America Movil SAB de CV (AMX) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the America Movil second quarter 2006 earnings conference call. My name is Katie, and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would like to now turn your call over to Mauricio, Head of Latin American Telecom [inaudible]. Sir, you may proceed.

Good morning, everyone. This is Mauricio Fernandes. I am the Latin America telecom analyst for Merrill Lynch, and it is our pleasure to be hosting the America Movil's second quarter 2006 earnings conference call.

On the line today with us we have from Mexico City, Daniel Hajj, CEO; Carlos Garcia Moreno, CFO; and [Paulina Mieva], Head of Investor Relations.

Now, I would like to turn it over to Daniel for his initial remarks. Daniel, please?

Thank you, Mauricio. Thank you, everybody. Thank you for being on the call. Carlos is going to make, as always, a small summary of the results and then we can pass to questions and answers.

Thanks. Good morning, everyone. Thank you, Mauricio, for hosting the call.

America Movil had another strong quarter in the second quarter. I think we can summarize it by saying that we have delivered the subscriber growth the market was expecting with far more EBITDA than the market had been expecting. Basically, our net additions of 7.2 million in the second quarter, which by the way was fairly similar to the ones that we have seen in the first quarter, as opposed to other years when we had seen much more [inaudible]. These net additions were very much in line with [average] the market was expecting.

To the extent that there were any differences in the case of net additions, they seemed to have been more based on the results of Tracfone. Tracfone is a company that [the analyst's] expectations have been [reconciled] and they probably haven't taken into consideration that the second quarter is typically the weakest for Tracfone. Second quarter has always been the weakest quarter for Tracfone. Nonetheless, Tracfone managed to cap 35% more net additions in the second quarter than they had a year before.

All in all, we ended June with nearly 108 million subscribers, which means that the net additions that we had over the first half of the year, which were $14.5 million, were even higher than what we have had in the first half of last. Last year, the net additions were 14.6% lower than the net additions that we had in the first half of the year.

Revenues were up 27.2% year over year in the second quarter. But I think it's very important to focus on service revenues because again, we have seen that sometimes the discrepancies between the expectations that [inaudible] have had regarding equipment sales as opposed to service revenue sales.

In the case of service revenue along they were up 31.6% year over year, which means nearly 8% quarter over quarter. Sequential growth of service revenues was particularly strong in Brazil, where we had 11.2% service revenue growth. In Columbia, 7%, Ecuador 8%. But most of the other operations have very sizeable increase of service revenue growth, with Mexico, Argentina, and the U.S. All of them had roughly 5% service revenue growth quarter over quarter. So again, for America Movil that's a full nearly 8% sequential service revenue growth.

We have we're told of the strong showing in service revenues [inaudible] our main markets both in Mexico and in Brazil we saw an increase in the [inaudible] in the quarter. I imagine this is going forward and it's consistent with what we have been mentioning for some time.

Now, service revenue is expanding with subscriber growth decelerating in relative terms certainly relative to the scale of our operation. We have seen a very significant expansion of EBITDA margin. The EBITDA margin in the second quarter 36.4%, was up 8.7 points relative to second quarter of last year. And behind this expansion, we are seeing very sizeable increases in places like [inaudible] where the swing in the EBITDA margin has been 23 points year over year. In Argentina, the swing shift has been 19.3 point. And in Columbia, we have seen a swing of 18.2 points. So we have seen very considerable margin expansions in these [inaudible] of South America.

But generally in America Movil, if you look at the numbers carefully, you will see that we have been quite successful at containing our costs, and we have been able to direct most of the extra revenue that we're getting directly to our EBITDA and to the bottom line.

As a result of this EBITDA, which was nearly 10% higher than the market [inaudible], we ended up having a very sizeable net profit in the quarter. We've had 10.8 billion net profit, which was nearly 33% higher than what we had last year. And this means that the profits for the first half of the year ended up being 20.8 billion pesos. Again, a very sizeable number. Again, a very sizeable number, which is 62% higher than what we've had in the first half of last year. I think this is something that is worth considering.

Again, in looking at the number that we have received from [inaudible], the differences regarding the net profit very often had to go with financing costs. I guess that there was an expectation, but that's because of the movement in the exchange rate, particularly the peso throughout the second quarter that we were going to have significant [inaudible]. The fact of the matter is that we have really a balanced position. We've had most of our debt that have been converted into pesos. So we didn't really total from the movement in the exchange rate throughout the second quarter. But we've had a net financing cost that was very similar actually, somewhat less than what is the actual net interest payments that were made.

One of the things that -- well, I'd say the only exception, the things that we saw this quarter was profit of 1.2 billion that was booked in Mexico, and this has to do with the new wealth of the license on Version 9. I think this is a topic that we have mentioned in the past. Initially, this license called for the payment of a certain percentage of service revenues over time. When the license expired, it was renewed under the same terms, but these terms were not consistent with the terms that have been granted to all their operators [inaudible]. So we decided to fight this in court. We eventually won. And now that we have a final ruling and we have established new terms with the Ministry of Communications, we are now booking the revenues-- the payment we had made as duties to the government, which we are recovering. We're making [inaudible] net profit for the quarter. So that's 1.2 billion out of the 10.8 billion pesos of net profit that we've had in the quarter.

One thing that is very important is that our cash flow has been very strong. Although we have been speeding up our share buy backs, particularly over the last couple of months. The fact of the matter is that our net debt came down significantly. Again, I think that this is something that was below what most analysts were expecting. And net debt ended our June at 44 billion pesos. And just to put it in perspective, this means that relative to the last 12 months EBITDA, our net debt today stands at 0.6 times net debt to EBITDA.

So again, we are seeing a company that is generating a sizeable cash flow today that is in the midst of continued expansion of its subscriber base, but also in the midst of a process of margin expansion. We are looking at a company that has already seen the peak we think of topics related to sales. [Inaudible] sales are falling and we expect it to continue to fall.

So all of this means that this is a company that has a sizeable and likely to increase free cash flow, and that is to date not leveraged by any means. I mean, telling 0.6 times net debt to EBITDA is probably the lowest ratio among any company within this class.

So I'd like to leave it here. But before I really want to call your attention to a small mistake that we had in the report. This is a mistake that we first [inaudible] to the table that has to go with the Central America numbers, Central America table consolidate the information from four operations– Guatemala, [inaudible], Honduras and Nicaragua. And due to a mathematical error, we had a mistake in the EBITDA. The real EBITDA should be $189 million, which means 51.3% EBITDA margin. I just want to make this correction. We will be making it formally to our report.

This does not affect the consolidated numbers. This is something that only affected this particular table and we wanted to call your attention to that.

But I would like to leave it here. Mauricio, maybe we can begin the question and answer session.

OK. Thank you, Carlos. So a couple of questions from me and then we'll open up for Q&A. Usually, the subscriber net tax to increase in the second quarter. Bu at this time it was flat relative to the first quarter. Thought it was still strong year on year. Is this a result of a delivery decision from you to grow less or do you think the market has started to show some signs of a slow down? That's the first question

The second question is the profitability as you mentioned was quite impressive, mostly driven by lower costs. What cost item do you think is mostly contributing to this improvement? And if you can give us an indication what you expect for the EBITDA margin going forward that would be great. Thank you.

Mauricio, on the first question, what you see is that first quarter of this year was really impressive. If you compare the first quarter of 2006 against first quarter of 2005, you will see that in 2005 we have around 5 million customers and 2006 we have 7 million customers. So the growth in the first quarter was very good because we have a very good January. We have a good sales in December, and then still we have a very good sales in January.

So that's really the reason why we have the same level of net tax in first and second quarter of 2006, it's because we have a very good quarter very first one quarter this year. But I think you are going to start to see a little bit of slow down, signs of slow down in some countries. In some countries we're growing really fast, penetration is growing very fast, by an example, Columbia and maybe you are going to start to see a little bit of signs of a slow down in some countries.

Remember also, and maybe it's good to say that the third quarter is the lowest quarter of the fourth quarter. So I think that the third quarter is not going be as first or second, but maybe in the fourth quarter we can recover that. So my view on net tax for the second semester is maybe around 13 to -- I think 13 would be good, 14 would be excellent if we have that, less in the third, a little bit better in the fourth quarter. But you are going to start to see signs of slow down in some countries.

The second on profitability, I think what we have been doing is being taken care about the customer -- we are not decreasing or lower our cost. What you are seeing is that all of our subscribers have been given us very good revenue. And when you have good revenue and increase of revenue, and you control the costs, you don't need to lower the costs, but you control the costs and you don't increase costs, then your margin starts to grow. And it's mainly what we are doing in all the companies in all the regions. So that's what you are seeing.

What we're going to expect for the next semester. Well, to maintain this [inaudible] will be very good because we are going to still have, as I told you, 13 to 14 million as net tax for the rest of the year. So that's what you are going to see more.

OK, thanks a lot. I'd like to turn it back to Katie. Katie, please open the call for Q&A now. Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Claudio Brocado.

Hi, Daniel, Carlos and Paulina. Congratulations on a very, very good quarter and on having John Cox in Brazil. Could you give us your outlook for the EBITDA margin in Brazil. The improvement was very impressive in the second quarter. But what do you expect going forward?

Well, we talked what we said is that we are going to have around 10% EBITDA margin in Brazil. The EBITDA it's become higher. I think things are going well for us in Brazil, and I expect to have more or less 12% to 13%.

Remember what I've been telling everybody that we do for the last two years, one year a lot of things to support the company. We do the write; we do good cover ads; we change the brand we increased coverage; we consolidate the building platforms. We do a lot of things, and today we're having all the benefits of that.

So in my view, you are going to see a little bit of increase in the margins in Brazil, but we have something that is very important to tell. We had [inaudible] change some rule in Brazil. What does that mean? We have partially [inaudible] and today we are not going to have [inaudible].

So, it's the way we used to book the things is when have partial [inaudible] you book only the difference between the interconnection incoming against outgoing interconnection. So you book that difference. Today with the new rules, you have to work all the interconnection as revenue, and then outgoing interconnection as cost. So you are going to see an increase of the revenues of Brazil. I think in all the companies it's worth changing with the auditors how we need to book it. But what you are going to see that you are going to see increases on the revenues and increases on the cost also.

What that means, that does not mean nothing in terms of the absolute EBITDA that you are going to see, but that means a little bit on the margin of the EBITDA, because when you have the same number of EBITDA with higher revenues than your EBITDA number is going to decrease a little bit. So that's still worth seeing how much is going to hit us -- not hit us, but how we're going to see that this new rule is going to hit us in the results. But if you still see the same way with [booket] you're going to see still increases of EBITDA for the next six months.

That's a very good point because even the same number of EBITDA in absolute amounts rise stayed over larger revenues just because of this accounting change but look like decline in the margins. But you do expect the same or not a little bit higher EBITDA in absolute amounts?

In absolute terms of EBITDA you're going to see that. We're seeing that maybe the way we need to look at this new interconnection these new rules can keep those between two to three points of EBITDA margin. Not absolute EBITDA. We're seeing the numbers, we're calculating the numbers and maybe in a couple of days we can tell you more how can those keep those. You're going to see increases on revenue definitely.

Well thank you very much and congratulations once again.

Thank you.

Your next question comes from [Mara Rusk], Morgan Stanley.

I have a question about potential expansion in all these countries in Latin America. So after the acquisition of Verizon what are the countries that are a priority in terms of expansion or for consolidation for America Movil? Thank you.

Hi there. Well, we still are working on doing the Verizon assets ready for Dominique and Republic Puerto Rico and Venezuela and then we need a lot on the Caribbean. We missed Panama. We're still missing Bolivia. But those are the countries that we are missing all the [inaudible-highly accented] as I told you but that's mainly what we are meeting there.

And do you see also a further consolidation in the countries you are already present Daniel?

Yes. I think you're going to see in the next year consolidation in the countries that we are operating. Of course, I don't know where but I think that in the future you're going to see more consolidation in some of the countries.

OK. And I have another question in terms of EBITDA margins in the long term. Where do you see the EBITDA margins of countries like Mexico that has very margins? Do you think these margins are sustainable in the long term?

What we think is that we sustain margins between 50 would be a good margin. We can reduce a little bit. You are not going to see big difference on Mexico in the margins. I don't think that we're going to improve too much the margins here but I also don't think that we can decrease too much. Maybe 5 to 10% difference between a little bit 2 points more in increases 2 points less decreases but I don't think for the next year to year and a half we're going to see big difference on the margins.

OK, thank you.

Your next question comes from Walter Pack from Pedi Capital. You may proceed.

The $2 billion payment that refund was made in Mexico. Did that show up in the revenue line or is that below EBITDA? You mentioned very low net debt levels also. I'm just curious why you're letting the net debt levels get to that level? Why are you not buying more stock back or why have you not planned a special dividend? It seems like a level that's probably too low than what really the company should be running at? Thank you.

What Carlos said is that it's 1.2 billion pesos. It's around $100 million what we book and it's down the EBITDA – it's below EBITDA. So it doesn't help for that EBITDA margins. So what we book them Carlos explained exactly as to why we do it. Well Carlos says that we one-sixth and well I want to comment that with one-sixth that to EBITDA because we still need to pay all the Verizon assets and that's mainly why we are not buying more – we're doing stock buyback but we need to be careful because still we need to pay around $4.5 billion. It's mainly what we need to pay and with that well we are going to increase the ratio. So that's the reason why we are not doing more.

And do you plan any special dividend between now and the end of the year?

Still today we don't have any plans to do a special dividend.

Thank you.

And your next question comes from [Rodrigo Ortega] from [Evva van Commer].

Gentlemen, congratulations and good report. I just wanted to ask you a few questions in terms of your guidance for the full year and years ahead. Are you changing – Do you change your margins for the first half of the year? Does this mean you're increasingly significantly your margin gains for the year and in terms of the penetration of subscribers in Latin America going ahead you had to target probably 60% through 2008. Do you still expect the number or are you waiting for a more aggressive target?

How the things are going, I think we're going to have more than 60% in 2008. There's no doubt that we're going to have more than that and as I told you, you are still going to see signs of a slowdown in some countries. Specific in some countries you're going to see some signs of the slowdown. The full year in terms of subscribers. We were saying that it was going to be between 22 and 24 million and I think this year we're going to see around 27 to 28 million new subscribers and it's going to be the second best year of America Movil so still it's very high even if we have 26 or 27 still the growth is excellent and one of the good news is that all those new subscribers are having very good consumptions. The service revenue is growing very well so we're happy on that.

OK. You're already expecting a higher penetration in Latin America going forward, right?

Yes, of course. From 2008, 60% I think we're going to have more than that.

And the reach up 65 to 70 or is that already high?

I don't know exactly the number but it will be more than 60% of course.

OK, thank you.

Thanks.

And your next question comes from Andrew Campbell of Credit Suisse. Please proceed.

Yes, good morning. You mentioned the Verizon acquisitions and I was wondering if you could just give us an update on the timing when you expect each of those to close and also there was some news about a potential tax issue with the Dominican Republic asset and I was wondering if that could maybe slow the timing on that?

Well yes. In Dominican Republic having some conversation between Verizon and the government about some potential tax issue they having talks then and I think that would delay the closing of that transaction. I hope we could do it in the third quarter. I don't know exactly it's going to be in the third quarter or not but I hope that would be in the third quarter.

On Puerto Rico that's Verizon and the government discussions. American Movil hasn't had anything to do on that. That's a problem between – when you sell the company that's the tax of Verizon not of the company there and in Puerto Rico well things are going on track a little bit more slowly than what we expect but we think we can finalize all the authorizations that maybe at the end of the year beginning of next year that is what we think it's going to be. And on Venezuela we already send the information to the government and we're still waiting for a response. That is more or less where things are in the Verizon assets.

Understood. Thank you very much.

Thank you.

And your next question comes from [inaudible].

Calling party pays in Mexico. Have you seen any price elasticity with the reduction of [inaudible-highly accented] in the second quarter and my second question was given the sharp output increase in Columbia do you think the reason to believe that net ads in Columbia going forward should be a bit less than 2 million per quarter?

Only calling party pays in Mexico what I think we have some [inaudible-highly accented] still we don't recover the all the price that we reduced but we are having an elasticity. I don't know if it's third or fourth quarter we can reduce. I think we are more or less increasing like 5% and it's 3.5% is the recovering and reduce on the price was around 10%. So still we have something more to recover.

On the [inaudible-highly accented] there is that mobile to mobile has increased very significantly so the connection of revenues from mobile to mobile have increased 27%. The first half of the year versus the first half of last year and as Amil said there's been a recovery [inaudible-highly accented] connection. We haven't completely recovered it but we are more than half way through the recovering of that part. So the connections revenues have actually increased.

And in Columbia what we're seeing is that we have big growth, revenues are growing not as the customers are growing and what we're looking and we're taking care that all the customers that we are incorporating will have. We have a lot of customers that are only receiving calls. What we want to do is to try to see how we can do those both to make those customers only making some calls but still they are being profitable and they are being good customers. But you are right. Is decreasing a little bit. So we need to be very careful on that.

One last question. Do you expect CB reduction in Mexico to be more than 10% or a lot more than 10%?

CB is the calling party paying?

Yes.

We have one more year with 10% because the contract was three years. We already lose two years and next year 2007 it still is going to be 7% and it's something that the [inaudible-highly accented] is never fading with what we're going to have in the future and I think they are going to do a whole package between national calling party pay as a new reduction on local calling party pay. We are in the [corportal] still new people are in so we need to give them some time to understand all those things.

OK, thank you very much.

One important thing for Mexico specifically. Interconnection calling party pays has been decreasing on the amounts of the revenues. It's only 15% of the revenues that the all calling party pays for Mexico. So we're increasing a lot of other sides of the revenues and calling party pays has been decreasing for only 15% and I think it's going to tend to decrease in the future every time.

OK, thank you very much.

And your next question comes from [inaudible].

Hi, good morning. One question. What can you tell us about the competitive environment in Mexico and Brazil? Has there been any change since the first quarter of this year?

Well Mexico, we're competing against four, maybe five companies. The four companies is [inaudible-highly accented] Bell, Telefonica, Nextel and we have huge competition there so we are still investing a lot on the branding, a lot on coverage, a lot on distribution or advertising, new handsets, new prices. We're reducing the prices in Mexico to be more competitive so we know that we have huge competition and we are being very careful on that.

In Brazil, the competition is also – they're big companies like [Team] like [Devo], like [Telemar] Brazil Telecom so in these two countries we have a lot competition and we need to do the things in the correct way to gain market. Brazil we were the leaders in second quarter on net ads so we're happy on that. Not only in prepaid also we have a very good amount of [inaudible-highly accented] and service revenue is increasing so we are happy how Brazil is doing and again repeating we do a lot of things the last two years to have these results. Finally Brazil is having all the benefits of what we do in the past.

Do you think you could benefit from [Devos] technological migration to GSM?

Well, I don't know. If they are migrating to GSM they've got 25%, 28 million customers on CDMA. So of course there's an opportunity to benefit of that. If they decide to migrate from CDMA to GSM well they have a reason that and I think we have an opportunity that when they migrate all the customers from CDMA to GSM we can get maybe a small amount of that but we can get some of those customers.

OK, thank you Daniel.

Thank you.

And your next question comes from Patrick Grant of Citigroup. Please proceed.

Hi, good morning. Could you talk again about - your net debt to EBITDA extremely low and if you look at your free cash flow that you'll generate for the rest of this year you're more than covering the 4.5 billion you need to finance the Verizon acquisitions. You're going to enter next year probably with the same certain net debt EBITDA even though you've paid for those acquisitions. When do you start paying out this cash more aggressively or what's your thinking behind that? How many more opportunities to consolidation do you think there are out there and if they're there how many big ones are there that can actually move the needle on the company today and then my other question was again on the calling party pays rate. Are you expecting a reduction in calling party pays and by how much by the end of this year in Mexico and what's your thinking on calling party pays rates in 2008 in Brazil? I know we have some minor reductions and changes in the system in Brazil right now. Then 2008 we could see big reductions there.

Well in Mexico I told you that we have three years contract 10% reduction so we are in the second year. We still have 2007 with 10% reduction on calling party pays. So we're going to have one more year and then I think the next year we're going to have a negotiation there with authorities with [inaudible-highly accented] I don't know what we're going to have. On the rates if we incorporate $4.5 billion more than we grow from 4 to 8-1/2 and when you go from 4 to 8.5 and when you grow from 4 to 8.5 then you are more than 1%, one time to EBITDA.

So, well, we don't want - - we have ratings, we have very good ratings a lot of things that we want to be careful on that. So, still today, I think this year we want to buy the companies, we want to pay them and we want to be careful on the ratio. And for next year, well as you said, we are having good cash flow. We are going - - I think we are going to have consolidations. How big they are will depend on with whom you consolidate and where. No? So still I don't have anything. We're not discussing with nobody today. So, I don't have that information.

But of course you can consolidate in a lot of the Latin American countries. Plus to grow in other countries. So, that's - - I mean in interconnection in Brazil, Patrick, well, it's difficult to say what is going to happen in 2008. So sometimes we don't know what's going to happen with the revelators in the next three months or in 2008 we don't know. But, what we need to do is to do the same thing that we do in Mexico that interconnection not be as a majority of our revenue. So, so that interconnections would be a part of the revenues and it's what is here in Mexico at 15%. And I think in Brazil in the next two years you are going to see the decrease on the level of, on the weight of interconnection, Patrick.

OK. Just a clarification question, the - -.

Sorry, Patrick, everything. There is a lot of traffic that is going cellular, cellular on net. So, that's something that is growing fast and it's helping us to - -.

To produce that - - to produce dependence on it.

Yes.

But, there is a negotiation going on right now for the introduction of nationwide calling party pays which could see a very big reduction in calling party pay rates, couldn't it?

Well, in Mexico, no. There's negotiation on the national calling space. There's people that wants to reduce. I don't think that - - we have a contract until 2007, so maybe in 2008. And I think regulators understand. I think, I'm not so sure, that a big reduction would not be benefit even for the country. It adds facts to the add reduction but it has to be a year-by-year and there's no reduction so you can recover traffic you can [inaudible] in some things that they want, rural area, some local. I think regulators understand that and well, they are new people I don't know what they are going to do. But, I think they are very bright people and they understand what they need to do. That's mainly what I can say.

And the 27, 28 million addition that you mentioned for this year, does that include the acquisitions or outside the acquisitions?

No, it's outside the acquisitions. We already do 14, so I'm saying we could do 13 more. It's more or less what I expect. Fourth quarter it's not very good for, it's not good quarter. And then fourth quarter that - - let's see how the economies are. How the economies are in each country would be. So, I don't know exactly how big it's going to be.

OK, great. Thank you.

Thank you, Patrick.

And your next question comes from James Breen, Thomas Weisel. Please proceed.

Thank you good morning. A couple of questions, one with respect to Puerto Rico and the technology there, are there any plans to convert that over to GSM? And then on the handset side, I think you had talked previously about potentially trying to work with the OEMs to get handset, GSM handsets at a lower price point, possibly to help increase penetration across the regions. Can you just talk about any trends there?

Well, I don't have any plans still in Puerto Rico. I think that we're going to move to GSM as we have all the operations in GSM. What we are focusing today in Puerto Rico is to close, to do all of the alterations and to close the company. When we do that then we are going to take the decision what to do. But still, I want to focus on the closing of the company. Then on the handset side of GSM. Well, we always try to have better prices in all the concepts. And all the prices are coming down and high level handsets, medium level handsets, low-end handsets. So, we want to - - we are working to have good prices on the handset side. Some people are saying that in the next year there are going to be up $25, $20. Well, I hope that we have those type of prices in the GSM handsets. And we can increase lots more the penetration.

Great. Thank you very much.

Thank you.

And your next question comes from Henry Cobbe of Thames River Capital.

Hi there. Thanks for answering the call. It's Henry Cobbe from Thames River Capital. Just a couple of questions. First of all, just striping out the equipment revenues and costs and looking at the underlying service EBITDA margin. It hit an all time high of 56% in the second quarter. And so the basic question is, is this sustainable now that you're really seeing traffic growth and revenue growth? And lower fixed costs going forward? Second is could you just update us on the Cap Ex estimates, your budget for the year on a consolidated basis? Third question, just looking at Columbia and it's a very important market for you and its growing very strongly. Where do you see the kind of penetration rate for the addressable market out over the next couple of years? And the last question, looking at the losses you sustained on equipment on a per gross add basis, it seems to be stable around the $32 per gross average, can effectively subsidy rate, would you be looking to decrease this subsidy in years to come? And if so, by how much?

Well, the third the question is simply what we want is to resolve as much as possible the subsidy of the concepts. And as much as we can reduce that then we can improve our results. And obviously from subsidies we have a lot on that. But I think we are contributing to put more penetration, to do more penetration in all Latin America with that. So, we - - it's a little bit of where are the profitability of the customers is, is where we are doing the subsidy there. So, that's mainly, as customers get low segment when they spend less, then I think we need to do less subsidy because then the customers are not profitable.

On Columbia, as I told you I think Columbia is going to have a reduction and a slow down on the [net tax] for the next year maybe. They have been growing a lot and I think penetration is going really fast. So, my view is that they are - - you are going to see signs of a slow down in Columbia. And it's a very important market. Still we are happy, because all the customers are giving us money, are consuming. So, but we want to be careful for the next year on those new subscribers because, yes, the segments of those subscribers - - we already cover a lot of new cities, small rural areas and then the new ones that are coming are people who are going to consumer more. So, we want to be more careful on those customers that all these customers will be profitable. And I think Carlos wants to add something on the first question.

The-- what Daniel mentioned that subsidies are ultimately a function of two things, the [inaudible] concepts which we have said that is coming down. And the expected profitability of the new subscribers. So to the extent that go lower segments then you have just the correspondingly [inaudible] subsidies that you are willing to provide.

But we are not going to do subsidies, only by doing subsidies. We are going to do subsidies when we saw that these customers are going to be profitable for us. It's what we have been doing for the last two, three years.

So, implicitly as you go down the income curve of customers towards lower [offer] customers we should expect to see the net equipment loss for gross add come down commensurably.

OK, that is exactly the case.

OK and Cap Ex, lastly.

Well, Cap Ex, Carlos said that we don't think we are going to have a increase on Cap Ex to net revenues. And we think that in the future that we're going to go UNPS and so some investments. But, I don't think that the Cap Ex would increase more than the levels that we are having today. So, that's mainly it. Depending a little bit on Dominican Republic if we are going to move to GSM on Puerto Rico, if we are going to GSM. But those things we still don't know because we, as I told you, we need to close the companies and see exactly how much we need to invest in each company.

OK, so are still - - still $3 billion for '06?

Yes, yes.

OK.

Thank you.

Thank you very much.

Next question comes from [Marshall Cole] at [inaudible].

Hi, Carlos. I have more questions specifically about consolidation in Brazil. With [inaudible] selling its stake in Brazil telecom and given that the group has been quitting some other region, other countries in the region, analysts start to say, that you went up selling [inaudible] Brazil and just shed other operations in the region. If you have say at some point say [inaudible] in Brazil, it would probably be able to replicate its model next going to Brazil, what would [fantastic] obviously. So, my question is regarding your interest in Brazil if it's up for sale and your overview on your consolidation fronts specifically on the mobile market in Brazil. Thank you.

Well, on Brazil the only thing that I can tell you is we haven't had any conversations with them around selling in Brazil. Some analysts are saying that [Team] says that if they can not stay with Brazil Telecom maybe they can sell also the cellular. But you never know what really they want to do. I don't know what the strategy of the Italians in Latin America. They exit two, three countries they are still in Brazil and in Argentina. So, we don't know exactly, but well maybe in the future would be company that would be for sale. So, I really don't know about Team.

Just a follow on, have you ever made the calculations on possible synergies between the two operations [inaudible] and Team and how would that work. I mean for example, I think it would have an operation like [inaudible], I mean it would be huge liquidities obviously, depends on the price. But have you ever made the calculations on that?

I can not speculate on that. I don't want to lose focus in Brazil. I'm really focus on what we need to do and we want to do and it's what we are doing. So, in the future - - and if we don't have any talks with them, so I can not calculate the synergies. So, I don't want to lose focus right now. I think the company's on track. The company is doing much better. You are going see, I hope you are going to see more improvement in the future. So, this is what we are doing in Brazil. Team would be for sale, well, if Team is for sale, then we can sit down and discuss it. But, still today, I don't - - I don't have anything there. I mean, the other side, we don't need Team in Brazil. We are doing very good. I think we are putting the support, the basis on the company. So, I'm not worried if they are going to sell Team or not sell. We are focusing on what we need to do.

Sure. Thanks a lot, Carlos.

Thank you.

Your next question comes from Chris King.

Good morning. Thank you very much. Two quick questions, both in Brazil. First was interested in your thoughts on the upcoming spectrum auctions, there including the 3G auction next year. And secondly was wondering, evidently we have seen reports that Telemar has recently abandoned all handsets subsidies in the country and migrating only to selling SIM cards once again. And was interested in whether or not you had seen any impact recently of that decision by them. Thank you.

We don't know. We don't know really if these customers that they are getting only by selling the SIM cards are good customers or not. Good customers we are going to see that maybe in six months, in one year you are going to see all those subscribers are good subscribers. We are not doing that. We still are selling equipment. We still are investing in the company. And I think at the end of the day we are going to have better results on that. We are going to invest more, of course, you need to invest a little bit more. But we are going to get the best customers is there in Brazil. When you have a handset against a SIM card, I think you get a better customer with a handset that only with a SIM card. So, it's mainly what I'm thinking. No. And what you said about the 3G as the license?

Whether you had finalized your plans or interest in participating in either one of the upcoming auctions in Brazil?

Well we need to understand really which options are coming as when they are going to be. We are analyzing all of that and we wait until the final rules of all the auctions that are coming.

Thank you.

Thank you.

At this time, we have no further questions.

OK. Melissa, well thank you for hosting the call and thank you everybody.

Only one comment, Mauricio and everyone. As of next week, we will have [inaudible] take over the IS responsibility. [Paulina] is leaving. She's going to get her MBA. So I would appreciate it all your further inquiries could go through [inaudible]. Thank you.

Thank you, Carlos on behalf of Merrill Lynch I want to thank you, Daniel and [Paulina] and wishing her all the best. And thank everyone for taking the time to participate today. Have a nice day.

Thank you.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.