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7 th Annual Latin America Conference September 13-14, 2004 www.telemar.com.br/ir Part I - Overview 1.1 Brazilian Telecom Market 1.2 Telemar Part II - Recent Developments and Growth Prospects 2.1 Highlights 2003/2004 2.2 Growth of the Business 2.3 Review of Operating Results

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slide1

7th Annual Latin America Conference

September 13-14, 2004

www.telemar.com.br/ir

slide2

Part I - Overview

1.1 Brazilian Telecom Market

1.2 Telemar

Part II - Recent Developments and Growth Prospects

2.1 Highlights 2003/2004

2.2 Growth of the Business

2.3 Review of Operating Results

2.4 Financial Position

slide3

Part I - Overview

1.1 Brazilian Telecom Market

1.2 Telemar

1 1 wireline sector

Embratel (DLD & ILD)

Telefonica

Telemar

1.1 Wireline Sector

2002

Jun/04

1998

2001

2003

38.8

39.3

LIS (Million)*

20.0

37.4

39.2

Fixed Lines in Service have doubled since privatization

23

23

Penetration (%)

11

21

23

Brasil Telecom

Lines in Service

Largest Incumbents

15.2 M

32%

9.6 M

20%

Revenue Share (Brazil: R$ 29.1 bn - 1H04)

12.2 M

31%

17%

* Source: Company´s Information

* Includes smaller incumbents and mirror companies (CTBC, Sercomtel, Vesper and GVT).

1 1 wireless market

TIM (TDMA/GSM)

1.1 Wireless Market

2002

Jun/04

1998

2001

2003

34.9

54.0

LIS (Million)*

7.4

28.7

46.4

20

30

Penetration (%)

5

17

26

Vivo – TEL/PT (CDMA)

Claro -AMX (TDMA/GSM)

Largest Groups

10.4 m

19%

11.1 m

23.5 m

21%

44%

Oi - Telemar (100% GSM)

Opportunity (TDMA/GSM)*

Total Subscribers

National Market Share

5.1 m

9%

3.6 m

7%

* Other groups such as Nextel, CTBC and Sercomtel had 0.3 m subscribers (0.5% market share).

* Source: Company´s Information

slide6

1.1 Growth in Customer Base

Fixed-line platform – LIS (million)

Mobile platform – Subscribers (million)

Penetration

Rate Brazil

(%)

Penetration

Rate Brazil

(%)

Brazil

Brazil

Region I

Region I

03

Jul/04

02

01

981

99

00

03

Jul/04

02

01

981

99

00

  • After doubling in size after privatization in 1998, further expansion of fixed-line platform more closely linked performance of Brazilian economy (current household penetration ~55%).
  • Brazilian subscriber base still growing at a rapid pace (over 30% p.a.).

1Privatization (Jul/98)

* Source: Company Information

slide7

1.1 Mobile Penetration Rate – Jul/04

Brazil – 30.4%

Region III – 36.5%

Region II – 37.3%

Region I – 25.0%

  • In jul/02, the penetration rate in Region I was 15% and in Brazil 18%;
  • Wireless penetration in Region I (25%) still offers room for growth;
  • According to Pyramid´s forecast, penetration will reach 40% by 2006.

* In July/04, population was estimated by IBGE.

1 1 mobile penetration projections
1.1 Mobile Penetration - Projections

Brazil (%)

July/2004: 30.4%

40%

39%

20%

2004

2005

2006

2003

2002

Ovum

Pyramid

1 1 adsl market in brazil
1.1 ADSL Market in Brazil

Market Share – Brazil*

Jun/04

Dec/03

(Cable)

(ADSL)

  • Brazil has 1.4 million broadband accesses (Jun/04);
  • ADSL has 84% market share of the Brazilian broadband subscriber base;
  • Broadband penetration is expected to represent 30% of total internet access in Brazil in the next five years.

(ADSL)

(ADSL)

*Source: Teleco & Telemar estimates.

PC Penetration (% of households)**

*

2003

*Source: Pyramid Research ** Brazil has approximately 42 million households

1 2 telemar overview june 2004
1.2 Telemar – Overview (June/2004)

Region I=

  • Concession for fixed line services
  • License for Wireless services (GSM)
  • Integrated Telecom Service Provider
    • 15.2 million wirelines in service
    • 5.3 million wireless subscribers (Jul/04)
    • 345,000 ADSL subscribers
  • Concession Area (Region I) - Local Service and PCS
    • 65% of Brazilian territory/94 million people
    • 40% of country’s GDP
    • Over 20 million households
  • Leadership in local and long distance services (Region I)
  • PCS Mobile services (GSM) in Region I

Nationwide

  • Authorization for fixed line services
  • Data, Corporate & Call Center Services (nationwide)
  • Telemar shares heavily traded at Bovespa (TNLP4): ~ US$ 47 m / day and at the NYSE (TNE): ~ US$ 22 m / day (Jul/04)
  • High Free Float: 82% of total shares
  • Market value: US$ 5.1 billion (Jul/04)
1 2 telemar shareholder structure
1.2 Telemar - Shareholder Structure

Holding Co.

TNLP

ADR

Tele Norte Leste Participações (TNE)

81.0%

Contact Center

Wireline

(TMAR)

Data

Wireless

slide12

Part II - Recent Developments and Growth Prospects

2.1 Highlights 2003/2004

2.2 Growth of the Business

2.3 Review of Operating Results

2.4 Financial Position

2 1 highlights 2003 2004
2.1 Highlights –2003/2004
  • Building a fully integrated telecom service provider
  • Change, adaptation and consolidation
    • Market share gains in relevant segments
    • Selective growth (new markets)
    • Consolidation of investments made in the network
  • Growth in highly competitive markets:
    • Long Distance (domestic and international)
    • Data & Corporate (nationwide)
    • GSM Mobile Services (Region I)
  • Exploring new opportunities:
    • Broadband
    • Bundled services
    • Satellite services
    • Agreements and Partnerships
  • Target: Ensure a sound financial position, with increasing returns to our shareholders.
2 2 expansion of customer base
2.2 Expansion of Customer Base

million

22.2

  • Ability to anticipate mobile traffic migration presenting an outstanding performance in customer base;
  • Capacity to maintain stable fixed line platform while increasing market share in new businesses (LD,Data, ADSL and Mobile).

20.6

CAGR (98-03) 19.5%

19.2

16.4

0.5 1

0.3

0.2

Wireless

ADSL

Wireline

1Target: 450,000 ADSL subscribers by YE 2004.

* Company’s acquisition

2 2 tmar fixed lines in service
2.2 TMAR Fixed Lines in Service

million lines

  • Investments for expansion of fixed line network essentially completed;
  • Fully digital platform:

 78% household lines

 18% business lines

4% public phones

  • Wireline penetration: ~55% of households (Region I);
  • Obstacles: Further increases in wireline penetration subject to GDP growth and regulatory changes.

maintenance

growth

2 2 oi s subscriber base
2.2 Oi´s Subscriber Base

million subscribers

~6.5

5.3

  • Most successful GSM launch globally

 5.3 million subs in 25 months;

  • 21% market share (Region I);
  • Share of mobile revenue in total consolidated business grew from 3% in 2002 to 8% in 1H04.

4.4

85%

3.9

85%

83%

2.8

2.2

80%

1.7

80%

78%

Post paid

Pre paid

Gross Revenue

(R$ million)

2 2 oi s market position
2.2 Oi´s Market Position

Market Share (Brazil v. Region I) – Jun/04

Region I

Brazil

  • Even with increased competition, Oi remains a high growth player in its operating market (35% of all net adds in 2Q04);
  • Wireless penetration in Region I (25%) still offers significant growth potential;
  • Challenge: Grow subscriber base by 65% in 2004, with positive EBITDA margins.

^Includes other operators:Telemig Celular, Tele Norte Celular, Nextel, CTBC, and SERCOMTEL.

Source: Teleco /Morgan Stanley.

Wireless Penetration (%) – Jul/04

*

*Source: Pyramid Research

2 2 adsl
2.2 ADSL

Thousand lines

450

  • Highest ADSL growth in Brazil (~37% of net adds/2003);
  • Annual revenue growth of 288% in 1H04, but still a low portion of fixed line revenues (1.6%);
  • Target: Increase ADSL penetration from 1.9% of fixed lines to 5% in 2-3 years.

Gross revenue

(R$ million)

2 2 call center services
2.2 Call Center Services

Attendant Positions

>15,000

14,887

12,907

  • Focus on profitability: EBITDA positive since inception;
  • Growth in attendant positions, in line with increase in customer base and net revenues

- Contax currently has 29 customers, including major banks, utilities, insurance, media, telecom, retail, excluding Telemar.

7,337

4,947

Net Revenues

(R$ million)

421

286

223

146

2 3 revenue drivers

DLD / ILD

Contact Center

Wireline

Concession Area

High Growth

High Growth

Moderate Growth

2.3 Revenue Drivers

Data, Internet &

Corporate

Wireless

High Growth

Integrated

Strategy

High Growth

  • The Company’s five main lines of businesses provide a healthy balance between stable cash flow and growth opportunities.
2 3 consolidated gross revenue breakdown
2.3 Consolidated Gross Revenue Breakdown

2002

R$ 16,091 million

2003

R$ 19,427 million

1H04

R$ 10,460 million

F- M

13%

F- M

17%

F- M

15%

Local

44%

Local

40%

Local

42%

  • Local Service decreased its share from 61% in 2002 to 53% in 1H04;
  • Real growth has been driven by competitive and less regulated segments of mobile, long distance and data:

 LD services increased its share from 13% in 2002 to 17% in 1H04;

 Mobile service rose from 3% in 2002 to 8% in 1H04 and

 Data increased its share from 6% in 2002 to 7% in 1H04.

F- M

13%

Local

40%

2 3 consolidated gross revenue
2.3 Consolidated Gross Revenue

R$ million

  • Revenue growth driven by less regulated/ highly competitive business (Mobile, LD & Data);
  • Revenue growth in regulated services basically driven by tariff increases;
  • Share of less regulated/competitive services increased from 27% to 32% of total revenues (1H03/1H04);
  • Expected growth in wireless, data and LD in 2004 should further increase that share.

10,460

+16%

9,023

Less regulated*

+40%

+7%

Regulated

1H04

1H03

* Services offered in highly competitive markets, less affected by regulation.

2 3 long distance services
2.3 Long Distance Services

LD Gross Revenue - R$ million

LD Traffic (billion minutes)

CAGR

37.5%

2,963

9.5

+31.7%

8.2

CAGR

17.9%

2,066

1,774

1,568

7.1

1,347

Contribution to Total Revenues (includes F2M)

17%

15%

15%

13%

11%

  • Telemar continues gaining market share and holding its market leadership in Region I.
2 3 data services
2.3 Data Services

Data Revenues (gross) - R$ million

CAGR

22.7%

+31.6%

  • Key corporate and government contracts won in 2003;
  • Data revenue growth driven by ADSL and IP services;
  • Target: Increase market share in data services for Region I and extend comprehensive offer on nationwide basis.

Major Clients won in 2003

2 3 mobile services revenue
2.3 Mobile Services Revenue*

R$ million

  • Outstanding revenue increase (69% yoy);
  • Services growth driven by subscriptions, outgoing calls & data services (mainly SMS);
  • EBITDA breakeven reached in Dec/03, after 18 months of operations;
  • Target: Maintain a high revenue growth rate with increasingly positive EBITDA margins.

511

866

Handsets

Services

1H04

1H03

* Refer to gross consolidated revenues (excluding Intercompany transactions).

2 3 consolidated net revenues and ebitda

Net Revenues

EBITDA

EBITDA Margin

2.3 Consolidated Net Revenues and EBITDA

R$ million

  • Delivering consistent revenue and EBITDA growth in spite of huge expansion of fixed line platform and startup of mobile business;
  • Recurring margins stable over time, in the mid-40’s  EBITDA 2001 impacted by extraordinary provisions;
  • Target 2004: Keep consolidated EBITDA margin at ~43% in spite of a higher growth in mobile revenues.
2 4 consolidated capex
2.4 Consolidated CAPEX

R$ billion

10.1

  • CAPEX 2003: ~12% of net revenues (v. 17% in 2002);
  • CAPEX 1H04: R$ 534 million (7.1% of net revenues);
  • Consolidated CAPEX since 1998: US$10.4 billion;
  • Target: Stabilize CAPEX at ~15% of net revenues to support growth in mobile and other services (broadband, long distance).

2.2

Wireless

7.9

2.8

2.5

2.2

2.0

2.0

1.7

40%

Wireline

0.9

0.6

0.5

60%

1.1

1.1

Anatel Targets/

Mobile License

(R$1.1 bn)

2 4 free cash flow after capex
2.4 Free Cash Flow after CAPEX

R$ million

CAGR (99-03)69.1%

1H04

1H03

2003

2002

2000

2001

1999

  • Having met fixed line universal service goals and successfully rolled out GSM services, our FCF is expected to remain strong in the coming years.
2 4 dividend payments 1999 2003
2.4 Dividend Payments - 1999/2003

R$ million

*

Dividend yield

Dividend Policy

  • All shares have the right to receive a minimum annual payment of 25% of adjusted net income;
  • Preferred Shares and ADR are entitled to a minimum dividend of:

 6% of the Company´s Capital;

 3% of the Company´s Shareholders´ Equity

Whichever is higher.

Dividend/ Interest on Capital

* Based on stock prices at 08/31/04.

  • Our goal is to continue to provide high cash returns to our shareholders.
2 4 debt position

12.1

22.6

28.0

11.4

6.4

19.5

2.4 Debt Position

R$ billion

Repayment Schedule – Jun/04

Net Debt – Jun/04

R$ 7.4 billion

Total Debt: R$ 12.2 billion

Net Debt/ EBITDA (x)

~

% of total

  • Given our strong cash generation, we estimate net debt to be less than 1x EBITDA by year end 2004.
2 4 key financial ratios
2.4 Key Financial Ratios

Net Debt / EBITDA

Amortization*/ EBITDA (%)

(*) 12 - Month EBITDA

* Principal and interest

Dividends* / EBITDA (%)

CAPEX / EBITDA (%)

*

* Early attainment of universal service targets.

* includes JCP (interest on capital)

2 4 key financial and valuation ratios
2.4 Key Financial and Valuation Ratios

Enterprise Value / EBITDA

Market Cap / EBITDA

EBITDA / Net Interest Expense

EBITDA / Total Debt Service

safe harbor statement
“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 Relations

Rua 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: invest@telemar.com.br

Visit our website:

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