Telefonica Brasil S.A.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil second quarter of the 2019 earnings conference call. Today with us, representing the management of Telefonica Brasil, we have Mr. Christian Gebara, CEO of the company, Mr. David Malcolm, CFO and Investor Relations Officer, and Mr. Luiz Plaster, IR Director. 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. Should any participant need assistance during the conference, please press star zero for reach 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. Luiz Plaster, Investor Relations Director of Telefonica Brasil. Mr. Luiz Plaster, you may proceed.

Good morning, everybody, and thank you for joining us in this conference call for Telefonica Brasil's 2019 second quarter results. The call, as usual, will be divided as follows. To start, Christian Gebara, our CEO, will give you a view of our operating and financial highlights for the second quarter of the year, and then go over our commercial and CAPEX evolution in more detail. Then, our CFO, Davi Melcon, will comment on our digitalization initiatives, efficiency commitments, and financial results. We will then move to Q&A. I now pass the word to Christian.

Thank you, Glaston. Good morning, everyone, and thank you for taking part of our second quarter 2019 results call. I start by commenting on the highlights on slide three. In the second quarter of the year, our FTTH customer base continued to grow at an accelerated pace of 37.9% year-over-year and FTTH revenues 55.1%. This again confirms that fiber is what is transforming our fixed business and will drive revenue growth in the future. In mobile, we continue to execute our role as market leaders by increasing prices and, most importantly, enhancing customer experience. As a result, our postpaid customer base expanded 8.5% and postpaid revenues grew 3.5% year-over-year. Total revenues were up 0.4%, mainly driven by mobile revenues that grew 2.3% year-over-year, including handsets, and by an improvement in the fixed revenue trend. In terms of costs, We still see additional opportunities to reduce non-quality costs and leverage on digitalization and efficiency initiatives so as to further improve profitability. In the second quarter, costs decreased 2.4% year-over-year when excluding cost of handsets, and our IPTA margin reached 34.9%. These elements combined with efficient financial management are what allow us to deliver superior cash generation, net income, and shareholder remuneration. In the first half of the year, our free cash flow expanded close to 13% year-over-year, reaching R$3.4 billion. We declared R$2.2 billion of interest on capital, and recurring net income grew 24.3% on an early comparison. Moving now to the details of our main businesses on slide four, we present the evolution of our mobile revenues, which grew 2.3% year-over-year when including handsets. If we exclude handsets, Mobile service revenues increased 0.1%. In the first half of the year, post-paid revenues grew 5.7%, benefited by the hybrid price increase in Q1 and a sequential improvement of prepaid revenues. For the second half of 2019, we will maintain our rational pricing strategy and have already announced a pure post-paid price increase that will positively impact the third quarter of 2019. While we're in prepaid, we expect to continue to improve the evolution based on better monetization of our customer base. On slide five, you see that our leadership in the mobile segment has slightly increased to 32.2% of market share, and that it's 40% when considered only postpaid customers. In terms of postpaid net ads, we see a sequential improvement, even after having increased our hybrid prices at the beginning of the year. Moving to the right-hand side of the slide, I would like to point out the results of an analysis conducted by the benchmark expert P3 and the magazine Connect on the quality of the mobile networks in Brazil based on 6.3 billion samples and almost 1 million users evaluating metrics such as voice and data coverage, download speed, and data availability. As you can see, we will add the overall nationwide results with a gap of more than 40 points versus second place operator. This is an indicator that really measures the overall network quality, including capacity and coverage, where Vivo has a differentiated position. Moving to our fixed business on Site 6, the transformation of fixed revenue mix is leading to continuous improvement. In the second quarter of 2019, total fixed revenues grew sequentially, and for the first time in the company's history, broadband revenues outweighed boys' revenues. The change in revenue mix and sustainable fiber growth are driving a gradual progress in the year-over-year trend. In the second quarter of 2019, fixed revenues dropped 2.8% year-over-year, compared to a drop of 3.2% in the first quarter of 2019 and a decrease of 3.7% a year ago. FTTH revenues reached For R$ 181 million, growing 55% year-over-year, and IPTV revenues reached R$ 217 million, increasing 40% year-over-year. This improvement confirms that we are on the right track to stabilize fixed revenues and resume growth in the near future. On slide 7, you can see that the shift of our fixed revenue mix is directly linked to the improved profile of our broadband services as we accelerate our FTTH deployment. In the second quarter of 2019, FTTH access grew 38% and now represents close to a third of our broadband customer base, a 9 percentage point increase versus a year ago. As a result, total broadband output increased 14% in over a year to 63.3 reais, the most significant increase of the last six quarters. On the right-hand side of the slide, you can see that our IPTV business is also performing very well. IPTV access increased 33% in Oliveira and now represents 44% of our overall PTV customer base, improving overall output by 5% to R$104. Now moving to slide 8, we continue to focus on the expansion of our fiber footprint. In the second quarter of 2019, we took our FTTH network to an additional 12 new cities, summing up to a total of 142 cities. and more than at the end of 2018. More importantly, we're increasing the number of home paths with FTTH, which now reach more than 9.5 million. For the second half of the year, we continue with the fast pace of fiber expansion, both in new and existing cities, while selectively overlaying FTTH in the most valuable FTTC footprint. On slide nine, We detailed the investment made in the period. CAPEX amounted to R$ 2.4 billion in the second quarter of 2019, totaling R$ 4.1 billion in the year, 10% higher than related CAPEX. As such, investment in fiber increased 34% year-over-year, further improving our presence to 252 cities with FTTX. Additionally, we continue to allocate CAPEX to amplify our coverage and network quality in 4G and 4.5G technologies with a 33% increase year-over-year. Moving to slide 10, you can see that on July 23rd, we signed a memorandum of understanding with Kim with the objective of analyzing options related to the sharing of mobile infrastructure. By signing this MOU, We intend to initiate discussion regarding the sharing of 2G and 4G infrastructures and other efficiency and cost reduction opportunities around network operations. We plan on combining our 2G footprint in a single grid model, something that can potentially release 2G frequencies to be reformed and used for up-to-date higher return technologies. Additionally, we intend to share our 4G network in bands of 700 MHz, initially in cities with less than 30,000 inhabitants, allowing for further expansion of our 4G footprint with less capex-opex intensity. The agreement is in line with the global trends of network sharing and consolidation of fundamental importance in a country of the geographical dimension of Brazil. It's also a solid step taken towards the rationalization of investments and Capture of Cost Efficiencies, which will additionally improve the overall quality of services for our customers. I now pass it on to our CFO, David Mocon.