Telefonica Brasil SA (VIV) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to Telesp Celular Participacoes, TCP’s fourth quarter 2004 earnings release conference call. Today we have with us Mr. Francisco Padinha, CEO of Telesp Celular Participacoes, and Mr. Arcadio Martinez, CFO.

Today we have a simultaneous webcast, also our presentation is on the internet, and can be accessed at the site www.vivo.com.br/ir. There will be a replay facility for this call on the website.

We inform you that all participants will be able to listen to the conference during the Company’s presentation. After the Company’s remarks are over, there will be question and answer section. At this time further instructions will be given. [OPERATOR INSTRUCTIONS].

Before proceeding let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of TCP management and on information currently available to the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions, because they relate to future events, and therefore depend on circumstances that may, or may not, occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of TCP, and could cause results to differ materially from those expressed in such forward-looking statements.

Now I’ll turn the conference over the Mr. Francisco Padinha, CEO of Telesp Celular Participacoes. Mr. Padinha, you may begin your conference.

Good morning ladies and gentlemen. I am Francisco Padinha, Telesp Celular Participacoes’ CEO, and I wish to thank you for joining us for TCP’s fourth quarter 2004 earnings release conference call.

This conference call is being simultaneously transmitted over the internet, and you may extract a copy of this presentation from our website, www.vivo.com.br/ir. Mr. Arcadio Martinez, CFO is here with me today, as well as our Investor Relations Officer, Charles Allen.

Based on the highlights of the fourth quarter 2004, I wish to pinpoint that we maintained a solid leadership position in a very competitive market, reaching a total of 17.6m customers at the end of December 2004 in TCP’s regions, or a 51% market share, contributing strongly to the achievement last year of the 26m Vivo customer mark.

We increased our portfolio of innovative services, confirming the CDMA superior technological features. More than 8 pioneer new services were launched in 2004, among the other new applications and features on current portfolios.

The metrics which were preserved within good limits show that the growth was achieved through a combination of flexibility, innovation and agility.

On slide number 3, we show some of our important attributes, in terms of our largest network coverage, and biggest capillarity in distribution channels in Sao Paulo State and the Mid-West region.

In both cases, we significantly surpassed our competitors, sometimes by several times. Concerning pre-paid recharge points, we have in the Mid-West region 39,000 POS. More than double our nearest competitor has. It’s threefold more than the third player. In Sao Paulo State pre-paid recharge POS reached 16,000. A supremacy that is twice as large as the other 2 competitors. This has been crucial for the success of our pre-paid outgoing traffic.

Turning to slide number 4, please note that through the champion attributes recognized by the independent IPESPE survey, Vivo is recognized by its solid position in the cellular market as a prime brand.

Such real advantages will much help in the efforts to keep growing in 2005. The intended growth will require special attention to capture the market segments that generate value, once our target is to keep the focus on revenues and margins.

Vivo is a premium brand, as you can see on slide 5, fully recognized by the market, and it’s the champion in terms of being the most remembered brand in the segment. That is why Vivo was awarded with the Top of the Mind 2004 and several other brand-related prizes.

In slide number 6, we show that Vivo has taken numerous active initiatives in terms of plans and tariffs, with the objectives to promote the correct perception, and a fair and correct pricing. The responses to the attacks of the competition were done without destroying value.

Looking at slide number 7, we can see some new services that take advantage of CDMA superior capacity to manage multimedia applications. The combination of CDMA capabilities with our creativity and first to market attitude, gave a start up advantage to the Company in many services that could be matched by our competitors based on GSM technology.

Slide number 8 shows that, in 2004, Vivo brand lead the innovation throughout the industry in terms of plans and services, which much contributed to establish a differential in favor of the Company.

It is worthwhile to underline in slide number 9, the cost [indiscernible] about 5.7% on average, quarter-over-quarter in 2004 of the post-paid client base. It is a clear demonstration that our strategy to focus on high value clients is successful. It more than counterbalanced the intense attack from our competitors, directed to cream skimming our best clients.

On the other hand, a sensible market segmentation guided the strategy to offer differentiated attention to each client. Following suit, pre-paid client base grew 39.6% in 2004 on average, quarter-over-quarter.

We see 2005 as a year of yet another growth period, although not as strong as before. This opportunity will be easy to promote our competitive advantages to acquire new clients to protect the existing base, and to tap the market potential to create value.

We wish to highlight in slide number 10, the low churn which has consistently been reduced along the past quarters. 1 key element in our strategy is to maintain the leadership, a feat successfully achieved in spite of the strong competitive pressure.

Quarter-over-quarter we see a slight increase in churn due to the overall commercial activity in the market.

As seen in slide number 11, the Company had to act in accordance to well established plans and kept the efforts focused because of the dynamic and aggressive environment. A certain degree of market share had to be sacrificed because business rationality and sustainable results could not be forgotten.

Meanwhile, timely attack and defense moves were undertaken. The market share graph is an evidence that the adopted policy favorably combined growth and protection of leadership while keeping business performance within good standards. Please note that the graph at the right depicts that competition was not evenly distributed across the regions we represent. We have acted accordingly to each of the local characteristics.

The slide number 12 is the picture of a success story. The performance was assured by the advantages offered by the Company in terms of coverage, innovation, new services and recognized value for money of our services.

Please note at the bottom right corner graph, that the B band operator has shown continuous improvement in the past quarters.

The growth in net service revenue depicted in this slide number 13 was due to the increase registered in the average client base, both post-paid and pre-paid as seen before. Value added services played their part, helped by the availability of new communication solutions and services, especially dedicated to the corporate and high-end client segments using CDMA advanced technology.

It is also worthwhile to mention that market penetration reached 39.2% in 2004 TCP region, still leaving room in the market for further and consistent growth.

The service revenue could have been higher if not for the regulatory effects of VC2, VC3 and Bill and Keep, as can be illustrated by the two columns at right, that show R$6,524m in net services revenue surpassing the R$6,166m actually registered in our books.

In slide number 14 we wish to clarify that revenues from data services do not include proceeds from voice mail and other services, that are not exclusively tied to data multimedia. The growth in the number of data transmissions enabled handsets, has indeed played its part to increase data revenues, but please note that the gain in the number of SMS is above the simple proportional growth.

The same principle applies to the gain in revenues, which is a clear signal of a positive evolution in this area. The average SMS message per month in the fourth quarter 2004 was approximately 91m, 30.2% higher than in the fourth quarter 2003. Please take note as well, that the data revenues in relation to the revenues generated by outgoing traffic, experienced an impressive growth, as depicted in the yellow columns at the right.

In slide number 15, we can zoom in detailed information about the demand for the data related services. Some of the business communication solutions are based in our data transmission capabilities. Vivo Vendas, Vivo Ordem de Servico and Vivo Entregas, which together with other facilities offered by the Company, constitute a real mobile office to our clients.

Meanwhile, all segments of our client base are constantly encouraged to use the available data transmission features. With EVDO, this revenue source will be even more promising after the Zap 3G becomes commercially available.

MOU, as shown in slide 16, has remained relatively stable in relation to the previous quarter. Please note that the positive 1.9 variation is mainly due to the higher usage registered in the pre-paid and the fourth quarter seasonality. The 2.3 reduction registered in the relation to the same period last year, was partially due to the incoming traffic from fixed to mobile and also by the smaller volume of bonus minutes.

Regarding slide number 17, we wish to remind you that in our third quarter 2004 conference call, we explained that during the first three quarters of the year, we have followed strict accounting procedures that makes sure that our revenue numbers are not inflated by the fraudulent traffic which later on would have to be written off as uncollectible.

Pre-paid card commissions are registered as less revenues instead of pure operating cost.

The fourth quarter 2004 versus third quarter 2004 ARPU increased 3.1% is the proof that the said implementation of that policy has already reached an advanced stage.

Finally, in relation to the 8.1% variation versus the fourth quarter 2003, we would like to add to the explanations, the effects of the fixed to mobile substitution and the right planning effects on the tariffs.

Thanks to the third quarter 2004 as seen on slide 18, an 11.3% decrease in SAC is registered. This effect is mainly due to the increase of the entry barrier combined with the successful procurement actions for handsets.

Consequent to the efforts to promote growth of the productivity levels, the number of clients per employee has risen. This is also due to the initiatives to tap the existing synergies among the companies at higher levels of operational efficiency.

The graph on the slide number 19 depicts that the cost of sales and merchandising sold were impacted by the efforts developed to face competition. Nevertheless, general and administrative expenses were reduced by 16.1% and 35.6% when comparing fourth quarter 2004 with the fourth quarter 2003 and the third quarter 2003 respectively, due to successful programs to reduce structural costs.

Costs related to service also experienced an 18.5% reduction on a year-over year comparison after certain contracts were renegotiated. This variable was also favorably affected by the partial Bill & Keep, thus reducing interconnection costs. Certain cost items and taxes were also reduced, especially in the TCO region.

In spite of the wage increase, in relation to the total operating revenue expenses, the participation of labor costs experienced a small reduction.

In slide 20, we can see that in spite of the highly competitive environment and strong commercial activity, the R$2,588m EBITDA is 3.4% higher than in 2003. We would like to clarify the market that according to our strict accounting rules the financial cost of installments related to the gross adds are accounted as operational expenses and does impacts directly on our EBITDA. They are not registered as financial costs, as we see in the other operations in this market.

Now I turn the word to my colleague, Mr. Arcadio Martinez for his remarks.

Thank you Francisco. Good morning or good afternoon ladies and gentlemen.

Moving on to slide 21, we are showing there the evolution of our capital investments during 2004, which is a total equivalent to 19% of revenue for the year. This growth in CapEx is part of the strategy to keep competitive advantages such as coverage, technology and advanced para-services, such as the ones based on 1X RTT and in the future on EVDO.

Naturally, part of the strong growth in our client base has also played an important role in the investment decision process. A relevant part of the investment was directed to increase the capacity to handle and transmit traffic in our own routes and systems, which adds reliability and will reduce future costs.

To extend our market continued [growth ahead of growth], we will continue with our capital investment programs in 2005 with a similar intensity to the ones shown in 2004.

Next slide number 22 shows the evolution of our growth and net debt compared to the previous quarter. Total amount of debt, as you can see dropped quarter-on-quarter by close to R$1.7b due to the cash proceeds of close to R$2b, from the new share issue at the end of 2004.

The net debt of the Company shown on this slide as of December 2004 was R$3.8b which represents a 17% reduction in terms of net debt to EBITDA now at 1.47 times EBITDA. Of course this improvement was 1 of the main reasons for the capital increase to be launched in the first place.

Moving on to the next slide where we show the final impact of the capital increase on the capital structure of the Company. Contrary to signing the manifestations the rights feature was a big success, was finalized on January 4, 2005, and very well received by the market with the participation of the vast majority of the shares with the offer of 97%.

As we can see on this slide, the impact on the capital structure was very small at the end of the day due to this high participation level on the part of minority shareholders.

In addition to that capital increase, we a couple of weeks ago, announced the decision of the Board of Directors of TCP to approve a reverse split of the shares of TCP and TCO, by way of grouping of shares in the proportion of 2,500 shares of TCP per 1 share, both differential and ordinary shares. In the case of TCO the ratio would be 3,000 old shares for 1 new share, both for ON and PN.

On slide 24 we show the net financial results. Results for the quarter and year-on-year which show a relatively negative evolution in the fourth quarter caused basically by the need to finance with a bid the amount, the price of the shares that were purchased from TCO shareholders in the public offering for [indiscernible] shares of TCO. It was completed in October. It was funded with debt that will carry on until the increase of capital with proceeds entering by the end of the year. So we have had a full quarter of impact of that original debt of R$900m, which has an impact from the financial expense.

Next to it, the other causes for this increasing financial expense in the fourth quarter were the depreciation of the dollar compared to the Real that caused losses in our hedging positions, as well as some unfavorable tax and other charges on some of our financial expenses, particularly taxes on the distribution of capital on shareholders’ equity that took place at the end of the fourth quarter.

Additionally, to the results of the fourth quarter we saw on that slide evolution year-on-year. Basically we kept our financial expenses stable year-on-year in spite of the higher level of debt in the average for the year 2004 compared to 2003. Of course, it was a consequence as well, of the drop in interest rates in Brazil during the year compared to the year before.

On the next slide we show the evolution of the net income. In this case net loss of the Company. In the fourth quarter we saw an increase of the losses to R$235m negative as a consequence, of course, of the seasonality of the Christmas campaign and the high commercial cost. I shall say that plus the negative evolution of the financial expenses [indiscernible]. For the accumulation of the year 2004, we are bound by 20% in terms of losses, so we showed an improved in our bottom line to [indiscernible].

For final comments, I pass the floor back to our CEO for his final remarks.

Just more -- 3 slides to finish our presentation. As you can see in slide 26, we are sure that social responsibility has to be understood as a broad concept. In our view, it materializes through a transparent and fair relationship with all entities we have contact with - community, clients, suppliers, workforce, government and the others. The Vivo Institute supports more than 40 projects to the benefit of 200,000 plus persons.

Through the Vivo Voluntario program many of our own employees enroll in community care programs, dedicating their spare time and much energy to great causes.

In slide number 27 we present a summary of the basic guidelines under the point of view of the strategy planning. In 2004 the executive teams have taken the value proposition from both the internal and external perspectives, to develop comprehensive actions that successfully integrated finance, marketing and operating functions. A similar approach will be extended in 2005.

Finally in slide 28, our competitive advantage will permit us to grow as the market grows, but within sensible guidelines in order to protect the existing client base and the value creating capability.

Leadership will continue to be one of the targets. Consumption of our services will be stimulated by the introduction of yet more advanced and differentiated features, made possible by our CDMA technology.

Our keen attention to the market behavior supported by a comprehensive data base assures that all segments will be satisfied by an adequate offer of quality and innovative services.

So thank you very much for your attention. Me and my colleague Arcadio will be keen to answer your questions. Thank you very much.

Thank you. Before opening the floor for questions, I would like to apologize for the momentary delay during the conference call on behalf of Vivo AMG consult. At this time the floor is open for questions. [OPERATOR INSTRUCTIONS]. We will take our first question coming from Vera Rossi of Morgan Stanley. Please go ahead.

Hi good morning. I have 2 questions. First on your ARPU. I have seen your ARPUs of contract users increasing in Sao Paulo and in Global Telecom, so what has caused this increase? And second, could we see that as a selection point in your ARPU trend?

And the next question is on TRO. I saw a decline in your contract ARPUs, and what caused this increase? Are you losing your high-end customers to competition or are you changing pricing plans to cheaper plans, so lowering your ARPU? Thank you.

Thank you for your question. Well, the situation is quite different from TRO to TCP areas, from Telesp Celular areas. In TRO, as you remember, we are a very strong operator at the beginning of 2004 as we are also in Telesp Cellular. We have strong plans in terms of contract prices. So what you are seeing is, of course, a mix of some churn. Not dramatic situation, but mainly actions coming from the right planning in these areas. And that is important the way the business segment of the market.

On the Telesp Celular and Global Telecom, what you are seeing in the ARPU on contracts is the effect and the success of our campaigns to increase the value of our offer, and mainly we have seen also the strong contribution on data, on these ARPUs. That is the main reason for this evolution.

Okay. And I have another question. Your outlook for 2005 in terms of subscriber growth, ARPUs and EBITDA margins, so what do we expect for this year?

On the customer base we believe that it will be slower than in 2004 as the market becomes more rational [and subsiding]. And on the EBITDA margins we believe that the current battle is on post-paid. So I believe that the EBITDA margins will be a bit more or less in line with the margins of 2004. And, sorry what was the last question?

ARPU.

The ARPU. The ARPU we can see some slight increases on contracts. But that will be counterbalanced by the effects of incoming ARPU. As you know, we are very dependent, in fact all the operators in Brazil, from the interconnection traffic, and that interconnection traffic coming from the fixed to mobile is decreasing due mainly to the effect of the substitution through wireless PABX or direct connection from the PABX to the mobile network. So we are seeing some substitution from fixed to mobile, to mobile to mobile, and the mobile to mobile tariffs are lower than the fixed to mobile. Some rebalance effects should be implemented in the future, but that would counterbalance the effect of the outgoing increase, slight increase, in the ARPU.

So the final effect you would expect in ARPUs is flat ARPUs year-over-year ‘05 versus ‘04, or you expect further decline in ‘05 versus ‘04?

Well that will depend on slight decrease as we can see the impact on the fixed to mobile.

Okay, thank you.

Our next question is coming from Patrick Grenham of Citigroup.

Good morning, I have a couple of questions. It seems a bit confusing about the market share in the Tele Centro western region. Is that because you are losing share to new entrants in the market, or are you losing share to existing entrants in the market? And have you had a policy about de-emphasizing the regions where we now have BRP as a new entrant? Or are you going to start fighting to gain market share back there?

Second operating question was on the pricing and the CapEx. You mention on your last sheet, the strategic going forward is that the CapEx, you will continue to invest in the network. You also mention that CapEx would be stable in ‘05 versus ‘04. Are the current levels of CapEx going to be there for the long term, or is there a possibility we will see an increase in the CapEx in ‘05?

And then I had a question on your finances too.

Our main goal is for us to keep our leadership and try to balance the leadership with the profitability of the Company. So I think that we should look, not only for the trends on our market share, and if you remember in TCO we are an incumbent. We have a very large market share. We have been attacked by 2 newcomers - TIM and Brazil Telecom GSM. Very active in that area. So are balancing our market share with our market share of revenues, and with our market share of EBITDA. So the situation in the TCO is quite comfortable in terms of basically, we mean the decrease in the market share and I would say the defense of profitability.

Anyway, we are keeping our activities in order to decrease the trend of the effects of these attacks of TIM and Brazil Telecom GSM. Mainly this last 1 from Brazil Telecom GSM, they have been very active on subsidies, and we are not, of course, willing to decrease our profitability too much.

As far as it concerns the CapEx, I would like to point out that the CapEx on Vivo has 3 main blocks. The first one is the CapEx related with the migration. I mean technology migration from TDMA to CDMA. By the beginning of 2004, we believed that it would be possible to manage these into phasing approach. What we saw during 2004 was a completely different strategy from our competitor that are migrating from TDMA to GSM. They have been following clearly a swap out approach. So we have been obliged to increase the degree of substitutions of TDMA by CDMA in our areas in order to keep our competitive advantage and our image of modernity.

The second block is IT. We are still concentrating roughly 6b systems, 6 pre-paid plus forms, a lot of front office and back office systems. Also the SAT systems from the administrative control etc. So there are some big related with these 3 main blocks of CapEx.

And, of course, the last 1 is coverage and quality of coverage. And this is in line with the growth of the market, and with the deployment and the trends of our competitors in certain areas. There are some, I would say areas, some churn areas that we need to increase our quality of service in order to keep our competitive advantage and our image of leader.

So I take it from what you are saying is the CapEx will stay at the same levels in ‘05, but there is really an internal transfer on the CapEx whereby once you’ve done the changeover on the billing systems and that sort of stuff, the emphasis would then go coverage and service quality?

CapEx in 2005 will be more or less in line with the CapEx in 2004, and that the debt will decrease the CapEx.

Okay. In absolute terms?

In absolute terms it was [indiscernible]. 1.9

And a question on your finances. You mentioned you had a big drop in your G&A expenses. But I notice you had a very big increase in your selling expenses. And when we look at your selling expenses it looks as if third party services and other selling expenses have opened up so much. And has there been a re-categorization of costs in the fourth quarter?

You mean for consolidated TCP?

Yes.

No there hasn’t, it’s just a consequence of the seasonality of the fourth quarter. We are talking about is inclusive commercial expenses basically commissions and a sort of, of expensive logistics, also [indiscernible] with a higher level of sales in the fourth quarter.

Right, because it went up very suddenly. And what’s in the other selling expenses? What’s in that?

Some details even in the controlled] press releases. Ordinary expenses improved things like commissions to dealers, our own shop structure as well. All the costs related with the personnel in those shops and things like that. Those are basically the main components.

Right, so we should see them drop again a lot in the first quarter when your additions drop?

Yes this is totally seasonal. That follows the activity in the marketplace at the end of the first quarter is typically more calm in terms of activations, you will see a drop yes.

Okay. But we won’t see an increase back up in the G&A expenses? They are down at these very low levels now for the long term?

We will try to keep the levels the way they are. We are making a big effort in reducing structural costs.

Just to complement what Arcadio says on these costs, in Brazil the volumes of the rentals of our shops in the supermarkets are directly related with the sales. So, as we increase the sales we increase also the rentals you know. It’s the practice in the market. That’s why sometimes it is kind of increasing according the force on the market.

Okay. How much of your standing expense would you consider to be fixed? Things like the overhead and that sort of stuff on your distribution outlets, and how much would be purely variable?

We don’t disclose that information, but most of it is variable.

Okay, thanks a lot.

[OPERATOR INSTRUCTIONS]. Our next question will be coming from David [Light] of JP Morgan.

Yes hello, good afternoon. I clearly sense competition easing in the low end handset market in Q4 and simultaneously intense buying in the high end. Can you confirm that was definitely the trend you saw?

And then whether you could maybe split pre-pay and post-pay sack in Q4 and maybe give us a Q3 comparative so we could look at that?

And then maybe if you could just give us your expectations for market dynamics in 2005. So whether you think there will be a lot more rationality in the billings market. And whether you think aggression in the high end, the contract and the corporate market should continue or even intensify. Thank you.

The trend in the competition we saw for instance in the last quarter 2004 was, in fact, a little more rational in terms of subsidies, if you compare, for instances, with the model stake in paying etc. So, what we believe is, and what I see now, is in fact that some we say, concerns about the profitability of the market, about the profitability of the Company, the operators are moving to post-pay. So, if you look for the offers that we have currently now in Brazil, the pre-paid has, in fact, increased, but the post-paid has decreased tremendously.

We have now in the market offers for instances from TIM, and the others, but mainly from TIM, from post-paid has R$99 in 10 times with [offers] [indiscernible]. So this is a very aggressive offer and we are, we have a lot of reserves about this because this normally, this is so aggressive offer, that normally creates bad debts or the migration from post-paid to pre-paid in the coming months.

So that’s, in my view, the new venture we think breaking on the trends in the Brazilian market. Anyway this is the driver of the growth of the market, which is now slower than in 2004, and we are trying to control this effect.

As far as is concerned, the segregation, we are asking for on the pre-paid and the post-paid, I am sorry but I am not able to disclose these figures.

So well, you will given the sort of sensitivity of your revenues to the contract subscribers, you will probably be a little more aggressive defending this market than perhaps pre-pay where you’d be maybe a little happier to lose some market share in the net adds? I’m assuming in the contracts you will probably going to defend market share a little more aggressively right?

Possibly yes. But you should take into account when you look for the net adds market share, you should take into account the arithmetic effect. When you decrease, in the certain market, when you decrease the top overheads of this market, the operator that has the largest customer base for the same share of [rough] adds and the same churn, low operators decrease dramatically the net adds. It is an arithmetic effect as a first effect.

On the other hand, of course, we need to protect our net adds market share. That’s why we are delighted once again being a force on subsidies in this area, and increasing tremendously our efforts on utilization and retention of our customers. And in this area, it’s important to point out that we have been able to control, and to decrease a little our post-paid churn. So, this is the challenge of the Company and the strategy we are following is in fact to balance the efforts on acquisitions with the efforts on utilization and retention.

And plus to looking for market share, not only of customers, but market share of revenues, market share of EBITDA also.

Okay, that’s great thanks.

Thank you very much.

Thank you. Our next question is coming from Andrew Campbell of CSFB.

Yes thank you. My question is about the Bill and Keep accounting system, and if you think full Bill and Keep is going to be implemented in the middle of this year, or you think it could possibly be delayed?

I think that will be delayed because what you are seeing is nobody can [indiscernible] the full Bill and Keep. After the fiasco in France, and the return to the normal relationship and the other countries, everybody understands that the full Bill and Keep, and even the pressure of Bill and Keep is tremendous -- it’s an invitation to the problems between operators.

So the cellular sector in Brazil and also the fixed operators are not willing to enter in this new figure. So we are billing with Anatel. I mean both associations, Anatel from the cellular operators and [Arafi] from the fixed operators, in order to eliminate this decision of the Anatel. And I strongly believe that should be at least postponed.

Okay. And just to have an idea, at the current time do you, on a net basis with the partial Bill and Keep, do you have much revenue that comes from exceeding the 55% ceiling?

What happens with, even with the partial Bill and Keep, you know, there are lot of tricks that the operators made in the network. Starting using traffic generators etc. in order to enter in the window of 55 to 45%. So it’s an artificial situation. So I don’t agree that we can achieve some favorable situation with the, even with the partial Bill and Keep.

Okay, thank you very much.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question comes from Charles Chichester of Cazenove.

Hi thank you. I’ve just got a question regarding the Rio de Janeiro market. It’s already highly penetrated compared to the other areas. You continue to take a pretty high market share of net additions there. Can you tell us whether you are still taking a large proportion of high RP clients in that area? Perhaps you could just talk a bit about that market a little and whether Claro and TIM have been aggressive in this area or not. Thanks.

So your question is related with the Claro activity and TIM activity in our areas is that right?

Yes I’m talking specifically about the Rio de Janeiro market. I’m just wondering, you know, it’s quite highly penetrated compared to other areas, I’m just wondering --

Okay. Well Rio de Janeiro is quite a peculiar market you know, because it’s a market where the people change the terminals with tremendous versatility. So, it’s a quite -- it’s an aggressive market, because for more than 1 year we had 4 operators in that area. Claro and TIM and Vivo and also Oi are more or less balanced in terms of market share, even in the market share of net adds.

For the time being what we are looking in terms of Rio de Janeiro strategy is to protect once again our profitability, and to not decrease too much our market share mainly in the pre-paid. Because in the post-paid we have very good churn in Rio de Janeiro, and this is due mainly to the success of our utilization plans in that area.

But in general, I believe that it will be difficult to increase profitably, penetration in Rio de Janeiro in overall.

Okay, thanks.

Thank you. Our next question is coming from Andre Baggio of JP Morgan.

Hi. Just a follow on the Bill and Keep. Do you have any news from Anatel, like what is there point of view, and do you expect that going forward let’s say for the second half of the year, to be maintaining the partial Bill and Keep, or to be reverted to a full interconnection regime?

What we are now trying to convince the Anatel is at least to keep the partial, because you know, it’s difficult to change completely the current regime, and postpone the full Bill and Keep. Anyway, the final effort of both sectors, I mean fixed and mobile, is now starting to eliminate this regime.

And what has been Anatel’s response so far? How do they see these efforts of you and the fixed line maybe?

I think Anatel is looking for other examples in the -- you are asking for fixed to mobile?

No, of the Bill and Keep, just the Bill and Keep.

They are receiving concerns -- our reserves to the regime. So I believe that they are willing to change the regime, and if they have, all the tools in this hand, they will change immediately. The problem is, in fact, they need to follow the rules. They need to follow the current model, and not facilitate alterations or changes, dramatic changes in the model.

So it’s more easy to keep the partial Bill and Keep and to postpone the first decision, and to postpone the full Bill and Keep. And after that, I believe that it will be possible to eliminate the Bill and Keep regime, as you saw in France for instance.

Okay thank you.

Thank you. Our next question will be coming from Ricardo Seara of BPI.

Hi, good morning - good afternoon sorry. When you say that next year the challenge will be to secure market share of both [suppliers] revenues and EBITDAs, this year Telesp Celular on a consolidated basis lost, according to your numbers, 5.2 percentage points market share, with a 2.6% decline in terms of EBITDA margins. My question is, if you are assuming that the margins will be at about the same level in the next year, how much do you factor into your estimates of market share loss in the year? Thank you.

The question is we decreased roughly 5.2 points from the market share in Telesp Celular. But if you look for the market, if you look for instance for Paraná and Santa Catarina, TIM has increased 7.2 points in the market share. So the result of the first attack of the operators in the region where we are dominant, that’s the issue.

The EBITDA margin has decreased a little, but if you take into account that in 2004 the entry barrier has decreased roughly 50% compared with 2003, I think that you conclude that our efforts to keep our profitability and our EBITDA margin has, in fact, obtained success.

So, the future. Well I believe that in 2005 the activity of the market is much lower than 2004. And our capacity to keep our most important customers has in fact -- we have been successful, because if you look for our churn, the churn on the post-paid, it’s decreasing a little.

So I believe that it will be possible for Vivo in the Telesp Celular region not to loose too much market share as we loose in 2004, if we have been able to succeed in these actions.

Do you have any internal project that moves you to make these efforts in securing clients, while not sacrificing that much in terms of margins?

Yes we have a lot of the actions, because our internal figures we are not able to disclose. We have a lot of the actions, we have proactive actions over our base. For instance, we have the right planning actions in order to protect our customers.

We have been very active on the business segment of the market, trying to bundle our data applications with the voice, and we have succeeded because we are increasing our customer base in the business segment in São Paulo. So I believe that it will be possible with these measures, to keep our leadership in this market, which is our final target.

Thank you.

Thank you. Our next question is coming from Maria [Janeiro] of Citigroup SF.

Hi good morning. Could you please give us an idea what percentage of your EBITDA comes from post-paid customers for Telesp Celular?

And the other question is from the full Bill and Keep, other than the by-passing by integrated operators, what are the other dangers that you see? Why do you think it’s so negative? And if you could confirm that you are within the band of the partial Bill and Keep. Thank you.

Well I think Arcadio can elaborate a little on the EBITDA. I will answer to the full Bill and Keep and integrated operators issues. Well, as I said before, I don’t believe that the full Bill and Keep will be implemented in Brazil, mainly because both fixed and cellular operators are not impressed. This could be interesting in the first place for the integrated operators, but the degree of fraud and the degree of conflict between cellular not integrated, and fixed with cellular integrated, will be tremendous, as we saw in France --

With the bypass?

Yes, that will be difficult. So, that’s why I believe that this issue -- the most important challenge is, in fact, the interconnection fees that we are now negotiating with the fixed operators and with the Anatel.

What is the deadline?

I believe that it will be possible probably to reach an interesting figure for the cellular operators. But we are still in the final stages of our negotiations, and it’s impossible to disclose figures okay. I am very confident about this process.

What is the deadline? Is it the end of February or?

The deadline, it’s, in fact it was the February 6 or 7, but I believe that it will be possible to finish still the end of this month.

Okay.

Maria on your EBITDA question, we don’t disclose unfortunately our EBITDA margins by segment. But as you can imagine that happens to everyone else - margins on pre-paid are lower than margins on contract customers.

Arcadio, but in the past I remember when you used to give more information, that percentage was quite high. It was something in the range of 50 to 55%. That was probably 3 years ago. I presume that has come down, is it significant still, is it as significant?

I couldn’t give you that information right now.

That’s alright, thanks a lot.

Okay.

I have a final question. Could you go through the agreement between Telefonica and Portugal Telecom and Vivo there was a change in the possible listing of Vivo?

No nothing, nothing has changed according to our information. That’s a question that is best answered by their controlling shareholding themselves. But according to our information those rumors were unfounded.

Okay, thanks a lot.

Thank you.

Thank you. Once again the floor is still open for questions. [OPERATOR INSTRUCTIONS]. We will take our next question coming from [Lars Joyer] of [Wernink Bank].

Hi. My questions are, are you planning on launching dual handsets CDMA GSM if you are planning on that?

And what’s your view in Minas Gerais? Are you still trying to negotiate the frequency with Anatel in the areas you do not operate in Brazil?

Well, in fact we planning to launch CDMA GSM mainly for the international market okay. And in Minas Gerais we are assisting with the Anatel to follow the same procedure that we have succeeded with CBTC in [indiscernible], which means that we are asking, not only Minas Gerais but also [scenarios] from TIM, to allow us to change the current roaming analogue platform, from analogue to CDMA.

We succeed with CBTC, which is a small operator, and we don’t see a reason to not succeed with the support of the Anatel in the Minas Gerais and [indiscernible]. It is, in fact, our first phase of our strategy.

The second phase of our strategy, and we are in fact assisting with the Anatel, is to look for the spectrum in the Minas Gerais market. The A and B band operators are migrating from CDMA to GSM. So they are leaving a free spectrum on 850 according to the regulatory framework and even the general law of telecommunications in Brazil, the Anatel has the obligation to look for this inefficient use of the spectrum, and to recall this spectrum in total or in part from these operators, and to start an auction again. This is our final request, and we are insisting with this tremendously supporting by law and also by the regulatory framework. So it’s our battle.

2 questions on that. The first 1 is, if you have the frequency then you would invest CDMA in both areas, and [indiscernible]?

And the second question do you have an expectation when this could happen?

If you have frequency, we will settle the business case, and according to the figures of the business case we will decide. Roaming platform or a 2 operation.

Do you have any expectation when Anatel could decide this matter?

No.

The final question is regarding the FX. The dollar is weak and I think it’s helping to reduce subsidies for handsets. Do you agree on that? Do you think if the Real devalues, then we might have some pressure in EBITDA this year?

We agree in part on the effect of the dollar in the terminals of course, add some help to the subsidy. But we have also some stock and we need the last value of the dollar. So it’s a mix that we should take into account okay.

Okay thank you.

Thank you. Once again the floor is still open for questions. [OPERATOR INSTRUCTIONS]. There appear to be no further questions at this time. Mr. Padinha, I turn the floor back over to you for any closing remarks you may have.

Well if there are no more questions, so thank you very much for your attention. Thank you very much for your availability and your interest in TCP, in Vivo TCP, and after this conference call, myself and my colleague, CFO, Arcadio Martinez and IR team, will be completely available for to answer independently some questions. Please do not hesitate to contact us. Okay, thank you very much once again.

Thank you, this does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day.