America Movil SAB de CV (AMX) 2003 Q2 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the America Movil Second Quarter 2003 Conference Call. During the presentation all participants will be in the listen only mode. Afterwards we will commence a Question and Answer Session. At that time, if you have any questions, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Tuesday, July 22, 2003. I would now like to turn the conference over to Mr. Don Charles le Martinique, Senior Latin American Telecommunications Analyst at JP Morgan. Please go ahead sir.

Good Morning Everyone, this is Don Charles le Martinique. On behalf of JP Morgan I would like to thank everybody for calling in this morning. Joining us from Mexico to Comment on the company's impressive second quarter results is Mr. Carlos Garcia Moreno , America Movil Chief Financial Officer. Carlos please go ahead.

Thank you Don Charles, and Good Morning everyone. We just had a very strong quarter so we will be glad to discuss some of the more important things in this conference call with you. I guess I would like to highlight some things. First, regarding the Income Statement showing the weekly trend of the operations. Secondly, I would like to talk a little bit about the impact of securities both in the Income Statements and in the Balance Sheet. Thirdly, I will focus a little bit on Net Debt. Finally, I would like to touch upon the issue of expectations.

So, first as regard to Operations. We had a very strong quarter, you have seen the numbers showing Revenues increased by 15%, Quarter-on-quarter increased by 45% relative to a year before. The, if you look at each one of these auxiliaries, this is very interesting. Each one of the operations for American Movil managed to generate a significant increase in Revenues, both on a quarterly basis and on an annual basis. For instance, in the case of Debt Face, we are talking about an increase Quarter-on-quarter of 8.4% Revenue of Service Revenues and of 9.4% of Total Revenue. In the case of [inaudible] Year-on-year, we are looking at 23% for Service Revenues, 23.3% for Total Revenue. We are seeing companies like [unintelligible] Peron show rates of growth of 88% Quarter-on-quarter and 157% Year-on-year for Service Revenues, 94% for Total Revenues Quarter-on-quarter and 150% for Total Revenues Year-on-year.

I would like to go on, the fact of the matter is that each one of the operations, every single one of the operations has had a very strong showing in terms of Revenue Growth. Both on a Quarter-on-quarter basis and a Year-on-year basis. The second thing is that each one of the operations have [unintelligible], every one [unintelligible] guarantee and increase in EBITDA, Quarter-on-quarter and alternatively also Year-on-year. So we are improving on revenues but also improving on EBITDA and that CAPEX changes being made for these very important results. Now, what is behind this? We think that it is important to think about Mexico. We have situations here where, as you know, there were some reductions in prices that were more marked in the prepaid sector, this was particularly applicable to the last quarter of last year and the very beginning of this year and what we are seeing is that what would have been expected in terms of there being a [inaudible] demand at the maturity of whatever we have in the Mexican Market. The tide is really turning and this has been proven correct. I think it is noteworthy the fact that these types of [unintelligible] on expansion of MOU's in excess of 6.5%. The second quarter vis-à-vis first which was completed with an increased [unintelligible] of 6.9%. In prepaid and again in postpaid we are seeing an increase in MOU's of nearly 6% which is also bringing about a decrease in revenues of almost [unintelligible] that amount.

So just in the case that what we are seeing is good, the response from the demands given a [unintelligible] and what has been a low cycling of [unintelligible] and in the presentation Mexico have a, I think somewhat different the situation in Brazil , in that in Brazil, as opposed to Mexico where we have seen prices come down, in Brazil, however, we are seeing prices go up. That has cast a [unintelligible] in this particular area of prepaid. This has been, in terms of factory, in fact that we [unintelligible] out in Telecom American contracts for a need of increase of 3% in the quarter. So, what are we seeing is that process of, in the context of Parisa motivation of the economy, it has a one-time effect on volume of traffic that will be coming down as the prices come down in real terms in the last reinflation terms. So, that is what we getting on the operational front.

Regarding the currency. During this quarter the Mexican Peso appreciated relative to a lower average in the second quarter against first quarter by 3.4%. That is more than all the other currencies in which we operate, so all the other currencies depreciate against the Peso, except for the Brazilian [unintelligible]. So, in terms of impact of the income statement of the flows primarily relating to Pesos, you would ask that have shelved, the consolidated income statements have been equivalent to those with Brazil. Again, Quarter-on-quarter, I would not stem [unintelligible] close to 14.6% which means that when compared to the Mexico Peso [depreciated] by approximately 11%.

Now, if you look at the effect of the carriages on the balance sheet and more specifically on Debt, it is very interesting. The carriages today, except for the Brazilian [unintelligible] and the Argentinean [unintelligible] the only currencies at the end of June to remain practically the same for the level as they were at the end of December. That essentially means that there have been no changes in the Total Value of the Balances over, one debt in particular, out of foreign exchange valuations. The only case in which we would have seen an impact would have been in the case of Brazilian Territory capitulated roughly 20% between the end June and December. But this did not have, this did not have an impact to the extent that we can't realize a reduction in Net Debt, the appreciation of NBI would have meant that something was worth more in dollars than Pesos. What has happened is that we were not affected because all we realized of the Net Debt that we had was effectively converted into dollars between the end of last year and beginning of this year. So, in fact, we did not stand to lose, but only to gain, by the appreciation of the very EBITDA that was the decision of the company. So, Net Debt, the effects of which had practically no effect on the change in Net Debt of American Movil, such that the changes in Net Debt of America Movil have been brought about practically exclusively by [cash flows].

This brings me to discuss the Total Level of Net Debt, the Total Level of Net Debt has come down and I am going to be talking also about the principal level not including accruing , but the principal level of the debt, gross debt has come down from $4.48B at the end of December to $4.03B, 4.0b at the end of June. However, Net Debt has come down from $3.5B down to $2.8B. What this means is that we have reduced the Net Debt load by having an increase in the cash level of the company and also by having a reduction in the growth level of debt. So, the change in Net Debt is a consequence of the reduction in growth and increase in the cash balances of American Movil. As I mentioned before, nearly, practically all of the change in Net Debt is updated with cash flows and not with with [inaudible]

The affect of taxes. I think that we, I think we mentioned to several of you that over time we have been looking at rearranging the original structure that we were born with, with a view to cutting out a more efficient structure, at least less cumbersome company-wide and more comfortable also on the keystone side on the tax side. Some of these changes have been in place for some time, some of the changes were expected to bring about a total reduction of some type of tax benefit over the, some of the changes in tax [unintelligible] benefit, maybe taking to the system and procedures typically the length of time and the fact of the matter is that we have seen already parts of these efforts that we have been doing together for some time, can succeed to the extent that we would be given a ruling in the second quarter that had the effect of brining about failings, this was one of the failings in the tax base of nearly [$1M] [inaudible], approximate 915 million [inaudible]. Again, this is something that I do not like to do, but we are very specific , generally part of the strategy of what I can say is that we should be expecting from time to time there may be so continued tax benefits. It is okay that they might have some accounting implications in terms of generating long-term loans, as well as they do not have that implication. But, I think it is important that we mention it, express it in this conference. I think these are really the most important things I wanted to highlight in this conference call. I would like now to open up to questions and answers.

Thanks a lot Carlos. Let me give the first question.

As it relates to margins, is the mood striking the future for second quarter numbers, I believe it was the improvement of margin in Telcel, could you share with us a bit more what drove this margin improvement and if there is anything beyond revenue growth and also in terms of other markets in then world with similar levels of market share concentration as Mexico, it would appear that you still have some essential upside potential to your margin levels at Telcel. Could you possible share with us what your thoughts are as to where Telcel margins could go in the near future.

I think when you compare Telcel to other companies in the world, you would have to do apples to apples comparisons. The first thing that would be different for most other companies and the way they are compared against the fact that a very favorable rate in Mexico is subject to the payment of certain duties to the government on account of license payment. This can be from anywhere between 5 and 8%. So this has had a Net Reduction of EBITDA margins, but we would have had, in the absence of these factors that we have had that other companies have not meant to pay. As you know, in the case of GSM, we do not have the same treatment to the extent that we had GSM subscribers to our overhead. We have also a benedict so in the end, you know, it is not that we are going to be able to shut down PDMA and go over to [unintelligible] from one day to the other but just in the fact that the fact that we should see that this 5 to 8 points in EBITDA margin that are being subtracted will be regularly reduced over time. Not to zero, but probably to about half of that.

The only things to consider to compare to other companies is that we are in a market that is growing and growing very rapidly. So, when you look at the EBITDA market, you have to adjust for subscriber costs. After all, acquisition costs is an important part of your cosmetics and [unintelligible] in EBITDA markets. So, again I think that the one specific things to note when making a comparison to other companies, I do think that there are things that are built into our numbers that essentially would point toward everything, a lot of other things in sequence. We have, we should expect to see an improvement in EBITDA markets because we had GSM that we have to factor out the duty and we continue to grow, the impact of growth becomes smaller and smaller on our income statement. But, I must stress that is all things in sequence, meaning that our [unintelligible] competitive landscape and [unintelligible]. So, that is what I would say to you. But, what we are driving for, in this sense is to when it is very much, on the one hand you have seen very, very good revenue growth, very sound revenue growth at the time in which part of these new revenues are increasing and being generated in net growth and we don't have the impact of the duty and the situation in which we have had a stable market on the competitive front.

Thank you very much.

Operator, we are now ready to take questions.

Thank you. Ladies and Gentlemen, if you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please life up your handset before entering your request. One moment please for the first question. Our first question comes from the line of Whitney Johnson with Merrill Lynch, please go ahead with your question.

Hi Carlos, I have a couple of questions for you. The first is on Depreciation and Amortization, it doubled versus last year, could you just walk us through the increase, what that is from and give us a breakdown?

Sure Whitney. The change in Depreciation and Amortization, I don't have any data to remedy that, but I can tell you what happened in this quarter. What you have, if you were to compare the second quarter of this year with the second quarter of last year, firstly we were not concern with Amortization at the time. So that alone is a major impact. But, comparing between the second quarter and the first quarter, besides, of this year, would be partly due to the impact of Amortization of EBIT, partially due to CAPEX and more CAPEX in your depreciation increases. But also partly, it has to do, very significantly has do with the Amortization of the plants. As you may recall, Whitney, at the end of last year we began an exercise that was tied to Colombia Brazil, and essentially based on the passage of 142. We were meant to provide a wonderful evaluation or re-evaluation of the Assets of the Colombian and the Brazilian subsidiaries. Putting these evaluations of assets, a specific value was given to the branch that they have and to the extent that you have a value for these branches, it remains to amortize this over time. So, what we are doing now is we are amortizing it and we began to amortize it on the basis of the original life of the item. We are amortization and we are doing this based on the remaining value and the remaining term of the licenses, which in the case of Brazil is 10 years, and in the case of Columbia is 9 years. So, that potentially, normally I would tell you that from the second quarter we can hold the changes are potentially these that I mentioned. The impact of EBIT, the amortization of the branch at a somewhat speedier pace than we initially began to do in first quarter and the impact of the issues of the CAPEX. This is on a fixed second quarter basis and on an annual basis, second quarter of '03 compared to second quarter of '02, the impact of EBIT is an important point to take into account.

Carlos, what was the prior life on the branch, you are saying it is now 10 and 9 years respectively, what was the life prior?

We had the value assigned to the branch. When we did the evaluation of amortization for this, we ran both the fixed assets and we were allowed to provide a value to the branch, it is not the same thing as to roll the operations that originally had no value and that was in Columbia. At the top of my mind, it is something I can't just describe so already, that branch was the most in Capital Value and likewise in Brazil, you have four branches, we used to have four branches and now we have five and we are [unintelligible] so this had previously been amortized on the basis of [unintelligible] .

Carlos, as we look forward to third quarter, are there any incremental step-ups if you will of new depreciation or amortization that we should expect for 3Q versus 2Q.

None whatsoever.

Okay.

Only to the extent that they are in your amortization.

Okay, just two final questions. Your R2 trended up very nicely, can you just talk us through what percentage of the R2 was data in the third quarter, excuse me 2Q, the quarter just passed versus 1Q of this year? And then, how much was the provision for the Telecom Tax for the second quarter?

Okay. In regards to the impact of data, the impact of data and I would put it to you this way, if you look at the 13 months data from all three companies from '01 to '02 the CAPEX had given up an extra 2 to 3 points of growth of second period growth.

So, your revenue growth was 200 to 300 basis points higher because of data?

That is correct

And then the provision for the Telecom Tax?

The provision for the Telecom Tax, is, hold on, it is 1., for the second quarter Whitney it is 169 million Pesos

169, okay.

Which meant it is 1.3% of the EBITDA percent.

Okay.

This is as compared to the, remember that early in the second quarter there were some changes in the law that essentially exempted some of the percentages that were previously being taxed. So this change was not retroactive, so we did not unwind any of the service credits in the first quarter, we did change the pace of service for that point onwards, okay?

Okay, Carlos, should we expect a similar pace in the third quarter on the Telecom Tax?

No, again, the only reason for this change that there was a change in the tax law.

Okay, thank you very much.

You are welcome Whitney.

Our next question comes from the line of Vera Rossi with Morgan Stanley, please go ahead with your question. Miss Rossi, your line is open.

Carlos, I have a question on Brazil and then on the Stock Buyback. My question on Brazil is, if you are still expecting to launch in September, the services in Sao Paolo and also in the other areas of Brazil. And, the question on the stock buyback is, how much has American Movil done in stock buybacks since the beginning of 2003.

Okay. In regards to the first question, we are proceeding ahead according to plan. The buildup of only GSM Network in Brazil, not only Sao Paolo, and again we still have a timetable of September. We think that, you know, we imagine it can be, it will be in the quarterly report. We expect that we will be providing, before the end of the year GSM in Brazil, besides what we already have up and running in Columbia, in Ecuador and in Mexico and Nicaragua. So, yes, we are on track to finalize our launch of operations sometime in September. Regards to the second question, I don't know, I am not sure if we can keep buying back stock at all, because we had it as our main priority, but so far this year, to reduce the level of Net Debt we have mentioned to you that it was a priority for the company. I think that we are there. You may remember that we had the costs in the past, all having the objective of getting down to levels of 1.3 to 1.4 levels of Net Debt to EBITDA by the end of this year. We are at the end of the first trimester and we are already down to [1.12 percent, 1.125] to be exact. So, I think that this is an issue that is not a concern to us anymore and that will be investigated.

Okay, I have just one follow-up question on the depreciation. Are you going to increase the depreciation rate of the TDMA Network as your launch the GSM Network?

Not, the depreciation rate, no, because we don't expect that we will have, you know that we will be shutting down the TDMA Network. The TDMA Network has, we have today two united networks in Mexico, okay, we have the United Network of Mexico, which is [inaudible] but the continuing attempts to reach all populations in Mexico,[inaudible] so that provides you with a line of communication that is really unsurpassed in Latin America. No, we are not expecting any change in the rate of depreciation of the assets, although there may be some things that can be done with a view to eventually incorporate, them into the overall tax structure that we have that will be able to comment to you on a latter date.

Okay, thank you very much.

Our next question comes from the line of Katie Blacklock with James River Capital, please go ahead.

Hi, my question is just regarding Brazil and specifically the competitive backdrop where you saw margins come down quite sharply in the second quarter versus the first quarter and I understand that part of that has to do with Mothers Day and so on in general subscriber growth, but you said in the first quarter conference call that you felt that EBITDA Margins were sustainable but there could be some squeeze as you launch GSM. Do you think that is still the case or has the competitive backdrop changed to such a degree that we should lower our expectations?

I believe that the, there will be an impact with the GSM launch, but the GSM launch for the year will only be affecting us in the last quarter and we will probably not have as much of an affect as it will have in the next colander year. But, no, certainly I think that there is a very marketable formality in Brazil as far as subscriber acquisitions and that our goals for the market, I think that we are still holding on to our EBITDA target that we mentioned at the beginning of the year.

Okay, so should we expect a squeeze on margins from the 27% level as you launch GSM?

There may be, to the extent that we will be launching operations in new areas, it is getting the operation started in three regions, you know, there is Sao Paolo, EKatierina and Baila [ph] When we launch the satellite there may be some impact on EBITDA because you have some opposition cost, but that is something that we expect will not be that material this year, but maybe next year.

Okay, thank you. I just have another question, just on CAPEX. Can you tell me what your CAPEX was in the second quarter and whether you are sticking with your $1.1B for the full year.

I think the CAPEX started with [unintelligible] mostly because of Mexico. I think that we are moving toward the 1.2 to 1.3 range. It is difficult to say if it is going to be 1.2 to 1.3, due to significant changes in equipment, but essentially because we are seeing these GSM operations in Mexico have been having a good demand and we want to ensure that we have more than adequate coverage both in geographic terms and in terms of capacity to handle the subscribers of the network. So that essentially, but we are looking at doing also, so we are moving from 1.1 to some areas to 1.2 to 1.3 for the year.

Okay, but that increases in Mexico?

It is increased in Mexico.

Okay, and so far this year, how much have you spent?

I think the amounts that have been spent are not that significant because in practically all of our operations we have floating plate of projects, which essentially means that we pay for the equipment once that is up and running and has been installed, so I would say that if we mention the third quarter, we should expect to see a move to backload of spending of CAPEX that is, you should expect to see more [unintelligible] of CAPEX towards the second part of the year.

Sure, but just roughly, I mean, have you spent 20% of that so far in the first half?

Maybe about a third.

Okay. Thank you.

You're welcome.

Our next question comes from the line of Andrew Campbell with Credit Suisse First Boston, please go ahead with your question.

Yes, hi Carlos. You mentioned the reduction in debt during the quarter and one of the factors that was pretty significant was the reduction in Working Capital and in particular that you were able to stretch your payables. My question is, is this a sustainable reduction on working capital or is there some seasonality here and is there a specific component of your payables that you are stretching, a certain reason why that has happened? Thank you.

Yes, I think that, as you have mentioned, we have had an, in most of the places an attempt to extend to our liquidity and that essentially has meant that we have made some changes in policies. So, yes, I think that this is less seasonal and more something that is a result of changes that have been put in place in several different areas to improve our overall picture.

Okay, great. And, the last thing is just a follow-up on the question about the Depreciation and Amortization. The Amortization that you have on the branch, is that tax-deductible amortization?

No, it is not.

Okay. That's great, thank you Carlos.

Our next question comes from the line of Daniel Henriquez of Goldman Sachs, please go ahead with your question.

Hi Carlos. I have two quick questions. The first one, given the working capital issue that you just mentioned that you are trying to postpone payments for the second half of the year and the fact that your CAPEX will probably be more by closing the second half of the year, what is your guidance in term of Net Debt to EBITDA, should it be 1.1 times now, do you think that by the end of the year it will be above that level, in line, that would be the first question?

The Net Debt to EBITDA, I don't expect that, I think that, I think Daniel that what we are seeing is our Net EBITDA Today is 1.1. I think that barring appreciation and the like, we should only expect to continue see a decline in the Net Debt To EBITDA Ratio. Although not necessarily in the Net Debt itself.

Okay. The second question, Carlos, is about when you take a look at your margins in Telcel this quarter what are the reasons for the margins being so strong, is it because of the cost of services decline Quarter-over-quarter, not only the revenue increased. Is there anything here, this cost of service decline that should be adjusted, I know it is related to tax, but is that number sustainable so that we can use it for the future?

No, I think that is basically the tax issue that we were mentioning, the changes in the set position from the second to the third but there is not anything that is worth highlighting on the actual items that may make up cost of services.

Okay, finally, could you just give us an update on your strategy for acquisitions, BCP and other opportunities you see in the region. Thank you, Carlos.

In the case of BCP, as I understand it, they are expecting to practically complete the transfer of the control from the shareholders of BCP to the group of lenders, which means that the lenders will be proceeding with the same look. In fact, that have hired an investment bank to advise them on this process and some, how we understand this is a process and it is to start any day now. So, that is something in which we would be participating as the market allows. Regarding other opportunities in the region, whatever is happening with prospective prospects that we have been shown, some in Central America, some in South America, but I would say that it is likely that other than BCP, at least one more contraction can be expected in the second half of the year.

Thanks a lot.

Our next question comes from the line of Patrick Recamp (ph) with Citigroup Smith Barney, please go ahead with your question.

Good morning, Carlos. I just have a couple of questions. Starting off with Medico, it looks as if you are having a very strong shift in the balance of outgoing and incoming traffic on the MOU's in Mexico. Do you think that is, that is clearly because the outgoing tariff's are dropping, do you think, how long more do you think that can last and are you still seeing signs in the third quarter that the rate of outgoing traffic will increase or continue or do you think that is going to slow down not as with the lowering the tariff and tax effect or is there more elasticity of demand coming?

And the Brazilian business, my question is, it looks as if, even thought you added BSC, you only added about 4M Reis of revenues in Brazil overall, either BSC is not generating any revenue, any EBITDA for you or you are seeing a drop off in EBITDA in your existing business, is that what is going on and is that to do with competition levels and how do you see that in the second half of the year? The last area is again, back to the [unintelligible] is looks as if, could you re-state the CAPEX number, I missed it when you were talking about the CAPEX earlier, but it also looks as if the CAPEX number you are showing for this quarter includes the fact that you have some shareholder loan between American Movil and BSC in the last quarter and how was the actual cash flow for BSC, did that come in during the third quarter or did the cash actually flow out in the second? Thanks.

Okay, with regard to your question on Mexico, I think that what happens and this is something that is innatural and we keep on saying this, , there seems to be some type of a networking effect. What happens, at first people used to get a cell phone as an extension of their trade, they would do it for work, randomly as more and more people staring having cell phones then more people would use it for unlimited calls and now what you are seeing is that as prices come down and people become more accustomed to using a phone, because remember a lot of people in Mexico never used a phone, they never owned a phone of their own, as they become more accustom to using a phone there is a tendency to give back calls. When you were in the early stages when people were only getting these for work, they were essentially used for receiving calls but they were not making calls because of the cost, they would receive calls from clients but they would not make any calls.

Now what you are seeing, again, as the circle of people that have their own cell phones now, grows and grows, and as it becomes more convenient, the price, the incentive of people to talk to each other, they have to call each other, they are more likely to return the call and that is what you should expect over time. The rate of incoming to outgoing should be coming down more towards the practical rate that would be expected for any phone. Most people that use a phone use it almost as much for making calls and for receiving phone calls. I think that is what we are seeing in the cellular segment of the market, so I think that this is well beyond the impact of one of the impacts of the reduction of pricing this year and more related to the dynamics of the market that we will be seeing going forward. The second question, on the CAPEX, I was essentially saying, I am not sure exactly, but the CAPEX is $1.2B to $1.3B for the year, that is what we are revising the numbers for and on your third question regarding the BSC. With BSC we have roughly [inaudible] Pesos of revenues, okay,

Wait, could you say that number again Carlos?

[inaudible] Pesos of Revenues and "$60" something of EBITDA, okay.

Okay, so $6M around that number.

64M Pesos of EBITDA in those two months. Remember that we only took control BSC in mid-May so this might not be very much, but when we took over, the significant part of the back office work of BSC is actually done at BCP and BSC pays a management fee for that to the extent that we can transfer those, that work over to operations so that we need not have BCP doing the back office work, that alone would, should bring out a significant improvement in margin. That is something that we are working on and you know, we expect that we will be able to have it in self-management very soon, okay. So, these are the numbers that you want, no?

But that suggests that the other operations in Brazil saw a decrease in their EBITDA in the second quarter compared to the first of about $2M to $3M.

Say again?

That suggests that you had a fall in your EBITDA in your other operations in Brazil of about $3M?

Yes, what I can tell you is that without BSC, we would have had revenues of 622M [Deis] which would have given you an increase quarter to e quarter of 13.3 percent, okay, and without BSC we would have an EBITDA margin of 27.6%, okay which is somewhat less than we would like to effectively show over Telecom American numbers.

It sounds like you are discounting the handsets aggressively to sell them out in Brazil, is that true?

We have done a promotion similar to what most of the rest of the competition have done, I don't know that we have done anything that is materially different.

And the cash flow for BSC, just to confirm, that was in the third quarter or in the second quarter, it wasn't, because in your intra-cell numbers, it wasn't.

You should see an increase in subsidiaries, I don't think you have to get mixed up with that, but it was immediately goes into an increasing in the difference of the full amount.

That was in the first quarter.

The time to pay for it was in May.

But the cash flow effect in your accounts shows in February rather than in May.

the cash flow, what do you mean by the cash flow?

That the effect in your accounts shows in February rather than in May

The more that I take on a debt, that I didn't used to have, that immediately becomes an increase in Net Debt, which effectively would have had an impact on cash flow. If I eventually go down and pay that Net Debt, it would lower on my balance sheet there would be the same impact of cash flows that you have with amortization of any debt.

Okay, I am just trying to piece out what the cash flow was in the second quarter and it looks as if BSC wasn't a distortion this quarter, it was more of a distortion first quarter.

I think they are not correct, but I think that the impact on cash flow, the impact on cash flow is at the moment that you take on the operations, it is at that point when the company cash flow would be provided. Both on account of your booking a new debt that you did not own and secondly the actual payment of the debt was as you had booked in on your own accounts. So, what we had in May was the equity we paid to the shareholders for the equity that they set aside the company, but we also had to book as a new obligation, the outstanding debt of BSC at that point. That was the amount of cash flow, it took to reduce its debt, essentially came from the cash balances and did not appear to change in Net Debt at that point. But, we, you are welcome to discuss this with me after the phone call.

Okay, thank you.

Thank you, Patrick.

Our next question comes from the line of Rizwan Ali with Bear Stearns, please go ahead with the question.

Hi Carlos. First of all I am wondering, now that you have mastered the price elasticity as more than one in Mexico, you appear to have quite a bit of a capacity in your network. Do they appear to make sense, at some point, to further reduce tariffs in order to increase revenues and outputs?

It does, I think that we have been really trying to gauge the sensitivity of the market to practice. Remember that earlier this year when we came about with the reduction in some of the prices in the prepaid payphone calls, they were very cautious but analysis of the revenue indicates that earlier this year there was, in a way they were navigating uncharted waters and I think that what we are taking is what we expected which was that there was indeed a reduction in demand, at this stage of development of the market, having to be corrected. To the extend that indicates demand, it may be the case that we have to bring about further declines in pricing that we may expect to see an impact on generating even with revenues.

But I think that eventually the market will take off on its own and certainly, as you mentioned. we have sufficient capacity in our networks to process more packages. Clearly the, from an operator perspective there is, you have to consider the balance between the prices that we charge and the taxes that those require. The law is the more profit that you charge, the more profit that you have to process and your debt will, therefore the more CAPEX that you will need and in this juncture, I think it is a good statement, that you are saying that we are in a good position to process much more traffic in Mexico without having to bring about an increase in CAPEX. Seemingly because of the capacity that we already have installed for the company.

One last question, if I may, the interest rate environment is pretty benign, you can get very good financing these days, why would you want to reduced you debt, at this junction, the only reason I can think of is that if you are preparing for an acquisition, would be that be a correct statement?

No, not necessarily, because what you are saying is that we are simply keeping the money, keep only debt and we can built up our cash balances. And, you see that when you have a debt and I am not so sure of the extend, but there is always a negative carry issue of the return you get on your short-term investment will be less than what you have to pay on the debt. These negative carry are very much independent of the nature of interest rates. So, essentially the only, there is a cost to having liquidity and we already have sufficient liquidity with the $1.2B today, so we don't really think that we need to keep on paying and we may have to carry an additional amount of liquidity. In this I think you also have to look to what is liquidity in relation to assets in a relatively short time frame, you know what are you funding sources and I think that we are comfortable with our funding sources and we are comfortable with the consideration of the company to say that we don't think that we want to have increases in balances at this point. I think that the impact of planning for acquisition should be more in terms of the Net Debt, that in the broad debt balance combination that you want to look at.

Thank you very much.

Thank you.

At this time we have no further questions, please proceed with your presentation.

Thank you very much for the chance Charles, I want to thank you for attending this call. This is your first call with American Movil for your new position with JP Morgan and again thanks for hosting the call.

: Thank you very much ,Carlos. Thanks for everybody that attended the call and we can all now disconnect. Thank you.

Thank you very much and Goodbye.