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Edited Transcript of VIVT4.SA earnings conference call or presentation 24-Jul-19 1:00pm GMT

Q2 2019 Telefonica Brasil SA Earnings Call

Sao Paulo Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Telefonica Brasil SA earnings conference call or presentation Wednesday, July 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Mauad Gebara

Telefônica Brasil S.A. - CEO & Director

* David Melcon Sanchez-Friera

Telefônica Brasil S.A. - Chief Financial & IR Officer

* Luis Carlos Da Costa Plaster

Telefônica Brasil S.A. - IR Director

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Conference Call Participants

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* Alejandro Lavin

Citigroup Inc, Research Division - VP

* Frederico P. Mendes

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Marcelo Peev dos Santos

JP Morgan Chase & Co, Research Division - Senior Analyst

* Maria Tereza Azevedo

UBS Investment Bank, Research Division - Director and Research Analyst

* Mathieu Robilliard

Barclays Bank PLC, Research Division - Research Analyst

* Rodrigo Villanueva

BofA Merrill Lynch, Research Division - VP

* Susana Salaru

Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology

* Valder Nogueira

Santander Investment Securities Inc., Research Division - Head of Telecom, Media and Technology

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil Second Quarter of 2019 Earnings Conference Call. Today, with us, representing the management of Telefónica Brasil, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Luis Plaster, IR Director. We also have a simultaneous webcast with slide presentation on the Internet that can be accessed at the site www.telefonica.com.br/ir. There will be a replay facility for this call on the website. (Operator Instructions)

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. Luis Plaster, Investor Relations Director of Telefónica Brasil. Mr. Luis Plaster, you may proceed.

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Luis Carlos Da Costa Plaster, Telefônica Brasil S.A. - IR Director [2]

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Good morning, everybody, and thank you for joining us in this conference call for Telefônica Brasil's 2019 Second Quarter results. The call, as usual, will be divided as follows. To start, Christian Gebara, our CEO, will give you an overview of our operating and financial highlights for the second quarter of the year and then go over our commercial and CapEx evolution in more detail. Then, our CFO, David Melcon, will comment on our digitalization initiatives, efficiency commitment and financial results. We will then move to Q&A.

I now pass the word to Christian.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [3]

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Thank you, Plaster. Good morning, everyone, and thank you for taking part of our second quarter 2019 results call. I'll start by commenting on the highlights on Slide 3. In the second quarter of the year, our FTTH customer base continued to grow at an accelerated pace of 37.9% year-over-year and FTTH revenues, 55.1%. This again confirms that fiber is transforming our fixed business and it will drive revenue growth in the future.

In mobile we continue to execute our role as market leaders by increasing prices and, most importantly, enhancing customer experience. As a result, our postpaid customer base expended 8.5% and the postpaid revenues grew 3.5% year-over-year.

Total revenues were up 0.4%, mainly driven by mobile revenue that grew 2.3% year-over-year, including handsets and by an improvement in the fixed revenue trends. In term of costs, we still see additional opportunity to reduce non-quality costs and leverage on digitalization and efficiency initiatives, so as to further improve profitability. In the second quarter, costs decreased 2.4% year-over-year when excluding cost of handsets, and our EBITDA margin reached 34.9%.

These elements combined with efficient financial management would allow us to deliver superior cash generation, net income and shareholder remuneration. In the first half of the year, our free cash flow expanded close to 13% year-over-year, reaching BRL 3.4 billion. We declared BRL 2.2 billion of interest on capital, and recurring net income grew 24.3% on a early comparison.

Moving now to the details of our main businesses on Slide 4, represent evolution of our mobile revenues, which grew 2.3% year-over-year, when including handsets. If we exclude handsets, mobile service revenues increased 0.1%. In the first half of the year, postpaid revenues grew 5.7%, benefited by the hybrid price increase in Q1 and a sequential improvement of prepaid revenues.

For the second half of 2019, we maintained our rational pricing strategy and have already announced a pure postpaid price increase that would positively impact the third quarter of '19. While in prepaid, we expect to continue to improve the evolution based on better monetization of our customer base.

On Slide 5, you see that our leadership in the mobile segments slightly increased to 32.2% of the market share and that it's 40% when considered only postpaid customers.

In terms of postpaid net adds, we see a sequential improvement, even after having increased our hybrid prices at the beginning of the year. Moving to the right-hand of the slide I would like to point out the results of an analysis conducted by the benchmark expert, P3, and the Magazine Connect on the quality of the mobile networks in Brazil, based on 6.3 billion samples and almost 1 million users, evaluating metrics such as, voice and data coverage, download speed and data availability. As you can see, Vivo led the overall national wide results, with a gap of more than 40 points versus second-place operator. This will indicate that we'll measure the overall network quality including capacity and coverage, where Vivo has a differentiated position.

Moving to our fixed business on Slide 6. The transformation of fixed revenue mix is leading to continuous improvement. In the second quarter of 2019, total fixed revenues grew sequentially, and for the first time in the company's history, broadband revenues outweighed voice revenues. The change in revenue mix and sustainable fiber growth are driving a gradual progress in the year-over-year trend. In second quarter 2019, fixed revenues dropped 2.8% year-over-year compared to a drop of 3.2% in the first quarter of 2019 and a decrease of 3.7% a year ago.

FTTH revenues reached BRL 481 million, growing 55% year-over-year and IPTV revenues reached BRL 217 million, increasing 40% year-over-year. This improvement confirms that we are on the right track to stabilize fixed revenues and resume growth in the near future.

On Slide 7, you can see that the shift of our fixed revenue mix is directly linked to improved profile of our broadband services, as we accelerate our FTTH deployment. In the second quarter of 2019, FTTH access grew 38% and now represents close to 1/3 of our broadband customer base, a 9 percentage points increase versus a year ago. As a result, total broadband ARPU increased 14% year-over-year to BRL 63.3, the most significant increase of the last 6 quarters. Over the right-hand side of the slide, you can see that our IPTV business is also performing very well. IPTV access increased 33% year-over-year and now represent 44% of our overall Pay TV customer base, improving overall ARPU by 5% to BRL 104.

Now moving to Slide 8. We continue to focus on the expansion of our fiber footprint. In the second quarter of 2019, we took our FTTH network to an additional 12 new cities, summing up to a total of 142 cities, 21 more than at the end of 2018. More importantly, we are increasing the number of our home passed with FTTH, which now reach more than 9.5 million. For the second half of the year, we continued the fast pace of fiber expansion, moving new and existing cities, while selectively overlaying FTTH in the most valuable FTTC footprint.

On Slide 9, we detail the investment made in the period. CapEx amounted to BRL 2.4 billion in the second quarter of 2019, totaling BRL 4.1 billion in the year, 10% higher than a year ago. The CapEx execution is aligned with the guidance given at our Investor Day of a higher FTTH-related CapEx. As such, investment in fiber increased 34% year-over-year, further improving our presence to 252 cities with FTTx. Additionally, we continue to allocate CapEx to amplify our coverage and network quality in 4G and 4.5G technologies, with a 33% increase year-over-year.

Moving to Slide 10, you can see that on July 23, we signed a memorandum of understanding with TIM with the objective of analyzing options related to the sharing of mobile infrastructure. By signing this MoU, we intend to initiate discussion regarding the sharing of 2G and 4G infrastructures and other efficiency and cost-reduction opportunities around network operations. We plan on combining our 2G footprint in a single-grid model, something that can potentially release 2G frequencies to be reformed and used for up-to-date, higher return technologies. Additionally, to intend to share our 4G network in band of 700 megahertz, initially in cities with less than 30,000 inhabitants, allowing for further expansion of our 4G footprint with less CapEx, OpEx intensity. The agreement is in line with the global trends of network sharing and consolidation of fundamental importance in a country with geographical dimension of Brazil. It's also a solid step taken towards a rationalization of investments and capture of cost efficiencies, which we additionally improve the overall quality of services for our customers.

I now pass it on to our CFO, David Melcon.

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [4]

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Good morning, everyone, and thank you, Christian. Moving to Slide 11. We continue to be very efficient in managing cost, averaging on digitalization and simplification processes that benefit not only ourselves but also our customer experience. In the second quarter of 2019, our operating expenses were flat year-by-year, significantly below inflation of 3.4% [persisting] in the period. Cost were negatively impacted by a accelerated handset sales. Excluding the cost of handsets sold, our expenses dropped 2.4%. Personnel cost that represent 13% of total OpEx decreased 2.6% as a result of the organization and restructuring executed in the last 12 months. Cost of service rendered that account for 40% of our total OpEx decreased 2.4%, benefited by the lower expenses, within the connection partially compensated by higher cost related to the expansion of our network.

Commercial expenses excluding bad debt, decreased 6.7% in the period, continually benefited by digitalization that significantly reduced expenses with call centers, back office, billing and posting. In the second quarter of 2019, commercial expenses represent 25% of our total OpEx.

Moving to Slide 12. Artificial intelligence and e-care app continues to be the catalyst to capture cost efficiencies and to improve the overall experience of our customer as well as their interaction with Vivo. Our virtual assistant, Aura, is already using more than 20 channels, recording more than 50 million interactions up to date, averaging a variety of key issues related to billing, data usage and prepaid balance, among others. Leveraging on Aura's capabilities, our cognitive call center address demands from our customers, reducing the number of calls with human interactions. In fact, since January, the number of calls pertained by our cognitive call center multiplied by 3, heightening satisfaction levels above 90%.

We are also constantly developing our e-care app, Meu Vivo, not only in mobile and fixed B2C but also in B2B. Each app is designed to attend the most common demands from our customers, unlocking non-quality cost savings. As a result, over the last 9 months, top ups made on the Meu Vivo increased more than 60%, contributing to our significant reduction of top-up commissions.

Now moving to Slide 13. Net income for the first half of 2019 reached BRL 2.8 billion, 24% higher than a year ago in a recurrent basis. This positive evolution was driven by EBITDA growth, boosted by total revenue expansion and rigorous cost evolution, improved financial results related to the lower net debt and reduced recurring tax expenses, resulting from the higher volumes of interest on capital recurred in the period, amounting to BRL 2.2 billion, significantly higher than in the previous year. This reinforced our plan to continually remunerate our shareholders, while investing to capture a growth opportunity, a combination that is unique to Vivo in the Brazilian telecom space.

Turning to Slide 14, in the first half of 2019, free cash flow grew 30% year-over-year, reaching an impressive BRL 3.4 billion, despite growing 10% the CapEx in the period, compensated by lower interest payments and improved working capital. The resources are being used not only to remunerate our shareholders but also to invest in cutting-edge technologies that will consistently yield higher returns.

Finally, as a reminder, in August and December 2019, we have schedule dividends and interest on capital payments related to 2019 results, totaling around BRL 7 billion.

Thank you, and now we can move to the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rodrigo Villanueva, Merrill Lynch.

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Rodrigo Villanueva, BofA Merrill Lynch, Research Division - VP [2]

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

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [3]

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Roderigo, this is Christian. In the first quarter, we increased price in the hybrid plan. And we saw better results for the mobile service revenue. So in the second quarter, we haven't raised any price. So maybe that's why, because when we combined the 2 of them, we have a growth up in the first semester, but a stronger growth in the first works, yes, we did increase price and that we could see in the results from mobile revenues, especially moved from the hybrid one. We're going to do the same for the postpaid that we already announced in the third quarter, and in the end of the year -- we're going to do it again in the hybrid. In the prepaid we also raised price, as we also said in the last call. We raised price for our weekly and biweekly offer, from 10 to 12. We also increased price of the face value of some of our top ups in some of the markets. And we could also see an improvement, now if you see the prepaid that was minus 19% in the first quarter, it's now minus 8.7% year-over-year revenue. So we do believe that when we do a price increase that it's blended with innovation in the portfolio and more data or more benefits, we could see -- we can see the results. But of course, it's not the only way for us to increase our attractiveness. I think our net add was also positive in this quarter, better than the quarter before. And going forward, we're going to continue to do more innovation in our offer, blend our FTTH footprint that today is 9.5 million home passed and give more conversions in our offer and to cross benefit between the 2 type of customers, the fixed and the mobile.

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Rodrigo Villanueva, BofA Merrill Lynch, Research Division - VP [4]

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

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [5]

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Yes. I don't know the number, if you got from the cost of goods sold over the total revenues, I don't think it's 100% correct because in cost of goods sold there are some other hardware that we sell for our B2B customers so the ratio is not the one. I think our strategy for devices that we've been saying for a long time now, I think we decided to come back to the game. I think it's very close to our core business, that is, cellular service. So we went to our stores as we are trying to communicate not only to the market but also to consumers in our communication that we want customers to find everything that they want in technology in our stores. Now we have 1,600 stores in Brazil and we want to be seen as the place for them to buy not only mobile service but also hardware and accessories. So our strategy is combined subsidies with few postpaids with more value but also selling devices to hybrid and prepaid customers without subsidies. So it's a mixture of the both. So that we're going to continue doing that. And again, hardware is all included in cost of goods sold not only in handsets.

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Operator [6]

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Our next question comes from Maria Tereza Azevedo, UBS.

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Maria Tereza Azevedo, UBS Investment Bank, Research Division - Director and Research Analyst [7]

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

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [8]

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Maria Tereza, thank you for the -- your question. Of course, we expect more rationality from our competitors. I think we've been giving signs of price increase. I think it's some of the segments in the mobile, a sum of competitors followed our movements. We still expect them to follow more closely, especially in the prepaid. It's not only in the price but also in the benefit that we offer. We've been very strict in off net or even some social network, that we don't want to give for free. Especially in the prepaid, when they are paying around BRL 7 to BRL 10 per week or even 2 weeks in some cases. So we expect rationality to come back. Now we see that in some segments, we don't see in all. We see for some competitors, not for all. So going forward, I think we should, especially for all the investments that we all need to make in the country. We have like options, we have network to deploy. So we need to generate more cash. So I'm positive that rationality will be among all of the players. Concerning consolidation, I think Brazil, as we said in others -- in other calls, now Brazil requires a lot of investment and very strong and with financial capability to be able to compete. So I cannot tell you what the number -- what the right number of competitor we should have in the market but I do believe that investment there required both in mobile and fixed don't allow to have so many players competing for the same customers.

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Maria Tereza Azevedo, UBS Investment Bank, Research Division - Director and Research Analyst [9]

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

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [10]

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I think the guidance that we gave for the 3-year plan is the one that we gave, so with the BRL 26.5 million or the BRL 24 million plus the BRL 2.5 million, they will be accelerated for the fiber. Although we consumed a little bit less last year, and we are trying to be a little bit more efficient also this year. But again, this the same, we haven't changed it. I think it's too early to say, Maria, that how much is going to be our CapEx expected for the 5G. The auction is planned to be in March 2020. It's going to be a lot of things being auctioned there, 700, maybe, the 2.3 that can also be used for 4G. So far what we're doing is, preparing ourselves for -- as a capacity standpoint. So we are putting the fiber to the sides, we are doing as much as we can. And I think also this MoU that we signed with TIM is also our ability to release investment maybe in 2G and 4G, in some other cities to invest in other technologies or high-speed technologies. So again, we keep the guidance that we showed in the markets for the 3-year plan that includes next year.

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Operator [11]

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Next question from Susana Salaru, Itaú.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [12]

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The first question is related to the price increase timing. We used to have price increases, if I'm not mistaken, in the beginning of the year and towards the end of the year. And this year, the whole (inaudible) of price ups changed. So if you could comment on the rationale of changing the price increase, that will be our first question.

The second question, just a follow-up on the handset business, you mentioned that you have been selling handsets with and without subsidies. Could you just elaborate a bit more, what are the kind of margins that you're waiting to have in this segment? And if these margins are positive, what are the strategies behind that? I mean how come you have can have positive margins on handsets? That's it.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [13]

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So Susana, I think -- last question, the price increase, it's more as a sense that we did, maybe we are doing 1 month in advance in some segments. We did hybrid last December, beginning of January, with some impact. We're going to do again December, January this year so it's more as 1 year after it. In the postpaid, similar, I think we did third quarter 2018, we are doing now August 2019, so it's more or less the same. And prepaid there's no rule because we've kept the same price for a long time. So we are doing offer-by-offer now. So it's -- I think it's similar to what we did in the past, maybe 1 month ahead, 1 month in a -- before, but it's always different for hybrid and pure postpaid, never at the same date.

Regarding handsets and then maybe I can give more detail that I don't know how much we can share, but it's a mix of pure postpaid customers and we also want to position ourselves in hybrid and the prepaid, customers that don't buy with subsidies, that would -- some years ago we decided not to sell to these customers and we decided to be back to this game, also selling, competing with retailers, big retailers, larger retailers that are capturing a lot of this market. So here there is a mixture of customers that we sell the subsidies although, the unit value of the subsidy is going down, we still sell with subsidies. But these customers, they won't buy for pure postpaid. In the hybrid, depending on the customer, we only give slight subsidies for the high-end one in the hybrid, we don't give to the others and we don't give in the prepaid. It's a difficult number for me to give you right now because there is also accessories that we sell together that the margin is much higher. So what we give as a number is that we are getting a positive margin, but it's a mix between subsidies, postpaid, without subsidies in other segments. And we are reinforcing our presence in segments without subsidies with a massive communications to drive customers to our stores and very focused in hybrid and prepaid.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [14]

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Okay. Just a follow-up on that, Christian. On the handsets, I mean, do you have any strategy regarding the inventory to have a high inventory turnover, just optimize the cost of the handset? Or you have been buying a big number of handsets through (inaudible) through your, up trading the (inaudible) in Germany to lower the prices? I mean in terms of procurement because I didn't think that you have guided during the first updates the profitability of the business?

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [15]

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

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Operator [16]

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Next question comes from Fred Mendes, Bradesco.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [17]

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I have 2 questions as well. I mean the first one, if you could give just a little bit more of information about the MoU you signed with TIM and the possibility of expanding to cities with more than 30,000 inhabitants, particularly in terms of potential improvement, in terms of capital allocation. This will be my first one, first question.

My second question, looking at the EBITDA margin, especially on a pro forma basis, just to get a better understanding of the potential for next quarters, I mean, we do expect here, at least it's our view, that the FTTH products, it does have a higher margin than other products such as copper and voice. So as the FTTH continues to grow at a fast pace, do you believe that we could see an improvement in margins, maybe above what the market expects? Or maybe on this initial stage you are charging a lower pricing in order to gain more market share, so that's why you're seeing such an improvement in margins yet. Of course, there are other moving parts but just trying to get understanding of this strategy here and the potential from the FTTH in terms of margins.

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [18]

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Fred, it's Christian. Thank you for the questions. Regarding the MoU, the first one, I think it's like very preliminary to talk about what's going to be the impact. Giving more color on the MoU, we're going -- there is 2 key pieces. The first one is the 2G. The 2G here, the idea is to work towards a single-grid, where we could split our footprint and give services, like in half of the country each, so that we could free our frequency to be used in other technologies, such as 3G or 4G. So that's the first idea that we have, we're going to start with cities, outside capital to see how it works and then we can keep improving it to more cities in -- depending on the analysis that we do during these 90 days that we have, before the final approval if it's needed by ANATEL and (inaudible). In the 4G, it's focused on 700, we started with 30,000-inhabitant city but, of course, if it works we may be expanding it to more -- to larger cities, so as you said, as you correctly said. So I think it would depend on the results, we are very are positive and optimistic that can work. We have 90 days to make it concrete as a plan, get the needed approvals and make it work. And also I think in the short term, we'd able to present through results, how is it working and with the impact in our CapEx and OpEx and especially in our coverage, that we could expand it, if we can do that splitted with TIM.

Regarding EBITDA margin, as you said, you're right. We've been increasing FTTH. We've been replacing some copper. At the same time, we're also replacing voice, that has high margin so -- but we're going in the right direction, if you consider only broadband, I think we have the right price points. We are trying to sell high speeds in cities that we get to optimize and to increase our ARPU. I think we've been seeing the ARPU go in the right trend. And I think, we believe that if the revenues come, or we're being able to increase margins and increase the EBITDA. But I think our key objective here is to increase in absolute numbers the EBITDA that we present. I think it's a mixture of very different services. Now there is handsets that Susana asked before that has evolved in our revenues, there's some B2B services that include services and hardware that is also -- is being very successful in our sales strategy and, of course, fiber is being a one that's contributing us not only with revenues but also with positive margin. So going forward, individually fiber is a good project that's bringing positive margin, as you said, but I need to combine with all the other services and products we are also selling.

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Operator [19]

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Our next question comes from Valder Nogueira, Santander.

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Valder Nogueira, Santander Investment Securities Inc., Research Division - Head of Telecom, Media and Technology [20]

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

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [21]

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Valder, thank you for the question. That's Christian again. I think as we said, no, we got to 142 cities with FTTH, a little bit more, in 250 if you consider FTTx, Brazil is a huge country, with more than 5,000 cities. I think we want to get to as much -- as many cities as we can. So -- and we have a guidance and we have a CapEx that is controlled. So we cannot do everything by our own. So we'd be able to consider other infrastructure type of models. We don't have anything right now. We've been analyzing and to see if there is an incentive for us to do that, how can we do that. But I think going forward, it's going to be hard to believe that we're being able to be independent player, building by ourselves all the network that, we believe, it's demanded in a country the size of Brazil, especially when we have 40% of the postpaid customer base but there is a lot of advantage for us to sell a bundle of our postpaid advantage, together with FTTH. And I think we started before, we have more expertise as a group and we're going to continue to accelerate and as we have CapEx limitation, we will need to see if there is any different model that can help us to be more aggressive in speed and respecting all the restrictions that we have as a company that wants to have this -- the control or have the FTTH built in the way that we know how to build it. That was the first question.

The second question was the price. I think the price -- I think our ARPU, broadband ARPU is going up. Now it's going up more than it -- more than 14% and we had 12% in the quarter before. So I think going forward, we expect to be increasing ARPU as we are selling more FTTH and less ADSL. So things, the natural movement, and we expect the market to be also rational on broadband because there is a lot of investment to make this fiber and also to the CPEs related to customers' premises. So going forward, we expect ARPU to grow as we replace more FTTC and ADSL by FTTH.

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Valder Nogueira, Santander Investment Securities Inc., Research Division - Head of Telecom, Media and Technology [22]

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Okay. And the second question is how has been -- how clients have reacted to your cross-sell offers on the 4.5G and fiber? Where -- which regions have been more adeeming to that offer? And how has that helped your overall ARPU dynamics?

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [23]

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Here it's more -- we are giving more benefits in the mobile side for fiber customers. It's not a very aggressive offer, what we did in today's normal day of mobile data to customer that are both fiber and postpaid with us. I don't have a number to give you. I think it's been good in states where we have a strong market share. I think it consolidates our position in these spaces. You could see our postpaid churn, it's very controlled. Although, there is some aggressive movements from some of my competitors with prices that are below wall rates and with a lot of benefits in social network and other things that I mentioned before. So I think that combined with many other things are helping us to keep our net adds in a very strong and solid number, keeping our churn down and going forward maybe we need to do more as a bundle, today is to have through bills, through offers, going forward maybe we need to put it back together and I think also there is a channel synergy that we don't see in all the numbers in a very clear way, Valder, but we are being able to sell more and more fiber in our stores, that's also give more value to the channel that we deploy it for a mobile purpose in the past and now it's being used also to sell high value products and services in the fixed business.

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Operator [24]

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Next question comes from Marcelo Santos, JPMorgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [26]

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Marcelo, it's Christian. I will answer this first and then will give David the second, okay? The agreement that we had with TIM and Oi is different from this one. That one was signed in 2015, it was related to the 2.5 frequency for 4G. It was very limited. I think at the end we did like 1,300 sites in our -- from Vivo. And they give each -- or more or less 667 each because they had a 10 plus 10 and we had 20 plus 20 megahertz as a frequency. I think that's not the same. I think that was very limited, as I said, it was a 3-way sharing that made it a little bit more complex. We had more frequencies and they had to add the 2 of them together. And I don't think that serves us right, a benchmark for us going forward. I think that was a good experience in a way to do things, but I think going forward, the one that we have -- planning to do with TIM is a little bit more aggressive, now going to more cities and more sites. But again, we have 90 days to define the scope and to get the right approvals to make it happen. But I don't think it's -- the benchmark would be the one that we get. But like we were talking about like, I don't know, feeding less than 150 cities, each that we put in the place to do the 3-way sharing that we had before. I think it's going to be different, this one. And lastly, and then I'm going to ask David. If you have more questions about that, then he will give you more answers.

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [27]

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Marcelo, thank you for your question. This is David. I think the main reason, if you compare tax rate year-over-year is a intercom capital. So in the first 6 months this year we declared BRL 2.2 billion compared to the BRL 400 million that we declared in the first half of previous year. Now continuing that we have a tax benefit of 35% of this amount, this explains evolution of the number, not that there's any other big impact here.

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Operator [28]

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Next question comes from Mathieu Robilliard, Barclays.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [29]

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I had 3 questions quickly, please. On B2B, could you give us a little bit -- the outlook for the segment in itself? And how you're doing there compared to your peers? Second, on the mobile venture you announced, you haven't announced anything on 3G, and I was wondering whether you had considered it but decided not to share anything on 3G? Or you hadn't considered it because you don't think it's the right time? And finally, I'm afraid I'm going to have to ask about the PLC 79, is it realistic to expect something in Q3 after the recess? Or could it be further delayed?

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [30]

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Mathieu, this is Christian. I would like to answer the 3 questions, thy are different ones. B2B, we see a positive trend. We don't give numbers specific for the B2B, but we see, as we've been saying for many quarters, a very positive trend in both fixed and mobile segments for the B2B, the fixed is a lot -- it's impacted by some deals that can move up or down when you compare year-over-year. But overall health of the business, it's positive. Although, the economy is still under recovery, we see our B2B getting more attractive. Now there are some numbers that we see going in a very positive ways, digital services, we've been partnering with big companies in digital arena, like Cisco and Microsoft, among others, we are going security, we are growing cloud, we are growing machine-to-machine. So there are many public numbers that we shared that's signaling what I'm saying that this positive trend that we see in B2B and I still depend a lot of the recovery of the economy. As much as new company started to reinvest in Brazil, we're going to see our business going up in the same way.

Regarding the MoU, it seemed I think your question was about the why 3G is not there. I think we wanted to do, just to point out, our key priorities in the short term to make it feasible and real. So 2G and 4G is going to be the first up. But there is a line in our MoU that says that we're going to be assessing other technologies and other frequencies. So once we get to the analysis of the 2G and 4G and we see that there is also opportunity to capture in the 3G, we're going to do it, we just didn't point out as the key priority because we wanted to make it real. So starting with 2G, the receipt is a little bit accomplished than 4G, new cities use 700. But again, when we get to a city that there is 2G, there is 4G and there is also 3G, of course, we're going to consider doing everything and getting much more of this MoU. PLC, we don't have a concrete date to carry out. We're still very optimistic. We don't know when's going to be the right timing. I think it's there, being analyzed by the Senator. We have to wait her timing to have it analyzed. Brazil is under a lot of reform at the same time so we don't know what's going to be the agenda of the Senate to approve maybe, maybe social security, the pension fund before, of course, and then the others, or they can go in parallel. This feeling I cannot give you. But still very optimistic. And I think, as a sector, we are all aiming for this approval.

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Operator [31]

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Next question comes from Alejandro Lavin, Citi

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Alejandro Lavin, Citigroup Inc, Research Division - VP [32]

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I have a couple of quick question on the balance sheet and leverage. So obviously, you have a very comfortable position right now in your net cash, well, make sure excluding IFRS 16. So obviously, this gives you a lot of flexibility going forward so I'm wondering what will be the top 2 or 3 possible uses for this leveraged capacity?

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [33]

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Alejandro, this is David Melcon. I will take the question. I mean as you say, we have very strong balance sheet. We are trying to consider that in the next 6 months, 5 months, we are going to pay the shareholder remuneration, coming from last year that would amount to almost BRL 7 billion. So we'll have a cash out of BRL 7 billion in the second half. So this is something that we need to consider. And then regarding what would be the plan for the future, I think having such a strong balance sheet give us opportunities also to have the flexibility for any thing to happen in the future, I'm thinking about the other tax report, and the potential, we believe, that this is the right structure that have at the moment and then we will see further around when there is any specific.

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Alejandro Lavin, Citigroup Inc, Research Division - VP [34]

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Okay. Great. If I may, a quick second question. What would be a normalized or steady-state leverage level that you would feel comfortable with?

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David Melcon Sanchez-Friera, Telefônica Brasil S.A. - Chief Financial & IR Officer [35]

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

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Operator [36]

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

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Christian Mauad Gebara, Telefônica Brasil S.A. - CEO & Director [37]

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So I'd like to thank you all for participating in our call. If you have any additional question, please come talk to our IR team. And as we said along the call, we are very optimistic about the country and our -- on a go-forward basis than we'll [buy] on the fixed for the second half of the year. So thank you, and hope to see you all soon. Bye-bye.

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Operator [38]

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Thank you. This concludes today's Telefônica Brasil 2Q '19 Results Conference Call. You may disconnect your lines at this time.