America Movil SAB de CV (AMX) 2008 Q3 法說會逐字稿

Mr. Sequeira, you may begin.

Hello, everyone. This is Carlos Sequeira, Head of UBS, (inaudible) Latin America Telecom Research. On behalf of UBS (inaudible), I would like to welcome you all to America Movil's third quarter 2008 conference call. We have with us today [Max Coseedy] and Mr. Daniel Hajj, America Movil's CEO, and Mr. Carlos Garcia Moreno, America Movil's CFO. Now it's my pleasure to turn the call over to Daniel.

All right, good morning. Thank you, Carlos. Good morning, everyone. Before going into the summary of our third quarter results, which Carlos Garcia Moreno will present in a few minutes, I wanted to take this opportunity to present to you our views as to the outlook for America Movil in the coming months, given the extraordinary circumstances that financial markets have been under recently.

First, I would like to mention that going into this crisis, the Latin American countries where we operate were in a strong shape. Public finances have improved, bringing down public debt levels. Inflation was almost everywhere well contained. Private sector debt was relatively low. And banks were well capitalized. The countries where we were for the most part generating credit surpluses.

These countries have solid fundamentals. They were well positioned to withstand a deterioration of the international economic situation. These are countries that have the desire and the capability to base a greater part of their economic growth on the expansion of their domestic markets.

Whereas economic growth rates may be affected by the international environment, we believe that Latin America will be less affected than other regions. Growth rates will remain higher and will recover more rapidly than in the rest of the world. And the currencies of the region, which have been subject to great volatility over the last few weeks, are relatively -- are likely to stabilize at more reasonable levels.

Looking specifically at our business, wireless penetration rates still have a way to go in Latin America. Mexico, Brazil and Peru, which alone represents 225 million pops, could see their wireless penetration rates increase by 15 percent points in the next two years. Revenue growth even in a tougher environment will be supported by subscribe growth. Down the road, data revenues are likely to become meaningful.

America Movil is well positioned to resist the economic and financial volatility. As opposed to our main competitors, we already are far advanced in the deployment of our 3G networks, which today cover 16 countries in a common GSM/UMTS platform. We have great coverage after investing in it for years. And our networks now have ample capacity, thanks to the investments we carried out over the last few months.

Most of the hard work regarding the modernization and expansion of our networks is behind us. Whereas we will continue to invest to remain well ahead of the market demand and of our competition, our capital expenditures will likely continue to fall relative to sales.

We feel very comfortable with our operations. They are lean. And they are efficient. We will step up our efforts to make sure that they remain so and that we maintain our competitive edge. We are now number one in three of our top four countries in the region and number two in Brazil, where we continue to gain market share. We have a great momentum in this market.

We have always run an operation that is very strong financially. We deliberately keep our leveraged ratios down, as we have known for years that the financial volatility that from time to time has affected our region is best faced from a strong financial position. Our credit ratings are among the best in the regions.

America Movil also has a good track record when it comes to acquisitions. For years, we have proved that we are disciplined engaging in acquisitions only where there is a clear value to be had for our shareholders. Today, we are not talking to anyone regarding acquisitions.

We have returned to our shareholders via share buybacks, repurchase, and dividends $1.8 billion in 2005, $2.2 billion in 2006 and $4.9 billion in 2007. Today, we believe there is nothing that can capture greater value for our shareholders than buying back our stock.

With the most advanced technological platform in the region, great coverage and distribution, a lean, efficient operation, and a strong financial position, we believe we can continue to make inroads in our markets and help them obtain higher penetration rates, even at a time of greater economic uncertainty in the world. Thank you. And I will now pass it to Carlos for the summary of our third quarter results. Thank you.

Thank you, Daniel. Good morning, everyone. Thanks to Carlos Sequeira and UBS for hosting the call. We had a strong showing in terms of subscriber growth in third quarter with net additions of 7.3 million that exceeded by 18.3% those obtained a year before.

Our net subscriber additions were nearly 30% higher than the consensus figure. In the nine months to September, we obtained a total of 19.2 million new subscribers, somewhat more than [the industry] of 2007. 19 million was the guidance that we gave you last year for net additions in 2008. That's what we have already through September.

Brazil led the way with 2.6 million additions in the quarter, which was 48% more than a year before. It was their third best quarter ever. With 35.7 million subscribers, Claro has taken over the number two spot in Brazil in terms of subscribers. And as Daniel said, we have a very good momentum going for us in that market.

Mexico followed with 1.5 million net gains. And then came Colombia with 1.2 million. Both countries generated more net additions than a year before. Colombia in particular has seen a major reacceleration of subscriber growth. We have attracted more clients that we lost through number portability in both Mexico after three months and Brazil after one month. Overall number portability has not been an important issue to date.

In the US, Ecuador and the Caribbean, subscriber additions were also higher than in 2007. As of September, we had almost 173 million subscribers and 3.9 million (sic - see press release) land lines. Our revenues for the period totaled MXN85.3 billion, driven by service revenues, which expanded 10.4% year on year. Service revenues were very much in consensus, although I may have factored in somewhat larger equipment sales.

I think it's important to mention that organic growth has been two percentage points higher than the number that I cited. But it has been understated by the relative movements of the exchange rates of our various operations. What I am trying to say here is at constant exchange rates, our rate of growth of service revenues would have been two points higher than the 10.4% that we mentioned right now.

Year-on-year service revenue growth totaled 24% in Argentina, which includes Uruguay and Paraguay, and Peru with 31% in Ecuador, and 17% in Brazil. Mexico and the US have approximately 10% growth rates.

The quarter data revenues increased 35% year on year, led by Brazil with 67%, Colombia with 48%, and Argentina with 34%. Through September, our revenues totaled MXN251 billion. Service revenues increased by 14.7% year on year -- this is for the nine months to September -- partly due to the fact that our Puerto Rican operation was not consolidated on the second quarter of 2007. And that affects the yearly comparison.

Our EBITDA came in at MXN34.9 billion and represented a margin of 40.9%. This margin was similar to the one seen a year before, in spite of the much faster pace of subscriber growth. We don't believe a much greater subscriber growth that the market had expected and that we had had last year, and that was explained -- at least (inaudible) EBITDA yield.

With depreciation down to 11.9% of revenues, we have now depreciated for the most part our TDMA and CDMA networks. Operating profits rose 25% year on year to MXN25 billion. As of September, slightly less than 20% of our net debt was exposed to US dollars. We consider this to be a prudent exposure, considering that over 13% of our revenues in the preceding nine months were dollar based. Our net foreign exchange losses, so considering gains in our forward positions, totaled MXN2.2 billion in the quarter.

Within our income tax provision, we're including an amount of MXN700 million that have been paid on account of our share repurchases, but which may be credited against any income taxes to be paid after January 1, 2009. Our net profit rose 31.6% year on year to MXN12.4 billion. Earnings per share have risen 37% and earnings per ADR 46% from a year before. Through September, we have made a net profit of close to MXN44 billion.

Capital expenditures totaled MXN45 billion in the first nine months of the year and our distribution to shareholders, dividends and share repurchases MXN41 billion for a total of MXN86 billion. Most of it was funded with our cash from operations. Our net borrowings in the period were only MXN13.7 billion.

Our net debt-to-EBITDA ratio stands at 0.78 times. The average life of our debt is 9.2 years. Today, we have $1.3 billion in cash, which compared to the debt amortizations that we have through the end of 2009, which add up to $2.1 billion. Of this $2.1 billion, $500 million of commercial paper is refinancible in the Mexican market.

I'd just like to leave this part of the summary with the comment that we're in very good shape from a liquidity standpoint. I think that we have good access to market. Mexico remains a good funding base. It is the best funding base in all of Latin America. And we are the prime issuers in the Mexican market. So that's something that I think is important to highlight. So with this, I would like to pass it over to Carlos Sequeira so that we can initiate the Q&A session. Thank you.

Thank you, Carlos. Before we start the Q&A session, I would like you to please limit your questions to two at a time, given that we have many connections to the call today. And I would take the opportunity and start the Q&A session with one question. What has driven the MXN18 billion investment in the quarter? And what can we expect for the fourth quarter 2008 and 2009? And related to that, what type of leverage would AMX be comfortable with going forward? Thanks.

In terms of CapEx, I think what is happening is that you start to invest at the beginning of the year. And maybe if this quarter is starting to put in operation a lot of the CapEx. But the CapEx that we plan for this year of $4 billion, I think it's going to be more or less what we're going to invest. We're on track there. And we feel that we're going to be in this range. For 2009, we haven't finalized our budget. So we're reviewing everything. But what I just said is that in terms of CapEx to sales, I think CapEx for next year is going to go down.

And just one thing, Carlos -- the number of CapEx for the quarter also includes the purchases of licenses and renewal of concessions. We had to pay the renewal of the concession in Ecuador. And so I think that Daniel said we're very much in line with the budget that we have mentioned for the year. The budget for this year was $4 billion in infrastructure.

And then we had a bit more than $1 billion in [spectrum] that we were to apply in Brazil. Obviously we acquired the licenses in Panama, and now the renewal of the concession in Ecuador. So that's basically what makes up the amounts. We are going to be -- we are certainly -- we are going to be within our budget by the end of the year.

Now in terms of the second question which has to do with leverage, I think that what we have said is we have always wanted to remain not very distant from the one times net debt to EBITDA. Sometimes in exceptional circumstances, we have gone beyond that. We think we can go -- that we can reduce rapidly the leveraged ratio afterwards. We did this in 2002, when we allowed our ratio to go all the way up to 1.6. But right now, I mean, we are at 0.78. And we do not have any reason to believe that we are going to be much higher than that one at this point.

Okay. Great. Thank you. Operator, I guess we can open the floor for questions. Thank you.

(Operator Instructions)

And one moment while we wait for our first question -- comes from Andrew Campbell with Credit Suisse. Your line is open.

Yes, thank you. I was just hoping we could get some additional color on the operating trends in Mexico that we saw in the quarter, in particular the decline in MOUs that we saw and also the very slight drop in ARPU. And I was wondering if we should attribute this to any change in the promotions that you were running if there's perhaps some impact from the economy behind the lower usage or just any color you can provide on what was going on there.

Andrew, good morning. On MOU, MOU has been up 18.6% against last year. So the MOU is 170-something. It's a very good MOU comparing against all the other countries in Latin America. We declined against last quarter because we take out some promotions that we have. And they were using the -- they were not being used as those type of promotions.

They use it irregularly in the network. So we're capping so that those promotions -- and we're locking so these promotions will only use it for that type of promotions and not use it in regular -- in other kinds of the network. That's mainly why the MOU goes down from last quarter. But as you see from last year, MOUs are increasing. And we have a very good MOU in Mexico. In terms of the ARPU, I think what you could see in the ARPU is we have a range that it's going in that range.

That range is not so big. That range is good. And we don't see any trend that people is not using the phone. I think that trend has not been changed. And we feel very comfortable if the ARPU -- the ARPU is not a number and that number stays forever. I think that number is going to move in that range. And I think it's what is happening. So we feel comfortable. We don't see that that trend is going down. And I think that ARPUs in Mexico are going to be in that kind of range. No? Okay? Hello?

Okay. Our next question comes from Stanley Martinez with Legal and General Investment Management. Your line is open.

Okay. Thanks. Good morning, gentlemen. Thanks for taking my questions. Just wondering if you saw any change in subscriber loading volume subsequent to the quarter end in markets like Mexico and Colombia and whether you saw any surprise in the mix between postpaid and prepaid in Mexico in the quarter, wondering what you are seeing there.

And then one other question on fixed mobile termination -- wondering if you can dimension any potential impact on next year from the [Propitel] proposal back on September 12th for a new fixed mobile termination rate regime. What type of impact could we expect? Would it be several hundred million pesos in '09 if the decision stands as it was presented by Propitel? Thanks.

Well it's too soon to see any type of -- your first question, it's too soon. We are not seeing any type of decline right now in usage from our subscribers, our customers. It's -- I think we're going to see that mainly in this quarter. But right now, we are not seeing anything.

In Mexico, we are really well in distribution to do postpaid customers. I think we're going to be improving. We're focusing in our postpaid customers. And I think we're going to have -- I hope we're going to have good numbers. And there's not going to be any decline in the postpaid customers in Mexico. I think our net of distribution for that kind of customer are in very good shape. We are very solid for -- here. And I don't think that there's going to be any change on that. I hope we can increase the numbers in Mexico.

In the interconnection rate, well there's an injunction there. We have contracts with almost all of the big telecommunication suppliers, let's say, Telmex, Telefonica, [USFL]. And we have only that difference with Axtel. And we have an injunction there. And well, it has to have some time to see what is going to happen. No, I cannot tell you anything else. We're going to -- it's in dispute right now. And we're going to see what is going to happen in the next months.

Our next question comes from Walter Piecyk with Pali Capital. Your line is open.

Thanks. I think just first some clarifications. Daniel, I think in your -- in the response to the first question, you had mentioned keeping ARPU stable. So I guess is that stable from Q3, which was MXN171, because I think earlier in the year, you were talking about ARPU going up in the second half of the year?

Well, ARPU is in the range. I think we have MXN171 in Mexico. Let's talk about Mexico. We had MXN171, as you said, in the first quarter. We had MXN176 in the second quarter. We have MXN175 in this quarter. I don't know exactly what we're going to have in the fourth quarter.

But all the fourth quarters always are a little bit higher because the Christmas season and promotions. But I don't know. And what I'm saying is we have that range. It's going to MXN171, as you said in first quarter. We are in MXN175, then in MXN177, in MXN175.

So I think it's going to be -- I don't see a trend of declining in ARPU in Mexico is what I'm trying to say. I don't have the number for fourth quarter. But always in the fourth quarter, it's a little bit higher than the third quarter. I don't know if it's going to be the same, a little bit lower, a little bit higher. But I don't see a big -- I don't see that the ARPU is going to have a big decline in the fourth quarter.

Sequentially, obviously, because annually, even if it's flat, you're still down pretty substantially from the prior year.

Remember that ARPU is a function of several things -- promotions, subscriber, timing. So I think we're going to remain in this range. No?

Okay. And, Daniel, you also mentioned on your initial comments there's nothing that has been -- has better value for the Company right now than buying back stock. And so you said also you're not looking at any acquisitions right now. Does this also mean that there's going to be no special dividend in December as there has been in years past?

Well we have to discuss that in the Board. But what we're thinking is -- and as you are seeing, we have been increasing our buyback shares for the last two, three months. And I hope that we stay this way and not give extra a dividend for last year and increase our buyback shares.

So does that mean that, no, you're not going to have a special dividend? Or you're just looking at it right now?

No, I think we're not going to have a special dividend, but --

Okay.

-- we have to define it in our Board. And the Board is in three weeks. So I don't think we're going to have any special dividend.

Okay. I know this is a third question. But it's a quick one. So I apologize. You said in the past you would take leverage to one times. And now you're saying it's going to stay stable with 0.8 times. Why is there that change in what you're willing to take leverage to?

Again? Again, I don't hear you.

I think in the past you've talked about taking the leverage ratio of the balance sheet to one times, I think -- well, not you, but maybe Carlos has talked about that a little bit more.

Yes.

And I think in your comments earlier, you were saying that you were more comfortable with where you are now, which is 0.8. I'm just wondering why you're willing to do less leverage now.

No, what I have always said is that we do not like to be much below one. That's what I have said.

And that has not changed.

And that has not changed.

Great. Thank you very much.

Thank you. Thank you.

Our next question comes from Chris King with Stifel Nicolaus. Your line is open.

Good morning. Thank you. Just wanted to get your quick thoughts on the current competitive landscape in Brazil and specifically whether the promotional activity from [Oy] surrounding their launch in Sao Paulo is having an impact. Obviously, that's only been out there for a couple of weeks now, but just was curious as to whether you are seeing any incremental changes in the competitive landscape in Brazil. Thank you.

Well it only starts maybe one month ago in Sao Paulo. I think they are doing good. What I'm hearing is that they are doing good. We don't see any big changes in our growth in Sao Paulo specifically. And we're doing okay, as we said, as we have a good momentum in Brazil.

I think customers prefer Claro at this moment. So we feel very comfortable. But always when you have more competition, it's going to be a little bit more tough. But we are in very good shape. We have been -- through all this year, we have been the leaders in net access. And I hope we stay the same for next year. Oy is an excellent competitor. And they are investing a lot. But we are not seeing any big changes in Brazil at this moment.

Our next question comes from Richard Dineen with HSBC Securities. Your line is open.

Thank you very much. Good morning. Just a question about your subscriber adds and margins in Brazil. Q1, you had 900,000 net adds. And margins were nearly 30%. Q2 was just shy of 2 million subs. And margins were 23%, which I think you commented at the time was due to the high subscriber activity.

This quarter, the subs have increased by 30% sequentially and the margins flat. I guess I'm just not really getting the drivers here. Was there some change in subsidy? Was there any benefit from increased scale -- are data services helping the margin? Any comments there would be appreciated.

Everything that you're saying has to be still with that. So sometimes the promotions and the subsidies are not there. Sometimes we get better pricing on the handsets. Sometimes the increase on revenues also are helping us. So there's a lot on the mix of things that you have to include there.

So that's promotion, subsidy. Sometimes subsidies are too high. And the handsets are not helping you with the prices. Other times, they are helping you with the prices. So that's mainly -- that's what you can see and the changes that you can have in the margins.

I'm not sure that I follow. I think if you look at the core EBITDA in Brazil from one quarter to the other, which is the one before you actually factor in subscriber acquisition costs, we were actually having an increase in the core EBITDA on a year-on-year basis. So maybe if you want, we can look at these numbers.

But basically, what you have is that the full increase -- in the second quarter, we have had a reduction that had partly to do with the collection cost. We talked about that with various analysts after the call. This time, we have not had that kind of an effect. And I think that this time, the margin is perfectly -- corresponds perfectly to the acquisition cost.

Your next question comes from Verena Wachnitz with T. Rowe Price. Your line is open.

Hi. Good morning. I want to talk to you about handset subsidies going forward with the depreciation of currencies in general and handset price usually in dollars. What will be your strategy going forward? Are you planning to keep prices and increase subsidies? Can you comment a bit about your strategy in that regard with your currency environment? Thank you.

Well it's different because not -- first of all, in not all the countries there has been the same volatility in the exchange rate. Okay? In some countries, we have more. In other ones, we have less. So and right now, we have a lot of volatility. But in the other side, we have a good inventory that we just pay at the exchange rates -- past exchange rates. So we don't know exactly. We're working on that. It's something that we need -- we're discussing what we're going to do. We're discussing also with the suppliers if they are going to reduce a little bit the prices or they are going to stay like that.

So we are in this moment -- because you know that Christmas promotions are big and that we have to take a decision soon what we're going to do. But we're going to be very careful with the subsidies. And we're going to try not to increase the price to the customer. So that's more or less what we want to do. So we have to work with exchange rates. We have to work with the suppliers. And we have to do a lot of other things. No?

Our next question comes from [Nakul Krishnaswamy] with Tiger Veda. Your line is open.

Good morning. In Mexico, can you just talk about -- it looks like the revenues actually went down sequentially and seems like some of that was more due to handsets than actually service revenue. So could you just confirm that? And looks like EBITDA also declined. But could you maybe talk about what the service -- I guess the [pre-fact] EBITDA actually did in the quarter. Did it actually decline as well?

From second quarter of 2008, we increased 1.3% to third quarter of 2008. So service revenues were increased. In the total revenues, we have almost the same because the equipment revenues are declining. And the equipment revenues are declining maybe because we're selling other types of handsets, maybe because we are doing some promotions, as we said. We take out also some promotions.

So there's a lot of things. I don't have it right now at this moment exactly why we are declining the equipment revenues. But you can talk with [Danielle]. And she can give you a breakdown why the equipment revenues are declining. But in service revenue, we're going up. Maybe it's the mix of the handsets. Now we're selling more of these ones. We're having better prices in other ones. So it depends a lot there.

Our next question comes from James Rivett with Citi. Your line is open.

Yes, just following on from that point about the lower equipment sales, is it fair to say that this quarter we've seen a jump in net additions on SIM-only products? And how should we expect for that trend going forward? My second question is on FX rates. You said a 2% off of revenue growth because of FX in the third quarter. If currencies remain as they are going into the fourth quarter and into 2009, what is the kind of headwind that we should be expecting there? Thanks very much.

Well as we said at the beginning, we don't have our budget. We're working on our budget. We want to see exactly what are going to be the increase on revenues in our operations and what's going to be the final exchange rate. We don't have it at this moment because even the exchange rates from today than last week has been very different in Mexico and in some countries.

So we have been working on that. We don't have the final numbers today to see exactly. And Carlos can tell you about the 2% increases the F-exchange will not have now.

Well I didn't get the first question, James. You can tell it again, please?

It was, yes, have you seen a big number of SIM-only sales this quarter? Is that why you've seen such strong net additions and lower -- ?

No, we don't have SIM -- seen a big jump on SIM-only SIMS. But you are talking in Mexico? Or you're talking in all the other countries?

In general, but Mexico as well.

Don't have it. But I don't think we have been increasing a lot the SIM-only. But we're selling -- by an example, in Brazil, we're selling a lot of the -- we call it [Band and Chatter] for the computers, the broadband. And the broadband is -- we're giving less subsidy by an example. But the price of the equipment is much less than a handset. So you can see a lot of different promotions and issues there. So that's mainly what can happen.

And in that regard and going back to the question that was asked before by the person from HSBC, it's interesting to note quarter over quarter in Brazil, subscriber acquisition costs go up 2%. But that's basically because of more gross adds. Gross adds were up 4.6% quarter over quarter. But our subscriber acquisition cost on a per gross add basis actually came down by 2.6%.

And that's basically what Daniel is saying. It's not only the sales of handsets now that represent new lines. It is now the sales of all things that include the PC card, wireless PC cards that represent new lines, represent new usage, but do not entail the same subsidy that we typically have had with handsets.

Now regarding the second question, just to add to what Daniel said, I think that our operations that all of the handsets which not in all places until an important foreign exchange cost because some countries may have local assembly of the handsets. Other than that, we don't really have much foreign exchange components in our operations. Our operations are basically run domestically. There's not many more inputs that are imported. So from that perspective, our operations do not stand to suffer much from the changes in the exchange rates. I think it's more of an accounting thing.

Also, important to note what Daniel said. Not everybody has had the same kind of movements in the currencies. We have had a bit more of a move in Brazil, a bit less so in Mexico. It's even less so in Colombia. It's even less so in Argentina. And as you know, we have a number of countries that are either dollar based or that are almost anchored to the dollar, which is --

Salvador, Ecuador.

-- in Central America and the Caribbean. So there's a good component of our operations that is not that sensitive to the exchange rate to begin with.

Our next -- pardon me. Our next question comes from Vera Rossi with Morgan Stanley. Your line is open.

Thank you. My first question is about your contract subscriber base. We have been seeing a slowdown in the growth in some countries. Is that something to do with the credit policy of AMX? Or you are seeing a lower demand in this customer segment?

We have to check country by country, Vera. I don't want to answer your question globally because I think we're doing different things in each country. But of course, in some countries, we have been more careful in the credit of the customers. In other ones, we don't feel bad there. So I prefer if you want that we can discuss that country by country. I don't think that's something that we're moving all around America Movil. That's some promotions and things that we're doing in each country. No?

But what I'm saying, in Mexico, by an example, we are investing a lot in the distribution in postpaid. And we're really focusing there. In Brazil, we're gaining market share in postpaid. So there's some countries that we have been a little bit more cautious. Ecuador, we have been very good also. Peru, we have also improving. In other ones, so why if you want, we can break down country by country. In Argentina, we're not doing so good. So I think it depends in each country.

In the Caribbean, for instance, Vera, the Caribbean is a region where you already have postpaid but very little prepaid. So in the Caribbean, most of the [efforts] have been going towards prepaid to expand the penetration.

Specifically in Puerto Rico, in Puerto Rico almost all of the subscribers were postpaid. And we are also trying to increase our prepaid base. So there's differences in all the countries. Vera, the second question? Vera?

(Operator Instructions)

I think Vera has another question.

Yes, I'm opening her line back up. Thank you.

Thank you.

This is Vera Rossi again.

Yes.

So my second question is a follow up on the currencies. What is the tax rate on handset prices you have for Brazil specifically negotiated for the fourth quarter? And my intention is to know if the currency depreciation is going to have an impact on the fourth quarter specifically in Brazil, which we saw one of the highest currency movements.

Well I think it's something that we don't disclose because we have specific arrangements with each of the suppliers. And I don't think we have something with one only. I think we have five or six suppliers, big suppliers. And with each one, we have a difference there. And we are talking with them to see how we can do not to increase the -- but we're going to be careful with the subsidies.

Also, it's going to depend a lot, Vera, on the exchange rate in that time because, let's say in Mexico in the last, let's say, one month is coming from 1230 to 1350. It's a big, big range there. So I think it's going to stabilize a little bit more in the next months or month or I don't know when.

And we want to discuss also with the suppliers what we're going to do there. We have to see also commissions. We have to see also marketing campaigns. We're reviewing a lot of things in our operations. And as I said, each country is going to have a different decision. And each country is going to decide different in these campaigns what -- as I told you, we are really interested in growing, in getting market share. In some countries, we are not going to lose momentum. So we are working on that, Vera.

Okay. Thank you.

Thank you.

Pardon me. Our next question comes from Rizwan Ali with Deutsche Bank. Your line is open.

Good morning. My first question was going back in the past and trying to see how the consumption patterns change in an economic slowdown. Are you expecting next year -- because of GDP growth slowing down in Mexico and elsewhere -- to sell less handsets or have lower sub growth? Or do you think the impact really will be more on the ARPU side of the equation?

Hi, Rizwan. I think what we -- so and I think this is probably the best parameter that we have to guide us. In 2001 and 2002, GDP growth in Mexico was practically nil. It was flat. And notwithstanding that, we saw very, very good subscriber growth. At that time, subscriber base was growing 50% per year or something like that.

So but we have seen in the past and we have mentioned it also in [conversations] is that the subscriber growth was -- it seems to be more driven by network effects of sorts. And those seem to be more independent of GDP growth.

So typically, what you would expect is that what we have seen is that when GDP tends to rise, there is a little bit of an extra kick that it gives to consumption. But it is not as symmetrical. It comes down, consumption doesn't fall as much because it basically has become more of a necessity.

So I think that what Daniel said in his statement at first is good in that we do expect subscriber growth to continue. And we do believe that subscriber growth will provide good support to revenue growth.

Related to that is, I mean, obviously, we've seen in Mexico where you have only 10% of your total sub base as postpaid. I mean, you would think that that should be going towards -- that that can be seen in other countries in Latin America, which is more like 20%, 25% of the sub base is postpaid. Do you think that slows down because you'll be now a lot more cautious about giving credit?

No, I don't think that's because of that reason. I think it's because in some countries because of the competition, we are more aggressive on the prepaid side. In other ones, we are less aggressive in the prepaid and more aggressive in the postpaid. So it's more or less in Mexico by an example, we have been very, very competitive in the prepaid side.

That's why there's not a huge difference between prepaid and postpaid. So that's why prepaid is growing. Well that's competition. And we have to live with competition. And that's really what happens. Now that's mainly what drives you to grow on postpaid or to grow on prepaid more there. So that's the reason.

One last one, if I may. I mean, we've seen CP risk go down with that. And the users have been -- haven't really increased as much. I mean, you'd think we finally reached a point where price elasticity has definitely gone either neutral or negative as opposed to being positive in the past many years.

I don't understand really the question. What you're saying is that the elasticity is going to finish right now is what you're saying?

No, it's -- the price elasticity is less than one, which means you don't get as much traffic increase as reduction in (inaudible - multiple speakers --

I don't think so. I think still there's a lot of -- it's in prices. But there's a lot of services that we're going to give.

I think, again, you have to look at the different markets. We've been reducing prices significantly in Brazil. They were relatively high relative to the -- compared to the other countries. And we're seeing very, very good response there. I think that in Mexico --

Mexico last year.

-- a tremendous reduction in prices. But that was also because we were about to roll out the 3G network. And we were going to have that much more capacity. And so we were much more aggressive driving prices down because we knew that we wanted to develop much more traffic in our network. But we cannot keep on growing 55% year on year the traffic levels we did last year.

So I think that what I've mentioned in conversations before with other investors is we think that the trend is definitely there for prices to continue to come down. And we definitely believe that we're going to continue to see good response on the demand side. I think the question is what is the pace of decline of rates.

And what is the pace of increase of traffic? And it's not going to be breakneck speed as we had last year, certainly not in Mexico. And we have seen -- we have not seen in any of the countries where we are. We haven't seen it in Argentina. We haven't seen it in Peru, haven't seen in Colombia any issues with elasticity.

Thank you very much.

Thank you, Rizwan.

Our next question is from [Gil Alexander] with [Darfil Associates]. Your line is open.

Good morning. As you look on your Brazilian operation, is it in the cards or is it possible that your EBITDA margin gets to 30% in the next few years?

Yes, I think, of course, as we grow more, the growth -- the size of the growth is less against the revenue. So I think, of course, I think 30% is a good --

We have seen that today subscriber acquisition costs are high because we had a reacceleration of subscriber growth. And that tends to weigh on EBITDA margins. I think what we would expect is that as subscriber growth comes down over the next couple of years that you will see a corresponding reduction in acquisition costs relative to revenues. And that should help increase margins. I think that in Brazil, in spite of it being a higher-cost country than other countries, in the medium term, EBITDA margins should be able to reach the mid 30s.

And I thank you. And could you give us a feel how the exchange rates that you're experiencing now could affect your fourth quarter?

Could you repeat that because it was -- it broke?

Excuse me. As you look at the exchange rates today, could you give us an idea how it might affect your fourth quarter operations?

Well the operations, as I was mentioning in one of the previous questions, most of our operation is really insulated from foreign exchange. It's not -- other than the handsets, which are not an issue in all the countries because some places, they are made locally. And certainly in several of the market, we haven't seen the swings that we have seen in Mexico and Brazil, which may still swing back. [We have to remind you] that we don't really believe that FX will have a major incident on the actual state of our operations.

I thank you.

Thank you.

Our next question comes from Will Milner with Arete Research. Your line is open.

Thanks. A couple of questions -- firstly, just to clarify on the foreign exchange loss in the third quarter, I mean, from the face of the P&L, you say the depreciation of various currencies versus the US dollar brought about the foreign exchange losses.

But when I look at the currency trends in the third quarter, most of the currencies appreciated against the US dollar. And yet, you showed the loss. So I'm wondering looking into the fourth quarter with the sort of 30% devaluation we've seen with some of the currencies versus the US dollar, the implication is that that loss will get a lot wider in the fourth quarter. Is that reasonable?

And the second question is just on the interconnect challenge in Mexico. Have any other fixed line operators to date sort of seen the success that Axtel had in getting that decision and launched their own challenges against [Alltel]? Thanks.

On the first question, what we have is, as we stated, we have a net debt exposure. This is different from the actual operations, which are revenues. But in terms of the net debt exposure to dollars, there was -- we had roughly 20% through September -- a bit more than 13% of our revenues were coming from -- were dollar based. So basically, those could be used directly to pay for the -- to pay the debt. So that's essentially our paper losses that we're talking about. And as regards to the second question -- ?

The second question is -- what I think we -- as I told you, is we have contact with all the other main and big suppliers, telecommunication suppliers in Mexico. So really the dispute right now is with Axtel. Depending on what happened with the dispute and when does it finalize, it's going to depend if the other ones are going to be interested in joining them or not. It depends on a lot of things. But today, well, that's an injunction. It's a dispute. And I think we have to wait.

I don't remember exactly when does the contract with the other telecommunication suppliers finalize. I think it's maybe in 2010. But other thing, it's every year interconnection between fixed to mobile in Mexico has been reduced. There's much more traffic between wireless companies and mobile companies.

So I think that that's not going to be a -- of course, it's a big reduction. It's money. But I don't think right now -- we used to have 30-or-something percent of our traffic between fixed to mobile. I think in Mexico today, it's less than 10%. And as time goes on, I think it's going to be less. So that's really what is happening now.

(Operator Instructions)

Operator, I think we have time for only one more question please. Thank you.

Okay. Our last question comes from Mauricio Fernandes with Merrill Lynch. Your line is open.

Thank you very much. Carlos or Daniel, could you be -- on CapEx, could you be a little bit more specific on the breakdown exactly? So for this, I just wanted to confirm -- I know you've mentioned it -- but about $4 billion in network or core CapEx. And the difference of what has been invested so far is basically either spectrum in Brazil, the license renewal in Ecuador and the spectrum or license payment in Panama. Is that -- ?

Yes, exactly. Exactly. What you're saying, that's exactly. It's $4 billion for all the operations. It's IT, network, et cetera. And the rest -- the other $800 million was for the licenses in Brazil, $200 was for Ecuador, and eight -- $250 million or $200-and-something -- and the rest of $80 million on the license of Panama. I think that's more or less what we have.

Okay. And just one more -- for Central America, net adds fell. But still margins fell to beyond the year-on-year or Q-on-Q basis. What's behind this so that we can understand the trend?

I think in Central America, where the competition tough, I think prices are really tough. And we're making some changes there. We're moving some things. And I think we -- I think for next year, I hope that our operations in Central America will be much better.

Competition is really tough. Prices are really high -- they're really low, sorry. And we're making more things. We are focusing more on the market. We are investing a little bit more in other things. So we're making some changes that I think will help us for the next year.

And, Mauricio, one thing -- it's not to do directly with your question but with a previous one. I just want to make sure that I am not misquoted. This has to do with the leverage. I have always said that we don't like to be much beyond one. But as I said earlier today, we would exceptionally go beyond one if we think that there's a good rationale to do that.

And that's why we did it exceptionally once in Brazil. We went beyond that. So I just want to make it clear that in normal course of circumstances, we like to be not much beyond one. But we always allow ourselves to have the flexibility of going beyond that if that's -- if we think that that's appropriate.

Okay. Thank you.

Thank you. And thank you, everybody. Thank you, Carlos, for the call.

Thank you.

Carlos, thank you very much.

Thank you very much. Bye bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.