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.

Moving to slide 11. One of the main cornerstones of Telefónica Brasil's equity story has been for quite some time our ability to be efficient in terms of costs, allowing us to transform the way that we work and relate with our customers by leveraging on digitalization and simplification initiatives. In the fourth quarter of 2018, our costs reduced for the 12th consecutive quarter on a yearly basis, reaching minus 1.4%, taking our EBITDA margins to a recent high of 37%. Personal costs that represent 13.7% of total OPEX increased 1.1%, significantly below inflation due to the ongoing organizational restructuring undertaken in the last quarters. Cost of service rendered, which accounts for 40% of our total OPEX, decreased slightly, minus 0.1%, driven by the higher cost related to the expansion of our mobile and fixed networks, entirely offset by lower regulatory taxes and interconnection costs. Commercial expenses, excluding bad debt, decreased 6.9% in the period as a result of our digitalization and simplification efforts that drastically reduced expenses with call centers, back office, billing, and posting. In the fourth quarter of 2018, commercial expenses represent 26.3% of our total OPEX. Finally, the bad debt over gross revenue ratio presented a slight year-over-year decrease reaching 2.2% thanks to our credit and collection actions and utilization of big data and analytics. Turning to slide 12, we give you an update on the evolution of our main digitalization initiatives that once again enable us to significantly reduce very representative cost buckets. In the fourth quarter, We had a 43% year-over-year increase of online fixed B2C sales. The percentage of digital top-ups reached 23%, increasing 3 percentage points year-over-year. Miobibo app unique users increased 22% year-over-year, where calls to our call centers reduced 24% compared to the previous year. The penetration of e-billing reached 58% of our total customer base, with almost two-thirds of our credit scoring being conducted through digital channels. 100% of stores are operating in our full-stack platform, and 73% of our technical support are already digital. In cost terms, in the quarter, billing and posting costs reduced 15% as a result of increasing billing adoption by our customers. Call center costs dropped 70% year-over-year as we switched customers' interactions to digital channels such as the eCare app, website, Facebook and others. Installation and maintenance costs reduced by 10% in comparison to the same period of last year. Commissions We feel that implementation and evolution of digitalization will be absolutely critical for anyone to succeed in the telecommunication sectors. As customers are demanding more and more self-care, easy solutions related to the interaction with the company require that we urgently move into a simple and more efficient business model. Now moving to slide 13, net income for 2018 reached a record level of 8.9 billion Reais, 93.7% higher than one year ago. The main drivers behind this evolution were higher EBITDA due to the strong expansion of revenue from growing businesses and cost control efforts leveraging on digitalization to register annual cost reduction for the third consecutive year. The non-recurring effects registered in the year, which impacted possibly both EBITDA and financial results, in 3.8 billion net of taxes. These non-recurring effects were mainly related to gains that we had during the year on the Superior Court of Justice recognizing our right to deduct ISMS from the basis of calculation of the Peace of Finch contribution for a period between 2003 and 2014. Shown in July 2014, In 2018, the generation of free cash flow from business activity reached an unprecedented level by growing 21% year-over-year to R6.9 billion, mainly as a result of our improved operating and financial performance with a strong EBITDA growth, lower interest and income taxes payments, and optimized working capital. That allowed us to further reduce our leverage. Our gross debt decreased 27% year-over-year, while our net debt position reached R2.2 billion in December 2018, a 42% decrease versus one year ago. Moving to slide 15, as a result of the impressive generation of net income and cash flow throughout the year, For 2018, we are proposing R$ 7 billion of total shareholder remuneration, a growth of 52% in comparison to 2017, and more than double the amount that we paid just a few years ago in 2015. The R$ 7 billion will be paid in two tranches, one during August 2019 and the other during December 2019. For 2018, we already started to deliberate on shareholder remuneration with a declaration of 700 million reais of interest on capital on February 15th. This confirms our commitment to remunerate our shareholders while maximizing value by investing to capture growth opportunities, a combination that is unique to Vivo in the Brazilian telecom space. Thank you, and now we can move to the Q&A.

Thank you. The floor is now open for questions. If you have a question, please press star then 1 on your touchtone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing the star key followed by 2. In case you are following the conference call via webcast, please click on Question to the Host to send your question. Questions will be taken in the order they are received. We do ask that when you pose your question that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. The first question will come from Valder Nogueira of Santander. Please go ahead.

Valder Nogueira Good morning, guys. First question is I just heard what Davi mentioned about Why not 100%? That's the first question.

Okay, Walter, we'll go over this question. So, I mean, if you see our remuneration for the year is $7 billion, which is, if we compare the payout of the free cash flow, is even more than 100%, no? When you compare it to the net result, it's around 78. But you need to consider that some of the results that we have during the year, mainly as the one-off that we have, the tax one-off, will not impact, benefit the cash until the next two or three years, no? That's why our recommendation, we have decided that 7 billion is representing a more than 50% increase every year. It's more than 100% payout of free cash flow, and therefore we think it's the right number.

Does it have any relation to a still uncertain scenario on potential taxation of dividends and interest on capital going forward, or was just the decision itself?

No, but it has nothing to do with moving forward. It's just for the year. Okay.

And my second question, you guys announced the partnership with Global in order to sell the Global content on the mobile platform, and I believe that the subscription should also be applicable to your broadband offers because you can log in. What do you expect to be the Contra-attack of competition because this is one of many initiatives that you guys are making that are proposing a very good value for your subscribers in terms of how to build the content that they want on whatever platform that they have while the main competitor on pay TV is not necessarily that many multi-devices you guys are. How do you expect them to react to this offer?

Valder, this is Christian. I think this deal that you mentioned is part of our strategy of being much more as a digital service hub. We've been talking about partnerships with different . You mentioned the one that we have with GlobalSat, but we also signed with Amazon Prime. We also signed with Netflix, and we are signed with NBA, NFL. So our position here is that we want to leverage as much as we can The strength of our brand, our channel, our possibility of bundle that with our services and we want to be this hub and of course we want to be playing a very important role, especially in this OTT video arena. Thank you, Chris. The next question will come from Diego Argal of Goldman Sachs. Please go ahead.

Hi, good morning, everybody, and thank you for taking my question. Two quick questions, if I may. The first one, on the fixed voice decline, this seems to be worsening in recent quarters, and I was wondering if you can give us some colors on the market dynamics that could help to justify this acceleration on the fixed to mobile substitution. And, for instance, was this performance driven by residential or B2B clients? And also, can you walk us through the main initiatives that you are taking to protect This will be my first question.

Thank you. Diego, this is Christian. Yes, there is an effect of the relevance of the service for customers. We are bundling as much as we can to protect. Once you bundle, you're also giving all the benefits of voice to fix, voice to mobile. So, and they become much more unlimited, the usage of the fixed voice. So before in the past, maybe there was an usage that was beyond this unlimited or bundled package that the customer would consume that's not included in the plan. So it affects in the amount that they pay. So I think it's a condition of the market. You can charge bundling that as much as we can do now. But of course, there is some excess consumption that we don't see anymore because it's included in the bundle that we put together with the broadband. And that's the reality of the market right now.

Perfect, Christian. But just quickly, so this was driven mostly by the residential, is that right?

It's mostly by the residential. That's the largest impact. But we also have B2B customers included, no? And the same strategy of bundling is in place for both. But yes, we see movement, this negative performance, mainly in the residential. But again, we are bundling as much as we can. Once you bundle, you're including everything in the bundle. Once you include everything, maybe in the past there was everything that was not included, there was some excess consumption that we could build. Now we don't build anymore because it's included in the package.

Got it. Thank you very much. And the second question, very quickly, on your depreciation, we saw a major increase in this line item in the quarter. Despite the fact that you have been investing in FTTH for some time now, can you just help us to understand what's going on and also to see whether or not this should be the next, you know, the current level for this line? Thank you.

Hi, thank you Diego for the question. This is David. So regarding the depreciation, we have an increase this year. As you know, every year we need to review the useful lives of our assets. The next question will come from Maria Azevedo of UBS. Please go ahead.

Hi, everyone. So my first question is on your FTTH strategy. Do you see any competitive threats from potential 5G fixed wireless broadband? And consider that you executed very well your CapEx allocation for this 2 million homes past. Do you see room to invest less than the guided 2.5 billion extra CapEx or maybe to expand further your geographical rollout?

Hi, Martha, this is... Sorry. This is Christian. Yeah, we don't see any other technology competing with FTTH for the moment. I think as being proven by our performance in every place that we get, that is the best ultra broadband solution. So we don't see 5G at the moment for what we see as technology or even devices available and that we have a competition right now. So we continue investing on FTTH and as I said, We had one of our largest deployments for 2018, increasing to 9 million home passes. Going forward, our plans for number of homes and number of customers connected are still the same. What we can see is more efficiency in the usage of this CAPEX. And I think in 2018 was one of the case. We kept the plan in number of homes connected and passed and cities that we reached with lower CAPEX. So going forward, that may happen as well. And then we'll see if expand the footprint or not. But our plan still is the same one that we presented in New York, ambitious one to increase home pass and connected as much customers as we can.

Perfect, thank you. And my second question is on mobile competition. Are you also seeing those stronger signs of recovery in prepaid revenue in the first quarter 19 as well? Do you see room for segment ARP growth in 2019? And if you can talk about competition in mobile in general, that would be very helpful. Thank you very much.

Yes, we see a very competitive market, as you described. We've still been capturing most of the postpaid customer base. I think that was the number that we showed for the year. We kept the lead in the percentage as the main driver being not only migrating prepaid to postpaid, but also upselling from control to postpaid and upselling within the segments. What we see here that we're also moving prices up. We increased price in phosphate and in hybrid in September and in December. There was movement from the competition, but it's still giving much more benefits than we give for the same price. And that I see for the prepaid, as you mentioned, we presented a better number for the fourth quarter. It's still negative. The negative sign here is driven by the macro, but also driven by our ability to continue migrating customers to hybrid. And here I see opportunity to be more rational and increase price. I think we've been stuck in the same price point for longer, and we don't see that in the hybrid and postpaid because, as I said, we moved prices. Thank you very much. The next question will come from Fred Mendez of Bradesco. Please go ahead.

Good morning, everyone. Thanks for the call. I have two questions as well. I think the first one related to what Maria just said, but just to try to understand a little bit more here on the dynamics of your ARPU on the post-paid XMQM. When I look here, of course, there is a small decrease. There was a decrease, and as Christian just mentioned, you did increase the prices. You did anticipate the price increase. and many more. As you pointed, you have been doing a great job here for the last three years. So I was just wondering, when you look to 2018, if we can expect once again OPEX to decrease on a year-over-year basis, or if you believe that most of the low-hanging fruits were already ripped. Thank you.

Hi Fred, this is Christian again. On the ARPU, there is the mixed influence here, and as I said, we kept a very strong recreation From prepaid to hybrid, that's always impacting the overall postpaid ARPU that you see. So although we increased price, as I said, we had to increase in September and in December, but the volume of the hybrids is still very high. So on the average, the ARPU is impacted by this. So it's mainly mixed. We don't see, I don't know if your question was Thank you very much. to avoid no more for two more now so is that what we are trying to drive here now giving more we give something else when we price but trying to control that to keep our post growing as we see in different segments but also in the mix together the post pay trying to keep it in stable or growing In the cost, there is a lot to be done. Digitalization is the driver that we are having here to drive costs down. I think Davi mentioned some of the KPIs that we follow. There are call center calls, penetration of e-billing, and we still see room to do more. So we are not only making more digital the interaction that we have with our end customers, but we are also implying that we're going to use more digital processes and tools to automate internal processes that will also bring The next question will come from Matthew Robillard of Barclays. Please go ahead.

Yes, good morning. Thank you very much. I had a question with regards to broadband. So obviously you're doing very well in terms of rolling out your fiber network, progressing in new cities, so I guess expanding your reach. Yet when we look at just broadband customers as a whole, the number is a bit flat because there's probably some migration into fiber from ADSL and maybe some market share loss in other parts. My question is really, As you continue to expand in new cities, should we expect at some point to see the total broadband customers grow? And is that, in your view, something that can happen already in 2019 or later on? So that's the first question. And second, in terms of 2019, you touched on the competitive environment. I was wondering what kind of scenarios have you built into your internal planning for 2019 with regards to the macro environment and competition in general compared to 2018? Thank you.

So for the first question, you're right. As you see separately, we have strong growth in FTTH, but we have to consider that the DSL, especially the one, the corporate one in São Paulo, the customer base is still very large. So, and there is some overlay or some churn there related to other players also attacking the Scopro customers that on the average is difficult to see that the growth that you correctly point out. So going forward, we're going to continue growing FTTH. Some of these will be overlay or FTTC areas mainly that we have outside São Paulo. So, I don't know if the number of customers will be the driver that will be following our performance, but I think it's much more the revenue growth that we are expecting to have once the revenues coming from Ultra Broadband become much more relevant than the ones coming from these legacy technologies. So, Matthew, I wouldn't be... So focus on the number of customers, because as I said, the customer base that we still have in ADSL, especially in São Paulo, is too large, and comparisons may be hard to have. Focus on growing FTTH and growing revenues on total, and also ARPU increase. Once we have the FTTH, also we can have the opportunity to increase ARPU, and also selling IPTV, they still bring it much higher. Don't know if I answered your first question, then I'm going to the second one.

Yes, it does. Thank you.

So the second one, I don't know if it was more general, we are optimistic about the economy. We, as I said, we're making movements for more rational behavior in mobile and fixed, as I said, so we expect competition to follow. And if the economy recovers, we expect to be a good scenario for Telecom 2019.

The next question will come from Susana Salaru of Itao. Please go ahead.

Hi, good morning. Thank you for the questions. Actually, we have two questions here. First, regarding the 5G, if you expect the 5G auction to happen this year or next year, and if that would affect your dividend policy or your payout dividend, that would be our first question. The second question is a little bit more related to the If you could elaborate a bit more on the effects that generated the positive results of approximately 120 million in other operating revenue in this quarter. That would be our second question. Thank you.

So, Susana, this is Christian. So, as I think I mentioned at the beginning, we had a very strong deployment of 4G in 2018. 4.5G, now that is the possibility of aggregate frequencies and offer more speed. For 2019, we continue on this track to deploy more and more 4G and more and more 4.5G. We are preparing the network for 5G, but we don't expect that to happen this year because there is no environment Thank you for joining us. have less than 60% of customers with 4G devices. Still, there is a room for having more customers with 4G, 4.5. And once we have these customers with these devices, the opportunity to upsell with plans with more data. So focusing still 4G and using the 700 MHz frequency that we started using like last year or one year and a half before and preparing ourselves when the 5G is a reality in Brazil that we don't expect to be this year.

Christian, sorry to interrupt, just a clarification, you don't expect to be a reality or you don't expect the auction to happen this year?

The reality we don't expect, but I don't think there is a reality for 5G, no, because there is no device and the auction, we don't have an answer from when it's going to happen, but we expect that not to happen in 2019.

Okay, great, thank you.

Hi, Susana, this is David, just for the second question, no? I mean, the impact in the other lines are fragmented and composed by some important cost reductions, mainly in contingency. Labor contingency reduced by 45% year-over-year, mainly on the back of a significant reduction of incoming calls during the year, incoming claims, mainly due to the labor reform that's enforced since the end of last year. In addition, civil contingency are also dropping due to the action taken by the company reviewing the end-to-end process and addressing the main issues that generate most of those claims. In addition, we have other costs that typically happen at the end of the year, which are some additional proceeds coming from contractual fines and tax recovery that, as I say, happen every quarter, particularly the fourth quarter. And this is why if you look at the evolution of the margins year over year, you see that normally the fourth quarter is usually a higher margin than the rest of the year, but includes all the recurring costs that happens through the year. So nothing exceptional.

Perfect. Very clear. Thank you.

The next question will come from Cesar Medina of Morgan Stanley. Please go ahead.

Hi, thanks for the call. I only have one question. Any updates on what do you expect for the telco reform? I mean, today you have a pension in Congress being debated. When would we see the timeline for the telco being discussed and approved? Thank you.

Hi, Sander, this is Christian. As you know, it's a new Congress, a new government. We are very optimistic because we believe that this law will benefit the society and are better aligned with our plan to focus more on new technologies rather than legacy. But we don't have a concrete timetable for that to happen. No, but optimistic, and we believe that this will go through. But I cannot give you more details about the timing.

Okay, thank you.

The next question will come from Marcelo Santos of J.P. Morgan. Please go ahead.

Hi, good morning. Thanks for taking the question. My first question is about the broadband deployment. You mentioned on page 9 of the presentation some of the best cases you had in 17 and 18. I wonder if you could comment a bit on the cases which were not so good or where you had more difficulties in the cities you launched and What kind of hurdles are you finding in these cities where you had more difficulties? And the second question would be about the interconnection revenues. I think we saw a 27% sequential expansion in interconnection, and you mentioned in the release that there were some settlements. So I was wondering, this 27% increase quarter over quarter, is it mostly on the settlements? Or was there any natural increase in interconnection? These are the two questions.

Marcelo, I think this question. The cities, yes, there are some that we have a little bit lower penetration. Here it's important to highlight that it's the penetration over the installed capacity, not its home past, so its installed capacity. But once we've been able to select where we want to enter, our performance has been better. There were some cities that were before that we had the agreement of the merger with the position of GVT, so maybe they were not so attractive as the one that we are picking now. So as we see now is that we are getting, on average, very good results. Some cases there are small players that are... are able to retain more customers that we see in others as the one that we presented here. But in the end, we still haven't put together all our strength that it would be the mobile plus the fix. We're still playing with the fix by itself with some very few cross benefits. And once we put all together, our strength will be even larger. So I think this is an example. Maybe it's one of the best examples, but again, once we put all our strengths, mobile plus fixed together, the channel that we have, I think we can capture this easily in any city that we decided to get in. So again, positive about the outcome. And in some cities, there are small players that may cause us some more difficulty, but we still haven't used all our tools to capture the markets.

Hi, Marcelo.

Otherwise, I will pass to David to answer the second one.

Hi, Marcelo. I will cover the second question. Interconnection revenues have some nationality during the year, due mainly for settlements with other operators, and thus it's difficult to compare quarter over quarter. But in terms of what can you expect for the future, for now going on, we expect these revenues overall being all more flat year over year, therefore compensating the drop of termination rates with higher traffic as a result of the unlimited on-net traffic offers that we have now since the last few years in the Brazilian market. So overall, we expect it to be flat. Perfect. Thank you.

The next question will come from Carlos Sequeira of PTG Pactual. Please go ahead.

Thank you. Good morning, everybody. So, I have a couple of questions. One is, would you consider making an extraordinary dividend payment to leverage up the company's balance sheet if interest on equity, tax benefits are discontinued? And, you know, there is a discussion. And if you have done any study on what would be the ideal leverage in that scenario. And the second one on CapEx, can you share with us your CapEx expectations for for the easier and what would be a long-term capex sale ratio, please. Thank you.

Hi Cadu, this is David. So regarding the first question, you know the benefit that we have as Telefónica Brasil, we have a very low leverage. We have only 2.2 billion reais net debt, which represents only 0.1% of total EBITDA. This gives us a lot of flexibility to face the potential tax reform that could happen during the year. So this is something that we are analyzing internally, but as far as we don't know what this tax reform is going to, which changes it's going to bring, so at the moment, our only draft analysis, so once we have more visibility about this potential reform, then we will consider and we will propose, we will recommend some review of our capital structure, if it's the case.

Okay, thanks. And, Apec?

For CAPEX Cadu, this is Christian.

Hey, Christian.

Yes, hi. As we said last year, no, we don't give guidance, but what we present about the 26.5 over three years, that would mean the 8.5 in the first year. We were able to respond for the plan that we had with lower. The next question will come from Julio Arcenegas of RBC. Please go ahead.

Yes, good morning. Thanks for taking the question. One question related to broadband performance. The company has some few losses this quarter and you mentioned that it was driven by the competition in the copper base. Can you give us some color of this competition? Basically, is this competition based on price from competitors or due to network upgrades that actually competitors are doing in the areas where you have copper? My second question is related to some of your comments before about the effect of bundles in fixed revenues. Can you give us a rough idea of how much from the fixed base is already in these sort of bundles? Basically, I would like to have more or less an idea of how long can last this effect. Thank you.

Okay, Julio, that's Christian. Related to the Copper Network in São Paulo, that was the one that I mentioned before, yes, there are some new competitors. As you know, there are many small players in different cities of the state of São Paulo. When they get there with an offer with speed that is above what we can offer with the corporate pure ADSL, that's the main reason why we may lose a customer. So it's difficult to respond when we don't have the overlay of FTTH. So again, it's a cap in the speed that we can offer the corporate. So that's the main reason. Sometimes outside São Paulo, we have FTTC, we can respond better. But when we are in São Paulo with pure ADSL, difficult to respond, getting to the limit of 4 or 10 megabits depending on the area and the distance from the central. So that's the main reason. Also, there are many players attacking smaller cities and São Paulo is the reality that we face. Regarding bundle, I was talking about voice. We bundle voice as much as we can in both B2C and B2B broadband plans. So the majority of our customers have a bundle, broadband plus voice. So it's protected as much as we can. The point was more than one new bundle, And you offer all the calls to fixed and to mobile included, the price is flat. So we don't have excess expenditure from the customer when they are not bundled. So that was my point to describe why revenues were not growing because we are bundling everything. We protect, but we don't have additional revenues from usage beyond the plan that they have in the bundle.

No, if I might follow up on that. I do understand the point, but basically I would like to know what percentage is already in this sort of bundle. Basically, I want to assess for how, I don't know, 20% of the base has already been bundled, 80% of the base still has to go through that process?

No, the vast majority is already bundled. The ones that have voice and broadband, but we don't give the number, but the vast majority.

Okay. Okay. Okay. Okay, thank you very much.

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

Thank you again for taking part of our call. I have interacted with already interactive many of you in my previous role, and now as the CEO, I should expect to maintain this channel open and strengthen our relationship going forward. So thank you, everyone.

Thank you. This concludes today's Telefonica Brasil 4Q18 results conference call. You may disconnect your lines at this time.