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.

Good morning, everyone, and thank you, Christian. Moving to slide 11, we continue to be very efficient managing cost, leveraging on digitalization and simplification processes that benefit not only our results, but also our customer experience. In the second quarter of 2019, our operating expenses were flat year by year, significantly below inflation of 3.4% registered in the period. Costs were negatively impacted by accelerated handset sales. Excluding the cost of handset sold, our expenses dropped 2.4%. Personal costs that represent 13% of total OPEX decreased 2.6% as a result of the organizational restructuring executed in the last 12 months. Cost of service rendered that account for 40% of total OPEX decreased 2.4%, benefited by the lower expenses with interconnection, partially compensated by higher costs related to the expansion of our network. Commercial expenses, excluding bad debt, decreased 6.7% in the period, continuously benefited by digitalization that significantly reduced expenses with call centers, back office, billing and posting. In the second quarter of 2019, commercial expenses represent 25% of our total optics. Moving to slide 12, artificial intelligence and our eCare app continue to be the catalyst to capture cost efficiencies and to improve the overall experience of our customers as well as their interaction with Vivo. Our virtual assistant, Aura, is already using more than 20 channels, recording more than 50 million interactions up to date, addressing a variety of key issues related to billing, data usage and prepay balance, among others. Leveraging on Aura's capabilities, our Cognitive Call Center addresses demands from our customers, reducing the number of calls with human interaction. In fact, since January, the number of calls retained by our Cognitive Call Center multiplied by three, achieving satisfaction levels above 90%. We are also constantly developing our eCare app, MeoVivo, not only in mobile and fixed B2C, but also in B2B. Each app is designed to attend the most common demands from our customers, unlocking non-quality cost savings. As a result, over the last nine months, top-ups made on Meo Vivo increased by more than 60%, contributing to a significant reduction of top-up commissions. Now moving to slide 13, net income for the first half of 2018 reached R$ 2.8 billion, This positive evolution was driven by EBITDA growth boosted by total revenue expansion and rigorous cost evolution, improved financial results related to the lower net debt, and reduced recurring tax expenses resulting from the higher volumes of interest on capital during the period amounting to 2.2 billion reais, significantly higher These reinforce our aim to continually remunerate our shareholders while investing to capture growth opportunities, a combination that is unique to Vivo in the Brazilian telecom space. Turning to slide 14, in the first half of 2019, free cash flow grew 13% year by year, reaching an impressive 3.4 billion reais, despite growing 10% the capex in the period, The resources are being used not only to remunerate our shareholders, but also to invest in cutting-edge technologies that will consistently yield higher returns. Finally, as a reminder, in August and December 2018, we have scheduled dividends and interest on capital payments related to 2018 results, totaling around R$7 billion. 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 1 on your touch-tone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. In case you are following the conference call via webcast, please click on the question to the host to send your question. Questions will be taken and 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. Our first question comes from Rodrigo Villanueva Merrill Lynch.

Thank you. Good morning, Christian, David, Laster. Good to speak with you. My first question is related to the wireless business. Over the last few months, Vivo has been consistently raising wireless prices across segments, but this doesn't seem to be driving up wireless service revenue growth. So I was wondering, why do you think this is the case? When would you expect wireless service revenue growth to accelerate? and if there are other initiatives that you are considering apart from price hikes to accelerate wireless service revenue growth. Thank you.

Hi Rodrigo, this is Christian. In the first quarter we increased price in the hybrid plan and we saw a better result for the mobile service revenue. So in the second quarter we haven't raised any price. So maybe that's why, because when you combine the two of them, we have a growth in the first semester, but a stronger growth in the first where, yes, we did increase price and that we could see in the results for mobile revenues, especially moved from the hybrid one. We're going to do the same for the postpaid that we already announced in the third quarter, and in the end of the year, we're going to do it again in the hybrid. In the prepaid, we also raised price, as we also said in the last call. We raised price for our weekly and bi-weekly offer from 10 to 12. We also increased price of the face value of some of our top-ups In some of the markets. And we could also see an improvement. Now if you see the prep rate that was minus 19% in the first quarter is now minus 8.7% year-over-year revenue. So we do believe that when we do a price increase that is blended with innovation in the portfolio and more data or more benefits, we can see the results. But of course it's not the only way. for us to increase our attractiveness. I think our net ads was also positive in this quarter, better than the quarter before. And going forward, we're going to continue to do more innovation in our offer, blend our FTTH footprint that today is 9.5 million home paths and be more convergent in our offer and to cross benefits between the two type of customers, the fixed and the mobile.

Understood, Christian. Very clear. And my second question is related to handset sales, as it seems that you're looking to gain share in this market. Looking at the P&L, it seems that you subsidize around 15% to 20% of handset costs. I was wondering if this is actually the case, and if not, could you please share with us how much of a profit can you make out of handsets? Thank you.

Yeah, I don't know the number you got from the cost of goods sold over the total revenues. I don't think it's 100% correct. Using cost of goods sold, there are some other hardware that we sell for B2B customers, so the ratio is not the one. I think our strategy for devices, as we've been saying for a long time now, I think we decided to come back to the game. I think it's very close to our core business that is selling service, so we want our stores, as we are trying to communicate Not only to the market but also to consumers in our communication that we want customers to find everything that they want in technology in our stores. We have 1.6 thousand stores in Brazil and we want to be seen as a place for them to buy not only mobile service but also hardware and accessories. So our strategy is combined Our next question comes from Maria Teresa Azevedo, UBS.

Hi everyone, thanks for the call. So my first question is on mobile competition following up on the previous question. You increased prices and we should see the benefit of this next quarter, but how do you see the competitive environment? Do you think rationality is going to prevail or do you see room for unlimited data plans or any disruptive movements from your competitors? And still on mobile, do you see any strategic value for a potential in-market consolidation Or do you think that the market is already very much segmented between the premium players and the other ones? That would be my first question.

Thank you. Maria Teresa, thank you for your question. Of course, we expect more rationality from our competitors. I think we've been giving signs of price increase. I think in some of the segments in the mobile, some of competitors followed our movement. We still expect them to follow more closely, especially in the prepaid. It's not only the price, but also the benefits that we offer. We've been very strict in off-net or even some social networks that we don't want to give for free, especially in the prepaid when they are paying around 10 reais per week or even two weeks in some cases. So we expect rationality to come back. We see that in some segments, we don't see no. We see from some competitors, not from all. So going forward, I think we should, especially for all the investment that we all need to make in the country. We have auctions, we have networks to deploy, so we need to generate more cash. So I'm positive that rationality will be among all of the players. Concerning consolidation, I think Brazil, as we said in the other calls, Brazil requires a lot of investment and very strong and with financial capability to be able to compete. So I cannot tell you the right number of competitors that we should have in the market, but I do believe that the investments that are required, both in mobile and fixed, don't allow to have so many players competing for the same customers.

Perfect. Thank you, Christian. And my second question would be on your CapEx and 5G strategy. You have an upcoming auction. Can you maybe comment on how complex is the upgrade? What are your strategy on 5G? If there are expectations of a massive rollout or if it's going to be a more gradual strategy? And if you see any risk of increased CapEx for 2020 and forward or if you can roll out 5G with your current plan? Thank you.

I think the guidance that we gave for the three-year plan is the one that we gave, so with the 26.5, not the 24, but the 2.5 that we accelerated for the fiber. Although we consumed a little bit less last year, and we are trying to be a little bit more efficient also this year, but the guidance is the same. We haven't changed it. I think it's too early to say how much is going to be our capital expenditure for the 5G. The auction is planned to be in March 2020. It's going to be a lot of things being auctioned there, 700 maybe, the 2.3 that can also be used for 4G. So far what we've been doing is preparing ourselves as a capacity standpoint, so we are putting the fiber to the side, we are doing as much as we can, and I think also this MOU that we signed with Tim is also our ability to release investment maybe in 2G and 4G in smaller cities to invest In other technologies or high-speed technologies. So, again, we keep the guidance that we showed in the market for the three-year plan that includes next year.

Perfect. Thank you very much.

Next question comes from Susana Salario, Itaú.

Hi, guys. Good morning. Thank you for taking our questions. The first question is related to the price increase timing. We used to have price increases, if I'm not mistaken, in the beginning of the year and towards the end of the year. And this year, the whole seasonality of price ups changed. So if you could comment on the rationale of changing the price increase, that would be our first question. The second question, just a follow-up on the handset business. You mentioned that you have been selling handsets with and without subsidies. Could you just elaborate a bit more what are the kind of margins that you aim to have in this segment? And if these margins are positive, what are the strategy behind that? I mean, how come you can have positive margins on handsets? That's it. Thank you.

Susana, so I think this question, the price increase, it's more or less the same that we did. Maybe we are doing one month in advance in some segments. We did a hybrid last December, beginning of January with some impact. We're going to do again December, January this year, so it's more or less one year after it. And the post-pay is similar. I think we did third quarter 2018. We are doing now. August 2019. So it's more or less the same. And prepaid has no rule because it kept the same price for a long time. So we are doing offer by offer. So I think it's similar to what we did in the past. Maybe one month ahead, one month before, but it's always different for hybrid and pure postpaid. They are never the same date. Regarding handsets, and then maybe our team can give you more detail, I don't know how much we can share, but it's a mix of pure post-paid customers and we also want to position ourselves in harboring the prepaid customers that don't buy with subsidies that some years ago we decided not to sell to these customers and we decided to be back to this game, also selling, competing with retailers, big retailers, large retailers that are capturing a lot of this market. So here there is a mixture of Customers that we sell with subsidies, although the unit value of the subsidy is going down, we still sell with subsidies, but these customers, they won't buy for pure post-paid. In the hardware, depending on the customer, we only give slight subsidies for the high-end one in the hardware. We don't give to the others, and we don't give in the prepaid. It's a difficult number for me to give you right now because there is also accessories that we sell together that the margin is much higher. So what we give as a number is that we are getting a positive margin, but it's a mix between subsidies in the pure postpaid without subsidies in other segments. And we are reinforcing our presence in segments without subsidies with a massive communication to drive customers to our stores. and very focused in hybrid and prepaid.

Just a follow-up on that, Christian. On the handsets, do you have any strategy regarding the inventory to have a high inventory turnover Just to optimize the cost of the handset or you have been buying a big number of handsets through your trading desk in Germany to lower the prices. In terms of procurement, is there anything that you guys are doing to facilitate the profitability of the business?

Our inventory is very, very well optimized, and I think the scale that we get is not for buying more. It's the scale of Telefonica Group that help us also have a good unit price. And even like Vivo by itself is a very strong buyer for Brazil, and we've been working a lot in the inventory optimization, and I can tell you that we have one of the best ratios in the market, not only in Brazil, but worldwide.

Okay, perfect. Thank you.

Next question comes from Fred Mendes Bradesco.

Good morning, everyone. Thanks for the call. I have two questions as well. I mean, the first one, if you could give just a little bit more of information about the MOU you signed with TEAM and the possibility of expanding to cities with more than 30,000 inhabitants, particularly in terms of potential improvement in terms of capital allocation. This would be my first question. My second question, Thank you very much. Thank you.

Hi Fred, this is Christian. Thank you for the question. Regarding the MOU, the first one, I think it's very preliminary to talk about what's going to be the impact. Giving more color on the MOU, there's two key pieces. The first one is the 2G. The 2G here, the idea is to work towards a single grid where we could split Thank you very much. It's focused on 700. We started with the 30,000 inhabitants city, but of course, if it works, we may be expanding it to larger cities, as you correctly said. I think it will depend on the results. We are very positive and optimistic that it can work. We have 90 days to make it concrete as a plan, get the needed approvals and make it work. Also, I think in the short term, we'll be able to present the results How is it working and with the impact in our CAPEX and OPEX and especially in our coverage that we could expand it if we can do that, split it with Tim. Regarding ABTA margin, as you said, you're right. We've been increasing FTTH. We've been replacing some copper. At the same time, we're also replacing void that has high margin, but we are going in the right direction if we consider only broadband. I think we have the right price point. We are trying to sell high speed in cities that we get to optimize and to increase our ARPU. I think we've been seeing the ARPU going in the right trend. And I think it will believe that if the revenues come, we'll be able to increase margins and increase OEPDA. But I think our key objective here is to increase in absolute numbers the EBITDA that we present. I think it's a mixture of very different services. There is handset, as Susana asked before, that is involved in our revenues. There are some B2B services that include services and hardware that is also being very successful in our same strategy. And of course, fiber is being one that's contributing not only with revenues, but also positive margins. So I think going forward, Individually Fiber is a good project that's bringing positive margin, as you said, but I need to combine with all the other services and projects we are also selling.

Perfect, Christian. Very clear. Thank you.

Next question comes from Valder Nogueira Santander.

Good morning, guys. Thanks for taking my question. Continue on the FTTH here and shifting gears from mobile. You have proven to have a very good FTTH strategy, and that has underscored the improvement that we saw in fixed line revenue dynamics. The question here is, do you see ways to speed up that rollout, meaning having built-to-suit agreements with construction companies or independent players, or even commercial agreements with them, And how has the pricing dynamics of FTTH behaved vis-a-vis the DSL prices and the price of competitors in the geographies you are? That's my first question.

Thank you for the question. That's Christian again. I think, as you said, we got to 142 cities with FTTH. A little bit more in 250, if you consider FTTEX. Brazil is a huge country with more than 5,000 cities. I think we want to get to as many cities as we can. So we have a guidance and we have a CAPEX that is controlled, so we cannot do everything by our own. So we'll be able to consider other infrastructure type of models. We don't have anything right now. We've been analyzing and to see if there is an incentive for us to do that. How can we do that? But I think going forward, it's going to be hard to believe that we're being able to be independent player, building by ourselves all the network that we believe it's demanded in a country the size of Brazil, especially when we have 40% of the post-paid customer base, that there is a lot of advantage for us. to sell a bundle of our postpaid advantage together with FTTH. And I think we started before. We have more expertise as a group, and we're going to continue to accelerate. And as we have capex limitation, we will need to see if there is any different model that can help us to be more aggressive in speed and respecting all the restrictions that we have As a company that wants to have the control or have the FTTH built in the way that we know how to build it. That was the first question. The second question was the price. I think the price, I think our ARPU, broadband ARPU is going up. It's going up more than 14% and we had 12% in the quarter before. So I think going forward we expect to be increasing ARPU as we are selling more FTTH and less ADSL. So I think it's a natural movement and I expect the market to be also rational on broadband because there is a lot of investment to make this fiber and also to the CPE related to customers' premises. So going forward we expect ARPU to grow as we replace more FTTC and ADSL by FTTH.

Okay, and the second question is how clients have reacted to your cross-sell offers on the 4.5G and fiber? Which regions have been more adhering to that offer and how that has helped your overall output dynamics?

Here we are giving more benefits in the mobile side for fiber customers. It's not a very aggressive offer. What we're giving today is more mobile data to customers that are both fiber and postpaid with us. I don't have a number to give you. I think it's been good in states where we have a strong market share. I think it consolidates our position in these places. If you see our post-pay turn, it's very controlled, although there is some aggressive movements from some of my competitors with prices that are below hours and with a lot of benefits in social network and other things that I mentioned before. So I think that combined with many other things are helping us to keep Our net ads in a very strong and solid number, keeping our churn down. And going forward, maybe we need to do more as a bundle. Today is to have two bills, two offers. Going forward, maybe we need to put them together. And I think also there's a channel synergy that we don't see in all the numbers in a very clear way, but we have been able to sell more and more fiber in our stores. Let's also give more value to the channel that we deployed for a mobile purpose in the past and now is being used also to sell high-value products and services in the fixed business.

Thank you, Christian. Next question comes from Marcelo Santos, JP Morgan.

Hi, good morning. Thanks for taking the question. The first question is going back a little bit to the MOU, the question of Fred. I know it's very preliminary, so it's hard to say the benefits, but I think you already had an agreement of sharing a network with Oi and maybe team that you signed in 2015 regarding the 2.5 gigahertz. What kind of lessons can you, what kind of benefits that you achieved there? What kind of things you could talk about that agreement of sharing network that could be useful for us to understand the benefits this new agreement could bring? This is the first question. And the second question is just a technical question on the tax rate, which seems very low in this quarter. Even with the interest in capital, it seems abnormally low. So just a comment on the reason about that. Thank you.

Marcelo S. Christian, I will answer the first, and then I will give David the second. The agreement that we had with Tim and Oi is different from this one. That one was signed in 2015, was related to the 2.5 frequency for 4G. It was very limited. I think at the end we did like 1,300 sites from Vivo and they gave each more or less 667 each because they had a 10 plus 10 and we had 20 plus 20 megahertz as a frequency. I think that's not the same. I think that was very limited as I said. It was a We had three-way sharing that made it a little bit more complex. We had more frequencies and they had to add the two of them together. And I don't think that serves as like a benchmark for us going forward. I think that was a good experience in a way to do things, but I think going forward the one that we have planning to do with him is a little bit more aggressive, now going to more cities and more sites. But again, we have 90 days to define the scope. and to get the right approvals to make it happen. But I don't think the benchmark would be the one that we did. We were talking about, I don't know, I think less than 150 cities each that we put in the place to do the three-way sharing that we had before. I think it's going to be different this one. And then I'm going to ask Davi, and if you have more questions about that, I will give you more.

Thank you. Hi, Marcelo. Thank you for your question. This is David. Hi. The main reason, if you compare tax rate year over year, is the interest on capital. So in the first six months this year, we declared 2.2 billion compared to the 400 million that we declared in the first half of the first year. Considering that we have a tax benefit of 35% of this amount, this explains the evolution of the number. There is no other big impact here.

Thank you very much. Thank you, Marcelo.

Next question comes from Matthew Robilia, Blacklace.

Good morning and thank you. I had three questions quickly, please. On B2B, could you give us a little bit of the outlook for the segment in itself and how you're doing there compared to your peers? Second, on the mobile venture you announced, You haven't announced anything on 3G, and I was wondering whether you had considered it but decided not to share anything on 3G, or you hadn't considered it because you don't think it's the right time. And finally, Fred, I have to ask about PLC79. Is it realistic to expect something in Q3 after the recess, or could it be further delayed? Many thanks.

Hi, Matthew. This is Christian. I'll try to answer the two questions, the different ones. B2B, we are a positive friend. We don't give numbers specifically for the B2B, but we see, as we've been saying for Many quarters. A very positive trend in both fixed and mobile segments for B2B. The fixed is a lot, it's impacted by some deals that can move up or down when you compare year over year, but overall health of the business is positive. Although the economy is still under recovery, we see our B2B getting more attractive. Now there are some numbers that we see going In a very positive way, digital services, we've been partnering with big companies in digital arena, like Cisco, Microsoft, among others. We are growing security, we are growing cloud, we are growing machine to machine. So there are many public numbers that we shared that signaling what I'm saying that is positive the trend that we see in B2B. And I still depend a lot of the recovery of the economy. As much as companies start to reinvest in Brazil, we're going to see our business going up in the same way. Regarding the MOU team, I think your question was about why 3G is not there. I think we wanted to point out Our key priorities in the short term to make it feasible and real. So 2G and 4G is going to be the first step. But there is a line in our MOU that also said that we're going to be assessing other technologies and other frequencies. So once we get to the analysis of the 2G and 4G and we see that there is also opportunity to capture in the 3G, we're going to do it. We just didn't point out as the key priority because we wanted to make it real. So starting with the 2G that we see easily to be accomplished and 4G new cities with 700. But again, when we get to a city that there is 2G, there is 4G, and there is also 3G, of course we're going to consider doing everything and getting much more of this MOU. PLC. We don't have a concrete date to tell you. We're still very optimistic. We don't know what's going to be there by timing. I think it's there being analyzed by the Senator. We have to wait her timing to have it analyzed. Brazil is under a lot of reforms at the same time, so we don't know what's going to be the agenda of the Senate Next question comes from Alejandro Lavin, Citi.

Hi guys, good morning. Thank you for the call. I have a couple of quick questions on the balance sheet and leverage. So obviously you have a very comfortable position right now. Your net cash will measure excluding IFRS 16. So obviously this gives you a lot of flexibility going forward. So I'm wondering what would be the top two or three possible uses for this leverage capacity?

Hi, Alejandro. This is David Melcon. I will take the question. I mean, as you say, we have a very strong balance sheet. You're trying to consider that in the next six months, five months, we are going to pay the shareholder remuneration coming from last year that will amount to almost 7 billion reais. So we have a cash out of 7 billion in the second half. So this is something that we need to consider. And then regarding what would be the plan for the future, I think having such a strong balance sheet gives us opportunities also to have flexibility for anything that could happen in the future. I'm thinking about the tax reform and a few other things, so we believe that this is the right structure that we have at the moment, and then we will see further on when there is any specific.

Okay, great. And if I may, a quick second question. What would be a normalized or steady state leverage level that you would feel comfortable with? Thank you.

I mean, we don't have a ratio, no. I think if you look to the tax, the interest rate here in Brazil, they have reduced significantly over the last couple of years. So I think now we are in a difficult situation that we were before. We are better. But at the moment, we don't have a plan, so I cannot give you a number. So if you include also the data we have from IFRS 16, so the number is slightly higher. But as I said before, I think we need to see what will be the next future, particularly about the tax reform and a few other things, then we will make the decision. But at the moment, we have nothing, no reference here.

Okay, very clear.

Thank you.

Thank you.

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.

So, I would like to thank you all for participating in our call. If you have any additional questions, please contact our IR team. And as we said along the call, we are very optimistic about the country and both our businesses, the mobile and the fixed, for the second half of the year. So, thank you and hope to see you soon. Bye-bye.

Thank you. This concludes today's Telefonica Brasil to Kill 19 Results conference call. You may disconnect your lines at this time.