America Movil SAB de CV (AMX) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the America Movil First Quarter 2009 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions to be given at that time. (Operator Instructions) And also as a reminder, this teleconference is being recorded.

And at this time, we will turn the call over to your host, Mr. Vera Rossi. Please go ahead.

Good morning for those of you in the U.S. and Latin America, and good afternoon to all of you in Europe. This is Vera Rossi. And on behalf of Morgan Stanley, we are pleased to be hosting America Movil first quarter '09 conference call. Speaking today will be Daniel Hajj, CEO of America Movil; Carlos Garcia Moreno, CFO. And also with us is Daniela Lecuona, Head of IR.

I will turn the call over to Daniel Hajj. Thank you. Daniel?

Yes, thank you, Vera. Good morning, everybody. Thank you being on the call. Carlos Garcia Moreno is going to make a summary of the first quarter results.

Thank you. Good morning, everyone. Thank you, Vera, for hosting the call. In last quarter, in which the economic situation was quite bad in both the US and Mexico, and it was -- well it was a clear tendency for the economies of the main South American countries to deteriorate as well, America Movil posted solid revenue growth, helped by [fair] establishments and a strong EBITDA growth, helped by the (inaudible) of subscriber growth in some of the main markets.

We added 3.9 million subscribers in this quarter, bringing our subscriber base to 186.6 million. In North America, both the US and Mexico operations did pretty well, in terms of net additions, which obtained 0.5 million plus in the US and 1.2 million in Mexico.

In South America, Brazil obtained 855,000 subs, which was 28.9% of the market's net adds; and Argentina, 436,000. Ecuador and Peru maintained a high pace of subscriber growth, both sequentially and annually. Colombia maintained a fair pace of gross additions, but a clean-up of our subscriber base led to a net reduction of 440,000 subs for us.

We continue to make to inroads in the postpaid market in various countries, supported by our investments on capacity and 3G network. In Mexico, our share has reached to 46.3% of the postpaid market.

Total revenues rose 15.4% or MXN93.8 billion. Equipment revenues were down somewhat, but service revenues grew rapidly, 18.5% year-on-year. They were well supported by data revenue growth of nearly 50% in (inaudible), mostly on account of 3G services that helped prop up ARPUs in several countries.

EBITDA was up nearly 13% as was operating profit. The EBITDA margin at 40.8% of revenue was just slightly lower in the same period of 2008. Net interest expense has fell 11.2% year-on-year on lower debt and interest rates, while non-interest financial costs arising for the most part from FX exposure and its hedging were roughly flat.

We had a net profit of MXN16.4 billion in the quarter, which was almost up 19% from a year ago. Our net debt came down by MXN8.9 billion. But in flow terms, it represented a reduction of MXN12.8 billion. The debt balance in peso terms rose because of the depreciation of the peso, and its impact on the non-peso debt. During the quarter, the peso depreciated vis--vis all the currencies in the region.

Capital expenditures totaled MXN10.6 billion and share buybacks MXN6 billion, with the free cash flow totaling MXN15.8 billion or 18.8 of service revenues. We have paid off completely all dollar-denominated obligations for America Movil falling due this year, including a prepayment of $300 million we made two days ago, and have ample liquidity to -- one, committed credit lines. We have $3.5 billion, including 1 billion just subscribed with the China Development Bank. And two, our current cash position of just under $1 billion. Our remaining short-term debt can be fully paid with cash at hand. The average life of our debt stands at 9.7 years to date, with small amounts coming due both next year and 2011.

With this, Vera, I'd like to turn it back to you, so that we can start the [questionnaire] session.

Thank you, Carlos. Tony, can you go ahead and open up for Q&A now. And while you organize the queue, I will ask a couple of questions.

Daniel and Carlos, could you talk about the sustainability of the trends in Mexico and in the other countries in Latin America? What you are seeing in terms of ARPUs and also net additions here during the second quarter? Thank you.

Okay. Vera. On sustainability, well you -- everybody knows that Latin America is behind Mexico in this crisis, and Mexico is behind US in this crisis. So we're entering in Latin America, we're feeling this slowdown at this moment. And what we clearly can see is that the number of net additions that we're having in this year is going to go down. We forecast in October with some indicators on the economy, that are totally different right now. And we're lowering our net additions number of 19 million subscribers, and we think it could be less about 10% to 15%. So we think that this 19 million is too high at this moment, and we think that it could go down by 10% to 15%.

In the other hand, we're focusing a lot on postpaid and data revenues. And I think this will help a lot there -- there is not going to be -- the net additions that maybe we are not going to get are the low income, the low spending subscriber. So I think this side of the additions, maybe we are not going to get it.

So in terms of ARPUs Vera, well, it's -- what we are seeing is that this crisis is hitting also on number of subscribers than in usage. And if the crisis is more or less at this level, I think we can maintain the ARPUs if the crisis -- or follow the trend that we are having. If the crisis is getting more and more difficult, hard, bad, so I think we are going to have less ARPU.

It's very difficult to forecast everything, you know, that with this flu that its happening in Mexico, moving to all America. So at this moment, it's very difficult. But we are more on the idea that it's going to hit us more on new subscribers, than on usage. But, well it's going to depend a lot on how those economies are going to develop.

And Daniel, just a follow-up question. If you see the scenario that you think is going to hit you more on new subscribers than on usage, that will be good for your EBITDA margins, correct?

Yes, yes. It's what you are seeing this first quarter. And -- well, it's also -- the EBITDA depends a lot on cost control, that we are making a big-big effort there. And also, the exchange rates -- the subsidies and the exchange rates, it's moving a lot all around. So it's -- we're going to depend a lot on that. But overall, we're going to get less additions. But with the same trends of ARPU, well, it's going to help a little bit, the EBITDA, yes.

Okay. Thank you.

Thank you.

We will open now for the Q&A. Tony, could you go ahead please?

Thank you. (Operator Instructions). And we'll take our first question from Rick Prentiss with Raymond James. Your line is open.

Great. On the net adds and the ARPU, can you talk about maybe how the competition is playing out in this new economic environment in Mexico and Brazil, now you've mentioned that the economy might affect adds negatively. What are you seeing in the competitive marketplace in the different markets?

Talking about Brazil. Well, I think we have a lot of competition, we have four competitors, its Vivo, TIM, Oi and us. And last year we saw Vivo really aggressive. At this moment, I think TIM is the one that has been leading their aggressiveness in the market. Oi has been always looking for customers. So, well Brazil is always very competitive, and I think it's going to still be as competitive all this year, because nobody wants to lose market share, and nobody wants to lose postpaid customers. There is coming all these new data revenues that are coming fast, so everybody wants that. So, well, I think in Brazil, it's going to maintain very competitive this market.

Mexico, well, Mexico is with also Nextel, is more segment, the competition in Mexico. Nextel is doing very strong on postpaid subscribers. Iusacell is going for the postpaid subscribers also. And Telefonica, those are looking for both.

As you can see, we are growing very good our postpaid base. We are growing very good our data. And that's why our ARPU is in this level. All -- in crisis, all overall that you are going to still see big competition in all the markets, not only Mexico, I mean Brazil, I think all the markets have been very competitive. And I think they're going to still be very competitive.

We do our job last year and we -- the last two years, we put a lot of money on CapEx on 3G, on coverage, on quality, and I think that's something that can help us a lot this year in terms of competition. In number portability, by an example, in Mexico and in Brazil, the two first countries that enter number portability, we have been gaining subscribers.

So, that means that we are -- we have a good brand, we have a good distribution, we have very good quality and the network, good coverage, good capacity. And that is going to help this year and the next year. So I think we are in good shape to pass this slowdown.

My second question is on the balance sheet. You produced a lot of nice cash flow. You paid down pretty significant amount of debt in the first quarter. As you think about your use of cash proceeds for the rest of this year, can you talk to us a little about your stock buyback program and the pace with which you might execute it?

Well, we don't have -- I think nobody has this ability on what is going to happen this year, when this crisis is going to end, what's going to happen with the debt. There is lot of uncertainties in the market today. And what we are seeing right now is we're being very careful on the -- on our working capital. We are working on reducing inventories. We are working on having cash flow. We are trying to pay -- I think we already pay all the debt that we should pay this year. We don't have anything else to pay this year.

So we have been -- financially, we want to be very careful. And at this moment, we don't know what exactly we are going to give another extra dividend or how much we are going to buy back on shares. But as we told you, we think we could be at least as the same amount that we do last year. So it's wherein in buyback or in extra dividend, what we've been -- we could be around the same amount of money that we do last year.

[Multiple Speakers]

We want to be prudent in this moment, no.

Yeah, very good. Thank you.

Thank you.

And our next question in queue, that will come from the line of Rodrigo Villanueva with Merrill Lynch. And your line is open.

Hi, good morning. I have a couple of questions. Given the drop in travel as a result of swine flu, I would like to know if you could share with us the proportion of revenues coming from roaming; and if possible, also the margin on roaming minutes versus domestic and long distance. Thank you.

I think the international roaming, because we have national roaming and international roaming -- I think the international roaming is not a big part of our revenues. I don't have exactly how much is it, the share. But it's not big. And I think this flu is going to hurt us more. As I told you on the new subscribers, people is not going out to buy things or -- but people needs to be communicated. So I think this flu is going to hurt more on the new subscribers than on the consumption. And what's the next question?

It's regarding margins on roaming minutes.

I don't have that. I don't remember exactly the margins on roaming. Roaming is all around the world. So I think we have different margins from U.S. and from Europe and from Asia. So, I don't have it at this moment.

Okay. I'll follow-up with any other. Thank you very much.

Thank you.

Thank you. The next question in queue, that will come from the line of Andrew Campbell with Credit Suisse. And your line is open.

Yes, good morning, Daniel and Carlos. My question is on large increase in data revenues that you saw in the quarter. And you mentioned the percentage growth. Perhaps you could also tell us how much now data represents of total service revenues?

And then I was also looking for just a little more color on where you're seeing the demand for 3G, if it's coming more from the data cards or is it smartphones or what's really driving that demand in data?

Well, we don't disclose the amount of data that we have on our service revenue. But what I can tell you is that we have a very good 3G network with good coverage. It's very important to have coverage. And the two things that we're selling more -- three things we are selling more is -- first, the PC cards. It's where you put PC in your computers and you have broadband all around the country. So that's the first thing.

Second, we are selling lot more of smartphones, and these smartphones are coming with, let's say, unlimited data or with limited data. And we're having a new rent in those smartphones. So the rental points, we are having the rental data. So these are main two things that we are selling.

And the third one is in the prepaid. In the prepaid, we are starting to give our prepaid subscribers data, and it has been working a lot. It's not a rent or they are using and they are consuming a lot of these type of value-added services.

So, I think we are happy. People is -- one of the things is people is very happy with our work products. So, I think these products can grow a lot, and we are having a good amount of subscribers with data packages all around Latin America.

Okay.

Data revenues are growing much faster than service revenues in almost every country of America Movil.

And within total data revenues, is the 3G contribution now meaningful as a percentage of total or is it still essentially all SMS with a very small contribution from 3G?

Well, all of the increment, for the most part, and this is coming from 3G.

Okay. Thank you.

Thank you.

Next question in queue that will come from the line of Chris King with Stifel Nicolaus. And your line is open.

Good morning and thank you. Two quick questions for you. First, with respect to usage trends in Mexico, very strong minutes of use number during the first quarter. Was just wondering what you're forecasting for the rest of the year for general minutes of use trends given the macroeconomic environment in Mexico.

And then secondly, just was wondering if you could provide us with the number of subscribers that you disconnected in the first quarter in Colombia, so we could get a cleaner kind of growth rate for your subscriber trends in that market. Thank you.

In the minutes of use in Mexico, you could see that it's one of the biggest in Latin America, and it's much higher than some of the countries or much of the -- or lot more countries than in Europe. If you compare Mexico and Europe or the rest of Latin America, we're having big, big minutes of use. And we have been growing for the last three years, because the competition has stopped in Mexico. And what we're giving is more minutes, more usage to all the people, more minutes, more data, and they are spending more or a little bit more than what they should spend without that.

So, we're doing that in an intelligent way. So, people is having lot more of benefits. They are paying a little bit more on what they used to pay. So, that's mainly is incredible, the amount of minutes that we do in Mexico. It's around 180. I don't have the number exactly, but it's around 180. And I think it's a very good indicator that the prices and competition is hard and tough here in Mexico.

In Colombia, the thing that I can tell you is that -- and I don't have the number, but the thing that I can tell you is that, the net disconnections were 440,000 [sic]. But the gross adds are in our budget. The gross adds are less than the -- a little bit less than last year, but they are still on what we think.

So, we're still seeing good sales in Colombia, but we decide to clean-up the base, because we have been growing so fast the last year on December, that may be, some of the people change; instead of giving the handset to his son or to his wife or to anybody, they decide to change, and they don't use the handset anymore. So that's why we decide to cut it. That could be one thing.

The other thing would be that, you know, that we have big penetration in Colombia, 95%, and we have the best coverage and we are all around Colombia. Maybe some of the subscribers that are low income subscribers, they decide to -- because of this slowdown, they decide not to use anymore their handsets.

So, maybe could be the first or the second thing or maybe both, but I am happy because we're still selling -- the gross additions in Colombia are still inside of our budget, in our forecast that we have.

Thank you.

Thank you. And our next question in queue, that will come from the line of John Henderson with Scotia Capital. And your line is open.

Thank you very much. Question on the 55.5% margin in Mexico, it's the highest margin you've reported there ever, I believe. Just wonder if there are any unusual drivers that might explain it, and whether we should see that dip back down or is this really -- truly a sustainable kind of level?

No. Well, you saw that margin because -- the first thing is, we slowed down a little bit our subscribers. So that's why this -- second, we're being very careful on cutting all the costs, and we have been very-very strong on the cost control. And third, it will help us a little bit in some countries, it doesn't help, but in Mexico, I think we have a little bit of benefit, because we have some inventory of handsets and with the exchange rate, is that -- we move a little bit the prices, and that give us a little bit more on profit, instead of subsidy, maybe if we have some profit when we sell some of our handsets.

So we have special things, but I think we can have good -- still we can have good margins in Mexico. I don't know if we can maintain this margin, but we can have good margins in the next months, still in Mexico.

Okay. And just a quick follow-up, also in Mexico. I'm wondering if you may consider sort of selling netbook PCs with embedded internet capability and subsidizing them, and sort of competing with TelMex in that fashion? Or is it -- well, if you just comment on that.

I do not understand the question. Can you repeat it please.

Well you know, low cost netbook PCs. I think for instance, AT&T is selling them for $50 in US and subsidizing them, if people sign on to a longer-term contract. Just wonder if you would consider that.

think that's something very interesting. We are looking at that. We are selling a lot of PC cards, and the PC cards are -- what we're looking is to put one, two or three different netbooks in our customer care centers, and start to sell this type of products. I think its -- you're right, in US is very -- has been doing very good in the US. And I think in Latin America, we already start to do that in Brazil. Very soon, we're doing that. We already negotiate all these products for Mexico, and we're going to move that to all the countries. I think it's very important. We want them to have the thing included in the PC, and with a contract for 12 or 24 months, I think we can make good prices for our customers in these netbooks.

$50 is really cheap, either they are subsidizing. But well, what I'm reading in AT&T, that they are subsidizing also a lot, their iPhone. So, well maybe it's something similar on what they are doing on the iPhone.

Thanks very much.

Thank you.

Thank you. And the next question in the queue, that will come from the line of James Rivett with Citi. And your line is open.

Good morning all. Great results. My first question is on Brazil. What's the issue there with ARPUs? Why have we seen an accelerated decline versus the trends that we saw in the fourth quarter of 2008 and the rest of the year? Is there anything changed, and is that the new level that we should expect through 2009? And my second question is on CapEx. It looks like it's much higher -- sort of -- you spent nearly a quarter of your budgets or your guidance in the first quarter. Is this a new sort of Carlos Slim group-wide policy of smoothing CapEx, or do you think you actually need to take out your guidance? Thank you.

And over to Carlos on the CapEx?

Well, on the CapEx -- I think there's really nothing special. I think we expect -- last year it was an unusually low level of CapEx because we hadn't taken delivery of some of the equipment that had been ordered. It's not because we had -- somehow made any adjustments to total. This year in CapEx, a lot of the things were already in the [plan] and we have effectively taken delivery areas, and [was] the case in some things. But we are not yet making any -- I mean, it's not like we made something specific to try to bring forward the investment. I think we may come back to you with numbers on CapEx.

Okay. And another thing is that, I think it's a very good idea to try to do the CapEx as -- we reduced our CapEx. You know, the number is going to be around MXN3 billion more or less. So what's happening? So we decide to put hands on and do the CapEx for the -- lets say first nine months. So if traffic is going okay, if usage is going okay, and then maybe we need a little bit more of CapEx, then we put it because traffic is growing and we need more capacity.

So that's why we are trying to put all our CapEx in the first, let's say eight to nine months of this year. So if we need something else, we can put it. I think at this moment we don't have anything that we're going to make more CapEx than what we need, in any countries or -- everything is under our budget. And it's mainly why you see a little bit more of CapEx this year against last year. Doesn't change anything okay. I think we decide to do the CapEx on October instead of January, and that moves a little bit faster, the CapEx.

In Brazil, what you could see in Brazil, is we are the biggest network in 2G and 3G. All of our subscribers are right now in 2G and 3G. So we have been cutting all the CDMA subscribers, moving all this CDMA subscribers, and that's why we're having a little bit more of costs than -- and I think this cost -- we need to reduce those costs for the next 10 months.

And on ARPU, it's because we have big growth last year, and then people need to start what always Carlos has been explaining to you, that when you have big amount of new subscribers, they start to use, and then you are going to see the future more usage of all the subscribers. It's what we're seeing, and there is nothing else that I -- any other explanation that I can see.

But just a follow-up on that. I mean, the fact that in the first quarter, I think my numbers, if I got them correct, you only saw a 5% year-on-year growth in usage and quite a big full quarter-on-quarter in Brazil. I mean is that purely the carnival effect or is maybe Brazil is slightly different market than what you are seeing everywhere else?

Well, sales are being really competitive, and we have also been reducing prices fast. And that's another issue that maybe that's why ARPUs has being reduced a little bit. But I think ARPUs are going to stabilize. I don't know if that's the level where they are going to stabilize, but I think ARPUs are going to stabilize as they are stabilizing in all the other countries.

Very clear. Congratulations again.

Thank you.

Thank you. And our next question in queue that will come from the line of Walter Piecyk with Pali Capital. And your line is open.

Thanks. My two questions just go back to the original question from [Vera] about the net adds and ARPU. When you talk about the 19 million being 10 to 15% lower, are there specific markets that reflect that or is it pretty much just a kind of blanket statement of all the markets?

And then the second question on ARPU is when you say that the economy looks like it's affecting our subs, but not our ARPU, does that -- [would you] take that to mean that, for example, in Mexico, our ARPU was MXN168 in the first quarter, that it should stay in your view in that range of in the high 160s throughout the course of all of 2009 or just that it will continue to decline, which is not at the type of rates that we saw in previous years? Thanks.

I think, well, the second quarter in Mexico, it's different than first quarter in Mexico. Second quarter in Mexico, we have Easter vacations. There are two weeks in April. So that does not help a lot on the ARPU. But as I told you, if we feel and we see that the economy is going to maintain like this, then the usage I think is going to be around 160, as what you said the ARPUs are. 160s or -- 160s.

But if the economy is going worst, then, well, we can see also a reduction on the usage of the people. It's really going to depend on the develop of the economy in Mexico and also in Latin America. I think it's very important. But in the other hand, we have good things that are all -- that data revenues that are coming. So, well, we need to play with these three things, and that's mainly what we're going see.

It's very difficult for us to forecast that. But those are the three big issues where we need to understand and to check very closely. It's going to be the develop of the economy, the develop of the data, new subscribers, data ARPU, new subscribers, new usage and the new subscribers that we are having.

Thanks. And just on the net add mix?

Can you repeat the other question?

Yeah. You had mentioned that previously you were thinking 19 million -- excuse me -- that would be -- you might think that it might be 10 or 15% less. Are there specific markets that reflect that, because the 19 obviously goes across all your markets? Or is it just kind of a blanket statement saying, everything should be 10 or 15% lower than maybe what we were previously expecting?

I think all overall is going to be 10 to 15 in all the markets. Maybe some markets are going to be higher; other, lower. But I think it's -- yes, it's around that. We -- Latin America is behind this crisis. So we need to understand, specifically as somebody says Brazil economy is in better shape than in Mexico right now. But well, everything -- all Latin America is behind Mexico and Mexico is behind U.S. So let's see how these economies are going to behave in the future. It's really going to depend on that.

Thanks.

Thank you. And our next question in queue that will come from the line of Andre Baggio with JPMorgan. And your line is open.

Hi. I have two questions. The first relates to the trends of contract addition in Mexico, which I noted that's improved a lot this quarter. Can you talk a little bit about the dynamics of that market? Is it change of structure for America Movil? Is it softening of the competition in that sense?

I think we're more -- I think what is happening is we're more focusing in the postpaid market in Mexico, and it's helping most of the data revenues. We're having -- a lot of our subscribers are using more data, and I think it's very good news for us. All our -- all subscribers are using new value-added services, and we're getting new subscribers on postpaid. I think that mainly -- we're focusing more on that. That's really what is happening.

Okay. Second question, can you talk a little bit about the core -- the evolution of the core margins, I'd like to say. I noted that handset sales as a percentage of revenues was down, which helps the overall margins. But could you talk a little bit about the evolution of the core margins in your services.

In which country?

Maybe Mexico, Brazil, I guess?

Okay, the core margin.

Well, the core margin is going up every quarter. In most places, basically the change in margins is being driven by -- and the total EBITDA margin is being driven by subscriber acquisition cost. But as Daniel stated, we make up some short-term extraordinary costs in some countries. (inaudible) of the 3G network and probably would be facing out of the -- all the CDMA clients in some operations.

So there is little bit of taking in of 3G and taking out of CDMA. And that's like a temporary factor. But that is basically -- what you see most -- almost every place a tendency for margins, for core EBITDA margins to rise and for the evaluations in total margins to be driven for the most part by changes in subscriber acquisition cost.

Okay. Thanks a lot.

Thank you.

Thank you. And our next question in queue that will come from the line of James Ratzer with New Street Research. And your line is open.

Yes. Thank you. I have two questions please. The first one is just regarding the new loan that you have been able to take out from the China Development Bank. Is that potentially indicative that you've been now looking to source more of your network equipment out of China? And if so, I was wondering if you could help us rethink about how future CapEx might develop to this, meaning you can source cheaper CapEx going into 2010, 2011.

And then the second question is regarding 3G and data take-up. I was wondering if you could help us with some understanding if the take-up about in Mexico -- I mean roughly what percentage of our 3G customers -- sort of your postpaid customers are now actually taking a 3G service and what percentage of your revenues in Mexico are actually now coming from data? Thank you.

Well, as regards to the China loan facilities, it's -- we have been checking up (inaudible). Within the last year, we set a couple (inaudible) from Sweden and from Finland. And now it happens that we're getting something similar from the Chinese. As you know, the network vendors we are really relying on today, a little bit mentioned in the sector which are Ericsson, Nokia and now Huawei. We sure are making inroads with working with Huawei last year...

And that's the one that we're buying 3G from. Those are the only three vendors.

Those are basically the only three vendors that are supplying 3G to us. And Huawei, it has -- we are doing (inaudible) last year. So we decided that when we took a component (inaudible) their input. The 3G -- last one is we're not really disclosing at this stage how many clients we have specifically on 3G. I don't even have the numbers here with me. But I think that basically we should be able to update the impact by looking at that result of data revenue, as I was explaining earlier.

And substantially all of the growth of data revenues is being driven by 3G. It is not being driven by SMSs. But of course, they have (inaudible) for some time. So basically, the boost in data revenues is coming from 3G, and it's -- that's really encouraging for us.

Can you tell us what percentage of your revenues in Mexico are now coming from data please?

No. I think that we've said last year that we were -- may be [side of] 15%. I think that's the case. It is going up, buts its moving very fast everywhere. So, we don't want to talk too much about what is the share. But again, I think you will be having a good idea when we provide you with the overall average rate of growth of data in other markets.

Thank you.

Thank you.

Thank you. And the next question in queue, that will come from the line of Damon Guirdham with Generation Investment Management. Please go ahead.

A quick question on your CapEx guidance and you mentioned the MXN3 billion, you are spending that in an accelerated fashion. Does that mean that the 3 billion is really a minimum guidance, and we should look at it as a range of MXN3 billion to something above that?

No. I think the MXN3 billion is what we think and we are on forecast on that. The only thing is as we -- the usage and capacity -- this crisis, we're not going to know exactly what's happening with the usage on this crisis. So, what we want is to have a small margin, that if we need to put a little bit more capacity, because in September, things are better than what we expected. Then we have a little bit of time to do that. But that's the only thing that we are thinking. So, we want to have a little bit of margin, if things are better than what we expected. And we need to put a little bit more. But you know that capacity is really cheap. While it's a little bit more expensive, is coverage and its 3G coverage. And so if we need -- what we are doing that it's only -- we need a little bit more capacity then we have at the time to put it. We want to still have the vast network in Latin America in terms of capacity, in terms of quality, in terms of data. So that's where we are investing in.

And just one more on CapEx. How much of your CapEx should I think of is denominated in local currencies, say civil works, etcetera?

I think it's difficult. But I think is maybe (inaudible) what is in local currency and what is in dollar.

Thank you.

Thank you.

Thank you. And our next question in queue, and that will come from the line of Rusty Johnson with Harding Loevner. And your line is open.

Thank you. My question regards to the longer term effect of migration towards more postpaid customers, and what that effect would have on your equipment costs? Do we find most of these customers receiving smartphones, higher-end equipment that's going to actually cost more. Presumably the ARPU is higher. So how do you see the dynamic between pulling them in and profitability including the hardware costs or whatever you would include for subsidized phones?

What we do, and the saw that increase, each segment of the market, the prepaid has to have their own profitability. Postpaid has their own profitability, and smartphones in postpaid has their own profitability. So, we have like a formula, and in that formula, its where we are selling and doing. Now, we are -- as you are saying exactly, we have more ARPU, then we can have a little bit more subsidy. In the other side, we have less ARPU. So we are reducing a lot of subsidy.

But in the other hand, one very good news is that smartphones are getting cheaper and cheaper, and that's something that we like a lot because then we can sell smartphones with data inside to a lot more people, okay. So, you could see smartphones in $200, something like that. One year ago, you saw smartphones in 350 something, as the model (inaudible). So I think smartphones are also going down. The prices of the handsets are going down, and that will help us a lot to enter in new segments in this market.

Okay. Just the final there. Your equipment cost was 5.4% on these results. Is that a representative trend, or does that reflect the fact that you had big inventories and weren't really buying much despite movements in currency. So, what do we think about the change in --

I think one of our -- one of the things that we're looking very closely is the subsidies on the handsets. And we are trying to give less subsidies to all of our customers. So in that case, we -- the acquisition cost is, if you could see the acquisition cost in all the countries, it's getting lower, it's getting better for us, and that's a trend that you are going to see all around Latin America. We are trying to -- as we are reducing a lot the rates, then we need to reduce also some cost. And big cost on our companies are subsidies, and we are being very careful on that.

Okay, thank you very much.

Thank you. And the next question in queue, that will come from the line of Richard Dineen with HSBC. And your line is open.

Thanks very much, yeah. I guess it's related to the last question, and Colombia, the cleanup of the subscriber base. Firstly, maybe you could explain what you identify as the reason behind the low usage of customers in that market that -- so you disconnect them. Is that just to resolve a late stage adoption of mobile from lower income segments, or maybe were you too aggressive with promotions and you sucked in some kind of marginal users, who weren't necessary loyal to your network? And either way, does that change your thinking about the value of subscriber growth or indeed your subscriber acquisition strategy in terms of subsidies or indeed other selling expenses?

And maybe just as quick follow up, are there other markets where you think you may have to conduct similar subscriber base cleaning exercises? Maybe I don't know Brazil, where you saw very strong growth also last year. Thanks very much.

In Colombia we're not changing any strategy. I think the strategy that we have been doing for the last two, three, four, five years has been very successful for us, and we're not changing any -- as you are saying maybe, some of the promotions maybe low income people, or other things are making that weakening of the rates. But at the end of the day, if you see that in the quarter, where it doesn't make a lot of sense.

But if you saw that in two years or three years, then it make a lot of sense, the strategy that we're taking, and we're going to still maintain this strategy all around Latin America. I think prepaid for us is very important, postpaid for us is very important, and data is becoming also very important. So we need to segment these three different products, and we want to focus in each one. Each one has their own profitability, and each one has their own importance. But I think it's still very important, the strategy that we are doing in Colombia.

In Brazil, well, at this moment we are not seeing anything that tell us that we need to clean up the base, and in the future, if we start to clean it -- well we are going to clean it, but at this moment, we don't have any indicator that make us think that we are going to clean the base there.

Okay. Thanks very much for your comments. Thank you.

Thank you. Our next question in queue, that will come from the line of Will Millner with Arete Research. And your line is open.

Thanks a lot. Just a couple of questions. I wonder if you can talk in a bit more detail about any changes you've made to your commercial offers in Mexico? Specifically design, to I guess cope with the downturn. I mean, I am asking really, because as I look at the trends in Mexico, it certainly doesn't look like that particularly affected by the macroeconomic slowdown, which suggest that may be further down the line. So, if you could talk about any specific changes there, that would be useful. And secondly, just sort of housekeeping --

Sorry. I don't get the question. Can you explain it a little bit better?

Yeah. You've talked about the macroeconomic impact in Mexico. But as I look at the trends, there hasn't been much of a negative effect so far, which suggests you either cope with it very well, or its further down the line. And I just wanted to understand, what specific changes you've made to any of your commercial offers, to cope I guess with lower disposable income or maybe economic changes but that we might be seeing?

Well, I think that -- what Daniel has pointed out earlier in the call, is one thing that has been helping us in Mexico and other places is, A, that we have data and B that we are becoming much more competitive in the postpaid market. So, we are tapping a different subscriber base. And all of those things have helped us mitigate the effects of the downturn. The downturn has been much more real, but we have essentially been managed -- been able to manage that by selling something that we are [happy for], which is data, and by tapping wealthier segment of subscribers and that helped us.

But I think, you know, in the end, we don't really know how prolonged the downturn will be. And I think to the extent that this is prolonged, you will increasingly feel the effects of the downturn in overall spending. If, for whatever reason, we feel the economy is relatively [strong], then it may very well be the case that we do not see any decreased spending down the road. But if the economies do not recover, then -- (inaudible) increasing the effect of our reduced spending. That's probably what will happen.

Okay. And can I have one quick follow-up, just as sort of housekeeping exercise? In which of the markets you operate are expecting regulatory changes this year to impact revenue and profit trends?

Well, you never know. So, I don't -- I think we're going to see a lot of changes in the regulations in all the countries during the next year or two years. But I don't see any big changes at this moment that will [correct] us in big revenues or in profitability.

So there is new things that are coming, but they are not coming in the short term. And that is not something that I could see that we have a big impact in our Company in the future. But regulators always change, and different things are coming of course, in all the countries.

Maybe.

And we think -- sorry.

That's all right. Thanks.

Okay. We have time now for one more question.

Thank you. And that question will come from Jose Magana with Pyramid. And your line is open.

Thank you very much. Hi gentlemen. For quite some time, since American numbers -- they haven't been right. Can you elaborate a little bit on efforts to reshape the -- your operations, and can you elaborate a little bit on your competition?

On the Central American operations?

Yes.

I think we are doing much better in Central America, we are putting the house in order. I think we do big investment, then we consolidate a lot of companies there. So I think, we are in much better shape, and you are going to see improvement in revenue and in EBITDA in the next quarters. I think -- I think the Company right now is in much better shape than last year. We do a big effort. We're making huge work on this Company, and you are going to see good improvements there.

Thank you very much.

Okay. And --

Thank you and thank you everybody.

Thank you, Daniel, Carlos, and Daniela for the call, and Tony, the operator will give us details for the replay now.

Thank you very much.

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