Telefonica Brasil SA (VIV) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen. At this time I would like to welcome you to the Telesp Celular Participacoes TCP second quarter 2005 earnings release conference call. Today we have with us, Mr. Roberto Oliveira de Lima, CEO of TCP and Mr. Ernesto Gardelliano, appointed CFO of TCP.

Today we have a simultaneous webcast with slide presentation on the internet that could 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 a question and answer section. At that time further instructions will be given. [OPERATOR INSTRUCTIONS]

Before proceeding, let me mention that forward-looking statements are being made un 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 are linked 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 at TCP, and cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Charles Allen, Head of Investor Relations at TCP. Mr. Allen you may begin.

Good morning ladies and gentlemen. It is nice to have you on line. Here is our news about the second quarter for TCP in Brazil. As you know the cellular market in Brazil is one of the most competitive of the world, especially in the second quarter of this year we had 2 important events - the Mother's Day and Valentine's Day - that make even more competitive the commercial [indiscernible] activity in this quarter.

Amidst the aggressive conditions in the second quarter I think that TCP did its best in order to retain its high value customer base, and to attract new customers. The growth of the customer base relating to the second quarter 2005 was enhanced by a 7.9% year-over-year growth in the post-paid segment, despite of the increasing pressure from our competitors. [That is a healthy growth industry] because joining figures at 1.5% have remained stable - a free statement that the improvements made have improved the lives of our customers, especially in the high end, have worked.

Likewise, the MOU in the post-paid segment has shown a positive evolution. Revenues from data related services has shown an enviable 44.4% growth year-over-year, and the net debt of the Company has shown a reduction in parallel to a [respectful] change in maturity, reducing short term and placing it in the long term.

[Indiscernible] the leadership and distribution coverage of VIVO in slide 3 shows that the few main competitive advantages presented by the Company are the network coverage and capillarity. We have, in Sao Paulo and in the mid-west region of Brazil, important differences compared to our competitors. In terms of distribution network, the same usual maintains the most important distribution network, when compared to the main competitors we have.

The VIVO brand that was introduced in the year 2003 is now a reality and is seen by the customers as the brand that aggregates the largest coverage in Brazil, that has the plans and tariffs more competitive, that offers the best handsets, has the best quality communication, easy to upgrade handsets and is the most experienced Company in the telecom cellular activity in Brazil, more and has the best customer care. You see that all these fundamentals give to VIVO, following a recent publisher in Brazil, the eighth place in the most valuable brands in Brazil.

Turning the page, in the next slide, you see that Top of Mind of VIVO maintains in the level of 48% for Brazil, and 56% for the state of Sao Paulo [indiscernible] Telesp Celular. VIVO is still a premium brand and is growing in the perception of our customers.

The main market actions during the second quarter was driven to maintain the high level segment of our market -- of our customer base. As I told you, the second quarter of the year is very strong because of Mother's Day and St. Valentine's Day, so we invested a lot, not only institutional branding, but also in actions to award the customer, based on the process.

We also developed a series of innovation technology marketing campaigns, that was current advise the launching of 3G technology at the end of June, beginning of July. When you look to slide number 8, you see that in 2004 and the beginning of 2005, VIVO and TCP launched a series of initiatives to sell new products, new data related products. All these initiatives show that, in slide number 9, we see the growth of the net revenues for VIVO ZAP, the data communication product, 166% based on the second quarter 2004. Multimedia Messages, 11 times growth since the second quarter 2004 to the second quarter 2005, and the number of downloads grew 5 times since the same second quarter in 2004 compared to 2005.

As a result of that, you see that it is not only forward of innovation by the innovation, but it implies a new source of revenue for VIVO, and you see in slide number 10 that the [big] related net revenues grew 44% since the second quarter 2004. And it is important to note that if in the second quarter 2004, the data net revenue from over the outgoing net revenue was only 11.4% - in this quarter it's 15%.

In the next slide, you see the post-paid ARPU. It grew from the first to the second quarter by 5.5%. It reduced from last year, due to the customer base growth that you see, as we grew 7.9% in the post-paid segment, but we grew 22% in the pre-paid segment, where the ARPU are lower than in the post-paid. This is why the ARPU grew.

The client base evolution - in the second quarter 2004 we had 15.5m customers and we grew to 19m customers in the second quarter 2005. This means 22.3% year-over-year, and when considering the post-paid, only consider that, quarter-to-quarter, we are talking about 5.9% of growth. The segmentation per client shows us that post-paid grew 7.9%, almost 8% growth from 2004 to 2005, and 25.5% in the pre-paid segment, which gives us the 22.3% growth in the total base.

The SAC was affected by the huge commercial efforts in the second quarter of the year. We grew from BRL129 to BRL159, and compared to the BRL125 of last year. But even though -- this was an intention of the Company to face the competitors that wanted to grow in our post-paid segment. In much more sense the productivity, you see that the range of customers per employee grew 22% since last year. And the ARPU was also affected by the strong commercial efforts. We saw that this chunk of the growth was in the pre-paid segment - 25%, so it is normal that the ARPU decreased. But we see that from the first quarter to the second quarter, we had a small growth which is a positive growth.

The MOU blended in post-paid since second quarter 2004 was quite stable, as we grew 0.4% year-over-year. And from the first quarter to the second quarter it grew 6.6%. Net revenues growing since 2004, 3.3% and 6.1% quarter-over-quarter, and the selling of handsets grew 5.6% year-over-year and 15% from the first quarter to the second quarter, due to the strong commercial activity in the second quarter.

The operating costs, we see that the G&A expenses reduced from BRL119m to BRL81m. The selling expenses, it's clear that this is due to the commercial efforts. The same for the cost of handsets. Personnel costs is quite in line with the inflation [indiscernible]. It's given to the legal correction of wages level in Brazil. And the cost of services rendered is totally in line with the customer base growth.

The addressable costs - you see that it's well managed. If we consider that all the taxes, like Fistel and others, grew from BRL91m to BRL160m, we see that the other costs are quite stable and well managed by the Company. Unfortunately, we cannot manage these kind of taxes, but the costs that are addressable by the Company maintains its level since last year and since the first half of this year.

The EBITDA margin decreased from the first half of 2004 to the second half of 2005, from 38% to 30%. The reason for that is the cost of sales. It means the [indiscernible] we need to the handsets. The EBITDA margin in the first half of 2005 was 30.1%, compared to the second quarter 2004, 35%, the first quarter 2005, 40%, and with the decrease in the second quarter the average is 30.1%.

The total CapEx was reduced in the second quarter, it's a question of time. In the second half of the year it should recover to the same levels of last year. And the CapEx over net revenues was to be 24% in the first quarter, it went to 15%.

And I now I would turn to Mr. Ernesto Gardelliano for his remarks on the finance.

Good morning ladies and gentlemen. Thank you for joining us. I'll be covering debts and financial expenses and net loss. So if we go to slide number 21, we can see there an important change in relationship between short term and long term debt. Short term debt was reduced by almost 50%, reaching BRL1.6b as of June 30.

The main issue related to that change is basically the launch -- the successful launch of our debentures program that was made back in May of this year. The total amount was BRL1b in 2 series, one covering BRL800m, the second one covering BRL200m, differing interest rates and maturities within 10 years.

The net short term debt -- net debt, as of June, is about BRL923m, which is totally manageable and can be easily covered by the operating cash flows generated by the Company. Another policy, the Company fully hedges the foreign denominated debt by means of derivatives contracts. If you look on the right side of the slide, you can see the ratio between net debt and EBITDA going up. That's basically because of the formula and the drop in EBITDA that we had in the second quarter. And again, 5% totally manageable and totally in accordance with our plans.

If we go to slide number 22, we can see that net financial results grew in relationship with the first quarter, and that's basically due to the fact of the increase in the interest rates from 4.18% to 4.56%, but when compared with the second quarter of last year, we see that we had a decrease, and that was basically due to the fact of a reduction in the payment of taxes related with the payment of interest on the owned capital.

If we go to page number 23, I'm talking about the net loss. Net loss is less than proportional in relation to the drop registered in EBITDA. This is an effect of financial expenses and depreciation, and partially counter-balanced by the positive effects of tax benefits and minority interest adjustment that are affecting that.

There is a strong confidence in the future based on our strategy that centers on customer care, quality, [indiscernible] products, systems and attainments of comparable advantages.

I would pass on my presentation to Mr. Lima again, so as to summarize this presentation. Then we will pass on to the Q&A section. Thank you.

So after this second quarter that was characterized by a strong effort to maintain the customer base of VIVO and TCP, while we could see that VIVO maintains its leadership in the region of TCP as well, the net adds at the end of the second quarter was 1.05m [new] customers. And the churn is quite stable. It went from 1.6% last year to 1.5% this year, but when you consider that we have, [a big], the most important customer base in the market, even though our rate of churn is low, it is the lowest in the Brazilian market, the actual value of the losses is very high.

So it means that the Company has to do bigger efforts than competitors just to compensate the loss we have, and to generate a positive net adds. The churn, I consider this to be one of the main important indicators of the quality of the service we render to our customers and this we want to improve, even though in the Brazilian market, 1.5% is already the best [indiscernible].

The market share evolution is, yes decreasing, it is true, but we have a very competitive market [inaudible] the strategy is to concentrate all the efforts in the high value segment of the market. So, at the end of the day we see that our market share and number of users went from 55% in 2004, to 48% in 2005. But 48% is still very hard for a Company that wants to be the leader.

The market share by region, we see that the same numbers are quite -- we see these numbers in Telesp Celular 51%, 49% in the mid [indiscernible] and 38% in the south of Brazil and Panama and Santa Catarina. In the north region of Brazil we have growing from 36% in last year, to 37% this year. This is a region where VIVO was able to grow.

We know that, even though we don't have the numbers, we know that our market share in revenues and in EBITDA is still the more important in the Brazilian market, and now I turn to the other kind of activities that VIVO developed since its activity [indiscernible], so we cannot prevent to be very active in social responsibility activities. So VIVO has developed a [sea of problems] in education, in assistance to people that need. And the Instituo VIVO celebrated last week its first year of existence, and is one of the most recognized non-profitable organizations in Brazil.

The final remarks I could address to you is that VIVO maintains its solid fundamentals. First of all, the customer base, a professional team with quality and expertise in aggressive markets, efficient processes in constant improvements. Here I should say that we have a lot of our investment concentrating on new systems that should be shared by all the VIVO operations in Brazil. This is the first of synergies and a first of saving for the future.

Innovation capacity that is shown by all the initiatives that concerned the data transmission and data communication that not only gives VIVO the opportunity to learn this new technology, but is already producing very important revenues as we showed.

The low churn is something that is a kind of obsession. We should maintain the high level for the Company in order to maintain our customers with us, and to defend from the competitor's aggressiveness.

Our priority is the segmented treatment of our customer portfolio and the new -- and the prospect as well. Development of projects with focus in quality, preserve the key customers and create economy of scale. To develop a wide range of service. To have always the most important coverage network in Brazil. To be the Top of Mind brand and to have the more important distribution network in the country.

So, what we can see is that VIVO maintains its strategies that will focus in maintaining the market share and, at the same time, generating the free cash flow necessary needed to its growth.

Thank you for your attention. We will be glad to answer your questions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Our first question is coming from Vera Rossi of Morgan Stanley.

Thank you. I have a couple of questions. My first question is about the provision for bad debt. Could you talk about what was the increase in bad debt provisions in this quarter?

The second question is about net additions. Could you tell us the level of net additions you expect for TCP and VIVO in 2005, and also what level of Wireless penetration you expect for Brazil by year end '05?

And my last question is on EBITDA margins. Where do you see EBITDA margins during the second half of '05, for TCP and for VIVO as well? Thank you.

Okay, this is Ernesto speaking. I'm going to talk about the first question and it relates to bad debt. I can tell you that we have not changed any accounting principle there, and basically the jump is caused by the intense commercial efforts developed during the second quarter as better controls of usage have been put in place. The jump is basically there. There is not a one-shot coming from the past. It's basically due to the activity experienced during the quarter.

In terms of net adds, it wouldn't be prudent to talk about the second quarter. We have just -- excuse me, the second half. We are just speaking about the second quarter of this year, as well as margins. If we say something to the market it would be -- we would not be responsible on our part, and that would create some expectations that, again, we are now working on this second half of the year. I don't know if you, Roberto, have anything else to say on it.

I think I'm with you, it's too early for us to make provisions on what we expect the net debt for this year and also in EBITDA margin. What I could say is that for entire Brazil, 55% of penetration maybe in 2 or 3 years [indiscernible]. We will show a high rate of growth and VIVO is able to grow [indiscernible] to the Company.

But, in terms of EBITDA margin for the second half, do you expect an improvement relative to the second quarter, or do you expect margins to stay where they are?

You know that we had in the second quarter, the 2 most important events days or celebration days in Brazil, so the commercial activity was very high. If we talk about the third quarter, maybe the Easter margin will be higher because the commercial activity will be lower. But for the fourth quarter, I would like to inspect a little more before telling what my expectations are. And at the end of year, we have Christmas also.

Okay. And just a follow up question on my first question on provisions for bad debt. Could I conclude that your client base is deteriorating, because you didn't change any accounting criteria and your level of bad debt has increased, is that correct assumption?

Your assumption is not correct. What I told you is that the customer base, as it was, did not experience any jump. The jump was caused basically by new customers that were added during that period, and unfortunately we had to disconnect and caused that jump in bad debt. But it's not related to the past -- to the customer base.

Okay, thank you.

Thank you. Our next question is coming from Andrew Campbell of Credit Suisse First Boston.

Yes, hi. I see you made some comments this morning to the local press about a potential for restructuring, and I was wondering, in terms of reorganizing the VIVO assets, what are the opportunities that you see, and is this something that -- could you try to give an idea if you think it would be done through stock or cash or what the think the vehicle would be for doing some kind of restructuring?

Maybe we [indiscernible] will talk about the [tree] in terms of synergy that we see in VIVO. The first of that was the creation of the brand. VIVO now covers all the operation in Brazil including other [activity] for TCP. And the synergy that we included on that concentrates on all the advertising efforts, generates the results of this [indiscernible].

The second question of synergy [indiscernible] systems. Now we have implemented the SATC [control], what relates to accounting systems and finance. And now we are working on the deployment of the billing systems and the front office call center, and we think that this would be finished by the end of the first quarter 2005, and it is a large burst of savings and synergy between -- among our operation.

We are not concerned that the reorganization. We know that these could save money in rough taxes and in terms of accounting and finance management, and we know that the numbers could be very high. But all the decisions on this reorganization depends on the shareholders' position, not only considering the routes of control but also the -- in the minority interests in the Company. So nowadays what we have are some studies on the subjects, but it's something that we don't have for the moment and is scheduled to implement.

And, if there are these tax and financial benefits, what's the rationale behind waiting? Why not do it as soon as possible?

Yes, that one depends on the management. We will do as fast as we can, but it depends on the shareholders' position.

Okay, thank you.

Thank you. Our next question is coming from Rizwan Ali of Bear Stearns.

My question is regarding the new subscribers you are adding. You said that, during the quarter, the new subscribers you had gave you bad debt problems. Do you think you are reaching the point where any additional subscribers you are adding, may give you only a marginal positive NPV, or maybe even going below -- having a negative NPV? And if that's the case, will you allow yourself to follow the market because other operators in the market are adding new customers that were just not add customers?

Well, having a positive NPV is a rule of VIVO and we have been practicing that [indiscernible] customers that could give revenues more than cost to the Company. But, what concerns the pre-paid customers, the risk is too low, but ARPU and the revenues are also too low. It depends on the cost of selling to make this NPV positive.

And what concerns the post-paid portfolio, we have stricter rules to acquire new customers, and as I mentioned about the cost of part of the customers we acquired was very recently, let's say, 1 problem that is not recurring, so we won't see that for the future. But always the VIVO strategy is more and more to segment the customers and also to segment the prospects, is just focus invest in commercial -- in the segments that could have more important value for VIVO.

Would you say you are running out of those customers? Was that your experience in the second quarter, positive NPV customers?

Could you repeat that question, I think --

Do you think you are running out of -- is it hard to find positive NPV customers now?

You know that in what concerns the post-paid segment it's not so hard to find these customers, what is hard is to compete against the 2 other competitors that are very strong in the segment. But we still have a positive growth. You noted that we showed the number of almost 8% growth in the post-paid customer portfolio since last year, so VIVO is growing at the same level of the market in the post-paid.

In what concerns the pre-paid, maybe we will find, more and more, a low level of customers that could not improve our ARPU or in the MOU.

Thank you very much.

But what we have in the portfolio [indiscernible] can say that, for the moment they are good customers.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Guy Peddy of Deutsche Bank.

Yes, good afternoon gentlemen. I'm just trying to understand what the strategy of VIVO and TCP actually is in H2. Because if I look at what happened in H1, actually highlighted in your slide, you try to reduce competitive pressures, but that was not followed by your competitors. Then in H2 you seem to get a lot more aggressive in defending market share. I'm trying to work out if the H2 strategy could defend market share, to continue to have over 20% of net adds, is it a focus on profitability, or should we expect volatility in the strategy like we've had in H1? Thank you.

What happened is that more the customer base of VIVO is big. Even though we have a low rate of churn the additional number of losses in the month are more and more high, so we have to increase our commercial effort just to compensate the losses. VIVO, in total, has more than 28m customers, well over [4.5% per month]. It's not a high rate of churn but, in terms of absolute number of customers, it's higher than our competitors. So, that is normal that we lose part of churn. It is important to keep the high end segment, and to focus our attention in maintaining the high end customers we have in our portfolio.

We know that we won't maintain 50% market share forever. What we want to have, is the more market share in revenues and more market share in EBITDA, and these for the future.

Thank you.

Thank you. Our next question is coming from Ricardo Silva of Itau.

Hi, I'm back. I just would like to stress again this net debt issue. You mentioned in your press release that debt expenses have increased in the quarter, because of the [indiscernible] expansion. Can you explain the more in detail because I don't get it? How the bad debt and the expansion are related, because the bad debt has increased much more than your revenues in general? So I don't understand why bad debt expenses have to increase in a quarter that you expand aggressively, even though it's not reflected directly in revenues.

And the second question is related to that. If the increase in accounts receivable that we saw in [TRO], if this is somehow related to the bad debt increase as well? Thanks.

When Vera asked that question at the beginning of this session I tried to point out that, first of all, there is mix in the growth of the increase in pre-paid and that's normal. And when I'm talking about the intensity of the commercial efforts during the second quarter, I'm talking about VIVO growth. Some customers prove to be not as successful as we could have wanted, and we had to disconnect them sooner than expected, thus causing this bad debt jump in the quarter, specifically from the post-paid. Is that clear?

That's absolutely clear.

And the second question was?

If the increase in bad debt caused the increase that we saw in the accounts receivable. If the increase in accounts receivable is somehow related to the increase in bad debt.

No, because if you have bad debt, that bad debt is compensating accounts receivable. The accounts receivable that we have, we've made our best estimates and that's fully recoverable. Take into account that those accounts receivable, not only taking into account receivables from customers, but from other sources where we have dealers and we have sites and other sources of income that are reflected in the other income in our P&L.

What happened is that, in the second quarter, the accounts receivable, the net accounts receivable, have increased almost -- more than BRL100m, so approximately 22%, 23% in the quarter. And as we didn't see the same amount of increase, the same magnitude of increase in revenues, I start to wonder why you are not receiving from your customers as fast as you did in the first quarter this year. Is there is any problem related to that?

No. The problem has been assumed and that's why the bad debt went up. What I'm telling you is the accounts receivable does not only take into account customers, but also dealers and other companies that we sell.

Okay.

Okay.

Perfect, perfect. Thank you very much.

Thank you. Our next question is coming from Stephen Graham of UBS.

Hi, Roberto, Ernesto. I have a question about the derivatives transactions and foreign exchange hedging. Each quarter you seem to show large losses on derivatives or on foreign exchange and you end up with a net loss, even though we understand that you are essentially 100% on your debt. This quarter, for example, you had derivative losses BRL545m. You had a positive exchange rate variation of BRL376m, so there's a big gap there. Can you explain how that happens?

It happens basically as we said okay. Our policy is to cover 100% of the foreign denominated debt. That's basically recording the changes in exchange rates that we experience during the quarter. And basically taking into account the contracts that we have signed with the suppliers in this case. There is nothing different. There is nothing that does not belong to that specific transaction.

Okay, but it's producing a persistent loss each quarter. You mention suppliers, so I understand that sounds like derivative hedging on handset purchasing, but if it's not for the handset purchasing, it seems strange that you're hedged against foreign exchange movements but every quarter there seems to be a net loss on foreign exchange movement.

Okay, I see what you're saying. I'm new here with VIVO but what I have seen since I arrived is that the real is going -- the dollar is going down and down every single day, except for today at least. We have seen that [now] for the past 3 months, I would say. That's basically the reason.

Okay, I'm it's still not getting to the question. I mean, if the dollar -- if the real has been gaining, then you should be feeling a gain on your dollar debt and a loss on the derivative, on the hedge, which should match and you should end up with a zero. But each quarter there seems to be a net loss, regardless of which way the foreign exchange is moving.

Again, I don't have an answer to that. What I can tell you is that we set the expectations on exchange rates and, according to the fluctuation of that, we have to record losses or gains. At this point, we set those expectations based upon the plans that we have with the Company.

Okay, if you are not satisfied with this we can come later with our hour and see if we have a better explanation.

Very good. Thanks a lot.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Mauricio Fernandes of Merrill Lynch.

Good morning everyone. Thanks for taking the question. My question is regarding retention costs. It's clear from the increase in subscriber subscription costs, and comparing that to the drop in the margin, that you must have increased your retention costs. Can you share with us what your total retention costs are today, maybe as a percentage of revenues or a percentage of total costs, if you can? And what do you think will be a more sustainable or reasonable level of retention costs going forward on the same basis? Thank you.

I don't think we can provide you with the numbers about the level of subscription costs, and it depends on the strategy for each month. It depends on the period in the year. It depends on the segment that we are trying to retain. So we have more costs when you look to the post-paid segment, where you have subsidized even more the handsets, but it's very variable. But this is something that is a secret for the Company, it makes part of the commercial strategy.

Okay, thank you.

You're welcome.

Thank you. Our next question is coming from Charles Chichester of Cazenove.

Hi, it's Charles Chichester from Cazenove. That's just partially answered my first main question. But just, in the area [indiscernible] just for your market share increase [indiscernible] other area. I'm just wondering what the specifics behind that are, whether you are seeing competition from Oi and TIM and Amazonia Celular, or whether it's just due to low penetration in that area, that you're finding it easy to gain market share, or you've [got some] strategic reason for making a specific effort in that area. Thanks.

The most part of Brazil [is still a small region] for the cellular communications in this year. VIVO is the number one to enter so the more the market develops the more we are able to increase our market share. So I don't think I have too much details on that, but we could provide you later.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. Our next question is a follow up question coming from Stephen Graham of UBS.

Hi. One more. Can you tell us how many customers at Tele Centro Oeste are still in the TDMA system and still need to be migrated to CDMA?

No, I don't think we can provide [those numbers] so, as we told you, this is another point that is part of the strategy. Since our competitors are doing the same, so the network coverage now that we keep it under our -- within the Company.

Okay, just asked. Thanks anyway.

Thank you. Our next question is coming from James McKenzie of Fidentis.

Hi, good morning. I apologize if this question has been asked already and you've addressed it, but I was looking to your contract ARPUs. I noticed that the average revenue per minute seems to have fallen quite substantially in your ARPU segment. I was wondering if you could just quickly discuss the reasons for that.

[Indiscernible] this question is about the ARPU, the blended ARPU is that correct?

No, it's more on the contract ARPU. I notice that the ARPU generally has been falling across the VIVO, but the number of minutes has been going up, meaning that the average revenue per minute has fallen quite sharply in the second quarter, and I was wondering if you could discuss the reasons for that.

Well, take it the main reason for that is basically stemming from some promotions that we made [indiscernible] free minutes, but it's not recurring. It's played an impact on the second quarter. Again, we still have some promotions out there covering for this. We have another one that covers for 100 minutes for BRL1, on top of some post-paid lines that covers minimal commitment from the customers. But again, let's say, looking ahead, we are not compromising the network in terms of downgrading revenue per minute.

And something else, we have, as we mentioned in the press releases, we have a constant monitoring of our customers in terms of right planning. We are going to keep the best customers here and, if needed, we are going to keep on improving the offers to them, in order to retain them in our base, but again not compromising the profitability of the Company.

Sure. If I was to paraphrase that, would that be to say that -- I mean this is a promotion that we'll see in the second quarter, but that probably in the third quarter we'll see the reverse effect, for example, probably minutes falling and the average revenue per minute increasing again?

No, I didn't say that. I told you that the second quarter started, we are ending this month of July, we had [ZAP] campaign going on and we had some additional promotions, but this is a cap, the biggest impact on the second quarter, stemming from the 2 campaigns that [indiscernible] VIVO.

Okay.

Thank you. Our next question is a follow up question coming from Vera Rossi of Morgan Stanley.

Thank you. My question is about provisions for bad debt again. When you finance the handsets [indiscernible] to your customers, who takes the bad debt risk - you or the dealer? Thank you. The seller or the dealer? Thank you.

Vera, it is the dealer who takes that risk. We, of course, [indiscernible] the dealers that [indiscernible] on that, but it's not [indiscernible]. It's a commercial expense and it's not reflected in the bad debt.

So, the bad debts that I see under Telesp Celular's income statement, it's only related to service revenue, it's not related to handset sales, is that correct?

Is that correct. There could be a minimum risk of handsets that we sell on ourselves, but the biggest part comes from the dealers, and the dealers take that risk.

Okay, thank you.

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

Hi. I would like to know if you could give us some color what was the effect of the price increase of the VC1 fixed to mobile rates that was nearly 8% in the last month of June, and if we should expect some positive effect of the increase of the [UM] of 14.5% in the third quarter?

As I said there is an increase of 4.5%, but we cannot comment on the 14.5% because not all the operators took this in consideration, and we just had the increase in the VC1 and not in the VC2 or VC3. So we have our numbers on that, but we prefer not to communicate.

Okay, thank you.

Thank you. Our next question is coming from Carlos Sequeria of UBS.

Hi. I have one question on the 3G market campaign. Can you tell us how much it will cost VIVO, the whole campaign throughout the 3G video product service?

No. There is a part of that that is an investment and we cannot tell how much it costs us, and also the operating costs on that. But I would say that it's quite marginal.

Okay, and what is the goal with the 3G campaign? Do you have any number of subscribers that you intend to have signing up for the service, or maybe it's a marketing strategy to reposition VIVO's brand. Can you just discuss it a bit more?

First of all, it's a way for us to test the new technology. Second, it's the way for us to establish a relationship with providers that [indiscernible] -- the content for the 3G operations, like TV networks and games, publishers. And we are learning on that. But we know that there is already a market for the 3G in the corporate business. We have a very successful operation in the ZAP system [indiscernible] we still responded very well to our campaign, and we expect to have some thousands of customers by the end of the year. And we know that this kind of technology will develop very fast, and we will want to be at the edge of this technology.

Okay, thank you.

Thank you. Our next question is a follow up question coming from Ricardo Silva or Itau.

Hi. I just have a question related to interconnection costs. I want to know why interconnection costs have increased so much more than outgoing revenues in a quarter-over-quarter comparison, particularly in the case of TRO and TCP. Will you explain why?

I can tell you this. First of all, the outgoing [indiscernible] that is related basically service plans and payment plans and monthly fees. And the increase in the interconnection is basically offset by bill and keep, the partial bill and keep that we have here.

[Indiscernible] agency have postponed, the partial effects of this scheme. Some analysis anticipated that we could have full bill and keep by the end of the year, that is not true now and that's good news. But again we have to fight for this bill, in order to be compensated properly when using the different networks. But, again, it's because of that.

Okay, so in other words it means that your outgoing traffic now is more unbalanced -- it was more unbalanced in the second quarter than it was in the first quarter, so you had to pay more interconnection costs than for the outgoing minutes generated, than you paid in the first quarter? That is correct?

Yes, correct.

Okay, great. Thanks again.

There are no further questions. At this time I would now like to turn the floor back over to management for any closing remarks.

So, I'd like to thank you all for your participation and it was a pleasure for me and Ernesto to be with you for the first time. We just have 20 days in the Company. But we look forward, very optimistically, we feel that the Company has strong fundamentals like its brands and its customer base. It is the reason the Company has been producing that can provide us the resource for us to continue investing, not only in the growth, but in innovation as well.

We know that we have some source of resources that come from synergies that we could enhance in systems and in the organization that we could foresee for the future. So, maybe we're going to meet again at the end of this quarter with good news. And thank you again. And, if you want, if Ernesto has to say something.

I'd like to join Roberto in again thanking you all. We'll be working hard in order to get good results to meet all expectations in this year. Charles and his team is open for further questions. If you need to get in touch, you have our website, you have our phone numbers, so please feel free to contact us again.

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