Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil Fourth Quarter of 2018 Earnings Conference Call. Today with us representing the management of Telefónica Brasil, we have Mr. Christian Gebara, the CEO of Telefónica Brasil; Mr. David Melcon, CFO and Investor Relations Officer; and Mr.

Luis Plaster, the IR Director. We also have a simultaneous webcast with a 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 section.

[Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the company's management beliefs and assumptions and on information currently available.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future.

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

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

To start, Christian Gebara, our CEO, will give you the highlights for the year and then go over our commercial and CapEx evolution. To conclude, our CFO, David Melcon will comment on our digitalization initiatives, efficiency commitments and financial results. We will then move to Q&A. I now pass the word to Chris..

Thank you, Plaster. Good morning, everyone, and thank you for taking part of our fourth quarter and full year 2018 results call.

Before I elaborate on the highlights for the year, I would like to take the opportunity to thank Eduardo Navarro who remains as our Chairman of the Board for his inspiring leadership and brilliant performance during his tenure as Telefônica Brasil CEO.

I had the honor of working very closely with Eduardo this past couple of years as Chief Operating Officer and I am sure that we as a company could not be better positioned to continue to capture all the opportunities that we have in the Brazilian telecom space.

To do so I would like to reinforce our commitment to the achievement of the objectives that we already had in place through designation of a strategy that is focused on three main pillars; capturing growth opportunities especially in high value services, allowing us to improve our revenue mix as we continue to invest in cutting-edge technologies such as fiber and 4.5G, to keep providing the best customer experience and connectivity in and out of home.

Expanding the company's profitability by leveraging on the capture of efficiencies mainly for the evolution of our digitalization initiatives which are transforming the way we work internally and related for our customers, strengthening our status as a unique generator of cash and net profit in the Latin TMT space allowing us to continue to provide unmatched shareholder remuneration without hampering our ability to invest in further enhancing our competitive position.

Now moving to Slide 4, let me comment on the highlights that we had during the year. Through the second combination of assets, coverage, grant and customer experience, we are able to finish 2018 with 55% of our mobile customers on postpaid after recording 3.6 million net additions which is 7% higher than 2017.

We capture a record breaking 604,000 FTTH net adds, an increase of 50% in comparison to last year's performance. We accelerated expansion of our premier technology footprint ensuring future revenue growth by connecting 30 new cities with FTTH reaching a total of 121 while also closing 2018 with 3,140 cities and [1004.5] G Series.

Consequently we continue to accelerate improvements our revenue mix depending less and less on legacy technologies such as voice and DTH while we accelerate our exposure to businesses such as postpaid, broadband and IPTV among others. In 2018, 70% of our revenues came from growing businesses which reached a strong expansion of 10% year-over-year.

In parallel, the fourth quarter of 2018 was the 12th consecutive quarter in which we reduced costs on an early basis representing three years in a row of decreasing OpEx. In 2018, our recurring operating costs reduced 2% year-over-year taking our cumulative EBITDA margin to 35.6% well above market's expectation at the beginning of the year.

As a result of the very strong operating performance presented throughout the year, our financials reached unprecedented levels reinforcing our position as a player that offers both value and growth components in its equity story. In 2018, we registered a record-breaking BRL8.9 billion of net income almost doubling the previous year's figures.

While in terms of free cash flow we generated BRL6.9 billion, 21% more than in 2017. As a result, we are able to propose our highest ever amount of shareholder remuneration BRL7 billion a growth of 52% versus 2017 underpinning our commitment to the generation of solid returns for our shareholders.

Moving now to the details of our main businesses on Slide 5, we present evolution of our mobile revenues which increased 2% year-over-year.

This performance was mainly supported by data and digital services that grew 6.3% and by our plan to accelerate smartphone sales which boosted handset revenues by 70% in the fourth quarter driving this line to represent 7.2% of our mobile revenues in the period.

Moving to the right-hand side of slide, the chart shows that our quarter-over-quarter basis mobile service revenues grew 4.1%, one percentage point more than a year ago which clearly represents a sign up sequentially recovery a trend that should be maintained going forward.

This performance was primarily driven by our postpaid revenues that sustained a consistent growth of 5.3% year-over-year which is well above inflation.

The increase in prices and strong level of net additions contributed to this positive results combined with our unique value proposition, the leverage on important partnerships with relevant contemplators to increase differentiation.

In addition, B2B mobile service revenues demonstrated a promising trend once again in the fourth quarter of 2018, contributing to maintain solid evolution of postpaid revenues.

Meanwhile, our prepaid business, 2018 was heavily affected by negative macroeconomic indicators and intense competition began to show initial signs of recovery at the end of the year.

The requisition of our prepaid offers to include more benefits and more effective management of our customer base, allow us to improve prepaid gross additions and top ups. As a result, on our quarter-over-quarter basis, prepaid revenues grew for the first time over the last five quarters with 2.6% increase.

As the economy picks up 2019, we are confident that these trends of improvements will remain in place for the next quarters. Moving to Slide 6, you can see that our leadership in postpaid net adds in 2018 and control trend level have enabled us to enhance our already comparable customer mix.

On the left hand side of this slide, the graph shows that we were able to maintain our leadership in Mobile market share, reaching 31.9% share in total and 40.5% in postpaid. In the Machine-to-Machine business, we also preserved our strong leads by reach of 41.5% market share.

In postpaid we had a robust performance in 2018, once again leading in net additions with share of 31%. This was a result of the 30.6 postpaid net adds recorded in the year, a growth of 7% in comparison to 2017.

This performance allowed us to further improve the profile of our customer base in which postpaid represents 55.2% of the total, 6.1 percentage point higher than a year ago.

An important part of the postpaid net adds for the year was achieved through our continuing effort to migrate customers to higher value offers, as you can see on the right hand side of the slide. Moreover, we continue to protect our existing base by improving the loyalty of our customers and as a consequence our churn continues to be very low.

As a result, and even in a scenario of more intense competition, we're able to increase overall mobile ARPU, which went up 0.5% year-over-year in 2018, driven by 10.1% growth of data ARPU in the same periods. Moving to Slide 7, represent the performance of our fixed business which dropped 3.5% in the fourth quarter of 2018.

As legacy businesses such as voice and DTH is still weighted heavily over the total. That said, we continue to accelerate the transformation of our fixed revenue mix which means that we depend less and less on the services.

Broadband grew 12.3% year-over-year in the quarter, leverage mainly by Ultra-Broadband that had an exceptional growth of 33.8% year-over-year.

The result of this revenue mix transformations as we can see on the right hand side of the slide, is that fixed revenue excluding voice and DTH, are constantly gaining more relevance attraction growing 10.5% year-over-year in 2018, and already representing 56% of total fixed revenues.

Our focus on the expansion of FTTH is reflected by remarkable 44% growth in revenues while IPTV that follows the same strategy presented 59% increase year-over-year. In fact, total TV revenues grew for the third consecutive quarter driven by express IPTV adoption.

Finally B2B have been improving trends in the fixed business with more growth in broadband and digital services such as security, cloud, and IoT. On Slide 8, you can clearly see that our strong commercial performance in FTTH and IPTV led to significant ARPU increase in 2018. The left hand side of the Slide shows that FTTx continues driving growth.

Our customer base had a strong increase of 10% year-over-year. Specifically in FTTH, accesses grew by 47% including 152,000 net additions in the quarter. Our premium customer base contributed to an overall broadband ARPU growth of 11.8%.

On the right hand side of the Slide, represent our focus on customer totalization for IPTV, which now represents 37% of total Pay TV base. We managed to grow by 52% our IPTV customer base with 43,000 net additions in the quarter. In the last 12 months, our total Pay TV ARPU grew 6%, reaching more than BRL100.

I would like to highlight the overall growth in Pay TV ARPU have consistently grown for the last 14 quarters. On Slide 9, we give you more details on the success of our UBB strategy, which bring in results that are exceeding our internal expectations in cities where we launched FTTH in 2017 and 2018.

In 2018, we beat our goals and launched a record number of 30 new FTTH cities representing an expansion never done before by any other Brazilian player, allowing us to reach 121 FTTH cities and surpassed the amount of cities covered by FTTC, which currently stands at 120.

We deployed approximately 2 million FTTH home passed, focusing not only on footprint expansion to new cities but also on the increase of penetration in existing areas. As a result, we have been able to further penetrate HP's home passed in large cities such as São Paulo.

On the right hand side of this Slide, you can see that we continue to deliver strong results in cities launched in the past couple of years. In two of these cities launched in 2017, our take up over installed capacity is already higher than 80%, exceeding by far our long-term targets.

We're also able to capture an important share of the broadband market especially on high speeds. In Jataí, a city launched in October 2018, the numbers are equally impressive. Two months after launch, 43% of the installed capacity was already sold. While we capture 18% of the broadband market and became the absolute leader in Ultra Broadband.

Moving to Slide 10, represent our cap execution in more detail. We reached BRL8.2 billion in 2018. Our investments were mainly focused on higher returns future proof technologies and IT transformation.

As we have been capturing some CapEx efficiencies and improving the location of resources, we're able to end the year with an expanded lower than what we initially planned without diverging from any of our strategic objectives.

On the right hand side of this Slide, the graph shows the 70% of our investments are focused on growth, especially in 4G and 4.5G FTTH and IPTV. As a result, we strongly expanded our fiber footprint, reaching 241 cities, 121 cities of them with FTTH as I said, all of which already have IPTV availability.

We're also enhancing the quality of our 4G network. At the year end, we covered 88% of the Brazilian population, reaching 3.100 cities with 4G, and our milestones of 1,000 cities with 4.5G coverage. In addition, we improved the quality of our sites, increasing fiber connected sites by 57% year-over-year. I now pass it on to our CFO, David Melcon..

Good morning, everyone, and thank you, Christian. Moving to Slide 11. One of the main cornerstone of Telefônica Brasil equity story has been for quite some time our ability to be efficient in terms of cost, allowing us to transform the way that we work and relate with our customers by leveraging on digitalization and simplification initiatives.

In the fourth quarter of 2018, our cost reviews for the 12th consecutive quarter on a yearly basis, reaching minus 1.4% taking our EBITDA margin to a recent high of 57%. Personnel cost that represent 13.7% of total OpEx, increased 1.1% significantly below inflation due to the ongoing organizational restructuring undertaking in the last quarters.

Cost of service rendered, which account for 40% of total OpEx decreased slightly minus 0.1%, driven by the higher cost related to the expansion of our mobile and fixed networks, entirely offset by lower regulatory taxes and interconnection costs.

Commercial expenses excluding bad debt decreased 6.9% in the period as a result of our digitalization and simplification efforts, drastically reduced expenses with call centers, back office, billing, and posting. In the fourth quarter of 2018, commercial expenses represent 26.3% of our total OpEx.

Finally the bad debt over gross revenue ratio presented a slight year-over-year decrease reaching 2.2% thanks to our credit and collection actions and utilization of big data analytics.

Turning to Slide 12, we give you an update on the evolution of our main digitalization initiatives that once again enable us to significantly reduce very representative cost buckets. In the fourth quarter, we had that 43% year-over-year increase of online fixed B2C sites.

The percentage of digital top-ups reached 23% increasing three percentage points year-over-year. Meu Vivo apps unit users increased 22% year-over-year where cost to our call centers produced 24% compared to the previous year.

The penetration of billing reached 58% of our total customer base with almost two-thirds of our great discovery being conducted through digital channels. 100% of our stores are operating in our full-full stack platform and 73% of our technical support are already digital.

In customs in the quarter billing and posting costs reduced 15% as a result of increase e-billing adoption by our customers. Call centers cost dropped 70% year-over-year as we treat customers interaction to digital channels such as e-care app, website, Facebook and others.

Installation and maintenance costs reduced by 10% in comparison to the same period of last year. Commissions of physical top-ups continue to increase rapidly 30% year-over-year as we incentivize top-ups through digital channels.

We feel that implementation and evolution of digitalization will be absolutely critical for anyone to succeed in the telecommunication sectors. As customers are demanding more and more safe care, easy solution related to interaction with the company require that we urgently move into our simple and more efficient business model.

Now moving to Slide 13, net income for 2018 reached a record level of BRL8.9 billion, 93.7% higher than one year ago.

The main drivers behind this evolution were higher EBITDA due to the strongest passion of revenue from growing businesses and cost control efforts liberating on digitalization to register annual cost reductions for the third consecutive year.

The Nonrecurring effects registering the year which impacted positively both EBITDA and financial results in 3.8 billion net of taxes.

These nonrecurring effects were mainly related to gains that we had during the year on the superior court of justice recognizing our right to deduct ICMS from the basis of calculation of PIS and COFINS contribution for the period between 2003 and 2014.

Turning to Slide 14, in 2018 the generator on free cash flow from business activity reached an unprecedented level by growing 21% year-over-year to BRL6.9 billion mainly as a result of our improved operating and financial performance with a strong EBITDA growth, lower interest and income taxes payments and optimize working capital.

That allowed us to further reduce our leverage our gross debt decreased 27% year-over-year while our net debt position reached to BRL2.2 billion in December 2018, a 42% decrease versus one year ago.

Moving to Slide 15, as a result of the impressive generation of net income and cash flow throughout the year for 2018 we are proposing BRL7 billion of total shareholder remuneration, a growth of 52% in comparison to 2017 and more than double the amount that we pay just a few years ago in 2015.

The BRL7 billion will be paid in two tranches, one during August 2019 and the other during December 2019. For 2019, we already started to deliver on shareholder remuneration with a declaration of BRL700 million of interest on capital on February 15.

This confirms our commitment to remunerate our shareholders while maximizing value by investing to capital growth opportunities a combination that is unique to Vivo in the Brazilian telecom space. Thank you. And now we can move to Q&A..

[Operator Instructions] The first question will come from Valder Nogueira of Santander. Please go ahead..

First question is, I just heard what Luis mentioned about dividends and how the company is playing that.

We have seen the proposal of the administration, it is understanding that the payout of your earnings this year should be around 70% to 80% I haven't seen the full numbers yet why not 100% that’s the first question?.

So if you see our remuneration for the year is 7 billion which is if we compare the payouts or the free cash flow is even more than 100%.

When you compare it to the net result is around 78% but you need to consider that some of the result that we have during the year are mainly as the one-off that we have the tax one-off will not impact benefit the cash until the next two or three years, that's why our recommendation we have decided that 7 billion is representing more than 50% increase year-over-year is more than 100% payout or free cash flow under 4 we think is the right kind of number..

Does it has any relation to a few certain scenario on potential taxation of dividends and interest of capital going forward or was just the decision itself?.

No, it had nothing to do with going forward it just for the year..

And my second question you guys announced the partnership with Global in order to sell the global content on the mobile platform. And I believe that the subscriptions should also be applicable to your broadband offers because you can login.

What do you expect to be the counter attack of competition because this is one of many initiatives that you guys are making that are proposing a very good value for your subscribers in terms of how to build the content that they want on whatever platform that they have while they may competitive on Pay TV it’s not necessarily that many multi-devices you guys are.

How do you expect them to react to this offer?.

Walter this is Christian. I think this deal that you mentioned is part of our strategy of being much more as a digital service hub with being talking about partnerships with different firms. You mentioned the one that we have Global but we also signed with Amazon Prime, we have also signed with Netflix, and we have signed with NBA, NFL.

So our position here is that we are going to leverage as much as we can in the strength of our brand, of our channel our possibility of bundle that for our services and we want to be this hub and of course we want to be player playing a very important role especially in this OTT video arena.

Different from others maybe our penetration of Pay TV is much lower, so we have lots to capture that selling 4G, 4.5G or ultra broadband together with content and that's our strategy going forward. So it's one of the partnerships that we sign it and we are going to come with others in the future..

The next question will come from Diego Aragao of Goldman Sachs. Please go ahead..

Two quick questions if I may, the first one on the fixed voice decline it’s seems to be worsening in recent quarters and I was wondering if you can give us some colors on the market dynamics that could help to justify this acceleration on the fixed to mobile substitution. And for instance was this performance driven by residential or B2B clients.

And also can you walk us through the main initiatives that you have taken to protect this revenue base this will be my first question..

Diego this is Christian. Yes, there is an effect of the relevance of the service for customers we are bundling as much as we can to protect. Once you're bundled, you're also giving all the benefits of voice to fix voice to mobile. So - and they become much more unlimited the usage of the fixed voice.

So before in the past maybe there was an usage - there was beyond this unlimited or bundled package that the customer would consume that's not included in the plan so which affects in the amount that they pay. So we think it's a condition of the market.

You can charge bundling that as much as we can do now but of course there is some excess consumption that we don't see anymore because it's included in the bundle that we put together with the broadband, and that's the reality of the market right now..

Just quickly, so this was driven by mostly by the residential, is that right?.

Is most of the part residential, that's the largest impact. But we also have B2B customers included nowhere and this same strategy of bundling is in place for both. But, yes, we see movement is negative, performance mainly in the residential. But again, we are bundling as much as we can. Once you bundle, you include everything in the bundle.

Once we include everything maybe in the past demographics was not included, there was some excess consumption that we could bill. Now we don't do bill anymore because it's included in the package..

And the second question very quickly on your deprecation we saw a major increase in this line item in the quarter despite the fact that you have been investing in FTTH for some time now.

Can you just help us to understand what's going on and also to see whether or not this should be the next the current level for this line?.

So regarding the depreciation we have an increase this year. As you know every year we need to review the [indiscernible] of our assets and therefore this we had an increase in depreciation around BRL260 million that was recognized in the fourth quarter and related to the full year.

And also we are also increasing our investment year-over-year and therefore this will also bring additional costs..

The next question will come from Maria Azevedo of UBS. Please go ahead..

So my first question is on your FTTH strategy.

Did you see any competitive threats from potential 5G fixed wireless broadband and considering that you executed very well your CapEx allocation for this 2 million home passed, do you see room to invest less than the guided BRL2.5 billion extra CapEx or maybe to expend further your geographical roll-out?.

Yes, we don't see any other technological peaking with FTTH for the moment. I think it's been proven by our performance inevitably that we get that is the best ultra broadband solution. So we don't see 5G at the moment for what we see as technology or even devices available and that we have a competition right now.

So we continue investing on FTTH and as I said, we had one of our largest deployment for 2018, increasing to 9 million home passed. Going forward, our plans for number of homes and number of customers connect still the same. What we can see is more efficiency in the usage of this CapEx, I think in 2018 was one of the case.

We kept the plan in number of homes connected and passed and cities that we reached with lower CapEx. So going forward that may happen as well and then we see if expand the footprint or not. But our plan still is the same one that represented in New York, ambitious one, to increase home passed and connected as much customers as we can..

And my second question is on mobile competition. Are you also seeing those stronger signs of recovery in prepaid revenue in the first quarter 2019 as well? Do you see room for segment ARPU growth in 2019? And if you can talk about competition in mobile in general that would be very helpful. Thank you very much..

Yes, we see a very competitive market. As described, we're still being capturing most of the postpaid customer base. I think that was the number that we show for the year. We kept the lead in the percentage as the main driver being not only migrating prepaid to postpaid but also upselling front control to postpaid and upselling within the segments.

While we see here that we're also moving prices up, we increase price in postpaid and in hybrid in September and in December. There was movements from the competition but still giving much more benefit than we give for the same price.

And then I see for the prepaid, as you mentioned we presented a better number for the fourth quarter, is still negative. The negative sign here is driven by the macro, but also driven by our ability to continue migrating customers to hybrid. And here - I see opportunity to be more rational and increase price.

I think we've been stuck in the same price point for longer and we don't see that in the hybrid and postpaid, because as I said we moved prices during the last years and more precisely in September and December for hybrid and postpaid; and we expect to move also prices in the prepaid..

The next question will come from Fred Mendes of Bradesco. Please go ahead..

I have two questions as well. I think the first one related to what Maria just said but just trying to understand a little bit more here on the dynamics of your ARPU on the postpaid ex. M2M.

When I look here of course there's more decrease year-over-year, but there was decrease and as Christian just mentioned, you did increase the prices, you did anticipate the price increase for this year. So I was expecting increase in ARPU and actually saw the opposite. So maybe I believe this had something do with the mix, more hybrid clients.

But I want to understand if there's something else here with this ARPU? This will be the first one. And then the second one is related to costs. As you pointed, you have been doing a great job here you know for last three years.

So I was just wondering when you look to 2019 if we can expect once again OpEx to decrease on a year-over-year basis or if you believe that most of the low hanging fruits are already reaped? Thank you..

On the ARPU, there is the mix influence here. And as I said, we kept a very strong migration from prepaid to hybrid. That's always impacting the overall postpaid ARPU that you see. So although we increase price as I said we had two increase in September and in December.

But the volume of the hybrid is still very high so on the average the ARPU is impacted by this. So it's mainly mix. We don't see – if your question was downgrade we don't see. Of course, there is always as I said; we improved price, competition followed in some ways, but it’s still giving more benefits than we do.

So I think there is – it would be a good movement from the market to increase prices and keep benefits to avoid no more for two more not so is that what we are trying to drive here now giving more, we give something else when we increase price but trying to control that to keep ARPU's growing as we see in different segments but also in the mix together the postpaid trying to keep it in stable or growing.

In the cost, there is a lot to be done. Digitalization is the driver that we are having here to drive costs down. I think that we mentioned some of the KPIs that we follow, there are call center calls, penetration of e-billing, and we still see room to do more.

Also we are not only making more digital the interaction that we have with our end customers, but we're also implying that we're going to use more digital processes and tools to automate internal processes that is also bring cost reduction. So we're positive about our gain of efficiency going forward..

The next question will come from Mathieu Robilliard of Barclays. Please go ahead..

I had a question with regards to broadband. Obviously, you're doing very well in terms of rolling out your fiber network progressing in new cities, so I guess expanding your reach.

Yet when we look at broadband customers as a whole the number is a bit flat because there's probably some migration into fiber - and maybe some market share loss in other parts.

My question is really, as you continue to expand in new cities, should we expect at some point to see the total broadband customers grow and is that in your view something that can happen already in 2019 or later on? So that's the first question.

And second, in terms of 2019, you touched on the competitive environment and I was wondering what kind of scenarios have you built into your internal planning for 2019 with regards to the macro-environment and competition in general compared to 2018? Thank you..

So, for the first question, you are right.

As we see separately that we have strong growth in FTTH but we have to consider that the DSL especially the corporate one in São Paulo, the customer base is still very large and there is some overlay or some churn there related to other players also attacking the corporate customers that on the average is difficult to see the growth that you correctly point out.

So going forward, we're going to continue growing FTTH. Some of these will be overlay or FTTC areas mainly that we have outside São Paulo.

So, I don't know the number of customers will be the drivers that will be following our performance, but I think it's much more the revenue growth that we are expecting to have - the revenues coming from ultra broadband become much more relevant than they are once coming from this legacy technology.

So, Mathieu, I wouldn't be as so focused in the number of customers, because as I said, the customer base that we still have in ADSL especially in São Paulo is still large and comparisons maybe hard to have.

Focusing in growing FTTH and growing revenues in total and also ARPU increase, once we have the FTTH also we can have the opportunity to increase ARPU and also selling IPTV - bring it much higher. Don't know if it answers your first question then going to the second one..

Yes, it does. Thank you..

So the second one, I don't know was more general. We are optimistic about the economy. We, as I said, we're making movements for more rationale behavior in mobile and fixed. As I said, so we expect competition to follow. And if the economy recovers we expect to be a good scenario for telecom in 2019..

The next question will come from Susana Salaru of Itau. Please go ahead..

Actually we have two questions here. First, regarding the 5G; you expect the 5G auction to happen this year or next year and if that would affect your dividend policy or your payout dividend? That would be our first question. The second question is little bit more related to the P&L of the fourth quarter.

If you could elaborate a bit more on the effect that generated the positive results of approximately BRL120 million in other operating revenue in this quarter? That will be our second question. Thank you..

I think I mentioned at the beginning, we had a very strong deployment for 4G in 2018. 4.5G, there is the possibility of aggregate frequencies and offer more speed. For 2019, we continue on this track to deploy more and more 4G and more and more 4.5G.

We are preparing the network for 5G but we don't expect that to happen this year because there is no environment even like hardware's and services that require 5G in Brazil for the moment. So our plans for 5G not happening this year but we're preparing ourselves for that.

And again, focusing on deploying more and more 4G, more and more customers in 4G still have room to have more customers like I think we have less than 60% of customers with 4G devices. Still there is a room for having more customers with 4G, 4.5, and once we have these customers with these devices the opportunity to upsell with plans with more data.

So, focusing still 4G and using the 700 megahertz frequency that we started using like last year or one year and a half before and preparing ourselves when the 5G is reality in Brazil. But we don't expect to be this year..

Please, I'm sorry to interrupt.

Just a clarification; you don't expect to be a reality or you don't expect that auction to happen this year?.

The reality we don't expect but I don't think there is a reality for 5G. No, because there is no device. And the auction, we don't have an answer of when it's going to happen but we expect that not to happen in 2019..

This is David, just for the second question. I mean the impact in the other lines - and composed by some important cost reductions mainly in contingency.

Labor contingency is reduced by 45% year-over-year mainly on the back of a significant reduction of incoming calls during the year, incoming claims mainly due to the labor reform that's in force since the end of last year.

In addition, civil contingency are also dropping due to the action taken by the Company reviewing the end-to-end process and addressing the main issues that generate most of those claims.

In addition, we have other costs that typically happen at end of the year, which are some additional proceeds coming from contractual fines and tax recovery, as I say happen every quarter particularly fourth quarter.

And this is why if you look at the evolution of the margins year-over-year you see normally the fourth quarter is usually higher margin than the rest of the year. That includes all the recurring costs that happen through the year, but nothing exceptional..

The next question will come from Cesar Medina of Morgan Stanley. Please go ahead..

I only have one question. Any updates on what do you expect for the telco reform? I mean today you have pension in congress being debated. When would you see the timeline for the telco being discussed [indiscernible]..

As you know, it's a new Congress, new government. We are very optimistic because we believe that this law will benefit the society [indiscernible] plan to focus more in new technology rather than legacy. But we don't have a concrete timetable for that to happen.

No, but optimistic and we believe that this will go through but I cannot give you more details about the timing..

The next question will come from Marcelo Santos of JPMorgan. Please go ahead..

My first question is about the broadband deployment. You mentioned on Page 9 of the Presentation, some of the best cases you had in 2017and 2018.

I wondered if you could comment a bit on the cases which were not so good or where you had more difficulties in the cities you launched and what kind of hurdles are you finding in these cities where you had more difficulties? And the second question would be about the interconnection revenues.

I think we saw 27% sequential expansion in interconnection and you mentioned in the release that there was some settlement. So I was wondering this 27% increase quarter-over-quarter is it mostly on the settlements or was there any natural increase in interconnection? These are the two questions..

The cities, yes, there are some that we have a little bit lower penetration. Here it's important to highlight that it's the penetration over the installed capacity not in home passed. So it's installed capacity, but once we're being able to select where we want to enter, our performance has been better.

There were some cities that were before that we had the agreement of the merger with the acquisition of GBT so maybe they were not so attractive as the one that we are picking now. So as we see, now is that we are getting on average very good results.

Some cases there are small players that are able to retain more customers that we see in others as the one that represented here. But in the end we still haven't put together all our strength that it would be the mobile plus the fixed. We're still playing with the fixed by itself with some very few cross benefits.

And once we put altogether our strength will be even larger. So I think this as an example maybe it's one of the best examples. But again, once we put all of our strength, mobile plus fixed together, the channel that we have I think we can capture this easily, and that is the reason that we decided to get in.

So again, positive about the outcome and in some cities there are small players that may cause us some more difficulty but still haven't used all our tools to capture their markets. And I'll pass to David, to answer the second one..

Hi, Marcelo, I will cover the second question. In the connection, revenues have some seasonality during the year due mainly for settlements with other operator. And thus it's difficult to compare quarter-over-quarter. But in terms of what can you expect for the future for now going on, we expect these revenues overall being almost flat year-over-year.

Therefore compensated the drop of termination rates with higher traffic as a result of the unlimited on-net traffic offers that we have now since the last few years in the Brazilian market. So overall we expect this to be flat..

The next question will come from Carlos Sequeira of BTG Pactual. Please go ahead..

So I have a couple of questions.

One is, would you consider making an extraordinary dividend payment to leverage up the Company's balance sheet if interest on equity tax benefits are discontinued? And there is a discussion and anything you have done any study on what would be the ideal leverage in that scenario? And the second one on CapEx, can you share with us your CapEx expectations for the year and what would be a long-term CapEx ratio, please?.

Regarding the line deferred question, the benefit that we have as Telefónica Brasil, we have a very low leverage. Now, we have only BRL2.2 billion net debt, which represents only 0.1% of total revenue. This gives us a lot of flexibility to face the potential tax reform that could happen during the year.

So this is something we are analyzing generally, but as far as we don't know what this tax reform is going to - which change is going to bring for the moment our only draft analysis.

So once we have more visibility about this potential reform, then we will consider and we'll propose, we would recommend some review of our capital structure if it's the case..

As we said last year, no, we don't give guidance but what we - we present 26.5 over 3 years, that would mean the 8.5 in the first year we were able to respond for the plan that we had with lower CapEx for 2018. For 2019-2020, we keep the same plan as a ceiling.

We wanted to be more efficient with more scale and to do what we need to do with lower than what would be the ceiling for the 26.5. So we keep the same number..

The next question will come from Julio Arciniegas of RBC. Please go ahead..

One question related to broadband performance. The Company have some few losses this quarter and you mentioned that it was driven by the competition in the corporate base.

Can you give us some color of this competition? Basically, is this competition based on price from competitors? Or due to network upgrades that actually competitors are doing in the areas where you have copper? And my second question is related to some of your comments before about the effect of bundles in fixed revenues.

Can you give us a rough idea of how much from the fixed base is already in the sort of bundles? Basically, I would like to have, more or less, an idea of how long can last this affect?.

Related to the corporate network in São Paulo, that was the one that I mentioned before, yes, there are some new competitors. As you know, there are many small players in different cities of the State of São Paulo.

When they get there with an offer with speed than more we can offer with the corporate for pure ADSL, that's the main reason why we may lose a customer. So it's difficult to respond when we don't have the overlay of FTTH. So, again it's a cap in the speed that we can offer corporate. So that's the main reason.

Sometimes outside São Paulo we have FTTC, we can respond better but when we are in São Paulo with pure ADSL, difficult to respond getting to the limit of 4 or 10 megabits depending on the area and the distance from the central. So that's the main reason. Also there are many players attacking smaller cities and São Paulo is the reality that we face.

Regarding bundle, I was talking about voice. We bundled voice as much as we can in both B2C and B2B broadband plans. So the majority of our customers have a bundle broadband plus voice. So it's protected as much as we can. The point was more than when you bundle and you offer all the calls to fix and to mobile included, the price is flat.

Also we don't have excess expenditure from the customer when they're not bundled. So that was my point to describe why revenues were not growing because we're bundling everything. We protect but we don't have additional revenues from usage beyond the plan that they have in the bundle..

No, if I might follow-up on that. I do understand the point but basically, I would like to know what percentage is already in this sort of bundle. Basically, I want to assess for - I don't know.

20% of the base has already this bundle, 80% of the base still has to go through the process?.

No, the vast majority is already bundled, the ones that have voice and broadband. But we don't give the number, but the vast majority..

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

Thank you again for taking part of our call. I have interacted with - had interacted many of you in my previous role. And now as the CEO, I should expect to maintain this channel open and this strengthened our relationship going forward. So, thank you everyone..

Thank you. This concludes today's Telefônica Brasil 4Q 2018 results conference call. You may disconnect your lines at this time..