America Movil SAB de CV (AMX) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the America Movil 2Q 2005 Results Conference Call. [OPERTOR INSTRUCTIONS]. I would now like to turn the conference over to Mr. Jean-Charles Lemardeley Senior Latin American Telecommunications Senior Analyst at JP Morgan. Please go ahead, sir.

Hello everyone. I am Jean-Charles Lemardeley, Latin American and senior Telco analyst for JP Morgan. I would like to thank you for participating in this conference call to discuss America Movil second quarter 2005 results. Joining us from Mexico City today are Daniel Hajj, CEO and Carlos Garcia-Moreno, CFO. Daniel and Carlos, please go ahead.

Thank you Jean-Charles thank you everybody. Thank you for being in the conference. As usual Carlos is going to make a small summary of the second quarter financial report.

Good morning everyone. Thank you, Jean-Charles, for hosting the call. Well, as you have all been able to see, we had quite a strong quarter in terms of subscriber growth. We have seen that Latin America is continuing to grow at a fast pace. That is partly explained by the continued economic growth in the region, but very much also explained by what appear to be network effects that are taking hold, and they are driving quite substantial increases in wireless penetration rates very much across the board.

We have seen so far this year gains of roughly 6 to 7 points in Mexico, Brazil and Argentina in wireless penetration rates. We have seen again so far this year Colombia at 11 points penetration and Ecuador an additional 10 points. All together this has translated in a year-on-year subscriber growth for America Movil of 46.6% which represented a very strong 11.2% of quarter-over-quarter subscriber growth at 10.4m net adds. I think it was the strongest quarter on record for America Movil in terms again of net additions.

We have seen net additions being at record level in Brazil, Colombia, Ecuador and Guatemala. Again, second quarter was the biggest ever in terms of net additions for the countries that I just mentioned. If you look at sequential growth quarter-over-quarter, we have seen very significant growth still in places like Argentina with 20%. Brazil itself 15.5%, Colombia with 30.6%, Ecuador with 15% and Mexico continuing to grow at a very stable rate of really from a much higher base, then we have Mexico with 5.4% quarter-over-quarter.

Year-over-year this 46.6% of blended or average for America Movil really comprises very disparate rates from having on the 1 hand Argentina with 144% year-over-year, Brazil 46%, Colombia 112% Ecuador 58% just to remind you and again Mexico from a much higher base at 26%.

Revenues came in at MXN42.6b. That's the potential so fairly strong revenue growth year-over-year at 33.5%. And quarter-over-quarter revenue growth was 10% and if we look at really more important operations in Mexico, we saw very good both total revenue and service revenue growth in the range of 5% to 6% quarter-over-quarter and turning to 30% profit year-over-year.

In the case of Argentina we are seeing also in total -- in cash total revenues and service revenues, probably the same growth rates quarter-over-quarter and year-over-year.

Colombia, it’s also very strong quarter-over-quarter subscriber and revenue growth of 19% for revenue growth and 18% service revenue growth. Brazil we have 21% quarter-over-quarter revenue growth, which means 42% year-over-year, very similar to the rate of growth of subscribers in Brazil. So altogether the fast pace of growth led really to an increase in subscriber acquisition costs, and that has led to a reduction in the EBITDA margin to 27.7%. However, at MXN11.8b for that EBITDA for the quarter was 10% better than last year for the same period.

Second quarter we also happen to have very important foreign exchange gains. These were effectively due to the application of the Brazilian real and the Mexican peso. And altogether they represented roughly MXN4.3b and they helped generate together with the operating profits for the company, a net income for the quarter of MXN7.9b, which was a 150% greater than what we saw in the same period of 2004, and roughly 75% greater than what we saw in the first quarter of this year.

So altogether I think that we have had a sound quarter, good growth and very much across the board both in terms of subscribers and in terms of revenue. And I think that I wouldn't like to say anything more. Maybe we just open it to question and answers and give it back to Jean-Charles.

Yes, thanks a lot. I'll go ahead with a couple of first questions. First can you give us an update on the potential acquisition opportunities that you see ahead of you for this year and maybe next year in the region, and also give us an update on your views on your opportunity to enter the Spanish market, especially now that France Telecom has acquired Amena?

And then partially said to this point your leverage now is very low, 0.8 times net debt to EBITDA thanks to your strong free cash flow. Can you share with us your thoughts on where your optimal leverage should be in the long run, and what it means for your use of free cash.

Well on the opportunities, we are not in Chile, we are not in Venezuela, we are not in Panama, we are not in Bolivia. We have a license in Peru that we are starting, the Caribbean. So I think we have still opportunities in the region. And we are ready to look at them if there is an opportunity.

Then in Spain, well, in Spain France Telecom is well the winner on Amena. The option on the license was not for a new entrance in that country. I think that that option was made for the actual competitors. And while the other opportunity is the UMTS license that has [indiscernible] it's straight up but I don't think we are looking at that at this moment. So in Spain maybe we – it’s not -- we are not going to do at this short time something in Spain at this moment. But we still have some opportunities in the region as I told you.

To deal with this big growth we are increasing a little bit our CapEx. We started the year with around $2.2b, something like that, in CapEx. I think the budget that we have for this year still we are going review that. It's around $3b, so with this big organic growth that we are having, we are increasing our CapEx there. And as you said we are in a good financial situation that we are content EBITDA times of. Still with the opportunities that we have and maybe some buy-backs or something like that we are going to do it for this year and maybe the next 1.

Good, so you’re raising your CapEx guidance for MXN3b for this year?

More or less, more or less. Still we have -- we need to see exactly how the growth in minutes in each country is going to be. But the new forecast for the CapEx is around $3b.

Thank you very much. Operator, we can turn it to the floor now for questions.

[OPERATOR INSTRUCTIONS]. Our first question is from the line of Andrew Campbell with Credit Suisse First Boston. Please proceed with your question.

Yes, good morning. In terms of that higher CapEx number could you give us a feel for where the incremental $500m is going, how it’s spread across the different markets? Is it mainly in Brazil, or is it elsewhere?

Just to clarify, if that includes the CapEx that you are going to spend in Peru and in Menis with the Greenfield licenses? And any kind of update you have on those 2 operations as to when you will be launching there?

Well in -- this $500m that maybe $600m is going to be all around the countries so you could see that we’re going to put more CapEx where we are growing more. Colombia, we are growing very fast, so I think that it's going to need a little bit more of CapEx. Mexico is above our forecast that we were going to put something in. Mexico, also in Brazil, Ecuador it needs a little bit more. So I think it's to maybe -- this incremental CapEx, we’re going to share it all around the countries.

In Menis, you’re right, it's our Greenfield operation in Brazil. I think we want to start before Christmas and I hope we’ll do the same in Peru. So our budget is to start before Christmas.

Okay great. And the $3b then includes those Greenfield operations?

Yes, yes of course, of course.

Okay. Thanks so much.

Thank you. Our next question is from the line of Martin Lara with Santander. Please proceed with your question.

Hi, good morning this is Martin Lara from Santander Mexico, just 2 questions. I would like your point of view with respect to Telefonica’s weak performance in Mexico in the quarter? And do you think that the market share gain that you had in Mexico is sustainable?

And the second question is, could you please provide us with the breakdown of your ARPU in Mexico in the quarter? And I am concerned about the 6% decline in the ARPU that you experienced. What should we expect in the next few quarters?

Well, what I can tell in Mexico, what I can tell is that in Mexico we feel comfortable about our new net adds that we are doing. You can check our minutes of use. Our minutes of use are above some of our competitors. So we feel very comfortable that all these new subscribers that are with us are consuming and are going to be good subscribers. So you should check that by the minutes of use that we have per subscriber.

The ARPU, well the ARPU declined a little bit through last year, but in this quarter maintained more or less the same, flat. So I think with the big subscribers that we are having, big growth that we having, first quarter and second quarter to maintain our ARPU means good news for us. So I am happy about the development in Mexico. And what's the other question?

And going forward what do you expect in terms of ARPU in Mexico?

Well, I think if it maintains flat for us it's excellent because still we feel that the growth is going to be important. Third quarter for all Latin America it’s a little bit lower than -- I think it's the lower quarter that we are gong to face because it's the cycle -- because of cycles. But the fourth quarter is going to be, I think, very good. Everything -- that depends a lot on the economies in each country and if the economy is maintaining good shape I think we can maintain the growth for all this year.

Okay and with respect to Telefonica?

Telefonica, I don't know exactly the numbers but what I can tell you is that all the new subscribers that we know -- I don't feel and I don't have subscribers that are not consuming it today. You could check it by the ARPU, you could check it by the minutes of use. So I feel very comfortable the way we are acquiring the cost of margin mix.

Okay, thank you very much.

Thank you.

Thank you. Our next question is from the line of Henry Cobbe with Thames River Capital. Please proceed with your question.

Hi everybody and thanks very much for the call. My question is really just about the pre-paid growth strategy. And it seems in all the successful emerging markets, pre-paid growth is being driven by a tariff reduction and volume growth, i.e. decreasing or making prices more affordable to the average consumer so that they can actually generate more traffic.

And this seems to be a problem in Brazil in particular, where the traffic growth is very, very slow. And is this because prices are high and why, at $0.12 a minute roughly, why are the prices high compared to say your competitors in Asia when the cost of the capacity installed is fairly similar globally? So could you just explain why pre-paid prices are so high relative to cost of capacity, and whether you will be changing your pre-paid growth strategy in the future?

And the second question is just on the outlook for equipment subsidies, how you see that changing in the Brazilian market in the second half? Thank you.

Okay, regarding the question about Brazil we have a solid revenue growth very, very much in line with our subscriber growth year-over-year. And service revenue growth is somewhat below at [30] something percent as opposed to 45% or so year-over-year.

But we have seen in every market that there is always a certain lapse when you are rolling and acquiring subscribers. Because the moment that you are taking on a new subscriber and the moment that this new subscriber starts generating a normal level of traffic, very often in pre-paid you are putting more -- a lot of people receive calls initially. They want to receive some calls on the cell phone and it takes some time for other people to get to know the phone number of the particular subscriber so it takes some time for traffic to build up.

So I think that from that perspective what we’re seeing in Brazil is very consistent with what we have seen in other countries, particularly Mexico. We have seen that it takes some time for a subscriber to put it some way, to mature.

And yet we have also done in Mexico where we have been reducing [indiscernible] for a couple of years and I think that is in Brazil prices haven’t come that much [worse] of the handsets but also the cost [indiscernible]. So I don't really think that we have any fundamental concerns in terms of the overall working of the market in Brazil. I think that is very consistent again, as with other markets and very consistent with what have seen before in Mexico. The second question was what?

Just on the outlook for subsidies, but before we go on looking at other markets again which have similar low rates of subscriber growth for those [indiscernible] India where there is 50% [through analogue] subscriber growth. EBITDA is growing also by 50% because of this the lower cost of the marginal minute. Or Malaysia subscriber growth is in the 30% to 40% range and EBITDA growth is around the 15%. Indonesia again its around 50% subscriber growth and EBITDA is growing at 15% to 20%.

So I want to see what's different about your pre paid module and why, I am sure there is a lag but in other countries the lag is much, much less because that seems to feed through much quicker to EBITDA. So could you just try to explain that?

Yes, well I think it's different when you compare some countries, it's different on the economies of the countries. So I think there are some people in some countries that they can not use more of the phone. And also the way they are growing, now when you are growing very fast, or then it's different when you have more a stable state growth in different countries.

But I think what you should check and what we need to be very careful and I think we are being careful is, the level of subsidy in these subscribers. Because every --- we need to make every subscriber profitable and if we put big subsidies there, and they have a low ARPU then maybe they are not going to be profitable.

But if you subsidize less and they have lower [indiscernible] what we really are looking is we are trying to make them use more of the phone, to all our subscribers. I think they are doing on the time, day by day they are consuming more, all the subscribers that we acquired on January are consuming more to date. And they were consuming in February or May, April so every time they are consuming more. And the other thing is the level of subsidy that you give to those subscribers I think. So those are the 2 things that we you need to be checking.

Well I have been checking them and the economics are very different. But looking at the Brazilian ARPU's at the moment they are roughly 4% of monthly GDP per capita. Whereas in India its 25% in China its 11% and its only the 3% to 2% level in the developed markets like Korea and Taiwan, which obviously is fully penetrated and very mature mobile markets.

So in an early stage of growth you should be having a much proportion of GDP in your ARPU. And again this is just that the pre paid pricing is too high and is unaffordable for marginal consumers. And until you adopt a mass model for pre paid its not really going to take off in terms of usage. Which leaves me to ask what kind of -- what is your current installed capacity? And what kind of utilization rates are you seeing and whether you have to expand capacity substantially, to accommodate the expected increased in traffic growth? So what's your utilization rate at the moment?

Well I think in terms of prices that you are saying you should see that prices in pre paid are going down very fast. If you check prices 2 years ago and prices today prices are going fast, very fast they are going down very fast. So in terms of prices I think we are doing a good effort and a good promotion all around Latin America. And all the other things I am going to check it and I'm happy to review it what you are saying.

Okay. And can you answer on your utilization rate what capacity utilization you've got at the moment?

I think we have enough capacity today in all the countries. We are growing fast we are increasing our CapEx but we have capacity to, we have enough capacity.

Okay so there's not substantial surplus is what I am asking?

No.

Okay thank you very much indeed for your time. Thank you.

Thank you.

Thank you. Our next question is from the line of Adam Galinsky with Goldman Sachs Asset Management. Please proceed with your question.

Thank you very much. I noticed a substantial increase in working capital and it served as a source of cash for the quarter, because it looks like it was a big increase in accounts payable.

Can you tell me please how you expect the reversal of this increase to take place, over what time frame? And actually maybe if you could just us know why it is that accounts payable rose so much in this particular quarter relative to previous quarters?

Yes what we have is a future arrangements with [Bendals] this is something that we have had for the last couple of years for the most part. In which a lot of the work that we have done in establishing a new network this will it take a pointing reception of the full network going that it is in operating condition. So essentially the majority of increasing working capital for [indiscernible] has to do with CapEx and the terms hat we have contracted with the vendor, will likely mean that the expectation will be probably for the most part, part of this year and part of next year, okay. There is a little bit also of accounts payable appreciated to [indiscernible] but the vast majority of this is attributed to CapEx.

Okay. And then a second question has to do just with your country by country breakdown of EBIDA. When you add those figures together you don't arrive at the group EBITDA, so I assume that something s getting left out of the country allocation. Can you help me to understand, what if you like is the non-allocated portion of EBITDA?

This has just has to do with [new customer use] in Mexican GAAP facilities for the [indiscernible] to get all the information from the [IFRS] accounting to Mexico. Essentially we have to play it slow [indiscernible] the inflation put everything in constant currency. And then on the [indiscernible] at the last exchange rate over into Mexican pesos. And then there are some of [indiscernible] we can work these things with you out and this is probably where [indiscernible] can tell you how we go about in the first consolidation.

Okay I'll follow up with you directly then thank you.

Thank you.

Thank you. Our next question is from the line of Mauricio Fernandes with Merrill Lynch. Please proceed with your question.

Thank you very much. Just a couple of questions, first on leaving the margin the growth in the year you have seen in facing in Brazil and Colombia, I was wondering whether the Brazil margin that you guided towards 0% for the year is this still case. I also wanted to get a better sense for what you expect, I know it depends a lot of growth, but assuming that growth remains at what it is, what kind of margin you expect for Colombia and Ecuador?

The second question is on the investor day you mentioned on a consolidated basis that you expect America Movil EBITDA in 2008 to reach $8b to $9b and there was -- I wanted to know is a still also the case?

My final question is on subscriber acquisition cost. I know you don't disclose the number but just wanted to know whether you are increasing? If you can actually finally disclose the number that would be great, but if not if you could give us a sense of whether subscriber acquisition cost for gross addition as increased in the quarter? Thank you.

I think in Brazil well its going to depend a lot also the margin for the conceivable EBITDA margin that we are going to -- that we expect for this year to depend a lot on the growth. We have 2 big big seasons that's its [model] date and it pretty much we also pass model day. And as I told you [third party] is not gong to be, we don't have anything exceptional but fourth quarter is going to be excellent.

So we are reviewing that what you could see is that we are working on cost control, on also in Colombia also in Ecuador. You could see that we will maintain the growth that we have, maybe we have the same EBITDA or better EBITDA because all these subscribers are giving us more revenue. So it will maintain this growth with could have the same or better EBITA also in Colombia and in Ecuador. In Brazil we need to review because there is more seasonality in Brazil than in other countries.

About the data for 2008 well we don't really review our guidance previous guidance every quarter, and also we just don't really have any more information there. I think that what we have said before it's not inconsistent with originally revenues and EBITDA targets that we mentioned in our investor day. So I would not -- whereas we have not yet done any new projections I would not believe that those will be materially different from the ones that we have already shown to you.

But as regards subscriber acquisition costs, I think it is mentioned in some parts, in the report, that we have seen a reduction for the most part in subscriber acquisition costs per gross add. And I'd say, I can tell you that not everybody considers that it is a subscriber demand so that is why we would not want to provide you with full-year numbers. But essentially what we have mentioned is that it's practically 100% of the decline in margins is attributable to subscriber's growth and to acquisition costs. So you can really work out what those costs can be.

And another thing is its very difficult to budget the subscriber position because it depends a lot on the -- what in each market you are competing with different players. And it's a different competition more aggressive sometimes, less aggressive other times. So it depends a lot the price of the country and the price to the customer the acquisition costs so it's very difficult. Because we are at every month is different they are [indiscernible] in each country and in each market, so therefore I can't [indiscernible] on an EBITDA basis the appreciation costs the second quarter because this first quarter were roughly the same.

I'm sorry were roughly the same?

Same the aggregate and the [indiscernible] out in some places it's a little bit. And its [indiscernible] accretive we had to go with competitive conditions and the dynamics in different markets. And so we consolidate with [indiscernible].

thank you very much 1 last follow up. What was the CapEx for the second quarter and for the first half of the year please? Thank you.

For the first half of the year it's already mentioned in the report.

$1.7b compared to -- to be exact its MEX17.6b which comes to be approximately $ 1.5b to $1.6b.

Okay. Thank you very much.

Thank you.

Thank you. Our next question is from the line of Vera Rossi with Morgan Stanley. Please proceed with your question.

Thank you and good morning. I have 2 questions 1 on wireless penetration in Latin America and the second 1 on traction. In terms of wireless penetration how high do you think penetration can go in the region?

And what drives penetration is it the handset prices or the price of the service, the price per minute.

And second on traction I realized that there was this low [dialing] in that additions to increase in churn this quarter. This is a seasonal factor or it's because you now are facing market competition from the U.S. carriers like Verizon? Thank you.

The second question on traction I think it's we have a very good quarter the fourth quarter of last year and the first of this year. And I think we have a little bit more of the [indiscernible] in this second quarter. Its more -- I think third is going to be very good, I think it's going to be good it's more cycle there. And fourth is going to be I think excellent. But on the other side we are facing more competition in the United States. But we feel very comfortable that we are going to do good growth in traction investors and more in the fourth quarter of this year.

In terms of penetration we always stop at some countries like Mexico, Brazil, Colombia, Argentina who will go to 60% penetration 65% penetration where we think that we are going to get there. We at the beginning we think that its going to be in 2008 end of 2007 maybe we are going to be a little bit earlier there.

And what drives penetration, well as you said handset prices, services prices but also a lot the economy of the country. If the economy is in good shape I think we can still grow as fast as we are growing right now. If the economies in the countries are start deteriorating maybe we are going to slow down a little bit. And also I think competition drives more penetration, when you have more competition there is more everything I think the market and then you have the more penetration. So I think also the different it's an [indiscernible] that we could have done better.

But just 1 follow up. Between handset prices and services prices is there 1 or the other that is more important and it should drive penetration up?

Well for the [long] segment of -- for -- I think its very important the price of the handset. But when you reduce a lot of price of the handset then you are going to see that customer, customers that really they don't consume anything. So you need to be very careful there because maybe you are going get some customers when you do the handset too cheap, too fast and too cheap. Then there is going to be some of those customers that they are not going to consume anything. So you need to be adjusting everything and to be very careful because maybe, to have good growth with bad customers I don't think we want that, so that is mainly what we are reviewing every month is there.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Patrick Grenham with Citigroup Smith Barney. Please proceed with your question.

Good morning. Could you just talk through again your subscriber addition guidance for this year? It looks as if we are going to see a lot more subscriber additions in Colombia, Mexico and Brazil. Do you have any idea or could you update us on what sort of numbers you are expecting at the end of the year?

Second question I have is on the CapEx your CapEx is going up a lot to MEX3b as you mentioned, is that going to continue for the long term? Because it seems to me that although your revenues are going up the traffic levels and the MOU's are not going up that much especially in Brazil. If they were to pick up a lot are we going to see them, how long is this MEX3b level of CapEx going to continue? Is it just this year or are we here for permanent levels of higher CapEx?

What you -- we saw CapEx not because of subscribers I think the CapEx level that we are doing is more for the traffic that we are doing in each country. So if we put out a lot of subscribers and they are having low traffic, when our CapEx is going to reduced so mainly the CapEx is more for traffic than for subscribers Patrick. So we are checking that we are not doing only because of subscribers.

The new [what exciting] I think we are going enter this year with approximately 22m net adds for America Movil, so I think that's what we are thinking to do. Depending a lot as I said earlier on the economies of each country so if everything maintains more or less the same. I think we could then with approximately 22m new subscribers for this year.

And how would that break out by quarter, I imagine that most of them would be in the fourth quarter|?

Third quarter is going to be much less I think the 2 big quarters are the second because Mother Day and the fourth because of Christmas. So I think maybe its going to be 65 [steady 5] or 60.40 on the third and fourth quarter I don't know exactly the number but maybe it would be like this Patrick.

Okay. And just to go into Brazil a little bit more. We have a big increase of subscribers in Brazil, no increase in the MOU's it's actually a drop in the MOU's and the ARPU isn't really going anywhere. But I imagine most of the increase in the CapEx has to be in Brazil because that's where the biggest upside and traffic flows is, would that be a correct assumption?

No, no I don't think this is all -- I think the CapEx is going to be -- the new CapEx is going to share by country because all the countries are above it. I think Ecuador and Colombia are growing more faster than Brazil now in terms of new subscribers. Colombia has 2.1m subscribers and in the actual base that we have. So I think we, in Argentina we are doing also we are doing very well, Central America also, Mexico, I don't think its only Brazil I think we are going to share the CapEx for all four.

And remember Patrick 1 thing when you move CapEx for coverage its more expensive than when you move CapEx for capacity. And what we are doing right now is CapEx for capacity not CapEx for coverage. Because the coverage is what we decide at the beginning of the year and we are doing that to all this year. And the only thing that we are doing more is only for capacity and capacity is much cheaper than coverage. You don't need a new tower, you don't need [cb watts] you don't need a lot of things it's totally different so that's why its -- this extra CapEx is only for capacity.

Okay. And just to verify after the investor day you mentioned EBITDA between MEX4.5 and MEX5b for this year. Do you think I could be lower than MEX4.5b this year given that you have a lot more acquisition costs?

No I don't think so I think we can maintain our budget on -- maybe on margin its going to be less but in terms of money it's going to be MEX4.5b to MEX5. Also it's going to depend a lot on the exchange rate and everything there but we don't think in terms of money that we are going to reduce our budget in anything.

Okay great thanks.

Thank you.

Thank you. Our next question is from the line of Miguel Garcia with Bear Stearns. Please proceed with your question.

Thank you. My question is about the growth in Brazil, we've seen ARPU's coming down to about $10. And my question is that you are saying that you expect these countries to reach much higher levels of penetration. So my question if you go forward and increase your penetration you are going to get to probably to subscribers with $8 or $9 ARPU. Can you make money at theses levels and if so how long can you go in terms of ARPU and still have a profitable operation of $6 $7?

As I told you before it depends a lot on the acquisition cost of each of the subscribers now. And these subscribers you are going to subsidize the more money to what they are going consume or they are going to get use or it's not going we are not going to make money. But I think every subscriber will be profitable depending on the subsidies and thee acquisition cost that we do in each 1. So that's mainly what we are going to face in the future.

But the only thing [clearly] we are going -- when you -- given the lag between the month and that you expect [indiscernible] and that you [indiscernible] just a little profit. Given that lag there is always the case that when you cover that acceleration that sizeable that initially it will deplete you're to reduce the MOU's. And that is what I see that is a natural [indiscernible] we have seen it in places as I said in places like Mexico.

So the factor that on day 1 you have a reduction but that doesn't that that reduction is going to be sustained over time. Again I ask you to look at the extent of [indiscernible] in Mexico you would have all the information. And you can see that ARPU has come bouncing back last at subscriber growth has slowed down. And that the new subscriber growth are generating the new traffic that we handle expected then to.

Okay thanks a lot.

Thank you.

Thank you. Our next question comes from the line of Rizwan Ali with Bear Stearns. Please proceed with your question.

Okay just a follow up on what Miguel asked. Do you think you are reaching a subscriber base in Brazil where the profitability, no doubt you will probably make money on these clients, but do you think the profitability is reaching levels which is just marginal, or your cost to capital?

And second thing is if you would to not assume an increase in ARPU's by this [margin] subscribers which may or may not happen, would you still be adding these subscribers in Brazil?

Yes, I think yes and I don't think we are expecting marginal expansion yes. I think what we want to do in Brazil is to end up with 25m subscribers. To have a good base of subscribers and in that case I think we are going have very good margins and our cost is going to be with a good reduction on cost. This margin is more for volumes and when we reach a good base of subscribers in Brazil, I don't have any doubt that we are going have good margin and we are going to make good money.

Okay. My second question was I think the first quarter conference call you were discussing how you were expecting a [price lost elasticity] from the reduction in [CPP] rates in Mexico. Have you see any lost of price elasticity from CPP production in the second quarter?

Yes second quarter against first quarter the growth 5.6% we have at the beginning of the year a reduction on 10% on price. We still doesn't have recoup all the volume 10% what we are in good -- we are growing good so we are happy with the elasticity right now.

And 1 last question is do you sell in Venezuela, can you tell us what strategy you may have in Venezuela between various possibilities of either going for Digitel or for [Trentvast] with TelMex?

Well I think depending on the price on each 1 and depending if they are selling each 1 of the 2 companies. But we need to review that but we are open and happy to invest in them as well. We shall meantime not on the condition and price so that going to be the issue.

The other thing is to have a license there now because the country is open to give a new license, so those are the 3 alternatives that we have today. New license, Digitel or Trentvast, those are the opportunities because America Movil will have have Venezuela.

I am just wondering is price the only issue for -- is the problem the price in the acquisition of Digitel?

Yes its prices but it's the conditions for America Movil so depending on the conditions and the price, and everything there so I think [Cantaley] they have a better base of subscribers it a more better market share than Digitel, depending on the price of each company Cantaley had the biggest. So while there is a lot of things that you need to check, I don't know if in Digitel because we are not in touch with anybody of these 2 or Cantaley are ready for sale. So I -- that's the issue today.

1 last question if I may. Does the possibility of reduction of CPP in Colombia, can you give us an idea of what is the possible reduction. And do you expect some kind of elasticity out of Colombia the way you are expecting in Mexico?

Yes I think there is a possibility on the reduction but the reduction in Colombia is going be made by us so we decide what, it's different than in Mexico. It's not a combination between the fixed a discussion between the fixed and the mobile. Today the reduction on the CPP in Colombia depends only on the mobile deal. And yes we are thinking to reduce a little bit because that the prices is at some level that we think that if we reduce that, we are going to have more traffic between fixed to mobile so we are making analysis and maybe we are going reduce that.

Thank you very much.

Thank you. Our next question comes from the line of James Breen of Thomas Weisel Partners. Just proceed with your question.

Thank you good morning gentlemen. Can you talk about the regulatory situation in Brazil? And what the feeling is in the billing [keep rules] that are currently in places is this just an experiment or you think this will end up sticking there?

No I don't think that yes, but in Brazil we finally do the increase between fixed and mobile that, finally the government decide the rate. And we start to what I think it was in July or June, June or July I don't remember such as the date. And what's the other question the bill and keep? I don't think we are gong have the bill and keep, full bill and keep at [that stage] I think the government already said that we are not going have full bill and keep in Brazil.

Should you think it goes back to the old system?

Well we are in that system today and I think that we are going to maintain the system, the actual system that we have today.

Great thank you.

Thank you. Our next question comes from the line of Walter Piecyk with Fulcrum Global Partners. Please proceed with your question.

Thanks. Carlos thanks a lot for providing that extra detail on [indiscernible] acquisition cost in Brazil. I think with some simple math you get a clear indication of very strong core margins in Brazil. If you just review what the share repurchases was for the quarter? And maybe talk about how you guys report MOU's. Are MOU's as they are reported in the press release at all impacted by the timing of the subscribers and when they come on during the quarter? Thanks.

Yes regarding the share buyback together with dividend payment they amounted to MEX3.3b in the period.

Can you indicate how many shares?

For the first 6 months. I don't have here the exact number of shares but if you can contact Amieva we will send it to you by email today.

And its 30.3 in 6 months not in the first.

And regards the MOU, we essentially take the averages for the -- we take the beginning number, the final figure and then have the effectively an average.

But the real [Inaudible] So the subscriber growth would obviously drive that number down, so either those customers are on for the full quarter in the following quarters, that's going to obviously impact the MOU for your subscriber base correct?

That's correct.

Well that's great news. 1 other question on the CapEx, with the increase, how did this affect your viewpoint on share repurchase, in the second-half of the year?

I think that our incentive to give back to the market whatever [it gets back what we] expect to have at the end of the day after acquisitions and everything. So we have partly we do it on account of liquidity issues so the first half of the year wouldn't have that much more [liquidity]. And the second-half of the year I think its going to be very much a function of, to the extent, of what we can do in the acquisitions.

But in the assets and acquisitions I don't think that we really have a target which we would sending the money back to the [indiscernible] we intended to return all the said [indiscernible]. Because we don't -- this is related to another question before whether we want to have the leverage come down much below the exiting levels. And now we do not have to we don't have that intent.

And in those acquisitions I think we are still in very good shape to do some buy backs.

Yes I think [indiscernible] we don't want to calculate that EBITDA [indiscernible] mostly over 50 the others. And that means that the asset weighted rating will either be given back to the market, by way of buy backs or will be utilized there for only acquisitions or a combination of both.

Okay. Just 1 other question I would think that the, when you strip out the impact of acquisition costs, which really isn't that hard, the margins of your business have been very strong and stable. But it seems like there's a further opportunity given that you've done some GSM overlay in your TDMA networks. And if you could just characterize across all the markets, as far as, where are you with the overlays that have gone on? Because once those are complete I would think that there would be a further lift in your pre-marketing margins that exist for the company? Thank you.

Well I think we do overlay, we can overlay in Guatemala on CDMA. We have an overlay in Mexico who want TDMA, GSM on TDMA we have another lay in Colombia, we have another lay final like there and ready also Colombia, Ecuador, Argentina and Brazil. I think we can overlay in all the countries and we are ready we are operating at normal operations in GSM. So all I see it as very good all around Latin America on the GSM networks that we have.

Right so if you look at those core margins over the past 2 years while your adding these cells sites. That margin expansion opportunity may have been somewhat limited, by the fact that you had been doing this overlay. So now you are saying that you complete that so the outlook for the future years on the core margin side and saying I wouldn't sense more optimistic given that the overlays are largely complete, correct?

Yes it's correct, correct.

Thank you very much.

To make the coverage it's more expensive than to make capacity so right now we have a good progress, still we are doing a lot of coverage but capacity is what is taking a lot more of our CapEx.

Great thank you very much.

Thank you.

Thank you. Our next question comes from the line of Rick Prentiss with Raymond James. Please proceed with your question.

Yes good morning gentlemen. My question is on the U.S. side, [Trackson] are launching the new brand also referencing back to the earlier question talking about price elasticity's. Can you talk about what you hope to accomplish in the U.S. with launching that [Net 10] and what your goals are?

Well I think the new Net 10 was to cover other sides of the market that are subscribers that wants to pay more at the entrance and less in the service. So I think we launch it in April and maybe in May. And we are happy, we are happy how the development of this new -- the new rate and I hope it will grow everyday is growing on sales. So it's another side it's another segment on the U.S. prepaid market what we are attacking there.

Any plans to monetize some of that stake, we've been watching Virgin Mogal in the U.S. they haven't come out anything with an offer on their side. Any thoughts on your side?

No we don't have anything right now.

Okay good. Good luck.

Thank you.

Thank you. We have a follow up question from the line of Henry Cobbe with Thames River Capital. Please proceed with your question.

Hi there thanks for taking the question. Just a follow up question on the CapEx, you mentioned that you are raising the CapEx to $3b and this is predominantly for the traffic, based on subscriber additions of 22m for 2005. And on the current MOU trends that implies that you are estimating traffic to go up from 60b minutes to about 88b minutes. And it means that effectively for that $3b you are paying another $100 per incremental minute, or $58,000 per incremental [airline] which is about 5 times the Asian average of $15,000 per incremental airline.

So could you explain again why you've got higher capacity costs which obviously then feed through into you're the fixed component of your tariffs. [Inaudible] you putting in a large amount of capacity in which capacity or CapEx will drop in 2006?

I answer 1 first [indiscernible] I don't understand your numbers you do it you stick very [tight] so I don't understand those. But I can tell you that our actually budget on CapEx at the beginning of the year was $2.2b $2.3b, so that means capacity and that means coverage a lot of that. So with that we shall money for [indiscernible] we have another Greenfield that is Peru. And then we have capacity for the incremental subscribers because at the beginning of the year we have 17m to 18m subscribers and we are moving from 17m to 22m. So that is really what we are doing on the CapEx okay.

And that -- mainly I can tell you that 85 or 80% of the new CapEx is going to be for capacity but maybe the rest would be for prepaid [the machine] so I even know everything on the CapEx but I can tell you that we are sharing in each country that CapEx.

Well what I am asking is for the incremental total traffic for example, your traffic is going to go from 60b minutes to 88b minutes for example, your incremental 28b minutes you are paying $3b which translates to $58,000 per airline of incremental capacity, which is 5 times the Asian average. So again the capacity should be is it a global commodity business it's the same from whatever network provider you get it from. So why are you paying so much for incremental capacity on a per minute or per airline basis?

I am sorry to tell you but that's not the formula and the way we do the CapEx it's not growing from 60b to 80b. As I told you at the beginning we are doing another lay of GSM so a lot of in all the countries we are moving, we are having good coverage but we still need to do more coverage. So its not only at capacity and the way you do your formula I don't think that the -- I think that what that was the additional CapEx over and above the initial forecast for the year doesn't relate exclusively to capacity which does not mean to say that the initial profit for the business of [40] of [indiscernible].

Okay but that's clearer then, that's clearer. Thank you.

You're welcome.

Thank you. Our next question is from the line of Frank Husic with Husic Capital Management. Please proceed with your question.

Operator, operator.

Yes.

There will be no questions on this.

There is 1 on the other 1 and then a final 1 please.

This will be the last question?

No I said this 1 and then 1 last 1.

Okay.

Thank you very much. Gentlemen do you have any further plans for more aggressively moving into the small and mid sized business market, the 1 that Nextel has primarily been exploiting?

Well you know that we already launched push to talk here in Mexico and in all the regions we cover medium companies and corporate and massive markets. And we have different type of services like push to talk, like GPRS like prepaid like [push to talk]. We are already covering all those.

And your comfortable with your current initiatives is that correct?

Yes I am comfortable with my current initiatives.

Okay. Thank you very much.

Thank you.

Thank you. There are no further questions at this time. I will now turn the conference back to you to continue with your presentation. Oh I am sorry we do have 1 last follow up question. Would you like to take the question?

[Indiscernible] yes.

The follow up question is from the line of Patrick Grenham with Citigroup Smith Barney. Please go ahead.

Sorry could you just give me some idea of how the nationwide calling card to base system is working? Is that going to be introduced in the third quarter of this year and what would the effect on revenues been if it is introduced?

I don't think it is going to be introduced in the third quarter of this year. But still the local authority people in Mexico are not giving us any feedback about that. So I don't think it is going be it's a lot of work to do and I don't think -- I don't -- we don't expect and I don't think we are going to have like a surprise to have the calling card in place at the third quarter. I think there's still a lot of meetings and talks and things to do before doing the calling card base.

A 2006 event then?

Maybe, maybe.

Okay great. Thank you.

Thank you very much Patrick.

Thank you. That does conclude the Q&A session I will turn the conference back to you to continue with you presentation or closing remarks.

Only to tell everybody thanks for being in the conference and thanks to Jean-Charles for hosting the conference. Thank you everybody.

Bye bye.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.