J and Friends Holdings Limited Sponsored ADR Class A (JF) Q3 2007 Earnings Report, Transcript and Summary

Good morning or good afternoon ladies and gentlemen, and welcome to the Portugal Telecom 2007 Third Quarter Results Conference Call, hosted by the Deputy CEO 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'd now like to turn the floor over to your host, Mr. Zeinal Bava. Thank you. Please go ahead.

Yes. Good afternoon, ladies and gentlemen. On behalf of the Portugal Telecom Board, thank you very much for attending this call. I am here with the Portugal Telecom finance team, our Chief Financial Officer, Luis Pacheco de Melo; our Chief Accounting Officer, Francisco Nunes; our IR Director, Nuno Prego; and a member of our accounting team as well Mr. Plumas Albino [ph]. Luis Pacheco and I will do a very brief presentation of the results, nine months results announcement and at the end of which we will of course be delighted to answer any questions that you may have. In the nine months of this year, our consolidated operating revenues amounted to €4.531 million. That's an increase of 5.7% year-on-year. EBITDA increased 11.8% to €1.726 million, equivalent to margin of 38.1%. The net income from operations increased 29.2% to over €900 million, more exactly €910 million. Net income for the period amounted to €670 million, an increase of 27.2% over the same period last year. Our operational cash flow, measured as EBITDA minus CapEx, increased 15.5% to €1.227 million. Our net debt at the end of September amounted to €4.3 billion and after-tax unfunded post-retirement benefit obligations totaled less than €1 billion, more exactly €917 million. Turning now to the operational highlights of each business, I will focus on the operating highlights and Luis Pacheco de Melo will take you through the financials. When it comes to fixed line division of Portugal Telecom, we saw a pickup in line loss in the third quarter and that is very much due to the fact that they are a lot more GSM-based fixed offers and of course wireless broadband has seen exponential growth in the last three to six months which is beginning to some extent cannibalize the potential addressable market of ADSL. Also we have seen in the last two, three months, triple play offers being launched aggressively by the local operators. Nonetheless, we think that the line loss has done better than we had expected and we hope that with a number of offers that we are planning for the next few quarters more integrated fixed voice fixed data but also fixed mobile will help us, we believe, reduce this line loss in terms of the future. The line loss that we saw in the third quarter of this year is in line with the past four quarters. So, to some extent we have not yet seen major deterioration in terms of market dynamics, and we believe that the recent changes that Portugal Telecom has announced in terms of how we wish to manage more fixed and mobile will certainly improve our competitive position in this market. ADSL net adds increased 13% on the back of the summer campaign, albeit that I will just point that one of the most successful products we have had is the pay as you go product which we will of course over a period of time we will need to assess whether those subs are active or not but to some extent I have to say that the summer campaign were successful and overall the numbers in terms of adds have gone up and reaching 13% growth which is better than we had expected. The triple play IPTV offer that we launched now has about 10,000 subscribers, the initial market reaction has been very positive, we still continue to see the IPTV offer that we have and the launch as a soft launch. At this stage we are likely to be far more focused in terms of geographical areas where we want to roll out this product. But at the same time Portugal Telecom on the fixed line is getting ready to have a broader TV offer which is likely to include other platforms other than IPTV, so we are, as you know, and this has come out in the Portuguese press, we are looking at DTH also as an option to offer television on a nationwide basis, and of course, we are also looking at the potential process of digital terrestrial television as well as an alternative platform in terms of the future. So, I think the key message here for you, is that we will have a very strong triple play offer next year. It would include voice, data, video. With regard to which platform we will use, I think it will very much depend on where exactly where we are operating that service in terms of the geography of the Portuguese market, because as you know the gross domestic product or the GDP per capita distribution in our country will lead us to choose the best possible platform to ensure that we have not just the best offer in terms of content but also competitive pricing. With regard to operational deficiency, as you know we have an ongoing curtailment program. We have indicated that we would reduce our staffing levels around 500 this year. At the end of the first of this nine months we had already reduced about 482 employees, or we have curtailed 482 employees at a cost a bit less than €3,000 euros per headcount, just to remind you that doesn't mean that we are writing checks of €300,000, a lot of the people are seeing the contract suspended or pre-retiring, and therefore, what we are basically booking on our P&L is the liability that we have with these people between now and the time upon which they retire and we have to fulfill all the obligations that we have with the pension fund. We are likely to maintain this program or be best, we are fairly happy at this stage with the efficiency ratio that we have at least measured in terms of lines per employee. Having said that we do see significant synergies both in terms of revenues but also cost, in trying to align our two Portuguese domestic businesses both fixed and mobile and also align what we have... what we call instrumental companies in the domestic markets. As far as we are concerned the efficiency increase in the Portugal Telecom is likely to continue and therefore we are fairly confident that we can continue to post solid margins across all our businesses in Portugal going forward. With regard to post retirement benefits, as you know significant work has been done in terms of the restructuring of our healthcare and also pension, overall pension fund liabilities, and as a result of this we are today looking at a unfunded pension liability of less than a €1 billion. And therefore, all this work has led us, had led to a significant reduction in the so called post-retirement benefits that you see in our P&L and the after tax unfunded liabilities now, as I mentioned earlier, roughly €910, 915 million. So when it comes to the fixed line, in summary, what I can say is that the market dynamics are as competitive as we have seen in the past, clearly there is work to be done with the regulator now that Portugal Telecom has new target to spin off and has spun off PT Multimedia. We believe that aligning mobile and fixed converges offers will enhance our competitive position and we will strive to continue to reduce costs going forward to maintain cash flow and the margin performance that we've had so far. In terms of the mobile business in Portugal, what I think you saw in the third quarter is a confirmation of what we saw in the first and the second quarter of this year which is that TMN is gaining market, TMN is increasing commercial activity, measured not just in terms of net adds, but also convergence from prepaid to postpaid, and also the work that we have or extensive work that we have done in terms of massive rollout of the wireless broadband but also Internet access using mobile and mobile TV. As you will have seen in our press release, the contribution from data in terms of overall revenues is now about 16% and its growing, and its growing at a rate that we believe will allow us to achieve 25% perhaps sooner than the three years that we have indicated previously, so I think at this rate we are likely to achieve those levels, perhaps, within two years. The non-SMS revenues have more than doubled, and therefore, I think, the trends when it comes to mobile for TMN are extremely, in my view, positive. We are gaining market share, there's still work to be done, both, geographically... they are certain areas in Portugal where we believe our market share should be higher than what it is at the moment, we are making significant progress also in the SME market, and clearly, when it comes to the youth segment, we believe that the recent launch of this PC program that we have done with the schools and teachers will certain help us work that penetration and our market share in that segment over the three to five years period. If you look at the net adds, we had about 190,000 net adds in the third quarter, we are not giving a breakdown of voice and data. What I can say is that data is doing extremely well, we continue to have and differentiate ourselves in terms of handset and the portfolio of exclusive handsets that we have. In the summer campaign alone, we launched 25 new handsets, 19 of which were exclusive that also allows us to keep subscriber acquisition and retention costs under control, which no doubt you have seen in our press release was down about 17% over the same period last year, down to, sort of, a record level in terms of a low number of €42. Wireless broadband is in my view one of our key priorities, we launched the first flat rate Internet access service in Portugal which we are commercializing at a rate of about €7.5, and of course, we are also leaders when it comes to PC program with schools and teachers at the moment where we think they are commanding a very, very large market share. Data service is going well, and notwithstanding top-line growth, we are maintaining a very, very, I would say, strong grip on costs; and as a result of which EBITDA margin is already above 45%. And you're seeing 2 percentage point improvement in our EBITDA margin and that is not just because top-line is growing, it's also because we are keeping costs pretty much under control. I'd like also to say that what you are seeing in this first quarter numbers has very little by way of synergies between peaks in mobile, because the government changes were announced only five weeks ago. And we believe that a substantial work and substantial savings for us in the future, and therefore, again, when it comes to TMN, I think the key message is that we will continue to be an active player across all segments in the Portuguese market. We think that the economic trends in Portugal will underpin minutes of usage performance going forward. And I think, and for the very first time, we gave you sense for how outgoing minutes were doing. And I think the trends at the moment are extremely positive. We're also building on our pricing power by investing in our brand and therefore when it comes to TMN, we believe that the trend remain positive and we think that next year they are likely to be supported also by all the work that we are doing in terms of data cards, as well. Turning now to Vivo. Vivo has already announced results. So therefore I will be short on this one. I think Vivo has done the transition between CDMA and GSM better than most had expected. In the process, we have also achieved full nationwide coverage through the Telemig acquisition, but also the purchase of the 1.9 gigahertz frequencies. The GSM rollout has been implemented in record time, and I'm sure no doubt we have seen significant increase in commercial activity as a result of this increased competitiveness of Vivo because of the change from CDMA to GSM. Recently worth highlighting is that Vivo has also been awarded... has been awarded the prices for being the best company with regard to consumer service, etcetera, and therefore, I think, with hindsight, I think the decision that we took to move to GSM was a very good decision and it's beginning to have a direct impact on the turnaround, that operational turnaround that we are executing at Vivo. ARPU, underlying ARPU is up 2.4% because of the elasticities that we are seeing in terms of minutes of usage and pricing. And most importantly data revenues also in Vivo are up 39%. Also worth highlighting is that the free cash flow generation is improving, now that most of the CapEx that we have to incur with the rollout of the GSM is behind us. So, with regard to Vivo and I think very much inline with what we have said in the past. We believe that the Brazilian economy is doing better than expected. That perceived risk, country risk has improved. And the Vivo turnaround is progressing in line with our plans and as a result Vivo continues to be a strategic asset for Portugal Telecom and one that we can think, we think will deliver superior growth in the future. The last point I would like to cover before I hand you over to Luis is our international assets in Africa. We monetized our African assets through this partnership with Helios. This was something that we had indicated that we would do first... in our first response to the hostile takeover of last year. In addition to having monetized part of that stake, we still remain open to increased partnerships in the region to increase our footprint, we still own 78% of Africatel, and we believe that what we need to do is make sure we keep majority, having said that we are open to other growth opportunities in the market assuming that those generate value for us. There is also a very positive performance that's worth highlighting pretty much across all our businesses, particularly in Angola, if you look at EBITDA performance, very, very robust about 22% growth, also if you look at the smaller businesses that we have. Even Santo Tomé or Cabo Verde, you are seeing EBITDA growing high single-digit. In Macao, CTM is growing about 17%, and again that is very much on the back of the economic performance of the Macao as a region, so the proportion of EBITDA or our international asset, excluding Vivo, amounted €247 million in the nine months and that's an increase of 12% year-on-year, so we believe that the international footprint that Portugal Telecom has will continue to deliver superior growth, while for domestic market, the domestic businesses that we have will continue to deliver a very robust cash flow which we believe will help us deliver the... shell the remuneration that we have promised. Investments that are required for us to move our domestic business into a different level when in comes to TV etcetera, and of course, will also help us continue to invest in our international footprint where we have strategic advantages and where it makes business sense for us. Let me now hand you over to our CFO, Luis Pacheco de Melo.

Thank you, Zeinal. Good afternoon ladies and gentlemen. Let me start by focusing on some financial highlights and then moving to net debt and some pension issues. Total revenues, as Zeinal mentioned, 5.7% up to €4.5 billion underpinned by strong growth at Vivo and also by TMN's good performance. On the wireline it was impacted negatively by the line loss that was not fully compensated by the growth that we saw from the data, corporate and the wholesale business. So total revenues on the wirelines were down 5.7%. On TMN, the good performance of 1.3% increase over nine months was underpinned by the continued customer growth, particularly, on the total space and wireless broadband. On Vivo performance, Vivo performance was impact positively by the strong customer growth and ARPU. Vivo revenues contribution to PT went up by 13.8%, but that includes the impact of the build and keep, if you exclude the build and keep impact then revenues would have grown by 5.1%. The consolidation of MTC, as you recall we acquired MTC in September 2006, also at positive contribution to direct revenue growth. Moving up on to EBITDA performance, total EBITDA was up by 11.8% we exclude the one-offs related to BRBs and Vivo provisions, EBITDA would have increased by 8.3%. On the wireline the performance was supported by the cost efficiency and was almost flat for the year, for the nine months since September. On TMN EBITDA increase underpinning by service growth and strict cost control and therefore EBITDA by 3.3% for the nine months and 4.5% for the quarter, bringing margins to 45.2% on the third quarter. On Vivo the growth was driven by the strong subscriber and acquisition, and IR commercial activity EBITDA was up 27.1% and 16.8% if we exclude the one-offs from last year. On the net income front, net income was up by 27.2% to €670 million, mainly due to better income from operations which had an improvement of around €205 million from last year. Excluding the one-off that we also add both, last year and this year, net income would have increased by 34%. On the negative impact that we have in these year were the curtailment cost of €142 million that relates to a 482 employees that we reduced at approximately €300,000 cost per employee. On the positive side, we have all the positive impact of the capital gain on the Africatel disposal and also on the capital gain that we had on the sale of the Banco Espírito Santo shares and the one unwinding of the equity stock on PT Multimedia. On the cash flow; operating cash flow amounted to slightly above €1 billion for the nine months; an increase of 77%, mainly due to higher working capital investments as a result of higher commercial activity on our mobile businesses, also to the consolidation of MTC, which we didn't own last year and also on some delay on the receivable of the management fees from different operations. On the positive side, the net disposals amounted to a €468 million, mainly as result, as I mentioned before of the PTM stock based disposal and the sale of 22% stack in Africatel. Income taxes increased by €148 million, mainly due because in 2007, we have to pay all the 2006 taxes and also prepay the 2007 taxes in three installments. So, as you recall, we were not paying taxes until the end of 2005. Therefore, last year we didn't pay cash also any taxes but this year we had the double impact on the tax payments which is the taxation of 2006 payable in 2007, plus the prepayment of the 2007 tax build. On the net debt profile, our net debt has increased by €575 million to €4.3 billion, and it is mainly due to the €1 billion share buyback and the €530 million in dividends. On the positive side, we add the disposals that I referred a while ago. Just in the third quarter we executed more or less €500 million in buyback. Our net debt to EBITDA including the unfunded pension liability after tax is now down to 2.3 times. Down from 2.7 times for the same period of last year. Our average cost of debt stands at 4.9% but that includes zero, if we exclude zero it stands at 3.5%. Maturity of our debt is now... stands now at 6.9 years, and in the third quarter we also successfully drive the €750 million convertible issue. Increasing bank debt spend by facilities and joined commercial paper and cash in hand now amount to €2.3 billion. On the pension front, we continue to do this progress on the pension front. Our total PBO right now, stands at €4.3 billion and we have assets of around €3.1 billion, therefore, our unfunded gross pension liability stands at €1.25 billion or €900 million net of tax, as I now referred to. The... out of the €1.25 billion gross unfunded pension liability, €1 billion relates to the salaries that we have to pay to the pre-retired and suspended employees. Therefore only €250 million relate to the unfunded of the pension obligation... pension and healthcare obligations that we maintain with our employees. Also the government has made further changes to the pension rules and therefore we're still analyzing the impact on PT, but our first estimate is that it will have a positive impact of between €80 million to €90 million reduction in our PDO. Let me now hand to Zeinal for his last comments.

Okay. Thank you, Luis. Before I summarize this brief presentation, just one last comment on the shareholder remuneration, we are executing the buyback and we have already acquired and we have brought onto our books, balance sheet, 103 million shares equivalent to 9.13% of our share capital. And we have also, as you know, an FD swap of about 21 million shares which relates to a previous buyback program that we have done but if you look at the aggregate amount we have already invested €1.2 billion in our own stock that is equivalent to 11% for share capital. And cumulative in terms of number of shares 123.7 million shares at this stage. We are continuing to execute the buyback, abiding by the rules that the local SEC here has put upon us. Therefore, we are limited as to how many shares we can buy in the market on a daily basis, but we will continue to abide by those rules and continue to execute the buyback in the market whilst, of course, not ruling out, as we have not done in the past, any other mechanism that we may use in the future to consider ways in which we can accelerate the buyback. With regard to spin-off, we have successfully completed the spin-off on the 7th of November. And as you know, and you can certainly on the slides that we have put for you on our site, we continue to work on the basis at approximately 50% of PT's current market cap was expected to be returned to shareholders over the next three years. So, we will continue to deliver on all the promises that we have done in the past and we will continue to do that in a timely fashion. With regard to the conclusions of what I think has been a very good quarter for us, we see positive operational and financial momentum at the moment underpinned very much by the performance of our domestic mobile business, but also all of our international assets, not just Vivo, all of our international assets, so I think the balance in terms of our footprint is beginning to provide us positive growth. We continue to see an attractive cash flow profile, so whilst our domestic business, of course, is being impacted by the trends that you all are familiar with line loss, traffic loss. We continue to generate operational cash flow which is robust and is growing and no doubt you saw in our press release, our operational cash flow cumulative nine months, increased about 16.5%. We continue, therefore, as a result of this, to have ample financial flexibility. Pacheco took you through everything about our net adds, not just maturity, but also flexibility in terms of standby facilities and commercial paper line. And last but not least, we have, the resolve at the Board level to continue to deliver on all the promises that we have made, and therefore, continue to have, at Portugal Telecom, an attractive shareholder remuneration policy. We believe, we can maintain this policy notwithstanding the fact that we plan to invest more in our business, because we see opportunities to grow in our domestic market, particularly, in mobile, but also in television where Portugal Telecom has, as you know, no market share at this stage, and we believe, therefore, it is possible to remain not just a growth company when it comes to these businesses but also a solid remuneration policy for our shareholders. Thank you very much, my team and I, of course, are now available for any questions that you may have. Question And Answer

Thank you. [Operator Instructions]. Our first question comes from Mitchell Collett with Cazenove. Please state your question.

Hi. Mitch Collett from Cazenove here. Two questions, if I may. Firstly, now that you've successfully completed the spin-off of PTM, are you sensing a lightening of the regulation department, and are you planning any new deals or promotions to capitalize on your new position? And secondly, in the wireline business could you give us a feeling for what proportion of your retail line losses are going to cable operators and what portion are going to unbundlers and what portion is probably fixed to mobile substitution? Thanks.

Okay. Thank you. With regard to regulation, we believe that with the spin-off of PT multimedia, we are now in a very different market. The cable company of Portugal Telecom, as you know, has an extensive network, national network, that covers about 2.8 million homes. And those happen to be from a GDP per capita, the best homes in Portugal, and that's why they have something which is pretty unique, which is both cable and DTH. DTH where, basically, is offered in places it doesn't make financial sense to rollout cable, and therefore we believe that today Portugal has a unique position when it comes to Europe in terms of liberalization of the market, they are two alternative providers of services and therefore... and in particular, when it comes to PT Multimedia a competitor which has the scale and has the financial flexibility to, obviously, engage in a long term strategy in this market. We believe that the Portuguese regulator will take this into account in his decisions with regard to, particularly, the broadband provisions that we have in this market. We believe that it no longer makes sense to have a retail minus cap on all our prices both wholesale and retail. We believe that particularly in those areas where there is unbundler local loop there should be a lot more freedom for Portugal Telecom to offer bundled services, but also far more aggressive pricing in terms of broadband ADSL. We think that at the moment if you look at our overall market share in terms of ADSL we are at about 40%. If you were to look at our market share in areas where there is unbundler local loop, our market share is significantly lower than 40% and therefore we believe that there are grounds for the Portuguese regulator to consider a segmented regulation because Portugal has very, very different economic dynamics when you are looking at the coastal areas and when you are looking at the interior of our country. Portugal Telecom has done more of a liberalization with the spin-off than has been achieved in the last seven, eight years by the regulator himself. And we have done that in the best interest not just of our shareholders but also in the best interest of our business, because we believe that this position by Portugal Telecom should pay dividends for us long term. We are hopeful that the ongoing dialogue that we have with the regulator, which is very constructive, will result in us having more freedom going forward to offer better services and better prices to our consumers. In terms of the wireline and the line loss, obviously, the main cable operator in terms of competition is TVCable, and if I recall in the third quarter results they announced that they had added 30,000 phone customers. Unbundled local loop in the third quarter was about 22,000. That doesn't include some of these GSM fixed offers that exist out there, which we think that in a three month period could be somewhere between 15,000 to 20,000. So, based on what is market information, we think that this has to be... this is more or less a split that we can to some extent identify. Any difference between this and our line loss has to do with fixed mobile cannibalization, purely where people basically switch from fixed to purely mobile. Thank you.

Great. Thank you.

Our next question comes from Jesus Romero with Merrill Lynch. Please state your question.

Yes. [indiscernible] Merrill Lynch, London. I have got two questions, the first one, I don't know if you can give us any more detail on the TV strategy for next year regarding CapEx. You mentioned you have different options DTH, or you could be looking at other platforms, but could you give us a sense of how much money are we talking about in terms of CapEx? And then the second one on termination in Portugal, in the press release you include the proposal related to efforts made in Portugal to cut termination to €0.065 by the end of next year. This is a proposal, I think, you have 30 days to give your opinion. Can you comment on this and potentially quantify the impact for next year? Thank you.

Thank you, Jesus. With regard to CapEx; just to be absolutely clear, we think that bar for specific projects that we have at TMN which, for example, relate to this PC program for the schools and the pupils and teachers. The television strategy that we have at the fixed line or potentially rollout of fiber, the CapEx in Portugal is likely to remain pretty stable, so if we do engage in any of these three major projects we will come forward with what we think will be the CapEx, so that you know exactly the impact this will have in our numbers. So bar for these three projects we will, before, come into the market with specific guidance. We believe that CapEx next year is likely to stay very similar to what you have seen in the past which is roughly €200 million to €220 million both in our fixed and our mobile businesses. So, between the two businesses is roughly €400 million, €450 million. Okay. So that's just to be absolutely clear. So when we do engage in any of these specific projects, we hope to come and do a specific presentation to the market, and then we will take you through not just what we think is the top line impact but also a cash flow impact of any such decisions. With regard to the TV, clearly, we believe that the option that we have taken in terms of IPTV is one that long-term is the right option for our company. We, however, believe that in order for us to be able to scale the current MSTV option that we have we will require more time both in terms of investments that we need to do in the network but also in terms of the training that we need to do of our technical staff, so that they can accelerate significantly the installations on a daily basis. So, therefore, we've decided to look at alternatives, and DTH appears to be one which we believe makes sense for the very same reason that in the past Portugal Telecom had a strategy of using cable in some homes and DTH on the other. We believe it also make sense for us on the fixed line side to think about Portugal in exactly the same way because we think that the time to market first and foremost is very important. We can put a DTH offer out there fairly quickly, and we can, we believe we can do that at a CapEx and a subscriber acquisition costs which is extremely competitive. Needless to say that we believe that with the changes that we've seen in terms of covenants of the fixed line, recently we have beefed up, I would say, significantly our television know-how, and therefore, we are fairly confident that we can launch DTH sooner rather than later, and we can do that with a subscriber acquisition costs which we think will be very competitive and therefore that is one of the ways in which we are thinking television offer in terms of the future. In terms of the digital terrestrial television there was some public consultation undertaken by the Portuguese Telecom Regulators, we have responded to that, we reserve the right to look at that process actively as and when it is announced. At this stage, the only thing that the regulator has put out is the general terms and conditions and requested constructive comments on the operators, which we have given, and therefore, we are eager to see what is the final decision. And even with regards to the digital terrestrial television, you two potential businesses there. One which is a Telecom's business which relates to transportation of the four frequency and the rest is some frequencies that will allow you to do Pay TV as well. So, long-term when you think about television, the main message for you is that we will always try and find the best way to keep subscriber acquisition cost at a level where we can generate a decent return for our shareholders, and therefore we will keep all our options open and consider all potential platforms that makes sense considering the GDP per capital distribution in our country. With regard to the fixed to mobile termination rate, one side you have the numbers and the impacts that this consultation or supposedly whatever the regulator has put out, may have, may due to our numbers... I prefer not to comment because we like to think that what the regulator has put out at this stage is a consultation, and in the past the regulator has changed his own views about this taking into account the comments from operators and we believe that we will make comments that we will lead and we will help the regulator take the best decision in this area. We think that the current position that is out there is out of context. We think that it doesn't promote investments or future investments in the sector. And I think it also brings to ban a symmetry for the third operator, which in our view is completely countercyclical with regard to what you are seeing in other European markets, and one symmetry which had already been removed in the Portuguese market. So, at this stage I prefer not to give you my numbers in terms of what the impact is, and prefer to work with the regulator constructively and continue to see with the regulator whether the final decision on mobile termination rates takes into account the context of the Portuguese market which in my view cannot just come down to trying to align the mobile termination rate with the European average or the lowest five in the European market. Thank you.

Zeinal, if I can ask a follow-on question regarding Brazil, on termination rates in Brazil, they are fairly high. Do you expect any changes in the next couple of years, or do you have any comments on termination rates in Vivo?

In fact just... now that you've asked a follow-up question, let me just ask something else to the Portuguese market. Instantly you also, there is something very positive that I think we saw at the comment from the Portuguese regulator which related to the spectrum fees in the Portuguese market. As you know in the past, I've always said that what Portugal Telecom is paying in terms of spectrum fees was very high, not just in absolute numbers but in the way that that spectrum was being charged. We were paying roughly €5 on a per sub basis. And that is another kind of a asymmetry that exist which favors the smallest operator in this market and is detrimental to the largest operator in this market. Recently we saw comments coming out of the Portuguese regulator which says that the model that's being used to charge the spectrum needs to be changed, market it mature and the new model needs to incentivize efficient use of the spectrum which as you know is a public asset. And therefore, we believe that at last, we believe there is a possibility that TMN will end up paying spectrum fees inline with the best practice in Europe and inline with the model that's ultimately incentivize all of us to make the best use of what we is a public asset which is the frequencies. In Brazil, with regard to interconnection, difficult to comment. I think when one thinks about Brazil, one also needs to take into account that the mobile business is... the fact is very competitive, is a major driver of innovation in the Brazil, and investments in the Brazilian market, and the margins are well below where they should be considering the penetration that you've had, so ultimately, I think decisions on regulation also need to take into account the context. And when you think about Brazil, clearly one needs to take into account that notwithstanding the fact that penetration is now in the sort of 60% area, margins are still in the 24%, 25% or less, and that is something that needs to taken into account by the regulator. Thank you.

Thanks.

Our next question comes from David Ray with JP Morgan. Please state your question.

Hello. It's David from JP Morgan. A couple of questions please. First of all just on the fixed line business you mentioned IPTV a fairly soft launch. DTT, terrestrial... digital terrestrial, could take some time to resolve. It sounds like whilst you are considering the likes of DTH maybe there are no imminent plans. So, does that maybe provide a window, a 12 months window for PT Multimedia to push fairly hard against you guys, should we be expecting the fixed line operations to dip a little, maybe before recovering the current trend? That is question number one, please. And then, my second question is, you know you mentioned in your conference call stable domestic assets growth from international assets. I guess the ongoing question is that you do not or you're bleeding a lot of that growth away to minorities, both, in Brazil, both, in the African operations. So, what is the possibility to own more of that growth, deliver that to your bottom-line be that an acquisition of the remaining share of Vivo or maybe a sale of Vivo, and maybe bringing some of the associate African assets into the consolidated line of the P&L. What is the potential for that? Thanks.

Thank you, David. With regard to the TV offer, what I can say to you is that one of the reasons why we have decided to pursue a DTH launch is because we think that time to market is absolutely crucial, and you very rightly pointed out. If you look at DTT or if you look at IPTV it is likely that we will require maybe 12, maybe 18 months to reach, I would say, a critical mass. And therefore, when it comes to DTH, we think we will be able to launch that in the first half of next year. I would like to commit a specific date, we have already acquired transformer capacity. We are already in extensive negotiations with the content providers, needless to say that the Portugal Telecom fixed line business now has extensive understanding of the Portuguese television market, because clearly as you know the management team used to be the one that used to run the cable business. And therefore we think that by bring to bear this expertise we should be able to have a national offer based on DTH, sooner rather than later, and therefore I believe that in having that or by having that offer sooner rather than later we will be able to bring to bear this bundled... the bundled approach very, very quickly to the Portuguese market. And I continue to believe that we have a very important role to play in this market, because we have the distribution network, not just in the main cities of Portugal but nationwide, and I think this distribution network what we have is a significant competitive advantage of our company. With regard to the international assets that we have, we believe that in a lot of these markets, it does make sense for us to have local partners. And we have benefited from having local partners. So if you, and in some of those African markets where we are present there are some legal restrictions as to how much we can own. So time permitting, as an when we can beef up our positions in some of those assets, we will be eager to do that as long as, of course, the valuations makes sense, and as long as legally it is possible. So, we're not pulling out anything at this stage, but when it comes to Africa, like I indicated during my introduction, once we have 78% in Africatel, we are open always to discuss potential partnerships; always aiming to keep above 50% control. But we will always look at avenues in which we can quickly increase our footprint by entering other partnerships; and therefore, again, and I don't think this is a minor point. I think it's a major point. Having local partners alongside us has always been beneficial for us. And I think it's the way for us to grow in the future. Thank you.

And then, on Brazil, perhaps?

On Brazil, we have a very good working relationship with Telefónica. I think the performance of Vivo and the successes that Vivo has had, are also accredit not just the Vivo management team, but also to the Telefónica and Portugal teams that dedicate a lot of their time to assist the management of Vivo to rollout a lot of these projects. And what we are very focused on, is making sure that Vivo grows EBITDA, grows subscriber base and ultimately post a much better profitability going forward. We see, frankly, room for us to improve that profitability as and when we think the market stabilizes. And when penetration is getting to the level that it is, chances are that we may have room to improve profitability in the future. Thank you.

Thank you. Our next question comes from James Rivett with Citi. Please state your question.

Yeah. Good afternoon. I just wondered about guidance for 2007 and beyond. You effectively raised numbers for the second quarter, you said, if I remember correctly, there was a degree of caution in your estimates. How do you think that view has changed now that we are just two months from the end of the year? And sort of secondly following on, on the retail DSL business which actually saw a revenue decline year-on-year; is it the shapes of things to come. Is effectively broadband now gone escrow or should we expect for that to pick up going forward? And then finally, are you seeing any benefits at this stage of the consolidation of the market, effectively the two deals that Sun-ICON has done, should we expect for them to be in anyway, shape or form help? Thanks very much.

Thank you. I think we had a guidance of €2.1 billion to €2.2 billion EBITDA for '07. Clearly, when you look at our third quarter numbers, we feel quite confident that we will do better than €2.2 billion, we will certainly do better than €2.2 billion, we continue to see good trends in mobile, in the domestic market, and I think what we need to do at this stage is we will deliver on more than €2.2 billion, but we need to keep our options open and we need to keep the product drive, because we are going to enter a very important commercial season for us, which is the Christmas campaign, and we believe that we have to continue to grow our share of net adds, but also our share of revenues in this market, and translate some of that top-line growth in the future, we think, in much more leverage in terms of EBITDA performance. So, we are fairly confident that €2.2 billion, we will be better than that, and we believe that that gives us flexibility also to have some commercial activity in the fourth quarter across all our businesses, not just in Portugal but also outside Portugal. When it comes to the broadband, if you look at some of these initiatives that are ongoing in the Portuguese market: the PC initiatives that the government led on the back of the UMTS licenses that we had, where PCs are being given to students and teachers and people that are being trained in specific schools; we believe that the PC penetration in this market will increase exponentially over the next 12 to 24 months. We... TMN, for example, in the fixed line business have just recently launched an offer for the SME market which not only includes fixed and mobile, voice and data services but also terminal equipments which is fixed phones, mobile phones but also PCs. And therefore I think what you are likely to see in the next 12 to 18 months is exponential growth of PC penetration in this market. So you will see two things, more PCs, more households with PCs, and also more households with modern equipments, which means that they can take full advantage of the 8 megas and the rich content in Portuguese language that, for example, Portugal Telecom has in its leading portal in Portugal called sapo. So, I think on the back of that it is highly likely that we will continue to see good ADSL growth. This is assuming that the mobile or wireless broadband prices continue to command a premium. So, if wireless broadband doesn't command a price premium than you are likely to see some of that market being occupied with the wireless broadband offers... adds additional costs, as you know, because the ADSL or ADSL prices, in terms of bandwidth, are far more effective and far more efficient than GSM. So, I think that broadband will continue to grow whether it's ADSL or wireless remains to be seen, but I think that the PC penetration growth will be so significant that broadband will grow and you are likely to have, in 2008, all things being equal a very solid broadband growth in this market. The consolidation of the market and these recent acquisitions that Sun-ICON has done, I think at this stage the market is competitive when it comes to the fixed line; the triple play offers out there are aggressive, the cable companies, as you know, enjoy a significant platform in this country. If you look at in particular TV Cabo, as I mentioned earlier, they already cover 2.8 million homes and their market share, broadband market share, in main cities is pretty significant, in fact, much higher than ADSL. So, I think at this stage it is early to say whether this consolidation will result in a more rational market. I think the good news for Portugal Telecom is that by aligning the interest of our fixed and our mobile business we can bring to bear to the market far more attractive offers, like this equity swaps offer [ph] that we just recently put out for SMEs, where we bring to bear fixed mobile and also terminal equipment where we are giving PCs to companies and basically we are pricing a workstation with all services included. So, I think, ultimately, we believe, we are in a very good position to bring to bear our distribution network, and our capillarity in terms of not just technical teams but also distribution network. And maybe the next three to six months we will know whether this consolidation will result in a more rational market. Thank you.

Thank you

Ladies and gentlemen we have time for one more question. Our final question comes from James McKenzie with Fidelity [ph]. Please state your question.

Hi just a couple of quick question. Firstly, on the share buyback, you mentioned the 23 million shares that you had in place from the previous buyback program. When we look at the €2.1 million or billion, sorry, of euros to be bought back; you've spent about €1.05 million of that, is the remaining €1.05 billion to be targeted at the shares less the treasury stock of a €123.7 million. I... what I am trying to say is, is the share buyback of 2.1 billion excluding those 23 million share that were already been in your treasury stock? And then secondly on Vivo, just wondering if you got any update on the acquisition of Telemig and any feeling as to what this might do to your numbers next year?

Okay. Thank you, James. With regard to the buyback, just to be absolutely clear. The 23 million, the 21 million shares relate to a previous buyback programs. So it has, it is additional to the 2.1 billion that we announced at the time of the hostile offer from Sun-ICON, so what I was trying to be absolutely sure that we will understood is that we have 103 million shares on our books... shares that we will burn in the next Shareholders' Meeting, and if you look at the aggregate done at the moment, including this 21 million, it was the, sort of, 11 % that I mentioned. So, we have, at the moment, about a 1 billion outstanding shares. If you were to adjust for the treasury shares and the equity [ph] sold?

The equity.

So, we will continue to execute the buyback inline with the requirements that the local SEC puts upon us and we hope that we will, at the time of the next Shareholders' Meeting, have delivered on what we have promised. And at this stage I think the speed of execution of the buyback is also dependant on the volumes that we see in the market. So, the more volumes there are the more we can acquire. If not, we will have to consider other options and we are not ruling out any other option at this stage.

Okay. Do you think the share buyback will be done by the AGM next year? That's obviously... is that still your intention?

It is our intention and our resolve, yes.

Okay. Fantastic.

Luis may want to answer the Vivo question. Please Luis?

On the Telemig acquisition, it's still pending some issues regarding them. At this precise moment, we still don't know what's the likely timetable for the hands of this process.

Okay. Thank you very much, ladies and gentlemen on behalf of the Board of Portugal Telecom for being on this call. Nuno Prego, our IR Director, as usual, will be available to take any questions that you may have, either by phone or by e-mail. And as you know we will be starting a roadshow tomorrow. We will be at a conference... at the conference of Morgan Stanley, and then we are undertaking a roadshow in Europe, also UK, but also the US. And of course, Nuno Prego is available should you want to see us in any one of these venues that we will be at. So, thank you very much for being available, and I look forward to seeing you over the next few weeks. Thank you.

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.