Telefonica Brasil SA (VIV) 2005 Q3 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, Third Quarter 2005 Earnings Release Conference Call. Today with us we have Mr. Roberto de Lima, CEO of Telesp Celular Participacoes, and Mr. Ernesto Gardelliano, CFO of Telesp Celular Participacoes. 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 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 to Mr. Roberto de Lima, CEO of Telesp Celular Participacoes. Mr. de Lima, you may begin your conference.

Okay, thank you. Good morning, ladies and gentlemen. It's a pleasure for us to be with you again, and I will start by the highlights that you can see in slide number two. And we can start by saying that the Brazilian market we consider that is still very competitive. I wouldn't say that the growth rate that we see in the market is a real growth rate.

We feel that more and more this market will be an exchange market, considering that the new customers that companies could attract are now -- have not the same value the customers we have bid for in the past. So our customer base in post-paid grew 9.6% year-over-year, in spite of the growing pressure from our competitors. Our churn remains very low [indiscernible] that the program's aimed at improving the loyalty of our customers, especially the high end have worked.

Likewise, the MOU and ARPU in the post-paid segment have shown positive evolutions. The revenues from data-related services remain at a growth trend, and has reached 41% year-over-year. Margins on the third quarter 2005 improved in relation to the previous quarter, reaching 29.5% for the first nine months of the year, in accordance with the strategy employed and the [productivity] of the quarter.

We can highlight the operating cash flow in the amount of BRL285.2m in the third quarter of 2005, with a growth of 127% compared to the second quarter 2005 and 50.2% over the third quarter 2004. The leadership in terms of availability of services is assured by a wide range of diversified and in some case unique service. As you know, we launched in July the Easy Deal technology, and nowadays we have more than 20,000 handsets sold and some 1,200 [operas] to laptops and notebooks.

On slide number three we can see that we are a very fast growing company. Our base grew 18.4%. We told you that in the post-paid we grew 9.8%, in a market that's now the total market. Remember that the growth in a big base client as ours should be an alliance, from the point of view of the quality of new adds, much more than through a plain percentage. We can see that the post-paid client base has shown a healthy growth, as we said, of 9.6% year-over-year.

TCP has shown its capability to grow in the most disputed segment of the market, a segment that offers high ARPU, MOU and delivers a better return. Nevertheless, the low-end segment of the market was not neglected because of its importance. Actions were taken to avoid price wars, directing our force to the high-return client segment and retention of our anchor clients. This is a strategy of growth that takes in consideration net adds, but with value creation in mind.

This result -- the result of this strategy, balanced between high, medium and lower range, focus on client retention, on brand consolidation and innovation, are already visible. It also confirms our capacity to attract and keep a good distribution network.

On slide number four we can see the evolution of the post-paid net adds, which is remarkable. Almost 164% when comparing to the third quarter 2005, on comparing this quarter with the third quarter 2004. In terms of accumulated net adds for the first nine months of the year, the growth is 156%. The mix of net adds in post-paids is the best-in-class in the market. It's also quite reassuring, representing 23.5% of the total net adds in the third quarter 2005, or 19.5 percentage points over the 4% of the third quarter 2004.

On slide number six -- number five, the 2.8% net service revenue growth on the third quarter this year versus the third quarter 2004 is mainly caused by the increase in the average number of customers, the increase of outgoing traffic, and the increasing use of data-related services and the value-added services, partially offset by the reduction of the inbound traffic that moves more and more to mobile-to-mobile instead of fixed-to-mobile.

Net service revenue remained stable when compared to the previous quarter, due to the reduction in the fixed-to-mobile traffic, in part caused by the effects of departure of bill-and-keep. It's important to note that the inbound traffic reduction affects the interconnection revenue. The lower handset sales revenue is explained by the adopted commercial strategy.

Slide number six. The CDMA technology employed by Vivo is competitive and is state-of-the-art. It's found in China, India and many other countries, with a client volume that is big enough to ensure economy of scale. CDMA has also allowed us to launch 10 different services in the last 18 months, with 65 handset models available, of which 77% are directed to the high and medium segments. The offered range is suitable to the Brazilian market and is very competitive.

To provide Internet access we have four models of cards from different suppliers. We already have a dual mode CDMA GSM model, which is expected to be launched in November 4. This handset has conditions to roam [digitally] all over Brazil, and will be used for travelers around more than 106 other countries.

The product launch is -- has a test in October 1, and we expect next year the market launch in the beginning of November.

In slide number seven, the force to consolidate Vivo brand are important to create a favorable perception of price, cost and relationship in our clients. In slide seven we see our leadership position brand attributes. It shows that our performance is adjusted to the market expectations, and that the program's focus on client satisfaction and retention by means of fidelity programs are the core today.

In the medium and long terms, our own employees from call center and phone distribution network mean more than 38,000, and to the person that effectively conveyed the current image of Vivo companies. The training of such -- those employees is thus being based on intense programs, such as development in leadership, managerial skills, development of sales team, and support to MBA, among others.

We turn to slide number eight. We see that TCP is firmly tied to the proposal of facing the challenges presented by the market, and by its large 19.4m client base that are cared for by almost 100 own stores, more than 1,250 outlets, and almost 1,100 points of recharge. Sao Paulo, Parana, and Santa Catalina estates, that's in tourist centers, have the alternate recharge facility, to start to have the possibility to recharge by means of cards, given the opportunity that these are already reflecting and their added revenues.

The alternate recharge facilities are less expensive to run, but are limited because it requires a specific location. We're continuing there to improve and to extend the coverage with -- together with the distribution network, perform an important role to maintain our competitive advantage. Team quality, branding and a constant improvement of the infrastructure are cornerstones of our strategy.

After Christmas, Mother's Day and Valentine's Day, the Father's Day is marked by intense commercial activity. This year Vivo kept its Father's Day sales campaign from July 18 to August 28. During this campaign, the post-paid entry-level price was similar to Mother's Day and Valentine's Day campaigns. After this period, the price didn't change. Some price prepaid increased afterwards, due to the strategy of focusing our force to attract the most valuable clients, with counter offers to medium and high-end segments.

Slide number 10 states that during the third quarter the emphasis of the promotion plans were given to increase consumption, and to create new client [habits]. All the actions obey the plan based on market segmentation, centering on medium and high end, but not forgetting the lower end. It's so marked by [characters for] Vivo brand. We wish to highlight the deployment of Vivo EV-DO by mid-September. This is an alternate planning tool, to facilitate the relationship with the clients and therefore keep them in our base.

Changing to slide 11, we see that the EV-DO service range, Vivo Play 3G, offered with a handset manufacture in Brazil, will have until the end of the year a handset collection of more than five models from different suppliers. This same evolution, which is a good opportunity to acquire know-how in 3G and other advanced technology, already allows us to offer a state-of-the art service, focused on corporate customers and high-end customers.

We can also compete with Blackberry by means of the Smart menu. We'll wish to highlight as well the high-speed Internet access. CDMA technology is, therefore, a tool capable to compete with advantage in some case, with features not paralleled by our competitors.

In slide number 12 we present a summary of the statistics of the mobile sector published by Anatel, the regulator. It attests that Vivo is the company that presented less complaints per 1,000 customers. We can say that's the same in terms of client care by TCP.

In the regional classification among SMP operators and considering all other indicators, Vivo operators have the best performance among mobile phone companies, as confirmed by the graphs of the SMP, 1 to 12. In August Vivo obtained the best result ever when 90.7% of the 420 Anatel indicators were reached. A handful of only 9.3% of non-confirming.

As seen in slide 13, data service revenue reached 6.2% of net service, due to standardization on our data platform, and on availability of larger range of data-enabled handsets. The monthly average number of SMS has been around 75m in the third quarter of 2005.

We highlighted, among the new VIVO Play 3G products, the Brazilian championship goals just after -- minutes after the game. [Benderenz] one of the open TV channels released on it clips and a summary of the main news of the day through the [indiscernible] TV, training clips and match of the Brazilian soccer team, part to completed results, movies and video clips downloads, and music downloads.

On the next slide, among the services rendered to corporate and business clients through our business units, Vivo Empresas, we can highlight Vivo Zap, that is 3G now with EV-DO, Vivo's [indiscernible] PDA, Push To Talk, the PPT, and tailor-made service plan. The growth registered in this segment is remarkable.

We believe in the high potential of the demand for data services because, if you want comparison, the percentage of data revenues in relation to the total revenues on the average of -- for 17 countries is around 11.7% in the second quarter 2004, while TCP features 6.4%.

We continue, with slide 15, that in spite of a 30.2% growth registered in the outgoing blended ARPU in the third quarter 2005, except for the [30.5%] reduction in relation to the second quarter 2005. It was a due to an 11% reduction registered in the inbound ARPU, due to the trend of the fixed-to-mobile traffic towards mobile-to-mobile traffic, in part due to the bypass.

The reduction in the third quarter 2004 is caused by the growth in the client base, and as already explained, in the migration of the traffic.

If we turn the page, we see that we have some good news in what concerns the ARPU. The post-paid ARPU shown in slide 15 -- 16, is increased 4.9% and 5.8%, in relation to the second quarter this year and the third quarter 2004 respectively.

The outgoing post-paid ARPU has shown a positive evolution, partially compensated by a reduction of the inbound ARPU. You'll see that from 2000 -- third quarter 2004 to the third quarter 2005 our outgoing ARPU and post-paid grew 19%. And from the last quarter to the third quarter, from the second quarter to the third quarter, the growth was of 11% in the outgoing ARPU in the post-paid. Although we don't disclose the numbers for prepaid ARPU, we can say that the -- it has shown a reduction caused by the corrective of the prepaid clients, and partially by the [Orange] side of the company strategy.

Quite the same about the MOU. The third quarter 2005 MOU, as shown in the slide 17, decreased 3.9% in relation to the second quarter 2005. The comparison between the second quarter and third quarter 2004 results in a decrease of 6.5%. Therefore, if we consider the 11.9% decrease when we compare third quarter 2005 with third quarter 2004, we can see that there is a reduction in the rate of decrease.

It's interesting and positive to note that the outgoing MOU is practically stable in relation to the previous quarter. And in relation to the third quarter 2004, the decrease of 6.6%, lower than the recorded in the blended MOU.

In slide 18 we see the growth of the post-paid MOU that was caused by the outgoing traffic, confirming the relevance of the efforts focused on the medium and high-end segments. You'll see that the post-paid outgoing MOU from third quarter 2004 to third quarter 2005 were up approximately 19%. And the same MOU post-paid and outgoing from the second quarter to the third quarter this year grew 9%.

Now, I will turn to Mr. Ernesto Gardelliano, who will comment on the next slides. Thanks for your attention.

Good morning, ladies and gentlemen. Thank you for joining us. I'll be covering the rest of the P&L, basically starting by customer acquisition costs. What we have seen during the quarter is a reduction that came only by a reduction in the [indiscernible] that we have during the quarter.

As many of you have noticed, we had a slowdown at the beginning of the quarter as compared with the campaigns of Mother's Day and Valentine's Day that happened during the second quarter here in Brazil, until Father's Day that was the mid-August. We kept a less aggressive campaign, and out of that we have shifted basically from the low end.

One thing that we understand and we are committed to are paybacks. We have seen that paybacks of the low end were not aligned exactly with our expectations. So basically, we focused more and more on the medium and high end. We at Vivo, being the leader in the market -- in the Brazilian market, we have more to lose. An appetite from our competitors. So basically, 60% of the promotions we had were targeted to the medium and high-end customers, and specifically targetting post-paid and [dataset].

The low churn that we have is the lowest among the peer group; it's still relevant. It is, in terms of percentage, the same level of third quarter of 2004. A small peak compared with the second quarter of 2005. We've been working throughout the different companies that comprise Vivo, trying to synergize and to get economies of scale of our customer base of almost 29m customers today. And we have been cleaning up some things with the migration of billing systems that we've have been doing throughout the region.

If we move over to slide number 20, where we go to the operating costs, we see a decline versus the second quarter of 2005. It not only stems from a reduction in commercial activity, but also of associated costs and network infrastructure, and [internal] costs that we were able to reduce. In relation to 2004, we see a dip here. That basically comes from a [indiscernible] of accounting practice for fiscal [indiscernible] of the controlling company, TCO. That had an impact this year. And also the increase in transmissions links, basically derived from coverage that we've been improving throughout the region.

As I've been telling you in the past slide, we are committed towards integration of not only the billing systems, post-paid and prepaid, also the data warehouse of the Company and front and back office. We are happy to inform you that today, during the third quarter, we have completed the deployment of the financial systems.

Today we have SAP throughout all of the Vivo properties, and we were able to finish the implementation of billing systems, post-paid and prepaid. And we will have those soon Santa Catalina and Sao Paulo area. We are committed to finish with those implementations throughout 2006, basically during the first semester of 2006, in order to cover Rio de Janeiro, Epirito Santo, [Santoretti] and by year-end [indiscernible].

In terms of headcount, basically we are the same. We have been doing some checking, some organizational restructuring, in order to be more agile, trying to work on standard layers. And basically those changes are proving to be effective.

If we move over to page number 21, we can see the improvement in EBITDA margin. These are aligned with the plan that we have put together. We came in with more than forecasted customer base by the end of the quarter.

These margins, although I have seen some comments since yesterday, I can tell you that they align with the plan that we have put together and we have agreed upon with controlling shareholders. But it must be taken into account that we operate in a competitive environment and that competitive environment is also something that we must see. We cannot isolate from what's going on in the market, so basically the retention costs are paying the price. We understand that we will be focusing in them.

And also, as far as revenues or ARPUs are concerned, incoming calls are paying the price too. The decrease is mainly happening through incoming calls. We have a partial bill-and-keep scheme regulated here in Brazil, and the uses of a mobile network in order to terminate and avoid payment of [CTPCs] is really working. So we are controlling -- setting up straight controls on outgoing calls, and trying to set up plans in order to offset the decline in incoming.

Something that is important to mention is that, for accounting purposes, we try to expense all of the acquisition-related costs incurred in the month of activation of new customers.

If we move to slide number 22, we can see that the CapEx evolution is really working. We still believe that the BRL1.4b consolidated CapEx requirements for the year are going to be accomplished. These investments relate not only to the migration of PDMA to CDMA, but also coverage, capacity and improvements in information technology.

In page number 23, here we talk about the leverage of the Company, gross and net debt. Gross debt increased by less than 2%. What we can say here that we saw an improvement of almost BRL251m in the short-term consolidated net debt, which total by the end of the third quarter an amount of BRL672m, which are basically covered by the Company's cash flow.

We have, during this year, as many of you already know, we have shifted the short-term debt into long-term debt by the issuance of debentures. We have a policy that permits 100% of foreign-denominated debts to be hedged, in order to cover foreign exchange volatility. 60% of our debt is foreign currency denominated, and the net debt is basically a conjunction of the liability side of the balance sheet (BRL1.2b in cash and financial investments) and derivative assets and liabilities, which turn out to be on a payable position, about BRL555m. Resulting that the net debt of the Company was BRL4.3b at the end of the quarter.

The increase in TCP's net debt, third quarter versus the second quarter, is due mainly to the current cost of the debt, being comprehensively higher than the amount of cash that we generated during the quarter.

If we move to the following slide, slide number 24, that the slight increase in interest rate of the period, which had a negative impact over TCP's net debt. The net financial expense in the third quarter recorded a reduction of 23 -- more than BRL23m when compared to the second quarter. The variation was caused mainly by lower burden, [when the certain] adjustment of tax is payable, and lower expenses with [TPMF], tax burdening movements of current account, checking account.

And another positive effect that we had during this third quarter was a discount obtained for a prepayment of a tax incentive in one of the control companies of TCO. In comparison with the third quarter of '05 with '04, TCP reduced the net financial expense by almost BRL32m, mainly due to the reduction of expense obtained during the renewal of financial transactions.

And as a consequence of the application of our hedging policy for protection against foreign exchange volatility, we have provided coverage of 100% of the debt. In such matters, the final cost of the foreign exchange debt of almost BRL3b, together with a swap, is now referenced in real, and the cost is basically [indiscernible] in Brazil. The result of foreign exchange debt and derivative is evidenced mainly by the combination of losses of derivatives of about BRL316m -- or BRL315m, and gains from foreign exchange variation of BRL177m as well.

Going to the next page, in terms of net results, we've seen a positive trend of reducing the loss experienced in the quarter. However, that benefit is not proportional to the benefit we have in the EBITDA margin. Basically this is the portion that comes through the activation of plant in process, of fixed assets that we have being building throughout the year that are now in order, so we started depreciating them. Also because of the better financial results, better EBITDA margin and related minority interest, we have higher income taxes related to those expenses that had an impact on the net result.

We have really a strong confidence in the future. That is supported by the strategy that Roberto already explained to all of you, that focuses on customer care, quality, product differentiating, systems and competitive advantages that we have so far.

I will pass on the presentation again to Mr. Lima. For us he will provide with the final comments of the presentation to you. Thank you.

Before going to the final comments, just a word about the social activity of Vivo. You know that we have the Vivo Institute that supports many projects in the benefit of thousands of persons, that's living up to the expectations set by the concept we have about social responsibility.

Vivo wants to make sure that this idea of social responsibility is understood in a broad sense. This idea was materialized through clear and transparent relationships with the community to which we belong. We are talking about customers, suppliers, shareholders, government and many others.

So -- and the final remarks. We all have been aware that the market will remain highly competitive. We maintain our strategy with the firm proposal to create value to our clients, employees and shareholders. We already offer a wide hand of diversified services, with quality and coverage supported by CDMA technology. We offer handset models that are compatible with the market worldwide, and promotions that stimulate with creativity the usage of new services.

Each person that directly or indirectly works to the Company's operator under the Vivo brand is being prepared to be an agent to promote the solidification of the Vivo brand. The result of such a force are lasting, and deserve the special attention that has been dedicated.

The good results, deriving mainly from our outgoing traffic and from post-paid segments, indicate that the attention given to the high and medium-end segment is beneficial to the business in terms of value generation. Therefore, the focus on net additions that register high penetration market segments with low ARPU should be taken with care.

We believe that we maintain the leadership with positive indicators in share of revenues, share of EBITDA and share of cash generation. We made planned investment to extend CDMA technology penetration into regions that still operate with the TDMA technology. We are also implementing standardized IT and IS platforms, as well as promoting network security, which is improving.

The coverage and important competitive advantages deserve the same attention that we dedicate to quality, because it's a factor which needs to be used now. We believe in the Brazilian market and in our performance, which will follow in accordance to our plans.

Thanks. Thank you all for your attention and I think now we'll go right to the question and answer session.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question is coming from Andrew Campbell of Credit Suisse First Boston. Please go ahead.

Yes, good morning. Just in terms of the full year guidance for EBITDA margin, we've been working with the assumption around 30% or so, and now with this margin in the third quarter it looks like that could be difficult to achieve. What do you think is reasonable for a full year EBITDA margin, and what should we look for in the fourth quarter?

Okay. This is Ernesto speaking. If you see the nine months ended by September 30, the margin is around 29.5%. So it's not that ahead from the 30%, around 30% guidance, that both controlling shareholders have provided to the market. So we are still working on that assumption.

Okay. But given that the fourth quarter is typically -- with seasonality and everything, there's typically a fairly big drop, is that still realistic?

It is. It is.

Okay. Thanks, Ernesto.

Thank you. Your next question is coming from Stephen Graham of UBS. Please go ahead.

Yes, hi. Roberto, I have a question for you. We had numbers last night also from Tim Participaciones, which is one of the competitors of part of Vivo in the south, and it's the part of Tim that's in a parallel situation to TCP. They are also the incumbent. They're number one in their market. However, they grew their revenue 14% year-on-year, TCP grew 3%, and they grew their subscribers twice as fast. And their margins were about 600 basis points richer, more comfortable, even though they grew their subscribers twice as fast.

So I'm wondering, I know you're new to the industry but, as you analyze the industry in your new role as CEO, have you benchmarked TCP to competitors? And can you tell us essentially what explains the big difference in performance between, say, a Tim Participaciones and a TCP?

We have considered part of the Tim operation in Brazil, as we are considering the TCP. We could say that our margin -- the margin we present in TCP is almost the margin we present for all our operation in Brazil, which is not the true 14%. When they showed their numbers yesterday, we know that they did not consider the rest of the Tim operation, all over the country, which should show a very low margin. So, much different than the margin they have presented for this -- the part of these results. So I think it is difficult to compare different things.

Okay. Well, how about this, the revenue growth, then? We haven't seen the Tim -- the other part of Tim report yet, revenue growth, but I presume it would be something similar or maybe even greater than 14% year-on-year. TCP is growing 3%. You have inflation in Brazil of 6%, so you're dropping in real terms but you have 18% more subscribers. Mathematically, what is happening that pushes your revenue down in real terms, despite more subscribers?

Yes. What is happening is that when we see the ARPU and the MOU of our post-paid clients and the outgoing traffic, we see that our numbers are much better than the blended ARPU and the blended MOU. So the factors of the revenues that we can control, where we can drive, I think that we are doing very well. But we are suffering from the switch from fixed-to-mobile to mobile-to-mobile, and we have plans for that to increase the ingoing -- the incoming traffic.

But for the moment, it's true that the final result is lower than the outgoing. So -- and we see -- when we know, as we are the first in the market, some of our prices are higher than our competitors. So we have to [right plan] our price while they are maybe increasing prices.

Okay. Thank you very much.

Thank you. Your next question is coming from Vera Rossi of Morgan Stanley. Please go ahead.

Thank you. I have two questions. My first question is about your post-paid base. How many -- what is the percentage of your contract users, or post-paid users, that are under a contract today, so they have a commitment with -- to stay with the Company for a period of time?

And second, can you talk about the provision for bad debt? It's the second quarter that we see a significant increase, so can you just give a little bit more color what you said in the press release, that you were having extraordinary events? Thanks.

Okay. So the answer for the first question is our post-paid portfolio with contracts is around 19% of the total portfolio, and it was higher in the last semester. The new adds that we got in the third quarter are, I remember 23%, so.

And for the second question, I will pass to Ernesto Gardelliano for him to answer your question.

Vera, basically what we have been seeing in TCP is we try to be very conservative, as I mentioned before when I referred to acquisition costs. And especially in TCO, when you look at TCP as a whole, that the jump comes from TCO. In TCO we have been analyzing certain behaviors and we try not to impact those post-paid customers. And basically what we have been understanding was that there was, how to say, an unusual usage of the network, or non-legal use of the network.

So basically, those accounts receivables that were stemming from the past quarter, we covered by an allowance in order not to impact the future result. When we have doubts about the collections, and when we understand that the existing customer, the real customer, is behaving as normal, we segregate those issues. And that is basically the impact that you have seen in this year.

So, let's just see if I understood correctly. So the reason for --

Can you speak louder, Vera, please?

Okay. Can you hear me now?

Now, yes.

Okay. So the reason for the increase in the provision for bad debt, it's because of a problem with fraud. It's not a problem with the credit quality of the customer -- of your customer base?

You said fraud. I said usage that was not legal. Okay. Yes, but it's not a credit [indiscernible] or credit related issue with the customer base.

So the fact that we had some calls that the customers do not recognize as a real call. And while you -- we are trying to identify the origin of the search of these calls, we decided to provision the value, considering that they could be not be paid by the customer. So these are calls that we are in discussion.

But this is related to the problem that TCP had on the cloning, or it's a billing problem? Because the customer doesn't recognize -- is it a billing or a cloning or a separate thing?

It could be one of those or it could be both. This is why we are analyzing. But what we decided to -- while we analyze, we decided to provision.

Okay. And I have another follow-up on the first question. So, of your post-paid base, 19% is under a contract. Is that the number?

Yes.

And of the net adds, you said 23% of your new post-paid net adds on this quarter?

I think -- yes, I think it was that, I have to see the numbers. But I think in the last quarter it was 23%.

Yes. The mix is growing faster in post-paid than in prepaid.

And do you expect to increase this percentage of customers under a contract?

This is our intention. It depends how the market will react but we are focused on that.

Okay, thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Your next question is coming from Andrea Baggio of JP Morgan. Please go ahead.

Hi, good morning. I want to know about this strategy. Is it possible to run the business just for focusing the high end only, or you need to have also the prepaid -- a fairly large prepaid base?

No. It's true that we have to have a very large prepaid base, and we are not saying that Vivo will be a niche company, just focusing on the high-end segment. We have to maintain our channel of distribution very active, for that we have to sell a lot of new handsets. But we are trying to do -- it's not, first of all, not to lose the good customers we have, the post-paid and the prepaid with higher value.

And second, know -- understand that this market is more and more a market that's going to replace handsets, and not only add new customers. So we have to be prepared to serve our clients. They want to change their handsets, and it means that our commercial activity will be not only focused on new adds, but also in the replacement activities.

Okay, thank you. The other question I have is that when I spoke to Ernesto, I was told that the focus was really to become, let's say, more focused on the margin and not so much on the additions. But however, this quarter additions was low but not -- margins were not impressive at the 28% for TCP. What happened and what could happen differently in the next quarters?

Maybe we can consider that the margin is not very high, and we would expect to have a higher margin. But it's the market who drives the margin that we can do, because of the competitive and the importance of the commercial cost. But if we compare our margins with the second and third competitors, we are doing much better than they are, so. And you have to go to compare with the consolidated numbers of the competitors.

So with this environment where -- that we are living in Brazil, we think that the high 20s that we are obtaining now are very good margins, even though we would expect to have more.

So does that mean for next year, even though subscriber net additions may slow down, that means that the margins should not improve that much. Is it correct?

It depends, Andrea, on how the market is going to react. If everybody's clapping on a competitor that is having negative margins, we are not isolated from that. So again, we have a plan here, we have a plan to execute but we cannot take our eyes out of the market. That's the reason, okay?

Yes. But as well as someone else was saying that we have another company that is just a Band A company, such as you. And they're having, let's say, some mid-30s margins. So why is their operating environment different than yours? I'm not talking about the second and third operator. [Indiscernible] a similar company, different region, let's say. You could take Telemig in the [indiscernible], you could take TIM in the south or whatever, but what's different from them?

I don't know. I believe the market is different, let's say. How aggressive the market is here in Sao Paulo, how aggressive the market is in [indiscernible].

Okay.

Or in Parana.

Or in Parana.

Okay. But it could be like, say, more focused on the corporates? Why would be the market so different from one region to other region like that? Because you're also in that region, so you know that region well. So you know if the competition is tough there, because you also have global telecom in Parana.

Yes. But global telecom in Parana is not the leader, let's say. There we have to chase the leader, and by doing that margins are lower, and that comes as a number of the consolidated numbers of TCP.

So would you say that Parana is as competitive a region as Sao Paulo?

No. But we there entered later than the others. And when you see our marketing strategy is not the same in every region of Brazil.

Okay, thanks a lot.

Thank you. Your next question is coming from Patrick Grenham of Citigroup. Please go ahead.

A couple of questions. The first one is, you mention your 28% margin. But it seems to me that you're saying your guidance for 30% margin for this year is still on target, which suggests that you're not going to be marketing very aggressively. But still, all of the answers you've given us are suggesting that your marketing costs are going to go up. You have to fight to keep your prepaid business. You're going to try and add more customers to increase the proportion of post-paid subscribers -- the post-paid subscribers that are contracts from 19%. And you have to try and tackle the fraud problems that you have on your base. How can you keep a 30% margin in that environment?

You know that the 30% margin depends on what the competitors will do. So we have to look at the real numbers of the competitors. You know that the third has a negative EBITDA margin. The second has almost half of the margin we have, and if they will keep to reducing the handset prices and subsidizing more than this year, we'll have to follow. So we'll not lose our market share.

But the problem is that the market is more and more a replacement market. The new customers we could attract are low-value customers. So we should focus on maintaining our portfolio. So if we -- for doing that, we have to lower price, we will do that. I think there is a limit for the competitors' action. I don't think that Claro could keep on maintaining negative margins for more two or three years. And I don't think that TIM will be satisfied with a [16%] margin for 2007 and 2008.

So is your strategy to actually keep the subscriber or keep your market share, because I don't understand what you're trying to say, actually? Because one minute you say you have to keep your market share, and the next minute you say you don't care about those subscribers, you only want to retain them. Even if you run at the current rate of your acquisition cost, just the seasonality in the fourth quarter suggests that you're going to have a 20% margin in the fourth quarter

Because we're talking about a country that is very contrasted. You have very different segments in Brazil. When you ask us what would be your market share next year, we do ask in which segment should we answer this question, because we want a good market share in the mid and high segments. So to consider market share, but number of users or number of access, I think we can make some mistakes if we keep on looking just after number of access.

So that means you're going to allow your share of subscribers to continue to fall?

Pardon? I didn't get your question.

So that means you will allow your share of subscribers to continue to fall?

Number of subscribers, maybe this will continue to fall, as it has been --

And if prices drop in your post-paid base or in your higher-end subscribers, you will lower your prices to meet whatever the market is.

We will try to maintain -- to put our prices in the market level.

Okay. So the message, then, is that the competitive pressure is not over, that you're going to continue losing market share of subscribers and that your prices still have more to fall.

On the other hand, you have prices going down, but we have a full array of services to keep on providing to those customers in order to keep the absolute number of revenues or the absolute amount of revenues that we get from them.

But you've had those services for two years and it hasn't worked so far.

Okay, you're right. But the difference between Vivo and the second competitor in the market is more than 10m customers. And when I look to that, this is what I think we should keep as a difference. And focusing more and more on the high end of the market and doing what we did this quarter, growing 23%, making a mix of new adds of 23% in post-paid and 77% in pre-paid.

So we won't solve this problem in a quarter or in two quarters. I think that we are here forever and we should understand that one day the competitors will not keep maintaining the level of marketing they have nowadays. They will have to pay the investments they did. So we see that they are starting to understand what is happening in the market. TCO said [on the graph] that the customers that he gets in last December he lose until -- he lost until May. So they are trying to understand that they cannot -- we cannot keep on subsidizing the subscribers that we'll lose four or five months after.

Right.

We expect that something will happen to put some more rationality in this market.

Okay. But that means you're depending on the competition to change the market. You're not doing a lot to actually change it.

Well, maybe.

Okay. Thanks a lot. Thank you.

Thank you. Your next question is coming from David Wright of JP Morgan. Please go ahead.

Hello, yes. Sorry about that. I have two questions. I guess, first of all, you mentioned about the integration of the SAP system. Could you possibly define for me, perhaps Ernesto, the three main areas where you see opportunity to cut costs over the next maybe 12 months or over 2006, and possibly give us some kind of indication of the materiality of those cost cuts that could be made?

And then the second question - and I apologize if this has been already asked, I joined the call a little late - is just to get your latest views on how you plan to complete your national footprint and what your latest thoughts are there on how you might go about doing that. Thank you.

Okay, David, let me start. Instead of starting by costs, I would like to -- let me say I will give you my three impressions on that, but first I would like to tell you that we see a huge opportunity in revenue assurance. We have set up our new strategy. We have started providing with results in terms of the different service plans that we have, and now I'm talking Vivo as a whole. In Vivo, we have six different billing systems; different natures, different service plans. We do not operate in the [indiscernible], so basically we have some issues with roaming there. And the main focus is to increase revenue. So that's my task.

Now, when we look below the revenue line, my concerns are now put throughout the processes that we have today, overlaps, and basically the logistics towards the supply chain with CPs. Those are the areas that I'm working on these days.

So let me just add something. You know that we have several new systems rollouts and this month of October we should complete the new -- the rollout of the new pre-paid platform in San Paolo. And the most part of the work has been done in the last two weeks. And this weekend we will finish with the implementation of this new platform.

For the rest, we are implementing the new billing system all over the country and the new front office system as well. And we feel that from these projects we could see some revenues -- not new revenues but we could guarantee the revenues of the Company and reducing some costs at the same time.

In order to consider the second part of your question about the possibilities for Vivo to operate in Minas Gerais northeast, we have been working with Anatel and the Secretary of Telecommunications in Brazil. And we think that we have good news, that before the end of this year they could change the recommendation for the use of the 1.9 frequency that was reserved for the fixed lines and were not used. From January 1, 2006, this frequency could be available to the mobile systems in Brazil. And maybe they will call an auction and Vivo will be present to buy the frequencies of 1.9 and to start making roaming in Minas Gerais, digital roaming Minas Gerais and northeast states. We are very positive on that, but it's true that we depend on the regulations and the government decision.

Okay. That's very interesting. Maybe just a very quick follow-up, just on the revenue assurance. I think I saw a figure of 6% or so of -- as a bad debt expense in Telesp Celular in San Paolo -- in Telesp Celular business, sorry, and that was maybe 3% or so 12 months ago. I hope my numbers are right there. But is that the kind of level that you think you can return to on a 12-month basis? Would that be a realistic objective for you?

David, can you repeat the question, because I don't get it.

Yes. I hope I have my numbers right. My impression was that bad debts -- bad debt expenses at TCP increased to 6.4% of revenues, from maybe around 3% one year ago. So I guess, as you look to improve your revenue assurance, is it realistic, do you think, to return to those kinds of levels on a 12-month view? Would that be an objective of yours?

It is. It is. It already is. And revenue assurance is not only monitoring CDRs from the making of a call until it is billed, but also until it is collected. So, definitely, you're right.

Okay. That's very useful. Thank you, gentlemen.

Thank you. Your next question is coming from Charles Chichester of Cazenove. Please go ahead.

Hi there. I've got a couple of questions. First one is relatively specific to the Rio region. Can you just talk a little bit about your strategy there, where you've held back on SACs and the churn's increased quite a lot. Your custom has improved due to negative net adds in the pre-paid segment, with a growing post-paid base. Can you tell us whether that's due to your more rational strategy or whether you think it's more just the result of the market dynamic down there and the success of the competitors? That's the first question.

I'm not sure I understood your question. Please could you repeat or simplify the question?

Yes. I'm just wondering what your strategy is down there and whether you think that what you've seen there, in terms of your contract base increasing and your pre-paid base shrinking, whether that's due to your -- the way you're going about it in that region, in terms of the sort of people you're trying to attract to your base, or whether you think that's just the result of the market dynamic there? Are you very, very competitive and in an ideal world you wouldn't have been losing pre-paid customers? I'm just wondering what your strategy down in that area is.

I'll try to answer. The strategy to focus on the post-paid, on the contract customers, is just because we had to defend our position. We have the most important customer base in post-paid and contract in Brazil. So we cannot allow our competitors to pick up our customers.

The second point, that we think there is a huge opportunity in small and medium companies that normally use the post-paid and contract services. And we think we have a challenge to develop a good channel for distribution for this kind of market, for this segment of the market, which should increase our participation in the post-paid and contract.

And what concerns the pre-pay, there's some actions that, when we consider that the pre-paid customer is a good customer with a high ARPU, we offer him to pass to the post-paid system in order to try to increase the revenue from these customers.

But it doesn't mean that we haven't done in the pre-paid market. We are still selling a lot of new access to this pre-paid. But trying to find who are the good customers to attract and not to attract any one, because lowering prices by subsidizing the handsets, we can attract customers that will not maintain the level of service we need to get a return on this investment.

Right. So we might see a decline in pre-paid customers, then, in other areas in the market, then, possibly?

We couldn't hear you quite clearly. Could you repeat your question, please?

I was just saying so we might see a similar sort of result, a decline in pre-paid customers, in other areas, then?

Maybe the -- we don't say that the results will go down. What we think is that the number of users of pre-pay that are still in the market, that don't have a cellular phone, is lower every day. So we should be very selective in attracting new customers. But we expect that if Brazil goes well in the next two or three years, the customer base that we have - we're talking about 23m pre-paid customers - we hope that these guys will have more revenues and they could spend more than they spend today. So our way forwards is to keep these customers in our portfolio.

Okay, thanks. Perhaps I could just ask a couple of very, very quick general questions. Just, first of all, from what you're seeing so far, does it look as though Q4 -- or do you think that Q4 is going to grow at a similar level to the first nine months, or perhaps a little bit more?

And second quick question is can you give us an idea of the level of inactivity in your subscriber base?

We would not -- we would rather not to comment on the fourth quarter. We think that this will be a very good season. This Christmas could be very strong and we should be prepared to face the competitors. So this is why we prefer not to comment our strategy.

Okay. Next question please?

What about --

Thank you. Your next question is coming from Mauricio Fernandez of Merrill Lynch. Please go ahead.

Thank you. Just one brief question about the CDMA -- the TDMA to CDMA migration at TCO. Could you tell us -- give us a sense as to the run rate of customers you're migrating per month? And what's your strategy going forward? Are you going to increase that or not? And whether this will result into -- in higher costs for the Company as a whole? Thank you.

The only answer I can give you is that we are balancing the commercial activity and the TDMA/CDMA migration, but, because we have to change handsets and all that, it means investments. And so we prefer not to give you the numbers.

Okay. There's no change in strategy there. What we have been seeing so far is what you should continue to do.

No. We should keep on moving people from TDMA to CDMA.

But not at a faster rate, at the same rate you've been doing so far?

It depends on the commercial activity.

Okay. Thank you.

Thank you. Your next question is coming from Brad Radulovacki of Oaktree Capital. Please go ahead.

Yes, just on that TDMA to CDMA migration. I'd heard that there were maybe 800,000 TDMA subscribers that were cloned that were still on your network. And that was down from, I believe, 1.6m earlier this year. How aggressively are you migrating those subscribers to the CDMA network? When do you think that will end? What costs are you incurring for that? And are those costs going to be replicated after you're done moving those subscribers?

I don't know where your information comes from about the 800,000 cloned customers. If it was true, we're dead, so there is no 800,000 clones. And TDMA and CDMA has nothing to do with clones, it depends on other things. And so we can -- the strategy of going from TDMA to CDMA is something related to efficiency, to cost, to investments, and -- but all the -- both networks are safe. Both networks are authenticated. It has nothing to do with the clones.

And the bad debts that you've incurred, that -- those aren't related to some of this fraud issue? Because it seems you can eliminate that with migrating these cloned users more aggressively to CDMA.

It shouldn't be cloning. If they appear, they are eliminated some minutes or some hours after. There is nothing -- we don't want any cloned users in our files, so I don't understand the question. I think what we're talking about is about replacing handsets that are not authenticable to be clone-proof. So this is something that has been done, and, if we still have some handsets that are not authenticated, I think these will disappear very fast. But it's marginal.

Okay. Thank you.

Thank you. Your next question is coming from Ricardo Silva of Itau. Please go ahead.

Hi. My question has already been answered. Thanks.

Okay. Thank you, Ricardo.

Time for the last question, so.

Thank you. Your next question is coming from [Andre Burrow] of ING. Please go ahead.

Yes, good morning. I have a couple of questions. First of all, when looking at your CapEx level, it's down to 13% of sales in the third quarter. What do you -- where do you expect it to be in the fourth quarter?

CapEx. Basically, we will be achieving the BRL1.4b as a consolidated number for TCP.

Okay.

Yes, for 2005.

Okay. And secondly, when looking at your presentation, it said that your brand is viewed as very strong versus competitors. Why is it, then, so difficult for you to compete in this market? Is it only price what matters?

I think this is a price-driven market. You see that our competitors' margins -- you noted that they are putting all they can in the price. So we have to follow not to -- not only to attract new customers, more than that, to maintain our customers since the market is more and more a replacing market. So I think this is the answer.

And thirdly, if I may - this is the last question - with respect to marketing costs. I think it has been asked, but did you say it is rising for the fourth quarter?

Yes, maybe true, we will not tell the number for marketing costs in the fourth quarter, but since we have Christmas we have to have a good campaign for Christmas. We are launching a new set of handsets with important suppliers, so we'll have to communicate on that. But our market is -- our marketing expenses are in the same level of the industry in Brazil.

Okay. Thank you very much.

Thank you. Due to time restraints, I'd like to turn the floor back to Mr. Roberto de Lima for any closing remarks.

So I would like to thank you all for your attention and for the questions.

I should say that our team is very optimistic for the future. We understand the market here. We understand the restraints at the same time that we recognize that we have several internal challenges in terms of organization, in terms of costs and in terms of efficiency. And we are focusing on that. We are doing a lot on systems, we are doing a lot of new processes.

But more than that, we are doing a lot in terms of human resources. Our training programs, our motivation programs, compensation programs, we are revising all that, trying to maintain the best people in the market with Vivo.

And another point that is very important is what the objective of one of the questions is, to get a national coverage in Brazil, entering Minas Gerais and the northeast. We are also very optimistic in what the government is doing now, what Anatel could provide for the first quarter of 2006. We are following this weekly and we expect to have good news very soon.

Once again, thanks for your attention.

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