America Movil SAB de CV (AMX) 2007 Q3 法說會逐字稿

Good morning. My name is Robin and I will be your conference operator today. At this time, I would like to welcome everyone to the America Movil's Third Quarter Results Conference Call.

(OPERATOR INSTRUCTIONS)

Thank you. Mr. Ali, you may begin your conference.

Good morning to those in U.S. and Latin America, and good afternoon to those in Europe. My name is Rizwan Ali. I am the Senior Latin American Telecom Analyst at Deutsche Bank, and I would like to welcome you to the America Movil's third quarter conference call. Also, a special thanks to Mr. Daniel Hajj, the CEO of America Movil; and Mr. Carlos Garcia-Moreno, the CFO, for participating in the call. After the management presentation, we will have a Q&A session.

And with this, I will ask Daniel and Carlos to make the presentation.

Thank you, Rizwan. Good morning everybody. Thank you for being in the call. As always, Carlos prepares a small summary of the third quarter results.

Good morning everyone. Thank you, Rizwan, for hosting this call. Well, as most of you may have seen by now, we had a good third quarter, with solid subscriber growth, brisk service revenue growth, and very good cash flow and EBITDA. Whereas EBITDA was in line with consensus, net additions exceeded by over 8% THE market consensus, there was more bang for the buck.

Our net additions totaled 6.2 million subscribers. Unusually for a third quarter, they exceeded those of the second quarter and were slightly higher than the ones we had last year. Postpaid subscribers grew more rapidly than prepaid subscribers in various markets, including Mexico and Brazil. In absolute terms, Brazil and Mexico led the way with 1.7 million and 1.4 million subscribers, respectively. In fact, Claro in Brazil appears to have led the Brazilian market with 28.3% of the net adds in the quarter. Argentina, Paraguay and Uruguay contributed with a combined 784,000, with Columbia adding 650,000 and Peru 485,000. Peru is our fastest growing subsidiary. At the end of the September, its subscriber base had increased by 71.4% relative to a year before.

America Movil had 143.4 million wireless subscribers at the end of the quarter, nearly 26% more than in September of 2006. Fixed lines totaled 3.8 million for a combined total of 147.1 million lines.

Service revenue growth has been strong in several countries. Notably, Argentina, Paraguay and Uruguay with 14.3% on the quarter and 38% year-on-year, and Brazil with 7.3% sequential growth and 24.2% annual growth. In Mexico, it was 3.7% on the quarter in nominal terms and in Peru, 7.8%.

In most operations, service revenues have increased much faster than total revenues, since equipment revenues are growing less rapidly on account of falling handset prices or take up all in all altogether. Quarter over quarter, consolidated service revenues increased by 2.2% in constant peso terms, but equipment revenues fell by 1.9%. As in other quarters, the fact of service and equipment revenues are following very different trends appears to be something that it is not being well assessed by some analysts.

Usage is growing behind the growth in service revenues. Quarter over quarter, we saw MOUs expand by 10.7% in Mexico, 11.6% in Brazil, between 3.5% and 4% in Columbia and Argentina, Uruguay, and Paraguay, nearly 9% in the Dominican Republic, and close to 7% in Ecuador, almost 6% in the U.S. as well.

EBITDA rose by nearly 45% year-on-year to MXN31.9 billion. It represented an EBITDA margin of 41%. Over a year ago, we saw improvements of 11 to 12 points in Brazil, Argentina, Uruguay, Paraguay and Columbia. Relative to the previous quarter, margins improved in the majority of our operations. We accelerated the depreciation of TDMA equipment, particularly in Columbia and Brazil and incurred some non-cash expenses associated with the dismantling of the equipment.

Our operating profit reflected part of this, but it was up 30% annually reaching MXN19.7 billion with our net profit coming in at MXN11.1 billion. We spent MXN56.5 billion in the first nine months of the year on CapEx, the acquisition of our Puerto Rican subsidiary, and on share buybacks and dividend. Substantially all of these have been financed from our cash flow. Our net debt is almost flat relative to the beginning of the year. Through share buybacks and dividends, assuming that our Shareholders Assembly votes in favor of the special dividend payments of MXN1 per share we announced last week, we will be returning to investors this calendar year approximately $5 billion.

Summing up, we are seeing healthy operations across the board with solid -- continued solid subscriber growth and strong underlying trends towards greater usage that are providing support to ARPUs through the expansion of MOUs. Our cash flow is quite substantial, and for the most part, it's flowing back to our shareholders. The Company remains financially very strong, on account of both its low leverage and the strength of its cash flow. We remain very well positioned vis-a-vis our competition, continuing to gain ground in various markets.

Thank you very much for listening to the call, and I will pass it back to Rizwan, so that we can begin the Q&A session. Thank you.

Thank you. I will start with the questions. I had two questions. First is about Chile. We have seen basically disappointing results in Chile, margin hasn't improved and you have disconnections. Can you talk a little bit about the market conditions in Chile? And second is, with regards to this -- these higher depreciation and retirement of the TDMA assets, should we -- should that have a tax impact? Does that mean you have lower cash taxes this year?

Well, the first question on the Chilean operation, what we decided this quarter is to clean the base of subscribers. We have been growing strong. And well, we have a little bit of subscribers in prepaid that don't consume, we have a little bit of subscribers in postpaid that -- that we have, bad accounts, people that getting in our base with not very good credit. So, we decided to cut it down, to turn it off, and that's really what is happening.

I think what -- what we are doing in Chile, we are -- I feel very comfortable -- we put the GSM operation, we have a very good coverage. We are moving to UMTS. We are growing our distribution channel. We are changing -- the change of the brand to the Claro brand was very good, very successfully. So, I think that the -- really the bases of Chile are okay. So, I am feeling comfortable, we just cleaned the base and I hope that the next year, we are going to have a more healthy growth with very good bases that we are putting to -- that we are building this year.

Rizwan, on the depreciation, yes, it has -- it has a tax advantage. It would lead us to pay less taxes than we otherwise would have to pay in those countries.

Great. Robin, can we start the Q&A session?

(OPERATOR INSTRUCTIONS) And the first question comes from the line of Walter Piecyk.

Close, Piecyk, Pali Capital. Daniel, just a question, I guess, on the network expense. Was that also impacted by this write-down? I think in your prepared comments, you made some mention about depreciation. There were some expenses to actually take down some of the TDMA, maybe I misunderstood that. Was the network expense also impacted by any 3G network build during the quarter?

And then, finally, this is all related to the same question, is the capital spending was obviously light in the quarter? Your -- it seems like you are spending on 3G. Can you just give us an update on 3G, whether you have got any price concessions from the vendors and whether you are still on track to spend the same amount on CapEx that you had laid out last quarter?

Well, starting with 3G, I think we are very advanced on the 3G. I think we can launch in the first quarter of next year. We are advanced right now, we need to test it, we need to have very good quality to improve the coverage and I think at the first quarter of next year, we can start 3G. But, what is happening on the -- that we are depreciating a little bit more on TDMA is because all the TDMA customers are already moved or they are moving faster to the GSM operation that we have. So, that means that the TDMA infrastructure is every day -- we are using them less and less, so that's really the reason why we are accelerating the depreciation on the TDMA network.

Perhaps on your depreciation, that's not -- there wasn't any network expense involved with turning off cell sites to TDMA?

No. Well, it -- there is two things, but still today we are not turning off any cell sites. We are still turning on. And, if we turn it off, then I think it's if we don't have customers, it would be very good for us for the cost. But, still today, we are still having all the network running, less capacity, less links, less energy, but all the network running in TDMA in all the countries.

So, the -- your comment on 3G though, it sounded like it's -- I mean, at the investor meeting in Mexico, I think you were planning on launching some markets at the end of the year, so if it's early in 2008, that would seem like it's progressing maybe a little slower. So, why would the network expense be, I think, moving up as a percentage of revenue?

I think that the acceleration of the depreciation on TDMA doesn't have anything to do --

No, no, no, I am not saying -- forget about TDMA. I am saying that either your network expense in general is elevated. I think your comments at your investor presentation was that you would have some WCDMA markets in Mexico up by the end of 2007. So, I guess now if it's early 2008, where are we in that [image]?

I think we are on track. The problem is that we -- as it's Christmas is a huge sales for us. We don't want to start and launch the and distract our old distributors and everybody on the 3G. We want that they focus on the GSM network and then we are starting to run the network. In some places, we are having testings right now, so we don't have any delay on that.

But really to launch and make the advertising and do everything, I think we prefer to wait on the first quarter of next year. We want to focus a lot on the growth and the subscriber growth in all the markets for the GSM network that we have today. So, we don't want to put GSM and then make advertising on 3G. And so, we want really to focus there and then start the 3G network at the beginning of next year.

Okay. So, does that mean we'll see that expected level of CapEx of US$3 billion plus in 2007, or is there some CapEx also that will move into 2008?

No, I think, we are -- you are going to see $3 billion in 2007 and we are finalizing the CapEx for 2008, and I think it's going to be more or less the same. We -- you know that in Brazil, we win some license in the north, so we are going to put more infrastructure there. So, there is going to be a little bit -- we are changing in Puerto Rico from CDMA to GSM. But, there is no big change as of what we have now.

Okay, thank you and thanks for the special dividend as well.

Thank you.

And the next question comes from the line of Chris King.

Good morning. Two quick questions for you. First, with respect to EBITDA for 2008, I was wondering if you could give us a little bit of color on your preliminary expectations for that. I know Street consensus has EBITDA growing far less quickly than 50% or so growth rate we have seen from you guys over the course of the last couple of years. Just was wondering what your thoughts were regarding 2008 EBITDA at this early stage. And secondly, just wanted to get a quick update on the anti-trust investigation in Mexico and when you expect to see a final resolution of that.

Well, on the EBITDA of 2008, I am sorry, we are still finalizing our budget. I think we are going to have it at the mid of November, the budget for next year. So, I don't have still today the number. So, I think at the beginning of next year, we can give you -- or at the end of next year, we can give you more or less an idea of what could be our revenues and our EBITDA for -- and subscribers also for next year.

In the terms of the anti-trust, well, there is still -- they are looking. We are having some conversations with them and well, we don't have anything still today and we are -- the only thing that I can tell you is that we get together with them. They have some questions, we respond to the questions and they are analyzing, that's the only thing that we have right now.

You said in the past that they would like to have the investigation wrapped up by year-end. Is that your hope as well?

It's what they said. I don't know if they are going to do it. I think they have a lot of things, and well, I really don't know.

Thank you.

Thank you.

And the next question comes from Andrew Campbell.

Yes, good morning. I just wanted to ask about the three -- the special auctions that are coming up in Mexico, what your expectations are. I am assuming that you would be interested in additional spectrum, even though you are preparing a 3G launch in your existing spectrum and if you have any idea in terms of what the potential obligations would be for those licenses or what they may cost?

On the cost, we don't know. The conditions still nobody knows. The conditions, I think, the government is still working on the conditions and I think we are going to be able to participate. What I heard is that they want another participant, but there are going to be some license for the actual participants. So, that's mainly what we have right now and on summary, I think we are going to be able to participate. I don't know if in all, maybe in the WiMAX, the yes or no or the 19. There is going to be three different end license, WiMAX, 1900 and 2.1, and I think we are going to be able to participate in the 1900 or in the 2.1 frequencies. And those are the ones that we are interested in.

And I think that's good, we are starting with 3G right now, but I think to have more frequencies makes more efficient your network. So, it's always good to have more frequencies.

Okay, thank you.

The next question?

And your next question comes from the line of Miguel Garcia.

Yes, I wanted to ask you about the strong subscriber growth in Mexico and a slightly weaker margin. Is this due to your own decision to speed up the growth or it is a response to more aggressiveness from Telefonica?

I think what you are seeing in Mexico is that competition is being more strong. What we've talked at the beginning of the year is that we are going to have margins over 50% -- 50% or over -- or higher than 50%, and we are getting that. So, 53% that we have this quarter, I think, is an excellent margin with the competition that we have and with the growth on postpaid subscribers and the prepaid subscribers that we have. We have 1.4 million subscribers in Mexico, so I think that's an excellent number and with that EBITDA, I think, the Mexican operation is running very good. We are reducing a lot, we are giving more -- we are reducing prices, giving more minutes to our customers, increasing usage. So, I think the Mexican operation stays running very good.

And the competition from Telefonica is more focused on subscriber acquisition or also on rates?

I think both. The Telefonica has been aggressive on subscriber acquisitions and on new rates and well, that's the market and that's what we have been seeing for the last year maybe. So, that's really what is happening in Mexico. But, the [wholesale] has been very strong, we are -- the elasticity in our customers has been very good. We are giving better prices, but they are using more the service. So, I am feeling very comfortable with Mexico.

And lastly, there is an increase in the -- slight increase in the participation of the postpaid subscribers and the total in Mexico. Is some -- it is something that is going to continue, the focus on the postpaid market or is only momentarily?

I think we have been having an increasing in the postpaid subscribers for a lot -- the last quarter, so it's not new. We are focusing in postpaid, but we are also focusing in prepaid. So, it's -- no, we don't prefer one or the other one. I think we - it's different -- the distribution channels are totally different. So, we are pushing in both ways and that's what we are doing not only in Mexico. It's what we are doing in all Latin American. We have our distribution for the postpaid corporate [masses] and then we have the distribution for the prepaid. And in both, we are really interested, I think the two type of customers can be very profitable for us and we are focusing in both.

Okay, thank you.

Thank you.

And the next question comes from the line of Patrick Grenham.

Good morning. Can I just ask first of all about the usage? We saw a big increase in usage in Mexico and Brazil in the quarter. What are you doing to stimulate that usage and how far can it go do you think? And can you keep that rate of growth in usage?

Well, until today, and all -- through all the year, we have been giving better rates and more minutes to our customers, and the customers have been reacting with more and more usage. So, what we have been seeing is that the customers that receive calls make more calls and that's really what is happening. So, still in Latin America, Patrick, there is a lot of people who needs to talk more. So, it's what we are seeing for the last year and that's the reason why when you give better -- more minutes, people use it. So, I think where that's going to stop, well, really, I don't know but I think we have still space to do that.

Given that the usage is growing so fast, when are we -- what sort of effect does that have on your CapEx and when are you going to really need to have the 3G overlays, the UMTS overlays already done to be able to accommodate this sort of traffic growth?

Patrick, the CapEx, when you put coverage and when you put capacity is totally different. When you put coverage, then you have to find a site, then you have to do civil works, then you have to do links, and it's different when the -- when you put only capacity. Capacity is much less expensive than to do coverage or things like that. So, the usage is not so expensive as the coverage. So, that's why I don't think you are going to see changes in the CapEx. We are, let's say, 10%, 12% revenue to CapEx and that's more or less what we think we are going to have, and I don't have some -- we don't feel that we have to put more money on CapEx at this time.

All right. What percentage of your CapEx would be for coverage and what percentage would be for capacity?

Well, we have very good coverage all around Latin America. In some countries, we need a little bit more, in other ones, we are okay. We always grow in coverage. I think, all the Latin -- it's very important to know that all the Latin American countries are growing a lot, they are growing in houses, they are growing in resorts, in places, all the countries are growing. So, you never stop putting coverage because there is always new places where you need to cover.

But, mostly, it's on the -- this 2008, we are dividing the CapEx in coverage, in the capacity for GSM and in UMTS. And all overall, that is going to be more or less the $3 billion or the $3.2 billion that we have been investing, is what we are going to do in the next year. Also, in the Central American operations, we are putting also, remember that we have peaks also and that we are doing the convergence there. We are going to be there with cable and that's more or less a little bit where we are also putting a little bit of money, but there is nothing -- there is a small amount of CapEx in those countries, no.

All right. On the 3G, you talked about the Mexican 3G licenses, what do you think of the Brazilian 3G? Are you going to participate in those auctions and do you think you will buy those -- that spectrum?

Yes, of course.

So, you don't think it is expensive?

We don't know what's going to be the price for the 3G license right now. But, I think for America Movil, it is very important to have enough spectrum. So, we are going to participate in Brazil or in any country that auctions more spectrum. Right now, in Brazil, we are going to give 3G in 850 and when we have the 2.1 that they are going to launch they said at the end of this year, so we are going to participate there and we can have that in other regions, because we don't have in all the regions the 850 frequencies.

Right. When do you think we will see 3G handsets in the market in Mexico and Brazil?

What's the price, you --

Not the price. When are you going to launch, actually sell the 3G handsets? I don't see any --

I said at the beginning -- as I said, at the beginning of next year, the first quarter of next year, I think we are going to have the launch. In some places, in November, we are going to start the testing and I don't want to make that big launch on 3G on December because we want to focus on the Christmas season. So, that's why we are moving that to the beginning of next year, it may be on January, February. But, we are on track. We are putting some cities on 3G and then the next year is going to come the Phase 2 on 3G that it is going to have a little bit more cities for all Latin American countries.

Okay. Okay, great. Thank you.

Thank you very much, Patrick.

And your next question comes from the line of [Stanley Martinez].

Thanks. Good morning, gentlemen. Just a follow-up to Patrick's question on usage, what proportion of your total minutes of use are inbound versus outbound in your key markets like Mexico, Brazil and Columbia, because I think a higher proportion of inbound/outbound should give some visibility into ARPU growth going forward?

And also, what proportion of your data ARPU is non-SMS? I think data is about 10% to 15% of service revenue. Just wondering what proportion of that is non-SMS relative to what we look at in some other countries.

And then just one last question, Carlos, in terms of the debt. If I look at your sources and uses of cash for the fourth quarter, you do have some pretty heavy uses coming up in terms of the closing of the Oceanic Jamaica acquisition, the dividend, probably some seasonally higher Q4 CapEx, is most of that borrowing going to be in non-U.S. dollar currencies, mainly in Brazil, I see you have already done a little bit in Peru?

You want to start with the debt?

I will deal with the debt. We have a significant amount of cash today. So, we don't really need to go out to the market for -- only for a fraction of the total amount, the dividend payment would be approximately $3.2 billion. I think that we may end up raising approximately $1 billion, okay? And we are looking at different options today. I don't think that we have yet defined what we will be doing, but we will -- very likely, we will end up doing something in Mexico in pesos and potentially we will do an international contraction.

Okay, great.

That's on the debt part.

On the proportions between inbound and outbound, we -- the increase in usage has been the same. We don't have any difference between having more inbound and outbound or that's exactly the same. We have not seen any change on the proportion between that.

On the SMS, I think the big part of our data services right now is SMS. What I think is going to change a little bit with 3G and with UMTS technology, I think we can increase a lot more on other type of services, let's say broadband, download music, all those type of things that you are seeing all around. It is not new, you can see it all around the world, and it is what we feel is going to increase our data services in the future.

Right. But, compared to other countries, you probably are fairly under-indexed in non-SMS data, and it would help in terms of comparisons and looking for the potential upside, if you gave a ballpark as to what the exact proportion of non-SMS is within your data, in order to compare it to some other markets.

We don't have those numbers right now exactly. But, as I told you, a big part of that is SMS. And I think it is very good what you are saying because we can have a good upside on the data revenues for the next years with UMTS. I think we are happy that we have a good upside there.

Thanks gentlemen.

Thank you.

And your next question comes from the line of Drake Johnstone.

Hi guys.

Hello.

The question I have for you is, you talked about the accelerated write-down of CDMA, and in your depreciation and amortization line, you recorded MXN12.173 billion. So, the question I have is, is this a one-time expense this quarter or will this expense continue for a number of quarters? And also, what was the magnitude of that expense this quarter? As, for example, at MXN9 billion, that would be -- depreciation and amortization would be 12% of your revenue in line with historical norms. And the other question is, on your other income line, you had a MXN1.45 billion expense and some of that you indicated was part of your CDMA charge. So, how much of the charge in other income was the CDMA network?

The overall charge for additional depreciation was MXN3.5 billion or MXN3.6 billion. This in both, as we mentioned here, basically two countries, which are Brazil and Columbia at present. It is not the full amount. We will continue to depreciate it. I think that this will be the highest amount in a given quarter. I think that the amount will likely be coming down going forward. But, I think that we likely will have some of these expenses certainly for the next two or three quarters, at least. Okay?

But, that basically would lead us to bring forth some of the tax benefits, which is something that we had already explained in another call. This obviously has tax implications to the extent that we have been doing this, particularly in those places where the tax laws allow us to take advantage of a more accelerated depreciation. Okay?

Okay. And then your other income line, you had a MXN1.45 billion expense in the quarter, and I think in your press release, you indicated that --

That includes -- that includes 400 -- roughly MXN400 million of charges associated with phasing out part of this equipment.

Okay, and one last question. On your tax rate of 40%, which I think was higher than, I think, 27% has been your typical tax rate, what contributed to the higher tax rate in the quarter?

It's basically that the overall net profit of the group comes down, but basically the taxes that are being paid today are really being paid for the most part in Mexico. So, to the extent that these deprecation charges that we are making are really not allowing us to reduce the tax burden in Mexico, to that extent, it -- what appears to be effective tax rate, appears to be higher. Okay? So, basically, an issue of not being able to reduce the overall taxes, even when the group as a whole appears to have a lower net income.

So, the tax rate was not related at all to the higher depreciation charge in the quarter?

Not in Mexico, but it will allow us to keep taxes low in the other countries.

Okay, thank you.

And the next question comes from the line of Henry Cobbe.

Hi there. Thanks very much for the call. It's Henry Cobbe from Nevsky Capital. Just a couple of questions. First of all, coming back to the depreciation, you say that there may be some more accelerated depreciation to come through in subsequent quarters. How much on a quarterly basis do you expect there to come or how much -- what is the book value of the TDMA assets, following this accelerated depreciation, how much more is there to come?

And secondly, could you just talk about the price competition in Mexico? It looks like you are responding to Telefonica's lower prices, and just want to feel comfortable that you are able to get the volume growth there to offset the price declines.

On the depreciation, what happens is, in one of the countries, what we are doing is we are essentially moving towards a regime that instead of being linear, it's basically front-loaded. So, that's basically what is changing in one of the countries. In the other countries, it is basically going to be depreciated over the next year or so. And that's -- but I think that the amount that we have in this quarter is going to be greater than what you will see in any other quarter by roughly 50% greater than what you may see in other quarters, on account of this type of [equipment]. Okay? What was your other question, sorry?

May I just stick on this one for a minute, you are saying this is 12% to 15% higher. But, in the last conference call, we also had a surprise on the depreciation side and you gave guidance in the call that for the second half of the year, you expected depreciation expenses to be around 11.5% of sales and that was because depreciation stepped up from MXN7.5 billion to MXN8.9 billion, and now it's stepped up again to MXN12.2 billion. So, even if you reduce that by 15%, that is still a much higher run rate than you had previously, that's of MXN10.5 billion per quarter. So, what's changed since the guidance you gave of 11.5% of sales the last quarter to the MXN10.5 billion per quarter that you are giving now?

As I have explained in a couple of occasions already, what we have said is that we are phasing out the TDMA equipment on a more accelerated basis. If we had continued with the same methodology that we had, we would be clearly below the 11% that we guided to. The fact that we are seeing now lower usage of TDMA services across the board and the fact, this is important, the fact that we have in various countries -- are able to accelerate depreciation in a way that will be tax efficient for us is what has led us to make the determination to accelerate these depreciation charges. Again, it is not unusual of anything other than to bringing them forward on a more rapid basis. Okay? Now, going back to the other question.

The question is you were talking about the market in Mexico that -- what we are seeing, what -- you are saying that with more competition and low prices of Telefonica, we are competing in that way that the elasticity and the usage are increasing. And that's really what you are seeing here in Mexico and you are going to see that in all the Latin American countries. Still people need to talk and to talk more every time that we give more minutes, reduce prices, people use more their phone, and that's what you are going to see -- that's the trend that you are going to see all around Latin America.

Okay. If you take it back to the TDMA issue, how -- what is the value of the TDMA assets on your balance sheet now?

I don't have the number here right now.

But, it's not so big, because one thing that Carlos is not saying is that we have been depreciating that infrastructure for a long time. So, there is not still a big amount of depreciation to do in the next year or two years or three years. [Here], you are seeing that a lot of TDMA customers are moving to GSM, so you are seeing less usage. And when you are seeing less usage, what Carlos is saying is that, for us, to accelerate the depreciation gives us tax benefit, and that's exactly what we are doing.

Yes. But, you are saying conflicting things because if you are saying that the recurring depreciation expense, stripping out the big number that hit the financials this quarter, would be 12% to 15% lower. That's depreciation expense of MXN10.5 billion per quarter, which is a substantial increase versus the first and second quarter.

Actually --

So, there must be there something else apart from TDMA going on. Are you moving to accelerated depreciation on other assets by those TDMA?

No.

No. There is absolutely nothing more that isn't gone. If you want, for the benefit of everybody else, we can go through this off the phone with Daniela or with myself, okay?

Yes, please. Thank you.

Thank you.

And the next question comes from the line of [Leela Kirby].

Yes, hi. Most of my questions have been asked, but just following up on the Mexican usage again. Sorry to ask again about this, but the growth is 30%, which year-on-year on your Mexican usage, which was almost double the growth rate we saw year-on-year no your previous quarter. Is it on the back of any specific promotions you were putting through this quarter or just previous tariff promotions earlier in the year that just continued to have a benefit on usage spend?

And also, part of that question, what is the prepaid usage in Mexico, is it similar to the average that you show overall for the country? And my last question. Just on Brazil, by contrast, we continue to see a much lower usage spend by customers there. What are some things you can do to help drive usage growth further in that market? Thanks.

On Mexico, they are normal promotions. The growth that we have 30% in usage is because we are reducing prices and people is using more the handsets. So, that's really -- that's the normal promotions. As the market is more competitive, then you have to give better prices, more minutes and that's what is happening in Mexico. There is nothing on the -- on that. Maybe a little bit that is helping is that the macroeconomics in all the countries help us to have better usage there.

In Brazil, what used to happen is that when the -- we start in the countries and when we started the GSM, we give very good and aggressive promotions. Let's say, at night, we give them a lot of minutes. So, when we finalize maybe for six months or for one year or for 15 months, those promotions, and then these promotions are already stopped and we have the customers and the customers are not using so much minutes, let's say, at night or in some parts of the day. So that's why in Brazil, the usage is a little bit down from the other years.

But, I think people is using a lot in Brazil. Usage is starting to grow there and you are going to see exactly the same trend in Brazil that you are seeing in Mexico. In Brazil, we used to have big promotions, in some areas, in some states. And but right now, we finalized with that and we have been all this year without that type of these promotions. We have seen that elasticity growth alongside penetrations increase and we will continue having very good usage trends in all the countries.

Great, thanks. And just in Mexico, is the prepaid usage similar to the average [user], the 144?

I don't have the number, but if you talk to Daniela, but I think, yes, t's more or less that, yes.

Okay, thank you.

Thank you.

And the next question comes from the line of [Marcello Manuso].

Good morning. Thanks for taking my question. I have two questions on the Caribbean region. The first is on the acquisition of Oceanic in Jamaica. What is the quality of Oceanic's assets and operations? Will it require significant investments? And the other is on the region in general, how is the Caribbean region? Do you plan to expand significantly there and potentially enter new markets? Those are my questions.

Well, in Jamaica, we are just finalizing. I think we are going to finalize the deal in this quarter and we have a CDMA operation there, a small operation and -- but Jamaica is not a big country, so what we are going to do is we are going to overlay with GSM and it's not going to be a big investment because the area is not so big. But, I think competition penetration is high and well, we need to do what we do in all the other countries, good distribution, a good brand, GSM, good management, good promotions, handsets. Well, there is a lot of things that we could do in Jamaica.

Regarding other markets there, do -- are you studying perhaps entering new markets?

In the Caribbean, we are big, big, big places right now, that is Puerto Rico, Dominicana and Jamaica, and we are open to see other markets as the -- if there is a possibility to go to other places, of course. I think when you have already Puerto Rico and Dominican and in Jamaica, the scale -- you have the scale in the Caribbean, so it helps you to go to any other place.

Okay, thank you.

Thank you.

(OPERATOR INSTRUCTIONS) And the next question comes from the line of [Berina Wadsmith].

Hi, good morning. I have two questions. One, to follow up on the depreciation of TDMA, my question is actually what the impact of this will be once it is concluded in two or three quarters, you said? What will be the run rate for depreciation as a percentage of revenues afterwards, since they will be lower? And also a separate question on Brazil, the potential reduction in fixed to mobile interconnection rates, what impact could that have in your operations and what percentage of your revenues are coming from interconnection rates there, if you could comment on this. Thank you.

As regards the depreciation. The run rate without the acceleration would have been in the neighborhood of 11% of revenues, I mean that's what we would have had this quarter. We ended up increasing the depreciation to 15.7% of revenues in this quarter. This difference, which is 4 points, 4.6 points to be exact, is something that we do not expect to continue all the time. A portion of that, of this 4 points, we probably will have 3 points going forward, just through the -- probably, through the end of next year. By then, we will have completely depreciated the TDMA assets in Brazil.

And in the case of Colombia, what we are doing is, we are moving to change fully the depreciation method for everything. It's going to be TDMA, but to the extent possible we will do it also for other equipment, because it again provides tax advantages in a country that has probably one of the highest tax rates in Latin America.

So, basically, that's what we are going to be doing. Instead of -- our run rate should be in the neighborhood of 14% of service revenues, I mean of total revenues, 14% total revenues through probably the first half of next year. And then, it should start coming down. And then, what's the next question, it was on interconnection charges?

On Brazil, your exposure to fixed to mobile interconnection rates and what you view as -- whether you think they will be coming down meaningfully?

Well, there is -- I don't -- we don't know exactly as what's going to be the reduction on the fixed to mobile rates. It's going to be cost structure, we need to discuss that. But I don't know exactly what's going to be the rate. So, -- and when.

And what percentage of your revenues the impact?

I don't have it, but net-net, it's not so -- I don't think it's -- as always, when you have a -- in Mexico, we have been having reduction from fixed to mobile and well, minutes increases, not immediately, but overall they increase or - so what I think we need to try to do is to make that reduction partially step by step, so we (inaudible) those and then it increase and then the reduction and it increase again. So, that's mainly what I think we need to do in those places. If we do a big reduction, then we are going to have a little bit of -- we are going to lose a little bit of revenue in the short time. But then in the long-term, there is coming again the revenue. The usage is coming and then we are going to have the revenue.

And the next question comes from the line of Benita Mikolajewicz.

Good morning, it's Benita Mikolajewicz here from UBS Asset Management. I just have a question about your effective tax rate for the group. What can we expect going forward?

We don't hear you, again please?

I am sorry, I was asking about your effective tax rate for the group, what can we expect in the fourth quarter, is it going to be the level similar to what we have seen in the third quarter or you expect a different level?

It should be coming down to a level closer to 30% in the fourth quarter.

Okay. Thank you very much.

Thank you.

And the next question comes from the line of Henry Cobbe.

Hi, I am sorry to follow up on this, I think it's quite important. You're talking about the Colombia and the move to, I assume, your double declining balance or accelerated depreciation policy. I am looking at the split of where the MXN3.6 billion comes from, and I see that about MXN1.3 billion is in Brazil, which is TDMA related. And then the majority of MXN2.4 billion is in Colombia, so are you actually saying that this is a change in accounting policy rather than just the TDMA assets?

Carlos?

I didn't hear the very last part of the question, what was it?

The majority of the additional depreciation is in Colombia, about MXN2.4 billion. Is this coming from a change in accounting policy? You are saying that you are now using an accelerated form of depreciation for all the assets in Colombia to get the tax benefits. So, this is actually an accounting change and not simply the TDMA asset write-down?

In all cases, it has been an accounting change. In Brazil, it is also being done as an accounting change. And the thing is that in those countries, provided you comply with certain things, the accounting change is also allowed for tax purposes, and that's what [help our prices.]

But, what we could do is, why don't you may talk to Daniela, the one that has some -- about the depreciation and the acceleration, and we can give you a full explanation about that. I think it's something easy to understand. So, we can give you the numbers for the next quarters and --

Well, you should give everyone the numbers.

Yes. I am sorry --

All I am saying is that in Colombia, it's applying to all the asset base, and not just the TDMA, is that right?

No, it's more TDMA. Carlos is saying other things, but it's TDMA -- related to the TDMA, maybe the prepaid on the TDMA and other things on the TDMA infrastructure. What I am saying is I can give the numbers to everybody, but we don't have the numbers right now. That's why we are not giving you exactly numbers today. We need to work it on to review it and to everybody that wants to talk to Daniela, I don't have any problem to give you exactly -- the exact numbers on what is going to be for the next year, the depreciation, what's going to be for the next year.

What Carlos is saying is, there are other infrastructure things related to the TDMA, it's not only TDMA at the radius, it's TDMA at prepaid, TDMA at other things that we can do it, and we are deciding if we want to do it or not. So, that's mainly what Carlos is saying.

Okay. And lastly, just could you talk about Chile again? And how -- when do you think margins will recover and how and what's driving them back at the moment?

Well, in Chile, I am not so worried about the margins right now. I think in Chile, what we need is to grow the market share as we do it in all the other countries. And well, of course, we are worried. But, today, what we want is to spend the money and to build the bases to grow their market share in Chile. I think that's very important to have it and I hope to have a positive EBITDA for next year. But, in Chile specifically, we are focusing on growth. That's very important.

And what is your estimate of your market share at the moment?

No, I don't have it for next year. We are still finalizing the budget.

For this year and -- I am sorry, quarter?

For the third quarter?

Yes.

I think we have in Chile 17% market share or 16% market share. I don't know exactly the numbers because other companies haven't released anything. But, I think we are between 16% and 18% market share.

Okay. Daniel, thank you very much indeed.

Thank you.

And the next question comes from the line of [Sven Mallory]

Thank you very much. Sven Mallory, Handelsbanken. I was just curious on the very nice improvement in profitability in Colombia, if you can give any light on your view on the market there and what is behind there, is it one-offs or just a healthy market there?

Well, the profitability in Colombia has been very good. We are on the 50% -- 49%, 48%, 51% margin and I think Colombia is running very good. We have a very good brand, we have a very good image in the market, we have very good quality, customer care. So, I think Colombia is doing very good. The subscriber growth has been reduced a little bit, but because the penetration has been increased very fast, but we are -- I think we have a very good company in Colombia.

Thank you very much.

Thank you. I think, Rizwan, I don't know if there is other questions.

Yes, we can end the call, I wanted to thank you everyone for participating in the call, especially Daniel Hajj and Carlos Garcia-Moreno. Thank you all and have a nice day.

Thank you.

Thank you, everybody.

And this concludes today's conference call. You may now disconnect.