Amos Genish - CEO David Melcon - CFO Christian Gebara - Chief Revenue Officer Rodrigo Dienstmann - Chief Resource Officer Luis Plaster - IR Director.

Richard Dineen - UBS Mathieu Robilliard - Barclays Susana Salaru - Itau Daniel Federle - Credit Suisse Michel Morin - Morgan Stanley Marcelo Santos - J.P. Morgan Mauricio Fernandes - Merrill Lynch Valder Nogueira - Santander.

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to the Telefonica Brasil Second Quarter of 2016 Earnings Conference Call. Today with us representing the management of Telefonica Brasil, we have Mr. Amos Genish, CEO; Mr. David Melcon, CFO and Investor Relations Officer; Mr. Christian Gebara, Chief Revenue Officer; Mr.

Rodrigo Dienstmann, Chief Resource 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 that 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 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 call over to Mr.

Luis Plaster, Investor Relations Director of Telefonica Brasil. Mr. Plaster, you may begin your conference..

Good morning, everybody. Thank you for joining us in this conference call for the second quarter of 2016 results release of Telefonica Brasil. Our call, as usual, will be divided in three parts. In the first part, our CEO, Amos Genish, will give you an overview of our operating and financial results for the quarter.

In the second part, Amos will pass it on to Christian Gebara, our Chief Revenues Officer, to go over our commercial strategy; to our CFO, David Melcon, who will discuss in detail our financial results and synergies evolution which has some important updates this quarter; and to Rodrigo Dienstmann, our Chief Resources Officer, who will explain our CapEx evolution; and finally we will move to Q&A.

Now I pass the word to Amos..

Thank you, Plaster, and good morning, everyone. I'm very pleased to present our results for the second quarter of 2016. This quarter we have been able to accelerate service revenues growth while continuing to consistently grow EBITDA into cash flow by leveraging synergies and efficiencies. I would like to highlight three messages about our results.

First, our service revenues are accelerating, driven by positive trends in the mobile business. Service revenues grew 1.6% year over year, an improvement versus the first quarter when they grew 1%. And our mobile business was the main driver behind growth acceleration, growing 2.6% year over year versus 0.4% in the first quarter.

Our mobile business continues to benefit from our data centric and value based strategy. On one hand, mobile data revenues grew 24% year over year, up from 23% in the first quarter. On the other hand, we maintained our leadership position in the postpaid segment with a market share of 42.3% and with the highest share of net additions.

The postpaid segment, which represents almost 70% of our mobile revenues, allows us to reduce exposure to economic downturns, while prepaid brings additional growth potential for when the economy recovers and consumer spending picks up again.

The fixed business was fully impacted by a reduction in termination rates as they started to take effect in March 2016. Fixed revenues were flat year over year. But excluding the effect of termination rates, they grew 2.8%.

This was driven by FTTx, where revenues grew almost 20%, and by pay TV, where we pursued a selective and value based approach and grew 13.9%. We have been able to leverage broadband and pay TV to compensate for the decline in fixed voice.

In fact, we strongly believe broadband will be the catalyst for future growth in this business, as we see a substantial pent up demand and additional improvements in IT systems and processes. In the state of Sao Paulo, we have a concession that will bring no doubt additional upside to that business.

The second message is we continued to deleverage synergies and efficiencies to contain costs. We have been pleased to report that year over year we had a reduction in adjusted operating costs for the second consecutive quarter. Our costs went down by 1.8%, significantly overcoming inflation, which reached 8.8% in the last 12 months.

Cost reduction has been driven by the first set of initiatives related to integration, to rationalization of commercial expenses into waste reduction programs that we started in the quarter that should bring further benefits in the future and that will not impact our effectiveness nor the quality of our services.

Solid results from the integration initiatives already executed allowed us to generate BRL557 million in synergies gained during the first half of the year. We estimate that BRL12.2 billion in synergies, net present value, have already been secured, mostly from OpEx, CapEx, and tax gains.

In addition, we found additional integration related opportunities to reduce overlap in our organization and decided to execute the second and final phase of rightsizing, which should be completed in the first week of August.

We estimate that the current trend of the results relating to synergies and new opportunities that, if it will continue, would present a net present value of synergies that may reach up to BRL25 billion. The third message is we are delivering consistently beta growth and outstanding cash flow generation.

We report consistent growth of 7% year over year in our recurring EBITDA, which does not include the one off I mentioned about the rightsizing. This is the same growth rate we delivered in the first quarter. Our EBITDA margin remained at a solid 31.4%, 1.8 percentage points above last year.

In addition, we continue to optimize and allocate CapEx considering our strategic intent to reach products and geographies and our revenue and quality objectives. Our investment in the first half of the year represents a 15.6% CapEx to revenue ratio, 2.8 percentage points less than year over year.

We expect CapEx to be higher in the second half of the year, driven by acceleration of investment in 4G and fiber deployments. Hence, we expect our CapEx to revenue ratio for the year to be between the current 15.6% and our initial guidance of 20%.

As a result of both our successful evolution in EBITDA and optimized CapEx, we were able to substantially increase operational cash flow generation.

Operational cash flow, EBITDA minus CapEx, grew in the quarter by 49.7% year-over-year and accumulates on the first half of the year, remembering that we have fully to reflect the seasonal payments of the first year taxes in the first quarter. So, during the first half, free cash flow was four times higher than last year.

Strong cash flow generation will allow us to sustain our strong practice of dividend payouts over the net profit, which in the last few years have been in the high 90%'s. In all, we are very pleased with these results despite operating in what is still a challenging macroeconomic scenario.

So, far we have been able to accelerate top line growth, improve quality for our customers, maintain a solid EBITDA evolution, generate substantial improvement in cash flow generation, and increase shareholders' return.

On the regulatory front, ongoing discussion about the new concession model encourage us to believe Brazil will evolve to have a new and more positive regulatory framework that should be beneficial for Vivo. However, it's too early to estimate when and what will be the effect on our business model.

Market expectation about Brazilian macroeconomic environment have improved in the recent past. If and when this sentiment turns into reality, we believe it could provide us an upside to the business, especially in segments such as B2B and prepaid.

In a final note, as some might be aware, Exame Magazine, the most influential business magazine in Brazil, recently selected Vivo as Company of the Year. This is the first time in 43 years of the existence of this award that a telecom operator received it. We are proud of this achievement, which evidenced the Company's efforts to excel and outperform.

And with this, I will pass it on to Christian.

Christian?.

Thank you, Amos. Good morning, everyone. Before going through the slides, I would like to highlight our key commercial initiatives and results for the second quarter. This was another very positive quarter for Vivo, reinforcing our leadership in key segments.

We are able to maintain our absolute leadership in mobile, especially in postpaid, with a significant increase on net portability ratio. We launched new portfolios for hybrid and prepaid, reinforcing our superior data centric value proposition. We've kept a solid and consistent evolution in fixed ultra-broadband in both customer base and ARPU.

We had a selective approach on pay TV, focusing on premium products and higher entry ARPU. We've generated new revenue streams in digital services in both B2C and B2B. We've consistently increased cross sell initiatives and synergies, leveraging our combined channel, customer base, and network footprint.

We reinforced Vivo's digital positioning with a new awareness campaign for mobile, We Care, our new Vivo app, significantly increasing downloads and usage. Moving on to slide five of the presentation, you can get a perspective about how we were able to grow 1.6% our top line despite regulatory effects.

Without these effects, our service revenues grew a solid 3.9% year over year. Our non-voice services revenues had a significant increase of 16.5% year over year, especially in key products like mobile data with 24%, pay TV with 13.9%, and ultra-broadband with almost 20%.

Non voice services already represented in this quarter 56% of our total revenues, 8 percentage points more than one year ago. This quarter we had a 12.5% decrease in mobile and fixed voice revenues, mainly to market trends and regulatory effects.

Getting on to the details of our main business, on slide six we present the evolution of our mobile business revenues, which grew 2.6% year over year or 4.7% excluding the reduction in mobile termination rates.

This growth rate is significantly higher than the previous quarter, mainly to growth in data revenues, 24% year over year, and postpaid performance. Postpaid's revenues grew 9.5%, now representing already 69% of our total mobile services revenue and 43% of our mobile customer base.

The left side of slide seven shows that in postpaid we maintained our solid leadership of 42.3% market share, capturing 37% of all net adds in the first five months of 2016.

I would like to highlight our performance in portability, with positive figures every month in 2016, as it was in 2015, increasing by 32% of our net rating compared to the previous quarter of this year.

You can also see that, despite the challenging economic scenario and the higher competitive pressure in the mobile segment, we are able to maintain a healthy and stable 0.7% voluntary churn rate in postpaid, a direct consequence of our superior data centric value proposition, best network, inspirational brand, and high quality channel experience.

On prepaid, we continue to increase penetration and loyalty of our weekly bundled offering, Vivo Turbo, increasing the number of active customers by 34% year over year.

The higher presentation of bundled offers, more sales of additional data packages, and value added service associated with the base cleanup of nonproductive customers we implemented by the end of 2015 drove up our prepaid outgoing ARPU by 15.4% in the last 12 months. On slide eight, you can see how our 4G offer continues to gain relevance.

4G traffic grew 98% year over year, while the number of 4G devices in our base grew an impressive 160%, reaching 13.5 million handsets. We are maintaining our solid leadership in this segment with 37% market share, more than 8 percentage points ahead of the second player. We perceive that customers are capturing benefits from our 4G experience.

Recent migrations from 3G to 4G devices increased in individual data consumption by 48% on postpaid and 33% on prepaid. In addition, we continue to drive up our ARPU, reaching BRL27.2 in the quarter, almost 16% more than one year ago. Data already represents 56% of our ARPU compared to 46% of last year's.

Last quarter, we announced reaching market leadership in machine to machine business, and now we increase this position with a solid 38.6% of market share in this segment. Moving to slide nine, you can see our performance on the fixed business.

We are able to maintain our revenue stable with a 0.1% increase year over year, or 2.8% growth if we exclude regulatory effects. Considering only the B2C segment, our fixed business grew 3.6% in the second quarter. Our focus on key high end products continues to drive our fixed business growth.

In ultra-broadband, FTTx, we reported 19.9% revenue growth year over year and 52% just considering growth in FTTH. Our pay TV revenues grew almost 14%, but IPTV 69%. On slide 10, you can see how our fixed business results continue to be driven by solid customer base increase in key services and by continued ARPU growth.

Our FTTC customer base has grown 6% in the last 12 months, while in FTTH this growth was 39%. In the first five months of 2016, we were able to capture 49% of all net adds in very high speeds, equal or above 34 megabits per second, maintaining our leadership position with 54% of market share.

We are able to increase broadband ARPU in both xDSL and FTTx through better pricing and improved sales mix strategy. On pay TV, we followed a more selective approach for new customers in order to ensure a best return on investment, especially in standalone DTH.

We are able to increase 50% our IPTV customer base, while our total pay TV ARPU grew 12% in the last 12 months. I would like to add that regarding synergies we continue to drive up cross sell initiatives, selling mobile products to former GVT customers as well as fixed products to mobile Vivo customers.

We have now all Vivo exclusive channels selling both fixed and mobile products. In B2B, we have been diversifying our revenues for digital service, growing 28.5% year over year. I would like to highlight our 67% growth in cloud services that was reinforced with the launch of Vivo Cloud Server 1, a simple and complete cloud solution for SMEs.

I now pass to our CFO, David Melcon, who will give a more detailed financial perspective on our second quarter results..

Thank you, Christian, and good morning, everyone. Moving on to slide 11, recurrent operating costs, which excludes the provision for the rightsizing done this quarter, reduced 1.8% compared to the last year, mostly driven by our selective commercial approach, the intense use of digital channels, in addition to the positive evolution of synergies.

Without interconnection costs, the expense were almost flat, with a 0.9% variation year over year, an outstanding evolution when considering the inflation of almost 9% in the same period. As a result, our recurring EBITDA margin increased 1.8 percentage points, reaching 31.4% in the second quarter 2016.

That, along with acceleration of service revenue described by Amos and Christian, allowed the achievement of a 7% increase of EBITDA in the quarter, confirming the trend seen in the past quarters. On slide 12, I will elaborate more on our cost evolution by concept. Service rendered and G&A costs together were stable year over year.

Low interconnection cost and synergies captured in the period, especially those in leasing of sales goods and a negotiation of a contract, compensate for higher costs related to network expansion.

Selling expenses decreased BRL98 million, reflecting the result of our rational commercial strategy and synergies generated by the integration of brand channels and launching of our national fixed portfolio in April, leading to lower costs in advertising and commissions.

Reducing of BRL101 million in cost of goods sold is a consequence of the selective approach in handsets, focusing exclusively on higher value customers. But that remained during the first semester of 2016 in a lower level than previous year, at 3.2% of net operating revenues.

We continue to implement stronger credit controls while protecting our top line growth. Personnel costs exclude the provision for the restructuring program in the amount of BRL101 million recorded this quarter, and grew less than inflation for the period. This restructuring program is the result of the integration of Vivo and GVT in all fronts.

As we unified entities, networks, channels, brand systems, and processes, new opportunities to have a leaner organization were created. This program will generate BRL181 million in personnel savings per year, with a positive impact of close to BRL70 million still in 2016.

Now moving to slide 13, net income for the first half of the year reached BRL1.9 billion, 42% higher than the amount of the same period in 2015.

When excluding the net impact of onetime events, namely the tower sale in the first quarter and the provision of restructuring in the second quarter, the net profit increased 22%, mainly due to the growth in EBITDA. The negative variation in depreciation and amortization is driven by higher level of investments in recent years.

Moving to slide 14, Telefonica has been consistent and disciplined in uniting a strong cash flow and sustaining a very robust dividend payout. Based on 2015 profit, BRL3.3 billion were declared as dividends and interest of capital, reaching the strong payout level of 99.2%.

With the objective of providing more visibility for our shareholders, we are presenting the schedule of payment.

As we have just announced yesterday, two tranches of payment are scheduled for the second semester, with the first one to be held on August 23rd in the total gross amount of BRL1.2 billion and the second happening on December 13 in the total gross amount of BRL2.1 billion.

In our notice to shareholders, filed with CVM and SEC and in our website, you can find detailed information on this. Now I will pass to Rodrigo Dienstmann to explain the execution of our CapEx strategy..

Thank you, David, and good morning, everyone. Now moving on to slide 15, in the first half of 2016, we have managed to keep the level of CapEx per net revenue at 15.6%, down 2.8 percentage points year over year, while prioritizing quality of service and customer experience.

By continuing to execute on our strategy and focus our CapEx to high value customer segments and geographies, we are able to reduce year over year investments without compromising our ability to grow the customer base and to cope with a traffic increase.

In fact, out of the BRL3.26 billion invested in the semester, approximately two thirds were allocated for growth projects in the business units to increase revenues, mainly focused on 4G coverage, 3G capacity, and the fixed business expansion.

For the rest of 2016, we intend to speed up network deployment and structural investments while maintaining a strong grip onto CapEx effectiveness with the use of big data analytics to smartly allocate resources to technologies, geographies, and high value customer segments.

These investments are mainly focused on 4G coverage in new cities, 3G capacity, backbone and backhaul expansion, new FTTx footprint, and CPEs for the new homes connected. Despite this acceleration, we still expect the ratio of CapEx per net revenue for the year to be under the initial guidance of 20%. With that, I pass it back to David..

Thank you, Rodrigo. On slide 16, our strong EBITDA evolution combined with discipline in working capital and financial management are the pillars for our consistent cash flow generation in 2016.

Free cash flow in the first half of 2016 achieved BRL1.6 billion, almost three times higher than in the same period of last year, with positive contributions in almost all lines but mainly in EBITDA, CapEx, and working capital evolution.

When considering the net proceeds from the sale of tower received in the second quarter, the total free cash flow amounted to BRL2.1 billion, four times more than last year.

To create a sustainable evolution of free cash flow is our final aim, allowing us to combine consistent investment and strong shareholder remuneration with a solid capital structure. In June 2016, net debt represents 0.2 times EBITDA, giving the company flexibility to navigate different economic scenarios.

Turning to slide 17, now I would like to share with you our progress on the synergy front. Since the start of the execution of our synergy plan, we have achieved key milestones and completed a large set of initiatives that will guarantee the capture of synergies in the long run. Let me elaborate on some important developments.

We have advanced in the unification of our fixed portfolio under a single brand and integrated channels, which is contributing to our revenue generation through improved pricing and better commercial trends, also creating large commercial and OpEx savings, as I have already explained.

On the OpEx front, we successfully executed the first phase of the rightsizing in 2015 and renegotiated contracts benefitting from our larger scale. In addition, we have secured many of the benefits from leveraging GVT's infrastructure, reducing network related OpEx and CapEx.

On taxes, we have secured additional BRL2.5 billion NPV from the goodwill benefit from the integration of legal entities in April. Execution of those activities secure an NPV of BRL12.2 billion, representing almost 90% of the base case and 55% of our more optimistic best case scenario.

Now on slide 18, in addition to the large percentage of NPV already secured, we are also seeing better trends, identifying new opportunities that result in a trending NPV of BRL25 billion, 13% higher than our best case scenario. Just as an example, in OpEx and CapEx projects we are clearly overachieving.

Through a stronger negotiation with third parties for field services, we have reduced even more maintenance and installation costs. Our more successful brand integration than anticipated is rationalizing further our advertising expenses.

We are also identifying value upside as we evolve the integration and are executing the second and final phase of the rightsizing, as I have already explained. The additional cost savings should amount to an NPV of BRL1.8 billion, incremental to our best case target.

We see this enhanced trading NPV as the result of the Company's engagement in extracting value of this operation in its full potential. Moving on to slide 19, our solid execution of the synergy milestones allowed us to generate solid result already in 2016, contributing strongly to our cash flow generation.

Incremental revenues and OpEx savings from synergy initiatives, mainly cross selling to fixed B2C customers and rationalization of commercial expenses from channel integration, contributed in BRL277 million for EBITDA in the year.

Including CapEx needed for generation of synergies, especially IT integration, our added cash flow generation reached BRL293 million in the year. Indirect cash flow generated from CapEx and OpEx avoidance reached BRL264 million, driven mainly by avoided investment in backbone routes using GVT's infrastructure. Thank you.

And now we can move to the Q&A..

Thank you. [Operator Instructions] Our first question comes from Richard Dineen of UBS. Please go ahead..

Thank you. Good morning, everyone. Thanks very much for taking the question. Two questions, if I may, just on the synergies. Given that these are running ahead of plan and you now have this trending best cast of BRL25 billion, just wondering what should be our expectation for the run rate and the margins.

I think you'd previously guided you were going to hit 100% run rate by 2020. Is that now going to be sooner? And if you look like you're on track for sort of 32% or 33% margins this year, just wondering how those margins should trend up to that full run rate.

Do they go to, I don't know, mid 30%'s once you've kind of hit full steam? And then secondly, just maybe just some comments on competition. I think you mentioned in the release that the strong mobile ARPU growth is being fueled by price rationality.

Just wondering whether you think that that's something you're seeing also with other operators or whether that's something just with Vivo kind of uniquely leveraging its pricing power. So, any comments on that would be very, very helpful. Thank you, guys..

Thank you, Richard, for the question. This is Amos. I will answer those two myself. About the synergies, again, as we mentioned we expect really reaching 70% to 80% of the run rate between 2017 and 2018, just to add more information to your question.

And with the acceleration of synergies we are seeing so far, we might more trending to reach that around 2017 than 2018. That's the best answer I can give you. We see some upside. I think we need more time to estimate where it would be falling between 2017 and 2018. But it seems earlier than we thought initially.

I'm sure we'll give a much more or new guidelines of that when we'll announce the full year results in February of 2017. With respect to the margin improvement, clearly the growth of our EBITDA and all the synergies and efficiency programs are leading to a consistent margin improvement quarter over quarter, year over year.

That's clearly trends we believe will continue not just in 2016 but in 2017 and 2018.

And we believe that, again, you can count on that or count or add that possibility to your model, as we are seeing again as we saw in the last quarters or are seeing with the integration with GVT that we've been able to execute on the promise of efficiency and synergies and margin improvement, but will not give a specific guidance at this stage for where we'll reach the 35% or 36%.

With respect to mobile ARPU, I will say first that we always committed to value driven strategy on pricing, even in kind of stressed moments in the markets when some of our competitors launched aggressive campaigns or products or promotion to different segments in mobile.

I think when we talk about pricing, clearly we see the market realizing that destroying value for volume did not work so well in the last 12, 18 months. I believe that there are some more rationalizations with respect to pricing in the market, and that could benefit going forward. Again, it all depends on other players' behavior, not just Vivo.

But, anyhow, it seems that some players are becoming more rational about destroying value as a whole for the market, and that can be an upside. We'll have to see how things will evolve in the next quarter. Thank you for the question, Richard. I hope that answer will cover it..

Yes. Thank you very much for that, Amos. Thank you, everyone..

Our next question comes from Mathieu Robilliard of Barclays. Please go ahead..

Yes. Good morning, good afternoon. Thank you for taking the question. First, going back to the environment in mobile, you've highlighted a show of the positives. We can also think about the fact that one of your competitors is facing an uncertain situation and GDP seems to have going in the right direction.

So, can we expect or do you expect the trends in mobile, which is probably more sensible to all of that, to improve for the rest of the year compared to the Q2, which was already very strong? That will be the first question. Second question with regards to some of the fixed KPIs, some of them are a bit on the weak side.

I'm thinking about the line losses. Is there an element of continued cleanup here of the customer base, or anything else that explains that trend? And finally, if you can, give us an update on the change in concession terms, how the discussions are going with the regulation and sorry, the regulator and the authorities in Brasilia? Thank you..

Thank you, Mathieu. I will pronounce your name better this time anyhow..

Thank you..

I will just have a quick introduction and then Christian will take it farther. But just on the first one, clearly I think the environment in mobile is improving because of, I believe there is better momentum in the market in general.

But more important than anything else, I believe the fact that 70% of our revenues are based on postpaid, and postpaid relatively was less impacted from the recession and probably getting better as we speak with the improvement in the economy, we've been able to so, as you can see, a substantially higher growth, almost 9.5%, on the revenues relating to that segment.

I don't think that at this stage we can say that our gains is relating to some weakness at that specific operator you mentioned. I believe that it's a more prepaid focus there. And I think prepaid is still having substantial stress going on. I think when you talk about GDP growth, I think the first segment will see a recovery.

And that's what we are hoping to see is really prepaid. So, a lot of your questions about if that trend will continue or increase will depend a lot on the prepaid segment coming from negative territory to more at least stable territory and then positive territory.

But with that, I will get Christian to maybe elaborate on these points and answer about the fixed business as well..

Yes. I think building on Amos' comments, like second quarter were promising results, not only like in the growth of the postpaid, but we kept also a very strong performance in portability, so very positive for Vivo.

So, if the economy helps now in the disposal of like resources from our customers to spend more, we believe that we are in a great position to capture that.

Talking about the fixed business, as we also mentioned in access, now if you split between xDSL and FTTx, we have like a slight decrease in the customer base of xDSL, but we increased in the FTTx. Now, FTTC we increased like customer business 6% quarter over year-over-year, sorry, and FTTH 39%. The good also data here is that we improved ARPU in both.

So, we are being very focused on value and not only on volume. And that is like you can see it in the ARPU performance for both DSL and FTTx, and more focused in the volume of FTTC and FTTH. In pay TV, I think the same strategy is there. We focus on quality in 3P. We are not like focusing any more in DTH standalone.

So there is a small decrease in the customer base of DTH, but on the other hand a very strong increase in IPTV of 50% of customer base. And in ARPU, as we've been very selective in choosing who to sell in each geography, which type of customer, you can see like a very strong ARPU increase of 12% in both DTH and IPTV. Hope it answers your question..

So, if I can just follow up in terms of specifically the voice the fixed voice accesses, I mean, that's a number that has come down a bit between Q1 and Q2. And I was wondering if there's a cleanup there or it's just a different way of selecting or disconnecting your customers, whatever..

No, it's no cleanup. I think it is current disconnection of customers of voice services..

Generally, I think just when you look, it's mostly coming from the concession area of the state of Sao Paulo. We have many lines of voice without ability to provide broadband to that. That segment is voice only lines, very exposed to disconnection.

And as long we will not reach without a fiber rollout to certain areas in the state of Sao Paulo to be able to provide the bundle, those voice lines standalone like exposed to disconnection. Again, as we mentioned, we are rolling out in the second half much more FTTx in the state of Sao Paulo.

And we believe that in the next few years, especially between 2017, 2018, without changing the CapEx envelope, we'll have a much bigger rollout of fiber in the state of Sao Paulo to address exactly that issue of not being able to provide reasonable broadband services to some millions of clients that need it in that state..

Very clear. Thank you..

Our next question comes from Susana Salaru of Itau. Please go ahead..

Hi. Good morning, everyone. Thanks for taking our questions. The first one is regarding the subscriber base mix on the mobile segment. We saw a significant increase in the relevance of the postpaid subscribers.

So, our question is if there is any kind of goal or target in terms of subscriber base mix, and how do you relate that with the pickup in the economy? That would be our first question. And the second question is also related to the subscriber base mix evolution.

You mentioned that one of the key drivers of synergies is selected commercial approach, and that will maintain selling expenses under control.

So, our question is, if postpaid continues to be the key driver to increase subscriber base, how to conciliate with maintaining the selected commercial product or maintaining the selling expenses under control? That's it. Thank you..

Hi, Susana. This is Christian. Regarding of the target of the mix of we don't have a target. Of course we have like a strategy of being stronger in postpaid. And here like the two products, not only pure postpaid, we are having like a good performance and also migrating prepaid customers to postpaid.

So, there is not a specific number, but of course it's part of our strategy to have recurrent revenues, bringing these customers from prepaid to postpaid, and also attracting customers from other players. And there we've been also successful because portability ratio has been positive to Vivo.

So, we're going to keep on this strategy, and also like delivering in our strengths that I mentioned in the beginning, best quality, best network. We're happy with the last results of Open Signal. They show that Vivo has the best 4G in the country. So, we are trying to capture all this advantage and having more customers, of course, in postpaid.

Regarding selling expenses, it's been doing that for the last quarters. We're being able to control and improve our performance in postpaid.

And that is a mixture of like choosing the best channel to the best customers and trying to be optimizing the channel that we choose to each of the customers, being very concise also in the use of subsidies with being, using buyback and other sources of advantage for the customer, benefits to the customers, to reduce the impact that it would be our OpEx related to subsidies.

Our loyalty program has also helped us, and many other things that we are doing to be very wise in the expenses of that. I don't know if there any comment, but its part of our strategy and we can keep on this trend with the results that we just presented in last quarter..

I would just add that of course there are synergies relating to cross selling enabling us to benefit from selling higher ARPU with lower costs per product. And cross selling is really increasing substantially. We are using most of Vivo's stores to sell GVT products today. We are more clearly using similar channels and integrating.

Channels that used to be Vivo and GVT now are being consolidated. And we consolidated the regional structure itself of the salespersons, telemarketing. Retention sales have been consolidated recently as well as B2B. Clearly all of that synergy is also a big part of what we see in the commercial cost reduction line..

And beyond that, like the opportunity to sell more products also gives us an opportunity to be more efficient on commission, okay, because most of our channel deals sell before only fixed or only mobile. Now they sell both. And we are also working on the commission side..

Thank you, Susana. I hope that's helpful..

Thank you. Yes, sure. Thank you..

Our next question comes from Daniel Federle of Credit Suisse. Please go ahead..

Hello. Good morning. Thank you for taking my questions. My first question is regarding the new guidance. I see that the new guidance implies a huge increase in OpEx synergies, 46%.

So, my question is basically why those opportunities were not able to be identified in the first assessment and, more importantly, how you see the possibility of new increases in synergies guidance going forward. And my second question is regarding CapEx. It was mentioned in the presentation that it would be lower than 20% of revenues.

But actually in the first half of the year, CapEx is declining 15% year over year. So, that would imply a much lower than 20% number for the year. So, how do you see CapEx in the second semester? Thank you..

Thank you, Daniel, for the question. So, regarding the first question, synergies seen in OpEx, so what we have been seeing, as we have explained in the presentation, over the last few quarters we are seeing a much better trend.

So, while we are executing the synergies that were identified at the beginning of the plan, so we are seeing that we could get even better benefits. So, this is on side.

And in the other side, as a result of these improvements, through our negotiations with third parties and reviewing our processes, we have identified that we could do an additional rightsizing in the organization. And this is what is also contributing to a significant part of the reduction in OpEx.

So, as part of the increase up to 9.8%, 1.8% related to this new rightsizing. And so, this is our best estimate that we have at the moment, so we are not expecting now any further review on synergies..

The question, why we didn't see it a year ago when we announced BRL22 billion, I think clearly we needed time of at least a few months or a year to really get the integration settled and then see where and what is working better or different than what we thought initially.

Clearly, to give you an example of the OpEx side, field services with a better mix of in source or outsource, applying in the fixed business the GVT model on the field services. The IT systems are positives.

And clearly technical and quality, productivity and quality factors helped a lot to gain substantial synergies and improvements in the financial costs relating to field services.

The same for call centers, and the big fish into that story was clearly that after one year we realized that we did not build sufficient lean organization as we thought initially a year ago when we did the first rightsizing in August 2015.

And after a few months of substantial work being done in all areas, we identified another opportunity that I believe will be the last one relating to that subject. So, going forward, again, you can always have surprises about better execution, or hopefully not worse execution.

But I believe the BRL25 billion is a very appropriate guideline at the moment. Relating to the CapEx, I think you may be misunderstood what we said. So, I think what we said is that we will be between the current 15.6% to the 20%. We will not be at 20% CapEx.

For sure we'll be lower than 20%, but we will not now give an exact number where it will it ended, the 15.6% to the 20%. I think it's somewhere in between, a lot of that relating to very smart capital allocation and better investment for strategic intent and in return of investment.

We are very confident that the synergies from CapEx are kicking in as well. And as we are more serious on CapEx, we can really have less cash CapEx coming every year. Going forward, I believe we'll see the trend continue year over year.

And it's clear to us that we are in the right direction to reduce CapEx as a percentage of revenue in the next coming years. I think as Christian mentioned, I think I will ask Rodrigo to mention the last study that came in from Open Signal about the quality of the 4G.

That's showing clearly that we with all those reductions in CapEx, we have been able to maintain high quality.

Rodrigo, you want to mention it also?.

Yes. I don't know if you guys follow it, but Open Signal is this renowned mobile benchmarking tool. And they released just yesterday the benchmark for Brazil. Vivo in fact is a clear leader. We are breaking away from competitors with a 20% increase in average speed for 4G. And that's almost 70% faster than the second competitor.

So, this is a testimony of our ability to optimize CapEx at the same way at the same time to really care for the quality and the customer experience. Just to complement Amos' question, if you take Q2 alone our level of CapEx was 16.8%, and we expect to accelerate it slightly towards the end of the year.

For you to have an idea, most of the new 4G cities are going to be added in the next the second semester. So, we expect to add another about 150 cities for 4G, and the same goes for some of the fixed FTTx expansion. So, again, we kept the guidance of keeping ourselves under 20% for the year..

Thank you, Daniel..

Okay. Thank you very much..

Our next question comes from Michel Morin of Morgan Stanley. Please go ahead..

Thank you. So, a couple of things. First, thank you very much for the additional disclosure around prepaid and postpaid on mobile. That's very helpful. I just wanted to see if we can dig a little deeper in that 9.5% growth in mobile service revenues.

What were the main components of that? I know obviously your subscribers are up, but was there a specific price increase that affected the entire base? Are you seeing customers sign up for bigger data buckets? So, what are the main components there? And I was wondering also, within that, you also have a significant component of control plan subscribers, and I'm wondering if you're seeing similar dynamics for that group or if they're more similar to prepaid.

Thank you..

Hi, Michel. This is Christian. Yes, I think it is the sum of most of the things that you mentioned. There was some price increase in the control increased prices as we did also in the postpaid, in the pure postpaid in the end of the year. There is more usage.

There is data usage, so we'll be able to capture that with right plans, with up sell of plans for people to use more. There is more migration from prepaid to control. And as I said before, we've been able also to have positive porting, so customers coming in from other operators to Vivo.

Also in our plans, we've been very successful with our what we call data sharing plan, adding more customers to the high data plans and being able to increase consumption of all these customers in this family group and this family plan. And all of that summed up gave us this good result.

So, as I said, some of the elements you mentioned and some of the others I am adding to the table. And in the control, I don't know if it's similar to the prepaid, but it's most similar maybe to the postpaid because also we are like all our plans are bundled. So, we have 100% now all plans that we sell in control are bundled as far as SMS and data.

And we increased price and also increased data allowance, and we see these customers consuming a lot of data, having a lot of smartphones in 4G. So, all of that added together gave us these good results..

Thank you. That's very helpful. If I can just follow up on portability, are you net positive with each of the players, or is this just on average with the players? Because one of your competitors was saying that they were positive basically since November, so just interested in seeing how that looks in the details..

Yes. I don't have specific amounts by competitor, but we are positive overall. And most of the months we are positive all competitors, okay? I don't know if there is a specific month that there is a specific promotion for a specific competitor that can change this number.

But the overall effect, I guess the port in and port out overall players against Vivo, we are positive every month..

Great. Thank you very much..

Thank you..

Our next question comes from Marcelo Santos of J.P. Morgan. Please go ahead..

Hi. Good morning. Thanks for taking the question. I just wanted to see if you could provide some a little bit more information on the renegotiation of content with content providers that you mentioned in the release.

So, have does this mean that you already renegotiated with Global regarding the channels that you are acquired for the pay TV? Have you already secured most of the gains that you expected in content, or could you just tell us how far are you in this process? That's the question..

Thank you, Marcelo, for the question. Negotiations on content are always tentative. We do not really want to get into many further details here. I will say that we reached agreement or understand, yes, with all content providers to reach our goals.

Some are maybe not in the final agreements, but a huge level have been signed and agreements are being elaborated as we speak. It might take a little bit longer, two, three months from now. But we are very comfortable we are reaching the synergies goals we had initially stipulated in our plan.

That's the best I can answer on that one, Marcelo, okay?.

Okay. Thank you very much..

Thank you..

Our next question comes from Mauricio Fernandes of Merrill Lynch. Please go ahead..

Thank you. Good morning. Nice to see the synergies up, Amos. One thing I noticed, though, is within the breakdown the estimate for interest on capital has come down for the synergies of the interest on capital has come down.

I was just wondering if there is any additional risk seen by management, or if this is just, I would say, a re-calculation of the tax credits, considering that there is goodwill amortization as well within the synergies. Thank you..

Thank you, Mauricio, for the question. This is David. So, as you say, we have reviewed the full synergies. So, we are seeing that the trend is much better, so 30% overall, and the operational we are growing 23%.

So, as part of this analysis on the tax side, so what we have seen is that we have secured the goodwill synergies that amount to BRL2.4 billion, BRL2.5 billion as part of the integration of the legal entities happening in April.

So, for the remaining of the tax synergies that's here, we have the interest of capital and we have some other small things, but we have reviewed with a more conservative scenario, so having a look to the overall synergies. So, that's why now we are getting to a lower number.

But overall despite this reduction in the tax synergies, overall we are able to increase this 13% overall in the synergies. So, without going to any further detail, so we have used more conservative approach, looking at the synergies as a whole and being able to deliver more in the operational side and secure the whole the figure as a whole..

Understood. Thank you, David..

Thank you, Mauricio..

Our next question comes from Valder Nogueira of Santander. Please go ahead..

Good morning, guys; two questions.

First of all, have you noticed regular xDSL customers more likely to churn for whatever reason than FTTH or FTTC customers other than up selling?.

Like the churn of xDSL. Hi, Valder. This is Christian. The churn of xDSL is on average higher than FTTx, okay, because like they have either they migrate or they upgrade. In our case, we have the offer, or they can go to another competitor with an offer like higher speeds. Of course, these customers are looking for ultra-broadband.

We don't see a different trend from what we saw in the past. So, I don't know if that was your question. I think they are more or less they kept the higher churn as they did in the past..

Okay, yes. That's part of the question.

So, the other angle of the question is, amidst the crisis that we are facing, or let's say this more challenging economic environment, were they more likely to churn than FTTx customers?.

Because of the yes. We didn't see a big change. I think there is a strong resilience for broadband, fixed broadband. I think people, even with the economic downturn, they want to be connected. So, we don't see this big movement on there. Of course, economically speaking, these customers can be more affected by the economic situation.

But there is no data that would suggest that that is impacting that tremendously..

Okay. And the second question is the synergies are kicking in. They're stronger. They are trickling down all the way to cash flow. And we saw very, very good numbers this quarter and this is very clear. When I look to Spain, I see Telefonica mother company was trying to sell O2 and it didn't go through. It has other options on the tables, as we know.

And my question is how does that how does what happened in Europe impact the funneling of potential M&A that you may have on your pipeline?.

Valder, I don't see any connection between the situation of O2 or European market and Brazil. I think, I believe strongly that Telefonica Group has sufficient commitment to Brazil, and we are running the company independent of any other business unit performance. With that, I think our strategic plan for the next --. [Call ends abruptly].