Telefonica Brasil SA (VIV) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Vivo audio conference call to discuss the second quarter 2004 financial results. [Operator instructions]. I would now like to turn the conference to Mr. Francisco Padinha. Please go ahead sir.

Ladies and gentlemen thank you for joining here for TCP's second quarter 2004 earnings release conference call. This conference call is being simultaneously transmitted over the internet and you may access a copy of this presentation from our website www.vivo.com.br/ir.

Here with me today is Arcadio Martinez, Vivo's appointed CFO and our Investor Relations Officer Ronald Aitken.

Just in order to facilitate comparisons, all financial and key operational indicators are presented on an aggregated basis, consolidating TCO 100% during the second quarter 2003 unless stated otherwise.

Data per operator is available in the earnings release.

I will begin with some of the operational highlights during the second quarter. First, we highlight TCP's leading market results. Total active customers reached 15.5 million subscribers, an increase of 43% and a 9% quarter-over-quarter with the postpaid base growing 6% year-on-year. Net adds totaled 1.2 million, up 205% year-over-year.

The Company was again successful in the customer retention strategy with market churn rate falling to 1.6% down from 2.1% a year earlier and special importance considering the rising competitive pressure.

In May we announced that we had surpassed the network coverage of the Band A operator, TIM, in the States of Paraná and Santa Caterina further confirming Vivo's important coverage attributes in all regions of operations, even in areas where we were the second licensee.

In the Northern region we expect to be the first Band B operator in Brazil to surpass the total client base of the Band A.

Total growth in pure data revenues remains an important achievement for the TCP Company. This segment already reaching 4.8% of the total service sales. About level the rate of 2.4% in the second quarter 2003.

The second quarter 2004 EBITDA reached R$645 million for a margin over the net service revenues of 41.8%. The contraction over the reported 43% a year ago reflects higher commercial activity and a more competitive business environment.

Net loss in the quarter was also reduced by 73% year-over-year to R$67 million, showing the Company's profitability momentum.

On slide 4 we show the evolution of total net additions and market share of net adds. Net additions reached 1.2 million for a yearly growth of 205%. Market share of net adds also expanded when compared with the year ago period to almost 44% according to Anatel, up from 38% in the second quarter 2003.

Quarter-over-quarter total net adds increased 24% with market share of net adds placed firmly due to the prepaid customers base cleaning up and the Company's strategy to increase the barrier of entries increasing the pricing differential between us and the competitor.

Importantly, the market share of gross adds remaining relatively stable at an estimated 47% versus 48% in the first quarter 2004.

On slide 5 we show that during the year the difference between the absolute client base of the TCP operators and its main competitor has had a very positive evolution and even accelerated from the previous quarter.

Most noteworthy, we estimate NVT's Band B operation to have surpassed the Band A competitor in terms of total subscribers - the first for any Band B operator in Brazil.

On slide 6 we outline the Company's continued customer retention success, despite the rising competitive pressures and the Company's well known strict disconnection policy status in the country.

As shown in the graph, reported monthly churn rate was reduced to 1.6% from 2.1% in the same period last year. This success has been achieved through important initiatives, including 1, the re-launch of our points program, making handsets operate easier.

Second, the rate of visibility of Vivo's loyalty plan.

Third, promotions incentivating prepaid charges.

Fourth, postpaid/prepaid migration with retaining the same cellular number.

Fifth, prepaid handsets upgrade.

The quarter-on-quarter rise is an expected seasonality effect.

Moving to slide 7 we show TCP's client base growth of 43% year-over-year and 9% quarter-over-quarter, a rate above the Brazilian average and reflecting the Company's premium brand strength, financial muscle and the liberated regions when compared to the income per capita.

On slide 8 we show the total market share at TCP during the second quarter 2004. The Company's consolidated market share, including its 2 Band B operations equated to 55.5% according to [indiscernible] Anatel figures. Note, that this figure is not adjusted for the towns in the State of São Paulo covered by TCP Cellular.

By region, it is important to analyze the positive evolution at GT and NBT which saw stable or rising market share quarter-over-quarter.

Next slide we outline the Company's top line growth. During the quarter, net service revenues reached R$1.5 million, up 10% year-on-year, 19% excluding SMP effect, which primarily reflects the average customer base expansion 39% and rising data revenues 121%. This is more than compensated by the negatives of strong promotional campaigns with free minutes, plus incoming traffic and the change in customer needs effect.

On slide 10, if we purely center on the evolution of our pure voice revenues, the story becomes rather more positive with revenue growth in all cases above the average growth in subscribers, indicating positive trends for our growing ARPU across all segments and positive seasonality in the second quarter 2004.

On slide 11 we breakdown the evolution of blended ARPU year-over-year and quarter-over-quarter. Firstly, year-over-year we can see that the Reals line declined in ARPU. R$3 is accounted for SMP effect, R$4.3 reflects the mix effect having a larger proportion of prepaid customers, resulting in the real negative ARPU variation of R$1.6, or 4.4% year-over-year.

This negative evolution can be further broken down into a positive R$0.4 change in outgoing ARPU, which is more than compensated by a negative R$2.1 evolution in the incoming ARPU.

On the outgoing side, rising traffic is partly compensated by lower tariffs free bonus minutes. Whilst on the incoming side, inter-company lower incoming traffic, fixed to mobile substitution and fixed line blocking more than compensated for higher PM increase.

Quarter-over-quarter the R$0.5 positive real ARPU variation again propelled by outgoing traffic is more than compensated by the mix and the Bill and Keep effect operator changing traffic trends, resulting in total reported ARPU decline of R$1.2, or 3%.

On slide 11 we breakdown the evolution of blended MOU year-over-year and quarter-over-quarter. Sorry slide 12. Again, the year-over-year evolution shows 11.5 minutes decline in MOU, of which 7.1 minutes reflects the mix effect. The rest, 4.1 minutes the MOU fall.

This in turn is explained by a 12.6 minute fall in incoming MOU, which is less than compensated by the positive 8.2 positive outgoing MOU.

Quarter-over-quarter, the 3.6 minutes decline in reported MOU consists of a negative 2.5 minutes impact due to the mix effect, for a remaining real annual negative 1.1 minutes evolution. Again here, 2.1 minutes impact of higher outgoing traffic is more than compensated by 3.2 minutes in falling incoming traffic.

In summary, annual trends have been principally impacted by lower incoming MOUs, which less than compensated for the rising outgoing MOU traffic.

In slide 13, you can see a more detailed breakdown of pure data sales evolution. This does not include all the revenue services such as voice mail, caller ID etc. as reported by other companies.

In the quarter, data revenues grew 112% year-over-year and our revenue percentage 4.8% of net service sales doubled the rate of a year earlier.

SMS revenues represented 71% of total data revenues at TCP and also reflecting rising penetration of SMS enabled phones, as well higher average usage per customer.

The next slide 14, we illustrate other important and growing segments of the data business, namely our downloads MMS and Vivo Zap segments, our high speed connectivity service.

Total download MMS spend reached 634,000 in the quarter. 61% quarter-over-quarter again represented over 30% of download spend. Download MMS enabled cell phones remains a small percentage of the total, but as this expands, so should the numbers for this business.

On Vivo Zap, the service is centered on professional customers and there has been a significant competitive advantage against what's offered by other operators. As we introduce EV-DO, which allows for speeds of 2.4 megabytes per second, we will start to directly compete with the ADSL broadband market.

In the next slide, 15, we discuss TCB's EBITDA evolution in the second quarter. Reported EBITDA in the period reached R$645 million for a margin of 35.1%, or 41.8% over net service revenue. Lower margin sequentially is explained by higher commercial activity due to the seasonal commercial campaigns and higher subscriber growth, gross add growth 25% quarter-over-quarter. EBITA margin in the first semester was a reported 37.8% or 44.6% over service revenues, in line with our general expectation.

In slide 16 we highlight TCP's 43% year-over-year productivity improvement obtained through continuous operational efficiencies. Clients per employee already surpasses 3,800 in the quarter.

More importantly, we show in the second graph, an 18% year-over-year decline in the SAC to R$125. This despite intensified competitive environment and accelerating subscriber results. This reduction is especially explained by a more favorable exchange rate and increasing scale advantage since the creation of Lira.

The quarter-over-quarter 4% increase is due to the devaluation of the Brazilian currency in May with the consequent impact on handset price and the rising total subsidy.

On slide 17 we talk about the impact of innovateness and numerous marketing actions that have been translating into yet higher levels of recognition in terms of Top of Mind rating.

In the latest reading of June, our Band B operator in Paraná, Santa Caterina surpassed the readings of our competitor, Timsul, reaching and also record rating of 46%. It is important to mention also that all this has been achieved with Vivo now spending less than our 2 largest competitors.

On the next slide, 18, we provide a survey completed by IPESPE, which shows Vivo on top again on most of the important trade attributes, namely coverage, network quality, best customer care, easiness to upgrade handsets and best promotions and discounts.

Innovation was the only attribute in which the corporation perceived Vivo as having the same rating as a third competitor. Something we are already addressing through more focus, advertising exactly touching on the attributes of technology and innovation. Today, many of our adverts already touch upon the motto Vivo - the technology of the future leveraging on our CDMA network, the technology choice for the 3G all over the world.

On slide 19 you can see our perception can be rather different from reality. In this chart we show Vivo's solid story of innovative leadership in the Brazilian cellular market. Being in fact the first to introduce many important breakthrough products such as WAP, SMS, video screening, ring tones and the others. As mentioned earlier, we hope to soon announce commercial launch of PPT, EV-DO and location data services in the Brazilian market.

The next slide, 20, we show some of our important attributes of largest network coverage and biggest [indiscernible] in distribution channels for São Paulo State and the Center West region. In both cases we significantly surpassed our competitor, sometimes several fold.

In terms of prepaid which has point of sales, we have 39,000 point of sales in the Center West region. More than twice more competitor 1, and three-fold more than competitor 2.

In São Paulo State, prepaid which has point of sales reached 16,000. Twice as much as both the other 2 competitors.

In the next slide, 21, we show some of our campaigns during the second quarter. The first 2 important promotions were Mothers Day and Valentines Day, which we also launched our points program largest coverage in Paraná, Santa Caterina adverts - Vivo O Vivo with [indiscernible] and numerous campaigns on the corporate business Vivo Empresas.

In the next slide, and before turning the presentation to Vivo's CFO Arcadio Martinez who will discuss the Company's financial results, I would like to touch up on Vivo's social responsibility report with the launch of Vivo Institute, the entity now involving the various Company's social responsibility actions and innovation of the Vivo Goodwill Center consisting of a public theatre open to the public.

Thanks Francisco. I want to make a quick summary in the next few minutes of the financial results of the quarter, below the EBITDA line, as well as some indicators regarding our balance sheet.

On slide 23 you have the evolution of our net financial results. Our net financial loss for the second quarter 2004 decreased to R$282 million, compared to R$363 million in the second quarter 2003 as a result of the generation of cash, reduction of debt, and the lower interest rates in the country compared to one year ago.

TCP consolidated net financial loss increased by R$63 million in the second quarter compared to the first quarter 2004 basically due to the favorable tax effect on our financial expenses and revenues.

We had total an increase of R$25 million compared to first quarter 2004. PIS/COFINS tax paid over interest on shareholder equity paid by TC to TCP from the operating company of São Paulo to Telesp Celular Participacoes holding company.

Also had an increase of R$23 million in PIS/COFINS expense as well related to the gains in the derivatives due to the real depreciation of the Real compared to the dollar in the second quarter as well. And excluding these true favorable tax effects of the combined impact of R$48 million, financial results of the quarter would have been in line with those of the first quarter 2004.

On the next page, 24, we show TCP's bottom line evolution. In the second quarter 2004 our net loss was reduced by 73% year-on-year to R$67 million, mainly reflecting higher operational results already commented and lower financial expenses compared to a year ago.

Compared to the first quarter of 2004, TCP's net loss was R$24 million higher due to the lower EBITDA already explained of course by a strong commercial activity in the quarter and by the negative evolution of the net financial expenses already mentioned when covered in the previous slide.

The yield rate of PIS/COFINS alone which went up from 3.4% to 9.4% over the last year impacted financial operational expenses and explained more for the loss of the quarter which would have been probably a net financial profit in the second quarter 2004 had the same rate of PIS/COFINS applied during the quarter.

Moving on to slide 25, we show the picture for total investments of TCP consolidated over the quarter and the first half of the year 2004. Total capital investments reached R$340 million during the second quarter and for the first half, which gives a better sense as to the seasonality effect, Capex was as a percentage of net sales at a rate of 12.6%, slightly above our guidance previously given of a maximum of 12%.

In 2004 total investments in the remainder of the year should reflect the Company's strategy to cover gross profit, continued expansion of CDMA [16] coverage and the CDMA project in the [general] region.

Besides customer growth, total 2004 CapEx should also be back to the historical average such as new and unified accounting billing and selling systems and prepaid platforms.

Through the customer base continued expanding over the second half of the year, total investment for the second half of 2004 will be slightly above the 12.6% rate compared to sales that we had in the first half of 2004.

Finally, on slide 26, we show the evolution of our gross and net debt and particularly the fact that we had higher levels of debt of gross debt in the second quarter compared to the first quarter due basically to higher cash needs during the quarter originated by first of all the higher operational cash needs in terms of intense commercial activity already mentioned when discussing customer figures.

Second, increasing CapEx already mentioned as well compared to the first quarter of 2004.

Finally, because of an increasing working capital, principally stocks in line with the sales growth over the second quarter 2004 as well.

67% of TCP's net debt at the end of the second quarter of R$4.3 billion will be maturing within one year. It's our short-term debt and so has probably different sources of funds in order to get access to the best possible market conditions. We have already 5 programs for the mission of medium-term notes for up to an amount of $500 million which is listed in Luxemburg. We're going to start issuing those notes at any time.

We have also filed with the stock market in Brussels ADM and also the shares within this program for up to R$2 billion we issued in the local market. We are also in the final phases of that filing. We expect very soon approval of the CVM and we will use this local program of debentures, all the medium-term notes to be issued outside of Brussels depending on the relative rates, the relative cost of [indiscernible] depending on market conditions.

That's it and now I am going to return it back to our CEO for some closing remarks.

Okay. Thank your Arcadio. Let me finalize by giving all of you a quick summary of these results.

First, we point to TCP's strong subscriber growth of 43% year-over-year above the average of the Brazilian market.

Second, we remain focused on our effort of customer retention through the many initiatives mentioned in this presentation.

Thirdly, we restate our focus on profitable growth in the Brazilian market, the stable tax being an important indicator of this commitment.

Finally, in relation to consumption, naturally be another focus and our success for the innovator business that we emphasize also.

I thank you for your attention. I would now like to pass the call to the Operator to receive any questions that you may have.

Thank you ladies and gentlemen, we will now begin the question and answer session. [Operator instructions]. Our first question from Faviola [Neuhesky] with CSFB. Please go ahead.

Hi, how are you? My first question is related to TRO. According to the press release and the explanation that you gave for lower margin in general for the Group, was a strong effort made in the quarter to acquiring clients and the strong campaigns that you had such as Valentines Day and Mothers Day. My question is how do you explain for RT for example, to have the worst performance in margin if TRO and Sierra 2 had the same dynamic competition dynamics. They both compete with the same operators like Timo [indiscernible]. In fact selling expenses at TRO decreased while Sierra increased and TRO had almost the double of the growth that Sierra 2 had. I just want to understand the trend in margins this quarter?

Okay. As we said and we explained, the impact, the main impact on EBITDA margin due in this quarter was related with a much more strong commercial activity as you can see for evolution of net adds okay. And these of course have strong impact on margins. Has a subsidy in Brazil. Is strong.

The second impact is related with some evolution of revenues, mainly related with incoming traffic as we explained during this presentation.

So we believe that during this year, if the competitive environment remains as we have now okay, the trend of the margins could be stable. Slightly increased. But that will then happen of the activity of our competitors in the market as we are not willing to decrease too much of course our market share. TRO impact performance is a little different from Telesp Celular that had some that had some accounting impact that probably Arcadio could explain a little more if you want.

I think the accounting impacts which were different in the first quarter and the second quarter. I explained on our press releases.

The competitive situation at the TRO region is different from the other regions. Sometimes, depending on the practice of our competitors, they focus their efforts in one of the regions compared to the others and the competitive pressure, the level of subsidy is different in different places. That's what explained the differences in the margins in the second quarter in the TCRP and TRO. That's the only thing I can comment.

Okay thanks. I just have another question. You also mentioned at TRO that due to the corporate restructure made in the last quarter, you have a fiscal benefit of R$500 million. My question is that if TRO is incorporated, it will lose that benefit?

You are talking about the tax benefit related to the transferring of the goodwill?

Yes. That is the main point in the press release R$500 million.

R$500 million. It started having an impact in the second quarter at TCP consolidated level. It didn't have an impact at TRO level yet because as you remember Faviola, the operation was a structure in 3 stages.

Right.

And at June 4 we were let's say at stage 2. So the goodwill was sitting with a new com which is consolidated at the TCP holding level, but doesn't have an impact yet. At June 31 it will start having an impact at TRO level. I don't know if that answers your question?

In fact no. My question is that if, for example, TRO is incorporated in any other company of Vivo it will lose that benefit like Global Telecom for example? Global Telecom has a huge loss. If Global Telecom is incorporated, Global Telecom loses its fiscal credit. This benefit of R$500 million that TRO has if TRO is incorporated in any other company of Vivo, it will lose that benefit?

No, I don't want to speculate on future consolidation moves. But I don't think that it will influence it. Provided that the new entity will have enough profits, I think that the new entity will be able to use the tax benefits as I said with goodwill.

Okay. Thanks.

Thank you. The next question comes from Jean-Charles Lemardeley with JP Morgan. Please go ahead.

Yes hello. I just had a question regarding the core operation in São Paulo, particularly the revenue side looks quite weak. You had another contraction in your postpaid ARPU. Modest, about 2.8%. That was on the back of a weak seasonality in the first quarter and also your prepaid ARPU contracted in your prepaid service revenue for doing basic calculation of ARPU times average subscribers doesn't show any increase really from the first to the second quarter. Could you comment on São Paulo and the competitor dynamics there, both on postpaid and on prepaid and what's really happening there?

Okay. Well as we explained during the presentation and you can see the details in the slides, we refer and we are explaining in detail that in fact the outgoing ARPU is increasing in both segments. I mean prepaid and postpaid a little in fact, in São Paulo on an overall operation of course. In São Paulo what we have is a completely different market. If you focus on São Paulo on postpaid, what happens is that in fact the corporate market, I mean the professional market, has a strong part of the pie on the postpaid revenues. So the impact of roughly 2% negative in the postpaid is mainly related with the right sizing of plans as we are not of course willing to lose important customers.

The second part, I mean the prepaid, it's much more related with incoming traffic, with the traffic coming from the fixed operations as well as the co-collected that the mobile operators in Brazil of the mobile subscribers they can in fact use this activity that in fact transforms mobile to fixed in the fixed to mobile. There are also some initiatives for the fixed operations to blocking this traffic. But anyway, what is important is the trend is to grow numbers and we are growing very well on net the traffic, on that okay, if you compare it with off net traffic. I mean the fixed to mobile. There are [various] substitution phenomenon in that we are leading now and we need to deal with this situation. But I would like to point out that the prepaid customers, I mean this behavior in terms of outgoing traffic, is favorable okay.

Okay. Just on the right sizing of the plans. You're basically referring to subscribers moving to smaller plans right. I mean from plans in which you were not using the format of minutes to maybe plans more fitted to their needs. How much more do you think you have to go on that front and how much more downside do you think there is on your postpaid ARPU?

That will depend because now what you are seeing is also an impact of tremendous effort in marketing and marketing campaigns done by our competitors in São Paulo State during the second quarter 2004. So we believe that it will be possible to stabilize this trend. But anyway and the right sizing is something that is much more related with the retention and accumulation of these customers rather than normally we have impact in the ARPU but we can have a potential for growth in the near future, which is the short-term picture. So we are not exactly optimistic, but we are confident that we can control this evolution.

Our next question comes from Jose Linares from Morgan Stanley. Please go ahead.

Yes good morning. The first question is given seasonally higher growth in the second half of 2004 should we expect a recovery in margins in the second half of the year, or should they still fall some more?

Then the second question is, in the face of more competition in your important markets and falling ARPUs and increasing subscriber acquisition costs, what do you expect to do with handset subsidies in the second half and how much are you committed to maintaining market share in the rest of the year? Thank you.

Well I think that the performance of the Company during the second quarter is reference for what we can do and how we can manage the dynamics of the margin versus market share. So that will depend -- the evolution of the margins of course that will depend mainly on the evolution of dollar, of course the currency and the evolution of the activity in the market.

So we believe if the activity in the market remains as we expect now, okay the margin could increase a little. But that will depend on the strategy of our competitors as we are not willing of course to decrease too much our market share as I said before.

So, as far as concerns the falling ARPUs, as we said we believe that also with the increasing economic -- I mean there are some positive signals of the recovery of the economic situation in Brazil. So the consumption could increase a little. So we believe that it will be possible to look for stable to a slightly increasing ARPU until the end of the year. But that will depend mainly on the economic conditions on one side, and on the other side for the activity of our competitors.

Because we're running out of time and there are so many questions, we can only permit one question per questioner. Our next question comes from Ricardo Seara from BPI. Please go ahead sir.

Yes hi, good afternoon. Actually it's [indiscernible] from BPI. I have got a question also regarding margins. Sorry to come back to the same subject. You reported in the first half of the year, and specifically in the second quarter, this contraction of margin due to the attractiveness in the market and also the competition. I was wondering given that in Q2 you lost 1 percentage point in market share in total Brazil, how much would you be willing to sacrifice margin if it would be below 30% so as to avoid losing 1 percentage point market share per quarter until the end of the year?

Okay. Well when you talk about total Brazil you should take into account that we are not operating in 7 States of Brazil okay. So anyway our strategy is in fact do not lose too much market share in order of course to balance our position and take also advantage of the growth in Brazil.

So as I said before and once again okay, the evolution of the margins will depend mainly on the activity of our competitors. We will continue with our strategy to balance margins and market share okay to increase productivity of the Company. This Company fortunately has a very strong strategy on margins, so the decrease in margins as you can see from our statements, it's mainly related roughly 100% related with commercial activity. So that will depend on the evolution of the activity of our competitors.

Our next question comes from Brian Russling from Cazenove. Please go ahead sir.

Yes I was just wondering what comfort you can give us that you won't see the same pressures that Telesp has seen and the results we can see today in the São Paulo region? If the competitors really hots up in the São Paulo region, then are you going to experience the same level of higher churn, higher SAC, lower market share of net adds?

No, it's completely different. The region of São Paulo is a region of the [SG] and São Paulo our customer base has much more economic power than the customer base of Bahia and Sergipe. So it's completely. I would say we are talking about different worlds. In Bahia and Sergipe we are trying to balance the market share once again with the profitability of the Company. So we believe, and we can show, that in São Paulo we have much more margin to deal with these two issues. So we are much more confident that we can keep and we can continue with success our strategy in São Paulo and the success of the Company in São Paulo because we are leading the market in São Paulo and try to balance the situation in Bahia, Sergipe as in fact it is a bull market. And we are not of course willing to engage in some kind of crazy offer in the States that in fact has a very low economic power because otherwise we are looking for the result of customer base of some of our competitors and in our vision, what they are its buying them. But anyway.

Our next question comes from Patrick Grenham from Citigroup Smith Barney. Please go ahead sir.

Thank you. Good morning. Could you just go through your revenues per minute? You mentioned that the MOUs on the outgoing MOUs went up, but the incoming MOUs went down across the board. But it seems to me you're your revenues per minute have dropped and in some cases have dropped quite dramatically second quarter over first quarter suggesting that although you're getting increasing outgoing MOUs you're doing that only by very big discounting on the outgoing traffic. Do you think that pricing on a per minute basis will stabilize, or are we going to see further big drops in pricing going forward?

The second question related to that, is your market share of additions has been dropping and it's now dropping in the São Paulo area. It's right down well below the 50% mark. What are you going to do to try and get that back up?

Okay, well as far it concerns the RPM, we should take into account that in fact during this season, during the second quarter and the first quarter we have a lot of volumes which is a consequence of our recent campaigns that have been working since January by the middle of February and up to that one is for the prepaid acquisitions. And also for the postpaid acquisitions during the Mothers Day campaign and the Valentines Day.

Anyway in the postpaid, our strategy is not to use too much bonus. But in prepaid we should of course I would say play the same game of our competitors because we are offering very aggressively the bonus over the network because they are deploying some [indiscernible] networks and GSM and we are trying to take advantage of this facility.

But what we are seeing, is decreasing of this phenomenon, or this impact and the RPM, the blended RPM or the RPM of postpaid should increase a little.

As far as it concerns the market share of net adds in São Paulo, I think it is important once again to stress that these 2 main competitors [Bioi] and Tim specially, we are growing on GSM from scratch. They are not excluding customers from the base. They have not churned in general okay. So we keep our very, very strict strategy to keep customers in the prepaid databases. So it's difficult to compare performance when you compare an incumbent that in fact uses very strict policies and databases and 2 new guys that in fact they are not excluding customers from the base because they are growing from the scratch GSM. And in my vision, they will keep this strategy until the end of the year unless they are willing to pay too much tax because in Brazil it costs money to keep customers in the base.

So in this time, I mean by the end of this first [result], it's difficult to make exact judgment about the operational performance when you compare 2 different situations. I mean talking about Vivo, São Paulo, or Tim or [indiscernible].

So in short, it's my answer.

Our next question comes from Charles Chester from Cazenove. Please go ahead sir.

Hi, it's Charles Chichester from Cazenove. I was just wondering if you could help explain a little bit what's happening in the Paraná, Santa Caterina region with Global Telecom? We've got the half year figures for the income statement and it looks as though there has been a dramatic increase in the cost of services provided out of proportion with the increase in net revenues. I was just wondering whether this is because of very heavy free air time promotions in this area in comparison to other regions, or is there something else happening here that we didn't see in the first quarter?

Sorry, could you repeat the question because I have difficulty to understand the first part of your question?

Just one moment sir. I had excused him. Just one moment please. Mr. Chichester, please repeat your question sir.

I'm just wondering if you could help explain a little bit what's happening in the Paraná Santa Caterina region with Global Telecom? We've got the half year figures on page 15 of the income statement of the release. It does look as though there has been a dramatic increase in the cost of services provided. Cost of services provided line is sort of out of proportion with the increase in net revenues and I'm just wondering obviously I can't tell exactly because normally we've got this quarterly. But this time we've got a half year statement. I'm just wondering this is because of very heavy free air time promotions in this area, or whether there is something else happening here? I'm just wondering if we can get more detail?

No, in fact in Paraná Santa Caterina and sorry now I understand your question and thank you. In Paraná Santa Caterina we have in fact a very aggressive strategy because it is the area where Tim has the most important operation. So how Tim is affecting Vivo. In São Paulo we are impacting in Paraná Santa Caterina. So that is why we increase our commercial activity in Paraná Santa Caterina and we have very good image there and we are increasing our market share so. In short it's the answer to your question.

Our final question comes from Stephen Graham with UBS. Please go ahead sir.

Hi. Can you comment on the status of any talks with Brazil Telecom on mobile termination rates in the South or the Center West?

Well the mobile termination rates is staggering in Brazil. It is in the very beginning of the story. We are through our cellular association in Brazil explaining to Anatel what in fact is happening in reality in this country because the relationship between the fixed termination and mobile termination in Brazil is roughly [126, 126.5]. It's completely different from Europe and the other countries. In Brazil we are using a tremendous subsidy and we are in fact substituting the role of the fixed operators in terms of supplying access to the telecommunication service. I mean you never saw service obligations okay. So we are very confident that Anatel produce these in a fair way okay. But anyway we are not willing to agree with any Decrees of the termination in the mobile network.

Thank you. As we can take no further questions, I would like to invite Mr. Francisco Padinha to proceed with his closing statements. Please go ahead sir.

Well so first of all thank you very much for having in fact following Vivo operations and TCP operations in São Paulo and Paraná and the Center West. We believe that our performance compares with our competitors in this very, very aggressive market. Has been very good. We are pursuing our strategy to balance our profitability with our market share and we are very confident about the performance, and about the capacity of the Company to keep and to increase in certain areas, its leadership role in the cellular market in Brazil.

Thank you very much everybody. We are of course 100% available to clarify any details of your questions. Please do not hesitate to contact me, or Arcadio Martinez, my colleague and we will be happy to explain every detail of this operation. I also would like to stress that our presentation has been very, very detailed. We had a very transparent Company. It is the tradition of our shareholders and we will keep our tradition and this culture in this Company.

So thank you very much for your interest and for your questions.

That does conclude the Vivo audio conference for toady. Thank you very much for your participation. Have a good day.