Telefonica Brasil S.A.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil fourth quarter of 2018 earnings conference call. Today with us, representing the management of Telefonica Brasil, we have Mr. Christian Gebara, the CEO of Telefonica Brasil, Mr. David Melcon, CFO and Investor Relations Officer, and Mr. Luiz Plester, the IR Director. We also have a simultaneous webcast with a 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. Should any participant need assistance during this conference, please press star zero for an operator. 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. Luis Plaster. Investor Relations Director of Telefonica Brasil. Mr. Plaster, you may begin your conference.

Thank you. Good morning, everybody, and thank you for joining us in this conference call for Telefonica Brasil's 2018 fourth quarter and full year results. The call will be divided as follows. To start, Christian Gebara, our CEO, will give you the highlights for the year and then go over our commercial and CapEx evolutions. To conclude, our CFO, Davi Melcon, will comment on our digitalization initiatives, efficiency commitment, and financial results. We will then move to Q&A. I now pass the word to Christian.

Thank you, Blaster. Good morning, everyone, and thank you for taking part of our fourth quarter and full year 2018 results call. Before elaborating on the highlights for the year, I would like to take the opportunity to thank Eduardo Navarro, who remains as our chairman of the board, for his inspiring leadership and brilliant performance during his tenure as Telefônica Brasil's CEO. I had the honor of working very closely with Eduardo this past couple of years as chief operating officer, and I'm sure that we as a company could not be better positioned to continue to capture all the opportunities that we have in the Brazilian telecom space. To do so, I would like to reinforce our commitment to the achievement of the objectives that we already had in place through the execution of a strategy that is focused on three main pillars. Capturing growth opportunities, especially in high-value services, allowing us to improve our revenue mix as we continue to invest in cutting-edge technologies such as fiber and 4.5G to keep providing the best customer experience and connectivity in and out of home. Expanding the company's profitability by leveraging on the capture of efficiencies, mainly through the evolution of our digitalization initiatives, which are transforming the way we work internally and relate with our customers. Strengthening our status as a unique generator of cash and net profit in the Latin TMT space, allowing us to continue to provide unmatched shareholder remuneration without hampering our ability to invest in further enhancing our competitive position. Now moving to slide 4, let me comment on the highlights that we had during the year. Through the second-to-none combination of assets, coverage, brand, and customer experience, we were able to finish 2018 with 55% of our mobile customers on postpaid. After recording 3.6 million net additions, which is 7% higher than 2017, we captured a record-breaking 604,000 FTTH net ads, an increase of 50% in comparison to last year's performance. We accelerated the expansion of our premium technology footprint, ensuring future revenue growth by connecting 30 new cities with FTTH, reaching a total of 121 while also closing 2018 with 3,140 cities and 1,004.5 G-Cities. Consequently, we continue to accelerate the improvement of our revenue mix, depending less and less on legacy technologies such as voice and DTH, while we accelerate our exposure to businesses such as postpaid, broadband and IPTV, among others. In 2018, 70% of our revenues came from growing businesses, which reached a strong expansion of 10% year over year. In parallel, the fourth quarter of 2018 was the 12th consecutive quarter in which we reduced costs on an early basis, representing three years in a row of decreasing OPEX. In 2018, our recurring operating costs reduced 2% year-over-year, taking our accumulated EBITDA margin to 35.6%, well above market expectations at the beginning of the year. As a result of the very strong operating performance presented throughout the year, our financials reached unprecedented levels, reinforcing our position as a player that offers both value and growth components in its equity story. In 2018, we registered a record-breaking R$ 8.9 billion of net income, almost doubling the previous year's figures. While in terms of free cash flow, we generated R$ 6.9 billion, 21% more than in 2017. As a result, we are able to propose our highest ever amount of shareholder remuneration, R$ 7 billion, a growth of 52% versus 2017, underpinning our commitment to the generation of solid returns for our shareholders. Moving now to the details of our main businesses on slide 5, we present the evolution of our mobile revenues, which increased 3% EOV year. This performance was mainly supported by data and digital services that grew 6.3% and by our plan to accelerate smartphone sales, which boosted handset revenues by 70% in the fourth quarter, driving this line to represent 7.2% of our mobile revenues in the period. Moving to the right-hand side of the slide, the chart shows that on a quarter-over-quarter basis, mobile services revenues grew 4.1%, one percentage point more than a year ago, which clearly represents a sign of sequential recovery, a trend that should be maintained going forward. This performance was primarily driven by our postpaid revenues that sustained a consistent growth of 5.3% year-over-year, which is well above inflation. The increasing price and strong level of net additions contributed to these positive results, combined with our unique value proposition that leveraged on important partnerships with relevant content players to increase differentiation. In addition, B2B mobile service revenues demonstrated a promising trend once again in the fourth quarter of 2018, contributing to maintain a solid evolution of first-rate revenues. Meanwhile, our prepaid business, that, through how 2018 was heavily affected by negative macroeconomic indicators and intense competition, began to show initial signs of recovery at the end of the year. The reposition of our prepaid offers to include more benefits and a more effective management of our customer base allow us to improve prepaid gross additions and top-ups. As a result, on a quarter-over-quarter basis, prepaid revenues grew for the first time over the last five quarters with a 2.6% increase. As the economy picks up in 2019, we are confident that these trends of improvements will remain in place for the next quarters. Moving to slide 6, you can see that our leadership in post-pay net ads in 2018 and controlled churn level have enabled us to enhance our already comparable customer mix. On the left-hand side of the slide, the graph shows that we were able to maintain our leadership in mobile market share, reaching 31.9% share In total, and 40.5% in postpaid. In the machine-to-machine business, we also preserved a strong lead by a reach of 41.5% market share. In postpaid, we had a robust performance in 2018, once again leading in net additions with a share of 31%. This was a result of the 30.6 postpaid net ads recorded in the year, a growth of 7% in comparison to 2017. This performance allowed us to further improve the profile of our customer base, in which postpaid represents 55.2% of the total, 6.1 percentage points higher than a year ago. An important part of the postpaid net ads for the year was achieved through our continued effort to migrate customers to higher value offers, as you can see on the right-hand side of the slide. Moreover, we continue to protect our existing base by improving the loyalty of our customers and as a consequence, our churn continues to be very low. As a result, and even in a scenario of more intense competition, we were able to increase overall mobile ARPU, which went up 0.5% year-over-year in 2018, driven by a 10.1% growth of data ARPU in the same period. Moving to slide 7, we present the performance of our fixed business, which dropped 3.5% in the fourth quarter of 2018, as legacy businesses such as Voice and DTH still waived heavily over the total. That said, we continue to accelerate the transformation of our fixed revenue mix, which means that we depend less and less on the services. Broadband grew 12.3% year-over-year in the quarter, leveraged mainly by Ultra Broadband, that we had an exceptional growth of 33.8% year-over-year. The result of these revenue mix transformations, as we can see on the right-hand side of the slide, is that fixed revenue, excluding voice and DTH, are constantly gaining more relevance and traction, growing 10.5% year-over-year in 2018 and already representing 56% of total fixed revenues. Our focus on the expansion of FTTH is reflected by a remarkable 44% growth in revenues, while IPTV, that follows the same strategy, presented a 59% increase year-over-year. In fact, total TV revenues grew for the third consecutive quarter, driven by expressive IPTV adoption. Finally, B2B have been improving trends in the fixed business, with more growth in broadband and digital services such as security, cloud, and IoT. On slide 8, you can clearly see that our strong commercial performance in FTTH and IPTV led to significant ARPU increase in 2018. The left-hand side of the slide shows that FTTH continues driving growth. Our customer base had a strong increase of 10% year-over-year. Specifically, in FTTH, accesses grew by 47%, including 152,000 net additions in the quarter. Our premium customer base contributed to an overall broadband ARPU growth of 11.8%. On the right-hand side of the slide, we present our focus on customer totalization for IPTV, which now represents 37% of total pay TV base. We managed to grow by 52% our IPTV customer base with 43,000 net additions in the quarter. In the last 12 months, Our total pay TVR pool grew 6%, reaching more than R$100. I would like to highlight that overall broadband and pay TVR pool have consistently grown for the last 14 quarters. On slide 9, we give you more details on the success of our UBB strategy, which bring in results that are exceeding our internal expectations in cities where we launched FTTH in 2017 and 2018. In 2018, We beat our goals and launched a record number of 30 new FTTH cities representing an expansion never done before by any other Brazilian player, allowing us to reach 121 FTTH cities and surpass the amount of cities covered by FTTC, which currently stands at 120. We deployed approximately 2 million FTTH homepests, focusing not only on footprint expansion to new cities, but also on the increase of penetration in existing areas. As a result, we have been able to further penetrate HP's home past in large cities such as São Paulo. On the right-hand side of the slide, you can see that we continue to deliver strong results in cities launched in the past couple of years. In two of the cities launched in 2017, Our take-up over installed capacity is already higher than 80%, exceeding by far our long-term target. We were also able to capture an important share of the broadband market, especially on high speeds. In Xatai, a city launched in October 2018, the numbers are equally impressive. Two months after launch, 43% of the installed capacity was already sold. While we captured 18% of the broadband market and became the absolute leader in ultra-broadband. Moving to slide 10, we present our capital execution in more detail, which reached R$ 8.2 billion in 2018. Our investments were mainly focused on higher returns, future-proof technologies and IT transformation. As we have been capturing some CAPEX efficiencies and improving the allocation of resources, we were able to end the year with an expenditure lower than what we initially planned without diverging from any of our strategic objectives. On the right-hand side of the slide, the graph shows that 70% of our investments are focused on growth, especially in 4G, 4.5G, FTTH and IPTV. As a result, we strongly expanded our fiber footprint reaching 241 cities. 121 cities of them with FTTH as I said, all of which already have IPTV availability. We are also enhancing the quality of our 4G network. At the year end, We covered 88% of the Brazilian population, reaching 3,100 cities with 4G and a milestone of 1,000 cities with 4.5G coverage. In addition, we improved the quality of our sites, increasing fiber-connected sites by 57% year-over-year. I now pass it on to our CFO, David Melcon. Good morning, everyone, and thank you, Christian.