J and Friends Holdings Limited Sponsored ADR Class A (JF) Q2 2007 Earnings Report, Transcript and Summary

Good morning or good afternoon ladies and gentlemen. And welcome to the Portugal Telecom 2007 First Half Results Conference Call hosted by the Executive Board Member of Portugal Telecom, Mr. Zeinal Bava and Mr. Luis Pacheco de Melo, Group CFO. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions]. I would now like to turn the floor over to your hosts. Please go ahead sir.

Thank you very much. Good afternoon ladies and gentlemen. On behalf of the board of Portugal Telecom many a thanks for attending this call. The objective today is mostly to the results of [inaudible] today for the first half ended 30th June 2007. As usual I am here with the team our CFO, Luis Pacheco de Melo, our Chief Accounting Officer, Francisco Nunes and a member of his team ands also Control and Planning Director, as well and of course our IR, Director, Nuno Prego. In the first half of ’07, consolidated operating revenues of Portugal Telecom amounted to €2.956 million, an increase of 5.4% year-on-year. EBITDA increased 16.2%, albeit as we call the attention on press release it was an [inaudible] but it increased 15.2% to €1147 million and that’s equivalent to a margin of 38.8%. And the net income from… an income from operations increased by 58.3% to about €606 million. Net income for the period amounted to €429 million. EBITDA minus CapEx increased 17.6%, of coursed underpinned by EBITDA to about €840 million. At the end of June 2007, our net debt amounted to roughly €4.28 million and after tax unfunded post retirement benefit obligations totaled €905 million. Our results have been prepared in accordance with IFRS and following the approval of PT Multimedia spin-off at Portugal Telecom’s annual shareholders’ meeting on the 27th. PT Multimedia has been considered as a discontinued operation for reporting purposes. For more details and discussion of PT Multimedia’s results, we would ask you to refer the PT Multimedia’s first half 2007 earnings release. I will take you now to the divisional performance. And then my colleague Luis Pacheco de Melo will take you through the main financial highlights across this first half of both increases. With regard to the wireline, albeit that we continue face consensus competitive environment both in voice and broadband and this is not just from a fixed line operations with increasing DSO from mobile operators, the performance has been ahead of our expectation. The level of line blocked continued to improve, so if you look at first half of ’06, it has significantly improved and is very much inline with last three quarters and this to some extent is a reflection of the continued effort we have been making in promoting on one hand growth in ADSL but also tariff plan et cetera. ADSL growth continued, so we increased the sub-numbers by 12% from €715,000, the Portuguese market has been slightly less than 1.6 million broadband subs and the ARPU however, was highlighting is actually coming down partly as a result of this very much increased penetration, which is being achieved on the back of a number of our speed products as well. The blended ARPU however, increased by 1.3% to about €30 and this is of course underpinned by penetration of data services and also the take up of the pricing plans that we have launched over the last two to three years. The MOU, the usage is stable, again on the back of a flat rates and I think most importantly what's highlighting is in terms of EBITDA, the cost fractionalization program which we continue to implement has allowed us to improve efficiency levels and operating margins and we forgot to curtailment as we have indicated in the past, we were looking to reduce staffing levels by about 500 people. We at the end of the June had already reduced staffing levels by 250,000 people… 253 people and at the end of July, we did an extra 82. So, at the end of July, we have reduced our staffing levels by 335 people to a very much inline with or perhaps staffed in we had ourselves access at least at the EBIT target of 500 for the full year. We launched IPTV services as well. It was a soft launch. We are at the moment focusing on the key or the capital district of Portugal. And we continue to believe that at the end of this year we should be able to have somewhere between 10,000 and 13,000 subs on this IPTV product that we had launched. Just one last comment in terms of efficiency ratios. Our lines per employee continue to improve. So, when you look at lines per employee second quarter '06 they were at 574 lines per employee. That number is now 622 and with robust margins, margins are at about 46.5% or be that as you know. There were exceptional items to this margin number that I am referring to for we exclude exceptional items. On the mobile side, we continue to see customer growth at the TMN, while highlighting the fact, we are clearly focused on increasing our postpaid and wireless broadband customers and that has done extremely well in the second quarter and the trend into this quarter remains fairly strong. Billing revenues increased by 1.5%, this is on the back of customer growth, of course offsetting dilution of customer ARPU with this level of penetration that one is achieving in Portugal. A lot of it on the back of second SIM card et cetera and machine applications as well. The ARPU erosion is obviously there. What you are also seeing is clearly the weight of data revenues increasing and with regard to data as a percentage of service revenues. We are already at 14.3% the amensing for 20%, 25% is where we should be in terms of future outlook and clearly the success of the wireless broadband service and internet mobile. Mobile internet that we have also launched should assist us in achieving those objectives medium-term. Non-SMS data revenues are growing very strong about 64%. We have been able to achieve very good EBITDA performance, both in terms of password numbers, first in growth but also in terms of margin and this is very much on the back of very, very strict control of unitary for Subscriber acquisition and retention costs which were down roughly 15% second quarter '07 versus second quarter '06. And also of course hike management of those adjustable costs mainly wages and salaries which have came in and came down strongly this quarter as well. Competition remains… is also fierce in mobiles not so fixed and we would expect in the next three to six months the market conditions to remain again very competitive as a number of our direct competitors launch very aggressive fixed to mobile conversion offers as well. One of the difficulties in comparing numbers of TMN and direct competitors is that fixed to mobile conversions services for one or two of our main competitors are already representing a significant part of their performance and top-line this year. On Vivo, perhaps a very quick comment on Vivo. Simply because we have already put out a lot of information. Customers increased 6% year-on-year and that is on the back of Vivo's improved competitive position that GSM networks, as you know hasn’t implemented in record time and it covers 96% of municipalities with CDMA coverage. GSM, obviously is already accounting for the bulk of the gross adds, adding into in Q2 '07 it was only the 84% of our total gross adds. The campaigns that we have been launching throughout 2007 that stimulate usage have been doing pretty well and one feels that more I think is about 16% and underlying ARPU is grown about 7%. Continued growth in data revenues is being driven also by non-SMS data about 17% and of course the migration in terms of technology is allowing Vivo to maintain unit fees Subscriber acquisition with pension lower. In fact if you look at second quarter '06, second quarter '07, those costs were down almost 21%. So, we look out for Vivo we are fairly, I would say, fairly happy with the turn around that we are seeing in that business from an operational standpoint. And the recent acquisition of [inaudible] provides a very good strategic fit and with regard to the spectrum as we have indicated for the acquisition of [inaudible] not only provides us with plenty of spectrum. We also are interest in the 1,900 mega hertz option as well which as you know, at least at this stage the dates are and we also have to be delivered on the 18th of September. This section will allow us to obtain coverage and rest of it equally provide further capacity in the key metropolitan areas. And as you know and this in discussion with Vivo of course in the past, this is pretty important to continue to help Vivo growth in the Brazilian markets. Just a couple of remarks on our international assets, first and foremost on maybe Tel … maybe Tel sole subscriber numbers grow almost 59% and of course that was at the expense of higher subscriber acquisition retention cost, which as a result will… for us represents a significant investment in the first half. And our golden asset continues to pose double digit EBITDA growth and with regard to number of the assets that we have, one that we recently acquired in the media, we obviously at this stage taking over the operation and we are obviously still remaining fairly bullish in terms of future prospects of growth in Africa. We think that Africa will see significant growth both in terms of penetration of mobile voice services, but also in the future also data services. Proportion of EBITDA for international assets, this is excluding Vivo amounted to $106 million in the first quarter’07… in the second quarter ’07, sorry, an increase of 9% year-on-year in constant currency. One of the important factors to highlight is that all our international assets are self funding and as such Portugal Telecom is now having to further invest in these businesses. Over 90%, just remind you, total cash flow is generated in Portugal. As, we now hand you over to my colleague Luis Pacheco de Melo who take you through the detail financials for the first half. Thank you.

Thank you Zeinal. Let me now focus on the main financials. I will focus my presentation on the first half results versus the first half of ’06 and therefore the numbers like decent from what we now just mentioned, our focus in the quarter. So overall group revenues at 5.4%, $2.96 billion and that being by 1.1% increase in TMN and 12.4% increase in Vivo. On the Wireline, revenue decreased by 5.7%, mainly as a result of lower voice revenues due to line loss. And the declines in retail revenues were most partly offset by higher ADSL revenues, lower sale revenues and also corporate revenues. On TMN, the performance… the 1.1% increase in revenues was getting by strong customer bills with billing revenues up by 1.9%. As we now set, basic revenues, it accounts for 40.3% of the overall total revenues. On Vivo, revenues were up by 12.4% in fact seasonally by the changing the internet connection regime last year and the growth in customer base and underlining ARPU. So, service revenues were up by 22% excluding the impact of the bill and keep revenues were up by 4.6%. On the other revenues increase… those increased mainly reflecting the consolidation of our Namibian assets in Q3. Focus now on the EBITDA performance. EBITDA was up by 16.2%, we had some one-offs, specially this year… throughout these and last year the provision on Vivo. That’s overall EBITDA increase by 16.2% giving an overall margin of 38.8%. Excluding the one-off that I have just referred to you EBITDA would have increased by 9.9%. Wireline EBITDA performance was supported on a great constitution and personal cost down 8.8% on the first half versus the first half of last year. Direct cost and other operating costs also declined at a considerable rate… good rate. EBITDA excluding the one-off remains flat vis-à-vis… which is flat of last year. The EBITDA 2.7% increase at TMN also looking by the service revenues, but despite the intense competition and the strong cost in the growth TMN was able to maintain operating costs constant by containing the tax and personal costs. And therefore, the margins have increased by 0.7%, those EBITDA margins and the pretax margins. On Vivo, EBITDA growth of 40% was driven by ARPU in customer growth. And also because last year, we had booked the provision… significant provision, excluding that one-off, EBITDA at Vivo would have increase by 22%. On the other items, the consolidation of [inaudible] in the newly the markets remain reasons for the increase the lower EBITDA. Moving now to net income. Net income grew by 6.9% to €429 million, primarily due to higher income from operations, PRB gains, lower financing costs this year and capital gain from some disposals from financial institutes and markets and that we proved on the second quarter. On the negative side, in 2006, we did not benefit from any tax gains, which we had in the first half of last year. Including the one-offs in this year and the previous year, net income would have increased by 57%. On the cash flow operating… free cash flow amounted to €627 million in the first half, a decrease of 2% mainly due to higher working capital investments of €28 million on the first half. On the free cash flow basis, this more than doubled to €537 million at outside one unwinding of PTM equity swaps that we have and the disposal of some financial assets. And of course, we increased despite higher… high tax impact on the first half of this year. In terms of net debt, which increased by €524 million since the beginning of the year, the slight decrease in strong free cash flow. The main reasons for this increase was that the expense which approximately €980 million on both dividend and buybacks. We have the highest tax losses around 100 million in resource tax when compared to last year. And… sorry… we have a mix in our tax losses of 100 million resource tax and we also have an extra organization contribution through our pension fund of €120 million in the first half. So, overall, we have spent more or less €1.2 billion and the EBITDA… and the net debt increased by €524 million. Average cost of debt was 4.8% with a maturity at six years in the first half. Excluding Brazil, the average cost of debt is down to 3.2% and then the maturity is 6.3 years. Of course, the maturity of our net debt is being affected by all the equity swaps on the buyback which has a very short maturity, when we receive the cash from the recent insurance of the 760 million convertible. If we buyback these shares to our balance sheet, this should increase our maturity of… on our debt of approximately 1.2 years. Net debt to EBITDA ratio including the unfunded pension liability improved to 2.3 times from 2.9 times in the first half of last year. Available cash and standby facilities and undrawn commercial paper now stand at €2.4 billion. With regards to the pension fund, we made further improvements on our unfunded pension liabilities that now stand at 905 million after tax and 1.2 billion before tax. The scores highlighting that out of these 1.2 billion unfunded pension liability, €900 million referred to salaries. These are suspended and previous hired employees. Well, actually there are funded a small portion on pension bring down to €300 million. With regards to PRB, as you have noticed we had a gain in the first half of around €36 million. And therefore, we estimate that for the full year, we should have a PRB on our P&L between €0 million and €5 million. Just a quick update on the share buyback. So, we have acquired more or less 70 million shares, which correspond to more or less 6.2% of the PT stock. The average cost of these immigrations [ph] €10.27 per share. Now before going to summary, let me now focus on guidance. With regards to the guidance, we would like to give you some updates and some revised guidance for 2007. At this stage, we will only focus on the consolidated numbers for the Group… overall Group. And given the first half performance, we have revised our guidance to overall EBITDA moving from the range of 2.0 to 2.1. Now we move free cash 100 million that is €2.1 billion and €2.2 billion. On the CapEx, we remain with our previous guidance of €800 million to €850 million [ph]. On net debt, our guidance is still 5.7, now we would like [inaudible] €500 million that we expect from the acquisition of Telemig so that our part of the consolidation of net debt coming from the acquisition of Telemig. And now on the buyback, most likely we will not being by the end of the year with the full €2.1 billion, rather by the end… by the time of the next general assembly meeting of the 2007 results. So, therefore, we remain our targets for the net debt at €5.7 billion. So, overall, we had a positive operational and financial performance on the second quarter. We saw continued growth in our international asset particularly Vivo. We saw a traffic cash flow profile with a solid balance sheet. We are on track to deliver on commitments made to shareholders, and given the first half performance we have revised our guidance on EBITDA with a range of €2.1 billion to €2.2 billion for the Group. Thank you very much. We will now be open for questions. Thank you very much. Question and Answer

Thank you [Operator Instructions]. Our first question comes from Christen Kern with Lehman Brothers. Please state a question.

Hi, there Zeinal. Just two or three questions. One on the strategy type please. Can you elaborate a bit on the wireline scenario going into 2008? I understand Anacom launched a public consultation on Naked DSL and Dell to some discussions around fourth mobile license even though in the 450 MHz spectrum and any updates would be much appreciated on fixed mobile? And also on the PTM spin-off situation? And finally, more detailed question on the guidance that fair to assume that your guidance, is it raise due to Vivo that this is the main contributor there? Thank you

Okay. Thank you very much. I think, it’s a very, very good question. So, the first with regard to Wireline, clearly, I think if you look at the Portuguese Telecom sector, things are changing pretty fast, particularly the advance of fixed mobiles convention offers is now very, very real. I think that’s why Portugal Telecom with a unique opportunity to bring today what makes it perhaps in our view the best of Telecom operator in Portugal. We have distribution network. We have the engineering background. We have powers switching a lot of operate that has in this market and such I think the way a fixed mobile conversion offers are lining up in the Portuguese markets, it will certainly lead to regulators allowing us to pretty much to the same, because it is no longer making sense to look at fixed mobile separately. And that’s what… in that regard, we think that we can bring today… in the future the great advantage that both the fixed line business to Portugal Telecom and the mobile business have. And hopefully, regain some market share in some key areas where we have not been able to be as competitive as we wanted to mainly because of the regulatory commitments and pressure that we have in ourselves. Naked ADSL, I think ultimately the terms and conditions also what is Naked ADSL will dictate whether it is a significant plus or not. I think it was interesting to see that some of our direct competitors have also come out very vocal concerned about Naked ADSL. I think in this regard, we will continue to lead at the Portuguese Telecom’s regulator, which a lot of these things has been… I would say very, very up to speed, what else is going in the world and very diligent, and in that respect, we will continue to convey our views and our issues directly to the regulator as it should be. But I would say that with regard to the Portuguese market, you are likely to see the next six to 12 months consolidation occur that you are seeing some of our competitors buying some smaller businesses. We also saw recently quick PT Multimedia and looking announcing the acquisition of another cable operators. So, clearly, you are seeing some consolidation which I think long-term is good for the industry, it certainly good also for the Portuguese consumers. With regard to the fourth mobile license, it is very difficult to provide you any more information other than what’s already public. We know that a number of companies have already shown interest in having access to both 450 megahertz, 900 and 1800 spectrum. Clearly, some companies have better conditions and provisions in front of the fourth operator than others. But I think at this stage, there isn’t a some timetable on this and I think we will need to see to what extend the regulator wants to progress and under what condition and I think that will dictate whether they will or they will not be a fourth operator in the Portuguese market. With regard to the spin-off, as we indicated we were working towards a timetable around end of September. I would say that things are going very much according to plan. There are a number of variants where from an operational standpoint, we needed to have the same between Multimedia and our fixed line business, and also other fixed companies of Portugal Telecom. So, when you think about IT systems and think about shared services when you also think about telecom as such and also HR, because there were a few of the people of the fixed line that had been posted in the wire… in the multimedia division. So, all these issues are being dealt with accordingly, and we think that they are making good progress on all fronts. And therefore, from a pure operational standpoint, things are progressing well, and therefore, we will not come into the way of accomplishing the sort of end of September that guiding us to some extensive date as we have put forward to levels and also to shareholders. With regard to the mechanics in itself, some financial statements will have to be posted by PT Multimedia and by PT. Those financial statements will be ready in the first week of September. It will then need to be approved both at PT Multimedia and also at PT. And at that point, I think that the both Portugal Telecom will define the registration date and the information statement as we will make public will then be distributed. So, on the spin-off, I would say the update is we are on track to deliver on this kind of September deadline that we have to some extent set up on ourselves. On the guidance Luis perhaps can provide you some color.

There is some own guidance. What we said is that fixed rates. We give the overall guidance for the group. Of course we feel slightly more positive growth on TMN on the Wirelines and on Vivo. But overall we just give guidance for the overall status.

Thank you.

Our next question comes from Kevin Chong with Citi. Please state your question.

Yes good afternoon this is Kevin Chong from Citi. Three quick questions please. Firstly just wondered any of the sort of improvements we are seeing in Q2 in terms of operations. How much of that is coming from any overall improvement within the Portuguese economy? And the second question relates to the Vivo. I am just trying to understand obviously there is significant speculation surrounding Telefonica's potential offers to Portugal Telecom for Vivo. And I am trying to understand, obviously following the recent decision to expand the business announced last week. I just wonder whether you can give us some indication of what it is that Portugal Telecom… what would make Portugal Telecom sell Vivo? Is there a price out there where you would sell the business? Is it not for sale at any price or is it an issue, should we think about that in the context of using proceeds? And then the last question just with respect to I am wondering if you could give us some idea as to when we are going to have clarity on when and where existing PT mergers will be poised to PTN demerger? Thank you.

Okay. Thank you very much. Well, clearly you are seeing the benefit of the improved economy in all our businesses in Portugal. In fact as Luis just mentioned, referring to guidance, that's one of the reasons why we have been able to revise the guidance because we are increasingly more confident that our domestic businesses are doing better than what we had been able to see in the Portuguese market in the first six of last year. Clearly, some of these things are related to management decisions. Cost cutting, clearly they have been to some extent dependent on the ability that we have had to reverse the trend in the top line, truly in mobile. But clearly here, I think, what you are seeing is the Portuguese economy beginning to do better, confidence levels picking up and that is beginning to filter through the… in the performances to some extent across all of our businesses here in Portugal. So we would hope that continuing the strength will lead us to underpin even stronger performance going forward. Having said that, clearly as I had mentioned earlier in the previous questions, the competitive environment remains to some extent very aggressive and we are obviously trying to be here. Forthcoming with…regarding some guidance that we also would like to keep some commercial flexibility in order to be more competitive in the Portuguese market in the next six months, if we have to do so. On the Vivo question as we have said already, a number of times we are not sellers of our stake at Vivo. We are focused on the turnaround of Vivo and we are prepared to work with Telefonica as a partner and Telefonica and Portugal Telecom have been partners for almost a decade now. To see whether we can reposition Vivo in that market, the change in technology was clearly a very important decision for us. And I think with hindsight the result that’s coming through and we are very happy and delighted with that. Clearly we believe that Vivo can do a lot more. Clearly, we think that Brazilian possibility have to be much higher than what we are seeing at the moment in that market. But we are confident that Vivo performance going forward if anything will improve and it will make some very happy shareholders alongside Telefonica offset that. With regard to any future decisions with regards to that asset I think it's ultimately a board decision for Portugal Telecom and the board will always be up to whatever fiduciary obligations it has. And therefore at this point our official punch line on this and we have said this many times, notwithstanding the speculation around us is that, we are not sellers of Vivo. I think your point about the recent acquisition we made, only vouches in favor of what we have said in the past in that, it is not the relationship between Portugal Telecom and Telefonica that will come in the way of Vivo doing the right thing for all channels; it's not just Portugal Telecom and Telefonica. And I think the decision that we… that Vivo took to acquire Telemig was backed by both shareholders, and judging from the market reaction, I think it was to some extent very well received by all shareholders, and we are very happy with that. So, I think it just goes to prove that we able to work with Telefonica in different sort of dimensions. On one hand, we have to work with management of Vivo to improve the performance of Vivo and on the other, if we have a partnership issues to deal with, we certainly will do that in private sessions as to long-term partners as opposed to doing it in public as some of these rumors will seem to suggest. On the clarity for management, having just answered the question on PTM spin-off timetable, clearly very much in line with that timetable, there will have to be a clarification on the governance both of PT and PT Multimedia. So, we would hope that as and when the… as and when the spin-off is done, there would be some clarity. And the moment we know how things will come together we will be forthcoming in terms of communicating to the market. Thank you.

Thank you.

Our next question comes from Bosco Ojeda with UBS. Please state your question.

Hi, good afternoon. I would like to know if you would update us on the P&L costs from most of the cash, the costs from the side of the pension commitment. And also on the personal redundancy expenses, if you could give us some update for this year, that would be helpful. Thank you.

Okay, so on pension, the main movements for the cash was basically [inaudible]. So, basically we started at the beginning of the year more or less with R$ 1.65 billion of unfunded pension liability. The extra lay-off or the severance costs was around R$ 85 million. We contributed more or less R$ 1.50 million. We have reduced the benefit of the pension of more or less R$ 45 million. And we had some actuarial gain of, on the discount price of around R$ 240 million. And so targeted returns on our assets was around R$ 40 million. So, overall these should bring it down to R$ 1.23 billion before tax, yes. So, for the full year what we expect is some curtailment of more or less the same size as the first quarter. So, basically we are indicating that we target more or less 500. And of this we have done 253, plus [inaudible] again in July. We should have more or less a cost of around R$ 150 million [inaudible] curtailment cost over there. And therefore, what we are estimating for the end of the year is flat around R$ 1.1 billion of unfunded pension liabilities for the end of the year.

So, from a cash perspective, what do you think would be the outflow this year?

In terms of cash. In terms cash, what we estimate overall to put in into the pension fund is R$ 120 million already on extraordinary, we have formed more or less R$ 164 million normal contributions. In the second half we should have around $19 million going to the pension fund.

Thank you.

Okay.

Our next question comes from George Ierodiaconou with Dresdner Kleinwort. Please state your question.

Hello. I have three questions please. The first one is on fixed to mobile substitution, we've seen a slowdown in Q1, I was wondering how much of that is due to the flat rate being introduced, whether there is anything else that you've launched in terms of your intention? Second question is on other OpEx in the Wireline, we've seen an $8 million reduction year-on-year and you do give some reasons in the text, but I was wondering whether any of that comes from any declines in provisions? And finally, just a question on your ADSL strategy, after the spin-off of Multimedia you'll only have control of just over 40% over the broadband market. Do you think whether that is defendable and could you give us an update on how the market is evolving after the consolidation by Sonaecom? Thank you.

Okay. Thank you. It’s a difficult question in the sense that the performance that we are seeing in terms of lines is a result of a number of things that the Company is doing. On one hand, clearly the bundling of minutes with the monthly rental I think has had a very good impact. If you look at for example the take up of tariff plans, I think we now have a significant portion of our overall subscribers taking up more than one service. And as you know there is a direct correlation between churn and the number of services that people actually buy from you. We’re also increasing the number of customers that have direct debits and also electronic billing. So rather than receiving paper at home, they receive via mail the monthly bill. That is again one of those important services in terms of reducing churns. So, I think, there are a range of initiatives that we have launched. I don’t want to under-stage the impact fixed to mobile conversion offers, simply because we have seen significant activity from Vodafone and from our direct competitor Sonaecom as well in terms of some of these launches. And therefore we will want to respond to them in line with and therefore we want to see how the next couple of months work out in terms of some of the initiatives that we have launched. On one hand PC bundled with wireless broadband at TMN. We’re also looking to reposition the many offers that we have as well both in fixed and mobile. So I think we remain confident that if the name of the game with regard to the future in fixed and mobile convergent offers that Portugal Telecom will be even in a stronger position than it is today because we will bring to bear our distribution networks and most importantly, our network and our R&D, which differentiate us in this market vis-à-vis our competitors. And Luis will take you through the other OpEx, let me just sense [ph] on the broadband market share. Broadband numbers, we think that our market share if you look at the whole Portugal Telecom group and at the moment that includes PT Multimedia is that we have a market share higher than 70%. If you look at our share of net adds that’s probably running at around 45% at the moment in this market. So we hope that with this increased regulatory flexibility that we are likely to get with spin-off of PTM, both PTM and the Wireline division with ADSL will be far more aggressive than they have been today, because hopefully both group have a lot more flexibility in terms of pricing and bundling and this will lead to an increase of net adds both of the fixed lines and also… and the multimedia as well, going forward. So at the moment, our share is still in excess of 70%, our share of net adds as I mentioned is only at about 45% to 46% and we hope that with the spin-off, both companies PTM and our Wireline business will be far more aggressive and therefore we hope to do much better in terms share of net adds going forward. Luis, on other OpEx?

On other OpEx as we were seeing quarter-on-quarter, the decline more or less is R$ 8 million. Of this R$ 8 million, $6 million is Q1 information [inaudible] costs. [inaudible] we are in the great into the IBM which we handled last year. So that reflects a $6 million decline. And we have another $2 million on deduction on consultant fees. We have the electronic fees and so on and so forth and lay offs that we did on the back half, on the… sorry, lay outs on the new billing reductions [ph] over there which is more or less R$ 2 million, and that accounts for more or less $8 million. With regards to provisions, so we account for… the reduction in provisions is less than $1 million. And that’s basically as a result of standard collection processes that can also give lower door-to-door sales which normally have higher provisioning levels. So the decline is not explained by any decline in the provisions cycle [ph].

Thank you.

Our next question comes from Mathieu Robilliard with BNP Paribas. Please state your question.

Good afternoon. I have a few questions, please. First on mobile, can you tell us how advanced you are in terms of making changes to roaming tariffs and what kind of impact we can expect? And should you remain quite positive, or at least not more negative for the rest of the year? How do you think you can offset that in terms of the top line of TMN? And also a question on TMN, a very impressive decrease in the SARC year-on-year. Now you alluded in the conference call to the fact that the environment would remain competitive. Does that mean that you think that this trend in SARC is not sustainable in H2 or you can still maintain that? And then I had a question on Meditel, you highlight the 6% revenue growth in Meditel, what seems to surprise with Meditel is that it underperforms quite significantly and Maroc telecom which in the meantime is increasing in seven years on mobile by 17% and I was wondering if there's an explanation or something you think that can be improved at Meditel that would allow it to close the gap than it was Maroc telecom. Thank you.

Thank you very much. Luis will take you through the Meditel question and I'll give you some highlights on the roaming and active subscriber acquisitions and retention costs. The roaming impact this year at TMN with the implementation of the recent decisions across the board in the sector will be somewhere between $7 million and $10 million. In terms of… in terms of full year, the impact is up to $22 million. So as the tariffs will come into play later than expected, the impact to the year will not be more than $7 million to $10 million maximum. In any event, next year I think the impact will be $20 million. Now of course, we are not factoring into this any elasticity because clearly more clarity on roaming tariffs and lowering roaming tariffs will most likely lead to higher usage as well. So we are not at this stage factoring in any of that. We will see what the impacts will be the next three, six months and then perhaps come back to you at a later date with some views on what potentially elasticity could be. With regard to subscriber acquisition retention costs, first and foremost, we have been able to achieve this by reducing the number of handsets that we had available at TMN and thus increasing our bargaining power vis-à-vis our equipment manufacturers. TMN in the past used to operate with 75% to 80% types of handsets. We have reduced that to a level that we think is more commensurate with industry block factors, and as a result we have been able to improve conditions. What we're highlighting here is also the fact that Vivo has migrated to GSM and that is also giving both us and of course our partners Telefonica the ability to present themselves with much greater bargaining power in the overall market. So subscriber acquisition retention costs decline has been achieved on much more stringent control of subsidies, changes in the line-up of equipment that we had and of course better management of the commissions in the Portuguese market as well. We think that the way we have reorganized ourselves across the board, and this includes our own direct sales force, we should be able to sustain any additional competitive pressure in the next three to six months. And if anything, if we do decide to become ourselves, more active commercially, we think that the guidance that we have provided on TMN continues to be fairly robust. And if anything we can do better than we have indicated in the past with regards to our EBITDA performance at TMN could do. Luis, on Meditel?

Thank you. On Meditel, the overall revenues were up by 6.2%. As you know the Morocco market is undergoing a substantial growth with part [inaudible] month, year, one year ago, more or less with our main competitor giving out some cards [ph] which we picked up later in the year, both with the same amplitudes [ph]. The growth level of gross adds from the first half of this year has been more or less twice the amount of last year. In terms of net ads, net adds is almost four times. We have had a significant impact on our commissioning and commercial costs, also around 80 to 90 in local currency which therefore, our EBITDA has increased by more or less 2% year on year in the first half. And these prices nearly represent more or less 10% of say 85. So, this has had an impact on the EBITDA levels, continuing impact of probably 7% to 8% in terms of growth rate. Thank you.

Thank you, we have time for two more questions. Our next question comes from Nuno Vieira with Millennium. Please state your question.

Yes, hello. Good afternoon. Just two questions, please. The first question is concerning the recent process and the recent find that the antitrust authorities in Portugal applied to PT [inaudible] signed. I’d just like to know if there are any further processes pending with ADC. And how much in the maximum could represent for PT? On another note, it is a recurrent question on mobile. I would like to know if you have got any updated views on the termination… on the mobile termination rates. And also to know still on TMN, if we should expect any roaming agreement between TMN and PTM, in order to PTM… in order for PTM to start supplying mobile services to its clients? Thank you very much.

Okay, thank you. With regard to the competition authority, we have put out a press release and we have made a number of public statements in that regard. And, as we have indicated, we will fight in court our views and we think that at least judging by the whole legal opinions that we have from our lawyers that we have a fairly strong case. With regard to other pending issues with not just ADC, but other relevant entities, I would ask that you refer to our 20-F which has been already published and where you have a specific risk factor and we have lined all the pending cases. As you can imagine at this stage we will not provide you with what we think that could happen in all of those cases other than to say that we are doing everything we can to make sure that the regulators are not biased in some of these decisions, and they live up to what is expected of them which is to be fair with all the other operators and everyone that works in the telecom sector in the Portuguese market. So, I will not take you through that list, but I think the 20-F is public, so you can refer to that. With regards to mobile, mobile termination rates, as you have indicated in the past, I mean, it's tough to even clarify as to where those rates will be in the future. But I think worth highlighting is that we have indicated both in the market generally speaking and to the relevant entities that we think that going forward, this is important that mobile termination rates is adjusted, should be adjusted also in line with what we are paying for spectrum, for the use of spectrum. In this regard, TMN pays an annual bill of about €26 million for the use of the same amount of spectrum that our competitors use, and we think that that is clearly unfair. The model that they use to charge for the spectrum needs to be updated. We understand that on a pro rata basis, it made sense when the industry was starting what 10 years ago. I think right now we think that we should be evolving and therefore we should put in place a model that incentivizes operators to use more efficiently, a spectrum which as you know, even for the purposes of the [inaudible] the country is a scarce resource. So Mobile termination rates we don’t have a view at this stage. We are obviously monitoring the situation. We, on spectrum have a very clear view and that is that we have significantly over paying compared to our competitors and compared to all European federal companies as well. And if there is a decision on one, there should be a decision on the other as well. With regard to PT Multimedia, and we should… the Multimedia has made that it wants to position itself as an MVNO. TMN will compete with other operators to present interests and terms and conditions like it does with all the other interesed parties. Although, as you know MVNOs are yet to materialize in this market. What you have seen in this market at this stage are tariff plans that are being launched by alternative companies. But I think at this stage, all I can say is that TMN does have the best network we think in this country and for anyone that wants to position itself as an MVNO we're always willing listeners. Thank you.

Our next question, our final question comes from Teresa Martinho with Banif. Please state your question.

Hello. I would like to know why have you postponed the timing for execution of the share buyback program? And from a visualization point of view, could your share buyback program to acquire directly through Telefonica the 10% stake they have in PT, if they'd be willing to sell? Then, do you already have any visibility regarding what kind of regulatory relief you may be granted at the Wireline business due to TM spin-off? Thank you.

On the buyback, if I understand, your question is about the timings, yes. We, as you know have been doing the buybacks in the market… as you know, we have Luis Pacheco to take you further. And then I'll answer the other question.

Okay, on the buyback, as you know, we are implementing with the fixed rules by MDA [ph], we can buy up to 25% of the daily volume. And we cannot operate under the opening and the pre-closing of the market. With regard to the stocks and shares, as long as our stocks is selling in the market, we can acquire in the market, probably some of the shares, somebody else's shares. We have to restrict it to 25% of the daily volume and therefore we cannot define the context [ph] at this stage.

Okay, just so we are absolutely clear, we can just buy shares in the market up to these limits, we have no reason to believe that Telefonica is selling at all. But I think your question was, if you could buy from them the 10% directly, we could not do that under the current conditions that operates in Portugal. On the regulatory relief, it is our expectation that with the spin-off of PT Multimedia, we should be granted this relief, we think that the significant market position of the Portugal Telecom group, both in voice and in broadband reduces significantly with the spin-off and therefore we would hope that in the best interest of the Portuguese market that both the fixed line business and multimedia be given a lot more flexibility to present more innovative and more aggressive pricing both in voice broadband and of course also video. At this stage, as you can imagine I will be not elaborate on the what we think the regulatory relief could be. We have in the past discussed universal service obligations, I think that is clearly one of the things that we have discussed I think with the markets in the past. We think there will be others. But I have to say that we are making good progress. I think it is very encouraging to see the Portuguese Telecom’s regulator also being innovative and receptive to our views that increasingly one should not be looking at the market based on the types of accesses. So I think the technical team and the regulator, Telecom regulator in our view are looking at the structure the right way and we think in the best interest of all operators and the consumers alike. So we are hopeful that going forward both our companies PTC, Wireline and PT Multimedia will be able to compete far more effectively than we have done in the past. As I said spin off reduces our amount of market position in Portugal, and as such we should be given a lot more flexibility. Thank you very much for being on this call. On behalf of the board of Portugal Telecom and my colleague here Luis Pacheco, Group CFO, we appreciate you being available. Our IR Director Nuno Prego, will of course be available after this call to answer any further questions that you may have. We think that worth highlighting just as a conclusion, is that we are seeing strong momentum across all our businesses, not just in Portugal but also in Brazil. Clearly, the good performance that we are seeing in the first half is underpinned not just by Vivo but also by our Wireline and our mobile business in Portugal. We continue to deliver on all promises that we made in our response to the hostile offer from Sonae, that in terms of the buy back, in terms of the spin off I think things are going very much in line of what we had promised to the market. We continue to have a very solid capital structure and ample financial flexibility. And worth highlighting is that if you look at the presentation that’s put out on our slides, the dividend next year will be $0.575 and that continues to lend very good support and of the new [ph] PT stocks. I appreciate you being available, and I look forward to speaking to you soon. Thank you. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.