Telefonica Brasil S.A.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil second quarter of 2020 earnings conference call. Today with us representing the management of Telefónica Brasil, we have Mr. Christian Gebara, CEO of the company, Mr. David Malkin, CFO and Investor Relations Officer, and Mr. Luis 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 There will be a replay facility for this call on the website. After a 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 an operator. Before proceeding, let me mention that forward-looking statements are being made under the saving 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 risk 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. 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 2020 second quarter results. The call, as usual, will be divided as follows. To start, Christian Gebara, our CEO, will present an update on the effects felt in this quarter due to the COVID pandemic and show how the situation is shifting our relationship with our customers. Then he will go over our operational and commercial performance, as well as our record FTTA expansion. Then, our CFO, David Melcon, will comment on our cost structure, efficiency commitment, investments, and financial highlights. To conclude, Christian will comment on our ongoing ESG initiatives. We will then move to Q&A, and now pass the word to Christian.

Thank you, Blaser. Good morning, everyone, and thank you for taking part in our second quarter 2020 results call. I will start by talking about the impacts of the pandemic on our operations. As you know, second quarter 2020 wasn't a typical quarter, with a drastic reduction of commercial activity in April, but starting to show early signs of recovery in May and June. Since the complete closure of our stores in March, we have gradually begun opening them up again, with reduced hours and limited capacity. In June, around 80% of our stores were already reopened to the public. This temporary shutdown had significant impact on postpaid additions and headset sales that typically take place in our stores. That said, we have perceived a recovery since May, and in June we only had 6,000 postpaid net disconnections and a softer reduction of minus 10% in headset sales year over year. In prepaid, we were able to revert the negative trend Having a slightly positive year-over-year growth of 0.8%, as connectivity across all segments remains essential. All in all, Vivo's top-quality value proposition continues to drive demand and sustain customer resilience. In fact, FTTH performed better in Q2 than in Q1, with record net ads. Additionally, churn decreased in all key segments. As customers are now giving more value to network quality and the overall experience. On slide 4, with the acceleration in the use of digital channels in recent months, the customer journey is changing fast, and Vivo is at the forefront of this transformation. By June, the acquisition of new mobile customers and migrations through e-commerce had increased 16.5%, while FTTA sales had gone up by 12.3% compared to March levels. Melvivo, our eCare platform, that reached 17.6 million unique users at the end of the quarter, saw an increase of 19.2% average daily users for mobile and 33.8% for fixed in the last three months. Meanwhile, Aura, our artificial intelligence platform, both had strong results when we compared March to June figures. The number of contacts via WhatsApp increased 74.6%, while revenues from prepaid top-ups through Aura increased 87.1%. As you can see, the use of digital channels expanded greatly during the confinement period, and these trends are here to stay creating a unique experience for our customers. Moving to slide five, through our ability to adapt, and our robust operating model focused on value and quality, we are able to deliver a solid operating performance and an elevated cash generation in the quarter. Fiverr, our main engine for future fixed revenue growth, boasted the highest level of net-end ever, even with the mobility restrictions facing the last months, as you can see. As a result, we increased our customer base by 31.9% year-over-year, reaching 2.9 million customers connected. In mobile, Evo's leading position in terms of quality and customer experience resulted in a 3.4% year-over-year growth of our postpaid subscriber base, reaching 43.1 million customers, which represents 58% of our total mobile access. Our mobile service revenues fell minus 1.5% year-over-year, which shows the limited effect caused by the pandemic on our operations. This is explained not only by the central role of connectivity, but also by our high-value client mix. In fact, 82% of our MSR is composed of post-paid revenues that are typically more resilient to macroeconomic downturns. Fiber revenues Made up of FTTH and IPTV, expanded 39.7% year-over-year and represent 26% of all fixed residents. This fast-paced evolution was unshaken by the COVID-19 crisis and we remain confident that it will be the main growth lever of the fixed business in the future. Looking at our costs, we remain focused on accelerating the savings coming from digitalization and simplification. In the quarter, our costs had a significant year-over-year reduction of minus 5.9%, leading our EBITDA margin to advance plus 0.5 percentage points. Lastly, we continue to expand our fiber footprint while having an efficient capital strategy focused on value. We reduced our investments on legacy technologies by minus 55% year-over-year and our capex oversales by minus 3.2 percentage points while maintaining intact the levels of investment on growth. The rational approach allows us, along with our strong revenues and efficient cost control, to generate solid cash flows. In Q2, operating cash flow margin reached 21.2%, expanding 3.7 percentage points year-over-year, and contributed to the increase of 62.6% of our free cash flow. The total 5.4 billion reais in the first half of the year. On slide 6, you can see that our total mobile revenue decreased minus 5.1%, mainly as a result of the sharp reduction in handset sales impacted by temporary confinement measures. The sale of handsets dropped minus 40.9% in the quarter and only began to improve when our stores gradually started to reopen. On the post-pandemic segment, the solid performance of hybrid in the quarter helped reduce the potential impact on revenues, that only fell minus 0.7%. Prepaid revenues tend to be more responsive to macroeconomic downturns and fell minus 4.9%. However, we were able to revert the trend due to the active management of our customer base and June figures showed an increase of plus 0.8% year-over-year. The result Our mobile service revenue declined minus 1.5% year-over-year. Moving to slide 7. In the second quarter, we again reaffirmed our mobile leadership, sustained by customer preference and gradual commercial recovery. Our overall mobile market share stood at 33%, the highest in 14 years. and a significant improvement of our post-paid churn that reduced 0.31 percentage points year-over-year, reinforced our leadership in this segment. Now, as you can see on the bottom left-hand side of the slide, prepaid registered the highest level of net ads in five years. We had 267,000 net ads as a result of our continuous efforts on client acquisition and active customer-based management. Boss Pays Brossettes, on the other hand, suffered from the closure of our stores, but with the gradual reopening, we saw a recovery throughout the quarter. Of the 206,000 net disconnections that we had in the second quarter, only 6,000 were in June. On slide 8, We present our fixed revenues that brought minus 51% due to the maturity of our legacy corporate-based services and our decision to stop selling DTHP TV, while we continue to see solid trends in the growing side of the business. On the right-hand side of the slide, you can see that the growing business were up 11% and continue to gain proportion over fixed revenues. This evolution demonstrates why we are confident that these segments will drive growth in the future. Our FTTH and IPTP revenues reflect the success of our accelerated fiber deployment. FTTH revenues rose 47.6% year-over-year, while our IPTP were up 22.3%. On the bottom right, to our effort to enhance sales of a diversified portfolio of service for B2B, You can see that data and ITT continues to increase its importance, and it now represents 18.6% of total fixed revenues, an increase of 1.7 percentage points year-over-year. Now moving forward to slide 9. The addition of higher value FTTH and IPTP customers continues to exceed expectations, improving the customer mix and driving ARPU growth. For the second quarter in a row, we had record FiberNet ads. 210,000, and a strong IPTV performance that contributed to the growth of broadband and BTP ARPUs. FTTH access in Q2 reached 2.9 million access, meaning a 32% year-over-year increase, and now represents 44% of our broadband customer base. As a consequence, broadband ARPU rose 18% year-over-year to 74 AI As FTTH, customers have significantly higher ARPU than customers from other technologies. Moving to the right-hand side of the slide, we present the evolution of our IPTV business. IPTV access increased 24% year-over-year, contributed to the improvement of PTV ARPU by 3%, reaching R$107. I would like to point out that these positive figures are the combination of our solid fiber expansion and attractive value proposition, with the slight quality trend accelerated by the mobility restrictions seen during the last few months. This will balance it out even more as time goes by. As customers, I am clearly demanding first demand rate connectivity for homeworking and homeschooling. JIV is ready to capture this opportunity thanks to our consistent investment in the largest We have record fiber deployment, adding an additional 1.3 million FTTH home paths to our footprint. In Q2, we entered 30 new cities with FTTH, reaching a total of 216 cities. We are expanding to fresh markets and E. Regis, while also accelerating the expansion process by overlaying our COPR and SDTC networks that allow us to improve NetEnt and Ultra Broadband ARPO. As you can see on the right-hand side of the slide, we reached 13.1 million home paths, a yearly increase of 37.4%, and we expect to surpass 14 million home paths at the end of the year. On slide 11, we would like to introduce our plan to create a new vehicle dedicated to fiber that will further enhance the capture of the ultra-broadened market. The objective is to be fully operational in 2021, including the carve-out of BIBO's 1.1 million brownfield FTTH homes path that will be complemented by the contributions of Telefonica Group and Potential Investors. This will allow us to create an independent and neutral wholesale network company that will reach more than 5 million home paths in 4 years. The focus will be on cities where the fiber of opportunities is still intact and will allow Vivo to have a less capex intensive deployment since we will manage the relationship with the customer and remunerate the new entity for the use of its network. This is a unique opportunity to unite Vivo's leading value proposition and superior customer care with Telefónica's Group's Fiber Expertise and Potential Investors' Financial Capability. As a result, FIVO will continue to expand its FTTH network through this new vehicle, through partnerships and organically, reaching more than 24 Bina Home Paths in 2024. I now pass it on to our CFO, David Balcon.