Ladies and Gentlemen, welcome to Vivo First Quarter 2023 Earnings Call. This conference is being recorded, and a replay will be available at the company's website at ri.teleconica.com.br. The presentation will also be available for download. This call is also available in Portuguese to access, [Operator Instructions]. Before proceeding, we would like to clarify that any statements that may be made during this call regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo's 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 respective forward-looking statements. Present at this conference, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Joao Pedro Carneiro, IR Director. Now I will turn the conference over to Mr. Joao Pedro Carneiro, Investor Relations Director of Vivo. Please, Mr. Carneiro, you may begin your conference.

Good morning, everyone, and welcome to Telefonica Brasil's conference call to present the first quarter 2023 results. The call will start with our CEO, Christian Gebara, commenting Vivo's financial and operating highlights, followed by an update on the progress of our B2B and B2C 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 generation. I now hand it over to Christian.

Thank you, Joao. Good morning, and thank you for joining our earnings call. I start representing the highlights of a very strong first quarter for Vivo, a period when we reached our highest total revenue year-over-year growth in over a decade, expanding top line by 12.1%, driven by an expansion of 15.9% of our mobile service revenue and by further improvement of our fixed business. This of the charge performance was a result of yet another positive quarter in operating terms, with mobile postpaid access growing 15.4% on an early basis, while our FTTH expanded base expanded 16.8%. The -- we have been able to grow EBITDA above inflation for a few quarters in a row, and this one was no exception as we presented a 9.6% year-over-year expansion. These results, coupled with the reducing CapEx intensity you should see throughout the year allowed us to generate BRL 3.1 billion in free cash flow in the first 3 months of 2023 with a robust growth of 26.4% versus the first quarter of '22. This confirms the conditions for us to maintain a leading shareholder remuneration in the industry going forward. Going to Slide 4. In the first quarter of 2023, our total revenue reached BRL 12.7 billion, the highest result the company produced in a single quarter in its history. More importantly, the 12.1% year-over-year evolution is the best we had in over 10 years, confirming that we are on the right track to continue delivering above inflation top line expansion going forward. Our revenue mix keeps on improving as we see our core services expanding. On the mobile side, service revenues grew 15.9% year-over-year with a strong performance, both in tread postpaid. In addition, smartphones and other electronics, which were increasing as a key element to enhance customer loyalty…

Thank you, Christian, and good morning, everyone. On Slide 12, you see that we were able to maintain our cost of operation, which comprise 68% of our cost and expanded 11% year-over-year, growing below revenues. Here, personnel costs continues to be one of the main drivers as this line is not only impacted by the annual salary increase, but also by the in-sourcing of staff to support our winning B2B digital services strategy and additional headcount related to new businesses. Apart from that, commercial and infrastructure costs remain well under control, while the provision for bad debt was slightly lower on a yearly basis, denoting how relevant our services have become to our customers. Looking at the cost of service and good sold, which mostly increased in line with our effort to sell high-growth solutions and products such as digital services, handsets, IT equipment and accessories, the expansion of 18% year-over-year was lower than the increase in revenues coming from these verticals. For the quarters to come, we see a path to improve the annual evolution of costs, not only from the opportunities around digitalization and simplification, which we continue to capture but also from the recently completed integration of Oi's mobile assets that resulted, for example, in the termination of the transition service agreement with Oi that had a cost of almost BRL 50 million this quarter and consumed around 1 percentage point of EBITDA year-over-year growth. This integration will also boost the capture of synergies related to the network costs, IT platforms and customer care, among others. Additionally, in March, we have started to amortize for tax purposes, the goodwill arising from the acquisition that will generate more than BRL 1 billion cash during the next 5 years. Going to Slide 13. As guided in the previous quarter,…

Thank you. We are going to start the question-and-answer session for investors and analysts. [Operator Instructions] Our first question comes from Fred Mendes from Bank of America.

I have 2 questions here on my side. The first one on costs. I mean, Dave already mentioned a little bit, but it was -- cost grew like 12%, personnel itself, 23%, a little bit higher than what we had here. So just wondering if the lower inflation in 2023, there is room to reduce this cost or given that the other business, they are growing this line, it should stay high throughout the year. This will be the first one. And then the second one on the B2B, once again, some acceleration already 6.5% of your revenue. Do you believe that there is room to continue to grow in this space as you add more products or this's kind of a one-off. Basically trying to understand the potential of this line here for the next years.

Fred, I will start with the first question. I mean, as we showed on the slide, we have divided the cost in 2 parts. The first one will be linked to the evolution of the new businesses more like cost of goods shorts and so on. So we are expecting this to continue to grow. But just to remind you that those revenues will have no CapEx allocated. So in terms of operating month flow cash flow margin will be very positive. Regarding the second one that you mentioned about inflation, we are working with different levels to make sure that we reduce those costs. And in fact, despite some lines are increasing, particularly the ones have to do with personnel costs. We explained that they are explained by just specific projects. But if we look to all the OpEx overall, we see a lot of opportunities both in simplification and digitalization. A part of the synergies coming from Oi to reduce and to improve the trends starting from the -- from the next quarter -- second quarter this year, we will see some improvements on the trends.

If I can continue Fred, with the B2B. So as you know, we've been giving a lot of visibility for our evolution in B2B digital services. This quarter was 32%. But if you see what happened in the last 5 years, the trend is actually the same, no positive evolution of the services. Here, we believe there is room for growth for many reasons. First, because Vivo has a unique channel footprint for B2B coming from the small companies to the large corporations. Now we are more than 5,000 sales reps distributed nationally with the relationship with all type of customers that allow us to sell more services. The second thing is that after the pandemic that was accelerated the need for digitalization in companies. And if you look at the level of digitalization penetration of digital services in all types of companies is still very low in Brazil, talking about cloud, cybersecurities, notebooks and many other type of services that we sell. It's much more -- we're talking here much more recurring services rather than hardware sale. So the mix is much more of a recurring services. And we see ourselves because we can prove it. We are one of the key partners of the large tech companies. So if you look at Cisco, Microsoft, Google, Holway among others, the search for our partnership because we have the footprint, we have the relationship and we can build the customers in an easy way to distribute their services. And apart from what they have as services, we are also investing in having people here that understand the services in depth that can help the sale, but more important can help the management of the services once it's implemented in our customer base. That's the reason that we bought one company last year, GVT. That's the reason that we are hiring people as well. So one of the as terms of the personnel cost is also related to increased capability, internal capability of being able to deploy and manage B2B services. So going forward, we don't give trend, but everything that we see is very positive for the role that B2B can play in our future revenue and mix. I don't know if first of all, your question about the B2B and the cost front. Otherwise, I can't complain.

Perfect. Christian, that'll be very clear. If I just may -- on these 2 points, if I just make a follow-up here, sorry for the third question, but it looks like the deal with [indiscernible] is about to be approved, it's already approved. So just wondering if with this, let's say, high spectrum, there is room to further decrease the CapEx in 2023, it's already lower than '22.

It's not approved. We -- yesterday, we had a positive decision of the technical team from the antitrust from CADE. So it's a first step in the antitrust. So yesterday, they approved no restriction to the deal as we expected because it's the secondary use of frequency, the spectrum that was bought by Winity, but we still need to grow for all other stages in the antitrust and the stages that we need to go through in Anatel. So it was a positive step in the antitrust, but we still need to have final approval there and also approval in Anatel.

Our next question comes from Marcelo Santos from JP Morgan. Mr. Marcelo, you may proceed.

he first question is for Dave regarding the working capital. I think in the first quarter, we saw a big release of BRL 1.3 billion in working capital. How should we think about this line going forward? And what are the main moving parts here that investors should keep in mind? And the second question is for Christian. I wanted to discuss a bit more Vivo Money. Could you please discuss the types of loans that you're giving there? What are they for? What are the average size? Are these to buy mobile phones or general loans? Any more color on these loans would be quite interesting.

Thank you, Marcelo, for the question. I will start with the first one. Look, Telefonica Brasil, we have shown very strong cash flow generation over the last few years. And working capital has been one of the key parts. So the key reasons why the working capital is still positive this quarter, I will summarize in two. The first have to do with the Fistel which is we have an injection obtained in relation not to pay the fiscal tax in 2020. This is something that is impacting our costs because we are recognizing the cost in our financial statements, but we are not paying -- so this had an impact in the last 12 months, annual impact of BRL 750 million positive impact in the working capital. The second one has to do with the monetization of the tax assets that we have in our balance sheet. Not only the ones that have to do with the taxation of the ISMS and Bescon, which is the most relevant. But just in the quarter, the [indiscernible] that we have monetized amount to around BRL 500 million. On top of that, we are always working with initiatives on working capital that taxes is one of just the key areas. But just those 2 are explained a significant part of it. On top of that, we keep working and something that is important that for the second quarter, we have still have some tax assets that will be monetized, that mean that will be cash coming in where the positive impact on the results was already recognized in the previous year now. So in summary, these are the key element for the working capital positive and we continue -- we expect a positive trend in the second question.

Marcelo going to Vivo money. So going back, real money was launched in October 2020. No, it's one of the financial services we offer in our fintech platform. It's a personal loan. It's available for Vivo's customers because we know this customer better. We can access the credit risk using our big data and data analytics. So we understand the profile, we can minimize risk, and we can be very assertive offering the right amount of loan to the right customers. Now the range goes from BRL 500 to BRL 50,000 on average is BRL 5,000 is very fast and practical the way they hired is 100% digitally that we do that. The money is not related to smartphone acquisition at the moment. It's a direct loan, and the customer can use it the way they want it. If you look at the numbers, the evolution, if I look at the number of contracts that have been generating that's been multiplied by 2, 3, 4 last year. So today, we have in the loan platform up approximately BRL 239 million being land. It's part of our strategy to reinforce our position of a digital hub. I think it -- of course, it will help also enable the acquisition of products as a way to finance it. So it's the way that we're going to use it more, as you mentioned, a smartphone or any other device for the smart home. Nowadays, the funds raised through our Fidica fund based on receivable rights. We are the only participant at the moment, but we are looking for others. So that's the way we are doing the financing of funds. I don't know if you have more questions, Marcelo, about Vivo money.

Our next question comes from Andre Salles from UBS.

The first one would be in terms of the price up schedule. If you guys could please share the company views on the price up schedule on your mobile plans, postpaid and both postpaid and prepaid. And the next question would be the developments of the capital reduction discussion with Dana Teoe. So if you guys could please just comment on that. And the follow-up here is that after a potential approval from the regulator, there are some additional internal steps that the company needs to make, right, such as shareholder holder meetings and approvals. So regarding these internal steps, could you please give the expected timing for this to happen?

So Marcelo, sorry, Andre, are we increasing price according to inflation every year. So in April now, we're going to have price increase for almost half of our hybrid customer base, more than half of our postpaid. In January, you already increased mostly all our fixed products, FTTA, IPTV and voice. So our strategy is always to adjust price. Even in January, there were some hybrid that we already adjusted. So if you look at the entry point of our hybrid went from 50.99% to 57%. We also had increased base inflation, our individual postpaid, our family plans. So we're following with the calendar to increase prices even the Vivo Total was recently increased. So in April, we have more increase in the mobile. And in the fixed, we have more increased not only the one in January because it was not 100%. But in June, we also have an increase in our fixed customer base. Prepaid we also aim to increase because we need to pass over inflation. It would be great to have the marketing -- the market following us on that because the price of prepaid has been in the same level for a long time. So we are aiming also to capture the inflation on prepaid as another one in the mobile space. So that's basically what we've been doing in price. Regarding the capital reduction that you mentioned. As you know, we have -- in February, we announced that we would do this reduction. So we already asked Anatel for that. So we filed in February 15, and they have 6 months to analyze, and we are confident with the approval of giving a very strong financial position. And after that, once it's approved, we need to comply with all the other necessary steps of this kind of operation, such as the general shareholder meeting that we need to approve. That's a period that we have to do to get it approved. So on schedule, waiting for Anatel to approve.

Our next question comes from Marco Nardini from XP.

I actually have 2 here on my side. The first one is regarding the competitive environment in FTTH. We saw once again a strong performance in top line growth this quarter. Can you provide us some further details on that, please? And the second one is regarding the EBITDA margin drop year-over-year. Can you give us some color on the end of the PSA contract with Oi in February impact on margins? And also, as David already mentioned, the increase in personnel expenses and higher share of digital services. What should we expect on margin performance over the next quarters, please?

So Marco, I'll start with the FTTH. So as I said, we are increasing our footprint. So we have today 24.4 million home pass -- we increased the connection of customers as well. So we have today, 5.7%. It's good to highlight. Also we increased 18% -- 18.7% the home pass, we increased 16.8% the home connected and increase in similar level the revenues coming from FTTH. So we are in a very strong position. If the market is a lot -- is very competitive, as you mentioned. There are many players. We are talking about very small players to large players like us that we are the number 1 in the market. And on general, in general, the number of net adds has been reduced. But Vivo stands out or if you look the last net add number available in March, Vivo gained 60,000. The second player gained 39,000. So we are gaining market share in a strong position. And as I said also, we are bundling that with mobile. So 75% of the sales of FTTH in our stores are in Vivo total. So either the customer is already a mobile and is acquiring fiber or it ends up being both with Vivo. So the competitiveness of the market -- the competitive of the market is very strong. We have different type of competitor, small ones, medium ones and large ones, but we have the largest network, the largest customer base and the only one in a national basis with the possibility to offer the Vivo total bundling, not only mobile and fiber but also digital services, as I highlighted. It's important to say that apart from selling IPTV were the key share over OTT video and we have 2.2 million subscribers that span OTT through Vivo. So that's the overall vision on ag. I don't know if you want any specific question on that. -- and the EBITDA, I think Dave will talk, but it's important to highlight our very strong growth in absolute terms, 9.6% of EBITDA growth, well above inflation. That shows that we are in the right direction. And important also to highlight the mix of services that we are selling now. We are very positive of our strategy of selling more digital services. We highlighted the 6.2% of the B2B, and we are also giving more color on the B2C. This service may come some of them with lower margin but they have no CapEx. So highlighting the growth in absolute terms of our EBITDA, also highlighting the growth in our operating cash flow margin that is also growing and is a very, very, very high number.

As Christian said, I mean, we prefer to look to the operating cash flow margin because the evolution of the revenues is very strong, particularly on these new services. But in terms of operating cash flow margin, they are similar -- could be similar to the telecom services, but we cannot look just on EBITDA. So we look this quarter, we are back to the 21% operating capital margin looking to the last 12 months, as we show on Slide 13 in our presentation. We are very positive in terms of seeing operating cash flow margin expansion -- looking to the last 12 months for the coming quarters as we are reducing CapEx and also we are improving our efficiencies. And regarding your specific question on the transition service agreement we had with Oi, we agreed at the beginning of the deal, BRL 172 million for the next 12 months after the acquisition that happened the 20th of April of 2022. So we have done an early termination of this contract as we have already merged the customers. So from the second quarter compared to the previous -- the first one, just on this contract, as I said on the call, there would be BRL 50 million less cost on top of the rest of the cost that we had to facilitate the migration of customers call centers, there were customers calling our call centers to clarify what was about the migration to the new services. Those costs will not happen again for the rest of the year. That's why, as I said, we are positive that the second quarter, we will see an improvement on the cost trends in the second quarter and also for the coming quarters.

Our next question comes from Victor Ricciuti from Credit Suisse.

The first one is regarding the competition in the mobile segment. As you already mentioned, you are being able to increase prices for almost the whole client base. And at the same time, you are able -- been able to also reduce churn -- so we were wondering how are you perceiving competition in the mobile segment? And how should -- do you expect it to continue throughout 2023? And my second question is regarding the Oi client base. So the Oi incorporation happened already 1 year ago. So now you are -- you can increase prices to this client base. So could you provide us some color around the commercial strategy for the Oi client base going forward?

I'm trying to answer. Yes, it's a very competitive market. It has been competitive for so many years. It's still very competitive. What I tried to highlight here is, first, there is the need of pass over inflation, and we are doing that. to be able to increase revenues and no regard because we have like investments, so we need to increase revenues to increase our profitability. So we are doing that. So hopefully, we're going to be followed by the market. The second thing is that I think the better proposition of Vivo unique, we have the best coverage combining mobile and fixed that give us increased loyalty. So that's why I think we also see the good performance in churn at both mobile, fiber and Vivo total. We're being able also to increase lifetime value, reducing churn with more services to our customer base. So let's take into focus here in the mobile access, we have 98 million access in our customer base. It's a growth of 14.2% in prepaid, but 15.4% in postpaid. That's a combination of attributes that we have, infrastructure, complete digital service value proposition, customer service that we focus in giving best experience and many others that I talked over the presentation. So going forward, we'll continue with our strategy. We are combining the inflation change that we need to put in prices with highlighting the value proposition that we can offer to customers. So very competitive, and our strategy is focused on what I just described. Regarding Oi, yes, we have full integration. We finalized the process. The customers that we had, we disconnected. So in final numbers, we are closer to EUR 9 million rather than 12 million. That was the first number that we received, concentrated most of them in our case, in prepaid, although we had some also in hybrids. There is no specific strategy of growing of increasing prices for this base is also very mixed in the number of customers that we have. There was a lot of migration from customers that were owing to Vivo customer base even before the deal or the incorporation was concluded. We also had the migration of 14 of customers on in other regions where we haven't received geographically the customers. So our strategy is the same. We are doing what we normally do. We try to upsell to customers. We try to move customers from prepaid to hybrids, from hybrid to -- with the Hybrid higher plan. We are adding digital services and some of them to have hybrids digital services, and we are also migrating hybrid to pure postpaid, has no specific action to what we got from for Oi rather than integrating the customer here, migrating to our plans and try to give them the best experience once they have now a coverage of network and channel that they did have when they were in the other operator.

Our next question comes from Daniel Federle from Credit Suisse.

So we are seeing Telecoms and I could say, especially Vivo growing faster than they used to growing faster than normal. And my question is in a scenario of like a more positive pricing environment. If this is more positive pricing given allow for a 1, 2 percentage points more in growth, should we expect this additional growth to pass through EBITDA? So 1, 2 percentage more in revenue should translate to 1, 2 percentage points additional EBITDA margin? Or are there like reinvestments, additional costs associated to this scenario?

I don't know if I would talk about Dan, about margin, but growth for EBITDA. We don't give trends. So there are many things implied in what you just said. First, we are growing in revenues in all segments. So I wouldn't specify the growth in mobile. We are growing mobile; we are growing fixed and we are growing in digital services. And the dynamic of these 3 segments are totally different. And if you talk B2C B2B, you are creating either other dimensions as we try to reflect here that we've been able to grow in all of them. Also important to highlight that what we call noncore that used to represent 9% of our revenues now represent 7% -- we took out a DTH from our value proposition. We are now offering the service, and we disconnected or migrated the customer they used to have. Even with this movement, we grew fixed in total, 3.5%. We are also growing handsets and electronics because we believe that's a way also to increase flow to our stores. It's our way to increase lifetime value, and it's proved that the customer is much more loyal, and they see as a technology partner rather than just a telco. So there's a combination of strategies here. So it's very difficult just to isolate mobile and believe that there is a mobile rationality and that would be reflected in EBITDA. If I talk about the specific telco service, maybe your assessment is correct. But here, we are talking about the combination of services and segments that give us this absolute growth. And as Dave said, -- we are also very focused on the operating cash flow margin that we've already set here a target for CapEx, $9 billion maximum this year. We already presented a number of our CapEx in the first quarter, lower than we had in previous quarter. So this is the strategy, trying to mix more revenues, opening up our spectrum to have more sources of revenues, controlling costs based on digitalization, understanding that some of these sources of revenues have different EBITDA margin but maybe a better operating cash flow margin since some of them don't depend on CapEx. So that's the view. That's the strategy, and we wanted to show this quarter with more color that we are going in the right direction.

Our next question comes from Felipe Cheng from Santander.

The first one is regarding shareholder distributions for this year, right, given that free cash flow generation was very strong in this first quarter, just wondering what is your expectations for dividend distributions in 2023. And if we could see a very -- a rising level of distributions relative to 2022. And my second question is regarding B2C ecosystem revenues, right? We already saw a relevant contribution of financial services and sale of OTT this quarter. So just wondering what other opportunities do you see, right, which could further complement your ecosystem going forward, right? And eventually, if you plan to do this through partnerships or M&A.

I will start with the first one. I mean, we have a practice to distribute 100% payout. This is something that will continue. We have a very strong cash flow generation, not only this quarter but also in the previous years. That's why we launched the project of capital reduction to close the gap between the net income that we have generated this quarter this year with the cash flow generation that will continue as in previous period, very strong. So that's it, so 100% payout and working on the capital reduction as we Christian explained before.

So Felipe, I don't know if you have more questions in the shareholder, but the one I go to the B2C ecosystem. So as I said, we are leveraging on the assets that we have, customer base, channel, big data, building capability and brand. And we see ourselves as one of the unique players in the market among sectors to be able to create a digital ecosystem in Brazil. And again, the key focus is serving through digitalization, customers that don't have access in the physical terms to services that we believe are very essential to our lives. So we're going to do that and when to open up the numbers quarter-over-quarter. This quarter, we gave more color in the financial services and entertainment we may give more color in the future to the other verticals that I described here. We are doing that as your question in different models. Some of them is pure distribution like entertainment, Others are JVs like the education that we did with Anima. Some may also have acquisition as the one in Health that we bought Valiosamprim to accelerate the creation of our platform that is with [indiscernible], Others would be minority stakes as we are doing with our venture capital fund, Vivo ventures. We already have 2 investments in fintechs, one in open finance -- there was Cafe. The second one, Clovier is a consortium that we're going to have a digital platform to sell a consortium that it's a typical Brazilian model of selling and something in installments financing the acquisition, cars, real estate and why not electronics. So each of these verticals will have a specific model, either partnership, M&A, distribution, and we're going to give more color over the quarters as soon as we develop more each of them. So that's the vision. And we believe that with all the assets that I described before, that we are among different sectors in Brazil, we are in a unique position to be the winner of the construction of our ecosystem.

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

Okay. So thank you for all of you for participating. As you could see, we start very strong this year. It's a reflection of the strategies that have been communicating along the last quarters and that will give a very robust and clear results that give us optimism about the next quarters, and we're going to be always at the disposal, Dave, myself and our IR team to answer any questions that you may have. So thank you again. Have a great day.

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