America Movil SAB de CV (AMX) 2011 Q2 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the America Movil Second quarter 2011 conference call. Now I would like to turn the call over to Mr. Michel Morin. Mr. Morin, you may begin your conference.

Good morning, everyone. On behalf of Morgan Stanley I'd like to welcome everyone to America Movil's second quarter results call. Today on the line with us we have Daniel Hajj, the CEO; Carlos Garcia Moreno, CFO; Oscar Von Hauske, the Wireline COO; and Daniela Lecuona, Investor Relations Officer. So without further ado, let me turn it over to Daniel.

Thank you, Michel. Thank you, welcome everybody. Carlos is going to make the summary of the second quarter results.

Thank you, Daniel. Good morning, everyone. Thank you, Michel, for hosting the call. Well, in the second quarter American Movil added 5.1 million wireless subscribers. That was approximately half of the 10.5 million were gained in the first half of the year to end June with 236 million wireless subs.

On the fixed-line side, we increased by 1.4 million our revenue generating units to 54 million with PayTV subs growing 34% year-on-year. Altogether, we had 290 million accesses at the end of June, 12.1% more than a year before. The gross fixed-line accesses have accelerated on the back of bundled offerings, double play and triple play, that are becoming increasingly popular. Year-on-year, fixed-line accesses increased nearly 14%.

Revenues were up 7.8% from the year-on-year quarter to MXN160 billion. Mobile revenues expanded 9.4% to MXN101 billion, whereas fixed-line revenues increased 5.2% to MXN58 billion, helped along by PayTV revenues that expanded 71% year-on-year. So total revenues then accelerated from a bit more than 6% the prior quarter to 7.8% in this quarter.

Mobile revenues were driven by data revenues that increased 56.7%. The overall expansion already reflects the impact of the 71% effective reduction in mobile termination rates that took place in Mexico. From May 17th, all operators that terminated calls Telcell's networks billed the interconnection charges at the reduced termination rates set by Cofetel, which are equivalent to [$2.20] or EUR1.65. In a sample including Mexico and two European countries, this interconnection rate was the second lowest despite the fact that the inflation rates are substantially higher in Europe.

The first net interconnection revenues came down by almost [4] percentage points [compared with] revenues from the prior year. Gross interconnection revenues came down by 50.2% in absolute terms and by 5.1 percentage points of (inaudible).

Several of our operations registered double digit value growth in the second quarter. In Mexico, Central America, and the Caribbean, revenue growth was more subdued and the others 2% because of the continued decline of fixed-line voice revenues and the reduction in mobile and fixed-line termination rates in Mexico.

In Brazil, annual revenue growth accelerated from 5.7% in the first quarter to 8.8% in the second one.

EBITA totaled MXN62 billion and was up 1.8% year-on-year, with the margin of our Mexican operations falling 3.4 percentage points on account of the loss of Internet interconnection (inaudible) in Mexico (inaudible) platform, greater expenses for customer care, the procurement of content, and subscriber growth. It's basically subscriber acquisition costs. Various operations, particularly South America, posted better EBITDA margins than prior year.

Financing costs declined 42% year-on-year and contributed to the 14% increase in net profits. Earnings per share were up 16% comparative terms and 24% up ADR.

Our net debt rose to MXN217 billion pesos in June from MXN207 billion in December to help fund MXN37 billion in capital outlays and dividends. Capital expenditures made up MXN41 billion of that amount and share buybacks nearly MXN30 billion with MXN2 billion going to the acquisition of minority interest in Net Servicos and Telmex International. Net debt stood at 0.87 times our EBITDA of the last 12 months.

So, with this summary, Michel, I would like to pass the floor back to you.

Great, thanks Carlos. Natura, can you please give the instructions for Q&A?

(Operator instructions)

Now while we poll for questions, Carlos, if I can jump in and ask the first question. Regarding the termination rates in Mexico, the new rates went into effect on May 17th, so I just wanted to confirm, perhaps to state the obvious, but the impact on results that we saw this quarter was really only impacting in the second half of the quarter, so if we were to look at ARPU trends on a sequential basis, is it fair to say that we should anticipate a similar impact in the third quarter when the rates will be at the lower level for the entire quarter?

Yes, Michel. We are just -- the interconnection rates, which we reduced that through May 16th, so it was exactly half of the second quarter. So you are going to see the same trends in the third quarter. Of course, it's going to depend a lot on the traffic, but I think you're going to see the same trends in the third quarter.

And are there any signs that these lower rates are being passed on to the final customers? And if so, maybe it's still too early, but are there any early signs that demand is picking up in relation to the elasticity that we might be able to see there?

I don't think there's going to be a lot of elasticity because we have been reducing the rates every year. So we are not seeing a big elasticity there. But I don't know exactly what those [specific] lines are going to do. I think they are still not reducing the rates to the end customer, but I am sure that they are going to do it in the near future.

So I don't know if they are going to do it in the third quarter, in the second quarter, in the fourth quarter, or they are going to do it totally or they are going to reduce a little bit less or a little bit more. I don't know, because there's a lot of competition in the [fix] in Mexico and there is a (inaudible). But I'm sure that they are going at the end of the day we're going to see reductions to the customers.

Great, thank you very much. Natura, we can open it up to the Q&A roster.

Ric Prentiss, Raymond James.

Thank you. Following up on the mobile termination rate, I think didn't Cofetel make it retroactive to January 1st and is there any possibility you might have to retroactively reduce rates?

And then maybe if you could update us as far as what you're seeing as far as mobile termination rate changes in Brazil as far as the timing, magnitude, or what it might mean to you?

Yes, we have a contract with some of the operators, Telmex, Telefonica, [and those] has a contract. So that's why we're putting these interconnection rates through May 16. The other ones, all the other operators we don't have a contract. They don't sign a contract since January, so we have retracted through January. But we have been put that in the first quarter. So the operators where we don't have any contract we have been putting the interconnection through January and -- put out the -- we already provisioned that in the first quarter, but that's mainly 10% or 15% of everything. So 85% was in the contract and it starts in May 16th.

Well, in Brazil, the interconnection rate is -- I think it's going to move, but I think that the government is going to -- I don't know exactly what they are going to decide, but I don't think they are going to make a 71% reduction on interconnection. I think what they are thinking to do is to have a reduction through the year and that will help to increase penetration in Brazil. So that's my view, that's what the government has been saying. Maybe they are not going to reduce 10% a year, maybe they are going to reduce 20% a year, but that's the way I think they are going to do it.

Andrew Campbell, Credit Suisse.

My question is on the competitive environment in Mexico and it seems that you have been unveiling some new plans, bucket plans that include calls outgoing to other mobile carriers as well. And I was wondering how you see this changing the competitive environment? And how this fits in with the new reality with the mobile termination rates?

Well, I think there's new plans not from us, from all the operators. So there's a lot of competition in Mexico. And I don't see any big change if all these bucket plans to all customers. I don't think you are going to see big changes in the way customers are calling on the -- or the way they decide they'll call. So in my view, there's not going to be a big change in demand or in ARPU because these new bucket plans that we're having.

The only difference is that we are not differentiate the [Telcells/Telcells] and Telcells to other customers. So that's also what other operators are doing here in Mexico and I don't think that's an issue or a big difference that we are going to see.

And just my follow-up would be, I mean in terms of any --

Sorry, Andrew, only to explain to you, we have that in Columbia. In Columbia the government asked us to reduce the difference between on net, the off net, and we have been doing that for maybe two years. And we haven't seen any big change in that. So that's why I'm thinking that you are not going to see big changes also in Mexico.

I see. And do you think that possibly you'll be asked by the regulator to do the same thing in Mexico?

I don't know, it's maybe yes. We are doing that, so if the regulator asks us to do that well, we are doing that already, so. But I don't think that's going to be something that we will be worried about in Telcell, no?

We have good customers, we have -- in postpaid. We have good coverage, we have -- I think the fundamentals are very important for us in Mexico. We have a very good distribution network, we have very good coverage. We have a lot of capacity. They were investing a lot, so we have good branding. So would we match in the market -- good customer care centers. We have around 300 customers owned care centers, so all of these things are the things that really count in Mexico. We have been doing that for around 12 years, so I think we have the big and the good fundamentals in Mexico in place.

James Breen, William Blair.

Just wondering if you could talk about data trends. I guess probably more specifically in Mexico and Brazil. Are you seeing cheaper handsets come to the market in the smartphone side that you think might help to increase overall data ARPUs? And just talk about some of the trends you're seeing there as they shift from text messaging to more Internet type data.

I think it's going to be very important for Latin America to have cheaper handsets, the cheaper smartphone handsets. I think everybody's going to use at the end of the day Internet and they are going to use data. So as you -- we start maybe two years ago with $500 handset, we have today $200 handsets with a very good software included, (inaudible) or Android, or Blackberry, or -- but we have much better handsets today and that's going to make customers to use more data in the future. All the trends in Latin America you could see that we're growing around more than 25% in data. And I think all the investments to do that you need to have a backhaul, backbone and a lot of investments that you need to do, and that's what we are investing and that's what we're doing.

So I think we expect good increasing in data usage in the future in Latin America. We still have a very small amount of customers with smartphones, so as the smartphones go they reduce the price, we have better prices in smartphones, then you are going to see more customers with smartphones and more customers using data.

Chris King, Stifel Nicolaus.

Two quick questions for you. First of all, just to follow-up on all of the questions regarding the regulatory environment in Mexico. We noticed an interview last week where the head of the Cofetel was talking about the possibility of perhaps implementing price floors for Telcell to try to manage the market share that you guys have there a little bit. And was just wondering what your thoughts were on that and whether you have had any formal conversations with the regulators on that?

And then secondly, just on Brazil, just was wondering if you could talk a little bit about the subscriber trends that you're seing there? We noticed that minutes of use as well as ARPUs were -- have now fallen about 10% or so both year-over-year with churn ticking up a little bit. Just was wondering if that was more of a competitive pressure that you're seeing or whether you're seeing any signs of more kind of macro pressures beginning to weigh on the Brazilian consumer a little bit?

Well, in Mexico I don't see those -- what the president of Cofetel, the interview of the president of Cofetel. But what I can tell you in Mexico is that my market share is because of the investments that we're doing, all the distribution. I think we have a lot of rural areas where the only operator is Telcell. So I don't think that the regulator is going to put us a floor in price.

So I think that the regulators are trying to do is to have a benefit for the customers, not a benefit for the competitors, no? And if we are going to benefit the customers with good coverage, good quality, good data I don't think they should put like a floor in prices, no? What they are doing is they are hurting the customer and I don't see any place in the world where they want to hurt the customer.

And the other thing is let's see what those competitors are doing, no? Because I don't think they can do in two days what we have been doing in 10 years, no? So, it's going to be interesting. I'm going to read that interview to understand what he's talking about, no?

And in Brazil, well, I think we're -- Carlos can talk a little bit in Brazil.

Well, as I mentioned in the beginning of the call, revenues in Brazil have accelerated from 5.7% in the first quarter to 8.8% in the second quarter. And whereas we're not looking very much at these revenues. Remember that this is made of commissions paid through distributors. That's the way that we have been booking our revenues. And so even after developing the commissions for the growth of (inaudible), which have been much more calculated given that we are going a lot on postpaid and postpaid obviously requires the payment of (inaudible) commissions and generally some (inaudible) positions, because as part of that I think that we are seeing very healthy revenue growth, I think both on the mobile and the fixed-line side.

Tomas Lajous, UBS.

I guess the question is, Daniel and Carlos, you've talked in the past about keeping the Mexico margin above 50%. We're seeing it getting very close to 50%. Would you still -- is your outlook still for an above 50% margin in Mexico? And that will be a first question.

The second question is a bit more general. We're seeing a little bit of growth come back. Carlos, you mentioned it in the case of Brazil. Overall we're seeing an acceleration of revenue growth over the past few quarters. Now would you say that you're comfortable sacrificing margins a little bit for more growth? Or are you going to get back towards a real cost control phase and trying to keep the margins up? What's going to be the focus, growth or margins over the next few quarters I guess?

First, when we talk about the 50% margin in Mexico, I think we are more or less in the 50% margin. In Mexico we don't think that the regulator was going to reduce the termination rate 70%-something in one day, no? I think that's bad for the telecommunications in Mexico, not for us only. It's going to hurt all the telecom operators in Mexico.

I think that there is still a lot of investment that you need to do in Mexico and I think for the penetration is not so good because then there's a lot of people that the only thing that they do is receiving calls in the rural areas. So that's very bad for them because -- and I don't think that's going to be a good business for the operators to invest in in the rural areas when the interconnection rate goes down from MXN0.85 to maybe MXN0.28 because of the billing change between minutes and seconds, okay? So it's around 70%-somethnig reduction.

I'm still thinking to be very close to the 50% margin. I hope we can be above the 50% margin, but going to your second question, I think we're going to (inaudible) more the growth than the EBITDA, but we are going to be very careful on the EBITDA. We have been always careful on the EBITDA, but I think what we need to do is to take advantage of the growth in Latin America.

So we cannot stop growing, only let's say in Brazil only to have better EBITDA. No, I think the next two years in Brazil are going to be excellent years for growth on -- still on wireless, on data, on TV, on broadband. So there's a lot of markets where you are going to see very good growth in the next years. And I think what we're going to do is to go for it, no?

So in an intelligent way, the way we have been doing for the last years, but I think it's very important to still be very -- that's why we're doing all the investments that we're doing, all the CapEx is to sustain all this big growth on data that it's going to come. And we're growing a lot also on postpaid subscribers. You could see that in every country our postpaid subscribers have been growing a lot. So we are being very focused on our strategy and that's what we're going to maintain on.

Just one thing. I mean you said that the termination rate cut hurts the industry overall. Do you think there's a possibility that termination rate goes back up in 2012?

That's something that we have to ask to the regulators. No, I don't think they are going to reduce the interconnection and then increase the interconnection. So, that doesn't look -- doesn't make sense for me that they would do 70%-something and then they increase it. But what I can see is that I hope that there is not going to be any more reductions on interconnection rates in the future, no? For some years.

Richard Dineen, HSBC.

This is Sean Glickenhaus actually calling for Richard. Just a little more detail on the Brazil data. It looks like data rates in Brazil, although they were up 16.5% does look like they decelerated quite a bit from the prior quarter, especially if you look at these numbers compared to competitors. Is there some type of plan to revitalize this? You obviously sound very positive or optimistic on that segment, but is there anything in particular other than increasing focus on postpaid subs as you've been doing, anything that you're doing to revitalize data in Brazil? And then I have one question on your guidance. Thanks.

Yes, on data what we need to do is to put more coverage in other cities to try to sell more the PC cards and the broadband -- wireless broadband. It's what we're doing. It's our (inaudible) were investments in Brazil is to do let's say fiber to the node where you can do a lot more data in the wireless broadband. So we are focusing on that. There's time to do the investments, but of course we're really interested in giving more data to the customers.

Our own customers that have the smartphone, to get new customers with smartphones for close data, and the PC cards, the broadband wireless access. So, we are being focused on that. We have to do the investments. I think Brazil is huge, it's big, and the investments took a little bit of time, but we are focusing on that.

That's actually very helpful. Thank you. Just one question on your guidance that you offered in the investor day of 7% to 9% EBITDA. So I have your CAGR. Knowing what you do now in terms of the Internet connect rate in Mexico, is that 7% to 9% growth kind of on the aggressive side?

I think that it's too early to say. I think that if you look at revenue growth, we are right on track on the guidance that we mentioned. Certainly in the short term we have had a somewhat unexpected impact on the EBITDA, but I think that some of them may be reverted.

For instance, if you look at fixed line revenues in Mexico that have been declining fast, they seem to be -- this decline seems to be becoming less important. I think that if they were falling at about 5% rate in the first quarter, by the second quarter it's only about 3.5% year-on-year. So, to the extent that they started like that could have a pretty immediate impact on EBITDA because that has been an important driver of EBITDA and growth for America Movil support.

So I think that if we look at some of the things like again, the overall infiltration of the fixed-line operations in Mexico and Central America. If we look at the effect of net interconnection rates now they're much bigger down the road than it has been in the second quarter. If that's the case, I think that we can still keep our EBITDA target. So we mentioned here at the beginning of the call there's several operations that are expanding margin -- the margins, the EBITDA margins today, okay? And there's some of them because EBITDA margins have been a bit more subdued because we have seen an acceleration of subscriber growth.

So again, I think that for the timeframe that we looked at, which was basically four years, it is too early to say that the numbers that we saw in investor day are not valid. I think that we are delivering revenue growth and I think that EBITDA growth should follow. We're delivering revenue growth, we're delivering subscriber growth, and we think EBITDA growth will follow.

And one more thing on the interconnection rate in Mexico. I think we are applying that rate, but this is on the profit. We're appealing that and we're going to fight that in court. I'm not saying that we're going to win, but we're going to fight and we're going to see what will the court decide on that. So we are being very conservative putting full interconnection in the results, but all this interconnection is under profit and we are going to appeal that in the court.

Gray Powell, Wells Fargo.

I just had a couple of quick ones. Not to keep focusing on the NTR in Mexico, but can you just tell us how much of this sequential decline in Mexican ARPU was related to the termination rate reduction?

Just not to look at the (inaudible), if you were to look at Telcell, the interconnection revenues, as I mentioned before, year-on-year fell by 50.2%. The non-interconnection revenues increased by 7%.

I think we have some on the growth. The growth has been hit a little bit. And the growth more on the postpaid side and better (inaudible) so it's a little bit more subsidies on that. So that (inaudible) also it -- on that what the mostly going to be on the interconnection on what Carlos is saying, no?

That's helpful. And then just kind of switching topics, margins in Brazil were down just a little bit sequentially. Can you talk about the main drivers there and how should we think about Brazil margins going forward?

Carlos is going to answer that, but just to say I think the core EBITDA in Brazil in Claro in the wireless side increased a little bit, so you could see that almost all of that is because of the acquisition costs. So big part in Claro is acquisition cost. The big growth that we're having -- the big growth on postpaid that we are having also, no?

If (inaudible) we have a (inaudible) acquisition costs it's important. We are spending more on customer care. Also we have more in call centers. And then while we have continued to see the increase in the procurement of content, which is something that we had already mentioned the value for. We have 255% more net tax in postpaid than what we had last year, so I think a big part of that is acquisition costs, no?

Thank you.

One more thing about -- on the cost -- on what Carlos is saying is we're investing a lot -- we have a very good strategy on the customer care center. So it has changed a little bit from what -- the way we attend the person two years ago and what we have to do it today and what we're going to do it in the future. Why? Because we used to sell a lot of postpaid voice, and when you sell a lot of postpaid voice, it's easy because then you sell the concept, they start to talk, and it's very easy for a person to understand that.

But when you start to sell data handsets and smartphones, it's really different. You have to explain how to do the email, it's different how to do data, it's different how to run Internet, how to download these things. So our customer care contacts spend a lot more time with the customers until they learn I think that there's going to be a curve until all the customers in Mexico learn how to do those type of things.

So that's why we are investing more. We think that's a big value for us to have a good customer care center, by person, to do it through personalize or do it through telephone. Or the other thing that we're doing, it's a lot through Internet. So we are investing a lot, we're moving and we have a good strategy for the next two to three years in the contact centers, no?

Stanley Martinez, Legal & General.

I have a couple of questions on the growth in your PayTV business, especially the 800,000 net adds that had this quarter. First, do you think that you can get to 20 million PayTV subscribers faster than 2013? I mean do you think that you're growing faster than the market as a whole?

And then second, with respect to the EBITDA margins, Brazil was the exception, but in Peru, in Columbia and Chile your EBITDA margin expansion corresponded to the acceleration in the non-wireless business. So I'm just wondering whether America Movil's marginal profitability is actually increasing in the PayTV business as you leverage your scale in programming and set top box procurement?

And then last, should I think of this as -- the PayTV business as a whole as an offset to the decline in your fixed voice revenues? That wasn't the case in Central America, but how should I think about sizing the opportunity in this product set for you?

Oscar can talk a little bit about the TV business.

Sure. Well, we have a run rate of growth in PayTV business around 200,000 per month. So that's the expectation that we see. Of course if we could get a grant to deliver TV in Mexico we would (inaudible) far more business.

And your assumption about expansion of the margins in the other countries, I think something comes from the synergies between America Movil and the wireless business that allow us to grow more in the revenue generated units. And to aggregate all the volume, we are getting a better cost, as you mentioned in the set top boxes and as well in the content -- in the cost of the content.

In the case of Brazil, we are going very, very fast in net terms in (inaudible) Brazil, so the cost of the content is growing more than 100% and of course as well the revenues. For we have a lot of costs of more acquisitions to enable the solution to the installation of the services and but we expect the PayTV business is growing pretty fast. If you see the case of Brazil, PayTV penetration in our view is still very low. It's around 18% of the households. When you compare with other countries like Argentina or even Mexico, in Argentina it's 62% and Mexico is 35%. So we could expect a good market position to (inaudible) in Brazil. I don't know if it --

One more thing that I want to add is that one of the big parts of the cost in the TV is content, okay? And as we grow in content, we're going to be allowed to have a better cost on that. So big part of -- big increase -- a big share of the increase in Brazil is because the fast growing PayTV business that we're having there. But also the cost has been growing a lot.

So when you target some amount of customers and every day you more and more customers, I think it's going to be more easy for us to get better prices in the content. I think volume it's going to be very important in the future, so I think we need to work very hard to try to reduce the cost of the content. So I think it's something that we're being working on that, no?

Thanks, Daniel. Does that breakpoint in terms of profitability with respect to your ability to source content, does that come when the business scales to 15 million or to 20 million? And I'm just thinking about the -- I know you don't think of your business this way, you think on a more integrated basis, but when I look at the growth in your PayTV business, Daniel, it looks to me as though it's the equivalent of actually opening up a new country in terms of the traditional wireless business. Is that the right way that I should think about the growth opportunity, both in terms of revenue and EBITDA for America Movil in this product set?

I think PayTV is going to be an excellent business. I think we have a good opportunity to grow there. Still penetrations as also Carlos is saying, penetrations in Latin America for the PayTV business is low. I think we still have a lot to do. And I don't think that we're going to see 50 million or even 20 million. I think what you're going to see is every day that you grow maybe you reach a little bit more scale. And when you reach more scale, then you can have better costs.

In the other side, in the set top box, as in all of those type of different devices, I think we're having much better prices. So every day I think we're making the TV business more and more profitable. But of course, it's not the same to do a [fixed] call or a long distance call than to have a PayTV business. Knowing the other side, you have to spend lots of money on content, but every day I think it's getting better and better, the profitability.

Mauricio Fernandes, Bank of America/Merrill Lynch.

Good morning. Daniel, just a quick question. It doesn't look like from your net adds in Mexico that not advertising on television has been an issue. So just wondering how you were thinking about it right now after a few months without doing advertisement on TV?

And second question is on Tracfone we noticed a slowdown in net adds, in net additions in the second quarter, both if you compare with the second quarter 2010 and if you compare with the first quarter 2011. Just wondering if you think that the niche -- this very high growth rates or net additions we've been seeing in the last many, many quarters has come to a slowdown and we're going to continue to see like that? Or are you -- it was just a oneoff slowdown? Thank you.

On the first question, we have been advertising in other places. I think we have radio, we have magazines, billboards, a lot on media, on the Internet. So our niche has been some sponsorships. So it has been good for us there. We have been doing well still.

The brands have been in very good top of mind, so I think we are not let's say suffering about that. We are doing another broadcast television and network. So we are targeting and it has been working good for us. So we are using a lot of internal media. So we're happy the way things are being developed in that issue.

So in the Tracfone --

We've got Tracfone, Mauricio. You may recall specifically the second quarter is always a weak quarter because that's in the US when people have to pay taxes and it has always been very sensitive. So practically every second quarter as far as I can remember has tended to be weaker. Probably last year wasn't the case because we had just launched Straight Talk, the new plan. And also the new plan was getting a lot of new adds and there was really no churn investment yet.

I think what we're seeing in this second quarter is partly finality, partly the beginning of churn or the effect of some churn numbers on some of the -- which would be natural on some of the days that we already have. But that's nothing unusual, nothing that was (inaudible) our expectations.

Martin Lara, (inaudible).

What can we expect in terms of net additions on a consolidated basis during the year? And also, in Mexico what ARPU should we expect going forward? Do you think the MXN155 level is sustainable? Or we should see a better ARPU?

I'm sorry, can you repeat it again? I don't -- we don't hear you very well, so can you repeat it?

The total net additions for the Company in 2011 and the ARPU in Mexico for the rest of the year.

The total net additions, I think we have been higher than the budget. We have been doing I think more than 10 million subscribers this year. So we said that we're going to have 16, so we're going to be higher than what we expect this year. As some of the people is saying that we have been -- I think Latin America has been very strong in their economies or been strong in the economies and that will help us a little bit on the growth on the subscribers. Mostly on postpaid. Postpaid has been running very good for us, so I'm happy.

And the second question you said ARPUs on what?

In Mexico.

What I can tell you is that in a week or so we have only had the effect of (inaudible) rates in second quarter for half of the quarter, since May 17th. So part of that is going to carry on until the third quarter.

I think it's important to understand that the relationship that we used to have between ARPU and EBITDA does no longer hold because where you are going to have less revenue by interconnection. That's not the (inaudible) of what the net impact on Telcell. Remember Telcell has interconnection revenue, but it also has interconnection costs. So going to have to focus on the net effect at the level of Telcell and then furthermore at the level of Mexico at the quarter. Mexico consolidated.

So where you will continue to see declines in gross interconnection revenues, and we have some impact on net (inaudible) depends really on the types of traffic that we will see. I think it is important to highlight that the relationship that you have had until now between ARPU and EBITDA is going to be different.

Okay, but the ARPU level?

I'm saying that the ARPU level is going to come down because ARPU includes interconnection revenues. Interconnection revenues will be part of it in the third quarter. That's what I just explained now again.

Carlos Sequeira, BTG Pactual.

I have a couple of questions please. One in Chile, churn rates went up a lot this quarter and I was wondering first the reasons for that and what is strategy into this specifically?

And the second on would be on Brazil. Postpaid net adds are quite strong, have been quite strong over the past quarters and once again this quarter. But this quarter specifically, MOUs came down in Brazil to the rate of 4 minutes. And my question is -- I mean I was expecting the MOUs to have gone up given how strong postpaid net additions were. So what should we expect in terms of usage and (inaudible) consequently in the next quarters given how strong postpaid net adds are? Thank you.

Can you repeat very quickly your questions?

Yes, sure. The first one is in Chile. Churn rates went up a lot and so my question is why --

In Chile let me talk a little bit about Chile. I think in Chile we have been doing very good in terms of gross adds. We have been having some promotions that haven't worked so well, so we have been very close in the market, and that some of the customers have become churn. But I think in Chile we are gaining market share, we're being strong in the distribution side, strong in the -- much better in the postpaid. I think in the postpaid we are doing much better than what we used to do last year.

So we have a big increase in Chile. Still we need to work a little bit in some promotions because some of those promotions are giving us some churn. But we are aware of that and we're working on that. It's not going to be from one quarter to the other one, but we think that we can return to the level of churn that we have all around Latin America. No, that's something that we have been working on that.

And to (inaudible) MOUs, I think that they are originally linked to some prepaid promotions. And basically we introduced a new promotion that essentially (inaudible) more the actual continuous purchase of third time as opposed to your holding the balances of minutes that you can consume. And it has had a good effect, both on revenues and it's not had such an impact on profits. So that's basically the transition from on top of promotions and prepaid, another type of promotions like that.

Andres Medina Mora, GBM.

My question is regarding prospective subscribers. What percentage of your subscriber base do you see them reaching by the end of 2012 or 2011? And also, we heard Telmex mention yesterday that they are investing a lot in fiber to the node. How much synergies of that could Telcell make given that they are still separate companies between them? Thank you.

I think we could do a lot of synergies. We worked as separate companies for doing -- can do a lot of synergies in the backbone, in the backhaul, in fiber to the node. I think that we're working on that. We have 60% of the Company, but we're working very close to them. But we're selling at commercial agreements that allow us to do those type of things, no? So that's mainly what we're doing.

The other question was?

The percentage subscribers.

I don't know exactly what's going to be at the end subscriber base in 2012. But what you could see the is same trends that we have been having the first six months, I think it's more or less what you could see the second half of the year.

And that increasingly one thing that we have over there is that increasingly postpaid market is going to be about data services. And I think that we have been strengthening our capabilities on data across all of our operations. As Daniel mentioned before, we are working on backhaul, working on backbones. We are really buying related to network equipment. We are having very, very good practice for smartphones. So I think that we are positioning ourselves very well in the data services market and that is going to be a critical element for postpaid.

Also one comment on that. I think to do data service is not only to say if you have to have good content, you have to have good value as added services. You have to have a very good network, you have to have very good coverage. So you have to work in a lot of things to have a good increase in data. And that's what we're doing all around Latin America.

So it's not only to have a smartphone and sell the smartphone, it's much more than that. It's big investments on those things, also as we're saying in customer care centers. So you have to do a lot of things all around to have more postpaid, but those postpaid to work with data and work with a lot of value added services that we're selling all around Latin America. So there is a big job, there's a future strategy that you have to execute and that's what we're doing right now, no?

Walter Piecyk, BTIG.

Carlos, I didn't really understand that explanation on the Brazil MOUs. But I'll follow up with Daniela online. But I guess if you have prepaid promotions I'm not sure how that drives your minutes down. Wouldn't that do the opposite?

Anyway, the question is are you guys -- for Daniel, are you guys planning on bidding on the auction in Brazil for I think it's 2.5 and 3.5 gig spectrum?

Well, again the last question on Brazil (inaudible)?

You guys -- I think there's probably going to -- they're hoping to get an auction off at some point, probably not until next year, but I think they're going to auction off the 2.5 and --

Oh, for spectrum?

Yes, for spectrum in Brazil. Are you guys planning on bidding in that spectrum -- in that auction?

2.5, I don't know. I don't think -- I think -- let's see how those -- the world is going to evolve on the 2.5 but that -- still at this moment I think we prefer other frequencies than the 2.5. But I need to check and we need to see if the -- what are the technologies that are going to develop in those regions (inaudible).

What I can tell you before you got talk to Daniela, that it is related to the traffic that you can have in the length of a call. You have different --

Got it.

-- calls that were (multiple speakers).

I understand, thank you.

Okay? So you can follow up with Daniela anyway.

No, I understand. That's a better explanation, thank you. And then the other question, Carlos, a lot of operators throughout the world are disclosing the percentage of their subscriber base that have smartphones. I may have missed this. Are you guys -- have you guys done that or can you give us some sense of what that is either on a total company basis or in Mexico or Brazil?

We have been disclosing the growth on data. We have not been disclosing the amount of handsets. But I don't know. I need to check. It's because of competition issues, but I don't know what -- let me --

It would just give us a good sense of what your growth opportunity is if you provide it.

I think more or less we have 15% of our base in postpaid, so today it's growing. So I don't know exactly what amount of those postpaids are smartphones and that they are using data. I don't have it in my mind right now. But to what we're targeting is to have all of our postpaid with a smartphone and with data. And don't forget, prepaid. Prepaid is going to be like -- even that they are going to use a small amount of data. There is going to be a lot of customers there. So we are planning to give data to also these customers.

And my last question is just related to that. I mean you said earlier in the call it's important to have cheaper handsets. I mean you guys have a good relationship with AT&T, you've seen the success that they have had in selling the iPhone 3GS at a low price. It seems hard --

We're doing that exactly in Mexico. I think that's something that we're selling in Mexico. We're doing very well and --

So why not in Brazil?

Not only the Apple, the iPhone, it's that we are also having other promotions that have been very successful in Mexico and in Brazil and Latin America. In Brazil it's -- the problem in Brazil is I think taxes for iPhone.

Right.

Taxes have been there, so. That's why we're doing promotions (multiple speakers).

But I think TIM has been selling a 3GS and obviously the taxes making it expensive, but it's a lot cheaper than buying an iPhone 4.

Well, I don't know that, but I'm going to check. It's a good comment. Thank you. Thank you, Michel.

Thank you, everyone. Again, Daniel, Carlos, and Daniela, and Oscar. Thanks for hosting the call here today.

Thank you. Thank everybody.

This concludes today's America Movil second quarter 2011 conference call. You may now disconnect.