Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefônica Brasil Second Quarter of 2018 Earnings Conference Call. Today with us representing the management of Telefônica Brasil, we have Mr. Eduardo Navarro, CEO; Mr. Christian Gebara, COO; 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 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's management beliefs and assumptions, and on information currently available. Forward-looking statements are not guarantees of performance.

They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the company's future results and could cause results to differ materially from those expressed in such forward-looking statements. Please note this event is being recorded. Now, I will turn the conference over to Mr.

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

Thank you. Good morning, everybody, and thank you for joining us in this conference call for Telefônica Brasil's 2018 second quarter results. As usual the call will be divided as follows. To start, Eduardo Navarro, our CEO, will give you an overview of our operating and financial highlights.

Secondly, Christian Gebara, our COO, will go over the evolution of our operations. Finally, our CFO, David Melcon will comment on financial results. And we will then move to Q&A. Before we start, let me quickly remind you that, as of last quarter, the accounting - the accounting statements will include the effects of IFRS 15.

That said, and for a better understanding of the evolution of our business, in this presentation we are showing pro-forma numbers for 2018, excluding those effects. Should you want to see our accounting evolution made adjustment, they are presented in summary in the last slide of this presentation and also in our press release.

I now pass the word to Eduardo..

Thank you, Plaster. Good morning, everybody, and thank you for taking the time to participate in our second quarter 2018 results call. In line with the previous quarters and our strategic pillar of ongoing revenue expansion, our total revenues continue to grow.

In the second quarter of 2018, we showed an increase of 1.1% year over year, which translates into a growth of 1.4% for the semester. Mobile revenues, as a whole, continued to demonstrate solid growth, also leveraged by our renewed strategy of handset sales, represented by a year-over-year increase of 4.2% for the quarter.

When looking at our fixed business, the transformation continues, driven by outstanding performance of fixed ultra-broadband and continues at accelerated pace, growing 19.6% year over year. In terms of profitability, our EBITDA margin for the quarter increased 1.5 percentage points year over year, reaching a solid 34.5%.

And this is mainly due to the fact that we presented the 10th consecutive quarter with reducing cost, a notable result that again confirms our commitment to efficiency, digitalization and simplification.

The generation of operating cash flow also remains robust, represented by a 70.5% margin for the - for the first six months of 2018, even with an accelerated execution of our fiber investments as announced at our Investor Day back in March.

Finally, in that point that I believe confirms our unique and innovative value proposition in key segments is the factor that we deliver another quarter of remarkable commercial performance by providing the best connectivity and then a revived [ph] customer experience. In mobile, we reached 714 cities with 4G+ or 4.5G.

We had absolute leader in postpaid net adds. We added 906,000 [ph] in the second quarter, 9% higher year over year. In net FTTH, we had a record of 162,000 net adds, which is 30% higher than an year before. With these results, we are further accelerating the shift of our revenue base.

Once again, I'm confident that we are on the right track and that initiatives in place will continue to produce positive results going forward.

Moving to our key financials on Slide 4, which focuses on accumulated numbers for the first-half of the year, you see that consistent revenue evolution combined with EBITDA expansion continued to result in solid free cash flow generation even with high investments.

As highlighted in the previous slide, in the first half of 2018 our total revenue grew 1.4% year over year. Mobile revenue increased 4.2% year-over-year, based on the sustainable growth of mobile services revenue and the double-digit growth in handset sales, on the back of our strategic initiative to attract high-value customers to our stores.

In terms of OpEx, we recorded a reduction for the 10th quarter in a row, as mentioned before, reflecting our commitment to digitalization and simplification initiatives.

The result is consistently EBITDA expansion, with growth of 6.5% year over year in the first 6 months and an accumulated margin of 34.7%, an increase of 1.6 percentage points if compared to the first half of the previous year. In CapEx, we invested R$3.7 billion in the first semester of 2018 which translates into a 17.1% CapEx per revenue ratio.

As I mentioned before, we accelerated the execution of our investments in the first half of the year. Even so, we expected to be more efficient that the trends [ph] announced at our Investor Day 2018, benefiting from the smart allocation while continuing to address - to fully address our FTTH deployment plan.

The solid EBITDA growth and disciplined financial management results in strong cash flow generation, taking our free cash flow to R$3 billion, represent an increase of 14% year over year.

Finally, I would like to highlight that our reported net income for the first half of 2018 reached R$4.3 billion, more than double year over year, positively impacted by an extraordinary gain that we have in the second quarter of 2018, result on a judicial decision related to the payment of PIS/COFINS over ICMS.

That will have a positive cash impact in the future. Now, I pass it to Christian, our Chief Operating Officer. Christian, please..

Thank you, Eduardo. Good morning, everyone. This was another positive quarter for Vivo, reinforcing our leadership in key segments. And as Eduardo said, we grew 1.4% in total revenues in comparison to the second quarter of 2017.

I would like to highlight our strong commercial performance in postpaid, ultra-broadband and IPTV, driving again our growth in key products in this quarter. Getting now into the details of our main businesses, on Slide 5 we present the evolution of our mobile revenues, which increased 4.2% year over year.

This performance was supported mainly by Data and Digital Services, which grew 11.5%. And also by our strategy to accelerate the smartphone sales, boosting handset revenues by 60.5%. Excluding handset, mobile service revenue grew 1.9% year over year.

Moving to the right hand side of the slide, the graph show that our postpaid revenues maintain a solid growth of 8%, driving up the trend of real growth observed during the last six quarters. Meanwhile, prepaid revenues are still being affected by negative macroeconomic trends related to high unemployment and low consumption level.

Prepaid revenues now account for 20% of our mobile revenues versus 25% from a year ago. Additionally, B2B mobile service revenues had positive growth this quarter, contributing to maintain the high-single-digit growth of postpaid revenues.

The left hand side of Slide 6 shows that our mobile market share increased 1.2 percentage points year-over-year reaching 31.9% with 41.3% in postpaid. In machine-to-machine business, we continued to expand our leadership with 41.8% market share.

In postpaid, we had an impressive performance, increasing by 936,000 our postpaid customer base in the quarter, leading the market in net addition in April and in May. We also had the strongest level of second quarter net additions since 2014.

I would like to point out that we continue to improve our customer base mix with postpaid representing more than half of our clients, 4.4 percentage points more than in the second quarter of 2017. On the right hand side of the slide, you can see that we continue to put efforts on migrating customers to higher value offers.

In the first half of the year, we accelerated migrations from prepaid to hybrid plans, increasing 19% year-over-year. Moreover, we continued to enhance postpaid customer loyalty, and as a consequence our churn reduced from 1.73% to 1.69%.

Finally, we continue to increase overall ARPU, which went up 1.3% year-over-year and data mobile ARPU increased 12.8%. Moving to Slide 7, we show that our strong mobile performance is supported by a rise of mobile asset that give us a niche position in the market to address the exponential demand for data services.

We are the best-positioned operator in premium spectrum bandwidth and we are consistently improving our mobile network infrastructure. As a result, we lead 4G coverage in 17 states combined with a large 4G+ or 4.5G presence across the country using double and triple carrier aggregation and mining.

Moreover, there is untapped potential to monetize 4G network, given that around half of our customer base does not have 4G devices yet, while we cover 86% of the population of the technology. Moving to Slide 8, we present our fixed business performance.

We continue to focus on broadband services, mainly in ultra broadband, which grew 19.6% year-over-year. This quarter fixed revenue decreased by 3.7% year-over-year, mainly due to the trend of voice decline and the global and strategic decision of deprioritize the DTH business.

As you can see on the right hand side of the slide, we consistently enhance the relevance of our premium products. Our focus on the expansion of FTTH is reflected in an impressive 48.3% growth in revenues, while IPTV, which followed the same strategy presented a 59.1% growth year-over-year.

Finally B2B, we are reversing negative trend in the fixed business with data and digital services mainly driven by security and cloud revenues that grew 169% and over 200% respectively. On Slide 9, you can clearly see our focus on attracting fixed customers to premium services.

The left hand side of the slide shows the FTTx continues driving up growth. Our customer base had a significant increase of 10% year-over-year and specifically in FTTH, we reached a record of 162,000 net additions in the second quarter.

We continued to increase our premium customer base sustaining profitability, which was reflected in an overall broadband ARPU growth of 12%. On the right hand side of the slide, we present our focus on customer digitalization through IPTV.

We managed to increase by 51% our IPTV customer base after a record of 56,000 net additions with IPTV now representing 30% of total Pay TV base. In the last 12 months, our total Pay TV ARPU grew 4%. Broadband and Pay TV ARPU have consistently grown for the last 12 quarters.

On Slide 10, we detail the success of our FTTH strategy, which bringing encouraging results in the new cities. On the left hand side of the slide, we show our significant expansion of homes passed. This year we've already deployed 700,000 new homes and new view reach 9 million homes passed by the year end.

We aim to more than double our total FTTH homes passed by 2020, starting with additional 2 million this year after expanding to more than 20 new cities. We are also investing in our existing FTTH footprint in order to increase penetration in larger cities.

In addition, we had a strong IPTV pickup reaching up to 40% of installed capacity in new FTTH cities ensuring customer totalization. On the right hand side of the slide, you can see that we had a successful track record in new FTTH cities, reaching expressive results with considerably higher ARPU.

Some examples in São Paulo state include Marília with 28% higher ARPU, Jaú with 30% and Guaratinguetá with 34%. Furthermore, in the cities we quickly reached a high share in the ultra-broadband market only a few months after launch, despite the strong competition.

Moving on to Slide 11, we present our CapEx execution for the second quarter, closing the first half of the year with R$3.7 billion. As you can see, we are accelerating the execution of our planned CapEx for the year to anticipate revenues.

Moreover, we keep working on capital efficiencies to deliver our mobile and fixed network expansion of the best allocation of resources. We expect that our fiber footprint reaching 224 cities, 98 of them was FTTH, of which 92 with IPTV available.

This quarter, we also continue to rollout 4G, which already covers 86% of the Brazilian population, an increase of 10 percentage point year-over-year. Moreover, we brought 4G+ coverage to 596 new cities in the year, reach a total of 714 cities with 4G+ or 4.5G.

Furthermore, we improved the quality of our sites increasing fiber-connected sites by 38% year-over-year. Finally our IT transformation to full stack is evolving at an intense pace, which will help us to reduce time to market and in the future also IT OpEx and CapEx. Now I pass it on to our CFO, David Melcon..

Good morning, everyone, and thank you, Christian. Moving to Slide 12, as already mentioned by Eduardo, the second quarter of 2018 was another quarter of decreasing recurring operating cost, which fell for the 10th consecutive quarter. This is not only means a remarkable achievement, but once again confirms our strong commitments to controlling costs.

Savings represent R$83 million in comparison to the same period of last year, which means more than 2% of recurring EBITDA. Personnel cost increased 15.7% mainly due to a non-recurring effect related to organizational restructuring during the quarter.

Excluding this effect, recurring personnel costs increased 3% related to the effects of inflation on salaries and benefits. This increase remains below the inflation level for the period. Cost of service rendered increased 2.1%, driven by higher costs with network expansion and some seasonality effects.

Commercial expenses excluding bad debt decreased 2.1% in the period, as a result of our digitalization initiatives that are mainly impacting commissions, call center and billing expenses, more than offsetting the increase related to the impressive evolution of our customer base, demonstrated by our leadership in postpaid net adds and record FTTH results.

Bad debt remains under control, reaching 3.4% of net revenues, reducing 1.4% year-over-year due to our efforts on credit and collection actions aimed at guaranteeing its stability. As a result, our recurring EBITDA growth was a solid 5.8% on a year-over-year basis, reaching 34.5% of recurring EBITDA margin in the second quarter of this year.

Moving to Slide 13, in regards to digitalization as we did in the last quarters, we present the evolution of the most significant KPIs, and we are happy to announce a double-digit reduction across all relevant cost lines.

Before we identify and list the impacts of cost reduction, let me update you regarding the performance of our digitalization KPIs for the quarter. A 36% year-over-year increase of online fixed B2C sales. The percentage of digital top-ups increased 4 percentage point year-over-year reaching 22%. Meu Vivo app reached 15 million users.

Call to our call centers reviews an impressive 25% year-over-year, while the penetration of billing reached almost 50% of our total customer base. More than 60% of credit scoring is being conducted through digital channels. Half of our point-of-sales are operating on our full stack platform and 18% of all technician supports are already digital.

Now let me update you about the main cost lines being impacted. Billing and posting cost reduced 18%, mainly due to our efforts to include new and current customers in billing. Call center drop - cost dropped 16% year-over-year due to the increase of digital interactions through our e-care app, website, Facebook and others.

Installation and maintenance cost reduced by 18% in comparison to the same period of last year. As digitalization and Meu Vivo penetration goes up, physical top-ups have been losing relevance, decreasing 28% year-over-year.

The pursuit of boosting these initiatives is key to transform our company into a digital and integrated company providing the best customer experience impression and online, while reducing relevant cost and maintaining of our financial discipline.

Now moving to Slide 14, net income for the first half of 2018 reached R$4.3 billion, more than doubling the amount in comparison to the same period of last year. The main drivers for these results were non-recurring effects considering the quarter had a positive impact in EBITDA of almost R$1.5 billion.

And on financial results of R$1.6 billion mainly due to a Superior Court of Justice ruling in favor of Telefônica Brasil that recognized the right to deduct ICMS from the basis of calculation of PIS and COFINS contribution for the period between 2003 and 2014.

Higher EBITDA due to the mobile revenue evolution and cost control from a digital therefore mentioned and partially compensated by higher tax levels in line with the higher net income level recorded in the period.

It's important to highlight that the non-recurring effects will have a progressive positive cash impact as the amount involved will be compensated as tax credit in the next future [ph]. These one-offs are a positive driver for a net income generation and value growth to our shareholder.

Turning to Slide 15, free cash flow from business activity reached a remarkable amount of R$3 billion, R$366 million higher than the previous year.

Despite the increase in our CapEx level due to our organic and accelerated FTTH deployment, we presented a better operating performance reflected in our EBITDA, lower interest rate in the period and significant improvement in our working capital, resulting in a free cash flow 14% higher than the same period of last year.

As we announced last quarter, shareholder remuneration of R$4.6 billion related to 2017 net income will be paid in two tranches. In August, we will pay R$2.4 billion, and in December this year, we will pay the remaining R$2.2 billion. Thank you and now we can move to the Q&A..

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Maria Azevedo of UBS. Please go ahead..

Hi, thanks for the question. Our first question is on FTTH. You posted very strong net-adds in the quarter, almost 2% of the total homes passed.

We would like to know if you expect this trend to continue and if you should assume that you can bring your 20% take-up rate to 50% levels in the next years, even assuming your geographical expansion? And if that's the case, are you seeing any competitive threats from the convergent players and regional fiber companies? Thank you..

Hi Maria, this is Christian. Yes, we had a very good positive net-adds for the quarter, and as you can see, is positive evolution. If you compare to the last quarter, we've improved. So I think we're going to go in the right direction. Last year, we had 16 cities. This year we have planned more than 20 cities.

And in the cities that we're entering, as an example that I gave you in the presentation, our success has been very high. So we're penetrating very highly the market with a good penetration of connected homes over homes passed. We don't give any guidance for our plan for the future.

We said no in New York that for the additional capital would be invest and that we were expecting 33% of take-up over the homes passed. So, we work with this as a minimal number for the future and we expect that to be higher, so in some cities even higher, over 40% after six months. So, again, to be conservative 33%, but we expect to be more.

And I don't know what the second part of your question was about. I think generally if I answer all of these or you are - and the convergence I think you asked. No, it's being very positive in the sense, because normally people have a very strong presence in the cities. The brand is well-known. We have commercial channel already in place.

So we are optimizing all the efforts that we have commercially with the mobile and the fixed, and we are giving broadband access. That gives us the right assets to be the key player for convergence in Brazil, because we have the best technology in the fixed as FTTH, and we have the leadership in the postpaid.

So, again, we are being positioned as the number one and it's a strong position to be the convergence player of Brazil..

Perfect. Thank you, Christian. And the second question is on the margin side. You have sequentially improved margins over the past several quarters. Are you reaching stabilization levels, now that the synergies and digitalization gains are mostly in or do you still envisage further efficiency gains and where they would mostly come from? Thanks again..

Hi Maria, this is David Melcon. As you can see over the last year, we have been improving our profitability things first, because of this integration of BBD [ph] and now thanks to the digitalization. So we have a target to have more than R$1.2 billion savings in the next three years coming from digitalization.

And of course, this will help to continue expanding our margin..

Perfect. Thank you very much..

Our next question comes from Diego Aragao of Goldman Sachs. Please go ahead..

Hi, good morning, everybody. And thank you for taking my question. Two questions if I may. The first one, I just want to understand these nonrecurring items highlighted in quarter. Specifically, I observed that if we would adjust the other net operating revenue and expense line, you would have a positive contribution in the quarter.

So I just want to understand what has happened there, given this is the very first time that you are reporting net gains in this line. Thank you..

Could you repeat Diego, what line you were referring to?.

Yes, so the line related to other net revenue and expenses..

Okay. Got you..

Okay, Diego. Thanks for your question. Let me address of the potential question about the one-offs that we have this quarter. The main effect that we have in the quarter is related to the Superior Court decision which exempt us from paying the PIS/COFINS tax over the base used to calculate the ICMS tax payment.

So this decision allowed us to recognize this quarter the present value of the PIS/COFINS contribution paid for the period between 2003 and 2014 related to Telesp and Telefônica data, which means a positive impact on EBITDA in the amount of R$1.8 billion and a positive impact on financial results of R$1.7 billion.

In addition to this, we have another three negative consolidated one-offs in the quarter, which are the first one is R$92 million related to the adoption of a risk-assessment model for the calculation of some labor contingency. We have R$171 million related to the write-off of some assets that are related from digital - sorry, judicial deposits.

And the third one is R$117 million, also negative, related to an organic seasonal restructuring, which reduced our personnel by about - personnel cost by about 5% that was recognized at the end of - that happened at the end of June.

Therefore, adding up the production and financial one-offs effect, we have this quarter result in a positive impact in EBITDA of the amount of R$1.4 million and a positive impact on financial results of R$1.6 billion. That's why as you can see in the presentation, the net income was boosted by around R$2 billion after the tax effect..

Yes, yeah, thank you for that. Okay. I can stick offline, I guess, just to properly understand these adjustments..

Yeah, you can. And most of those adjustments are in the line that you referred about other cost and income, so you....

We took the decision, to put out this extraordinary to get in this line, no, in order to make clear the what was [indiscernible] to this extraordinary effect..

Yes, and the recurring evolution of the results, as you can see in the presentation, is shown without excluding these four elements. But anyway, I mean, Plaster and the team can give you all the details, additional detail….

Okay, yeah. Perfect. Thank you very much. And the second question is related to your mobile ARPU. I just want to understand what you're seeing in terms of trends for each client segment given that you are - you continue to increase nicely your postpaid base.

You are now reporting lower net connections in prepaid and still your ARPU declined year on year? Thank you..

So as, Diego, I said also in the presentation of being very positive net-adds in the postpaid. The ARPU in the postpaid is impacted by the mix and also as we are increasing the mix of hybrid over total postpaid, that does impact in the ARPU. So that's why maybe you can see this evolution for the postpaid.

And in the prepaid, as I also said, we see a stronger impact in the economy, impacting this segment. But again, we keep a very, very high ARPU, total ARPU of over R$28, much above the average of the market.

So, the evolution also - again, also you have to consider that the price increase that we could pass, because of inflation in the last year was much lower than years before, so that - mixing that, the blending of the mix on the postpaid, the economic situation impacting the prepaid, we ended up with this ARPU evolution.

Okay, it's still very high, as I said, compared to the average of the market, but impacted by the evolution of inflation and the mix..

Perfect. Thank you very much. Very clear..

Thank you..

Our next question comes from Andre Baggio of JPMorgan. Please go ahead..

Good morning, everyone. So I'd like to explore a little bit more starting with broadband. We saw the strong gains in the FTTH, but we also saw losses in the DSL.

So first of all, I'd say in terms of the DSL losses, is it mostly explained by competitors gaining the clients of Vivo or by Vivo changing its DSL into FTTH?.

Hi, Andre, this is Christian again. I think this is a mix of both. As I said, the example that I gave of three new cities that we deployed with FTTH was Marília, Jaú and Guaratinguetá. The three of them are in the state of São Paulo. And as you said, we - it's a market where we're having DSL.

And of course when we get with an offer that is with FTTH, there is a replacement, no, and also we see not only when we do FTTH, but when some small players get to the cities as customers are looking for higher speeds, of course, there is a loss of DSL.

That's why all the focus of the company [and therefore] [ph] investments is in FTTH, because demand for that is very high and customers are willing to pay more for having at least 10, 15 or over 30 megabits as a speed for their broadband. So it's a mixture of both that's affecting the DSL.

And also sometimes, even with the mobile, now we offer 4G, 4G+, so the experience they can have with your mobile can be better with the DSL experience. So I think, this technology is - it has to be overcome by the new ones and that's why we are betting FTTH..

Okay. Understood. Thank you. Second question on mobile, in the past I remember Vivo used to be the leader - not only the leader, but also the company, which was growing faster.

Now, we saw a strong acceleration of [indiscernible] seems to be growing well, so it seems that Vivo is getting behind which damaged not only the - cannot be really explained by the economy, because that's - the economy should affect everyone.

So what can be done in order for Vivo to at least maintain its market share or how you see the mobile market?.

So as you said, in the last years, Vivo has been having like very positive growth in the mobile segment quarter after quarter. So that's not to say with some of the competitors that were mentioned, so the baseline to compare the year-over-year is different, and also we start with a different baseline.

I think there is a lot of - everyone now in the market is doing much more migration from prepaid to hybrid, and I think that is bringing positive effect to our competitor.

But as I said, our net adds in postpaid remains the number one, so April and May, we don't have June for this quarter, but April and May Vivo let our ARPU versus the second competitor is 30% higher. If you compare to the third competitor, is 50% higher.

So I think there is a combination of things that Vivo continues to have a very strong performance, but our business line when compared is different. And again, of course, we recognize that the others also playing a better performance and I think a lot of this is driven by migration from prepaid to postpaid..

Just to add, a good one, that the churns are very low rate, that means that you have asset [ph] by defending our market leadership, and I think that we are competent. So we have been able to defend this leadership..

Okay. Thanks..

Our next question comes from Daniel Federle of Credit Suisse..

Thank you. Good morning. My first question is a follow-up on a previous one. We understand that the mix of an increasing amount of control clients will eventually reduce ARPUs in the postpaid market. However, we also have been seeing fast decline - a fast decline in the postpaid prices, especially in the pure postpaid segment.

So if you could comment a little bit how ARPUs are evolving in the pure postpaid segment would be very helpful.

And the second question is regarding interconnections, because interconnections revenues significantly higher or higher than expected in the second quarter as well as the interconnection cost? So any color on this side would be helpful as well. Thank you..

Okay, Daniel, good question. We don't reveal the ARPU for pure postpaid, but our strategy continues to be the same. We are trying to upsell and our key products for the pure postpaid is family plan.

So our idea is to bring more families and more lines to the same account, so we try to have more data with a higher price and having more members of the family or having more devices of members of the family in the same account. Increasing loyalty and in the end like paying for the plan more than used to pay in the past. So that's the strategy.

As I said before, we've been not able to have price increases we used to have in the past, because of inflation. And finally as you said, there is a competitive environment that is different and some players are playing a lower price, so we also in some markets with some segments we are defending ourselves with a more competitive price as well.

But as I also mentioned, net adds continue to be high. Churn is lower than it used to be before. So we are pretty confident that in the pure postpaid, our attributes of network, 4G, 4G+ as I said, but also 3G; innovation in the offer as we'd have data sharing, as I said also in previous calls.

The strength of our brand is putting on in a very strong position. And as I also mentioned about the FTTH, as we now getting to more places, where FTTH is given us a convergence footprint that is going to be unbeatable, not only now, but mainly for the future, when we're going to blend the offer together of the fixed and the mobile.

In the interconnection, as you said, the revenues is impacted by - we are giving a much more controlled limited calls in our offers. We don't give in the prepaid. We give - in most of the plans that we're doing the control, we do only local and limited with all new - national unlimited for off-net, but our competitors are being more aggressive.

Since they are more aggressive, we were increasing our revenues in interconnection..

Perfect. Thank you..

Our next question comes from Fred Mendes of Bradesco. Please go ahead..

Good morning, everyone. Thanks for the call. I just want to go back a little bit to Diego's question regarding the ICMS decision. Of course, you already mentioned this is related [to the last in the past] [ph].

But just wondering if there's something specific or probably we can see some decisions on this line for the sectors, of course, that you are aware of? And then just to understand, is this something you receive like a cash payment and if so when will that happen? So that will be my first question.

My second question is related to the - we did see improvement in terms of the B2B operations of the fixed segment. You did mention that you negotiated some large contracts, so just wondering if this is a trend that we should see for the next quarters or that's also something very specific from this one? Thank you..

Hi Fred, this is Christian. I will start with the second question with the B2B, and then I'll pass it to David to answer the first one. So in B2B, as also I think I told you in previous calls, it's difficult to see the comparison, because in some quarters we have important deals being closed that can impact our revenues for the quarter, okay.

So this quarter, it's not specifically the case of a big deal, but it being performing well both in mobile and in fixed. I think in the fixed side, everything related to data that means also the fiber deployment that we are doing for B2C is also impacting positively B2B.

There is some other data deployments for B2B customer that's always giving us good results, and especially in digital service. I think we've been trying and being successful in migrating voice revenues to more digital, and here, I think we mentioned security, we mentioned cloud, we are also leading the machine-to-machine.

So here, I think the greater effort that we have in the company is be able to have the right processes, have the right talent and have the right portfolio to be able to compete in the data and digital arena as an important player, and also growing from voice, growing much more in data and in digital services.

So we don't have specific numbers for B2B, but as I can tell you is that the trend is positive and in the postpaid range that we have like this 8% growth in postpaid that is branded B2C and B2B and I can tell you that B2B is equally contributing for the result.

So now, I pass to David to talk about the ICMS if I have answered your question for the B2B..

Hi Fred, this is David Melcon. Just to recap, I mean this is - these are lawsuits just for Telefônica Brasil that's come from Telefe and Telefônica data from 2008. So it's just specific only for Telefônica. And this have to do with the decision that the ICMS do not integrate the PIS/COFINS calculation basis.

So we are expecting this will be some cash credit that will be recover, that will take we expect around three years and will start around in 12 months. And we remind that these assets will be a basis also using the financer Brazilian risk free rates which is the SELIC.

And also related to this, I mean this - certainly these results are very good for the net income and therefore for the shareholder remuneration, which is already very strong.

We remind that the remuneration need to be evaluated at the year-end, and of course, need to be approved by the shareholders general meeting that will take place in the first half of 2019..

Perfect. Thanks, David. Thank you, Chris. Very clear..

Thank you..

Thank you..

Our next question comes from Jose Quintana of Scotiabank. Please go ahead..

Yeah, thank you. This is actually Andres Coello. Just regarding the last question, just more clarity on the matter, so basically, what we should expect this tax decision to be translated into potentially an extraordinary dividend for this year or perhaps part of the ordinary dividend next year? So that's my first question.

And also, because we're seeing a very important reduction in net debt, right.

Net debt being down - has come down quite nicely during the year, so perhaps that give you more space for additional dividends this year?.

Hi, Andres. Thank you for the question. I mean, as I mentioned before on Fred's question, I mean, these results are very good for the net income, and the shareholder remuneration will benefit from this.

But this is something that the remuneration, the decision will not be taken until the end of the year, and of course, need to be approved by the shareholders in our meeting, but as I said at the beginning this will be always positive for the remuneration, but we cannot give any number..

Okay..

Second question about the net debt, I mean, if you see the reduction of the net debt now in June is due to the seasonality. We look also the last year what happened is that because we paid the dividends and the interest on capital in the second half of the year, the net debt at the end of June is the lowest - the lower figure across the full year.

And also, the second half is where we will generate additional costs, so minus the dividends that we will pay, so we are expecting to have similar numbers than the previous year..

Okay. Very clear. Thank you..

Our next question comes from Walter Piecyk of BTIG..

Thanks.

Are you guys able to give us a sense of what the data growth is on your network either on a growth per zone basis or overall growth?.

You mean - data traffic you mean?.

Yeah, wireless data traffic specifically, sorry..

Yeah, we don't give this number, but as we are - like we've been - as we are deploying a lot of 4G recently and 4G+ I think we're getting a much better usage of our network.

There was - and also now using new frequencies as the 700 is being much more efficient, the usage of our networks, so we used to have some handover to the 3G, especially indoor, because of the penetration of the frequency that we had.

Now, with this spectrum with more frequencies, I think will be much better usage of them and the traffic is being much better distributed between 4G and 3G. We don't give a specific number. There is always an increase.

But I think it's been very well handled by the deployment that we have both in the mobile and also in the fixed that also help us with the Wi-Fi penetration. So, Walter, I think pretty okay..

Okay.

So when you think about 2019 data growth, whatever that number might be, in terms of the network, is your anticipation maybe adding more cell-sites in 2019 than 2018 or is it may be better to consider purchasing spectrum from Nextel?.

Look, we have the best portfolio of spectrum in the market. As you may recall, we - apart from the 20 plus 20 that we bought in 2.6, then we bought additional 10 plus 10, so we have 60 megahertz of the 2.6. We started using the 700 now. We're doing a lot of reforming in 1,800.

So, as you said, for this horizon of 2020, 2021 I think we have a lot of spectrum. So let's see what's going to be the future auctions for spectrum. There is Anatel talking about new auctions in the future. So in the end we're being always very present in any auction for a spectrum. So I think we're going to keep analyzing what our needs.

But for the moment, as I told you, with the reform - with the usage of 700 and we say the 60 megahertz that we have in 2.6 that only people has in their market. We're pretty confident that we'll have enough spectrum to handle the data traffic..

And, if I may, one more, América Móvil had talked about maybe increasing the financing of expensive, more expensive smartphones to their postpaid customers. Obviously, you guys have been the most successful in postpaid again this quarter.

Is financing phones part of the game-plan going forward here or is that something you already do to some extent?.

Yeah, we are doing more financing. It doesn't mean subsidies. It's different from that, so we are doing financing. We are helping to buy smartphones. So we're doing that. Smartphone, the accessories is being very successful as you said. And so, selling to customers and maybe we didn't use to sell in the past that like hybrids or even prepaid.

So we continue with this strategy. And financing is one of the two that we have. We have also buyback. That is something also that we'll be pioneering doing that in the market now, so buying back the handsets. And we continue with this strategy.

Yes, we're doing - finding ways, not doing subsidies, but financing and buyback to help customers to use, to change is - that one is also driving flow to our stores..

Great. Thank you very much..

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

Hey, good morning. Thank you. Just a very generic question about the competitive environment in mobile, as you discussed on previous questions, some of the competitors are growing a bit more, but you're still growing.

And I was wondering if you thought that the environment was rational and has it gotten worse? And how is the macroeconomic light weakness playing into that? Thank you..

Hi Mathieu, this is Christian again. Not to repeat myself, I think the macro is impacting mostly the prepaid. Of course, it's also impacting B2B, which is companies when they are willing to invest more, to spend more, there is a positive impact in their telecommunication expenditure. So, we hope the macro gets better.

Unemployment gets lower, and then we can see consumption going up and companies investing more. So I think that has to have a positive impact in our business. So, so far unemployment is too high. Consumption is still low. So we don't see the increase, especially in prepaid as I said, that we would expect.

Regarding rationality of the market, I think it can be more rational. Of course, there are always movements from one or other player, they're driving prices a little bit down. I think there is room for more rationality.

But, again, we - as we have some attributes that no one can replicate, as I mentioned before, the infrastructure, the spectrum, the network, then the sales channels, the brand, the customer service. We're still betting that we can be the leading one in this.

But the others are doing well, migrating mainly prepaid to hybrids, as I said, and also having more effort to capture some postpaid customers. We keep doing a good number in net-adds. We keep controlling our churn or even reducing debt.

And we keep investing in the fixed business that in the end will help us to sustain our leadership in the mobile, when convergence plays an important role in Brazil, so again, macro getting better. I think everyone is going to get better.

And hopefully, there's going to be more rationality in the price and then going to be also beneficial for everyone..

Thanks. I guess, one of the context for my question was the comments I think by AMX back at its Investor Day in October, that they want to become number one in mobile. But from what you say, you're very confident about the position you can maintain in the Brazilian market.

Is that right?.

Yeah, I don't have data to comment on that. But, again, I don't know what is number one, number one in customer, number one in revenues, number one - I don't know. So, there are so many KPIs that you can consider. I think what we presented today is a solid growth, is a good margin, and it's a good capture of customers. So - and their reduced churn.

So again, I don't have more information about the Investor Day that you mentioned. So we are confident that as a telecom player, regarding all segments and all technologies, fixed, mobile, we have a very strong portfolio of assets. And we are pretty confident that we're going to continue leading these aspects..

Thank you very much..

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

I'd like to thank you all to participate in the call. The results of this quarter proves that we are on track on our strategy, on grow, and on the mobile, on fiber, to work on the utilization to increase profitability. We are in the right way. And I think that our commitment to shareholder value creation is very strong.

And I hope to see you again in our next quarter, that at which time we are going to have a new President elected for the country. I hope you can take all the Brazilians the right decision. We are very confident on this. And in the meantime, all the management team, we are also available to have a one-to-one meeting with you.

Thank you all very much and thank you for all that being in the organization..

Thank you. This concludes today's Telefônica Brasil second quarter 2018 results conference call. You may disconnect your lines at this time..