Telefonica Brasil SA (VIV) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil fourth quarter and year of 2015 earnings conference call. Today with us representing the management of Telefonica Brasil, we have Mr. Amos Genish, CEO; Mr. Alberto Horcajo, CFO and Investor Relations Director; and Mr. Christian Gebara, Chief Revenue Officer. We also have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.telefonica.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 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 Company's management beliefs and assumptions and on information currently available. 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 Company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Amos Genish, CEO of Telefonica Brasil. Mr. Genish, you may begin your conference.

Thank you and hi everyone, I would like to thank you all for attending this conference call for the results of Telefonica Brasil for the fourth quarter of 2015. This time, we'll not go page by page on the documents we distributed yesterday. Our call will have four parts. In the first part, I will share with you my overall perspective about the accomplishments in 2015. In the second part, I will pass it to Christian Gebara, our Chief Revenue Officer to go into details about our commercial strategy and to our CFO, Alberto Horcajo who will discuss our financial results. In the third part, I will comment on our strategy and share my perspective for 2016. And finally, we'll move to Q&A.

With respect to 2015, for us it was a remarkable year and we conclude in this year acquisition of GVT becoming the leader in the Brazilian telecom market, started a quick and effective integration process that enable us to meet our value capture goals for the year. Second, we execute with discipline a data centric strategy that combined with the capture of synergies led to us to deliver robust financial operation results. I will now elaborate on these two topics.

First, with respect to acquisition of GVT and the integration process. I'm pleased with our advance of the integration and synergies capture with GVT. As you might recall, just after the acquisition of GVT, this was completed in May 28, we started to execute a comprehensive integration plan between what we had developed after the anti-trust body's approval of the operations that [been] on March 25. As it was discussed in previous call, our plan confirm the best case of operational synergies that have been estimated during 2014 at the time of due diligence at about BRL9.6 billion in net present value and point out to an upside potential that would allow us -- allow the NPV to reach BRL16.2 billion. That will refer to the best case scenario. As mentioned in the past, in addition to the operational synergies, the operation will also bring significant fiscal gains.

Integration of synergies initiative has advanced according to plan. We have acted on tactical opportunities such as cost selling and on leveraging [networks] complementary, but also have started structural projects to integrate systems, operations, and product portfolio. No less importantly, we acted fast to fully integrate the organization and to build a single and unique performance-based culture. As of today, we operate as one company in all aspects. I would like to point out that we reach all major milestones we set up when we prepare our plan and in some cases, we will anticipate actions that's being planned for 2016. We're also very pleased that we have been able to meet the financial synergies goals we had set for the year. Synergies added BRL98 million to our EBITDA in the period and related investments were of a similar magnitude, the net effect on cash flow was neutral, which is in line with our expectation. In addition, as we leverage [a forecast] from both companies, we were able to accelerate backhaul of mobile sites to improve redundancy and increase capacity of our rational backbone and to avoid fiber overlap in the state of Sao Paulo. All of these synergies represented over BRL600 million in CapEx and OpEx. Based on the advance of the integration process and on the synergies captured so far, management believes it has built the foundation to continue delivering synergies as planned.

Now regarding our fourth quarter and full-year 2015 results. We are pleased to report, we continue outperforming the market as we did in previous quarters. Our topline grew 4.8% in the year driven by our mobile business, which grew 6.2% and supported by our fixed businesses, which grew 2.7%. For the fourth quarter, we grew 3.4% year-over-year with growth of 3.3% and 3.5% on the mobile and fixed business respectively. As you may have noticed, we had slowed down our mobile business topline mainly due to slowdown in the prepaid segments due to the economic scenario in the country. In addition, one should recognize that in the fourth quarter of 2014, we had the peak in prepaid revenues as we started the data blockage for prepaid at that time. That clearly will continue to have an effect also in Q1 2016. On mobile, execution of a consistent data centric strategy with creative product innovation allowed data revenues to grow 34% year-over-year and reached more than 50% of mobile service revenues in the fourth quarter. We consistently increased market share in the postpaid segment during the year.

Our fixed business also had a remarkable year with a double-digit revenue growth in the key services such as FTTX based broadband and Pay TV. Growth in both services was driven not only by solid growth in our customer base, but also by smart monetization that allowed ARPU to grow in both services. We continued to lead the ultra-broadband market. We also took several decisions to contain costs in 2015 and beyond not only executing our synergies plan, but also looking for value driven efficiencies. For example, we adjusted our policy to disconnect non-profitable prepaid SIM card. As a result of this and many other cost [containment] decision, our costs grew substantially less than inflation in the period thus allowing our EBITDA to grow by 3.4% and reach a margin of 30.2%. Our service EBITDA margin reached 34% in the year and 36.3% in the fourth quarter.

In order to continue meeting our customer needs, we invested BRL8.3 billion to expand our mobile and fixed network. We maintain our leadership in mobile coverage where our combined network of 3G and 4G reached more than 3,500 cities with 89% of the population. We also expand our high speed broadband networks in affected areas reaching 16 million homes passed with fiber. Net of the investment I just mentioned, our operational cash flow, EBITDA minus CapEx grew by a robust 12.6%. We are also extremely pleased with our improvement in quality and customer experience. We launched an ambitious quality program with an end-to-end approach. Our customer satisfaction index increased consistently during this year and position us as the operator with the highest attraction in the market and our gap with the closest competitor increased more than four times. I pass it now to Christian who will go in details about our commercial strategy. Christian, please.

Thank you, Amos. Good morning, everyone. I will now present in more detail our commercial strategy and highlight some last year's results. As Amos said, we are very pleased that 2015 was another positive year for Vivo. Our data centric strategy allow us to strengthen our leadership position in all segments and products. Initially, I would like to highlight the four major guidelines that we successfully followed in 2015. First, we reinforced our marketing strategy towards a data centric approach. Second, we presented a very innovative product portfolio anticipating the market. Third, we expanded our fixed business through a robust 3P portfolio combining high-speed broadband (technical difficulty) and fourth, we accelerated a transformation of our customer experience to the development and enhancement of our digital channels. Starting with the mobile business. Revenues went up by 3.3% year-over-year in the fourth quarter, a full-year growth of 6.2%. We saw different patterns in B2C and B2B having consumer mobile business grow 7.3% year-over-year. Business generated revenues, which are service revenues excluding interconnection, grew a robust 11.8%. Our focus on best network experience, innovative offers, superior channel, and aspirational brands continue to pay off granting us absolute leadership in postpaid customer with a 69% share on net adds in the fourth quarter, reaching a 42.4% market share in this segment, 0.8 percentage points more than the previous year. Our differentiated position in the mobile data connectivity reflects as Amos said our superior coverage with more than 3,500 cities with 3G and 4G, 89% of the population, 47% more cities than the closest competitor. Vivo stands out as the leader in 4G with 37.6% market share according to latest Anatel figures.

Following the market trend of voice users decrease, we adopted a data centric portfolio strategy for the consumer and enterprise segments including larger data allowance for all mobile products instead of focusing on voice-based features. For consumers, postpaid plans range up to 30 gigabytes while in prepaid, we now have one of the most attractive offers in the market with 400 megabyte per week. We also launched the data carryover, which we call Vivo Easy in all postpaid plans. This is an exclusive feature from Vivo in the Brazilian markets.

As a result, our mobile ARPU grew 4.8% in the last 12 months, 8.2% if you consider only B2C segment. By the end of 2015, data already accounted for 54% of our ARPU in B2C compared to 40% by the end of 2014. For us, we launched a new simplified data driven portfolio with all services including a very friendly mechanism to headlines and share voice and data allowances. It's already improving data penetration and margins in this segment. Summarizing, we had a solid mobile strategy that has enhanced our leadership position and customer preference reflected also in our postpaid network ability ratio which has been very positive in every single month of the entire year.

Now we move to fixed business on which we were able to accelerate growth with a solid 3.5% year-over-year in the fourth quarter. Our consumers fixed business grew by 5.8% in 2015, driven not only by the growth in the former GVT but also in the Vivo stand-alone businesses in Sao Paulo where we grew 1.6%. We maintain our focus on 3P portfolio. It's only possible with a strong value proposition in ultra-broadband using our fiber network and clearer Pay TV for which we have our IPTV and interactive DTH offers. Our national FTTH, which Amos comment, continued to expand reaching over 16 million homes passed. We maintain our leadership on high-speed broadband with 55% market share in speeds above 34 megabits per second.

Today, our average [speeds is beating FTTX] is already reaching 34 megabits per second. On Pay TV, we're able to maintain a double-digit growth figures in a declining market recording a 10% increase in customer base and a 27% revenue growth in 2015. We have been very selective in new customer acquisitions that along with improved ARPU for better mix of sales in broadband and Pay TV, [over] our ARPU in key fixed business last year. Plus 7% in Pay TV, plus 7% in broadband while maintaining stable and healthy trend levels. It's also important to mention that by the end of 2015, all GVT products are already available in more than 150 TV stores all over the country. We have all our stores in GVT footprint, above 700 stores selling GVT products by the end of April when every product we have a single identity under Vivo brands. The beauty of the segment you are able to capture new large accounts combining both companies' national fiber footprints.

In summary, I would like to highlight our acceleration in 3P consolidating Vivo's position in high-speed broadband and a significant improvements in Pay TV. Finally, I will also like to mention we have been investing considerably in digitalization and digital services. We recently launched our [high tier app], which is called MEU Vivo, my Vivo. In it, customers can control data consumption, review detailed billing information, and schedule business to our stores. Downloads increased by more than 100% last year alone and we have an ambitious plan for 2016. We have improved significantly our online channels reaching more than 30% of FTTX sales through our ecommerce. Last quarter, we launch the first postpaid plan as an app that we call Vivo Easy. Customers can manage everything on the contract using only a very simple and 3P mobile app interface completely changing the way they interact with us. (inaudible) IT services offering leveraged on the best commercial data sector in LATAM and Telefonica's global experience and expertise in digital services. Our IT-related revenues increased by more than 40% year-over-year. I now pass to our CFO Alberto Horcajo who will give you more detailed financial perspective on our 2015 results.

Thank you, Christian, and hello everyone. I would like to start by pointing out that we closed last year with many financial achievements worth mentioning. First, a smooth, fast, and comprehensive integration of Vivo and GVT. Amos has already explained it, but I would like to reiterate that much more than the mere integration of two companies, the acquisition of GVT has been transformational for our culture and market positioning. In a record time, we have been able to integrate in all fronts with the legal merger planned for April 1 while maintaining the focus on the operation and already capturing synergies mapped for the second half of 2015. Besides preferring the companies to meet all objectives we have for 2016 and beyond. Second, a cost evolution in 2015, well below inflation for the period reflecting our relentless focus in efficiency and the capture of synergies. Last year, we successfully managed significant cost challenges, which were reflected in high inflation, contraction in disposable income, energy price hikes, and the strong depreciation of the real. In this context, we were able to overhaul partnerships, re-think and re-deploy parts of our consistent commercial strategy as Christian just pointed out, leverage the joint operation and enhance our credit and collection practices. The result has been a continued growth in commercial costs and personnel expense as shown in the presentation while bad debt returned during the fourth quarter of 2015 to the levels we were managing a year before, close to 2.5% of net revenues. With expenses rising at roughly half the prevailing inflation rate combined with an annual increase in revenues of 3.4% in the quarter, which is an increase of 6% in EBITDA securing a 31.9% EBITDA margin in the quarter reported. While excluding handset activity, our margin exceeds 36% in the quarter as Amos mentioned in the introduction.

Third, CapEx execution in the year strictly in line with our guidance even with significant exchange rate deterioration. We executed CapEx as planned prioritizing the projects with high returns and which further improve our differentiation in perceived quality and network advantage creating sustainable conditions for Vivo to continue to gain volume beyond our share of customer base. Consequently, CapEx in 2015 reached BRL8.3 billion, just short of 20% of sales. With the increase of less than 1% over the previous year figure.

Finally, cash flow from the operations growing at double-digit and sustaining a robust balance sheet. Thanks to financial discipline and understanding shareholders? expectations, we managed to grow operating cash flow three times as fast as EBITDA in 2015. We closed the year with an even more solid financial profile, to face with optionality different market scenarios while potentially sustaining a steady income distribution. In 2015, close to BRL4 billion were paid out to shareholders. As of December 31, net debt stood at BRL4.6 billion, down 36% year-over-year and representing just 0.36 times the trailing EBITDA of the previous 12 months and around 4% of the total asset base. Since this is my last quarterly release acting as CFO of Vivo, I want to share my appreciation for your continued attention and kind feedback over the last three years of [foreign] exchanges. I am convinced that David Melcon who will assume the CFO role in the near future will take them to a higher level. With this, I pass it on to Amos for his final comments prior to the Q&A as I also celebrate what in my experience has been a very rewarding partnership. Thanks a lot. Amos.

Thank you, Alberto. I would like to thank you for your leadership and commitment to Telefonica Brasil over the last three years. We will miss you and wish you success in your new role in Telefonica Group. I would like also to welcome David Melcon as the up and coming CFO of the Company.

I would like to share with you some perspective about the context of our business and about our strategy and plans going forward. As all of you know, [relevant forces are playing] in the telecom market in Brazil. One, the Brazilian telecom market has entered into a phase with slower growth than in the past. Two, the country's macroeconomic situation continues to be challenging at least in the short-term. And three, just as in other countries, consumers are migrating fast from voice to data and digital services. With this context, by year-end 2015, we launched a refined strategy for Telefonica Brasil which aims to improve the long-term stability of our business model and meet customers' expectation and it is based on six pillars. One, provide the best mobile and fixed broadband connectivity to maintain our competitive advantage. Two, put the customer as the center part of value proposition with excellence across the entire customer journey. Three, innovate, integrate, and [convergence assets] from 3P to 4P and 5P in all segments. Four, leverage the potential of big data to optimize the business to scientific and fact-based decision making. Five, accelerate the transformation of our business to end-to-end digitalization. Six, simplify, optimize, and better allocate our resources. We believe that a disciplined integration of this strategy will allow us to create more value to shareholders and become more relevant to our customers. We will elaborate on this strategy in future investor events.

Now, before going to Q&A, I would like to share with you my thought about 2016, which I expect will continue to be a positive year for Telefonica Brasil due to the following four factors. One, we continue delivering aggressively on our data centric strategy. Two, we will deliver additional key milestones related to the integration and synergies. Three, we'll obsessively continue increasing the efficiency of our operations and optimize our CapEx allocation. Four, we deliver a good prospects of positive changes in the [fixed concession] model.

Now let me elaborate on each one. First, with respect to our data centric strategy, we plan to, first, continue delivering attractive and innovative mobile products and facilitate customers' migration to data. Second, introduce caps for data usage in fixed broadband, bring financial benefits and improving customer experience. Third, continue to gradually extend our 4G coverage to reach almost 60% of the [population] by year-end with a smart and value based approach and continued penetration of 4G devices, which in our case stands at around 20% of smartphone customer base and the future availability of efficient and cost effective 700 megahertz spectrum.

We believe Vivo has the best 4G spectrum in the market, which will allow us to provide the best capacity to our customers, which mean less sites. We will invest BRL8.7 billion in our networks and system in 2016 plus about BRL200 million related to Spectrum we acquired recently. Second, we expect to reach key integration milestones in 2016 and among others, we will. Final transformation of the fixed business, migrating Vivo's fixed customers to GVT's IT and operational systems and launching an integrated national 3P portfolio. Second, to provide our top customers with in-house field services and customer care. Third, unify our brand into Vivo. Fourth, launch [quad play offers] during the year.

These milestones will bring additional value and convenience to our customers, simplify and improve customer service, strengthen our position as a key player in the high value segments and [growth of the] fixed business. Third, we'll maintain our latest focus in cost contention with several projects to increase efficiency and reduce waste. With respect to CapEx, we are pleased to mention that during 2016, we finalized negotiation with all key vendors for co-network, which allows us to secure deployment of dollar-related CapEx in favorable terms similar to what we had in 2015 minimizing impact from exchange rate variation we had in 2015. Fourth, we believe there are good prospects of positive change in the fixed concession model, which might be updated to include lighter obligation, bring benefits to our operational model as well as improving the long-term visibility of the concession.

Having said that, I would like to point out that during 2016, we'll mostly emphasize EBITDA growth and service margin improvement due to three reasons. First, as we mentioned already, we expect to have lower handset revenues in 2016 which as you already know will have a meaningless effect on EBITDA. Second, we'll be stricter and will avoid maintaining low margin customers including large corporations on the enterprise market. Third, expect the regulatory reductions in fixed interconnection rate 2016 will benefit our OpEx but also impact our revenues in the fixed business. In summary, our main drive will be delivering robust EBITDA growth and service margin improvement during the year. Now, we can move to Q&A.

Thank you. The floor is now open for questions. (Operator Instructions). Maria Azevedo, UBS.

Hi, thanks for taking the question. Can you please expand a little bit more on how a weaker macro environment will impact the timing and the margin expansion path that will follow the BRL16 billion NPV synergies that you're still confident in delivering? That will be my first question. Thank you.

Thank you for the question. I've said we are in an unstable macro environment and I think the key enemy in that macro environment for us at this stage is the inflation that affecting many cost lines and as such will be able to contain cost to offset the effect of inflation. Clearly we'll have a better outcome of our margins in EBITDA as well as of course any effect on synergies. Again as I mentioned on the dollar side, we still have some dollar variation that was mostly during 2015 (inaudible) feeling comfortable about the delivery of the physical part of the CapEx in our plans so that will also be a positive fact. So dollars inflation are the two elements. Clearly, dollar as we mentioned will secure inflation. It's actually a factor that we should take into account in (inaudible) affect our business model going forward.

We have a good plan. If it would be around the 6%, it will go again well outside of that range. We'll have to see what it's doing to our business and our margin. With respect to synergies, I think they're well advancing and I don't think the macroeconomics has any immediate effect or any relevant effects, the synergies are more operational synergies relating to our executions. On the cost selling side, clearly the macro can affect some of the cost selling revenues that are part of the synergies plan as this clearly market would be weaker than it is today, it might reduce the potential of the cost selling especially in 2016 or maybe even 2017. I hope that answers your question.

Sure, thank you very much. And as a follow up question, Amos, what level of prepaid disconnection are you expecting for the Company going forward and if we should expect the same level of data ARPU growth for the coming quarters as well? Thank you very much.

I would say that by the end of 2016 we'll finalize the disconnection of the non-profitable customer base we had that was carried on for many years. I mean it's kind of policy and policy at the time was I believe relevant and we found in 2015 that this doesn't make any sense to carry on those meaningless customers that are not profitable. I believe that we're in a -- ended 2015 with a stable base and from now on, it's a normal behavior of the prepaid market, which again, I would not predict growth or not, but I believe it's clearly the massive disconnection well behind us.

Susana Salaru, Itau.

Hi, good morning, guys. Thank you for taking our questions. Actually, the first question relates to the new data plans that are including a larger data allowance with the same price. So, in other words, the price per mega has become cheaper. So our concern here is that this move would trigger some price war with other players if they follow the same methodology that Telefonica did. That would be the first question. The second question, we would just like to learn a little bit more about the content cost negotiations, how's it going. And also in the content costs, what percentage of the content cost that is USD-related and how the FX fluctuation is negotiated with the content? That's it, guys. Thank you.

The first question related to the data plans. We increased data allowance in our plans, but also increased price. So we are pretty confident that we are moving, we were moving customers to the higher plans. In the prepaid, we launched a new plan that is much more expensive than the one we used to have and we're moving upgrading customers for 400 megabits instead of the 150 that we had before and the same we're doing the postpaid. So and not considering only the price per megabits, but we're moving our customer base to upgrading their plans with more data allowance. So we're pretty confident that we're in the right direction.

If I may, our concern here is that if a customer use BRL200 per month with some data allowance, they would the same amount of money with a higher data allowance. So basically what we're doing, we're using the same -- you're going to receive the same amount of revenues, you're just giving away more data allowance and that you indicate the mark that they have to react, that's our concern that maybe the effect on revenue is not going to be direct.

Our strategy is not only based in data allowance, we're trying to -- it also comes with minutes off net. So we increased the price and we increased the data allowance and the minutes off net. So we don't compare, it's actually the same price for the same price as you said, the same data. There are some minutes also included and we launched new things also in the plans. For instance, we have data carryover. That's something new that is also asking customers to have higher plans because they can use the data in the next month and also we have a strategy that with data -- with dependence now that we call MEU Vivo that allow customer to add more lines to the same plan. So I think it's a combination of the three things. I cannot compare only data for data and price per mega.

Susana, we will expect this plan to increase ARPU in postpaid and believe that's also ARPU prepaid [has been] in the first question will improve in 2016. So again we will be careful not entering into commercial strategy and we will not elaborate more on that source of it, Susana. Now going to the content cost, I would say that we finalized 30% of the overall content cost. So that's all behind us in good terms as expected. The 70% you can imagine with who it is, still under negotiation. I cannot predict the outcome of that. I think we advance and we expect that's been mentioned in the past that those negotiations will end around April, May 2016. We do not expect it to end earlier. So we are on time with respect to the process. With respect to dollar exposure in the content cost, about 20% of our total content costs are dollar-linked.

Mauricio Fernandes, Merrill Lynch.

Good morning, everybody. Amos, could you please specify I think you did some during your initial remarks about the main destinations for CapEx in 2016. I guess, there will be some integration with GVT, but that's more of CapEx avoidance not CapEx increase. So if you could just, if possible what are the main destinations of CapEx? That will be great. And back to, just a follow-up on Susana's question, a question on the competitive environment. We've been through a few months already since new pricing plans have been out in the market. So wonder if after the end of the quarter since we have the numbers, if you could give us your latest perspective into whether there's been any change to the dynamics in the market, there's been any shift in customer mix or not to other carriers, please. Thank you.

Mauricio, thank you for the questions. First about CapEx, again as I mentioned, our guidelines for CapEx 2016 is about BRL8.9 billion, of which about BRL200 million has been already committed for the spectrum acquisition of 2.5 giga, an option that was in December we won luckily. I think all the key figures that we wanted to win, especially all the state of Sao Paulo, the state of Rio de Janeiro and other key cities giving us a substantial leeway in 4G spectrum and this 700 would be available in those cities. So that was a good step forward there.

The rest BRL8.7 billion will be invested in general terms, [we invest in 2015]. We'll continue to expand our 4G from about 46% to 6% of the population. We'll continue improve our 3G coverage, an improved quality of 3G year. Again, you should remember that 3G is still a very relevant spectrum, only 20% of smartphone are 4G devices. So we still need to count on 3G for a while and we need to make sure our 3G networks is as it is today, best-in-class.

We'll continue expand our fiber networks, some are out of Sao Paulo in few cities, but a lot in the state of Sao Paulo. Fiber, again, FTTX in general will be a key driver for our growth for next year in the fixed business. We see substantial opportunity in the state of Sao Paulo migrating customer in 1 mega to 4 mega to higher speeds, again, 10, 16, 25, 60, but again, that's clearly would be a three, four years plan and we're starting to invest in migrating customer from a capital line and it's going very well, both technically and commercially.

The rest of course, we are B2B. It's a segment that also require CapEx and we'll continue maintain our aggressive profile with respect to acquiring customers with high margin and core networks, again IP and so on. So I think again, I don't know how much details you would like to cover. I think we believe that the process we are going through now which is trying to find how to optimize GAAP CapEx is -- we deliver good results, we mentioned that in last year, we did in a key of big data that help us to optimize network investment in the mobile sites when we finally using data analytics have been able to understand better where to invest in mobile expansion capacity, again, matching it with high ARPU customers. That's about it.

Mauricio, completing like your second question, as we said before, we are pretty confident with our data centric strategy. Now I think it fully responds to what customers are demanding expecting from a Telco operator and for the public figures that we have for Anatel for October, November and December, you should take it mostly like postpaid net adds excluding machine-to-machine (inaudible) we'll add three months and we capture almost 70% of net adds of the market. So we're pretty confident that we're in the right direction.

Thank you. Appreciate it. Amos, just one if I can -- one follow-up on CapEx, everything seems to be done. Looking in the long-term in a way to put the Company in a position to be even more competitive. Just wondering if there is any -- you could share any ideas on when the capital intensity itself, which is around the 20% of revenues, you would envisage it to start declining as if I think this is a critical aspect to investors as well.

I think even last year we mentioned it's a three years program for about 20%. So it's for 2015, 2016, and 2017. We don't have any visibility beyond that but the current analysis we have that after 2015, we should have a reduction in CapEx, again due to synergies and due to the fact that we believe that we will be after substantial phase of investment in the mobile networks in our 3G, will be clearly -- would be, say, end of the cycle of investment and 4G will reach a satisfactory level while 2G will be totally phased out.

So clearly, that's what we see on the mobile side and again we have to take into account that doesn't include all the future plans we see in the mobile market that we have our time to estimate with [BRL1 million] CapEx, especially the IoT, Internet of Things initiative and services that is up and coming and virtual reality 4K, 8K and so on.

So all of that clearly it's not in our current plan. We'll have to follow the market trends coming into here in Brazil and of course 4G will come to Brazil, we'll have to see what it means to us but a lot of uncertainty but all of that clearly would also mean potential in revenues, customers, acquisition and so on and would like of course to always lead the trend. But that's the stuff we have today and products and services we have selling today, I think 2017 will be probably the last year we'll see that level of CapEx again both in expansion is expected to continue for three years even 2018, but we believe again it could be in the lower level but again that's my best estimate at this stage for CapEx trends above 2017.

Michael Moran, Morgan Stanley.

Thank you. Amos, I was wondering if you'd be willing to share with us average data use per subscriber per month in terms of megabytes and what you're seeing and what the current level is at and how that's been trending and also, if you can talk about the ARPU differences between your 4G subscribers and the rest of the base to give us a sense of the ARPU uplift that you're seeing there? And then secondly, I wanted to come back to the comment that was made about the B2C business growing faster than B2B. I just wanted to understand a little bit, if you can expand a little bit more as to why you're flagging this and perhaps help us quantify what the mix of B2C and B2B is in your mobile business. That would be helpful. Thank you.

Thank you, Michael for the questions. About the average data usage, let us look into that and see what we can share with you. It's always sensitive information and we're thinking strategically to share or not but while we are looking to that, let me talk about 4G and 3G ARPU. Our sales is showing that 4G customers having a 15% more ARPU than 3G. So clearly, and as much we will continue migrate customer from 3G to 4G, we'll see an increased ARPU. I believe that just initial, I think it must be even higher than that. Our 4G coverage also improving with capacity. We're adding better experience, customers are more -- spending more time on the mobile networks.

On the other end, I think as I mentioned in the call, we've seen clearly a higher growth of data in the fixed broadband than in the mobiles. It's a trend which I believe is new, it's not just in Telefonica Brasil, it's a worldwide trend. More and more data is going through fixed broadband than mobile. I mean on the gross level, yes and that's why, as I mentioned in my call, we are planning to put caps for broadband usage as some companies already started doing in the world and we'll follow them by the end of the year. So that will [maybe to] monetize data usage, like analysis on the mobile networks or in the fixed networks.

With respect to B2C and B2B, I would say that, again, B2C showing really I would say resilience, high resilience to the economies in B2B from several reasons since B2B having higher effect of the economy. That's for example you see clear number of small companies been closed and less being opened as previous years and all of that clearly we have less customers available in the market. Second, big customers especially big, but all of them -- but the big ones are more aggressively negotiating terms and that of course have effect on revenues, costs and so on. In the end, as has been mentioned, B2C is having a better growth profile than we have in B2B in 2016. I think that trend probably will probably continue in 2016.

Thank you, Amos. And so what's the mix of revenues from B2C versus B2B currently?

On postpaid customer base out of our total [which represented] 20% of them is mixing, control, postpaid, dongles and M2M, okay. It's more or less what we can disclose.

20% is B2B?

That's on number of customer, number of access.

Matthew Rodelar, Barclays.

Good afternoon. Thank you very much. Two questions please. First, obviously a very strong performance across the businesses notably compared to competition. However in Q4, some of the KPIs in fixed were a bit weak on broadband or access line. I was wondering is that just a fluke some disconnections were made on the reason or is it the macro environment taking a further toll on demand for that. And if that's the case, what's the outlook for 2016 specifically on these items? And the second question in terms of the change in concession terms, obviously quite a bit of news flow recently around that. Is it your expectation that the change in concession terms in fixed could happen in 2016 or you think that can be delayed? Thank you very much.

Thank you for the questions. Clearly, about the disconnection we have in the fixed business, it was resulting of alignment, verification of disconnection policy between GVT and Telefonica as part of the integration process. It's just clearly was about how quickly disconnect different customers once policy was aligned, disconnection happened in Q4 mostly and you would not expect to see it beyond that in Q1 and beyond. So clearly, we are done with that and as a business, really any effect on the revenues itself has to complete on the ARPU and revenue growth. So, it clearly was a really technical cleanup of alignment of policy that led to that reduction in the customer base. So we don't expect anything to go beyond 2016.

The change in concession contract I think being in meetings in the last few days with the Minister of Telecom and a player in the industry I believe there is a clear -- I mean determination of four partisan goals to adjust the concession model still in 2016. Clearly, there are various possibilities of those changes and different people have different opinions, that the concession itself should be canceled entirely and move to authorization kept only in some markets there's no competition has been also by the representative of Anatel in the last board meeting of Anatel although to light concessions generally in all the countries. Overall, I think the direction is clear that we expect to a light operational obligations as we have today. That will have the benefit to our short-term P&L.

Again, people expect (inaudible) June this year but I will not be surprised if you allowed some delay on that, but I still expect this year, things will be resolved. Then there was an issue relating to the possibility of the asset, which is a more complex issue. Again, there's clear understanding for all people involved that a clarity is needed and building a security for the operator to invest going forward. There is maybe different opinions, it could be ended, which is a decree of the President. So need to go to a Congress approval which is probably would be longer. So again, that part of the change to the concession could be slipped [to 2017], but it has no effect on the current P&L of the Company as it's an issue that should be resolved in 2025 aspects of the concession when it would be ending. So again, two different aspects of concession, one I think there is clear direction where we want to go and we'll see the outcome of that but I think it is positive and now the (inaudible) to asset in the end of the concession in 2025 we resolve legally is still under discussion. That's the best I can tell you at this stage.

Carlos Akira, BTG Pactual.

Hi, good morning, to Alberto a question. How are you? Before making any questions, I would like to thank Alberto for the friendship and guidance over the past few years and wish you the best of luck on your projects. I hope we can still keep in touch.

So on the questions, the first one on service margins, we can clearly see that service margin has been growing faster than the EBITDA margin and the gap has been widening right throughout 2015. So my first question is how we should look at this margin gap, should we expect especially now that the smartphone base, the smartphone has penetrated the base more, can we expect that this gap will close during 2016? So that's the first question.

And the second one is going back to fiber-to-the-curb opportunity in Sao Paulo, which I know how excited the Company is about the opportunity. So what we're trying to get here is a sense of how big the opportunity might be, how many households you believe you can upgrade in the region, and what type of ARPU improvement you think we can see once these households are upgraded? Thank you very much.

Carlos, thank you so much for the question and your nice words to Alberto. We all share it. About service margin clearly we're pleased with the progress of the margins, which is really the most relevant one. As I mentioned, we are positive on our view about that extension of the service margin in the coming years due to the many initiatives I mentioned on the call. Now, the gap between the service margin and the overall EBITDA margin will depend on the terminal sales we'll have in the next coming years and our summation in the call, [how 2016] the terminal sales will be lower in 2016 to 2015 in absolute terms.

The market is more soft about buying or replacing terminals. The federal reason for that, clearly the economy is second. Our taxes went up by 10% due to the lengthy decision of the government on smartphone. And B2B, as we mentioned becoming a more weaker market than B2C and B2B was a big consumer of devices. We see that also is going down. So I think 2016, the gap will be reducing.

Again, going beyond 2017, I think all depends if markets will recover and people will stop buying back new smartphone and a trend we really want to see, we want to see more smartphone penetration, we want to see more 4G penetration, we want to see the elimination of 2G devices, at least going to 3G. So I think overall trends of decline of terminal is not already a good trend although it has a very low impact, sometimes zero margin effect having customer changing handset, in general, or we task specifically when they come into our stores, they enable us even to upsell product is a good trend. However, I think 2016 is a clear trend, we'll have a decline on that.

With respect to fiber-to-the-curb, I agree it was really exciting, just to mention, we have 3.5 million with residential customers on cap network with speed of one to four mega. About 1.7 million of that 3.5 million, about half of that, is what we call [bundled laga popular], which is a government initiative of BRL29.99 products that is an exam [for ICMS or VAT].

So, clearly very low ARPU customers and also a lot of the change we have in broadband if you look is really relating to that signal called xDSL and other premium broadband is growing faster. So, it's difficult to turn those customers to at least to FTTC to 10 to 25 mega, maybe 35 mega. It's a very different ball game for them and the demand is huge. We launched (inaudible) in 2015. We reached technically to a speed much more with the one we thought initially and commercially most customers choosing clearly speeds above 50 mega. So, ARPU is more than double I would say in the current pile. Again, we'll have to continue to build out. Potential is big. Clearly, we cannot do everything we want, but again as I mentioned, the next three years will be, our focus is to try to get 1.5 million out of the 3.5 million cover at least with own parts of fiber-to-the-curb. I hope that answers your question.

Luis Azevedo, Bradesco.

Well, hi, Amos, hi everybody. So pretty much two questions, the first is regarding the regulatory framework, you said that's probably should see lighter obligations after the change in concession. Could you give us a color on how much it could represent in terms of lower CapEx requirements or lower OpEx. Do you have any figure for example, public phones [so ever]. And the second question is regarding dividends, do you expect to distribute 100% payout or close to that for this year or the Company may reduce the payout ratio in order to size an M&A opportunities? Thank you.

Thank you, Luis. About the regulatory question, I would say that we've finally stopped calculating what might it mean to us and we don't have even internally, the framework of the changes just came recently. Now that we have an idea what Anatel going to or once maybe to go with us, you might be aware of the presentation being done by Consular Freitas in the last Board meeting talking with other Consulars and others in the last few days we start getting understanding where it might go that light concession or authorization and we start running some numbers. So, I cannot give you an exact time that we might be able to share with investors in the future. About the dividend policy, I believe, again, we'll continue with the same dividend policy we have so far. It has nothing to do with any M&A possibility or potential. Again to make it clear, we have nothing or not involved with any one of them at this stage.

Okay and do you still -- are willing to buy Sky Brazil in the case AT&T decides to sell?

Again, we are not looking in that opportunity at all at this stage. I'm not aware that the company is for sale and moreover I think we said in the past, at this stage, I think we are very much consistently saying very pleased with our position in all key markets including Pay TV, we had the phenomenal organic growth in 2015. We expect continuous high growth in 2016 and as long that not a relevant opportunity, I cannot comment on that.

Jonathan Dann, Royal Bank of Canada.

Hi to Amos and Alberto and Luis. I have two questions, the first one, with the CapEx guidance you've given, are you confident that operating cash flow, EBITDA minus CapEx increases at a similar amount to 2015, sort of around the BRL500 million market? And then my second question is I guess so to trying to delve a little bit into the financials, I mean are you able to sort of clarify how much the Nextel roaming revenues contribute to revenue growth? And then I've another hypothetical question, if the assets are reversed, does that mean they come onto your balance sheet and would that trigger some form of tax payment?

Hi, Dann, how are you? Many good questions. Again, EBITDA minus CapEx 2016 is a sensitive question as we don't give guidelines and I would just say that the increase in CapEx excluding Spectrum is within our plans to continue to grow operational free cash flow.

About Nextel revenues, we will not be able to disclose their numbers relating to Nextel. Really a confidential agreement with the customers and we're not in a position to mention it. I would say that, again, it's within the multi-years contract been signed. There are minimum revenues within that contract and this would probably continue on as it was in 2015 and 2015 but again, I would not be able to share with you the exact number of specific customers. In respect to the (inaudible) of the assets, the assets are actually registered on our balance sheet with the nominal value has been acquired and depreciated over time. I think BRL7.6 billion as of the end of December, 2015.

Clearly, if you will go another 10 years, depreciation will lead to very little nominal value in order book when the severity might happen. So again, I cannot tell you exactly where it would be, but again, another 10 years depreciation will leave very little on the books, again, book value with respect to assets. So I think it will be very irrelevant from tax point of view. It will be relevant from the economic value of those assets, clearly could be different than the book value.

I was just going to, in the event that Nextel is sold to a different mobile operator, are you protected from them? I guess someone else would perhaps see that, that roaming contractor is an attractive profits source if they acquired Nextel.

Of course, they are protected. Agreements is covering any event and whoever will buy, if there will be such an acquisition of Nextel, I don't know if that there is any process going on, but hypothetically there will be an acquisition of Nextel, the buyer will have to oblige with the contract signed with Nextel. They can pay it out or continue with the roaming which maybe, may not make sense, but anyhow, the financial benefits should be in full compliance in any case, in any scenario.

Okay, thanks. Can I ask one slight extra question. In the slide, you have some excellent charts of player one, two, three, and four. When you say player two in mobile, do you mean Claro or do you mean TIM. I'm just trying to work out in your mind who you see as the second largest player?

We cannot and again, specifically we are trying not to put names of competitors to avoid any reference to competitors, but I think as you know, it's a public information. It'll be easier for you to find it out and if you cannot find it, you could call Luis Plaster, he'd be happy to point out to you the sources we took these information.

Walter Piecyk, BTIG.

I missed the earlier question, you talked about LTE expansion, the percentages, I missed those numbers. If you don't mind restating that, I'd appreciate it. And then the question was related to CapEx. So it seems like a lot of your comments were about expansion. I'm just curious whether because of all these data growth, now [50%] of your ARPU that you're having to do any type of capacity type investment in the form of additional cell sites and things like that.

Yes, thank you, maybe you want to take the first one.

Yes, I think what was said by Amos in the beginning of the call was that new 4G covers 60% of the population by the end of the year. It was the number stated.

46% in 2015, going to 60% in 2016, and 80% is the plan for the end of 2018 at this stage.

And that's what's the primary driver of the increase in CapEx?

Yes. It's combination of other 4G in the mobile, investment 4G has a higher weight than the 3G. Again, we are increasing capacity and we're increasing coverage both and that's hopefully answer your question about capacity.

So when you think of capacity, that kind of leads into my next question which is as you get more of your customers consuming more data, Nextel was mentioned, Oi is obviously struggling, is there -- can you kind of refresh us on the regulatory issues of buying spectrum like if Oi was selling spectrum in a distressed state or NII was trying to sell some spectrum, are you able to do that and would that be a better option than maybe spending on cell sites in the market?

Maybe you, unless you're referring to one sharing or to buying spectrum. The configuration does not allow the selling spectrum. If a company being sold, spectrum generally should go back to the regulator who will auction it again. That's the rule. I can tell you that the way we see it at regulator level, we're fully covered with the spectrum we have today. If somebody would offer me more spectrum, I really don't need to buy.

We're well positioned in 3G, extremely well positioned in 4G. The best position I think in 2.5G after we bought another 20. We had 40 megahertz, we bought another 20 in the last spectrum. So we are the best 2.5G coverage in the country and of course the 700 mega, which we bought a year ago and now we are after a long process, filing the first city will be turned off from the analog signal of TV, Rio Verde in the state of Goias. We've been actually disconnected in last week. Hopefully at the end of the year start using [700], which is much more efficient spectrum by the end of the year. It's about, I think one-third of the cost of 2.5 giga, about full efficiency. So clearly we are well covered. I think we have no any intention to buy spectrum from anyone. What we doing is sharing the larger base stations with the operators. We signed a deal with Oi and team that did not affect much Q4 but would affect us in this year as we'll get more sites from them especially in rural areas where the demand is now high and we feel comfortable it's whether the share the radio than they actually -- its own radio, but again I hope I'm addressing your question.

You are, but I just don't -- so what do you think happens to Oi them. I mean no one can theoretically buy it. My thought was that maybe the government would allow them to sell their spectrum because they want to help them with some cash and they're so distressed and maybe that'd be a reason for them to allow you to buy their spectrum. You obviously don't want to buy spectrum. So what happens to this Company?

I really cannot get into about Oi at all. I can tell you that if an operator A buy operator B and there's an overlap of spectrum, this overlap spectrum need to go back to the regulator, that's the rule. Clearly, the regulator have the right to decide and maybe to do other larger things and not to take it back and leave it with the buyer, but anyhow this question really should be reserved to Oi, also the regulator, but again that's a general rule as we know it.

Will Milner, Arete Research.

Thank you very much. Can I just try to understand the evolution of your EBITDA in 2016. I mean, firstly a clarification, I think you did say the target was to grow EBITDA in 2016, just wanted to clarify that first, but then just thinking about how it looks over the quarters, I mean if I look at the last quarter fourth quarter, it look like the revenues ex-handsets were growing 3% and that's obviously been slowing and the operating costs adjusted for the personal restructuring charge a year ago we're growing around 6%. So certainly without the synergy delivery, EBITDA is falling and it looks from the slide as though a lot of the integration projects are only going to deliver in the second half of 2016. So I guess is it reasonable to sort of think that over the next couple of quarters the likelihood is EBITDA is going to be falling and then as your synergy project to start to deliver you internally for believe and hope that EBITDA will grow in the second half of 2016. Is that the right way to frame the EBITDA progression over the next year? Thanks.

Not entered into quarterly evolution of EBITDA. Unfortunately that's not the right tone and we don't give quarterly guidelines, final guidelines. I will just repeat what I said. We expect a positive evolution for EBITDA in the next coming years. It's a combination of efficiency measurements we are taking and clearly the synergy upside we are having and its part of our plan. So we clearly will benefit from the synergies and that's part of the EBITDA evolution. (multiple speakers). Thank you so much.

Thanks. If I can have one quick follow-up. Interesting to hear you mention you would be using data caps on fixed broadband to boost growth rates. I just wonder have you had any conversations with the regulator about that business approach?

I mean, we don't see any issue with the regulator. All that we need is to have is to change contracts of customers and what we did is we're working hard to contract with customer. Currently, all the new adds all new contracts and the basis changing plans or any other this type of cross-sell or up-sell, we are updating this contract that would include our rights to kept is the fixed broadband based on the plan we have. As you know, 2% of our customers using about 20% of our IP broadband. Just understand that some outliers are really abusing kind of the unlimited IP we are providing. There has to be some rules into that to believe we can monetize. There's only I think at least four or five operators worldwide including one in the US that starts to have a cap. I think we have a clear vision as operators, in the era of data and digital and less voice, we have to monetize our data and that's one step forward. This is in the mobile last year. So [2014 and finished on 2014] and at the end of 2016 beginning of 2017, we'll start doing the 76 which clearly will have substantial benefits on the data revenues going forward, but we believe and again we cover our regulatory aspects but we need to make sure that customers they have the new contracts in effect.

This concludes the question and answer section. At this time, I would like to turn the floor back to Mr. Genish for any closing remarks.

Thank you. I would like to thank everyone that were on the call participating in that long call. I hope the new format is helpful, not flipping page by page and we'll look at your comments about that format going forward so we improve in the next call. Thank you all and good bye.

Thank you. This concludes today's Telefonica Brasil's fourth quarter 2015 and 2015 results conference call. You may disconnect your lines at this time.