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2004 Brazilian Telecommunications Conference

2004 Brazilian Telecommunications Conference. September 23-24 Rio de Janeiro, Brazil . www.telemar.com.br/ir. Agenda. 1. Highlights 2Q04 . 2. Market Trends . 3. Regulatory Agenda. Highlights 2Q04. Fixed Line Stable (0.5%)

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2004 Brazilian Telecommunications Conference

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  1. 2004 Brazilian Telecommunications Conference September 23-24 Rio de Janeiro, Brazil www.telemar.com.br/ir

  2. Agenda 1. Highlights 2Q04 2. Market Trends 3. Regulatory Agenda

  3. Highlights 2Q04 • Fixed Line Stable (0.5%) • Strong growth in mobile subs (15.5% QoQ) as well as ADSL (21.5% QoQ) • Revenue increased by 3.3% QoQ, mainly due to mobile services and handset sales, what put pressure on • EBITDA margin (40.7%) also impacted by provision for contingencies (bad debt reduction being the good news) • FCF after CAPEX of R$ 1.5 billion, helped by low CAPEX level and WC needs • Net Debt down by R$ 1 billion at R$ 7.3 billion (1.1x EBITDA)

  4. Market Trends - Penetration Figures / Brazil Fixed: 38 m (Jul/04) Mobile: 57 m (Aug/04) 22% 32% • Mobile penetration still has a lot of room to grow, helped also by expected economy recovery; • Anatel estimates between 62.8 m 69.8 m subs by 2004YE; • Estimated penetration for 2008YE ranges from 42% to 58%; • Regarding fixed line market, penetration should be more or less stable, following closely GDP growth. 58% Max. 42% Min. Mobile* Fixed Line** 23% * Estimates from: Citigroup, Goldman, JP Morgan, Merryl Lynch, Pyramid Research. ** Estimates from Yankee Group

  5. Market Trends – Broadband Growth / Brazil Broadband Access – ( thousands) • ADSL has become the dominant broadband technology in Brazil (over 80% market share); • Broadband subscriber base expected to increase by over 2.5x from 2003 through 2006 (Pyramid Research); • Telemar has a target to increase broadband penetration from 2% to 5% of fixed lines in service in 2-3 years. 3,831 3,547 3,148 2,591 1,874 ADSL 1,490 1,199 694 326 130 Source: Anatel / Teleco / Pyramid Research estimates.

  6. Market Trends - Traffic Migration / Telemar • Local traffic mostly impacted by: - ADSL growth (local traffic flat monthly rate) - Performance of the economy, also resulting on - Stability of fixed lines in service; • Decrease in F2M traffic is mainly due to: - Line blockage for F2M calls; - Migration to mobile calls (mobile post-paid rates currently lower than F2M rates in many plans). Local Voice Traffic (F2F) Local Fixed to Mobile (F2M)

  7. Regulatory Agenda 1- Mobile Termination Rate • “Free negotiation” (scheduled to start since July, 2004); • Target:Recover margins in F-M calls / share uncollectibles 2- Local Traffic in Minutes Conversion of local traffic billing: from Pulses to Minutes (2006) 3- Unbundling • Line Sharing: in May 2004, Anatel established the overall conditions for line sharing, setting maximum reference values, such as monthly rental prices, at R$ 15.42 / pair and • Full unbundling: Anatel yet to determine prices.

  8. Regulatory Agenda 4- Tariff Index • Tariff increases based on: IST – ATelecom Sector price index (TBD) “K” – New Productivity factor (TBD) • Interconnection rates: a) Defined as a % of local tariff (60% -2006; 50%-2007) b) “Long Range Incremental Costs” (2008 on) 5- New Universal Service Targets (2006 on) • Line Installation: Maximum Period: 1 week (=2004); Coverage: All Localities >300 people (=2005) - Currently >600 • Collective Access: Public Telephone / Internet Access (new service) 2006 • Special Class of Individual Access (AICE) (TBD) Higher period for line installation Lower monthly fee (taxes?) Pre Paid fixed line Virtual Telephone (use of voice and electronic mail in collective access) 6- Fixed Line Number Portability • To be implemented as of 2006 (TBD)

  9. “Safe Harbor” Statement This presentation contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements and involve inherent risks and uncertainties. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events Investor Relations - Telemar Rua Humberto de Campos, 425 / 8º andar Leblon Rio de Janeiro -RJ Phone: ( 55 21) 3131-1314/1313/1315/1316 Fax: (55 21) 3131-1155 E-mail: invest@telemar.com.br Visit our website: http://www.telemar.com.br/ir

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