America Movil SAB de CV (AMX) 2009 Q2 法說會逐字稿

Our call will begin now.

Good morning, everyone, and welcome to America Movil's 2Q '09 Conference Call. My name is Andres Coello and I am Telecom and Media Analyst with BBVA Bancomer, Mexico's largest financial institution. I am glad to introduce you today to Mr. Daniel Hajj and Mr. Carlos Garcia-Moreno, Chief Executive and Chief Financial Officers of America Movil.

Mr. Daniel, Mr. Carlos, please go ahead.

Thank you, Andres, and as always, it's -- thank you for being in the call. Carlos Garcia-Moreno is going to make a small summary of the second quarter results.

Good morning, everyone. Thank you, Andres, for opening the call. As was the case in the first quarter, the second quarter was characterized by a fairly sharp economic contraction involving US and Mexico. But this time, the general outlook for the main economies in South America seems to improve towards the period.

Overall, the combination in most operations of strong data growth, the deceleration of subscriber growth and good cost controls contributed to an improvement of EBITDA margins. Our past and present investment in our networks continue to allow us to offer more and better quality services to our clients, which has helped our retention efforts, which means lower churn rate, and has given help to bring us new results.

In both Mexico and Brazil, we have had net subscriber gains from number portability. We added 3.7 million subscribers in the quarter, in line with our guidance on subscriber growth for 2009. 900,000 were obtained in Brazil, 730,000 in the US through out subsidiary Tracfone, 548,000 in Mexico, and 367,000 in Argentina. Tracfone and some other operations, most notably in the Caribbean, gained more subs than in the same period of 2008.

Our focus on postpaid subs has yielded faster postpaid growth in several important markets, including Mexico, Brazil, Argentina, and Peru. In Mexico, our share of the postpaid markets, only 7%, will likely continue to increase. Revenues reported of MXN94 billion were 11.2% higher than in the year earlier quarter. Service revenues were up 15.9%, but equipment revenues declined by 17.3%, partly on account of the lower peso subscriber growth.

The expansion of service revenues was underpinned by the surge in data revenues. The median of local currency expansion in data revenues was 56%, excluding Central America. They provided good support to ARPUs practically across the board. In substantially all our operations, our average price per minute of voice kept on coming down, 15.4% in Mexico, 17% in Argentina, 18% in Colombia. Peru and the US at over 30% year-on-year and nearly 30% in the Caribbean.

Our EBITDA rose 13.4% from the previous year to MXN39 billion, helped by a top-line and lower subscriber acquisition cost. EBITDA margins rose in most operations. Exceptions include Tracfone in the US and our Caribbean operations, which I referred to before, have been increasing past their subscriber base. Our consolidated EBITDA margin was up nearly one percentage point to 41.8%.

We obtained a comprehensive financing income of MXN2.4 billion, mostly on account of foreign exchange gains resulting mainly from the appreciation of the Mexican peso with respect to the US dollar that more than doubled our overall financial expense. Altogether, our operation generated MXN22.5 billion in net profits, 27.5% more than a year before.

Through June, our net profits totaled nearly MXN40 billion. Our cash flow has enabled us to reduce by 25.5% to MXN5.8 billion our net debt so far this year and to fund share buybacks in the amount of MXN10.4 billion, of which MXN4.4 billion took place in the second quarter.

We remain financially strong with a net debt that represents only 0.65 times EBITDA and a comfortable maturity profile resulting from an average life of our debt of nearly 10 years. Our capital expenditures totaled MXN18.6 billion through June. They are very much in line with our projected amount for the year.

I think this summarizes the state of the results in the quarter. Andres, maybe we can open up the floor for questions.

Yes, Daniel and Carlos, first I would like to congratulate you for the strong results shown in the quarter and particularly in the light of the difficult economic conditions that you -- that our unit is facing. I have two questions. First question, do you think that the swine flu crisis was the main reason behind the 8.2% growth in minutes of use in Mexico or can we expect them to continue to grow at the high pace that we saw in Q2 for the rest of the year?

Andres, I think the -- what happens with the swine flu is that it hit us a lot more in the sales of the equipment and sales of the concept. I think that's mainly people does not go out in the streets, a lot of stores closed. But I think the usage has been very good. Prices has been coming down and that's really what is driving them all up so that's really what is happening in Mexico. We are, as you are seeing in Mexico, we are being very good on postpaid and postpaid give us more minutes of use, so with less -- low price and more postpaid subscribers is what is driving the minutes of use higher.

Okay. And second question, can you give us the latest update on the coming spectrum auctions in Mexico? How much money do you expect to spend and is that estimate already your CapEx guidance for 2009 or 2010?

Well, it's still -- we haven't had the latest news on the auctions. I think what I'm hearing is that they are going to auction 1,900 megahertz a spectrum and 1.7 and 2.1 is for 3G and maybe for LT spectrum in Mexico. What they are saying is that they are going to allow to participate everybody. What also they are saying is that they are going to -- or what they are looking is to give some of this spectrum to a new competitor is what they are thinking to do or what they want to do.

And the auction side, we don't know exactly the rules, if we're going to pay some money up front or we have to pay like a rent per year. So, there is still a lot of things that we -- that we're going to saw later in this maybe month or the next month.

Okay. Operator, please open to questions.

(Operator Instructions).

Your first question comes from the line of Vera Rossi.

Good morning, everyone. I have two questions, one on Brazil and the other one on Tracfone. In Brazil, what caused the decrease in market share of net additions during the quarter? And on Tracfone, do you expect to launch the Straight Talk on a nationwide basis in the US and if you expect to continue to have this level post net additions in the US going forward. Thank you.

Good morning, Vera. On Brazil, I think we -- what we're looking at -- you saw in the numbers, is that we're looking for postpaid customers, for good customers. We don't -- we are not get in the naked SIM sales, so we feel that they are not very good subscribers. We're going to see if all these subscribers that just add in the second quarter in Brazil are going to have consumption and they are going to deliver revenues. It's very important for everybody to know, also for us, no, if that's a good market or not.

But what we're looking and what we're seeing is that we're very strong in postpaid in Brazil. We have a very good network. We have very good quality. And I think we're in a good position in Brazil to still gain market share. We need to really understand what's going to be the promotions in SIM as they told me that some competitors are giving two SIMs free if you contract or -- so it's -- I think it's a little bit of irrational, those SIM cards. But let's see these are going to consume in the next months, no?

In Tracfone, first of all, we have to make a -- we make a mistake in the report. We report 103 minutes of use and the number is 75 minutes of use. I'm sorry about that mistake and please correct that. But what we're doing right now, we have a new product that is the Straight Talk -- we call them a Straight Talk product. That it's all you can eat for X amount of money. And I think it's $45.

And what we're doing is we're testing the product and if the product is -- give us good results, of course we're going to roll out through all the United States nationwide. So, we're waiting for the results and if the results are good, then we're going to roll out all through the US.

Okay. Thank you, Daniel.

Thank you, Vera.

(Operator Instructions).

Your next question comes from the line of Henry Cobbe.

Hi there. Thank you very much for the call. My question is just on Brazil. You mentioned the quality of your postpaid subscriber base. And I just want to query what happened to MOUs in the second quarter. Like MOUs are down 16% or 17% which, looking at subscriber growth implies that traffic grew only 3% year-on-year. Could you explain -- is that another typo?

No, it's a very good question. I think what happened in second quarter is that promotions were more rational with increase on promotion. I don't think they are going to stay like that. Second quarter, you saw a little bit more rational promotions. It doesn't -- it's different than what you are selling to the customers. So, the naked SIMs are still the same. But in the promotions are more rational and maybe in third quarter, change that and fourth quarter also we change that. So, that's why the minutes of use in Brazil decrease a little bit. It's because a little bit more rational promotions.

We have good promotions on first quarter, so we reduce the promotions on second quarter and let's see what's going to happen in third and -- next question, no?

Yes, operator, please, next question.

Your next question comes from the line of Ric Prentiss.

Yes. Good morning. Ric Prentiss, Raymond James. Appreciate the info on the Tracfone minutes of use. In the Tracfone promotion, do you have to buy a large bucket of minutes and text messages from Verizon and then sell the product? And if so, did that affect the EBITDA margins in Tracfone at all in the second quarter?

No, that's not the way we're going to do that. We have an agreement with Verizon and the only thing that I can say on the agreement is that this product will be profitable for Tracfone, not like all the other products that we're selling. We're selling four products. We're selling Tracfone, Net10, this one that it's Straight Talk and Tradelink. And those are the four products that we're selling.

And more or less, all of them has the same, let's say, economics or strategy there. So, that's what we're doing. I cannot talk more with what's the deal with Verizon or what's the deal with my other carriers in the other -- in the other plans. But I think we're looking to make this plan profitable, no.

Okay. And my second question is in Mexico. Obviously, impressive results in Mexico with increasing usage and nice ARPU. During the swine flu problem, you mentioned it hit sales a little bit. How were people able to go out and reload their cards or replenish their usage? How did that actually play out in the quarter?

Well, I think you -- everybody -- we're selling a lot of the cards, also electronic. You don't have to go out and buy a card. So, you can buy a card by phone, by electronic. You can do it through your credit card. So, there is a lot of different ways you should recharge.

Very good. Thank you.

Or you can buy also in ATM -- in the ATM in Mexico.

Yes, yes. You can do it in a lot of ways to buy the card. And with the swine flu, I think really they were only -- maybe one to two weeks where really people and store were closed. Not more than two weeks. So, I don't think that was an issue for recharging your phone.

Very good. Thank you.

Your next question comes from the line of Andrew Campbell.

I know that data revenues are becoming more and more important in Mexico. I was wondering if maybe you could give us a number for how many mobile broadband subscribers you have in Mexico now? And my second question is on the prepaid data plans, which I understand that you've launched over the past few months. If you could give us an idea for how well those are going, how the take-up has been?

Well, we are not disclosing the data, but what I can tell you is that in Mexico, we are growing around 40 something -- 45% year-over-year our data revenue. So, you could see that we are improving and that we're growing and that data has been very important for our ARPU. I think what we're focusing in Mexico and what drives the ARPU and -- or maintain the ARPU and drive revenues is we're doing a lot more on postpaid.

How we're doing more, we're focusing more on postpaid. We're focusing more on retention. We're making much and better quality on our network and we're giving data usage for all our customers. So, that's really what we're focusing in Mexico. We're now selling netbooks also and every day, we're selling more value-added services. So, that's really what is making ARPU grow.

Thank you.

And if -- and what you are seeing in Mexico is what you are going to see all around Latin America. We already invest in a 3G network all around Latin America and our strategy has been pushing and pushing data and data has been growing in all the markets. So, you -- I'm confident that you are going to see the same thing that you are seeing in Mexico, you are going to saw them in all the other countries, no.

Brazil is doing very good also on data, on postpaid, on data. People likes a lot smartphones, so smartphones has been increasing a lot their sales. So, that's more or less what you are going to see in the next few years or in the next year in Latin America. In the prepaid, we are also giving prepaid data and there is prepaid plans. And they are also working. So, data is working.

Okay. Thank you very much.

Thank you.

Your next question comes from Verena Wachnitz.

Yes, hi. From T. Rowe Price. Hi. Congratulations on the strong results. I have two questions. One is on your margin, especially in Mexico but also in general. Could you comment a bit about what contributed more, the subscriber growth slowdown, the cost cuts, the data growth? You mention all these factors, but could you give us a sense of which was more important?

And also, then talking about data, which you mentioned before, do you think at some point we'll see the growth in data revenues leading to higher ARPUs rather than just offsetting a decline in voice ARPU? And if so, when do you think that might happen? Thank you.

Well, the first question is what's the rise in data -- sorry, margins in Mexico. Well, first you are seeing that we have a reduction on acquisition costs. So, as you are selling less, you have reduction on acquisition cost and that's driving also margins up. Second, the cost control that we're having is very -- it's very important. We have been having a very good cost control.

And third, what I'm saying not that the revenue is growing and the data revenue -- we used to have, last year, all the costs and expenses of the 3G networks and today we're having more -- much revenues on data. So, we used to have costs and right now we're having the revenue. So, that's driving the margins up. So, that's mainly what we're -- these three things are because also the acquisition cost has been going down. We are not selling what we were selling last year.

So, that's also something that helps the margins out. When things get better and maybe we start to sell more, then maybe we have a reduction because we are having higher acquisition costs, no. So, that's what drives margins up, some down.

And the second question, can you repeat it, please?

Oh, yes. I was just wondering when do you think we might see or if we might see the growth in data revenues offsetting the decline in voice ARPUs and therefore leading to higher ARPUs on a consolidated level?

Well, I think people -- the way we saw that is that people is -- the way we see that is that people use voice and then are starting to used data. They are not reducing their voice or their calls to use data. At the beginning, you could see that because two years ago, data was like SMS, was mainly the growth on data. But today the growth on data is going, browsing, downloading music, going to Facebook. So, there's a lot more things that they are not reducing the voice minutes. So, I don't think they will reduce that, no.

And generally, just to follow up on the question, I mean, we are in a very soft economic environment across the board, which normally cuts on usage. You would expect the economies improved, but usage will also be picking up across the board, no. So, I think the amazing thing is that data is growing so fast in what is still a very soft economic environment.

Okay, thanks.

Your next question comes from the line of Mauricio Fernandes of Merrill Lynch.

Good morning, thank you. On the ARPU in Mexico, the increase relative to the first quarter, it appears that the flu was helpful in terms of driving usage. I was just wondering how much of the ARPU increase was the contribution from the flu and how much of it was regular increase in -- or simply increase in usage trends. And if you could share with us, once the flu threat was mainly over, so what was the ARPU, say in June or July? What it has been has been in line with the quarter with the number you reported in the quarter for MXN172. Thank you.

Yes, I think what Daniel just mentioned, Mauricio, is precisely that the flu was -- when you consider it, it was a relatively short-lived phenomenon. I mean, the bigger part of the flu was probably, at most, one week. So, I think that there's more secular trends out there. You are seeing, I think, the growth in data revenues didn't have anything to do with the flu and it was quite amazing. It's 45% this quarter and it's much more rapid than what we've had even last quarter.

So, you are seeing an acceleration of revenues on data and that is helping make up for -- what we were saying is that it's a very challenging economy. Mexico, as you probably have heard, has been rumored to have a DTT decline of about 9% this year. Even recently the president, President Calderon made the statement. So, we are indeed facing very difficult times in Mexico. And what has been helping is that we have -- we just happen to have a new product that is very much in demand. That was not the case some time ago.

But this challenging environment is also posing more difficulty towards subscriber growth. I think we have been saying that since late last year, Mauricio, as you remember, that we were expecting that the economic downturn was going to impair our ability to keep on growing subscribers and that is clearly one of the things that we are seeing evidently in Mexico. So -- but the question -- I don't think that what you saw in terms of five more years and so on was so much linked to the particular sign.

Okay. And just one more. Not that this is a major driver, but in Colombia, we saw -- it created some decline in net additions. I was just wondering if there is anything that has happened there or is that -- that's given in the current stage of penetration there that we're going to see in some quarters the number of net adds following and any others growing. Just wondering if there's anything special that has happened in -- that has happened in the second quarter?

Yes. Mauricio, in Colombia, we have 95% penetration. So, what we're focusing there is to grow our postpaid base, our database. And that's where we're focusing in Colombia. So, that's why you are going to see -- there's an economic slowdown there also. So, what -- the strategy right now, we have high market share there also. So, what we're doing there is to focus on a very good subscriber, data subscribers and that's really what is happening in Colombia. High penetration make us look for much better subscribers.

Okay. Thank you, Daniel. Thank you, Carlos.

Your next question comes from the line of Richard Dineen of HSBC.

Thanks very much. Yes, I guess, two questions, really. One is that -- one of the key criticisms of operators in the US and Europe is that they have been caught a little bit on the back foot, caught sleeping when it comes to mobile applications, really giving up this role to the likes of Apple and Google.

Now, given data is obviously important for you, it's at an earlier stage of development in your markets and given that Apple and Google are not maybe such dominant brands in your markets, do you think you have a chance to head off that threat and play a more central role in the provision, the aggregation of applications, maybe with your own rival app store or do you see yourself leaving that role to others?

And secondly, just quickly, if I can just ask for clarification on the Brazil subscriber numbers, could you confirm whether or not there was any attempt to kind of clean the subscriber base with involuntary disconnections as we saw in Colombia in Q1? So, those are my two questions. Thanks.

On Brazil, we are -- we have a calendar -- this connection calendar and we follow that calendar. We have a little bit more disconnections on second quarter because the high subscribers that we get on December and November. So, that's why we have that on the second quarter. And -- but what we're saying, we're focusing a lot in postpaid subscribers, data subscribers. And that's what we're seeing -- we are going to see in Brazil. We are not -- or we don't want to over disconnect or lead disconnect the subscribers.

There is a calendar, there is a policy that we have and we're following this policy. Always in the second quarter, we have a little bit more of those disconnections because we have the big sales on Christmas and some of the subscribers does not consume. They change the handset, prepaid subscribers and then, well, we have to disconnect that. So, that's mainly what is happening in Brazil.

On terms of the content, what you are talking about, Google and Apple -- well, Apple, as everybody knows, is the -- it's -- all these application stories is through Apple. I don't now if they are making a lot of money or not. But we have also our content that we're selling to our customers. We have a store in America Movil. This store, it's big. It's not a small store. We're selling a lot of content to all of our subscribers, not only iTunes content or the Apple content. We're selling other content to -- we have a music store. We have a lot of content that it's regional. So, we are -- I think we are doing good.

On Google, I don't know exactly what you are saying. We have some agreements with Google, Yahoo!, Microsoft, and I think we are doing good, no. So, the content that America Movil is selling to the customers is good. It's -- and we're growing that content very fast.

Okay. Thanks very much for your comments.

Thank you.

Your next question comes from the line of Rizwan Ali of Deutsche Bank.

My question was related to data services. You said that SMS, which used to be something like 75% to 80% of the total data services used is now a lot less. Is it possible for you to break down exactly or more roughly how much SMS is now and what are the features and services which are growing the most? And my second question is you said that the ARPU was impacted, but not much by the swine flu in Mexico. I mean, would you consider second quarter ARPU in Mexico to be sustainable and similarly the margin in Mexico in the second quarter to be sustainable going forward?

In -- well, what you're saying about the SMS -- the only thing that -- I don't have it. We don't disclose those numbers. But -- and really I don't have it right now. But what happened? The SMS starts three or four years ago, growing a lot and that's part of what we have been growing on data, okay, the SMS. And maybe SMS, it's a -- you can cannibalize a little bit of the voice with the SMS.

But what I'm saying is that today the data where we're growing, that it's browsing music and all this type of new value-added services, applications are not cannibalizing the voice. That's my view and right now, nothing of this services are -- have to do something with voice, okay? So, that's what I tried to say, like, a couple of questions ago.

But that's the other -- the swine flu and the ARPU, I think -- what I can tell you is that the ARPU is going to evaluate a little bit higher, a little bit lower. I don't think we're going to have, because of the swine flu, a high decrease on the ARPU in the third and fourth quarter. I think data is growing 45% year by year. So, I think that's really the ways why our ARPU has been at this level. So, I don't think big variations on our ARPU or going higher or going lower, I think everything has a tendency. And what I hope is that we could sustain this ARPU for the future.

Carlos, I don't know if you want to say something?

On the data -- I think that it's fair to say that SMS, after so much total growth, has more or less stabilized. And it was really not growing, at least not as a share of service revenues. So, what we have seen over the last year or 18 months is that we have had a very significant increase in the share of data revenues within the total service revenues. And this has been driven clearly by 3G data services. Because just prior to the version 3G, data coming from SMS had been really flat relative to dollar service earnings.

Just to mention a couple of figures that I think would be interesting. In the case of Mexico, data already represents 21% of service revenues. When, in the past, I think SMS has computed more or less most something like 14%, 15% --

No, or 10%.

-- or that. In some other countries, probably in Brazil, SMS was contributing probably not more than 6%. And today, we have probably twice that as the share of data in certain territories. So, we are indeed seeing a major shift in the contribution of data and this shift is not being driven by SMS.

3G is giving other services -- 3G give us other services and that's what people is using.

And with regards to Mexican margins, do you think they're sustainable?

Well, Mexican margins, it depends a lot on the acquisition cost. We are -- if net adds will maintain or I think that the third quarter, it's one of the lowest quarters because of nationality we have, so maybe we can sustain that. Maybe in the fourth quarter that we have more growth of net adds, we can decrease a little bit.

But as I told you, I don't think you are going to see big changes on -- there's a tendency and that's what you are going to see. Cost controls depends a lot on the exchange rate because we have a lot of costs in dollar terms. So -- well, there's a lot of things that you need to review on that. But I hope we can maintain those margins, no.

Thank you.

Your next question comes from the line of James Rivett.

Hey, good afternoon. Good morning, guys. Two questions, if I can. The first is I understand how mobile data is great from an EBITDA margin point of view. But are we running into the risk that as we go into 2010, we need to see a materially higher CapEx just to sort of fund this growth because the network capacity runs out or is that more of a 2011-2012 type issue?

My second question relates to Rizwan's about the margins in Mexico. Is it fair to say that part of the reason why your margins have been so strong is that you bought a lot of handsets at the end of last year? Sorry about that. That you bought a lot of handsets at the end of last year and you have to now restart buying the handsets? Is that a fair assumption? Thank you.

No, I don't think that's a fair assumption. I don't think it's because we are lowering our inventories and then we buy cheap handsets and then we're selling at high prices. I don't think that's really -- what is driving margins is the acquisition cost is very important again and data revenue. I think those -- and cost controls. So, these three things are the main reasons. In terms of the CapEx, I think America Movil has something excellent that we already invest in the 3G networks in all Latin America.

Of course, next year, if data has been growing the way it is growing, we have to make other investments. But I don't see any extra CapEx that we should put as the next year because of the data. It's inside of the budget that we have for the next two or three years. So, it's moving a little bit, so we are growing a lot on data and then you have to put more CapEx on data. But you have already in place the CapEx in voice. So, that's -- I don't see any increase or big increase on CapEx for the next years. No, I think that's mainly -- we have our budget and in our budget it's more or less what we are going to invest.

Perfect. That's very clear. Just a follow-up on the inventories question. So, the 20% year-on-year fall, I think it is, in terms of the inventories, that's not -- that's not handset destocking. That's presumably related more to effects issues, right?

No, maybe you could see that in the first quarter, but not in the second quarter. So in the first quarter, we reduce our inventories. We have inventories at the end of December. The first quarter will reduce that. In the second quarter, we start to buy in the second quarter handsets, so it's not because the -- all the inventory that we have, no. And it's one thing.

The other thing, important thing is you have inventory, but then you have terms of payment. And then, when you have to pay that, it's maybe 30 days or 60 days or 90 days or 15 days. I don't know exactly what are the conditions of payment. So, the inventory doesn't have anything to do with the payment of that inventory. So, I don't think that's something that helps, no.

But if you want to follow up with Daniel, we can do that.

No, that's perfect. Thank you. Thank you very much. Very clear.

Thanks.

Thank you.

Your next question comes from Dan Kwiatkowski of Schroder's.

Hello. Two questions. Since the fourth quarter of '06, consolidated SG&A has risen from something like 16.1% to about 18.8% of sales. And I was just wondering if you could explain why is that? Is that just because of agent costs and distribution costs? And where that's going to go going forward. Are we going to see any operating leverage going forward?

And the second question is on Central America. We've seen a fairly consistent decline in nominal revenues. Can you explain --?

The first question is -- what you're asking me is why we are reducing our acquisition cost?

No, no. On your SG&A, your selling, general and administrative expenses, they've consistently outgrown sales since the fourth quarter of '06. And I was wondering why SG&A keeps on outpacing sales and what we should expect from SG&A on a consolidated basis going forward?

I don't know exactly why since 2006 SG&A is growing a little bit more than revenues. We can -- I'm going to check that, but maybe reclassification could be it or something, but I don't know exactly. I will check that. And the second question -- but that will be a little bit an increase or provisions or something like that. So, I don't know. I will check that.

And the second question?

The second question is on Central America. Again, we -- well, we've seen declining revenues for about a year now in Central America -- just all stagnant revenues. Can you explain what's happening in Central America and how you expect to grow revenues and EBITDA going forward in Central America?

I think, really, in Central America, we have some bad promotions last year. We have some things that does not work and that we are correcting this year. I think I feel in a much better shape. We are checking a lot all the new promotions and all the new things and that's really what is happening. What happened last year is that we sell a lot, but all these customers does not consume what we feel and what we think they are going to consume.

We correct that and we are starting to grow with much better subscribers. So, that's really what you could see. Right now in Central America, I think, in the future you are going to see -- maybe next quarter because you compare with the other, but you are going to see improvements in all Latin America -- in all Central America assets -- companies.

And just to come back to your first question, besides, as Daniel mentioned, we have grown more in postpaid. That obviously means we need to have more reserves for collection. So, we have greater reserves on bad debt and that's simply because of the postpaid; obviously the economic environment makes it be more critical. Another thing that is important is that we've also been growing in customer service centers, which is an important part of the --

The strategy -- so if the customer care sense it's very important. It's important that you -- we have a number portability in Mexico. We have number portability. In Mexico, we gain subscribers. Everybody thinks that we should lose because we have a big base -- a big -- a higher base than all the other competitors. But we're growing in -- and that means that we have good customer care, quality of the net we're covered at. So, we have a lot more things there and maybe that's why we're growing a little bit the SG&A.

Do you think the evolution of that going forward, is it going to continue to expand as a percentage of sales or do think -- at what stage are we going to have operating leverage?

I don't know exactly because I don't know what's the provisions on bad debt that we need to put and what's the accounting issues that we need to do that, but I don't think that's a big issue for the results, no.

Okay. Thank you.

Overall, we are growing our margins and that's been what counts, no.

Yes, absolutely. Thank you very much.

Thank you. No more questions?

Okay, operator, next question, please?

Yes, your next question comes from the line of Gil Alexander of Darfil Associates.

Good morning. As you look at your data sales, could you give us any help how much data sales could be of your total revenues in, let's say, three years for Mexico in your system?

We don't know. I think what we should see is that Japan is maybe 45% or 50% of the revenues is data. And also, I think we are -- we -- I don't know exactly what's going to be in Latin America, but I think there's still a long way to go.

Can you -- could you give us a ballpark figure as to how much you've spent on 3G in the last two, three years?

No, I don't know because we -- you use the switches, but you don't use the links. So, it's difficult to know what's exactly on 3G. But what I can tell you is that we have a very good network all around Latin America with very good coverage. And we are ahead of all our competitors in this technology.

I thank you very much.

Thank you.

Your next question comes from the line of Andre Baggio of JPMorgan.

Hi. Good morning. It's actually Andre Baggio. My question relates to the cash flow. In a sense, the Company has been generating a lot of free cash flow and net debt going down. Do you expect to make any extraordinary distribution of, let's say, either increasing buybacks or dividends or are there any other things going on?

Well, we're going to pay a dividend next -- I think it's Thursday or Friday. I know it's the 24th of July. So, we are not seeing anything right now. If we're going to do something, we're going to do it maybe at the end of the year. But as we said last conference call is we want in this slowdown and difficult economic moment, I think what is better for us is to maintain really healthy financially, so we're not going to -- we don't have anything to buy right now at this moment.

So, we are only putting the Company very strong financially. On buybacks, well, we are buying back our stock. It depends on the price. It depends on the days, but we are buying back the stock. Almost every day we are buying something, no.

Okay. And also relates to the cash flows. Like say, in Mexico your level of CapEx this year is substantially lower than what it has been in the past. Do you think it's sort of a sustainable level and that could help America Movil to grow its free cash flow if we apply that levels to the other countries in the universe? Or do you think that we could see a revision of this trend in the CapEx?

Can you repeat the question, sorry? That we have lower CapEx than last year?

Yes, the CapEx levels in Mexico are sustainable. If they could go back to what they were or if that signals that the CapEx could be lowered for America Movil as a whole, generating more free cash flow.

What we said is that we're going to invest $3 billion. What we said and I don't think maybe we can invest $3 billion plus 5% to 10% less. 5% to 10% is not exactly -- we have to see what the growth on minutes, the growth on data. But I don't think we're going to have -- or more than 10% or less than 10% of that. And I don't think we're going to invest more than -- our budget for next year is going to be around $3 billion. We don't have it right now, but it could be around $3 billion, a little bit more or a little bit less, no.

Remember, Andre, that not -- we were going to spend $4 billion per year over three years, which were going to be '08, '09 and '10. And we ended up moving forth all of investment to '08, which is when we were putting in place all the 3G networks, as Daniel was mentioning.

So, last year, we ended up investing a total of $5 billion in infrastructure plus $1 billion in licenses. And that is much higher than what we have in for this year which is only $3 billion. So, that's where you have the difference in terms of the actual CapEx. But we are in line with our three-year budget. We were mentioning $4 billion per year over three years.

And then, maybe next year could be $3.5 billion or maybe $2.8 billion. I don't know exactly, but I don't think we're going to see big changes on that.

Okay. Thanks a lot.

Thank you.

Okay, operator, one last question, please.

Thank you, sir. Your next question comes from the line of Phyllis Comara of Pax World Funds.

Just a question or two about what's going on in the US with the Straight Talk. If you could give me an idea of what cities you're expanding into with that program and how long you may want to give it to make a determination of whether or not it works and any kind of, like customer service or any kind of -- what kind of expenses do you have in the US as you grow the business?

What I can tell you right now is that we're making testings. We have 240 something stores with Wal-Mart. The testing has been doing very well. And we still haven't made a decision if we are going to roll out nationwide and when we are going to roll out nationwide. So, that's really the economics for Tracfone could be more or less the same as other products that we have. And we're looking to have Straight Talk as a profitable product. So, that's mainly what we're looking.

Do you have to -- I know you're using other companies' networks. Are you investing customer service people in the US or is the customer service mainly taken care of through the Wal-Mart stores?

No, no. We have to have -- we have our customer care centers and customer care centers help us in all the other products. And I think they are going to help us also in this product.

And you'll probably -- well, you don't -- do you have an idea of how much revenue target that you need to hit or an EBITDA target that you want to hit before --

No, no. We don't have that economics right now.

Okay.

But it's a profitable product. We want them to be a profitable product.

Okay. And then, could you also talk about future growth just in general? Do you have any plans to expand into other countries where -- or other -- even maybe other continents where you aren't right now? What are your expansion plans for growing the business in the future?

Well, what -- we are almost all Latin America. We don't have anything right now, but as always, we are open to hear for some alternatives and those alternatives has to be financially sound, good for us, not the way we have been doing all the other investments. We want to do the next ones, if we have next investment, no. So, we are not in a hurry and we don't have nothing today. But we are open to hear from -- for any alternative in Latin America or outside Latin America.

Thank you.

As always, no, that's -- no, we haven't been changing that.

Okay. Great.

Thank you very much.

Thank you.

And thank you, Andres, for hosting the call and thank you, everybody, for being in the call.

Now --

Thank you.

Now --

On behalf of BB -- no, no. On behalf of BBVA, thanks for joining the call.

This concludes today's conference call. You may now disconnect.