Brazilian retailers that sell a wide variety of imported goods can benefit from a stronger currency. In particular, we optimistic about Lojas Renner (pictured). Customers do so by pressing a simple button labeled unsatisfied, satisfied or enchanted. If a customer chooses unsatisfied, an associate immediately engages them to correct their experience.

In 2009, 16.6 million of the 17.2 million customers surveyed selected either satisfied or enchanted. We think this unique customer feedback loop gives the company a competitive advantage over other retailers.

Another thing to keep an eye on is the proposed integration of the Chile, Peru and Colombia stock exchanges to create a joint equities platform. Known as Mila, the joint exchange is currently in a beta testing phase. If approved, Mila could be the capital creation platform Latin America needs to take the next step in development.

We understand that the integration still requires some issues to be resolved before investors can reap the benefits of a larger trading platform. The companies which stand to benefit the most from a higher profile are those that currently fly under the radar of most investors, particularly those in Peru and Colombia.

Oi SA Management Discusses Q4 2012 Results

Oi SA Management Discusses Q4 2012 Results

Good morning, ladies and gentlemen. Participating on this call today are Alex Zornig, CFO; James Meaney, COO; Andre Borges, Regulatory and Strategy Director; Tarso Rebello, Controller; Bayard Gontijo, Treasurer and IR Director and their teams. [ Instructions]This conference call contains forward looking statements that are subject to known and unknown risks and uncertainties that could cause the company’s actual results to differ materially from those in 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. Alex Zornig, CFO. Please, Mr. Zornig. You may now proceed.Good morning, and thank you, all, for participating in the conference call. I will review today our results for the quarter and our key achievements for the year and discuss our guidance for 2013. Then, James and I will be happy to respond to your questions. First, I will briefly go over the key elements of Oi’s strategy, which we announced in April 2012.First slide shows we have split our business into 3 major segments: Residential, where our objective is to leverage the largest residential customer base in Brazil by providing bundle offerings of fixed line, broadband Internet, Pay TV and in some cases, mobile; Personal Mobility, where we focus on building the high value customer base, and increasing the profitability of our prepaid base; and Business and Corporate, where our strategy is to increase our market share, especially in So Paulo. We recognize that for us to grow in each of these segments, it’s important to deliver the best products and service based on continuous innovation and on our ability to offer high value conversion service. To get there, we have, and will, continue to invest in data transmission speed, network quality and coverage, as well as in the sales channels and in the people who serve our customers. Within that context,on Slide 2, I will start reviewing our performance in 2012 as compared to the plans that we have communicated to the investments community. We are very pleased that our results for the fourth quarter and full year of 2012 strongly support the viability of our strategy and attest to our ability to deliver in all of the segments in which we operate.We ended the year with 19.1 million Residential RGUs, including 12.5 million fixed lines, 5.1 million broadband access lines, 757,000 Pay TV customers and 727,000 public. In the Personal Mobility segment, we ended up 2012 with 46.3 million RGUs, of which, 39.8 million were prepaid and 6.5 million were postpaid. Regarding Business/Corporate segment, we ended 2012 with 9 million RGUs. Thus, we end the year with 74.3 million RGUs mainly in line with our guidance.With regard to our financial results, on Slide 3, total net revenue of 2012 amounted to BRL 28.1 billion, of which, BRL 27.5 billion were net service revenue. Our 2012 EBITDA was BRL 8.8 billion with EBITDA margin of 31%, reflecting the improvements we achieved in the year. We invest in 2012 a total CapEx of BRL 6.6 billion, which supports our commitment to expand network capillarity and capacity and also to improve our service quality. In terms of debt, we closed the year with net debt of approximately BRL 25 billion. Two of these financial results of 2012 are in line with the guidance that we released in April 2012.Now into Slide 4, I highlight an important milestone for the company, which demonstrates the success of our focus on bundled service. Total net revenue of the Residential segment present a year over year increase. This is a result of the annual expansion of the base, which resumed growing in the third quarter of 2012.On the fifth slide, I will review the initiatives and results achieved in the quarter and in the year. Lower churn combined with leverage sales led to the reversal of historical falloff in Residential RGUs. In 2012, we added over 500,000 Residential RGUs after having lost nearly 600,000 in 2011. One of the key actions we implement to reduce churn was to increase our customer loyalty base. Our loyalty broadband base, for example, went up 30% to 60% by the end of the year. This increase is due to both, the addition of new customers into their loyalty programs and the migration of existing customers to this type of plan. To accelerate the acquisition of new customers, we invested in advertising campaigns featuring celebrities and expand our sales channels.It’s important to mention that the numbers of company owned stores nearly tripled in the year and the number of door to door salespeople increased by more than 60% in 2012. Also in order to reduce churn and leverage sales, we focus on our offering bundled products, adding value to fixed line through broadband and Pay TV. We position our portfolio of offering. That initiative was the upgrade in broadband speeds, which has also contributed a lot to sales and customer loyalty in the Residential segment.Slide 6 shows that the strategy of bundling products, repositioning the portfolio and focus on the unlimited co package has made Fixed Line more effective for our new customers. And at the same time, it’s promoted the retention of existing customers. As a result, the churn in the Fixed Line was reduced by almost 50%. Broadband new offers customer loyalty, investments network and channel expansions have resulted in annual growth of more than 15%. At the end of 2012, 31% of broadband customers had speeds of 5 meg or more. This is a result of our investments in expanding the availability of higher speeds broadband for Residential clients and in strengthening our upgrade in base protection issues.In December, we introduced the Fiber to the Home product, which offers ultrahigh speed Internet and IPTV. IPTV is a differential Pay TV solution that brings several innovative features to the Brazilian market. Also our DTH Pay TV was repositioning in 2012 in new channels, pay per view package and HD content, resulting in a residential growth of more than 100% in the base. With these accomplishments the last quarter of the year, including market share of that has reached 18%. After the success on market share gains, Oi has become the third largest economic group in the Pay TV market, with a 5% of market share by the end of 2012 versus almost 3% in December 2011. These results illustrate the success of our strategy, offering HD channels starting with entry package at a competitive rates, combined with broadband, fixed line and mobile product. As a result, since the third quarter of 2012, we have reported year over year growth in Residential RGUs, and we ended the year with the growth of 3%.Slide 7 shows that as a result of the conversion strategy as mentioned before, the share of homes with more than one Oi product increased by almost 7% in the year. This has been directly reflected in Residential ARPU, which will grew nearly 7% as well in 2012. As a result, as I previously mentioned, we achieved an important milestone in the fourth quarter. In the first time net revenue from the Residential segment recorded year over year growth.Moving onto Slide 8, as part of our strategy of focusing on high value customers in the Personal Mobility segment, we carried out several initiatives in 2012 with the goal of reducing churn and increasing sales. As a result, we added nearly 1.2 million new postpaid customers in 2012 more than 3x the number added in 2011.In the fourth quarter, net additions amount to 387,000 postpaid customers, the best result since 2010. Among the initiatives to reduce churn are, number 1, promoting the sales of loyalty plans, which have multi discount if the customer stays with the plan for 12 months. Today, nearly 100% of the postpaid plan sold are loyalty plans. The first quarter of 2012, these plans accounted for only 20% of the sales. Number 2, proactive approach in determining the best plans for the customers based on the analysis of the consumer profile. In order to increase sales, we also reconfigure our offering and expand our sales channel and 3G coverage. Simplified plan for the postpaid segment that we introduced in early 2012 remain unchanged, allowing a better communication by the sales force and a better understanding of the offers by the customer. As I mentioned earlier, we have increased the number of company owned stores.In the end of 2012, we have 187 stores. Opening new stores and spending this channel were key to delivering benchmark customers care to high value clients, sustaining our returns to the handset market and serving as a model for our franchise. Another important element of our strategy for the high value segment was the expansion of 3G coverage. We closed 2012 with 700 cities covered, corresponding to 7/10 of urban Brazilian population. All these initiatives have led to positive trends in our postpaid mix. As presented on Slide 9, the fourth quarter of 2012, Oi was the only carrier to post a significant market share gain in the postpaid market, recording growth of 3 percentage points. Slide 10 shows our actions to increase the profitability of our prepaid base such, as the simplified offer introduced in 2012 that gives the same value or twice the recharge amount as a daily bonus depending on the region. In order to promote the use of value added and data service, we can choose to offer SMS message as a bonus for prepaid users, increase the sales of SMS package and introduce a prepaid mobile Internet plan to be used in tablets and computers.At the same time, we spend sales channels and focus on prepaid plans like large retail chains and point of sales that sells recharge and sim cards. As a result of these initiatives, the gross recharge volume continues to consistently growing in line with the customer base, evidence of our successful strategy with focus on profitability.Slide 11 shows the main results of the Business and Corporate segment. We end the year with a nearly 9 million RGUs, 2% sequential increase and a 14% year over year increase as a result of the positioning we achieve in this segment. Regarding the Business segments, key highlights of the fourth quarter include the continued growth in the fixed base, reduced churn and the profitability of mobile voice and the increased mobile Internet penetration.In the Fixed segment, the number of voice data and broadband clients increased in the fourth quarter and in the year. It’s important to mention that we have developed partnership with large hardware supply and technology integrators, which embraces our presence with synergic high value solutions. The Corporate segment, we continue to execute on our strategy of helping clients leverage their revenues and rationalize their cost through the innovative use of technology.Postpaid VPN network, IP Internet access and digital trunk products stood out in terms of RGU growth in the fourth quarter 2012. In addition, we signed important agreements to provide IT and telecommunication service too, for example, Arena Castelao, one of the FIFA 2014 stadiums, and we also began implementing together with Pernambuco State government what we call PE Connected project, a world class benchmark of service conversions on a single platform.Slide 12 shows that our net revenue amounts BRL 7.4 billion in the fourth quarter of 2012, an increase of 5% compared to the previous quarter. We succeed in posting year over year revenue growth for the second consecutive quarter as you can see in the on the lower left chart. We closed 2012 in net revenue of more than BRL 28 billion, reporting 1% year over year growth, something we had not seen for several years. Revenue expansion from the Personal Mobility segment, coupled with reduced attrition in the Residential segment is driving these improvements.Slide 13 presents the efficiency of our cost and expense management, ensuring that our expense increase at the rate lower than inflation. Costs as a percent of revenue were 69% in 2012, which shows that we have maintained our operating margins while growing. It’s important to mention that cost and expense were positively impacted in the amount of BRL 200 million from one of events in the fourth quarter, including the result of the sale of a subsidiary, which are approximately 1,200 mobile nonreversible towers. As a result of this transaction, more than BRL 500 million was already received by the company. As operation is in line with Oi’s strategy of monetizing nonstrategic assets, generate funds to be used in the company’s core business. Those are in line with social demands for more rational and shared infrastructure. Shared telecom towers present enormous potential and can be attested by the price tag of the transaction, the highest price per tower ever paid in Brazil.Slide 14 shows that our EBITDA continues to increase in 2012 and in the fourth quarter, reached to BRL 2.5 billion with a 33% margin. Consistent growth in revenue and efficient cost and expense management had a positive impact in our EBITDA, which reached BRL 8.8 billion for the year.Slide 15 shows our fourth quarter net income of BRL 837 million. It’s worth noting that since the conclusion of our corporate restructuring, our net income has been impacted by the fair value from the acquisition of Brasil Telecom. we have filed our request with the CVM in late August 2012 to reverse this record based on the advice of our outside accountants to consider that reversing the fair value is the most appropriate accounting method for reporting our net income. If the request of CVM is approved, our net income for the year will be BRL 1.8 billion. In our opinion, this amount most accurately reflects net income generated by the company’s operations in the period. We highlight that amortization of fair value has no tax effect.On Slide 16, our consolidated gross debt reached nearly BRL 33 billion at the end of 2012. At the year end, net debt reached BRL 25 billion resulting in a net debt to EBITDA ratio of 2.85x, which is below the self imposed and certain guidelines of our dividend policy. Therefore, management is proposing the general meeting, the payment of additional dividend of BRL 1 billion on top of the amounts already paid in August 2012. At the end of fourth quarter, the cost of our debt remained unchanged and the average maturity was approximately 5 years, almost 6% of our debt to be mature after 2017. Even though 40% of the total debt is contracting for currency, less than 2% of our debt is exposed to exchange variations.On Slide 17, CapEx we made during the year. In the quarter, we invested a little more than BRL 2 billion in line with the previous quarter. 2012, in line with our strategy, we invested BRL 6.6 billion, expand our 2G and 3G networks to adapt our fixed data network and to expand the quality and coverage of Oi TV. We also invested in the optimization of IT systems in the 4G license and the expansion of company owned stores.Now to Slide 18, which provides our guidance for 2013. We expect to build up on the progress we made in 2012 by effectively executing our existing strategy. Net service revenue for 2013 are expected to range from BRL 28 billion to BRL 29 billion, which at the midpoint represents almost 4% year over year growth. EBITDA should be between BRL 9 billion and BRL 9.8 million, up 6.8% at midpoint, reflecting continued operating levels. RGUs for 2013 are expected to range for BRL 75 million to BRL 76.5 million, which at the midpoint represents 2% year over year growth. CapEx will be BRL 6 billion. As a result, we expect our net debt to EBITDA ratio for 2013 to be at or below 3x. With that, we conclude our presentation. James and I will answer your questions now. I remind you that this conference call aims at discussing our 2012 operating and financial results, as well as our guidance for 2013. So please limit your questions to topics related to these subjects. We’d like now to open to call to the questions.