Telefonica Brasil S.A.

Good morning, ladies and gentlemen. Welcome to Vivo's third quarter 2022 earnings call. This conference is being recorded and the replay will be available at the company's website at ritelefonica.com.br. The presentation will also be available for download. This call is also available in Portuguese. To access, you can press the globe icon on the lower right side of your Zoom screen and then choose to enter the Portuguese room. After that, select Mute Original Audio for a better experience. Para acessar nossa conferência em português, clique no ícone do globo localizado no canto inferior direito da sua tela Zoom e selecione a opção Portuguese Room. Ao acessar a nova sala, certifique-se de silenciar o áudio original. We would like to inform you that all attendees will only be listening to the conference during the presentation, and then we will start the question and answer section when further instructions will be provided. Before proceeding, we would like to clarify that any statement that may be made during this conference call regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo Executive Board and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore depends on circumstances that may or may not occur. Investors should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in the respective forward-looking statements. Presented at this conference, we have Mr. Christian Gebara, CEO of the company, Mr. Davi Malcolm, CFO and Investor Relations Officer, and Mr. João Pedro Carneiro, IR Director. Now, I'll turn the conference over to Mr. João Pedro Carneiro, Investor Relations Director of Vivo. Please, Mr. Carneiro, you may begin your conference.

Good morning, everyone, and welcome to Telefónica Brasil's conference call to present the third quarter 2022 results. The call will start with our CEO, Christian Gebara, commenting Vivo's operating and financial highlights, followed by an update on the progress of our digital ecosystems and ESG initiatives. Then our CFO, David Melcon, will go through our cost and CapEx evolution, net income, shareholder remuneration, and free cash flow. I now hand it over to Christian.

Thank you, João. Good morning and thank you for joining our running calls. To start on slide three, with the highlights of the third quarter of 2022, in the period we were able to reach double digital growth rates in access, revenues, and EBITDA, leading to an overall improvement of our business profitability. Our total access grew 14.6% year-over-year to 112 million subs, of which 57.5 million users in postpaid and 5.3 million in FTTH. Contributing for total revenues to increase 10.6% in the quarter, as mobile and fixed expanded to the tune of 14.7% and 2.1%, respectively. Our strong operating momentum coupled with efficiency initiatives that helped our cost of operations to grow below inflation, led to an EBITDA expansion of 12.3% year-over-year with a margin of 40.6%. The result drove improved bottom-line performances as net income reached R$1.4 billion in the quarter, up 9.3% year-over-year. In line with the enhanced profitability and robustness of our business model, which can be attested by the R$ 6.5 billion in the free cash flow generated over the first nine months of 2022, we already deliberated the distribution of R$ 3.4 billion as dividends and interest on capital, complemented by almost 500 million investors in the buyback of our shares. We remain fully committed to maintaining a healthy level of shareholder remuneration while also striving to create value and improve returns by investing to further differentiate people's assets and value proposition. Moving ahead to slide four, our revenues grew well above inflation in the quarter, expanding double digits for the second quarter in a row. This performance has been driven by the service relabel score that already represent 92% of our top line and grew 13.8% year-over-year. As we reduce our exposure to non-core legacy operations and increase the weight of revenues coming from services that have been proven to be essential, with a greater lifetime value, the resilience of our business model can only improve. On slide 5, you can see the detailed results of our main services. On the mobile side, service revenue grew 13.8% year-over-year, with strong displays from both postpaid and prepaid that reached growth rates of 12% and 21.5% respectively. We are seeing early signs of benefits coming from mobile consolidation in the form of improved user quality and experience that turns into higher consumptions and market rationality. Moving to the fixed side of our core business, revenue expanded 11.2% year-over-year, again driven by the FTTH and corporate data and ICT, both of which have been spearheading the transformation of our total fixed business. To further enhance our corporate data and ICT presence, this month we concluded the acquisition of Vita IT, now called Vivo Vita, for up to R$ 120 million. Vivo Vita already generates over R$ 100 million of annual revenues and it allows us to increase our capabilities in network management and equipment solutions. Moving to slide six, once again, we are pleased to present very solid operating results on mobile and fiber that are direct consequence of our competitive advantage of being the only player capable of providing connectivity service over the best technologies available in both segments. Our mobile base expanded 18% during the year, reaching 97.3 million subs. Quarter over quarter, we saw a reduction of 1.9 million lines because of 3 million access coming from oil that were disconnected in September as they were considered inactive according to our criteria. Excluding the effect of this cleanup, we are able to further improve the already very strong level of human post-pain deaths posted in the second quarter of 2022. with 987,000 new subs being incorporated over the past three months. Portability remains on the rise while we keep on migrating prepaid customers to our hybrid offers and maintaining healthy churn rates. On fiber, during the quarter, we expanded our FTTH network to 1.2 million new premises, reaching 22.3 million home paths. Our accelerated footprint expansion coupled with the fully converged Vivo total offer that already accounts for 40% of our gross ads led our FTTH customer base to expand 21.1% year-over-year to 5.3 million access. Moreover, we recently launched our 1GB speed offer that will keep in further differentiating Vivo from our broadband providers and increase the average speed of our customer base. On slide 7, we update you on the evolution of our digital services initiatives, starting with B2B. A year ago, in the third quarter of 2021, we disclosed for the first time the amount of revenues coming from digital B2B products, such as cloud, cybersecurity, IoT, and digital solutions, which back then totaled R$1.9 billion. A year later, the same pool of revenues grew 33% to R$2.5 billion, Thank you very much. In September, we reached R$ 160 million of credit considered since inception, almost doubling in size quarter over quarter. We have very ambitious plans for financial services, and we continue to expand our portfolio and volume. Moreover, Vivo Ventures, our corporate venture capital fund, made its first movement during the quarter, committing to invest $3 million in Klavi, a fintech focused on providing open finance solutions. Going to slide 8, we are pleased to announce Vivo was ranked by S&P Global as one of the top 10 most sustainable telcos in the world according to the Global Sustainability Corporate Assessment evaluation after increasing our score versus last year. Now moving to recent developments on the environmental front, we now expect to have 85 green power plants in operation during next year, of which 42 are already functional, extending our commitment to use renewable energy in our operations. Moving to the social front, as part of our effort to reflect Brazil's diversity in our workforce, we launched a Vivo training program in which 50% of roles will be filled by Black people. In governance, yesterday we announced the inclusion of Vivo's share as part of our executive variable compensation, further strengthening management's alignment with our shareholders. ESG is a core pillar of our strategy, as such as we continue to work very hard to improve and increase the number of initiatives taken to build a more sustainable business model. Now, Davi will take us through the financial highlights of the quarter.

Thank you, Christian, and good morning, everyone. On slide 9, we detail the evolution of our cost base on an annual basis. As we continue to transform our revenue mix, speeding up the top-line growth through the sale of digital solutions and equipment that are heavier in terms of cost, but much lighter in terms of capex. The analysis of our opex performance split between cost of service and cost of operations becomes even more important. We start with the revenue-driven cost of services and goods source, which represents 32% of our total OPEX in the period and grew 26.9% year-over-year. This increase is mainly in line with the annual growth of our revenues coming from B2B digital services and handset sales, which were up 33% and 26% year-over-year, respectively. Therefore, as we scale up the proportion of revenues coming from these segments with benefits to customer retention and increased lifetime value, cost should respond to a similar trend. Now we move to our cost of operations that grew only 2.6% year-over-year, considerably below the last 12 months' inflation that reached 7.2% in September. Here we continue to be very effective in terms of capturing efficiencies related to the way we serve our customers by moving interactions to digital platforms, which are user-friendly and far less expensive than processes involving human interactions. In addition, in the third quarter this year, we reached our lowest level ever of bad debt over gross revenues, which is also dropping 18% year-over-year. This result is a clear sign of how relevant our services are to our customers. Now moving to slide 10, here today we invested over 7 billion Reais in an operation accelerating the deployment of capital in technologies that will allow us to create further differentiation versus our competitors. Our recent operating performance shows that this strategy is bearing fruits as Vivo continues to extend its leadership in higher value segments. Even though we are investing more to guarantee vivo, present and future commanding position in Brazil, we continue to see our operating cash flow margin trending above 20% of revenues, a level we see as sustainable going forward. Moving to slide 11, in the third quarter this year, our net income grew 9.3% year-over-year, reaching R1.4 billion. This positive evolution, which was backed by our solid operating and financial performance in the period, created space for Vivo to continue directing a relevant amount of resources towards the remuneration of our shareholders. In the first nine months, we already declared the distribution of 3.4 billion reais as dividend and interest on capital. On top of that, so far this year, we invested almost 500 million reais to buy back our shares in a movement that enhances dividend per share. Moreover, on October 18th, we pay out 3.5 billion reais related to the second tranche of the dividends and interest on capital delivered to distribute 2021 results, totaling 6.2 billion reais returned to shareholders during 2022. Finally, on slide 12, you can see that due to date, we generated 6.5 billion reais of free cash flow. Considering the last 12 months figure, we closed the quarter with a free cash flow yield of 10.6%, being able to convert every R$ 1,000 of net revenues into R$ 154 of free cash flow. We continue to be a strong cash generating company that help us to maintain an healthy balance sheet, allowing us to follow investment alternatives, both organic and inorganic, maintaining an alternative shareholder return, while also providing for a space to optimize our capital structure. Thank you. And now we can move to the Q&A.

Thank you. We will now begin the question and answer section. For investors and analysts, if you wish to ask a question, please press the raise hand button. If your question has already been taken, you can leave the queue pressing the same button. Wait while we pull for questions. Our first question comes from Bernardo Gutmann from XPA. Please, Mr. Gutmann, your microphone is open.

Hi, good morning, everyone. Thanks for taking my question here. Actually, I have two questions. The first one related to 5G. The migration of data traffic to 5G networks seems to be faster than expected. If this trend remains in place, can we expect any CapEx or OpEx avoidance I don't know if it would be easy to isolate these elements since there are other movements that should drive efficiency, such as the additional spectrum from Oi. And the second question. So if you could make a general comment on the mobile competitive environment, how are things trending in both segments, postpaid and prepaid? Is the competitive landscaping easing now that Oi is no longer here? Thanks.

Hi, Bernardo. This is Christian. I'll try to answer the two questions. In 5G, as you know, we deployed 5G in all capitals, but in around, I don't know, Thank you very much. Thank you very much. www.patreon.com.br So we don't see a big change in what we were expecting in our deployment for going forward. And again, when we do 5G, we are replacing some investment that we would do in 4G. But considering Brazil, the presence of 4G is still very large and will be very large in the short term. Spectrum-wise, we are in a very good situation, as you know, because we got a lot of spectrum in the auction. and especially 3.5 that is for 5G, but also 2.3, 50 megahertz in some regions that also allow us to give the 5G experience to these customers. And the spectrum that we acquired from NOI, Also help us in going forward. We're going to have also changing the usage of the spectrum 2G, 3G also moving to other frequencies and going to the using these frequencies to 4G and 5G. So again, according to plan and we are confident that we have the resources and the spectrum to respond to the demand. To the second, I don't know if I answered the first, and then I go to the second.

Very clear, Christian. Thanks.

So, going to the second, the mobile market is and was very competitive, even when we had the presence of oil. As you know, or he was already in a very weak position in the last years, beginning to have the 700 megahertz for 4G. So the competition was already very strong among the three players. We see opportunities for more rational market now because there was this tax reduction Thank you very much. as though as you see also in the post page. So we believe that considering all the investment that we all need to make and all the investment that you already did made know in the past buying these frequencies of 5G, buying the assets from NOI, that the market should be more rational. So we are very optimistic about the solution going forward. Don't know if that's also answered.

Yes, very clear, Christian. Thanks a lot.

Thank you for the question.

Our next question comes from Lucas Chaves from UBS. Please, Mr. Chaves, your microphone is open.

So thanks for having my question. So two on my side too. The first one I'd like to understand the tip and pace going forward, if you can give us more detail. Does anything change with the tax gains and how we're seeing the fourth quarter in terms of distributions and 2023? And finally, regarding the ICMS pass-through, how are the clients reacting to the selling efforts? Thank you.

I answered the second one, and Davi answered the first one. Lucas, this is Christian. So the SMS, as you know, we are implementing fully the reduction in all services, in all segments. So it's positive, because there is a reduction in price for all our plans. Also, the ability for some customers that were looking for Thank you very much. Thank you very much. Thank you very much. Thank you very much. Don't know if I answered them, I pass to Davi for the deep thanks.

That's perfect. Very clear. Thanks, Christian.

Hi, Lucas. So in the first nine months of the year, we have already declared 3.4 billion reais, which is equivalent to a dividend yield above 5%. And there is still three months to go until the end of the year. On top of that, if you consider the additional share buyback within the period, which is something like 500 million, the dividend yield goes up to 5.7 in nine months. But as you say, the third quarter net income for sure would be also a positive. We have a positive impact in the dividend for the year as we maintain our practice to distribute 100% of the payout. The free cash flow was also very strong and the free cash flow yield is around 10%. So we are continuing exploring alternatives to our current capital structure to continue being attractive as we have been until now.

Okay, very clear, thank you.

Our next question comes from Marcelo Santos from JP Morgan. Please, Mr. Marcelo, your microphone is open.

Hello, Christian, Davi, João Pedro. Thanks for taking the questions. I have two. I wanted to focus a bit on the CAPEX and on the fiber deployments. Starting with the fiber deployments, I wanted to understand the strategy of the company. I saw that you accelerated homes past the third quarter. At the same time, this year is seeing lower fiber net ads for the whole industry, lower broadband net ads for the whole industry. So what Could you please discuss a bit this and maybe if you're going to be able to reach your target before 2024? And the second question kind of related to that is the CapEx outlook. I think the CapEx was at least a bit higher than what we expected in the near term. How should we see CapEx for this year and for the next year? Thank you very much.

Okay, Marcelo, that's Christian. Thank you for the question. So, yes, I think the market accelerated after the pandemic in 2021. And then now we see a performance from all players, as you said, of the market lower than we saw last year. I think it's normal. I think there was a lot of demand after the open up of the economy. and also because our service became very essential so everyone wants to have a very good connection at home and fiber is the best one when you need download and upload and that's the reality that we all face right now uh although the market is lower as you said we are the leader now we are getting most of net net ads of the market and we have the possibility here to be even stronger if you consider that we are the only one We've offered that blend the best technology in fiber with the best coverage and quality perception in the mobile. So going forward, Vivo Total, that's our key product of Convergency, is going to be even stronger. And I'm going to add to that also the digital service that I mentioned before. Our plan... is the 29 million home pass that we talked in the last call, I guess. That's going to be built by 6.4 million home pass from Fibre Brazil, our co-controlled fiber and neutral fiber network with CDPQ, 1 million with our agreement with ATC in Minas Gerais, and 21.6 million of our own deployment, of Vivo's deployment. So So that's the plan for right now, and that's what we are still keeping for the future. So if you consider also our customer base today is 5.3 million customers, and we said that by the end of 2020, Thank you very much. Yeah, for the CAPEX, I think was your second question. We are not providing a formal guidance, but it should be around R$9 billion. Up to now, it was what we disclosed, seven. We have to take into account that this year we had extraordinary CAPEX of the R$400 million to integrate oil assets here in our company. So we keep... The same level, OK, that there was this extraordinary of 400 million to integrate oil up to now seven. And we are always around the nine billion. And that's that's what we disclose about CapEx. And we are confident that we are investing the right technology that will give us more revenues in the future, both in the mobile and also in the fixed business that it's fiber.

Christian, just one question. For 2023 on the CAPEX, should we expect similar levels than 2022 or maybe lower because you don't have the extraordinary 400?

We still like discussing it, but it's going to be similar. We have other type of obligations related to the 5G auction, so you can consider similar levels.

Okay, thank you very much. Very clear.

Thank you for the question, Marcelo.

Our next question comes from Victor Tomita from Goldman Sachs. Please, Mr. Tomita, your microphone is open.

Good morning, everyone, and thanks for taking our questions. One quick question from our side. We found it quite interesting to see the new incentive plan for managers being based on Telefónica Brasil shares. Could you confirm if there is still a part of compensation That will remain based on shares of the parent company and on what the relative size or mix is between compensation based on Telefonica Brasil versus Telefonica Group shares. And that would be our question. Thank you very much.

Hi Vitor, this is Christian. The long-term incentive plan before was just related to the group, group KPIs. That were the shares, there were the free cash flow, and also ESG related to emissions. Now it's 50-50. So 50% will be local, so it's Vivo. It's Vivo shares, Vivo free cash flow and emissions, local emissions. And the other 50% will be Telefonica shares, Telefonica total free cash flow and total emissions.

Very clear. Thank you very much.

Thank you for the question. Our next question comes from Fred Manges from Bank of America. Please, Fred Mendes, your microphone's open.

Thank you. Hello. Good morning, everyone. Thanks for the call. I have two questions as well. I mean, the first one on the working capital. I know there are a lot of lines moving there, you know, fiscal gains, etc. But just trying to wonder if it was a bit smaller, the contribution, the positive contribution of this quarter, if we should start to assume this as a sustainable level or not necessarily. This will be my first one. And then my second one, more on Vivo Money. You know, interesting, you were growing, you know, at 60%, quarter over quarter, give or take, this quarter was like 100%. So just wondering how you see, I mean, do you think you already found the correct business model for this segment and now it's time to scale? And if you're already in a point of breakeven, you know, so just wondering how we should see the scale of this business for next years. Thank you.

Fred, this is Christian. I will start with the second one and leave the Vivo the first one, okay? So, yes, you're right. I think we got on track and we know how to do it. Also, Vivo Money, it's growing a lot. We decided to show the number because it's very positive, even in not only the amount... Thank you very much. So, again, we still have room to expand, not only expand the customer base that we can reach, now that we have a model that is getting better every time, but also the type of service that we can offer. Thank you very much. Today, as I said, 160 million of credit given. It's already a relevant platform when you compare to other fintechs that started doing this business. And we have room to grow it even more. And together with the Vivo Money, we have another portfolio. and many others that we are about to launch. And as I said also, we bought an open banking company that is Klavi. So we are very confident that we can be a relevant player in this field and also associate the financial services capability with our business, giving away to customers not only to pay, but to get credit to acquire more of our services and products. I don't know if it's answer, Fred, otherwise I pass it to Davi.

Perfect, Christian. Just a follow up on this, if I may. And in a more mature stage, Vivo Money and the other initiatives combined, should they have like a similar level of financials than the rest of the companies or is it a completely different business and margins should be quite different? Thank you.

It's totally different business and even in financial service we have different margins in different business. Some of them I think will be very high margin and I think lending we are being able to capture a lot of value out of Vivo Money. Others may be also a way for us to increase engagement. and customers using our platforms to do many other things and then we're going to reduce churn and increase lifetime value. And insurance, we also make money. So depending on the business within FinTech or within the financial service, we'll have a different KPI and different model. But in the end, Thank you.

Hi, Fred. I will take the first one. I mean, look, it's difficult to predict working capital in the future, considering the volatility that this line used to have. But one thing is important, just to consider the impact we have this quarter, plus some of the tax assets that we have still in the balance sheet. Thank you, David. Thank you, Christian. Thank you.

Our next question comes from Fanny Canamuri from HSBC. Mr. Fanny, your microphone is open.

Hi, thanks for taking my question. So I just want an update on what is happening with the OI adjusted closing price. So since you had deposited the money with the court, how is it accounted in the balance sheet currently? And second question, because you have disconnected the $3 million deposit, Clients, is there any change to the synergy estimates that you have given previously? Thank you.

The second question, sorry, I didn't get the second one funny.

Since you had disconnected some 3 million clients, is there any change to your estimates in synergies that you have given? Ah, okay.

Okay, so let's go to the second one. We got 12.5 million access for NOI and we disconnected 3 million due to some business criteria www.patreon.com It doesn't change the number that we gave for synergies. So when we talked about our synergy that was 5.4 billion reais, we just talked about synergies in OPEX and CAPEX. No, we didn't talk about synergies in revenues. So all this disconnection, it doesn't change anything in synergies. It's just an operational decision that we took. So this 5.4 billion synergies were in network spectrum. and others. So they are not related to customer base. And revenues are there, and we are already migrating customers to Vivo, so it doesn't change the synergy that we presented to the market. Regarding the price adjustment, I think was the first question. We do too know that it's mainly due to this disconnection of customers. That were inactive. No, we presented a claim. The three buyers presented a claim of a price adjustment of, in our case, is equivalent of R$ 1 billion, more or less. That's equivalent. And we had... Some money that we already had here retained that was around 500 million reais. So we claimed a little bit more than 1 billion in adjustment and we had retained around 500 million reais. The judge decided that we needed to make a deposit of this 5 million that we had retained. So we made this deposit, and this deposit is in a sort of scroll account that depends on the decision of the arbitration. We are now going through an arbitration. Thanks. Just a quick question. In the current balance sheet that you have, where is this reflected? Is it in the cash or is it in the judicial deposits?

Let me comment on that one. So at the moment we have sitting in our financial debt what we call contractual obligation. This is the 516 million that Christian referred to. This is on the liability, so financial debt at the end of September. And the potential claim of 1 billion, we haven't recognized any impact that would be positive in the case that this will end up with a final decision. So, so far, there is no positive effect recognized in our balance sheet at the end of September.

Thanks very clear. Thank you. Thank you.

The question and answer section is over. I would like to hand the floor over to Mr. Christian Gebara for the company's final remarks. Please, Mr. Christian, you may proceed.

Okay, thank you everyone. I'd like to follow our call. As you could see, strong and positive results in all areas and in all KPIs. So we're very confident of going forward. We are in a specific and good momentum to capture even more value in the next quarter. So any other questions that you may have, please, you can reach us. And again, thank you for following our call and we are going to be in touch.

Thank you so much.

Thank you.

Vivo's conference call is now closed. We thank you for your participation and wish you a very pleasant day.