Telefonica Brasil SA (VIV) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Vivo Participacoes' fourth quarter 2008 earnings conference call. Today with us we have Mr. Roberto Lima, CEO of Vivo Participacoes, and Mr. Ernesto Gardelliano, CFO of Vivo Participacoes. Today we have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.vivo.com.br/ir. There will be a replay facility for this call on the website. After the Company's remarks are over there will be a question and answer session. 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 Vivo's 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 Vivo and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Roberto Lima, CEO of Vivo Participacoes. Mr. Lima, you may begin your conference.

Good morning, ladies and gentlemen. On behalf of Vivo Participacoes SA we would like to thank you all for attending our fourth quarter 2008 earnings release presentation. In this quarter, as in the third quarter of 2008, our published results are consolidated with those of Telemig.

The fourth quarter of 2008 was another period of major achievements. We started operating in northeast region in the states of Ceara and Pernambuco and extended our coverage and service to more than 3,000 Brazilian municipalities. Having started with the implementation project for our 3G network in the same year this allowed us to close December with the largest coverage in WCDMA which means high-speed data transmission and access to the internet.

This growth was promoted at a high standard of quality service and customer assistance. In December, when the new call center assistance rules became effective we are the only Company in the telecommunications industry showing to be prepared to comply with the new rules. Quality and service and customer assistance, as well as offers on prices in line with consumer [expectations] have contributed to turn Vivo customers into the most satisfied on the market thus reducing unnecessary costs and increasing revenue.

Treading a different path on the market that places focus on expansion of market share, we have made efforts towards strengthening the relationship with our customer base. They were the target for the offers of our best products and service. Satisfied customers do not change to another telephone operator, and more, they attract other customers because they become a spokesman of the benefit to be a Vivo customer. This strategy allows benefits to be achieved.

The financial results in the quarter are extremely significant. From an inorganic viewpoint the net service revenue grew 27% in relation to the fourth quarter 2007 recording BRL3.8b. Allied to a strong [strict] internal controls we have managed to keep our costs at a lower level than the revenue growth generating 6.2 percentage points of additional margin. In the same comparison the net profit calculated in accordance with the corporate law recorded BRL215.5m. From a combined view we are talking about a margin increase of 6.6 percentage points. In December Vivo earned 30 basis points in market share.

However, as much importance as the fourth quarter results is the course of action which made 2008 a year of benchmarking results, the reasons which make us assured that we are treading the self-sustainable prosperous path. Besides the beginning of our operations in the northeast region and the launching of the 3G WCDMA service there was the start up of our coverage in Minas Gerais state.

This and other achievements are based in a strategy that started to be developed in 2005 demanding firm and courageous decisions. We fought fraud and cloning problems, unified systemic platforms and carried out the corporate reorganizations. We made a challenging decision to build a GSM network overlapping the CDMA network in such manner that our customers could be able to talk in the whole domestic territory and in more than 170 countries.

These actions were responsible for giving rise to the 2008 achievements. We affirmed our leadership on the market and in the market share of revenue and the financial results earned in the year are evidence that we did good work.

In slide four we can see that the net service revenue recorded an inorganic growth of 25% in relation to the 2007. Expenses were kept under strict control and despite the significant growth in the customer base they increased by 17%. Thus the EBITDA grew 45% and resulted in an EBITDA margin of 29.2%, 4.3 percentage points higher than the margin recorded last year. The EBIT on its turn showed an increase of 131% and recorded BRL1.4b and in the same comparison the net profit calculated pursuant to the corporate law managed to reverse the negative result recorded last year totally BRL389.7m.

From a combined view we recorded 15% growth in the net service revenue and an increase in costs of a mere 6% in the year, evidencing once again our control over manageable costs and the self-supported growth and profitability recorded during the year. Accordingly the [EBITDA] grew 37% and the EBITDA margin increased by 5.2 percentage points. The EBIT recorded a 118 growth in the period.

Moving to the next slide our commitment [and chase] for excellence has generated results. Here on the slide five are the most recent awards received by Vivo. Top of Mind Internet, Reliable Brands, Best Broadband, Largest Coverage in Third Generation, Best Tariffs and price, Best Call Center. The foregoing are only a few examples of [those] Vivo has gained in the last years.

Moving to the next slide we can say that it was the stress that allied the customer satisfaction that has taken us to a customer base of 44.9m customers and consequently to continue being the market leader with a market share of 29.8% as shown in slide seven. Equally or more important than the market share is the revenue share estimated at 33% showing the [quality] of our customer portfolio. Net addition in the quarter reached 2.668m customers showing that we are successful in attracting customers and our efficiency in the sales channels.

In addition, the main campaign in the period that is Christmas has brought the promotion up to ten times more being focused on attracting and retaining customers and has [turned] Vivo in the leading company in terms of market share of net additions in December with 42% of new customers. Currently, we have more than 10,000 points of sale of handsets and more than 570,000 points of recharge in the main cities of Brazil. The GSM operation has reached more than 67% of total customer base and already records more than 30.4m access.

In slide eight we present the subscription acquisition costs which recorded BRL74 in the quarter, a reduction of 2.6% in relation to the previous quarter and of 24.5% in relation to the fourth quarter 2007. This reduction is related to a drop in subsidy expense and sales of SIM cards and GSM handsets also contributed to this result once they have lower acquisition costs.

Some factors such as efficiency of the sales channels, (inaudible) of offers and the best portfolio of handsets in the industry resulted in the churn remaining under control along the year. The churn rate recorded a reduction for the fourth consecutive quarter and has stood at 2.5%. Our efforts of the customer loyalty building and retention front such as the reward program especially for exchange of handsets also contributed to this reduction.

The churn control is one more indicator of customer satisfaction. Vivo and Telemig represent respectively first and second best rates in terms of customer complaints to Anatel among the operators serving the domestic market. [Teleco] site also points Vivo as the Company which most meets Anatel quality standards with an average of more than 99%. These achievements are the result of intensive investment in process improvement, infrastructure and qualifying training for employees directly or indirectly involved in the relationship with the users.

Slide nine shows the ARPU and MOU variations. Blended ARPU recorded BRL29.1 in the quarter, 1% down in comparison with third quarter 2008 due to the 4.6% down in incoming ARPU. When compared with the fourth quarter 2007 the ARPU fell by 5.8%, a result of more than 20% growth in the customer base and of the pricing strategy to increase the number of active customers.

The Company's growth strategy of selecting qualified customers allows Vivo to have the highly self-sustainable growth in the long term resulting in a better protection of the customer base in periods of crisis, reduction of churn rates and a significant reduction in allowance for doubtful accounts which recorded a drop of 70% in the quarter and 28% in the year. It's also worth noting that the Data ARPU moved up 17% in relation to 2007 led mainly by the postpaid segments.

The sales of Smartphones contributed to stimulate even more the revenue in this segment and strengthening Vivo's strategy of marketing innovation. The Company continued to place its focus on the rational acquisition and maintenance of high and medium-end customers, always seeking positive results from its commercial operations. Blended MOU increased by 6% in the fourth quarter of 2008 over the same period of 2007, impacted by the outgoing traffic of prepaid customers fueled by the usage incentive campaigns.

Now I would like to offer the floor to Ernesto Gardelliano who will comment on our financial performance.

Thank you, Roberto, and good morning to all of you. On slide 12 you can see that net service revenues in 2008 increased by 14.7% over the previous year and 4% over the previous quarter. Data and value-added services revenues grew by 38% in the year accounting for 10% of the net service revenues. Access and usage revenue also contributed with an increase of 13.7% primarily from the growth of total outgoing revenue mainly driven by usage incentive campaigns, which boosted customer satisfaction and profitability by offering a more attractive cost/benefit ratio. Telemig contributed with net service revenues of BRL387m in the fourth quarter of 2008.

As shown in slide 13, SMS and Vivo ZAP plus WAP grew respectively 41% and 37% in the year-to-year comparison. Data revenue plus value-added services in fourth quarter 2008 increased consumption by 21% in relation to the fourth quarter of 2007. The growth in the sales of Smartphones and mobile broadband devices boosted consumption of services such as Vivo Zap, which is the mobile broadband Internet, mobile emailing, access to Java contents and interactivity services with the SMS.

Another service fueled by the growth in the data revenue is Vivo Play, a leader in selling digital format songs in Latin America accounting for an average of 450,000 downloads of songs on a monthly basis. In December we recorded more than 570m pages visited via WAP and more than 7m single users, a growth of 26% in relation to the same quarter of last year.

On slide 14 we comment on our operating costs. The figures show the Company's ability to capture competitive advantages and reduce fixed costs seeking the best cost/benefit ratio for all of its target stakeholders -- customers, employees and shareholders. The cost of services rendered excluding Fistel fee recorded an upturn of 18% in relation to the same quarter of last year. This increase is due to the 12% growth in interconnection costs as a result of outgoing traffic growth driven by usage incentive campaigns in addition to an increase of 17% in expenses with third party services. In comparison with the previous quarter they grew only by 7% while in that same third quarter 2008 these costs were positively impacted by the end of toll billing renegotiations.

The cost of goods sold increased by 7% over the fourth quarter 2007 mainly due to the exchange rate appreciation in the period. In the quarter-to-quarter comparison there was an increase of 17% as a result of increased selling activity, which is typical of the Christmas campaign. Selling expenses remain almost stable in relation to third quarter 2008 and fourth quarter 2007. Once again the recovery of past due accounts receivable impacted the allowance for doubtful accounts, which recorded 1% of the gross revenue in the quarter and reached the lowest rate in Vivo's history.

G&A expenses recorded a transaction of 58% on a year-on-year and 52% on a quarter-on-quarter basis due to the recovery of taxes and settlement with suppliers. Personnel expenses increased by 6% in the quarter and decreased by 7% when compared with the fourth quarter 2007. Fistel fee also moved up significantly in the year-on-year comparison due to the increase in the customer base.

On slide 15 you can see that the fourth quarter 2008 EBITDA totaled BRL1.4b or 42.6% up in relation to the same quarter of the previous year. This EBITDA margin in the quarter reached 32.7%, an increase of 6.6 percentage points in relation to the fourth quarter 2007. On a combined basis the EBITDA in the year recorded BRL4.9b and the EBITDA margin recorded 30.8%, an increase of 5.2 percentage points. This result was impacted by the first quarter extraordinary effect of the settlement of the ICMS tax dispute in Telemig which accounted for BRL238m. Without that effect the EBITDA would have been BRL4.6b in the year-to-date with an EBITDA margin of 29.3% even though it means 30% increase in the year.

The strong growth in revenues due to increase in the customer base and to the usage incentive campaigns, the strict control of our fixed costs and mainly the reduction in the allowance for doubtful accounts due to the credit quality criteria has strongly contributed to the result. This growth was also achieved due to the stability in the cost of goods sold explained by the sales of GSM handsets, which are sold in larger scale and a lower acquisition cost and the growth in the sales of lines without the sale of handsets.

On slide 16 we show our cash flow from operations excluding investment activities. In 2008 we had a cash consumption of BRL533.4m due to the investments made in the period. The operating profit recorded BRL578.6m in the quarter, an increase of 3.8% in relation to the previous quarter. When compared to the same period of last year EBIT recorded an increase of 199%. On the year-on-year comparison EBIT recorded BRL1,837m or a growth of 118%.

We can see on slide 17 the net profit calculated in accordance with the Brazilian corporate law. Vivo increased the net result by 61% reaching BRL215.5m in the quarter. In the year we reversed the net loss and recorded a net profit of BRL389.7m. A dividend proposal of BRL1.096 per share representing a yield of 3.88% based on the December 30, 2008 price will be forwarded to the shareholders meeting for approval.

On slide 18 you can see that Vivo's net financial expense increased by BRL90.7m in the quarter. This increase is primarily due to the charges payable for the financing of the 3G licenses once Vivo has chosen to pay into installments and to the assessment of the fees and (inaudible) taxes on the allocation of interest on our capital. The gross debt totaled BRL8b of which 31% is in foreign currency and 100% protected by hedge transactions. It was partially offset by cash generation, financial investments and derivative assets and liabilities resulting in a net debt of BRL5.3b in the quarter.

The increase in the net debt was directly related to the acquisition of important assets such as the acquisition of Telemig, the start of operations in the northeast, the deployment of our 3G network and the 3G licenses. It is worth noting that despite investments of more than BRL6.5b along the year we recorded a gross debt variation of only BRL3.5b due to the cash generation in the period.

In this period of market uncertainties Vivo has chosen to place its focus on short term liquidity rather than on the payment of the 3G licenses. This financing and funding from structured transactions with Banco Nacional de Desenvolvimento and Banco do Nordeste have caused a change in the debt profile which is now 61% long term.

Slide 19 shows Vivo's investments, which continue to focus on projects to increase the capacity of the GSM network which now includes Minas Gerais, Ceara and Pernambuco states ensuring support to the strong commercial activity in 2008 and providing for high quality services. We have also recorded work in process in the other four states where we have been awarded license to operate. The results of this effort was the leadership in the compliance with Anatel's quality standards, as mentioned before.

Additionally we launched the Wide CDMA network which allows data traffic at high speed and make it possible for Vivo to offer services such as Vivo ZAP, 3.5G digital TV transmission and video call. In the year-to-date Vivo's investments in infrastructure including license and start-up of the Northeast operation, totaled more than BRL4b, equivalent to 25% of the net revenue. Investments in maintenance and expansion excluding licenses came to BRL2.8b corresponding to 18% of the total net revenue. During the quarter investment totaled BRL1.3b.

Thank you for being here with us today and now, I'll ask Roberto to take the lead for his final comments.

Thank you, Ernesto. At the end of the year there were more than 150m handsets in Brazil. There are more people inserted in the networks to which we referred in the beginning of this presentation with further possibilities of income generation, access to culture, information, education, safety and entertainment. That is with more possibilities of developing and evolving themselves. Upon doing so they inject fuel in the development and progress of the country itself.

Our service is essential for people to continue being connected and from these connections to find new opportunities even in periods of economic instability or in crisis. We are [leaving] the beginning of our new era, the era of knowledge and information, of network society and the current context invites us as citizens and as a company and as a country to seriously reflect about the future we want to build. Whether if you want to be ahead of this moment of change from an industrial society to an information society or if you want to keep the old status and stay away from this process.

Investing in a broadband nationwide network, for instance, can make all the difference for Brazil in terms of education, socioeconomic development, inclusion of more citizens in the consumer market. Vivo has selected the first option. We believe in the essential nature of our service. We will continue investing towards increasing our network for our service to have even more quality and value-added, for people to connect themselves each time more and for more people to be able to connect among themselves.

Connecting people is our business. Doing it with the best quality is our focus. Accordingly, we have become trustworthy to our customers, employees, partners, society, our investors and shareholders. These 2008 results deserve to be reviewed beyond their significant figures. They are generated as from a consistent strategy pursued by Vivo in a determined and courageous manner in the last years and which serves as a base for its future in a self-supported growth route.

Thank you for your attention and we are glad to take your questions.

Thank you. The floor is now open for questions. (Operator Instructions) The first question comes from James Rivett of Citi. Please go ahead.

Good morning, guys. Congratulations on the great quarter. I just wonder whether you could give us some guidance on what you expect for 2009, especially after this strong performance that we've seen. Should we expect for ongoing margin acceleration as we move into 2009 and also should we expect the CapEx to be falling next year, as well? Thank you.

Good morning, James. This is Ernesto speaking. As you know as for quite a time we do not provide full guidance for the year. We keep on talking about consistent performance in order to deliver consistent results and again this year specifically we have to keep a more open eye in order to see what's going on in the market. What we can tell you is that we have been doing our homework.

Our focus is still on costs, something that we are able to manage. And in terms of CapEx we submitted a proposal that is going to go to the shareholders meeting on March 19, 2009 that calls for CapEx of about BRL2.6b including only Vivo and plus Telemig. This year that amount was a bit higher excluding licenses and excluding the acquisition of the controlling stake of Telemig plus the two mandatory and voluntary tender offers. And basically that CapEx is intended to grow in the third generation technology, plus the commitments that we have to fulfill once we sign the contract with the regulator for the 2.1 frequencies that we were awarded in April of 2008.

Thank you, that's very clear. Just a follow up on that. You said you need to keep your eyes open on the market.

I'm saying more open, more open than ever.

Sure.

The eyes is always open.

Yes. No, no, sure but does that mean that there are trends that we've seen coming out of America Movil, out of Claro are making you incrementally more nervous now than you were let's say two months ago?

No, I would say that we're not nervous. We are confident on what we are doing. But of course you need to keep an eye because for two quarters in a row their numbers were quite different from ours, so as Roberto mentioned during the presentation, as he made a point in many interviews that he has given, we focus on our customer base. We have now in January more than 45m customers to look after. And again, given the fact that the real jumped down versus the dollar last year that is still putting a pressure on the telephone costs.

We believe that the market in terms of numbers if this macroeconomic scenario is going to deepen that is going to have some impact on the number of gross adds for the year. However, the SIM card only model is still there in place. It's helping us as a matter of fact since there are new phones with triple band and quad band phones that operate in most of the frequencies, so we will keep on working on that.

And once we started working in the past on the structural costs in order to make a more efficient, agile and near to the customer organization again that will make room enough for our commercial activity to keep on being at a pace that will enable us to grow not only in terms of customers but in terms of traffic. So that's [a point]. Loyalty programs are there. They will keep on focusing on that because now we have more customers to take care of.

Perfect. Thank you very much.

The next question comes from Mitchell Collett of Cazenove.

Hi there. Can you talk to us about your dividend policy going forward? The payout rate still looks quite high this year. Should we expect that to continue in future years?

And also on the provision for bad debts, am I right in understanding that some of this quarter's good performance is because of reclaiming bad debts from prior quarters? Or is that the wrong way to think about it? Thanks.

Okay, in answer to question, to the first question, let's say we are not declaring a dividend policy. What we have proposed and the Board approved yesterday and that's going to be submitted to the shareholders' meeting in the coming month is the result of what we felt given the fact that we were able to provide with profitability. We turned the red and we were able to do that again looking at the short term liquidity focus that we express to everyone. We applied for the financing of the 3G licenses with Anatel because we understood that it was better to look after liquidity in the short term.

And if you look at the commitment we have with National Development Bank, the other development banks throughout Brazil and European investment banks, 61% of our debt is now long term. So we were able to declare, to propose this. But we are not saying that this is going to be a moving forward. Again, during 2009 we need to see what the market is going to be looking like. And we will again make an evaluation on the following year, given what the market is provided, what the credit scenario is going to be out there in terms of financing availability, but that doesn't mean that we are setting up a policy.

The second question you asked about uncollectability. Again, we always have recoverability of past due accounts, especially if you look at our performance for the past years. During the fourth quarter and given the fact that in Brazil just after [two] months payment with more cash for our customers, there's a good time, a good period, in order to strengthen our efforts in order to get more money out there. And on top of that this year we started a process with the corporate segment where we were facing some problems, so we were able to overcome them through our Group that consisted not only of the credit and collection people, but revenue assurance billing and the corporate guys, in order to find what was lacking there. And that proved to be very successful.

Okay. Is it fair to assume therefore that you can sustain a bad debt to revenue of roughly 1.4% going forward, then?

I wouldn't tell you that going forward, given the fact that the world is facing a collectability problem. What we can tell you is that for the first quarter we do not expect a jump in the uncollectability levels for the final customers that we have. Yes, indeed, we started facing some issues with our distribution networks where for some of them we had to renegotiate term of payments -- payment terms, in order to help them move with the lack of credit availability from the banks.

Great, thank you.

The next question comes from Andrew Campbell of Credit Suisse. Please go ahead.

Yes, good morning, Roberto and Ernesto. I was just hoping to get a little more color on the operations in the northeast region, how that business is going. Also if there was any negative EBITDA impact from those operations in the fourth quarter? And if you expect them to be EBITDA negative during 2009.

Okay, good morning, Andrew. Northeast is going very well. In October last year we launched two of the six states we had to launch. The first two were Pernambuco and Ceara. And then the first month, the number of sales surprised our team. We sell as much as 2.5 times the numbers we expected to sell. And November and December were two very good months. It's under the expectations we had. And last week we launched two more states, the states of Paraiba and Alagoas. So it means that in the next month we will launch the other two to complete our national coverage.

So operations are going very well. We already have a network that is 2G and 3G network, which means that we are able to accept all the segments in the market from the low level to the high end of the market. And people value very much the Vivo brand. We are now getting to the level of quality of service that we expect to have. And it means that we think we are able to grow.

In terms of EBITDA for the next year for that reason, we wouldn't like to express our regards on that. But I should say that it's under control. So it's the first time that Vivo launched something from scratch. And it was a very good experience.

Okay, great. And another question, just a follow-up, I want to ask. It's about the new call center law that went into effect in the fourth quarter. It appears that there were no one-off items or no increase really in SG&A as a result of that. Was that the case? Or were there some perhaps one-off costs that were embedded in the numbers?

Andrew, let's say we are keeping on looking at our processes in order to improve the cost efficiency of them. Of course, the new decree that started in December of last year has some negatives because we had to adapt new systems in place that in our case were investments that we had to put in place.

I do not know if you were able to look at the results. But out of the telecom industry that is public, there are papers talking about that, Vivo was the only one achieving 93% of the requirements that that decree called for on the very first week that the decree started to be operative. Of course, throughout the year we changed our model with our call center suppliers that enabled us to start recovering part of those costs, and that were able to make us reduce our third party services that had an impact throughout the year, especially during the fourth quarter.

Understood. Thanks, Ernesto.

The next question comes from Alex Garcia of Raymond James. Please go ahead.

Good morning, everyone, good morning, Roberto. Basically my question is regarding the reduction in G&A reported in the 4Q. I read that you guys have reduced it a lot outsourcing. So I was wondering if we -- this has a more permanent characteristic? Or somewhere in 2009 you guys are going to bring back outsourcing expenses? And this is my first question.

Okay, this is Ernesto speaking. That question came also during our Portuguese explanation. And the fact is this. I mentioned about this restructuring, the process of restructuring that made it possible to work on the call center side during the fourth quarter. And it usually happens, you start renegotiating terms with suppliers and make some settlements that based upon the debts that you have, you are able to take that out. There's an important issue that again when you consider the fourth quarter 2007 and the first quarter 2008, management fees ended in August of this year. So there's an impact on that in the fourth quarter as well as when compared with the third. And also the recoverability of some taxes that we were able to apply.

If you look on a looking forward basis, I wouldn't say that we will be able to achieve the same level of expenses moving forward. What I can tell you is that we are -- I don't know how to say it in English, but basically looking at every single angle where there's a possibility, where there is a tax incentive, that will make it possible for us to reduce those structural costs that will enable us for a, I would say, a cushion in the budget that can move that extra amount to the commercial side.

We need to keep on growing. We need to keep on growing not only in terms of customers but in terms of services that we are deploying. Today Vivo is the only one having more than 45m customers. If you look at the banking industry, if you look at other industries throughout Brazil I really do not recall any other company with such a big customer base. Out of that customer base we are able to extract not only value from the connectivity services that we provide, but also in terms of what we are able to do with that base.

Okay, Ernesto, thanks. And just if you guys allow me one more question. I'm just wondering if you guys could give us some idea of the number of cities that are currently covered with 3G technology? And how many clients do you have on WCDMA mode? Thanks.

That number for minutes covered by 3G is 316. So we are the number one in Brazil, in number of minutes [paid]. It means that we are covering more than 90% of the Brazilian population. And the number of users is growing very fast. But they should approach nowadays there's 700,000 users in Internet access. And we have another month that have Smartphones that make some incidental use of 3G. But we shouldn't say that they are only 3G users. So they use one time to another.

Robert, those numbers you have just given, does it involve all technologies that you guys operate including [MVNO]?

Yes. Yes, and MVNO we are now migrating, we are proposing the customers that have the [EVO] and want the next technology that they migrate to 3G. For us, the network -- from the network management point of view it's better to have these customers migrating to the WCDMA. It already includes some old customers of CDMA.

Okay, just my final question, I'm not going to take that long. You guys were doing this on a proactive basis? Or you guys are waiting for the clients to ask to move from video to 3G, to WCDMA?

It depends on the region. In the regions that we need some spectrum we are doing that in a proactive way. In other regions where we have enough network in 3G and GSM we don't do that, we just stack the customer for not having some (inaudible) costs, additional (inaudible) costs.

Okay, thanks, perfect.

The next question comes from Andre Baggio of JP Morgan. Please go ahead.

Hi, everyone. I was looking into the numbers that show that the service revenue growth was bigger than the traffic growth, that should suggest some increasing prices. Can you confirm that's the reality and what's the outlook for price? How can you increase price in a difficult time in Brazil?

And then two effects, first that we increased our numbers in data traffic more than in voice. We grew by 18% the data traffic and revenues, and 14.7% in total. So (inaudible) has to increase revenues more than the traffic.

The other point is that the low end market that comes to Vivo, the new customers we attract, they have a low level. So the mix of these two effects is what gives the numbers we have nowadays. If you look to the ARPU and the MOU, the minutes of use, you will see that we are reducing ARPU but we are compensating that by increasing of minutes of use. So -- and this is what we want to do it, to reduce price and to increase the usage from our customers in order to be more protected against the current competition.

Yes, but there's something else, Andre. When you -- probably you're looking at second quarter and third quarter, we still have some of that. For Mothers' Day we launched a very, very aggressive campaign with minutes of BRL0.05. That promotion was set that day and extended for those customers keeping on recharging their phones and applying for the basis of that promotion. That promotion stayed until October. So basically there's the lack of that promotion that in essence, taking that pressure out, you can assume that there's an increase. There was not a nominal increase. The phase-out of a promotion that we launched for Mothers' Day.

Okay, thank you. And I have a second question which relates to FX. I just want to hear from you what's your view on the impact with the -- if FX remains at let's say 220, 230, what could happen with the handset prices, handset costs during the year? Because in the fourth quarter in the [Senate] you have negotiated a better rate with the suppliers, if that can go on.

And what's also the impact on the CapEx, if it has any impact on the suppliers over there.

So you are right, what happened in the fourth quarter is that we get agreements with our main partners to negotiate the dollar that was convenient for both companies. In the first quarter, we already did our deals for the handsets and we think that we have a good price considering that even though we accept some increase in price in dollar or in reals, the companies, they also reduce part of their margin for us not to stop the market.

So -- but on the other side what we have is that the chip set or it means the SIM card market is growing more and more important for us. So we are selling 45% of new additions with just the SIM card, which will reduce our final subscription acquisition costs. But it's true that dollar will be something very important to be followed during this year of 2009.

Okay, that is the final question. What is the -- what happened with the CapEx in fourth quarter? Why did it go up so much?

The CapEx in the fourth quarter, if you look at performance, usually in the fourth quarter is the more hectic quarter, in order to prepare the company for the following year. That usually happens, you start the deploying a plan at the beginning of the year. And again, when you prepare for the Christmas campaign, it's something that you have to do it in the fourth quarter, let's say. Nowadays we have that network.

We keep on investing. As I said before, we submitted this proposal, submitted to the shareholders' meeting. That's going to happen on March 19. In the case of Vivo Participacoes it's going to be around BRL2.2b. In the case of Telemig it's going to be BRL408m. So overall we are decreasing the amount, the combined amount of what we have invested in 2008. But again, you will see that behavior also happening throughout this year.

Okay. Okay. Thanks a lot.

Welcome.

The next question comes from Peter Lyons of Oscar Gruss & Son. Please go ahead.

Hi, guys. Great quarter. I was wondering if you could mention -- talk a little bit about number portability and what you're seeing in terms of the effect thus far and what you're expecting, I guess, for the oncoming number portability in Sao Paolo, Rio de Janeiro. That's my first question.

Second question is, in the past you mentioned that you don't really actively push your data advertising. I was wondering if you have any plans to more actively advertise your data services in 2009 and if you have the capacity at this point to handle increased usage.

Okay. For the first question about portability, we should say that in total the numbers in Brazil are very low compared to the expectations that Anatel and other markets had for portability. Anyway, we've this month of March, this month of February, Rio de Janeiro now has the portability and in the next month will have Sao Paolo. And we expect that the numbers will increase in Brazil. Sometimes things start happening, when it happens in Sao Paolo, Rio de Janeiro. Anyway, it is very below the number of portability we expect for when we launched the -- when Anatel launched the idea of portability.

In terms of the result for Vivo, we think we are doing great. We have more income customers than -- in post-paid than in pre-paid. We are winners in both segments, but much more in post-paid. It means that the quality strategy is paying off. So people are attracted by this level of service that Vivo has. And this means that we expect that Rio de Janeiro, Sao Paolo will confirm the quality service we have.

The other point about the 3G service network, you know that we launched the WCDMA network later than our competitors. Some of them, they launched that by the end of 2007. We didn't want to launch this service without having the certainty that -- without being sure that we'll have a very good service and quality. And now we think that we already have. This is attested by all the institutes in Brazil that we have the best network in quality and capacity and stability. It means that we are reducing prices, we are pushing the sale of service for the modems and the Smartphones. And we think that sales will increase from now on.

So you guys see WCDMA contributing more in 2009 and you guys are going to push it more actively in 2009, is that what you're saying?

Yes. You can see that our data revenue that accounted for 80% in the beginning of the year, in the end of the year it accounted for more than 10%. So and we expect to increase it even more, the data revenue.

Okay, great, thank you very much.

You're welcome.

The next question comes from Rizwan Ali of Deutsche Bank. Please go ahead.

Thank you. My question is regarding the dividends. In an environment like this where it is a bit of a credit crunch, I'm just trying to figure out why would you want to pay such a large dividend and not reduce your debt or -- especially given the fact that you are now thinking of paying a reasonably high rate for the purchase of licenses to Anatel.

Rizwan, this is Ernesto speaking. Why is -- we never did it before, as a matter of fact, this is the first time that Vivo's going to pay dividends out there. And we wanted to be fair to all type of shareholders, so that's why no matter that the law can call for a minimum dividend, we wanted to again, for a good corporate governance, to start paying our debt. And our debt is with our shareholders as well.

As I mentioned before, our debt is 61% long term. We're able to achieve very good agreements with the National Development Bank and other development banks throughout Brazil and in Europe that enabled us to keep on investing in the network we wanted to have. And today we have been working closely with the financial community. Of course, there's an issue about the price of the financing. But we believe that this will demonstrate the consistency that we have in talking throughout these three years and that it will pay off. We will be paying off debt, but we wanted to do this and again for all of the shareholders, so in essence is part of the story that we've been telling to all of you for the past three years.

One other question. Your MOUs from third quarter, fourth quarter came down a bit more than what we expected. What are the trends you're observing in the first quarter this year so far, a month and a half of this year?

As I mentioned before, the third quarter still had the impact of the BRL0.05 promotion that we launched back in May. In the fourth quarter that ended. And what we see is again what we are looking, looking forward, is that our strategy of keep on fostering outgoing minutes is paying off. We are seeing on a quarterly basis that that performance or that behavior is really moving in the direction that we want to go. And mobile substitution is out there since incoming calls are moving down.

So on the outgoing and to keeping on building our community, it's really providing the results that you are looking for, again now on the incoming side it's something that is going down on a quarterly basis. It's not the -- the path is not the same. We have shown that in our presentation. And that's something that we have to look for in order to keep our revenue stream going up, not only by customers but by all of the additional services that we are providing in order to keep that same following to finance all of the operations and investments that we are proposing so far.

Thank you very much.

The next question comes from Walter Piecyk of Pali Capital. Please go ahead.

Thank you. Ernesto, how much was the recovery of taxes in the fourth quarter that helped the G&A expense?

I would say that not only taxes, but taxes, settlement with suppliers, these new two processes that in 2008 were related to call centers. We started in 2007 with all of the distribution network when we created a special team in order to consolidate, concentrate, to have an adjustment policy. Overall, all of that amount is between BRL60m to BRL70m.

But a lot of that stuff you mentioned does have an ongoing benefit. It sounds like the recovery of taxes is the only item there that may not occur on future quarters.

It's taxes and settlement with suppliers as well.

And that's all BRL60m to BRL70m for the quarter?

Yes.

Got it. The other question is on the margins of the company. You're about 15 percentage points higher than America Movil. You're about ten percentage points or more higher than TIM, who I guess has not yet reported.

They have not reported yet.

Is there any plan to basically take this opportunity since you're outperforming those companies to -- I think -- I guess the word would be -- or you'd say put a foot on their neck and just cut prices all a bit more, since you have the margin ability to do that in order to take this opportunity to take some share since you have the margin ability to do that?

I think that we expect that they will get closer to our margins and we do (inaudible) and the commercial (Multiple Speakers).

They don't seem to be headed in that direction.

Yes, but you know that Brazil over passed 70% penetration. So what concerns the A and B classes, they are -- we have more than 100% penetration. It means that now we are trying to pick up customers one from the other and it costs a lot of money. So we are not including new good customers in the market.

So this is why we will keep our focus on maintaining our 45m customers satisfied, giving them the best opportunity to have best service and products, the example of iPhone. Instead of offering iPhones to the new customers to bring them new customers to our base, we just offer iPhones to our own customers. So we will put focus on maintaining and increasing the level of services that we have for our own customers. And we expect that the other companies that are already very big, they account for more than 35m customers, they will do the same. So because the [concept] is putting some money to the window. And you're not to do -- to use it to do that.

Telemar did have some price promotions. I think they yanked them when they launched the new market. So you don't anticipate in 2009 seeing some of the price promotions that we saw in Brazil in the first half of 2008?

So about that, we did the same. So when we launched our operations in northeast we launched the [2.80] for three months. They tried to conquer the market. We already have then more than 300,000 good customers in the northeast region. And we tried to protect our base. When they launch something very aggressive in Sao Paolo we are able to answer in the same way what we did in the Mothers' Day campaign. So -- and you see that in the month of December, that is the most important commercial period in Brazil, Vivo was able to get back 30 basis points of market share.

I'm just curious, why not use those promotions in the first and second quarter when these guys are struggling and take even more market share? Because they have less ability to react at this point.

Walter, Walter, there's not a magic formula out there.

Right. I'm just curious, why not use those promotions in the first and second quarter when these guys are struggling and take even more market share? Because they have less ability to react at this point.

Walter, Walter, there's not a magic formula out there, there's a very delicate and adequate balance in order to decide how much to invest on the commercial side. One thing that we've been talking quite a lot, and we said that again during our presentation is, market share is something that we are looking for throughout 2008. It was the first year that Vivo lost the less amount in terms of market share but look at our revenue share. We kept on growing in the revenue share piece. So again it's something to be focused, we discuss a lot internally what the strategy's going to be. But take it for granted, if I say here the angle of the Vivo premises with $100 note, someone's going to take me out. I don't know if that's going to pay off. But that's how we operate here.

Okay, just one last and different question. RIM on the BlackBerries. Are you seeing any difference in pricing from them as far as the cost of the unit or even the cost of the monthly service? I know with some of your pre-pay customers which are obviously still the vast majority of your customers, it's difficult to offer that service to them. Has there been any change from RIM on changing the negotiation as far as how much they would charge you per month, offer this -- the email service or the cost of the unit itself?

I wouldn't like to comment on that because we negotiate with RIM every time and we are under negotiations now. But what we could say that the BlackBerry in Brazil is for a segment in the corporate market and in the individual market. Nowadays I think we are between the two or three most important channel of sales for RIM in Latin America, so we have our power for negotiations. But it's true that the product's a very good product and service. It costs -- it's a little more expensive than other alternatives we have. But there is some demand for that. So when I look to the customers, they want to have their BlackBerry. So this is why we keep our good relationship we have with RIM.

The dollar in Brazil increased a lot from September last year. This put some more pressure on the negotiations we have with RIM. But I don't see anything changed. So maybe they will try to land some more simple products to reduce price to get a broader base to sell their product. But it didn't show up yet.

Great, thank you very much.

You're welcome.

The next question comes from Will Milner of Arete Research. Please go ahead.

Thanks a lot. I wonder, could you just give an update on the process, the timing and your own assessment of the likely outcome of Anatel's review of the VUM interconnect rates, which I think is due Q1/Q2 next year.

And secondly, related to that question, what was your total revenues from interconnect in 2008? Either as an absolute number or as a percentage of the net service revenues. Thanks.

Okay, in what concerns VUM that we have signed an agreement with all the other operators that stands for one year, one year and a half more. So in this period of time maybe something could happen from Anatel. But what we have now guarantees that nothing will change in the next 12 to 16 months -- 18 months. But anyway, we are trying to give new models together with the other operations, trying to reduce price for the future. But to maintain the rules for what exists today. In what concern the cost base that negotiation that Anatel should introduce, this will be -- has been postponed once or twice and now I expect for 2010 will we start talking about that again.

So for the second question, I don't think that we will do --

It's better what we have in terms of all of the network usage that takes into account also what we sell to the other carriers in terms of transmission, it calls for about 40%.

Okay. Thanks a lot.

Thank you. The next question comes from Norbert Lou of Punch Card Capital. Please go ahead.

Hi, the current share price of Telemig is lower than what Vivo paid in the acquisition and the tender offers last year, and it looks like the EBITDA growth in the fourth quarter was quite healthy for that subsidiary. Have you considered buying the remaining shares of Telemig and taking it private to capitalize on the cheap valuation?

Let's say the share price -- you're right, but the share price of the whole world went down when you compare with last year. At this point that decision is not on the table.

Is there a timeline for when that decision would be taken?

No.

The next question comes from Brian Rusling of Cazenove. Please go ahead.

Hi, just a couple of further questions. Just given the macroeconomic environment and the slowdown in growth in Brazil, can you talk us through how you are directly seeing that? Whether it is recharge rates or whether it -- you mentioned earlier something about needing to help your distributors.

Second question is, how is Oil attacking Sao Paolo now? Last time we talked, you were talking about them coming in and attacking the low end of the market. Is that still what they're doing, or have they changed their tactics?

And then the third question is, at Telemig the churn level is quite a bit higher than you've got in your own operations. Is this just a period of transition before you get that churn level down to what would be a normal lever level?

Okay, let's go question by question. Number one, when we said that we are -- it's not a willingness to help, it's on a one-on-one basis. What I told is that some of our distributors are facing liquidity issues. So we have to renegotiate payment terms. That doesn't mean that we are subsidizing or doing anything of that model. It's not a policy, we say. It's that the uncertainty period is causing some more pressure and we need to see what type of shoulders those partners have, let's say, whether they are infrastructure that can access other markets, or whether they are small businesses that we have to look after. So that's the number one.

Number second, you -- excuse me, I don't remember the question.

I think it was about Oi --

Telemig. And Oi in Sao Paolo.

In Sao Paolo. And simply that we respect this company, they are doing a good job in Sao Paolo. But they focus the low end market to enter in Sao Paolo, but we are sure that in the future they will try to get some post-paid customers. And we prefer that they do that against our competitors and to Vivo, we are in a different frequency, we are in 850, so it's more difficult for Oi to sell a SIM card to our customers than to -- compared to the other two operators that are present in Sao Paolo. This is a kind of protection that we have.

And in terms of quality, Oi has presented some issues that allow us to communicate on that and to protect our own base. And we still have the leadership in terms of number of users and also in revenues in Sao Paolo. I think that we are defending very well our position, although we know that Oi wants to grow, they will grow, they will take part of the share. And I expect that they will help us to grow the market in Sao Paolo.

I think the third question --?

It was churn in Telemig.

What about churn in Telemig. Telemig doesn't have a no days offer, TDMA customers, that we are migrating to GSM. And since we bought the company, since we entered in the management of the company in April 2008, we will look at very seriously to do portfolio to see what part of the portfolio was not performing. And so we month by month we are doing some disconnections. But nothing that we think that we'll last for the future.

So now I think that we are -- we have Telemig under our own management. We invested a lot in channel distribution that was very, very poor in Minas Gerais. We are increasing the capacity of our network. We will see for 2008 we will have to invest more than we invested in 2008 -- we invest more in 2009, considering that we are increasing the 3G network as well. So I expect that for the future we'll see the churn rate get down. And going to the same level of EVO.

But going back to the first question, in terms of the slowdown in economic growth, you're not seeing any direct impact in terms of recharge rates, in terms of --?

Recharge?

Recharge from our customer base. We're talking about recharge for the pre-paid customers. Before seeing the reduction in the recharge we start doing a lot of promotion, now. We have a kind of sweepstake that's very strong in terms of communication, and I think that we are able to compensate the normal behavior of the customer by promoting, by reducing price, by giving incentives for people to recharge more.

In the past we had -- the lowest recharge coupon we had was by BRL11. Nowadays we have recharge for BRL6 and BRL3, so we are adapting our systems to the new environment we have, and trying to make it easier for the customer to recharge. We increased our point of sales -- point of recharge sales to 570,000 points of sale all over Brazil, so instead of waiting for the recharge to decrease, we started doing something very important last year. We invest a lot of money in the promotions we are doing, so -- and it's paying off.

Thank you.

Okay.

The next question comes from [Luca Stella] of Banco Itau. Please go ahead.

Hi. My question has been answered, thank you.

The final audio question will come from Henry Cobbe of Nevsky Capital. Following that question, Vivo will take some questions from the webcast. Please go ahead with your question, Mr. Cobbe.

Thanks very much for the call. Just to repeat, you mentioned something earlier about BRL238m of one-off that was included in the EBITDA for the full year. Could you just repeat that again, what that number was?

Can you repeat your question, I didn't get it.

You mentioned in the narrative a BRL238m one-off gain in the course of the year. Can you just run through that, which quarter that was, and how that was booked?

Okay. Telemig had in the past a dispute with the state of Minas Gerais, relating to a tax on sales on a specific issue of their services. I think it was access at that time. Although there was a dispute at that time, Telemig kept on making a deposit of that tax on a [judicial] way. So at the beginning of 2008, it was able to renegotiate with the state that pending issue -- pending dispute, so from then on the issue was a taxable issue, so started paying not in a disputed way, but what it was disputed from the past, it was agreed upon and the money was given back. That amount was the BRL238m.

And where was that booked? Under which quarter?

First quarter 2008.

Okay. Okay, so that isn't actually in your pro forma numbers.

Yes, combined numbers.

It's in the full year combined numbers.

Yes.

And is it in the operating line -- above the operating line?

Other revenues.

Other revenues. A BRL238m gain.

Yes.

Okay, and --

It was a gain under cash, and the cash went to the Company.

Okay. And secondly, just also in the text on page 5 of your earnings release, you talk about the on-the-net traffic, and the positive variation of 43.4% and 67.2%, versus 4Q '07. Perhaps, could you give us the traffic breakdown? What percentage of your traffic in 4Q '08 was on net?

Can you tell me the page, because I've --

Page five of the English -- last paragraph. My question is what percentage of traffic -- not just for the variance, but just the percentage share of your traffic that is on net now?

We don't disclose these numbers, sorry.

Okay, well, then, looking at the variance isn't particularly helpful either.

Well, thanks very much indeed for your time. Thank you.

Now the webcast. Can I read it? There is a question from [Fernando Ridedo] from Societe Generale, and says what are the CapEx plans for Vivo going forward? How much shall the company spend in the next three years? How does the company expect to finance it? Has the credit crisis impacted the CapEx plans of the company at this point?

Okay, the -- Our policy is to provide a CapEx guidance for the current or the following year, given the fact that that CapEx number, according to the Brazilian law, must be approved by the shareholders' meeting. So there's a proposal for this year, 2009, that as I said before is BRL2.2b in the case of Vivo, BRL408m in the case of Telemig. A combined number of more than BRL2.6b.

We do not provide guidance on a three-year basis, just one.

And how do we expect to finance that, is basically with the cash flow of the Company. We had at the end of 2008 a gross debt of about BRL8b, but we had cash investments and derivative instruments that applied for a net debt of BRL5.3b. And again, what we plan -- to do it is basically throughout the earnings from the operation.

There's a second -- And it says, has the credit risk impacted the CapEx plan of the Company at this point? No, at this point, it has not.

The second question is from [Alfred Teiron] from [Elemental Advisers]. It says, Vivo has over BRL2.2b of cash on its balance sheet. Can you describe some of the contemplated uses? And also can you discuss whether a purchase of the rest of Telemig shares will eventually occur to make that 100% a subsidiary of Vivo?

Okay, out of that money we proposed a dividend. That is -- was made public and must go to the shareholders' meeting. Part of that is -- cash is in order to meet and, again, in order to keep our short term liquidity policy that we have in place.

And we can discuss whether a purchase of the rest of Telemig shares will eventually occur. The answer is no at this time.

Mr. Lima, does that conclude the answer to that question, sir?

Yes.

Thank you. Then this concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Robert Lima for any closing remarks.

So, thank you all for attending our fourth quarter 2008 conference call and you must know that we are very glad to present the level and the quality of results we present this quarter. We should say that they are not exceptional. It comes from a strategy that was built three years ago. 2008 was very important for Vivo, because finally we left after us all the -- we could call strategy handicaps we had, like being a different technology than that the market has elected.

We entered in Minas Gerais that is the second most important state for telecommunications in Brazil, which was lacking for Vivo. We couldn't be successful if we were not present in Minas Gerais. We already launched the northeast and we should complete our national cover and national commercial operations by the end of the month of March.

So all that, in parallel to a quality strategy that paid off all this time, we can say that Vivo is considered nowadays as the premium company in the Brazilian market. We have the best customers, we have the best indicators, and this is how we are -- on what we are going to base our strategy for the future. Keep on having good relationships with the customers, with employees, with the partners, associates, investors and our shareholders. And so this is what we think will produce our results for the future in an environment that could be a little more challenging than the environment we saw in the last three years.

But, anyway, we have a very good team to face all these challenges, and we are very confident on our future.

So, once again, thank you very much.

Thank you. This concludes today's Vivo fourth quarter 2008 results conference call. You may disconnect your lines at this time.