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 2020 and 2020 earnings conference call. Today with us, representing the management of Telefonica Brasil, we have Mr. Christian Gebara, CEO of the company, Mr. David Malkin, CFO and Investor Relations Officer, and Mr. Luiz Plaster, IR Director. We also have a simultaneous webcast with a slide presentation on the internet that can be accessed at the website www.telefonica.com.br. 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 this time, further instructions will be given. Should any participant need assistance during this conference call, please press the 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. Luiz Plaster, Investor Relations Director of Telefonica Brasil. Mr. Plaster, you may begin your conference.

Thank you. Good morning and welcome to Telefonica Brasil's conference call to discuss 2020 fourth quarter and full year results.

The call will be divided as follows. First, our CEO, Christian Gebara, will give you an overview of our operational and financial performance.

Then our CFO, David Melcon, will comment on the acquisition of Voice Mobile Assets, our constant capex management, and our shareholder remuneration for 2020.

To conclude, Christian will comment on our ESG initiatives and then move to the Q&A session.

Now I hand over to Christian.

Thank you, Blaster. Good morning, everyone, and thank you for attending our running calls. I would like to start by giving an overview of 2020. The pandemic has accelerated Brazil's digital transformation, which confirmed the essentiality of our services. During this challenging year, Vivo delivered a solid set of results, driven by the increased demand for our high-quality and reliable connectivity. Our purpose of digitalizing to bring closer has never been so appropriate. We ended the year with 95 million access. In mobile, we added 4 million customers and in 2020, with Vivo's market share at historic highs of 33.6%. Our fiber deployment continued at full speed, reaching 15.7 million home paths and an increase of 4.7 million HPs, which is more than double what it did in 2019. FPTH revenues increased by 52.9% year-over-year in the fourth quarter. In terms of profitability, and despite the hand-wins of the temporary confinement measures, our residual EBITDA totalled R$ 17.8 billion. The EBITDA margin increased 0.3%, 0.0 per year, reaching 41.3%, due to the performance of our growing business and effective cost management that we will elaborate later in the presentation. We are also able to deliver our highest ever level of free cash flow, R$ 9.6 billion, growing 12.6% year-over-year. All these factors allowed us to propose a shareholder remuneration of R$ 5.4 billion for the year, with a payout of 113.6% and a dividend yield of 7%, which is more than three times higher than the local interest rates. Moving to slide 4. You can see that the recovery of Bibo's Key Segment was consistent throughout 2020. Postpaid revenues grew 4.9% quarter-over-quarter due to the acceleration of net additions and continued execution of our more-for-more strategy. Prepaid also continued to outperform, with revenues increasing 4.3% quarter-over-quarter, driven by a robust level of net additions and recurrency of top-ups. FTTH revenues rose 8.2% quarter of quarter, supported by the constant growth of the customer base and migration to higher speeds. Lastly, handset sales continued to recover, growing 14% in comparison to the previous quarter. This performance was benefited by improved commercial activity and the success of our end-of-the-year campaigns like Black Friday. On slide five, We show the transformation of people's revenue profile, which validates our positive outlook for the future. We divided our total revenues into two categories, core and no-core businesses. Our core businesses are based on high-speed connectivity, both fixed and mobile, with the key enabler for digital services. The results that Vivo is increasing its relevance into these cutting-edge technologies like fiber and is in the best position to explore the full potential of customers' digital lives. Vivo's core businesses include mobile, handsets, FTTX, IPTV, digital services, and data and ICT. These segments represent 88% of our total revenues and grew 3.2% year-over-year. mainly due to the positive results from FTTH and consistent performance in mobile. The non-core businesses, which represent 12% of revenues and dropped 26.4% year-over-year, are made up of mature legacy technologies that we have strategically decided to deprioritize. The fixed-to-mobile substitution and the voice-to-data migrations are consolidated realities with no going back. We no longer foster the commercialization of ETSL, which is an automated technology. And we stopped actively selling DTH back in mid-2019. As a result, and from now on, we'll be focusing our presentations on the core business to better convey the company that lives today and the future that we foresee. On slide 6, you can see that the total mobile revenues increased 1.6% year-over-year, despite the impact of the pandemic on handset sales. Prepaid revenues grew 7.3%, driven by an impressive volume of net additions and continuous effort related to customer base management. The Post-Made segment, which accounts for 57% of access and 80% of mobile services revenues, was up 0.9% year-over-year and showed ARPU improvement. We continue to execute our more-for-more strategy and are combining data with a complete portfolio of co-branded digital services. These actions are paying off and we are optimistic going forward. Turning to slide 7. We also again reaffirmed our mobile leadership and people's market share remains at historic highs, reaching 33.6% in December of 2020. Postpaid churn saw a reduction of 0.53 percentage points year over year and stands at the lowest level in five years. On the bottom left-hand side of the slide, we show the breakdown of postpaid net additions and how they have been improving. In the fourth quarter 2020, we had 638,000 net ads. Prepaid also had another strong quarter of net additions, 905,000, which indicates how quality connectivity is increasingly important across all segments. On slide 8, we show the performance of our core fixed business that grew 9.1% year over year. The data and ICT line decreased 4.2% due to many companies postponing investments during the pandemic. But we are convinced that FIBO's revamped B2B portfolio puts us in a privileged position to capture this opportunity as soon as the economy picks up. FTTH's revenues were up 13.8%, driven by the relevance of FTTH. that represent 73% of these revenues. FTTH is our main growth catalyst, delivering an impressive 52.9% revenue increase year over year and a compound annual growth of 45% in the recent past. As we expand our FTTH footprint, IPTV access and revenues also grow. During the last two years, IPTV Revenues posted a compound annual growth rate of 25%, confirming the appeal of our high-speed broadband and content platform bundle. Moving to line 9, you can see the wrap-up of our fiber access and the constantly improving quality of our customer base. Our fiber products continue to attract more customers, which resulted in a 36% increase of FTTH access year-over-year. We also show a substantial increase in FTTH ARPU, 13% year-over-year, mainly related to the demand for higher speeds. Moving to the right-hand side of the slide, we present acceleration of FTTH net ads. The total, 248,000 in the fourth quarter of 2020, 1.7 times higher than the previous year. I would also like to highlight the high value profile of last quarter's FTTH gross ads. More than 35% were convergent customers. Approximately 30% were on speeds of 300 megabits. Approximately 20% were sold together via IPTV and more than 25% were bundled with OTTs like Netflix and Disney+. On slide 10, we show how our fiber deployment continues accelerating. As previously mentioned, we ended 2020 with 15.7 million home paths, an increase of 4.7 million year-over-year. By year end, our fiber footprint covers 266 cities, reinforcing our commitment to offering a best-in-class experience across Brazil. The cities launched during the last two years have already achieved the expected penetration rate, confirming the accuracy of our strategic fiber deployment plan. FIBO has the largest FTTH footprint in Latin America. which is equivalent to the sum of home paths in the UK, Germany, Netherlands and Australia. We also lead in terms of homes connected with 20.3% market share in FTTH, more than 6 percentage points ahead of the second player. But we still see that there is room for further Fibre Group in Brazil and we plan to reach at least 24 million home paths by the end of 2024. One of the ways that we'll be doing this is by launching and independent neutral fiber network. The initiative is progressing well. We have entered an advanced phase of negotiations together with Telefonica Infra and a major international investor and expect the signing in the near future. TIVO will be the anchor tenant carving out 1.6 million brownfield home paths and the target is to reach at least 5.5 million home paths with FTTH in four years. We will keep you updated as soon as there are further developments. Moving to slide 11, we would like to share some KPIs that illustrate Vivo's initial success at expanding its portfolio beyond traditional telco services. One of our key initiatives is VivoMoney, our 100% digital personal loan platform. VivoMoney is in its early stages, but since launching in October, we have seen positive results. New contracts per month increased 2.5 times and monthly credit origination grew 2.4 times in just two months. Vivo Money stands out not only for its simple and quick loans, but also for its focus on high-quality mobile customers with a digital profile. We're seeing that Vivo Money is attracting customers that demonstrate higher adoption of our new Vivo HR app. Another promising development in the fourth quarter was our digital marketplace, lojavivo.com.br. Launched in July 2020, we had an increase of 6.7 times its gross merchandise value quarter over quarter. Loja Vivo is key to our strategy of becoming a one-stop shop for our customers' technology and connectivity needs. Vivo is also a digital hub for B2B. Delivering a unique set of corporate solutions, our cloud and cybersecurity segments proved how resilient they are despite of this year's economic downturn and grew revenues 77% and 116% respectively. Another initiative, Vivo Ads, our digital advertising platform, saw its revenues grow 14% year-over-year. In August, we launched a self-service sales channel AIMED AT EXPANDING ITS REACH TO SMALL AND MEDIA ENTERPRISES, MAKING IT POSSIBLE FOR THEM TO HAVE ACCESS TO MOBILE MARKETING CAMPAIGNS. TO CONCLUDE, THE TERRA PORTAL REMAINS THE THIRD LARGEST PORTAL IN THE COUNTRY, WITH 211 MILLION VISITS PER MONTH IN 2020, AN INCREASE OF 35% YEAR-OF-YEAR DUE TO THE IMPROVED MEDIA COVERAGE WHICH ALSO CONTRIBUTED TO VIVO AD REVENUES. Now I would like to pass it over to David, our CFO.

Good morning, everyone, and thank you, Christian. Moving to slide 12, I would like to present a brief overview of the acquisition of OIS mobile assets. This opportunity will consolidate Vivos' leadership in quality of services, one of our historic strengths, and contribute to the generation of additional value for our shareholders through the capture of synergies. The joint bid that won the auction on December 14, 2020 was set at R$ 16.5 billion, of which Vivo will pay R$ 5.5 billion. Okay, thank you. Let's continue with the slide. So these are the key milestones of the overall acquisition process, and we are confident that the transaction will be completed by the end of 2021. As you can see on the bottom left-hand side of the slide, this will represent a unique opportunity for Vivo With the redistribution of spectrum frequencies, we will strengthen our value offering and through the acquisition of customers in regions where we have lower market share, we will be able to make better use of our network and broaden our customer base. Additionally, OPEX and CAPEX synergies will certainly be enhanced by a solid track record of previous integrations, such as the case with the acquisition of GBT in 2015. Furthermore, this movement is positive, not only for Vivo, but for the telco industry and Brazilian society as a whole. There will be a mass upgrade in customer experience, given the improvement of network usage in all corners of the country, and further acceleration of investment dedicated to infrastructure and innovation to advance Brazil's digitalization process. Turning to slide 13, we saw our continuous commitment to improving our cost structure. Recurring costs, excluding goods sold, contracted by 4.2% year-over-year in nominal terms. If we were to discount the effect of inflation, we would see an even more impressive 8.7 degrees. G&A and personal costs were benefited by ongoing optimization initiatives and temporary government measures such as payroll subsidies. Commercial expenses saw a 9.2% reduction driven by our digitalization and simplification efforts. Another positive factor has been the greatest use of digital channels across our customer base, decreasing expenses by commissioning, consensual billing and advertising. Provision for PACT-ED also dropped 9% year-over-year, reflecting our customers' concern to maintain their payments up-to-date, as well as the measures that we have implemented, like offering the option to pay in installments. Cost of service rented decreased 10% year-over-year due to the high interconnection costs, valuable regulatory fees that are impacted by the acceleration of the mobile customer base and the growing demand for digital services that come through partnerships. As a result, our recurring EBITDA totaled almost R4.9 billion in the fourth quarter of 2020, with a margin of 43.6%. On slide 14, we present figures from our digitalization and simplification fronts that are key drivers for sequential cost contraction and improved customer experience. In December, e-billing penetration hit 84%, a significant 12 percentage points increase year-over-year, while payments made through digital platforms now represent 64% of collections. Recently, we started offering digital technical support and this new way of caring for our customers already represent 25% of the overall technical support. We were able to reduce call center costs by 24% in 2020 through the growing use of e-care channels like MiuVivo, artificial intelligence with Aura and a selection of WhatsApp solutions. The enhanced acceptance from our customers for all that is digital was also seen in prepaid top-ups and B2C sales. In December 2020, 37% of recharges were made through digital platforms, and our B2B digital sales increased 61% year-over-year. That said, there is still room to advance in the digitalization journey, both internally, transforming our back offices, and in the way that we interact and serve our customers. On the right-hand side of the slide, you can see that since 2017, we were able to deliver our OPEC savings of 1.5 billion reais. Our OPEC savings improved sequentially from 394 million in 2018 to 624 million in 2020. We ended the year having reached 94% of our 2021 target of 1.6 billion, but let me again reinforce that we are confident that we can do even more. Moving to slide 15, On the left-hand side of the slide, we can see the performance of our smart CAPEX allocation. Our CAPEX ratio decreased 1.9 percentage points year-over-year, and our CAPEX decreased 11.9% in relation to the previous year. Regarding the reduction in CAPEX, we invested even more in FTPH and cutting-edge technologies in general. Growing technologies account for 70% of our total CAPEX investment. I would also like to to share more details regarding a network sharing agreement with TIM that is divided into three main fronts. In 4G coverage expansion, we have already reached 348 new cities and we expect to close the first semester of the year with 730 cities covered, half for each operator. Another front is the network consolidation that will result in a single grid model focused on cities below 30,000 inhabitants. We are carrying out a pilot in 50 cities, which will be completed during 2021, and will then be able to define the next steps. The full potential of this front involves an extension of the model to 1.6 thousand cities. Lastly, we have the 2G network shutdown, which means that each operator will switch off half of the 2G sites. The alignment phase is ongoing, and rollout is expected for the third quarter. To this network sharing, we will have additional 4G coverage, better network capacity, and OPEX and CAPEX efficiencies. We are enthusiastic about the future of this agreement, and it corroborates our commitment to quality and the optimization of our investment. Turning to the next slide, I'm happy to report the conclusion of the unification of shared classes. Since November 23rd this year, We are trading with only the VT3 ticker in the Brasilia stock market, while our IDR ticker remains unchanged. This represents a significant step towards a greater level of governance, granting all shareholders tag-along and voting rights. I would also like to give you an update about the share-by-pack program. So far, we have acquired 1.3 million shares for a total value of R$ 58 million. We continue to be active and the program will be in place until January 2022. Finally, and reinforcing our commitment to our shareholders, we are proposing a remuneration of 5.4 billion reais for 2020, which represents a payout of 130% and a gross amount of 3.2 reais per share. Our dividend yield stands at 7%, more than three times the local interest rate. The payment of this amount will be divided in two tranches. The first tranche of R$ 2.6 billion will be paid on July 13th and the second tranche of R$ 2.8 billion will be paid in October 5th, 2021. This remuneration has been proposed by the Board of Directors and is pending the necessary approvals by the General Assembly Holdings Meeting to be held on April 15th. And finally, moving to slide 17, you can see that our efficiency Thank you, and now I pass the word back to Christian.

Thank you, Davi. To conclude today's presentation, I would like to comment on the progress and some of the results around our commitment to ESG. Regarding our environmental initiatives, Recycle with Vivo collected 7.7 tons of electronic waste in 2020, an increase of 15% in comparison to 2019. Vivo, in its first local submission to the Carmel Disclosure Project, had the best grade in the assessment. and was included in its prestigious A-list. As for our social actions, Fundação Telefônica Vivo invested 59.4 million reais in education last year that benefited 2.4 million students and teachers. In response to the ongoing pandemic, there was also an additional investment of 36.6 million reais in donations, totaling 96 million reais in 2020. Last month, Vivo also donated, through Fundação Telefônica Vivo, an additional R$ 300,000 for the purchase of medical equipment in the state of Amazonas. Vivo was also recognized for its commitment to promoting diversity and social inclusion by winning the CNN Notable Awards in the Diversity category. Another important achievement is the fact that we were classified as industry mover in S&P's Sustainability Yearbook. Finally, we will maintain its listing in the main ESG indexes like BITRIS Corporate Sustainability Index and Carbon Efficiency Index, and our compliance program obtained the DSC 10000 Certificate, guaranteeing our conformity with Brazilian anti-corruption laws and regulations. These are just a few examples of how we seek to be a protagonist in promoting sustainable development contributing to our society. Thank you, and we can now move to Q&A.

Thank you. The floor is now open for questions. If you have a question, press star 1. If at any point your question is answered, you may remove yourself 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 in the order they are received. We do ask that when you pose your question that you pick up your handset to provide optimal sound quality. Please hold. Our first question comes from Fred Mendes, Bradesco BBI.

Hello. Good morning, everyone. I have two questions here. I mean, the first one related to the FTTH. A strong increase again in the ARPU, and it looks like the high-speed products like the 300 megabytes is driving this growth. So, I think the first question here is, do you see room to increase the ARPU above R$90, since the average that we have here? And then, on the same topic, if these clients that you are adding, a very strong net addition again, if you are getting clients from the competition, or if that's basically an upgrade from the corporate clients that you already have. Thank you.

Hi, Fred. That's Christian. The second question, I know about the NetEase. Most of it is new customers that are coming in. So most of the net ads are coming from new customers. So new cities that we enter or penetration of the existing network. So most of it is coming from new customers. Regarding ARPU, so as you correctly stated, Our pool is improving for two reasons. We are selling more. The mix of high speed 300 is growing. So we still see room for growing even more. And also we are blended together with our broadband offer OTTs. So we started with Netflix. Very successful. We added Disney+, and we're going to add others in the near future. So, blending content with fiber is a strategy going forward that we're going to follow, and also increase and improve the mix of 300 or even high speeds that we consider appropriate in the future will also be in our strategy. So, ARPU may continue with this positive trend.

Thank you, thank you, Christian. And if I may, just a quick follow-up. You briefly mentioned about the carve-out process during the beginning of the presentation, but can you give us a little bit more details on that or not yet? Thank you.

Okay, Fred. So, as we ended the year with 15.7 million home paths, so out of these 15.7, we're going to carve out 1.6 million We're going to contribute with this new independent and neutral fiber network. It's a company, FiberZil. So we was contributing at this 1.6 million brownfield HPs. Then we have an international investor as a partner and Telefonica Infra. That's from Telefonica Group. also as a partner together in this vehicle and in this company. The objective is at the end of 2024, we end with a network with more than 5.5 million HPs that contributed to the 24 million HPs that we said also in this presentation that is going to combine organic growth from Vivo and this 5.5

Our next question comes from Leonardo Olmos, UBS.

Hi, good morning everyone. My question is on mobile. A very wide range of meta additions in the quarter. AMX with over 2 million subs, Steam 200,000, and UEF 1.8. So my question is, what's your strategy in meta additions in the fourth quarter? What was it? And how do you see that playing out in 2021?

Hi Leonardo, that's Christian. So, as we stated in the beginning, we are seeing a recovery. I will talk about first postpaid and then we talk about prepaid. In the postpaid, after the very difficult months March and April, what we saw after that was a reopening of the economy. When the reopening of the economy occurs, We also open our stores and our physical channels and we see a better mood from the customers to go to malls and to stores and to buy telco services or technology services. So I think we were able to capture this positive trend, this recovery of the economy and reopening of the channels. I also believe that our superior quality and customer experience I think we've been innovating in our offer. We innovated in the hybrid and also innovated in the post-paid. Here I will emphasize the SELFIE plan that is a combination of data with an OTT on a value-added services. Here we have strong partnerships and we launched it just after the pandemic started in May, June. Partnerships with Happy for delivery, partnership with Netflix for video, partnership with Spotify for music, We are about to launch new partnerships. That's driving this concept of buying content plus data in the same level of protagonism and not only having data and with an added service as a secondary service. Thank you very much. People with more mobility than they were before, people buying new SIM cards and that we are able to capture. Again, the quality, the coverage of people stands out. And also there is the government aid. The government also, with some incentives that they put in place in the last year, was also positive for driving consumption and the proof of aid in this case was also benefited.

Thank you, Christian. You mentioned that migration from prepaid to postpaid or hybrid. Looking at your own base, especially considering the new prepaid you recently had, how long do you think that can go? How long can you... How many more clients can you migrate from prepaid to hybrid or postpaid?

The prepaid is increasing the base. So when we keep... And I cannot tell you for how long I think we are putting a lot of effort in creating a very wise and very attractive portfolio coming from prepaid going to hybrid I think it's much more our ability to drive customers into people and get them with the best offer that stands for their needs. Our percentage of postpaid customers is very high, as you know, and here I think it's our ability to drive our prepaid to postpaid, so that's why our revenues coming from postpaid is much higher than the ones coming from prepaid. Thank you, Leonardo.

Our next question comes from Marcelo Santos, JP Morgan. Please proceed.

Hi, good morning. Thank you for taking the questions. I'd like to explore a little bit more the digital initiatives that you put on slide 11, Vivo Money and Vivo Marketplace. I wonder if you could give a little bit more color. On Vivo Money, how far has this been running as a fully implemented initiative? I understand you ran it as a pilot for a while, but is it available to all? What are the main hurdles to grow? And what alternatives of funding are you studying? Do you consider launching some kind of FIDIC? Any data you could share about losses, like delinquency or anything that would be interesting? Anything, basically. And on the marketplace, what kind of channels? Are the users using more the app or is it more through the Internet? What are the incentives you are putting to bring sellers? How do you work logistics? So, basically, if you could give some more call on these initiatives, that would be very helpful. Thank you.

So, Marcelo, good question. I think, to start it, we strongly believe in our ability to leverage digital services through our customer base, Channel Capillarity, both physical and online, our big data capability and the strength of our brand. So Vivo Money that we included in this presentation is one example among many others that we are working in different sectors and different verticals. Financial services is one, hardware and accessories is another one. Health is another one, education, entertainment, so there are several ones. In People Money, we've been working a lot in this project for a long time and we've been very cautious and conservative the way we want to expand it. We launched it commercially in a segmented approach in October was when we started offering this to a segmented customer base. It's not for everyone. And we started with hybrid and post-paid customers. We still haven't addressed the prepaid customers. That is most of the target that is maybe more aligned with the needs of this credit. What we started offering for these customers is loans that are coming from R$ 1,000 to R$ 30,000, And it's 100% digital, as you ask it also, so we normally do that through push notifications. Thank you very much. Most of them are not banks. Some banks are entering that, but others are companies that are just addressing the financial needs of this customer base. Here we started with FIDIC, and today it's funded by us, but we're going to add more partners as it grows. What we try to show here is what we had in October. was multiplied by 2.5 on what we had in December. We are opening up a little bit more or getting awareness of the service. We're not doing a massive campaign, putting on TV or using all the channels available to market what is Vivo Money. We've been very conservative and cautious to start growing on that. That's only one piece of a financial service strategy that we have. We're going to be talking about more financial services in the near future. Today, if you consider that our customers, they go and they buy most of it. Today, we reached more than 35% of our top-ups in prepaid already done digitally. Why not this top-up that is digitally executed could not end to be a wallet? So today they use this money only to buy data and buy a prepaid plan. We foresee that the same money that they put in the prepaid app they could also use to buy other services. So that's also the initial thought that we had for a wallet. That is a Vivo wallet that we started from a customer base that already use us for the top up as I mentioned before. So there are many other insurances or something that we already sell. So we have pieces and Vivo Money is another piece in a larger and broader strategy to have a relevant role in financial services. and the other one that is in this slide only to mention if you want is a marketplace we have an e-commerce and our e-commerce was centered in selling our services telco services plus the smartphone We decided to open up to be a marketplace for technology, not only selling the products that we have in our own store, but adding together stores from other players. So that's why we call it Lodge of People, that's a marketplace. So you can buy a smartphone, you can buy an accessory, you can buy a service from people, but you can also buy a fridge. You can also buy a blender. You can also buy different types of accessories. We strongly believe that we can go much further with that. And so that's why we mentioned for the first time this with a number that's multiplied by seven almost the third quarter and now in the fourth quarter it's multiplied by seven all the results that we have in the third quarter. That's only to address some of the questions that we normally have. How can you leverage customer base Thank you. Thank you very much.

Our next question comes from Susana Saleru, Itaú.

Hi. Good morning, guys. Thank you for taking our questions. We have two. The first question is related to the SPTH growth. It's actually expanding very fast. So our question is, what is the pricing strategy you want to get when you place it if you have... A more aggressive pricing strategy to be able to maintain this level of growth going forward. That would be our first question. The second question is related to the top of the pre-tax. How much more do you believe that you can deliver in terms of a digital recharge? We are asking that question because we understand that the key cost The pre-paid, the key cost of the pay is the top-up cost. So, I would just like to know, two years from now, do you believe that what will be the percentage of the checks done digitally versus non-digitally? And if you are aware, that would be an important driver for margin exchange. Thank you.

Susana, can you repeat the second question? I didn't get it. I cannot answer the FTTH, but what is the question? I understand that you want the prepaid. What is the question? The top-ups?

My question is about the top-ups. Today, digitally, 37% of the rich ads are digital. Thank you. Thank you.

Susana, I think we've been growing a lot in top-ups through digital channels and there are always new digital channels coming up. So it's difficult for me to tell you what is going to be the limit. And I think also many more people are getting credit cards. So when the people have a credit card, it has more access to digital channels. We have new wallets coming in in the market. These wallets also help the digital penetration. So if you see some of the new brands coming up in the market now that are used to buying in online channels, and I don't want to name them, not to be naming one and not naming the other, but there are many, many companies bringing up digital payment solutions. All of them, they have been adopted by Vivo. When we adopt these new ways of payment, we see an increase, an important increase in the usage of digital channels. Now, the PIX also will facilitate people to get money, will facilitate people to have an account, and will facilitate people to transfer this money to a wallet. So that's why also I answered before Marcelo, Thank you very much. Thank you. And we are growing constantly. In the first one, in the FTTH, as I said, we are the largest fiber network in the country. Last year, we got 4.7 million new homes. We got almost 1 million new customers. We have an ambitious plan to go to more cities. We are overlaying some of our ADSL and FTTC network when we believe there is an opportunity. We still haven't played convergence. No, we can't play convergence. We have the highest market share in mobile. We have strong partnerships with OTT bringing content to the FTTH offer. So I believe there is room for much more growth and that's why we are doing this independent neutral fiber network. because we foresee as a great opportunity for Brazil where the penetration of ultra-broadbands is too low and we see Vivo as the leader in what we call convergent offer that is mobile, fiber plus OTT. We are in a unique position to do that.

Thank you very much.

Thank you, Susana.

Thank you. Our next question comes from Sumit Data, New Street Research.

Yeah, hi there. Thanks for taking my question. Questions, a couple if that's okay. First of all, on OI, we have quite a bit of guidance from your kind of peers, Telecom Italia last night, on how their business would look with OI. I guess you're not giving anything specific I wonder if you could maybe add a bit of color as to the direction of numbers when we think about incorporating oil. Specifically as well, they kind of guided up to some incremental capex in 2021 ahead of the deal closing. I wondered whether you were going to see a similar step up in capex, a kind of preparation capex, if you will. That's the first question, please. And then secondly, on the balance sheet, you know, you're paying a generous dividend this year above net income. You're buying back stock. Where would you sort of envisage the leverage of the balance sheet getting on a sort of two-year basis? Thank you.

So thank you for the question. This is Christian. So as you said, we are not... I think what we show here is the process that we're going through and the state that it's for people if the deal is approved by Anatel and the antitrust institution in Brazil called CADE. What we see here is the opportunity to bring customers to our customer base and that with no additional cost. These customers will be Thank you very much. We are able to also treat and take care of these customers with our own structure. We have a robust structure for digital channel stores and call centers and also to address the incremental number of customers that we may have if this operation goes through. We don't have, we don't consider additional capex for this year, capex as you asked. and that's going to be absorbed in our project for the year. And different from how we don't give guidances here in Brazil about our numbers. But our CAPEX will be controlled. I think we had an additional CAPEX in the past for acceleration of Thank you. Let me cover the second question.

So we continue with our policy to distribute 100% of the net income. And this year, on top of that, we adopt 600 million of distributive reserves that we had in the balance sheet. So we end up having a very attractive shareholder remuneration. It's around the dividend yield around 7%, which is three times the SELIC, which is the locally interest rate. So considering that this year we have a very, very strong free cash flow generation of more than 9 billion, that means that we will still have additional cash that could be used partially to finance the acquisition of OIS mobile assets that we hope will happen, we expect, by the end of the year. And then we are also expecting, I mean, this year there will be the 5G spectrum option. And again, we expect to leverage the company to absorb this payment. And having such a strong balance sheet that we have today and the low interest rate that we are enjoying now here in Brazil, We think we have the best combination to combine growth, to keep investing in our co-business, to have a strong shareholder remuneration, as we have already shown over the last few years, maintaining our policy of 100%, plus to be able to fund at a very attractive interest rate all the opportunities that are coming in front of us. As I say, always mobile and also the spectrum auction that we will have during this year.

That's really helpful. Can I ask a very quick follow-up, which is what is your latest expectation for the 5G auction in terms of structuring cash up front or wrapped into future coverage, and what is the expectation for timing? Thank you.

The 5G, we expect, I don't have an official date. The government has been stating that they want to do it by June, July, we still need the rules of the auction to be defined, approved by the regulatory institution Anatel. They may do that this week. There was a first vote, actually three votes, and then there was asked for the president of Anatel to review the documentation about the ruling of the auction. There are some obligations related to the auction that still need to be defined. The investment required and the cap for this investment. So, we're still waiting. We may have some news in the following days. These numbers of the value of the auction also needs to be approved by the... Okay, great, thank you.

Our next question comes from Maria Teresa Acevedo, Banco Santander.

Hi, thank you for the question. It's just a follow-up on the previous question on 5G. Can you please comment on your 5G strategy plans? Are you going to focus more on personal mobility or fixed wireless access, or do you expect early adoption on B2B automation and IoT platforms? and also in that context, do you see any opportunities not only on the ARPA but also on the cost side from having 5G networks with softwareization, virtualization that could optimize your network maintenance cost? That would be all. Thank you.

It's difficult for us to share the strategies that we are planning for 5G. It ranges from most of the The topics that you just described. Of course there is usage of data, mobile usage of 5G that may increase. There are the usage of some apps or solutions that we can use with fiber but not with 4G. So 5G may also be helpful for that. I mean gaming and many other entertainment that with 5G the experience will be much better. with the speed and the latency related to that. Of course, we foresee a big number of new applications with IoT, with B2C, with connected homes, but B2B mainly, as you just described, we've been doing some private LTE network with important clients in Brazil with great success. I'm sure that with 5G we'll be able to do that in a more massive way, with better results, and here we are in We are already working and already planning our business, industrial clients and many others. 5G may also mean a different way of structuring their whole business. So, again, in the end, you may consider smart cities. Difficult to see the money that we're going to capture from that right now. Still have time for that. And many other applications that we've seen in other countries. Fixed wireless. Our focus is in fiber, is FTTH, but why not in some remote areas to complement our footprint? As you're seeing here, that we may end 2024 with 24 million home paths. There are many other homes in Brazil, and why not complement these strategies? We do complement with 4G sometimes with FWA solutions. So we're open to all of them. In the cost side situation, It's difficult to tell you. There is also, of course, some automation that may be captured, but there are many more sites that need to be put in place for 5G. And I think, again, we've been pioneering in sharing infrastructure. We've been doing that with Teams, and we're open to do more also in 5G. So we started with 4G with Teams. 2G, we are piloting single-grid 3G, 4G. And again, we'll be opening to do that also in the 5G.

Perfect. Thank you, Christian. And this is a follow-up question. Do you have any additional color you can share on the fiber scene of process? Do you expect that this can improve your returns on the fiber in the mid-cities and reduce a little bit your capex? And how are you thinking about the franchisees as well for the smaller cities? Thank you.

We're talking about the franchise in Terra or the fiber as you know?

Oh, both, actually.

Okay, the franchising that we have with the Terra brand, it's very focused on smaller cities. The number of franchising is not in the number of 24 million home paths that I said. We have already launched seven cities we franchise. The model is different. The capex is 100% franchise. From the franchisee, so Vivo has no capex. And the revenue, we only have royalties from the franchisee of royalties that is paid to the, sorry, the franchising fees that is paid from the franchisee to Vivo. So it's a different model, very focused on the smaller cities. We have here the target of cities with less than In the other model that we already have in place with American Tower or with Phoenix Tower, there are A combined model where the capex is split between Vivo and the partner. In this case, talking about American Tower or Phoenix Tower, that together we have already more than 25 cities. Part of the capex is responsibility of the partner. It reduces our capex and we pay for home connection and there's an OPEX related to any customer that we connect. There's going to be a similar model that we're going to put in place with Five Brazil. Lower CAPEX and the OPEX related to connecting new customers. And also give us the speed. This is not only the CAPEX, OPEX formula, also speed. If you consider the case of American Tower in Minas Gerais, they bought the MIG Telecom, so we leverage From their infrastructure there, we put part of the infrastructure that we already have there, reduce our gap and we can address this opportunity much faster. If you consider that our aim there is to get to 800,000 home paths, we already surpassed 300. So we are doing very fast, moving very fast, with very good results.

Perfect, thank you. And the fiber skin-off is also in a bench box, right?

What about the farmer spin-off? It's what?

It's in advanced stages and it will also drive a lower CAPEX impact in your balance sheet.

Yes, it is in a very advanced stage and the model is more or less the same that I said that we are developing with ATC American Tower. Now, part of the CAPEX is the responsibility of the partner in the case of Thank you very much, Christian. Thank you.

Our next question comes from Alejandro de Loiza, BBVA.

Hi, good morning, everyone. This is Alejandro Calostra. Thank you so much for taking my question. You mentioned at the beginning of the call that most of the new subscribers in FTTH come from new customers. However, the pace of... This connection from other technologies is still outpacing the number of net additions in FTTH, even though you benefit from entering new regions with FTTH. So my question is, why do you think customers from other technologies are migrating to other companies? What are they offering that you do not at this stage, and what Thank you.

Thank you, Alejandro, for the question. I restate what I said. Most of the customers that we are bringing to FTTH are new customers. Your question is correct as well. The issue here is not the areas are not the same. Sometimes I'm I'm coming to new cities. Most of the cities that I entered last year, I don't have any network. No, I only have network if I used to have FTTC, then there is an overlay, it's not a new city. Or if I'm doing overlay in the state of São Paulo, that is the only place that I have corporate, no ADSL, no different from other players. Our concentration of corporate is exclusive in São Paulo, and then we have another few cities where we bought from GDT, where we have FTTC. So the markets where I enter or the markets where I'm losing customers, as you correctly stated, are not necessarily the same. When I am overlaying, when I'm entering, I'm losing these customers to myself. So these are the percentage that is the minority of customers that migrate from IDSL FTTC to FTTH because I put the network there and they connect, they are already a people customer and it's much easier and they migrate to FTTH servers from the same operator. But in some cities, or in some places, I'm not there yet with FTTA. So this customer, an ADSL customer or an FTTC customer, may find out another alternative with higher speed that I cannot offer with DSL and FTTC. I may try to retain this customer, but if he is an ADSL customer with a 4 Mbps speed in their broadband, and I faced the competition of a local fiber provider offering this customer 100 or 200 megabits, it's impossible to retain. The customer is willing to pay a little bit more, they will certainly migrate to this new technology. But the same happened to us in places where we were not there. There was someone that captured my customer that used to be DSL and now I'm winning back this customer. So, it's a mixture of different scenarios, Alejandro. So, they're not so easy to put a number. The only thing that I can say is where I can migrate, I'm migrating because I'm deploying the network. Where I'm not deploying the network, I'm trying to retain, but normally I lose the customer because they have an alternative with much higher speed. and where I'm entering, I'm capturing the customer. Even if the customer is in another technology with higher speeds, normally fiber is the winner, so I win back this customer. If it's a different technology with good speed, but not as good as fiber for upload and download, and even when it's in a fiber local provider, I'm able to capture this customer because I offer fiber, I offer ATT blended, I offer IPTV for those who want to buy IPTV, And in the future, I also play Convergence. I will offer Mobio plus FTTH.

Okay, great. Thank you for the explanation. And how long do you think it will take you to cover with FTTH those regions where you still cover with only FTTC?

I may overlay all the areas that I think are interesting for me, that it's financially attractive. It doesn't mean that I'm going to migrate and overlay 100%. Thank you very much for the explanation. Okay, Alejandro, thank you.

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

So, thank you all for joining our call today. If you have any additional questions, as you know, you please access our team. Hope to see you soon in our first quarter of 2021 results release that will be in April. So, thank you so much.

Thank you. This concludes today's Telefonica Brasil 4KIL 20 Results Conference Call. You may disconnect your lines at this time. Have a great day.