Telefonica Brasil S.A.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefônica Brasil first quarter of 2022 earnings conference call. Today, with us representing the management of Telefônica Brasil, we have Mr. Christian Gebara, CEO of the company, Mr. Davi Melcon, CFO and Investor Relations Officer. and Mr. João Pedro Carneiro, 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 slash 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 session. At the time, further instructions will be given. Should any participant need assistance during this conference, please press star zero for an operator. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. João Pedro Carneiro, Investor Relations Director of Telefonica Brasil. Mr. Carneiro, please proceed.

Good morning, everyone, and welcome to Telefónica Brasil's earning call for the first quarter of 2022. Today's call will be divided in two parts. To start, our CEO, Christian Gebara, will briefly comment on the acquisition of Oi's mobile assets, then go over Vivo's financial and operating highlights, followed by an update about our digital ecosystems and ESG initiatives. Afterwards, David Melcon, our CFO, will go through our cost and capex structure, net income, free cash flow, and shareholder remuneration. Now, I'll hand it over to Christian.

Thank you, João. Good morning, everyone, and thank you for joining our running call. Starting on slide three, we show how the long-waited deal with all these old mobile assets will generate value for Vivo and reinforce our leadership in the mobile segment. We acquired 43 MHz of spectrum on a nationwide basis, 2.7 thousand sites and 12.5 million mobile access, of which 4.6 million are post-paid. As a result, Vivo's total access base will jump from 100 million to 112 million, allowing us to become mobile market leader in five additional Brazilian states, extending our leadership to 17 states that represent 60% of Brazil's GDP and 67% of the population. Regarding synergies, our initial calculations point to an NPV of R$ 5.4 billion in cost and capex savings and avoidance, net of investments and integration costs. This is composed of optimizations amounting to R$ 1.8 billion in network, R$ 1.7 billion in spectrum and R$ 1 billion in commercial on top of R$ 0.9 billion in fiscal benefits. Moreover, the customer base being incorporated generated approximately 135 million reais in monthly net revenues in March 2022, from which we expect to extract margins above 70%, both in EBITDA and operating cash flow terms, when the synergies reach their running rate. Moving to the steps we have ahead, during the next week we will start to proceed with the full customer base migration, when users coming from OE will be fully integrated in our network and systems. This migration will be done gradually and should be completed by the end of the first quarter of 2023. For more details about the assets and synergies, please access the specific presentation available on our investor relations website. Now, going to slide four. We had a very positive result in the first quarter of 2022, reaching an impressive milestone of 100 million access, the largest ever in our history, and our post-paid customer base totaled 51 million access in the quarter after growing 11% year-over-year, while our FTTH homes connected continued to grow remarkably, up 29% year-over-year. Such strong performance drove our top line to grow 4.6% year-over-year, the best annual evolution we had since 2015, with mobile service revenues up 5.7% While our fixed business expanded 1.9%, confirming the positive trend theme over the past couple of quarters. This positive revenue performance was enough to offset cost pressures arising for alternative business models and higher inflation, resulting in EBITDA growth of 1.3% versus first quarter 2021. Our strong operating momentum combined with solid financial trends led to a free cash flow generation of 2.5 billion reais, This allows us to continue investing in growth technologies and in organic opportunities while maintaining the best shareholder remuneration profile of the industry. On the next slide, you can see that we continue to successfully transition into an improved mix of revenues, with inflation-linked products such as mobile postpaid, handset, fiber, IPTV, and B2B solutions representing almost 80% of our results. This premium product exposure is unique to Vivo, helping us navigate well during tighter economic cycles supported by our outperforming core businesses. Moving to slide 6, here we detail the evolution of our mobile and fixed core revenues with positive performance across the board. On the left-hand side, you can see that our mobile revenues rose 6.1% year-over-year. as our strong bottom of net additions both in postpaid and prepaid combined for more rational competitive environment helped us reach mid single digit growth in both products. On top of that, handset revenues had another robust quarter up 10% versus first quarter 21. Moving to our core fixed business, revenues grew 11.9% year over year driven by 26% expansion of FTTH. which on a 12-month basis is getting closer to reach the landmark of 5 billion reais in revenues. Additionally, B2B data, ICT and digital services continue to outperform, up 13.1% year-over-year as demand for complete solutions continues to grow with companies increasing their digital footprint. Moving to slide 7, here we show how our operating results confirm that our customers continue to choose Vivo when opting for high-quality connectivity. We closed first quarter 22 with 85.3 million mobile access, up 7.1% year-over-year, with an impressive 10.6% increase of our post-paid base. This performance was driven by continued prepaid to hybrid migration, while churn remained at historic low levels and portability figures more than doubled. hitting another record. In fact, around 25% of all net additions in the quarter came from other carriers, which attests that the strength of our brand, good value proposition and a matched customer experience are paying off. Regarding our FPTH operations, we expanded our homes by 4.2 million premises year-over-year, reaching a total of 20.5 million HPs in 341 cities, while connecting 1.1 million new customers, thus totaling 4.8 million homes connected. For the foreseeable future, we continue to execute on our convergent strategy that is being spearheaded by our Vivo Total offer, which truly bundles FTTH broadband, mobile post-paid and digital services in a single plan. We believe that this solution will be key for us to reach our targets in terms of FTTH penetration, while reinforcing our strategy of increasing the lifetime value of our customer base. On slide 8, we update our digital B2B figures which is composed of high growth tech services that already account for 5% of our total revenues. We closed the last 12 months ended in March 2022, we've joined 2.2 billion reais in B2B digital revenues, growing an impressive 41% year over year. Cloud businesses continue to command this performance by nearing triple-digit growth rates as we distribute the best solutions available in the market by partnering with companies that are hyperscalers, adding managed services. In addition, IoT and messaging revenues rose 32% year over year, while digital solutions grew 24%. These positive figures reflect our successful strategy of providing our B2B customers a wide range of solutions that go beyond connectivity, leveraging one of the most relevant B2B omnichannel platforms in the country. On slide 9, we provide more color on the new elements of our B2C digital ecosystem that will help us leverage its development even further. As you know, we announced the creation of Vivo Ventures, with an initial investment of R$320 million to be disbursed over the next five years. The goal here is to acquire 10% to 20% stakes in up to 20 growth-stage startups with pre-money valuation of over R$100 million, which must be focused on providing innovative solutions related to entertainment, smart home, financial services, education, health, and other segments that have relevant cross-sell potential with our current value proposition. With that in mind, Vivo increased its participation in the Brazilian tech market, helping the investees to escalate their business and, as a result, accelerate our digital ecosystem, while profiting from the financial return that these players can potentially provide us with. Going to the right-hand side of the slide, we show how our existing services have adapted to the change in conception patterns of our customers. In this sense, we recently launched VivoPlay, A CapEx Light video streaming platform offering access to live channels that can be bundled with a wide range of over-the-top applications for affordable prices, starting from 29.9 reais per month. Currently, we have the third largest telco in the world in terms of number of partnerships with different content providers, attesting the attractiveness of Vivos Kids access, such as brand, channel, customer base, and billing capability. Moving to the bottom of the slide, we highlight the recent reposition of our media tech arm, Terra, that runs the fourth largest news portal in the country, with almost 70 million unique users and over 650 million page views per month. Terra will leverage on its unique big data capability to offer customized data-driven solutions related to content and advertising. Moving to slide 10, where we present some of our ESG accomplishments and projects that represent the cornerstones of our company's purpose, digitalize to bring closer. Regarding the environment, in the first quarter of 2022, we reached 23 operating power plants for the use of distributed generation on track to comply with our target of having over 80 plants in operation by the end of 2022. We have also advanced in matters of governance, equality and diversity. As of April 2022, we've elected a new board of directors, increasing the number of women to four, accounting for 32% of the new composition. On the diversity front, we hired 375 new black interns, 50% of the available positions, who joined us in the first quarter of this year, and launched the Accoyer platform, to promote assistance for victims of racism in partnerships with Zumbidos Palmares University. Now I pass the word to Davi to comment on our financial results.

Thank you, Christian, and good morning everyone. On slide 11, we present our OPEX evolution for the quarter, which was up 7% year-over-year. Our cost of service and goods sold that represent 31% of our total expenditure grew 10% year over year as we expand our exposure to high growth services such as the digital solution being offered by B2B and B2C. Moreover, as our handset sales grew double digit in the quarter, we felt a similar impact on cost of goods sold. Moving to the cost of operations, Here, we continue to capture gains arising from our digitalization efforts and efficient financial management that help reducing spending on customer service and back debt. Inflation impacts online, such as personal and third-party contracts, led to a year-by-year growth of 5.6% in these cost buckets that represent 69% of our total OPEX. All in all, We were able to maintain the cost evolution when below the inflation registered in the period, which is clearly a positive result. Moving on, slide 12 shows how VIVO has been able to improve CAPEX allocation and grow its operating gas generation. We ended the quarter totaling 1.9 billion reais in investments directed to the most up-to-date technologies. In this sense, Fiverr remains as the centerpiece of our strategy, representing around one-third of our capex. It's also worth noting that we have already started investing in the deployment of 5G, liberating on the spectrum we acquired last year. As a result, our operating cash flow, measured as EBITDA minus capex, rose 4.8% in the quarter, amounting to R$ 2.6 billion. This allowed us to reach a sound operating cash flow margin level of 23.2%, monetizing the incremental revenues generated in the quarter. Now, on slide 13, we saw that our free cash flow grew double digit, regardless of the reduction of net income in the period. In the first quarter of this year, our net income dropped 20% year-over-year, mainly impacted by non-cash items such as increasing depreciation and amortization that is mainly related to the amortization of our recently acquired 5G spectrum licenses. The latter also led to higher debt, which coupled with growing interest rates, increasing our financial expenses. Nevertheless, we were able to generate 2.5 billion reais of free cash flow of 12.6% year-over-year, which was three times higher than our net income. Moving now to slide 14, our strong cash generation allowed us to deliver second-to-none shareholder remuneration while accommodating for our investment needs and inorganic transactions done recently, maintaining a low level of debt as we register a net cash position before leases of R$ 2.9 billion in the quarter. In this sense, over the last 12 months, we declared R$ 6.3 billion to our shareholders in the form of dividends and interest on capital. On top of that, in the first quarter this year, we invested R$ 115 million in Share by Bank and plan to continue executing the program in place until February 2023. while maintaining our historically high payout levels. 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 by pressing star 2. In case you are following the conference call via webcast, please click on question to the host to send your question. Questions will be taken in the order they are received. We do ask that when you pose your question that you pick up your handset to provide optimum sound quality. Please hold. Thank you for holding. Our first question comes from Bernardo Gutmann, XP. Please proceed.

Hi, good morning, everyone. Thanks for taking my question. Actually, I have two questions here. The first one about the margins. I would like to understand if there is any other element besides OiMobile that could drive the EBITDA margin up in the coming quarters. Perhaps digitalization still has some positive marginal effect here. And the second, about the synergies, I would like to understand basically the company's rationale for not giving more complete guidance that reflects the market repair and its revenue synergies. If you could add a little more color on this front, thanks.

Hi Bernardo, this is Christian. I'm going to go to the second and then I leave the view of the first. I think we gave a lot of clarity related to OPEX and CAPEX. For the moment, we believe that it's what we can assume as a very strong and very reliable number, and it's a very high number for synergies, so we understand that Serving these customers, the best network in the Northeast, mainly where we are getting most of the 12.5 million customers, where we have not only the best internet mobile network, but also the best channel, both offline and online, and all the other assets that Vivo can leverage to offer to these customers, it's a lot. So we are very confident of the ability to capture all of this, and add to that the frequency that we again nationally that we offer as a much better services and capex avoidance for the whole geography. Now of course we do also believe that going forward our ability to cross-sell or sell much more services to this customer base considering that we can offer like a convergent offer fix plus mobile that we can offer digital service that we can also All this ecosystem that we are deploying in health, in education, in entertainment that can also be very attractive, also the financial services that we are deploying, people money, people pay, could also be very beneficial to this type of customers, considering they are mostly hybrid and prepaid. But for the moment, I think we are fine and very positive with the synergies that we presented. Hi Bernardo.

So regarding the margin, I mean, if you look to the margin, we have this quarter, it's almost 14%, which is a very strong margin. And if you look to the details of the cost, you see one-third of the costs are somehow linked to the new sales revenue that we have around B2B and also goods of goods sold on equipment and handset. So the more we grow on those costs, the more we will grow also on revenue. That's why we have a record growth on revenue for the last six years, now that we are growing 4.6%. But if we look to the cost of operations, the rest of the costs that represent around 70% or 69% of the total cost, you see that mainly the only cost which is growing has to do with personal costs. On the rest, on the other ones particularly, commercial infrastructure is almost flat, G&A also down, bad debt is also down. So we see that there's a potential, and the team here is working very hard to accelerate the digitalization that is helping us to reduce those costs. and also to improve the quality of our service. So for the future, we see that some of those trends will continue, so we'll continue digitalizing. There is still plenty of space in both in back office and front office. But on top of that, I think we're also changing the mix of the costs. So things that before used to be capex, now they are turning into opex. Let me give you an example on the deployment on fiber, on these neutral fiber networks. We are seeing that now we are reducing our intensity in capital, which is very good news in terms of return on capital. But on the other hand, perhaps we are not growing as much as we were growing before on EBITDA margin. Also, now we suggest that it's better to look to operating capital margin. That if you look to the case of Vivo this quarter, we are showing a 23.2%, which is, again, we believe, record in our industry. And we are growing also year by year. That is what 23.1%, no? And as you mentioned, and Christian mentioned, the synergy that we have declared has to do with OPEX and CAPEX. That means that we will be able to have incremental revenues coming from the revenues from customers from hoy without or with limited costs in both OPEX and CAPEX. So the figures, these are the margins that will benefit from the integration. So the answer is yes, there is a space.

Our first question comes from Leonardo Olmos, UBS.

Hi, good morning, everyone.

I have a couple of questions. The first one is more strategic and the second is more financial. The first one is regarding Vivo Money, if you could discuss the growth in credit portfolio and what's the potential to see in this product. And also Vivo Ventures, kind of a similar question, what type of investments that you see that are on your pipeline. What can you tell more about Vivo Ventures? And the second question is related to financial expenses. It was way above what we expected and we want to understand if we should expect similar net financial expenses in the coming quarters. I'm talking about half a billion in the first quarter. Should you expect two billion from net financial expenses for the full year 22? Thank you.

So Leo, this is Christian. I will start with Vivo Money, Vivo Ventures, then I hand it to Davi. Okay, so Vivo Money, I don't know which type of detail you need, but we launched this in October 2020. Okay, so we've been very conservative in deploying the service because we want to do it right, especially because we are only dealing with our own customer base. So once we get into the financial service, we need to do that In the way that we preserve the customer experience that these customers they have when they are dealing with people. Our loans, our credit, it ranges from 1,000 to 50,000, that's the maximum. In the first quarter of 22, the number of contracts, they grew 4.7%, so we are now more than 10,000 customers already using the services and we already lent 52 million Reais, okay? That's more or less where we stand right now. So there's what we are growing in the origination of new contracts and we are growing also in the money that we are lending to customers. So what we are trying to do here, apart from lending money, is trying to associate This with our portfolio, here I'm talking about devices and accessories, how can I We use this platform to leverage the sales of handsets and devices in our own stores, online and offline. So we started doing that right now, just started, as an option for payment of a new device. Of course, they need to go through our credit approval, and that we are being conservative, as I said, considering the situation that we face in Brazil in credit. So far, the funds that are raised are through a FIDIC, which are for the moment we are the only participants. So we may consider having other participants but for the moment We are doing that with our own funds. So that's the situation that we have for Vivo Money. It's growing and we've been trying new segmentations and also new type of combined value proposition, as I said, together with the sale of one device. I'm going to go to the second part of the first question, if you don't have any more questions in Vivo Money. In Vivo Ventures, And we announced now, in April 11, the creation of our corporate venture capital fund. Here in Brazil, we have WIDA, that was very relevant, but very focused in seed money. So we invested, on average, 1.5 million reais. and was in the very seed state of companies. And we did that with successful investments, mentioning the recent ones, Alicerce in education, Gabriel in security, Olivia in Financial Tech, among others. And we realized also that apart from the investment that was very limited because we didn't have the fund, we didn't have the strategy of going in the growth stage, that we could have an opportunity also to follow some of these investments in the growth stage, in the next stage of their development, considering that most of them were very successful. Also, we realized That most of these companies, when they were successful, they were leveraging Vivo's assets. So they were connecting to us. We could be also a customer of this company, not only for our own services, as the case of Gupy, that is an HR company, but also blending their services for our value propositions, the case of Alicerce or others that we are planning to do in the near future. So, getting money from Vivo has two values, not only the money by itself, but also having the access of assets that we could offer that is our customer base, our billing capability, and the strength of our brand. So, we decided to do more and go to the next stage, that is the growth stage. So we established this venture fund that's going to be over five years, R$320 million. The ticket here will be higher than the one that I told you about a while ago, that was 1.5. Here we're talking about 15 to 20 million tickets per company. We expect to get up to 20%. The focus will be mainly in the B2C ecosystem, so we're talking about entertainment, we're talking about health, education, logistics, any e-commerce platform, like smart home connectivity, so everything related to the vision that we also presented in our B2C ecosystem. So if I have answered your questions, Leo, I will give to the V and I compliment anything about the other one.

Yes, very much. Thank you.

Hi, Leo. So let me answer the second one. I mean, you're right, as you said, the financial expenses in the quarter are growing above 60% year to year. And let me give you, explain you what are the key reasons and then we can talk about what should be the outlook for the future, no? So the first reason why those costs are going up is because, you know, the local interest rate has gone up. So if you look at the interest rate one year ago, the first quarter last year was around 3%. Now we are talking about 13%, so 10 percentage points up. The second reason is last quarter last year we acquired the 5G frequency. And this, of course, this has an impact on financial expenses. When you look to the IFRS 16, which has the debt coming from infrastructure, it's almost flattish, even though we increased it slightly, 700 million G of a year. And then the fourth one, the fourth reason why those costs are going up has to do with the monetary update of some of the, let's say, non-financial liabilities that we have in our balance sheet. Particularly when we talk about provisions and so on, we need to update those provisions every quarter based on interest rate. But these are not cash items. Because if you look to the evolution of the free cash flow, we are seeing that we have a growth of 12%. So having a higher financial expenses doesn't need to be a negative thing. So we are investing, we are improving the capital structure of the company, and we are bringing assets that will generate even more value to our shareholders. Now here we are talking about 5G that year, and we are about also, we show in the next quarter, the acquisition of oil. But at the same time, our free cash flow is going up with a better mix in our balance sheet. So this cost will continue going up through the year. But all in all, we believe that this is positive for shareholders and we are generating value as we are acquiring assets that will bring a higher return for shareholders.

Very clear, David. Thank you. Thank you, Christian. Have a great day.

Our next question comes from Victor Hitiuti, Reuters Suisse.

Good morning, everyone. Thanks for taking my question. I have two from my side. The first one regarding repricing. So as inflation has not decreased yet, what are people's plans around repricing for 2022? And do you plan on repricing pure composted more actively this year, or should it be seen more on control plans? And the second one is regarding B2B. So Vivo has been reporting strong growth in its business, and you stated that you expect to continue growing in the future. But as B2B has an intrinsic lower EBITDA margin, how do you see margins going forward? Should we see it partially offsetting the benefits from oil? Thank you.

So, Victor, this is Christian. I'm going to go. B2B, we are very positive about our strategy. As I said before, we have the best channel, omni-channel, so we have, like, it's only for you to have an idea. 5,000 B2B reps visiting customers and we, as we stated a long time ago, our strategy here is to be the technology partner of these customers. So we're going beyond connectivity, although connectivity is still relevant and you could see that our data revenues also increased. We are selling many more services, and here the focus will be mainly in cloud, IoT and cyber. Actually, Telefonica established three companies that we have here in Brazil as well. One very focused, Telefonica Tech, one focused in cyber, another one in IoT, and the third one in cloud. So the services are going to be part of the value proposition. Yes, you're right, the margin is lower, but most of them, the capex is almost inexistent. So, as David stated before, we should look for operating cash flow. We may give up some margin in EBITDA, but in operating cash flow, we're going to contribute a lot to the future of the company. And now, moreover, we're developing a very strong relationship with these customers, and that we may be the sole technology provider. So, when we see our number almost like 100% growth in cloud, Even if you're selling hyperscales, we're combining that with managed services. So that's why we have the differentiation relationship and the credibility to be there, help the customer, not only buying the service, but implementing the services in their company. So positive, continue with the strategy, happy with the number that we have in the last 12 months. 2.2 billion reais in digital service for V2V, although margins are much lower than the UNVUs for connectivity, the CAPEX is also a different story from what they use also when we deploy 5G or fiber. So that was the first one. The second one, Vitor, is repricing, you're talking about repricing of all services? And if I... Yeah.

Yeah, exactly. What are people's plans around repricing for 2022? Do you plan on being more active on pure post-paid repricing, or should we see it happening more on control plans?

We are doing the inflation repricing in both. We did part of hybrid already this quarter, and we're going to do more maybe between the second and the third quarter. In post-paid, we're also doing in the second to the third quarter the pricing following the contract that we have. and we're doing also in Fiverr. Now we did part of it in the beginning and we're going to do also that along the year. So we are reflecting repricing as inflation is going up. In the prepaid, although our ARPU increased, our revenues increased, we believe there is opportunity of repricing. So we need to follow the market and also expecting competitors to follow this trend of also repricing prepaid. I think that's the segment where the market hasn't followed inflation evolution so far.

Very clear. Thank you.

Our next question comes from Marcelo Santos, JP Morgan.

Hi, good morning. Thank you for the questions, Christian, Davi, João Pedro. I think the first question would be about the sustainability of the pace We have seen some of your competitors claim that the current environment is tough and to attract quality customers you need to be in a lower number, but you continue to add at a healthy pace. How do you see this going forward given this macroeconomic environment? And the second question is more on the mobile. So we were gaining on prepaid to hybrid migration, but given this inflationary environment, how do you see this continuing? Is there still further space? Your prepaid base is already pretty small, so Are we reaching the limit, or is there further space to be gained? These are the two questions. Thank you.

Marcelo, I'm going to go to the second, then I'll go to the first. Our prepaid base is not small. No, I wouldn't say that. No, we grew the prepaid base, so we have 34.4 million customers, and actually, we are also receiving customers for noise, so I would say that our prepaid base is very relevant. And if you consider our mobile customer base, We grew in this quarter of the year 7.1%, 2.2% in prepaid and 10.6% in postpaid. Of course, we still have the strategy and I think a very successful strategy of migrate prepaid to postpaid or prepaid to hybrid in this case. and we believe that there's room to continue doing that and we are very happy to be still very attractive as the destination of prepaid customers because we are growing our customer base. So we continue doing that and we're going to continue doing also the migration from prepaid to hybrid but also attracting customers from pure postpaid. So as you see, I think also the presentation, we show the net portability www.patreon.com Post-patron in 1.2%. So, I will also ask FTTH, Marcelo, and if you have more questions, I come back to mobile. In the FTTH, we are number one company in the FTTH deployment. So, we reached 20.5 million home paths. We are in 341 cities. We also increased... by 1.1 million the number of customers connected with our FTTH services. So, although there is competition, Of course, there is the macro impact. Maybe the other competitors that are giving you the overview of the market, they don't have the same footprint that we do, and also the possibility of blend together fiber with mobile and digital services. So, even if the situation, the macro, is challenging for everyone, we believe we have assets, that are difficult to replicate at the moment, especially the composition of our value proposition, the footprint of our channel that is 1,700 stores, the door-to-door, the e-commerce, and the app Vivo, and also the combination of digital service that we have partnerships of many and the most relevant video ones. So if you see the numbers of share, evolution of share in FTTH market in the last months, You could see, although the market didn't grow the way it used to do in the past, we've captured a share from other operators.

Perfect. Very clear. Thank you very much.

Thank you, Marcelo.

Our next question is from Joshua Mills, BNP Paribas. Please proceed.

Hi, guys. Thank you for the questions. Just a couple from my side. First would just be on the inflation effect. If you could firstly talk about how the mechanism for putting through inflation-linked prices to your contracts works this time, Claire. Is it an automatic thing, or do you have to go out and ask them voluntarily to take those services? It sounds like everyone in the market is putting prices up, so it shouldn't be an issue, but just a bit of clarity on that mechanism would be great. And then secondly, talking about the impact of inflation on your cost base, you talk about the impact on labor costs this year. How should we expect that to develop into the second half of 2022 and also 2023, given where Brazil inflation is? And when you make the agreement with your workers, is there any contract term in there already which directly links payment to inflation? Thank you very much.

Joshua, this is Christian. I will start with the first question. I think the revenue mix that we have Thank you very much. In this case, we have by contract the right of increased price. We have been always giving it in the price point that we sell it, because we could not absorb this exchange or inflation evolution. What we don't have 100% associated with inflation that I described before is the prepaid revenue that in our case represents less than what all the other revenues that I described before. In prepaid, it depends more in the market dynamics. We believe we should increase price. Price has been very similar in the last years. and there is opportunity regarding the inflation that is now in its peak to increase prices in this segment as well. All the rest, by contract, we have the ability to increase and we've been doing so in the last quarters. If I answer your questions in revenues, I will give it to David to talk a little bit more about cost, Joshua.

Hi, Joshua. As I mentioned before, I mean, we have the ability to be able to be also part of a large group, Telefonica, to negotiate some of the costs with vendors, allowing us to have some of them down year over year, despite having an inflation of double digits. In particular, talking about the labor costs and personal costs, here we are planning to renegotiate every year, and this year will be in September. Unfortunately, we cannot disclose any information, but this is Something that we will start, say, in a few months to see what would be the impact for the future, but we cannot disclose anything at that moment.

Great. So maybe just one very small follow-up. On energy costs, which quite a few telcos have talked about as a rising headwind, how exposed are you there and do you have any hedging mechanisms in place should energy costs rise in the future?

So regarding energy cost, even though there's a pressure on that one, here we have been working over the last few years to be a company more sustainable, but at the same time to have also some savings. So we have already having a high percentage of our energy coming from different alternative sources that bring a unitary cost significantly below what should be the market now. So we are heading here with the local market on different instruments. So we have not been penalized perhaps as other markets, other companies on that one, no? Even though it's a relevant cost for our base, but it's a cost that we are managing to have it below inflation. Awesome.

Thank you very much.

Our next question comes from Fred Mendes, Bank of America.

Hello, good morning, everyone, and thanks for the call. I have two questions as well. I think the first one is more like a follow-up from the last questions about the mobile front, but it's more like a reconciliation as well. I mean, when I look at the numbers, I mean, you increase your base of clients on the postpaid by seven and a half year over year, and mobile service revenue growth was at 6%. And you have a price increase in July to a hybrid balance of 8%, right? So just, I mean, once I look at the net ads, on the post-pay net ads, it looks like they are entering at a very, very low price. I do understand that it's upsetting, they usually enter at a very low price, but just want to get a view from you at which level these guys are entering, or if in order to get to sell the 4P, And also, as a follow-up pretty much from this one, if you keep your net ads at the same level, we should see mobile service revenue growth acceleration over the next quarter as you increase price. I know that you don't give a guidance, but that should be the trend as long as you keep the net ads at the same level. Thank you.

Hi Fred, this is Christian. Yes, maybe your calculation is correct. We are not giving trend. Regarding the additions of new customers, no, they are not entering in a very low price. That's not correct. I think the mix, if you consider phosphate, there is. A combination of mix that the hybrid is growing faster and is contributing to the effect of ARPU. But it's not that we are lowering price and also the impact of the convergence is not at the moment affecting the mobile ARPU. Although we are very focused in customer ARPU and we're going to do more of this and try to give you more clarity on these numbers because we want to We're having this very large customer base trying to sell more services to the same customers. So we're going to do that fiber and mobile and digital services. At this moment, what we could show you is that, yes, we had a very strong commercial activity, both prepaid and postpaid. In the postpaid, we increase migration from prepaid to hybrid, but also we capture a lot of customers from the market, as I said before, the portability went up. So, it's more of a mix, hybrid and postpaid, rather than the entry point being low. And also, the price increase, we didn't do all of the price increase that we were expecting. We are following the right timing of the contracts to do price increase. So there are some price increases still to be done in hybrid and pure postpaid this year that may impact the total revenues, but we are very positive of our commercial attractiveness and then the ability to capture more customers and also migrate customers from prepaid to postpaid. As in the previous question they were asking, the base is still very large and it's getting larger and give us ability to have a lake to be able to migrate more. That's, I think, our two questions. So, yeah, we are positive about the future.

Perfect. Perfect. Thank you, Christian. Very clear. And if I may, just a follow-up here, just try to understand the dynamics. When you have a price increase Let's say you have a price increase to 50% of your base. Do you see usually a lot of downgrades of the plan, which means that you're giving the price increase, let's say that goes to your base, but actually the client takes a lower ticket plan, it doesn't count as a churn. Is that something that happens a lot or you actually, once you have a price increase, the impact of the price increase is much higher than this, let's say, Thank you.

Fred, yes, you answered the question. Yes, in the end, yes, it's higher than the downgrade. We had our downgrade since the beginning, you know, not only now. I think we've been able to manage it better. But there is some, yes, but the impact is more positive than negative. And I think that's the dynamics. What we've been now trying to do more How do you increase price and what are you offering? So we are going to digital services combination that is also helpful because in the past, as you remember, we would give more data. Now sometimes we do that, but then we need to plan things out. So that we are doing upgrade with digital services and now we are trying to do also combination with the fixed. So that gives us room to do upgrade of our pool, our pool of the customer and not our pool of the services and keeping the customer much more loyal.

Perfect. Super clear, Christian. Thank you very much.

Thank you. The question and answer session is concluded. Please, Mr. Christian Gebara, go ahead.

So, thank you everyone for joining our call. We are very happy and positive about the good start of 2022 and very enthusiastic about the rest of the year, given our strength. In the commercial activity and portfolio and the strategy that we defined some years ago being placed right now, giving this great outcome. So any other question that you may have, our team here is totally available to answer that. So thank you once again.

Thank you. This concludes today's Telefonica Brasil first quarter 2022 results conference call. You may disconnect your lines at this time.

Have a nice day.