America Movil SAB de CV (AMX) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the America Movil 2Q Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Rizwan Ali, Senior Latin American Telecom Analyst at Deutsche Bank. You may begin.

Good morning and good afternoon to those in Europe. It's a pleasure for us to host America Movil's Second Quarter 2010 Conference Call. Representing the Company today is Mr. Daniel Hajj, the CEO, Mr. Carlos Garcia Moreno, the CFO and Daniela Lecuona, the IR Manager.

And with this, I'll ask Mr. Hajj to begin his presentation, after which we'll have a Q&A session. Daniel?

Thank you, Rizwan. Good morning, everybody. Thank you for being at America Movil's Second Quarter Results Conference Call. And I am going to ask Carlos to give us a brief summary of the results. Carlos?

Thank you, Daniel. Thank you, Rizwan, for hosting the call. Good morning, everyone.

Well, before getting in to the results of our operations, I would like to start by saying that we closed last month our tender offers for Carso Global Telecom and Telmex Internacional. We received 94.6% of the stock of CGT in exchange for 7.1 billion America Movil shares and 33% of TII's stock, which we paid for with a combination of AMX shares and cash, with 1.3 billion AMX shares and $2.1 billion of cash. As of last week, we owned 99.9% of CGT stock, and directly or indirectly 59.4% of the stock of Telmex and 94.6% of the stock of TII. Beginning July 1st, we will consolidate both entities in our financial statements.

With the Latin American and US economies expanding throughout the second quarter, subscriber growth continued to turn, providing support to that of revenues and EBITDA. We are at 4.9 million subs in the quarter, 31% more than in the year earlier quarter. Brazil and Mexico led the way with 1.3 million and 1.0 million subs respectively, followed by Argentina and the US with approximately 0.5 million each. In the majority of our operations, postpaid subscribers kept on growing more rapidly than prepaid.

In the six months to June, we obtained 10.3 million new subs to close the month with 211 million subs, 11% more than a year before. Together with our fixed lines and those of our new subsidiaries, we had a total of 259 million accesses at the end of the semester, including 27 million telephone lines, 12 million broadband accesses and 8.7 million television subscribers.

Service revenues expanded everywhere, with one minor exception as voice revenues, cyclical in nature, increased at a slightly faster pace than GDP on average, and data revenues continued to show remarkable growth in various countries, even doubling year-on-year in some of them, equipment revenue growth across the board. Revenues were up 11.9% from a year before to MXN100.9 billion with service revenues expanding 10.8%, driven by better revenues that shot up 41.6%. Through June, revenues increased 10.9% and service revenues 10.0%.

EBITDA came in at MXN42 billion. It was up 9.4% in annual terms with EBITDA margin declining only slightly from the prior year, in spite of the faster pace of subscriber growth. In Mexico and South America, margins expanded everywhere, rising nearly 10 points in Peru and almost 6 points in Argentina. In the first six months, EBITDA totaled at MXN84.3 billion having grown in line with revenues.

At our factored 0.8% annual growth rate, operating profits rose late on EBITDA because of part replication charges mainly in Brazil, a total of MXN28.9 billion in the quarter and helped bring about a net profit of MXN18.7 billion. The latter was more than the previous year's, mostly on account of extraordinary and significant foreign exchange gains obtained in the second quarter of 2009.

Our net debt, MXN71.6 billion in June, it was MXN11.9 billion lower than in December even after allowing for the cash costs associated with the acquisition of TII stock which was MXN26.8 billion. Accrued capital expenditures totaled MXN14.8 billion and share buybacks MXN5.5 billion. Capital expenditures are in line with the total for the year of approximately MXN45 billion.

We ended June with ample liquidity, obtained partly to fund the purchase of TII stock. As you recall, TII investors could have elected to be paid fully in cash -- and partly to actively manage the liabilities of the new subsidiaries with a view to taking advantage of funding opportunities in the debt capital market and improving its debt profile in terms of maturities and capital structure.

Well, with that I would like to open the call for Q&A and thanks, Rizwan, for taking the call.

Thank you very much. Let me just start the Q&A session with two questions and then, we will open it up for further questions. Then, my first question was that we have seen share in most of your markets, at least the large majority of your market, increase. At the same time, we saw pretty significant growth on the postpaid side of the business as opposed to prepaid. So, I'm wondering whether the increase in churn is related to you converting your high end prepaid customers into postpaid, or is there any other reason?

That's a very good question. I think there are two reasons. The second quarter is important because in terms of churn because there is a lot of people who change their prepaid phone in maybe Christmas and January. That is big sales and part of that is reflected in second quarter. The second thing that it's very important is that we are doing a big effort to make our prepaid subscribers, the good prepaid subscribers try to upgrade to our postpaid plans. So, that's mainly what we're doing in all the countries and we're having a good success doing that.

Thank you, and operator, if you would start the Q&A session, and I'll request all the participants to please restrict yourself to only two questions.

Thank you. (Operator Instructions).

Thank you. Our first question comes from Ric Prentiss of Raymond James. Your line is open.

Thank you. Two questions, first with the Mexican inspection auctions done, maybe if you could update us about your thoughts on the auction and your plans there to roll out further service? And then, any new licenses, opportunities, Costa Rica or any other opportunities you might be looking at or are interested in?

Well, the Mexican inspection ends one part, the 1,900 mega last week and beginning of this week, it ends 1.7, 2.1. Telcel gained 20 megahertz in all the regions plus 10 megahertz in three regions more and with that, I think that we can be prepared to give the four generation data. So, we are planning -- we are not exactly -- we don't know exactly when, but we are reviewing when that it will be good for Telcel to start putting that infrastructure. I think that's very good for us because it gives us the alternative to increase in the data side of our business that is the one that is growing a lot.

Other places with the spectrum, well, we are not reviewing. I think we are really taking care that in all the countries where we operate, we are checking when does the governments are going to auction the 4G, let's say the LT license, and we are really interested in getting those licenses, no?

And then in the US, big quarter for Straight Talk it looked like. Margins are still a little bit light. What kind of scale do you need with the Straight Talk product to get the margins back up into the teens in the United States?

Well, I think Straight Talk has been an excellent product. The track on service revenue has increased substantially, over 59% along with its ARPU 10% to 12% due to Straight Talk. I think it's a very good plan. We are growing a lot. Mostly of our growth last year, the growth that we have used to be in SafeLink, that it's other segment of the market, its other product. And this year, we are growing. I think we expect to continue to see good growth for the revenues and subscribers this year and we also expect to see negative EBITDA comparables as we continue to build the new business that is the Straight Talk. But I think this product is an excellent product.

Great. Thank you, guys.

Thanks.

Thank you. Our next question comes from Michel Morin of Barclays Capital. Your line is open.

Hi, good morning. I just wanted to expand a little bit on TracFone and specifically the net adds were a little bit weaker than I think most people were expecting. And I think that we saw negative resale, net adds at AT&T, so I was wondering if you could elaborate as to whether or not that's a direct relationship there in terms of what we saw at AT&T impacting you and whether or not that has been resolved now. And I guess tied to that is perhaps the mixed shift towards more Straight Talk during the quarter might have been the reason for the margin being weaker, perhaps, than what some people were expecting in the US. Thank you.

Yes, no. What -- when you compare last year against this year is they are two different products. The first product was SafeLink. That is a total different market. That's a product that the ARPU -- it's around $10. And today, we are having this new product that is the Straight Talk, this -- sorry, this SafeLink product we are in almost all the states in the United States and it's a little bit saturated right now. It's for some type of people and it's a little bit saturated at this moment.

The other one that we are doing today is the Straight Talk. That is a product that has a higher ARPU, that uses more minutes and that is being very good in the market. And that's what you could see in TracFone. I don't know exactly what were the net adds on AT&T. What I can tell you is that we are working with all the vendors, mainly AT&T and Verizon, with all the carriers and that our business is doing good. No, that's what I can tell you about TracFone.

Okay, Daniel. And if I may with a separate question, I think Nokia is about to launch a new handset that handles dual SIM cards. It's called the C1. Are -- have you made any plans to sell that handset and how do you think that might impact the market to have dual SIM card handsets sold by a major vendor like Nokia in a market like Brazil in particular where there are multiple SIM cards?

Well, I don't know exactly about that phone. It's new for me and I'm going to take a look. I don't think that it's good for a lot of customers, but I really need to take a closer look to see if they are going to impact or it's going to favor our -- depending on the market, it's going to impact or favor to some of the customers and some of our companies, no?

Okay. Thank you, Daniel.

Thank you very much.

Thank you. Our next question comes from Tomas Lajous of UBS. Your line is open.

Hi, gentlemen. Thank you very much for the call. I think it would be helpful if you could talk a little bit about Brazil. The ARPU was kind of low. Margin was down vis-a-vis the previous quarter. If you can tell us a little bit about what's going on there and how you think this can sort of get better now that you will be integrating with your other businesses in Brazil in terms of how that integration can help the Brazil mobile business. So, that would be the first question.

Talking a little bit about Brazil, well, I think first of all the integration with Embratel is going to be very helpful for us. It's going to help us to grow more rapidly the infrastructures so we can give more data, and that will give us a better ARPU and better customers. We're working hard. We're doing good in the market, but I think we could do much better with the quality of customers that are getting in our network.

So, we are being -- working on that and I think we can have some better results of which of -- what type of customers are coming to Claro, and I think we need to work on that. It's going to help a lot all the infrastructure that we have with Embratel and that will help a lot to develop more quickly all the data in some of the places in Brazil that we are not doing right now data. So, I think that will help a lot. Other is our service revenue in Brazil growth, 4.3%. Our most are growing 28%, but still the market is being very competitive and the price per minute has been reduced 33%. So, that's what is happening a little bit on Brazil.

Also, it's very important when you compare ARPUs that our ARPU in Claro doesn't have the long distance. Remember that we don't have long distance and we do our long distance through Embratel. And I think that's one of the reasons why you see that our ARPU is a little bit lower than other ARPUs, no, so because we don't have the long distance inside our ARPU. But as I'm saying, we are also working to get better quality of customers in Brazil. So, that's mainly what we are doing and I think with Embratel integrations, we are going to have a much better network in Brazil to give the data because Brazil is growing very fast on data.

Thank you, Daniel. And the other question, I don't know if it's for you or for Carlos, but if you guys can talk a little bit about sort of liquidity funding, financing, what happens now in terms of your debt, the TII debt, the Telmex debt and how that can affect distributions to shareholders, either buybacks or dividends.

Carlos?

No, I think from all that the distributions, well, very much a repayment on the basis of quality capital structure we want to have. I think that we have talked to you and to the market about our wanting to stay close to 1 times net debt to EBITDA. I don't think that we have changed that, so the distributions should flow from given that premise, okay?

I think that one thing that is clear is that with the new subsidiaries, we're also getting some flexibility in terms of our capacity to provide new distributions. That is basically because of the taxes based on -- the profits of which they have already been paying taxes and that have not represented in distributions to shareholders in the past.

So other than that, Tomas, basically what we did is what I said in the call. We wanted to take advantage of good conditions in the market. The fixed income investors have liked very much the story of the consolidation of America Movil and we were able to secure very good financing at medium and long-terms, and we expect that all our subsidiaries should take advantage of that.

Perfect. Thank you, Carlos. Thank you, Daniel.

Thank you.

Thank you.

Thank you. Our next question comes from Gary Powell, your line -- from Wells Fargo. Your line is open.

Good morning. Thanks for taking the questions. I just had a couple of quick ones. On your Q2 postpaid subscriber growth in Mexico, can you roughly say how much of that was attributable to wireless broadband? And then longer term, what do you think the overall opportunity is for wireless broadband penetration in your region?

Well, we are not disclosing those numbers. We are not disclosing which of the customers are with the phone plus plan, a broadband plan. And they are using the broadband through the phone and I -- we are not disclosing also which ones are through the computer. So, but I can tell you that in both cases, we are growing good and our data is growing a lot in Mexico.

Okay, and then just second question, you saw a pretty good uptick in usage in Mexico. ARPU is slightly improved there this quarter as well. Can you just talk about the main drivers in Q2 and how we should we think about those trends over the next six to 12 months?

Well, I think that in terms of minutes of use, still prices are going down. We have a very competitive market, and when prices are going down in prepaid and in postpaid, people are using more and that means that you have more minutes of use. Second is that we are moving, as we were saying, a lot of prepaid customers to postpaid customers and these postpaid customers are using also more. And the third, I think economies are being a little bit more -- are being better, so it also helps us that people spend a little bit more money and use more the phone. So, I think those are the three things that you could see in the second quarter in Mexico.

Okay, thank you very much.

Thank you.

Thank you. Our next question comes from [Autumn Gray] of Barclays Capital. Your line is open.

It was already answered. Thank you.

Thank you. Our next question comes from [Rozio Barnen] of Merrill Lynch. Your line is open.

Thank you. It's actually Mauricio Fernandes. A couple of questions, Daniel, if I may. One is why did the margins fall sequentially relative to the first quarter on a consolidated basis if the net additions were actually slightly lower, but let's call it the same? And secondly, specifically in Central America we noticed a significant decline in EBITDA margin. I was just wondering if that was related to a one-off effect because the net additions that were higher in the quarter relative to the first shouldn't be enough to explain the whole margin decline in Central America. Thank you.

Well, first, the EBITDA margin fell a little bit in the second quarter because we are -- our cost of service grew a little bit and that means that the places where we grow it is little bit in Brazil, maybe Colombia, a little bit also in TracFone. So, TracFone is because we are having much higher -- Straight Talk customers are a high end customer, so we need to spend a little bit more of money to get these type of customers. There was a little bit more of subsidy also.

The other, Brazil and the other places, and mainly in all Latin America, we are doing good investments in the data in all around backbone, back hole and a little bit also on IT. So, that -- when you do the investments and you are not using, and you don't have a big use of this infrastructure then your costs get a little bit higher. But I think with the integration of Telmex Internacional and with more and more usage that we are going to have in data in the next years, I think on the months and years, then I think this is going to be a very good investment.

The second, in Central America, I think in Central America we are going much better. I think our growth, in terms of subscribers, are maybe 2 times then what we used to have. And we have a non-cash provision related to our investment in Honduras. And I think we are reviewing that; that's why we only make the provision, but it's a non-cash provision and I think in -- it's around $25 million to $30 million what we put.

So, if you take out that, you are doing more or less the same or a little bit better than what we used to do in terms of the EBITDA. So, that's mainly what is happening in Central America. I think we are doing much better in the market. We are growing in all the segments. We are growing in broadband. We're growing in wireless broadband. We're growing in prepaid, in postpaid, in also with TV, satellite and cable. So, I think in Central America, we are doing a good job, no? I feel comfortable as to with the results in Central America.

Okay, thank you.

Thank you.

Thank you. Our next question comes from Andrew Campbell of Credit Suisse. Your line is open.

Yes, good morning. A question for the (inaudible technical difficulty) --

Andrew, we are not following you.

Okay. Yes, my question is on the (inaudible technical difficulty) --

Andy, you have a bad connection.

Yes. I don't know, Carlos, if you hear him.

Oh no, he's breaking up.

Sorry, Andy, but you have a bad connection.

Okay, Mr. Campbell, you can redial in. I'll go to the next question. Our next question comes from Walter Piecyk of BTIG. Your line is open.

Great, thanks. Hi, Daniel. Can you -- I mean, you talk about a lot about data and I know you don't want to give out some of the numbers I think on a previous question. But could you just talk about just generally in Latin America how you see -- where do you see the biggest success opportunities in data? Is it going to be PC cards? Is it going to be smartphones?

And then, if it smartphones, is it reasonable to think that with the prepaid base in Latin America, given you can't really subsidize that prepaid base that heavily that the adoption of things like iPhones or some of these new Androids that are out by HTC and Motorola can be successful? Or does it really have to be more midrange or low end products like a BlackBerry or that others would be selling? Thanks.

Well, I think we are interested in all the markets. In the PC cards, we are really interested. I think we have a good opportunity in all Latin America because it is still broadband penetration is not so high, and we have a good opportunity in that place. In the other one, I think also that in all our postpaid base, we are going to an effort to sell them a data plan. I think that's one of the things that we want to do is that all our customers will have a data plan.

In the other side, prices of smartphones are falling very rapidly, very quickly and I think more and more people are going to use the smartphones and they are going to use data. Also in prepaid, you don't have to have a plan, a data plan to use data, or to go browsing, or to use chat or to do -- go to Internet. So, also in prepaid, there is going to be a lot of people who are going to use their phones too, and their prepaid phones to use data and we're happy with that.

A lot of the usage -- we are selling prepaid cards on the PC cards also. So, I think prepaid is going to be also very interesting for all the young people that they want to use, maybe one or two days of data or maybe they are not heavy users, but they are going to use data a lot, no?

Okay. And then, my second question is just every year in the United States through TracFone, you've had something new, whether it's Net10, or Assurance or Straight Talk. What's the plan for this year as far as a new service offering in the US?

Well, for this year the plan is to still, I think we have a Straight Talk plan and it's a very good program and we're focusing on that. We don't have nothing right now for the US. What we have is to make Straight Talk very successful and that a lot of people in the US will have that plan, no. It's what we're focusing on.

Great, thank you.

Thank you.

Thank you. Our next question comes from Will Milner of Arete Research. Your line is open.

Thank you, just a question on Mexico and I guess future levels of competition there. Just the recent award of the 1700 megahertz spectrum to Nextel-Televisa, does that come with any regulatory conditions that might speed up a launch of their 3G services? And specifically, I guess I'm thinking about national roaming agreement or potentially site sharing.

No, I think -- I'm not so sure, but I think what Nextel-Televisa gets was not the 1,900, was the 1.7, 2.1 frequencies. So, in 1900, I think they don't have a lot of the spectrum, so I'm not so sure what they are going to do. We have big competition in Mexico. If there is going to be a new entrance in the market, well, we need to give a better service, a better quality and to have much coverage, to have a lot of capacity on data. And that's what we are doing to prepare for new competition.

In Mexico, there's big competition. It's Telefonica, it's Iusacell, with UniFone. It's Nextel and it's also if there's a new one that is coming or there is Televisa joining Nextel, well, what we need to do is what we do in all the other countries, that is prepare with good branding, good service, coverage quality, good phones, good networks. So, that's mainly what we are focusing on.

Okay, and then my second question just on the future synergies from the group reorganization. I know you've not given a quantification so far, but it was very clear that Telefonica expected to gain significant tax synergies from merging Telewest and Vivo in Brazil. And do you think you can create tax assets in a restructuring of Embratel and Claro there?

Of -- I think that Claro and Embratel will do an excellent synergy. We don't give any numbers because we really think that the big synergies -- Telmex Internacional was running very efficient. America Movil was running very efficient, so I think that really the efficiency is all in the CapEx, let's say in the CapEx for the next year. So, we're going to create one network where we're going to give both the services and that's going to save us a lot of money on CapEx, a lot of money on cost.

Second is that we have distribution channels. They have distribution channels, so in terms of the commercial side, they are going to help us a lot selling our products and we're going to help them to sell their products. So, if we do that the synergies would be excellent, so in terms of IT also would be very important. So, I think there's no doubt that Telmex Internacional and America Movil will make a very good combination in Latin America, in terms of commercial, in terms of networks, in terms of CapEx, in terms of technology. So, I think that you are going to see that in the next years, no?

But I guess just specifically, you're not contemplating a tax restructuring of Embratel and Claro?

A tax? Well, I think we're not disclosing that, but also I think in the tax and fiscal, we will be selling a lot of products between the companies, so maybe there is also some tax synergies. We are evaluating that. We are not having the decision today. We need to do a lot of things in each of the countries, but also I think in that would be something, no?

Okay, thank you.

Thank you.

Thank you. Our next question comes from Andres Medina Mora of GBM. Your line is open.

Hi. Thank you, Carlos and Daniel. My question is regarding postpaid subscribers in Brazil. We have seen this trend not as -- not growing as fast as in other countries. What should we expect going forward?

Oh, as I told you is I think we need to do more in the market in Brazil. We need to have better customers in Claro, and we're working on that. We're -- I think the data networks will help us because we're going to sell the smartphones. We're going to sell more data plans. But we agree. We need to do more and better in postpaid in with better -- not only with postpaids, to get the best customers in Brazil and we are focusing on that.

Great, thank you, and just one follow-up if I could. We have heard your previous guidance of subscribers around roughly 13.5 million subscribers. We have seen that number I think could be a little short now. Are you considering a revision of that guidance?

No. I think you are right that we are not making another budget. We still are reviewing that, but well, we have more than 10 million customers at the first six months, so the 13 million or 14 million that we do I think we're going to be higher. Or 15 million, I think that is what our budget was. I think it's going to be higher than that, so, but we haven't been reviewing the numbers.

Okay. Great, thank you.

Thank you.

Thank you. Our next question comes from [James Starkman] of Merrill Lynch. Your line is open.

Yes. I'm a retired Vice President of Merrill Lynch and just an individual investor in America Movil. Basically, on a consolidated basis after the Telmex integration, what would the per ADR per share earnings have been pro forma for the current quarter? And consensus estimates by analysts was about $0.97 and as reported in billions, I just couldn't find the per share figure on your website yet.

Is that approximately what you earned for the quarter and the consensus for the full year for most analysts was about $3.74 per ADR share and about $4.29 for next year. Are you comfortable with those figures? And also, had the Telmex consolidation taken place during this, the second quarter, what would the earnings have been?

So, Carlos, I don't know if you have the numbers because I don't have that number here.

No, I don't have the numbers and the reason is we -- in order to have something that is really comparable, you need to have everything done under IFRS and that was in America Movil, we already had moved to IFRS. Neither TII nor Telmex have done that. In order to look at the specific profits and so on, we need to first move them over to IFRS, which we intend to do in the third quarter. So, I think that giving you a number right now would be misleading and that it is really not comparable.

All right. As reported, did it work out to about $0.97 a share for the second quarter?

I don't have the numbers here with me and as I was saying, I don't think it makes sense to add up things that are done under this and it is not of use.

Well, assuming it wasn't consolidated, which it was not, I'm just asking for what the per share numbers worked out to for the second quarter.

Well, I'm sorry. I don't have the numbers. If you want, maybe we can just do an exercise later after the call.

Oh, okay. And just a second question, after the consolidation of Telmex, approximately what would be the revenues and projected profits from fixed line phones in the entire Company versus the mobile phones?

Well, again, I don't want to give you numbers because we cannot add them up right now. We don't have the same methodologies. We -- if you look at the pro forma for last year, we still hadn't moved over to IFRS. I think fixed line telephony was in the range of 35% or 40%. It was about 30%. It was 30% exactly. Telephony was 30% of total revenues while voice was 50% of total revenues and then data in fixed and data in wireless accounted for 10% of total revenues, service revenues for pro forma for 2009.

Right, right. And all right, and are you quite optimistic about the second half of the year?

On what?

Are you optimistic about revenues and earnings growth for the second half of the year?

Well, I think we're still think the second half would be a good quarter, a good half like the first one and in America Movil and in Telmex Internacional, I think we have a good opportunity in broadband. We have a good opportunity in satellite business, in TV, in fixed, so I think it would be a good half, no.

And lastly, the recent dividend, was just a onetime event, or do you plan any kind of a quarterly distribution?

Well, I think Telmex is giving their dividend. We have -- America Movil have our own policy on the dividends and we're going to follow our policy in terms of dividends and buybacks. No, Carlos?

Yes, exactly. We have -- I think we've always provided a dividend payment in July and another one in November. Telmex provided one in July.

Right, so you do expect another November dividend?

That's right, yes.

Okay.

It's already --

And ongoing --

That's already been announced. That's not something that we're going -- that is something that has been announced that we split in two the dividend payment. We pay half in July and half in November.

James Starkman. Got you, okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Chris King of Stifel Nicolaus. Your line is open.

Good morning and thank you. Just a quick question on Brazil, just wanted to talk about the potential impact of the rumored interconnection rate step down that Anatel is discussing in Brazil of about 20% over both next year and the following year. Just was wondering if you do see that type of interconnection rate step down in Brazil, how do you think that would play out with respect to the broader wireless market in Brazil in terms of pricing and minutes of use trends, as well as a kind of a rough approximation of what it could do to your margins in Brazil over the next couple of years.

Well, I think that in Brazil, we're going to have a gradual reduction on the terminate on rate, as we used to have it in all Latin America, so it's not going to be any different on what -- we have reductions in Mexico, we have reductions in Columbia, in Peru, in Chile, in Argentina. So, I think in Brazil, we're also going to have the reductions on termination rates and I think what you are going to see in Brazil is exactly what you see in the rest of Latin America, no.

There's going to be reduction. There's going to be more usage, more traffic and that will compensate the reduction on the termination rates. That's what has been happening all around Latin America, I think all around the world and that's exactly what is going to happen in Brazil. Of course, I think we're expecting a reduction on the terminate on rates. I don't know exactly for how long and how big are going to be the reductions, but we are thinking that there is going to be some reductions in the terminates on rates.

Thank you.

Thank you. Our next question comes from [Verena Wachinitz] of T. Rowe Price. Your line is open.

Yes, thank you. I want to go through a quick question on data. Data basically is now 22% of ARPU across the board. Where do you see that going over the next few years? I think the average for developed markets is 32%. Do you think Latin America can go to that level or it can get even to higher levels given as you mentioned before the low broadband penetration? Thank you.

Well, you can compare that to other countries. I think maybe in Japan is around 40% of the revenues. I don't know exactly when we're going to get that, but I'm sure that a big part of our revenues are going to come from data. I don't the speed and how many years, but of course we're going to reach 40% as other countries are getting right now.

No, it's exactly as penetration, no? Penetration in some places were 100% when we used to be 60%. Right now, we are more than 100% in that, so I don't think there's going to be any difference on that, no? In some countries, we have with -- the average of America Movil today is 23%, so that means that in some place, in some countries we have less than 40% -- less than 20% and in other ones we have higher than 20%.

Thank you. Our next question comes from Richard Dineen of HSBC. Your line is open.

Thank you very much. Just maybe touching on the Argentina, Paraguay, Uruguay group where your margins are doing very well there, I was just wondering how to model those going out. Do you think they're going to start to flatten maybe in the mid-40s, or do you think they can go higher over the next couple of years?

And secondly, just on margins also in Brazil, just -- they've always seemed to have been a little bit volatile, just wondering if you might be able to give us some guidance for remaining quarters. It looks like you did I guess 29% or so in H1 average. Is that kind of a sensible figure to plug in as an average for H2 and thus the full year? So, anything on either of those, that would be great. Thanks.

Well, first, on Argentina we have very good margins. I think what we were doing that is a lot of the revenue that it's coming goes directly to EBITDA because we do all the CapEx and all the investments that we need to do. And the way we are controlling costs are being very good.

You can see that exactly the same in Peru. In Peru, we are also growing a lot on revenues. We are controlling costs. So, these two companies are moving to the 40% EBITDA. And I think as we could do good revenues and still control the EBITDA, maybe control the costs maybe the EBITDA could go a little bit higher. That is going to depend a lot on the structure of the cost in each country, but I think in Argentina and in Peru, we are doing an excellent job.

In Brazil, I cannot give you -- specifically in Brazil, I cannot give you any detail on EBITDA because in Brazil, we are focusing -- still the market is there and we are focusing more on the market, on the good customers, on the data, on smartphones than on what we could do. The first priority today in Brazil is to get more revenue and to get better subscribers, so that's mainly what we are focusing there.

Well, just on that, would you suggest therefore that maybe the first quarter was a bit of an outlier and that it -- we shouldn't be necessarily trying to model from that kind of year-on-year improvement through the year. Were there any sort of unusual features about the first quarter that you don't feel would necessarily recur?

I don't know. It's difficult because what is being difficult for me is how aggressive is going to be the market in the second half of the year. So, it's going to depend a lot on how competitive and how -- what's going to be the reduction on prices or the promotions that we're going to do on the amount of postpaid customers that we're going to get. But as I told you, the priority is today a market share with very good subscribers, no.

Okay. Thanks very much, gentlemen, appreciate it.

Thank you.

Thank you. Our next question comes from Jennifer Leonard of Morgan Stanley. Your line is open.

Hi, good morning. I just wanted to follow up on Mauricio's question about margins. I noticed that the cost of service increased about 23% year-over-year and has also increased as a percentage of revenues. Did you see any particular pressures on costs this quarter and could you discuss how we should think about that going forward?

Say to Carlos too?

The single most important in increasing cost of service has to do with the TracFone in the US because already, you have been migrating from products that were more of low usage, the products that are of much great usage that I had already mentioned that before.

So, if you look at the numbers, the single place where you are seeing more significant increase of cost of services is basically TracFone; again, because it comes from a model that was a low usage model to one that is a high end model. Other than that, as Daniel mentioned before, I think you have some issues in Brazil and Colombia mostly to do with the development of networks which were at data capacity that moves into payment of rental links and things like that, okay?

Thank you very much.

Thank you.

Thank you.

Thank you. Our next question comes from Gil Alexandre of Darphil Associates. Your line is open.

Good morning. With reference to the last question, do you expect your cost of service to be over 20% in the second half?

Want that, Carlos?

No. I don't know that we ever give this kind of detailed guidance, okay?

But it depends also, what Carlos is saying, I think we have been very successful on the Straight Talk plans and the Straight Talk program has been driving us the cost of service up. So, if we still have a very good second quarter in terms of Straight Talk and the investment that we are doing in all the infrastructure in Latin America, maybe yes. No, but it is going to depend on that. No, Carlos?

Yes.

Thank you. Our next question comes from Michel Morin of Barclays Capital. Your line is open.

Thanks for taking the follow-up. I just wanted to ask about uses of cash, given that your leverage is slower than your stated target of one time. And specifically, you're now a $100 billion market cap Company. I think some investors would like to see a higher regular dividend payment. Is that something that you are open minded about, reconsidering a more substantial increase to the regular dividends going forward? And related to that, how should we think about buybacks, not just at the America Movil level, but your view on buybacks at the Telmex level given that you are now the controlling shareholder there? Thank you.

Michel, regarding the first question, as I mentioned a little while ago, the first things that drives distribution, the shareholders, is the -- a capital structure, a desired capital structure is 1 times net debt to EBITDA. We have, if you look at the last three years, in each one of the last three years, we have distributed to shareholders more than MXN50 billion, okay, in each one of the last three years. And that essentially means that we have tried to be as close as we have been able to our net debt to EBITDA target ratio.

We have done these distributions in very good ways and so with an ordinary dividend and it is increasing alongside net income. We don't expect to change that any time soon. The additional distributions have taken, will be placed either of share buybacks which were, for instance, quite active in 2008, or of extraordinary dividends that we have provided both in 2007 and in 2009.

So, I think that, again, the question is how is the -- what is the total amount that can be distributed and that is a function of A, the target working capital structure that you -- I mean capital structure that we intend to have and B, the type of profits after taxes that you can distribute freely without incurring any new taxes, okay?

So, again, going back to your second question, are we thinking that we should change the way that we work with the distributions to shareholders? No. I think that we like the flexibility that we have been able to have so far with our share buybacks and investors generally are aware that we will be returning the cash to them in either one of the forms that I have described to the extent that we can get close to our target of 1 times net debt to EBITDA.

Thank you, Carlos. And thoughts on Telmex's own policy?

On Telmex's own policy, well, I think they have to present this at the Board and [I daresay I] should be their Board and they share congress assembly, the one that will end up making their decisions.

Okay. All right, thank you.

Thank you.

Thank you. Our next question comes from Taras Shumelda of American Century. Your line is open.

Hi. Wanted to go back to the migration of prepaid customers into postpaid. Can you maybe give us a little more detail on exactly what you are doing to accomplish this? Are these -- is this targeted marketing to some of your higher end prepaid customers? Are these just general offers? What are the costs? Do you have any targets in that respect? Anything you could quantify would be very helpful. Thank you.

No. What we're doing is we are targeting the best customers, the customers that are using more voice or data, and what we do is we're offering an upgrade to be in postpaid. It's more convenient for them and some of them, they accept. Some of them, they prefer to stay as a prepaid customer and that's really what we're doing. No, when you have more services in postpaid and people want to use those services, so that means that people are going to move, no? So, that's more or less -- not all of them what we are contacting they are moving, but some of them they are moving.

If I may, a follow-up question, do you have any specific targets and how can I say it, in conversions rates or anything?

No. We don't have any targets.

And a final question, I am not sure maybe --

We have, sorry, we have a lot of our customers visiting us in our customer care centers. We receive in Latin America a lot of customers and when they are there, and they are asking for new things, and they are asking for more data and they are asking for more things, then we are offering them these type of things, no.

I see. And if I may, just one more question. With respect to Telmex, thank you. With respect to Telmex and Telmex Internacional, have you provided in the past any sort of synergies or any other quantifiable targets that you plan to achieve out of this merger? And if so, would you remind us what they are?

No. We have not provided any targets so far. We have basically said that we intend -- we believe the greatest synergies will be coming from CapEx, the fact that together we will have to spend less to get to the certain development of the infrastructure. And that's basically what we have said. I think the types of synergies are, first and foremost, CapEx. There's a little bit of synergies to be had on account of some efficiencies in terms of costs, but what we do not expect to have is big redundancies of personnel because there's very little overlap between the companies, so we will not have that kind of synergies.

Thank you.

Thank you. I think we're going to take one more caller at this point, one more question.

Okay, thank you. Our final question comes from Miguel Garcia of Deutsche Bank. Your line is open.

Thank you. My question is regarding TracFone. We have seen a lot of volatility in the number of subscribers in this year from 1 million to less than 0.5 million. So, how should we think about the rest of year, the following quarters? Was the second quarter extraordinary in terms of the low level of [that] or is the first quarter more representative of what should see in the future?

In the first half of 2009, SafeLink had launched in many states and still a significant amount of net gains growth, almost no churn until 12 months, okay, out. During the first half of this year, SafeLink growth slowed and began seeing churn. So, that's mainly what is impacting us at the net gains.

Almost all of TracFone growth has come from Straight Talk in quarter two, so that's more or less what is happening, okay? We have a lot of new subscribers in SafeLink during the first half and they are churning right now, some of them. So, that's mainly what you could see. We expect to see growth from other brands during the second half of the year and not only Straight Talk. I think we're going to see -- in the other brands, we're going to see a little bit more of growth.

So, I conclude there's something between the first and second quarter would be normal for the next quarters?

Yes, well no, because the end of the year is very good in the United States. It's Christmas. It's maybe third quarter, it's not as good, so well, I think all overall we are going to have a very good year in TracFone in the 2010. It's going to be a very good year of TracFone.

Okay, and one quick question if I may. You already said that the net out for the year is going to be higher than -- that it should be higher, right, that you had budgeted. Now, what happens with the CapEx, what's the impact on CapEx? Should we assume that the MXN3 billion, MXN3.1 billion is something that is maybe short too for the year?

No, I think we said MXN3 billion, MXN3.1 billion, and we always say that could be 10% more, 10% less. I think we are right now in the MXN3.1 billion, as we said, and I don't think we're going to do a little bit more than that, but well maybe if minutes of use grow or we have to put more on data, maybe we can use that 10% to have a little bit more, no.

In TracFone, you -- I recommend you to see the revenue growth. It's very important that you see revenue growth. Revenue growth is 59% this year, so it's very important. Not only subscribers, no, because maybe it's Straight Talk subscribers account maybe by to SafeLink subscribers, so check the revenue. I think revenue is very important and for us, it's very important.

Okay, thanks a lot.

Thank you.

Thank you. There are no further questions at this time.

Thank you, Rizwan, and thank you, everybody for being on the call, Carlos, Daniela and thank you, everybody.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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