Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil Second Quarter of 2020 Earnings Conference Call. Today with us, representing the management of Telefónica Brasil, we have Mr. Christian Gebara, CEO of the company; Mr. David 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. After the company's remarks are over, there will be a question-and-answer session. At the time, further instructions will be given. [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 the 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. Plaster, you may begin your conference.

Thank you. Good morning, everybody, and thank you for joining us in this conference call for Telefónica Brasil's 2020 Second Quarter results. The call, as usual, will be divided as follows: To start, Christian Gebara, our CEO, will present an update on the effects felt in this quarter due to the COVID pandemic and show how the situation is shifting our relationship with our customers; then he will go over operation and commercial performance as well as our record FTTH expansion; then our CFO, David Melcon, will comment on our cost structure, efficiency commitments, investments and financial highlights; to conclude, Christian will comment on our ongoing ESG initiatives. We will then move to Q&A. And now, pass the word to Christian.

Thank you, Plaster. Good morning, everyone, and thank you for taking part in our second quarter 2020 results call. I will start by taking -- talking about the impacts of the pandemic on our operations. As you know, second quarter '20 was an atypical quarter with a drastic reduction of commercial activity in April, but starting to show early signs of recovery in May and June. Since the complete closure of our stores in March, we have gradually begun opening them up again, with reduced hours and limited capacity. In June, around 80% of our stores are already reopened to the public. This temporary shutdown had significant impact on postpaid additions and handset sales that typically take place in our stores. That said, we have perceived a recovery since May. And in June, we only had 6,000 postpaid net disconnections and a softer reduction of minus 10% in handset sales year-over-year. In prepaid, we were able to revert the negative trend, having a slightly positive year-over-year growth of 0.8%, as connectivity across all segments remains essential. All in all, Vivo's top quality value proposition continues to drive demand and sustain customer resilience. In fact, FTTH performed better in Q2 than in Q1, with record net adds. Additionally, churn decreased in all key segments, as customers are now giving more value to network quality and the overall experience. On Slide 4, with the acceleration in the use of digital channels in recent months, the customer journey is changing fast, and Vivo is at the forefront of this transformation. By June, the acquisition of new mobile customers and migrations through e-commerce had increased 16.5%, while FTTH sales has gone up by 12.3% compared to March levels. Meu Vivo, our e-care platform, that reached 17.6 million unique users at the end of the…

Good morning, everyone, and thank you, Christian. On Slide 12, we show how our strong cost reduction help us offset the revenue drag caused by the economic slowdown. Our cost reduced 5.9% year-over-year, which led to an increment of 0.5 percentage points to our EBITDA margin that closed the quarter at almost 40%. This quarter suffered from some atypical but temporary cost effect, mainly due to the COVID-19 crisis. But the provisions, for example, reached 3.5% of gross revenue, a 1.1 percentage point year-over-year increase with payment delays more concentrated in B2B, but with minimum cash impact. Cost of goods sold were down 34.6% as a result of lower handset sales in the period. Whilst personnel cost fell 6%, given the temporary workday reduction and benefit from government measures. Cost of service rendered increased 4.8% this quarter as a result of higher interconnection costs, associated to the seasonality of IP traffic reported last year. Our G&A and others line was also affected by temporary effects and contingencies benefited by ongoing reductions. However, the most significant factor for our consistent cost reduction and efficiency continues to be our digitalization and simplification efforts. In the second quarter 2020, we had 75% of our customers receiving e-bills. A 12 percentage point year-over-year increase and 60% of the payments were made through digital platforms. We have reduced by 21%, the number of call center calls through this growing use of digital channels like Meu Vivo and AURA. Those initiatives are critical. As a result, in consistent OpEx reduction, while also contributing to an improved user experience by our customer demand. On slide 13, you can see that we continue to invest in future-proof technologies, while still expanding our operating cash flow margin that increased 3.7 points year-over-year. Our CapEx contracted 19% year-over-year to BRL…

Thank you, David. I would like to conclude today's presentation by saying that the site delivering high-quality connectivity solutions to our clients and superior remuneration to our shareholders. Vivo also want to contribute to society through its commitment to ESG by being socially responsible and helping to build a more sustainable environment. To achieve that, some of our efforts in the short-term are our donations regarding the COVID situation. At Vivo, we are aware of the pressure on the health system in terms of supply shortages and the families facing financial difficulties during the pandemic. For that reason, we donated BRL 38 million in 12 states across Brazil for the purchase of hospital supplies and equipment and food provisions for vulnerable families. Another initiative already in place is recycle with Vivo that already collected 111 tonnes of electronic waste since 2006, through more than 1,600 collection points available at our stores and other strategic points across the country. Moving to our medium and long-term initiatives, we have just announced a comprehensive project of distributed generation use in solar, hybrid and biogas energy, which will provide 80% of our low voltage energy consumption, covering 23 states and reducing costs while generation -- generating local development. Finally, I'm glad to say that Vivo is a carbon neutral company with 100% of our energy being renewable, and our 100% of direct emissions compensated by offsets. These are some of the many initiatives that Vivo performed either on its own or together with the Fundacao Telefónica Vivo, and at helping society navigate towards a more sustainable present and future. Thank you, and we can now move on to the Q&A.

[Operator Instructions]. Our first question comes from Maria Tereza Azevedo, Santander.

Thank you for the call, David, Christian and Plaster. My first question is on the fiber strategy. Is the idea here to sell the control, allow more leverage and maybe buy regional ISP providers as well? And is it fair for us to assume that the strategy is going to be that you're going to keep your own fiber in the multi-strategic markets? And then you will share neutral network on the middle market, similarly to what you're doing on the mobile rent sharing agreement?

That's Christian answering. So I couldn't get 100% portfolio of what you asked. The idea is that we're going to continue growing fiber with different models, okay? We continue with the organic growth that as we stated today, we have reached like 13 million homes passed. And we're going to add, maybe another 1 million at the end of the year, with 14 million homes passed. We're going to give partnerships that we have with American Tower, for instance, in Minas Gerais that we planned in 4 years, another 800,000 homes passed. We do the franchising as well. As I think we announced 1 year ago that we already have 3 cities where we have a franchisee. That's a different model because 100% of the CapEx is with the franchisee, and we only get the royalty. We have also Fenix Fiber, another partnership in different states in Brazil, where we have already more than 10 cities. And now we are launching this vehicle that I just talk to you about, that's going to be a neutral network as you ask, yes. We're going to be their core client, but we're going to have other clients also using this network. We're going to -- our first contribution is going to be 1.1 million home pass that Vivo is contributing to this new company. And that Telefónica and our financial partner will make also their contribution, and we plan in 4 years to build through this vehicle more than 5 million homes passed, keeping also, in parallel, our organic growth and the growth that we're going to deploy with our partners. So I don't know if that was the question? Did you want to ask something else, and I can complement.

Perfect. Christian. And my second question is on the mobile market segmentation and potential market repair. Can you please comment on the strategic value that you see for Oi mobile assets? And is it mostly on the capacity and spectrum? Or do you see any threats to your high-end postpaid subscriber base in the case of a potential wholesale player?

I think we are like, as you know, we have a binding offer that we submitted a second one on Monday. They have a value there. We are doing that in conjunction with team at Claro. We believe that there's a lot of synergy in the deal that's related to network management, customer management, channel and commercial activity. So I think together, the 2 of us, we are able to capture that. Moreover, I think considering regulatory and antitrust issues, I think the 3 of us together we are able to mitigate that. We are talking at here about 3 operators that have been acting in this market for decades. I think the migration of customers to our networks will be easier. And as we said, we have tower and we have spectrum to support the new contribution of customers that we'll inherit if this offer goes on. Of course, there are some other synergies in having more spectrum and also optimizing the situation or the spectrum map, when we put together some frequencies that Oi has and we also have in our portfolio.

Our next question comes from Marcelo Santos, JPMorgan.

Christian, David and Plaster. I have two. The first is on the fiber carve-out that you announced you're doing. Could you please provide a bit more details on what components of the network would actually be carved-out? What's the target of the geographical expansion that this carve-out is going to seek? Is this going to be mostly cities in Sao Paulo? Or is it something more nationwide? And also, if -- this is going to focus more on converting maybe your corporate clients? Or are you going to new areas where you don't have copper with this network. So this is the question under the fiber carve-out. The second question would be about the DSL subscribers, which the pace of decline seems to be deteriorating. In the past, I think you have mentioned that you thought that fixed revenues could start turning around maybe by the end of the year. I know this was pre-COVID, but I think that was more or less expectation that you would have the new revenue sources overcoming the legacy ones. Is this still -- is it still reasonable to expect? These are my 2 questions.

Marcelo, like so many questions. If I forget something, please remind me later on. So we are carving out 1.1 million homes passed that is from the central to the customer premise, including the CPE. So we are taking out, and we are adding this to the new vehicle, this 1.1 million customers, our customers outside the state of São Paulo and in cities where we deployed FTTH and that's not when we have the combination of FTTC and FTTH. It means city that we built FTTH that were beyond GVT's previous footprint. So it's not São Paulo, and it's not what we have -- still have some FTTC that was inherited of the acquisition of IPTV. So that's the 1.1 million homes passed that we are adding to this vehicle. Going forward, the growth of -- we are not giving up the name of the cities. It's more than 200 cities. It is in every state outside São Paulo, not all of them, but a vast number of states in different regions. We are not doing the vehicle growth in the state of São Paulo, state of São Paulo is going to be mostly 100% of our organic growth. So that's where we're going to built this additional 4 million homes passed that we're going to add to this 1.1 million in four years. I don't know if it answers your first question.

Yes. Thank you.

Second question. Yes, you're right, DSL is going down. When we show the number of the growth in broadband. And you could see that the growth is not so nice, but it's still close to 7%. That is the -- you add to this number what we grow in the FTTH that is 47.6%, and there is not such a growth in the FTTC and not a growth in DSL that ends up in the 6.7%. Here we had combination of 2 things. We are doing overly also over our DSL network and over our FTTC network. So part of the growth that we have is also because we are surpassing the copper network by our fiber network. We understand that we cannot be competitive with copper so either we do it ourselves or someone else, another competitor will take out these customers. So we've been doing this overlay. When you ask about when the mix would be as good enough to be the final result at positive. And I think in the Slide 8, we show that already, we have 57% of our growth in fixed already what we call in new growth technologies that's growing 11% because we are adding not only the fiber but are also adding data and ICT from B2B. And what is not the growth more towards legacy, it represents 43% and is decreasing minus 20.3%. Here, there's also a decision that we took this year. Last year, we took the decision of stock DTH. But this year, we are prioritizing the usage and the deployment of our CapEx. We are not very focused in CapEx deployment of DSL, DTH and FTTC. So that is also impacting our revenue performance. But we think that is much more profitable and is much better in the cash generation for the company to prioritize CapEx only for the growth of new technologies, both in the mobile, as we have seen it before in the FTTH and IPTV growth and of course, data and ICT for B2B as well. So it's difficult for me to say when and now because we're also being more conservative in the usage of CapEx for legacy technologies.

Next question comes from Rodrigo Villanueva, Bank of America.

Christian and David, Plaster. I have a couple of questions. The first one is regarding accounts receivable. It seems to me that on a net basis, they declined by around 5%, both quarter-on-quarter and year-on-year. And it seems that you have not been facing any issue to collect despite the COVID crisis. So I was wondering if you could provide more color on the performance of accounts receivable. And if you would expect to see some sort of deterioration during the second half of the year? That would be my first question.

Rodrigo, this is David. If you look to our balance sheet, particularly the budget is something that is very relevant this quarter. Now, I think there have been 2 different behaviors, one on B2C and other one on B2B. B2C represents 75% of the total revenues of the company, and it has been very resilient to the impact of the pandemic during this quarter. I mean, the budget for this segment is in line with previous quarters, and we expect this to continue going forward. As for B2B, which represents around 20% of the total revenues has been more impacted, especially because of SME, that's more related to companies optimizing and protecting the liquidity. Nevertheless, we are monitoring closely the evolution and adopting the necessary measures to minimize the impact such as negotiating debt and offering the option of paying installments, free of interest and fine. So I would say, in summary, on the budget, I mean, it's under control, and we believe the worst impact is already behind us.

Understood, David. Very clear. The second question that I have is related to the use of Huawei equipment. We have seen different comments on press articles regarding the potential for Vivo to use Huawei equipment going forward. So I was wondering if you could please clarify if you have already reached a decision regarding these -- I mean, basically, the use of Huawei equipment in your network?

Rodrigo, it's like, we are following it closely. So you may know, we follow and we have all the security and protection of our hardware already in place for any vendor. We have like the highest higher safety standards, and we are like closely monitoring everything that's going on regarding all this and any decision taken by our regulator agency and government, of course, we need to fulfill everything that may be decided. As you know, we work with a multi-vendor strategy. We think that it's very beneficial to have a multi-vendor strategy, not only for price but also for innovation. So far, we continue with our strategy monitoring what's going to be any -- if there is any decision for 5G. So far, we keep it the way it is, which is monitoring and keeping all the security and protection standards that we have here aligned with the Telefónica Group.

Christian, very clear. And one final question, if I may. When Vivo thinks about new fiber to the home clusters, is there a minimum threshold in terms of population living in those areas that you consider?

We have a different model for all different types of cities, okay? When the city -- or, like, if you consider the number of cities that we have to date, we have more than 200 cities, as I stated before, we are talking about, in general, the largest cities. We are in most of the state capitals here in Brazil, with an exception of some in the north. So we continue growing that way in the larger cities, midsized cities. With the vehicle itself, if you are asking about what will the vehicle itself. We are going to focus in midsized cities because the smallest one, that we can be considered below 50,000 inhabitants, we are trying to reach the appropriate franchisee model that I also explained in previous calls. Now that there we have franchisees that will be able to deploy the CapEx by himself and he will pay us a royalty. So more midsized, smallest one will be for franchisee, but it doesn't take out of our rather, if there is a small city close to a largest center that may be creating a cluster, there should be also deployment to have the backbone and infrastructure there. So it's going to be a combination with Vivo. We're going to check every opportunity, but we have a different model to each of them. Even in Minas Gerais, for instance, we are doing 40 cities, midsized, in general. Some of them are a little bit smaller than the number that I gave you but as we have a partner that is American Tower that's willing to deploy, they have the infrastructure, we're going to take the opportunity also to deploy it. And also we take into consideration our postpaid penetrations like [indiscernible] is very high and the convergence opportunity that we have is also we're taking into consideration.

Our next question comes from Fred Mendes, Bradesco BBI.

I have two questions here as well. I mean, the first one, on the mobile phones, I mean, we saw a decrease in ARPU, 2.6% year-over-year. So I just want to understand this trend because historically, the net adds on the postpaid, there has been more towards the hybrid plans, that does not seems to be -- what we saw some weakness with these net adds over the next months, which obviously explained by the pandemic. So just want to understand if maybe during the pandemic, Vivo focused more on down-selling in order to keep discuss with the mitigation or if there is something else here behind these ARPU results? And then my second question, on the FTTH, when you have a final copper and you want to upgrade these clients to FTTH, are you being able to charge a higher price? Or that's kind of the price that the client can afford it. And also if you can share with us the ARPU for the FTTH only?

Fred, this is Christian. No, look, the ARPU, there are many things consideration year over quarter. So it is true that postpaid, the pure postpaid was impacted, the new acquisition was impacted because our stores were closed. So most of our sales of pure postpaid, as you know, are through stores. So in March, we closed all of them. We're talking about 1,600 stores, and we start reopening them through the quarter. So if you look at net additions of postpaid. And here, I'm adding for pure postpaid with hybrid, it was minus 134,000 in April and was already in almost 0 in June. So of course, there is a recovery, and that has a positive impact in our ARPU once the recovery is there, and we are back to the levels that we had before. We are not facing churn, our churn is very controlled either like it's even better than it was before. But the ability to be more commercially active during this quarter was low. So we were not able to launch. We've just launched like 1 month ago, our new pure postpaid value proposition. Outside our family plan that we call Selfie, that is a plan that has a good ARPU because it adds to the plan, the partnership with 1 digital OTT Netflix, Rappi, Spotify, and we are planning to launch more. But of course, we need to have stores and commercial activity to be able to do that. Migration was also impacted in the first moment because people were more concerned, they were at home, but we see also recovery in migrating customers. And as you can see, our net add in prepaid, it's fairly and strongly positive. That give us room for more migration in the next quarters. And inflation is very low, Fred. So I think we should also be not considering ARPU included that we had in the past, when Inflation was different for the reality that we have in Brazil right now. Second question about overlaying copper or FTTC. In copper, I think was your question, DSL. Yes, depending on the -- we have some different pricing situation in the DSL. But normally, ARPU can be improved because we have the possibility of selling different speeds and much higher speeds. And also, we can add IPTV that gives us a very good improvement in our book that sometimes DSL, that was pure DSL of DTH was not possible to do.

Next question comes from Mr. Tito Ferraz, Itaú.

My first question here is regarding CapEx levels. So we've seen CapEx levels decreasing and with less focus on deploying a copper network. Can you give us some more color on what would be a reasonable level of CapEx going forward as a percentage of sales?

Tito, this is Christian. Yes. As I said before, that we are not stopping any investment in growth. So here, I'm talking about 4.5G and FTTH deployment, deployment of homes passed and also connecting customers. So as you can see in our presentation, the CapEx for technology, what we consider fiber, we had growth of 5.3%. In legacy, we'll be more conservative. No, we were already very determined to stop DTH. Now we are much more selective also with other fixed technology, such as DSL and FTTC. We are not giving guidance still, I think, what that's going to happen in this quarter, and in the last quarter of the year regarding the commercial activity. But we're going to be more conservative when we talk about legacy. Even this quarter, if you compare CapEx level, it was much lower than it was in the same quarter in 2019. So a different mix with strong focus in what's growth for us is fixed and what's in technology mobile.

Okay. And just a quick follow-up question here. Looking forward at your -- the agreement with TIM, when can we start taking at some results on CapEx and OpEx savings from this initiative?

Yes. Good question. As you know, we got all the improvement -- all the approvals in the regulatory agency in the CADE antitrust agency. So we are now ready to start working on this. This year is too early to see results, we are adopting preparing our networks in both fronts in the 2G and also in the 4G for cities that are below 30,000 inhabitants, as we said -- the 2,000 inhabitants, as we said. So I think next year, will be the first year we're going to start capturing the OpEx and the CapEx related to this agreement.

Next question comes from Mr. Walter Piecyk, LightShed.

Over to the fiber. Is that the long-term game plan? Is there potentially an opportunity to sell those customers to AT&T's Sky business? And then even beyond how you...

Sorry, sorry, you were on mute. Can you start the question from the beginning because we just got the last word?

Sure, sorry. You said a lot on the call about taking CapEx or moving the DTH customers away. Obviously, we can see the sub-growth there going down from satellite and you're shifting to fiber. Is the long-term plan to continue to do that? Is there an opportunity maybe to sell some of those customers to Sky? Conversely, could you -- if you can get a really good deal on Sky, just buy them for the customers and then over time, migrate them to ADSL? And then in general, again, just thoughts on Pay TV, like does it even make sense to offer a Pay TV product? Isn't it better maybe just to become a broadband provider and let the customer figure out their own over-the-top Pay TV services, thereby getting much higher margins for your business? If you could just talk about those issues, I'd appreciate it.

Walter, look, we are -- as you know, we are not leaving Pay TV player in the market. So what we have in Pay TV today is the combination of 800,000 IPTV customers. And something more than 300,000 of DTH or 300-something-thousand DTH customers. Over, as I said before, already more than 13 million homes passed and almost 3 million, only if you consider FTTH, 3 million customers in FTTH and more customers in FTTC. So our deal with Pay TV, especially in IPTV, that's what we are betting for the future because, as I said, we are not giving service to new customers in DTH is to operate when the customer really wants a triple play. Also sometimes, the customer really wants to have a triple play, and they want a full Pay TV. It's not the majority of customers, most of customers. And of course, it has some difference between cities, but most of the customers that just bought broadband. And as you said, they may decide for our OTT model and even in this sense, we just launched our fiber service and FTTH plus Netflix. That we are selling our broadband with Netflix and not necessarily selling or forcing the bundle with the Pay TV. Now you can buy individually Netflix with broadband. So going forward, what we're going to have this hybrid model. We keep IPTV as an option for those customers who want to have the Pay TV full-service, these customers still exist. We are also willing to continue selling only broadband and plus OTT, we are partnering with all of them, and we want to be selling bundled, pay service together for our broadband. And here, I can give 2 names, Netflix and Amazon Prime Video, renegotiating some different deals with other OTTs, open to do with all of them. And in DSL and in DTH, yes, it's going to be going down now because the churn is normal churn of a DTH service and we are not adding new customers. If someone can come here and try to buy our customers if it makes sense to our customers. If it makes sense to the way we operate, we are open to the discussion. But right now, we don't have this on the table.

That was very helpful. And that strategy seems to make a lot of sense. Just one quick follow-up. Can you give us a sense of what percent of your wireless subscriber base is -- has LTE phones or is using LTE service today? Or maybe a mix of traffic, if it's not mix of phones?

[Indiscernible] smartphones, it's more than 50%, for sure. I don't have the exact number, but it's growing up, but it's more than 50% over the smartphone customer base, for sure.

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

Well, thank you all for participating in this call. As usual, we are always open for further questions if you want, you can reach our Investor Relations team. So thank you all. And good day for everyone. Bye-bye.

Thank you. This concludes today's Telefónica Brasil 2020 Results Conference call. You may disconnect your lines now. Have a great day.