Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefonica Brasil First Quarter of 2022 Earnings Conference Call. Today with us representing the management of Telefonica Brasil, we have Mr. Christian Gebara CEO of the company. Mr. David Melcon CFO and Investor Relations Officer, and Mr.

Joao Pedro Carneiro, IR Director. We also have a simultaneous webcast with slide presentation on the internet that can be accessed at the site www. telefonica.com. 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.

It could cause results to differ materially from those expressed at a search forward looking statements. Now, I will turn the conference over to Mr. Joao Pedro Carneiro, Investor Relations Director of Telefonica Brazil. Mr. Carneiro, please proceed..

Good morning, everyone. And welcome to Telefonica Brazil's earning call for the first quarter of 2022. Today's call will be divided in two parts.

To start our CEO Christian Gebara will briefly comment on the acquisition of Oi's mobile assets, then go over Vivo’s financial and operating highlights followed by an update about our digital ecosystems and ESG initiatives.

Afterwards, David Melcon, our CFO will go through our cost and CapEx structure, net income, free cash flow and shareholder remuneration. Now I hand it over to Christian..

Thank you Joao. Good morning, everyone. And thank you for joining our earnings calls. Starting on slide three, we show you probably a long waited deal with Oi's mobiles asset to generate value for Vivo and reinforce our leadership in the mobile segment.

We acquired 43 megahertz of spectrum on a national wide basis, 2,700 sites and 12.5 million mobile access of which 4.6 million are postpaid.

As a result, Vivo’s total access base will jump from 100 million to 112 million, allowing us to become mobile market leader in five additional Brazilian states, extending our leadership to 17 states that represent 60% of Brazil's GDP, and 67% of the population.

Regarding synergies, our initial regulation point to an LPV of 5.4 billion reais in costs and CapEx savings and avoidance net of investments and integration costs. This is composed optimizations amounting to 1.8 billion rise in network 1.7 billion AIS in spectrum and 1 billion housing commercial on top of 0.9 billion in fiscal benefits.

Moreover, the customer base be incorporated generated approximately 135 million reais in monthly net revenue March 2022. From which we expect to extract margins above 70% both in EBITDA and operating cash flow terms. When the synergies reach they are running rates. Moving to the steps we have had.

During the next week we will start to proceed with this book customer based migration. When users can finally will be fully integrated in our network and systems. This migration will be done gradually and should be completed by the end of the first quarter of 2023.

For more details about the assets and synergies, please access this specific presentation available on our Investor Relations website.

Now going to slide four, we had a very positive result in the first quarter 22 richly impressive mice on a 100 million axis, the largest ever in our history, and our postpaid customer base total 51 million axes in the quarter after growing 11% year over year, while our FTTH homes connected continue to grow remarkably 29% year over year.

Such strong performance drove our top line to grow 4.6% year over year, the best and revolution we had since 2015, with mobile service revenues up 5.7%, while our fixed business expanded 1.9%, confirming the positive trends seem over the past couple of quarters.

This positive revenue performance was enough to offset cost pressures are rising for alternative business models and higher inflation, resulting in EBITDA growth of 1.3% versus first quarter 2021. Our strong operating momentum combined with solid financial trends led to a free cash flow generation of 2.5 billion reais up 12.6% year over year.

This allows us to continue investing in growth technology and inorganic opportunities while maintaining the best shareholder remuneration profile of the industry.

On the next slide, you can see that we continue to successfully transition into an improved mix of revenues with inflation linked products such as mobile, postpaid handset, fiber, B2C and B2B solutions, representing almost 80% of our result.

This premium products portion is unique to Vivo, helping us navigate well during tighter economic cycles supported by our outperforming core businesses. Moving to slide six, here we detail the evolution of our mobile and fixed core revenue positive performance across the board.

On the left hand side, you can see that our mobile revenues rose 6.1% year over year, as our strong bottom of net additions, both in postpaid and prepaid combined for more rational competitive environment helped us reach mid-single digit growth in both products.

On top of that, handset service and another robust quarter up 10% versus first quarter ‘21. Moving toward core fixed business revenues grew 11.9% year over year, driven by 26% expansion of FTTH, which on a 12-month basis is getting closer to reach the landmark of 5 billion reais in revenues.

Additionally, B2B data, ICT and digital services continue to outperform, up 13.1% year over year as demand for complete solutions continues to growth company, increasing the digital footprint. Moving to slide seven, here we show how our operating results confirm that our customers continue to choose Vivo when opting for high quality connectivity.

We close first quarter ‘22 with 85.3 million mobile access up 7.1% year over year, we've been impress 10.6% increase of our postpaid base. This performance was driven by continued prepaid to hybrid migration while trend remain at historic low levels, and portability figures more than doubled, hitting another record.

In fact, around 25% of all net additions in the quarter came from other carriers which attests that the strength of our brand good value proposition and unmatched customer experience are being asked.

Regarding our FTTH operations, we expanded our home space by 4.2 million premises year over year, reaching a total of 20.5 million HPs in 341 cities while connecting 1.1 million new customers, there's totaling 4.8 million homes connected.

For the foreseeable future we continue to execute on our convergence strategy that is being spearheaded by our Vivo Total offering, which truly bundles FTTH, broadband, mobile, postpaid and digital services in a single plan.

We believe that this solution will be key for us to reach our targets in terms of FTTH penetration, while reinforcing our strategy of increasing the lifetime value of our customer base. On slide eight, we update our digital B2B figures which is composed of high growth tech services that already account for 5% of our total revenues.

We call the last 12 months ending March 2022, we've joined 2.2 billion reais B2B digital revenue growing at an impressive 41% year over year.

Cloud businesses continue to command this performance by nearing triple digit growth rates as we distribute the best solutions that they will have market by partnering with companies that are hyperscalers, adding managed services. In addition, IoT and messaging revenues rose 32% year over year while digital solutions grew 24%.

This positive figures reflect our successful strategy of providing our B2B customers a wide range of solutions that go beyond connectivity, leveraging one of the most relevant B2B omni channel platforms in the country.

On slide nine, we provide more color on the new elements of our b2c digital ecosystem that will help us leverage is developed even further. As you know, we announced the creation of Vivo ventures, we have an initial investment of 320 million reais to be disbursed over the next five years.

The goal here is to acquire a 10% to 20% stake in up to 20 growth stage startups with pre money valuation of over 100 million reais, which must be focused on providing innovative solutions related to entertainment, smart home, financial services, education, health, or another segments that have relevant cross sell potential with our current value proposition.

With that, in mind, Vivo increases its participation in the Brazilian tech market helping the industries to escalate their business and as a result, accelerate our digital ecosystem while profiting from the financial return that these players can potentially provide us with.

Going to the right hand side of this slide which show how our existing services have adapt to the changing consumption patterns of our customers.

In the sense, we recently launched believably an epic flight video streaming platform, offering access to live channels that can be blended with a wide range of over the top applications for affordable prices starting from 29.9 reais per month.

Currently, we have the third largest telco in the world in terms of number of partnerships with different content providers testing the attractiveness of people's keys assets, such as brand, channel, customer base, and billing capability.

Moving to the bottom of this slide, we highlight the recent preposition of our media tech arm Terra, that runs the fourth largest news portal in the country, with almost 70 million unique users and over 650 million page views per month.

Terra will leverage on its unique big data capabilities to offer customized data driven solutions related to content and advertising. Moving to slide 10, where we present some of our ESG accomplishments and projects that represent a cornerstones of our company's purpose, digitalized, to bring closer.

Regarding the environment in the first quarter of ’22, we reached 23 operating power plants for the use of distributed generation on track to comply with our target of having overstated plants in operation by the end of 2022. We have also advanced in matters of governance equality and diversity.

As of April 2022, we will like the new board of directors increasing the number of Vivo to for accounting for 32% of the new composition.

On the diversity front we are at 375 new black interns 50% of the available positions who join us in the first quarter of this year, and launched their core A platform to promote a system for victims of racism in partnerships with some people thought [indiscernible] University.

Now I turn the call to David a better word to defeat to comment on our financial results..

Thank you, Christian. And good morning everyone.

On a lighter level, we present our topics evolution for the quarter, which was up 7% year over year, our cost of service and goods sold that represent 31% of our total expenditure grew 10% year over year, as we expand our exposure to high growth services, such as a digital solution being offered by B2B and b2c.

Moreover, as our handset sales group double digit in the quarter, we felt a similar impact on cost of goods sold. Moving to the cost of operations. Here we continue to capture gains arising from our digitalization efforts and efficient financial management that has reducing spending on customer service and budget.

Inflation impact online such as personnel and third party contract lead to a year over year growth of 5.6% in this cost bucket that represent 69% of our total OpEx. All in all, we were able to maintain the cost evolution went below the inflation register in the period, which is clearly a positive result.

Moving on as like Total so as Vivo have been able to improve CapEx allocation and grow its operating cash generation. We ended the quarter, totaling 1.9 billion reais in investments directly to the most up to date technologies. In the sense, fiber remains as the centerpiece of our strategies, representing around one-third of our CapEx.

It's also worth noting that we have already started investing in the deployment of 5g, liberating on the spectrum we acquired last year. As a result, our operating cash flow measure as EBITDA minus CapEx rose 4.8% in the quarter, amounting to 2.6 billion reais.

This allowed us to reach a sound operating capital margin level of 23.2%, monetizing the incremental revenues generated in the quarter.

Now on slide 13, we show that our free cash flow grew double digit, regardless of the reduction of net income in the period, in the first quarter of this year, our net income dropped 20% year over year, mainly impacted by non-cash items such as increasing depreciation and amortization.

That is mainly related to the amortization of our recently acquired 5g spectrum licenses. The later also lead to higher debt, which coupled with growing interest rates, increasing our financial expenses. Nevertheless, we're able to generate 2.5 billion reais for free cash flow of 12.6% year over year, which was three times higher than our net income.

Moving now to slide 14, our strong cash generation allows us to deliver second to none shareholder remuneration, while accommodating for our investment needs and inorganic transactions don't presently maintaining a low level of debt, as well as a net cash position before leases of 2.9 billion reais in the quarter.

In this sense, over the last 12 months, we've declared 6.3 billion reais to our shareholders in the form of dividends and interest on capital. On top of that, in the first quarter of this year, we invested 150 million reais in share buyback.

I'm planning to continue executing the program in place until February 2023 while maintaining our historically high payout levers. Thank you. And now we can move to the Q&A..

[Operator Instructions] Our first question comes from Bernardo Goodman XP. Please proceed..

Hi, good morning, everyone. Thanks for taking my question. Actually, I have two questions here. The first one about the margins. I would like to understand that if there is any other element besides or immobile that could drive the EBITDA margin up in the coming quarters. Perhaps digitalization is to have some positive marginal effect here.

In the second about the synergies, I would like to understand basically the company's rationale for not giving more complete guidance that reflects the market with their and its revenue synergies if you could add a little more color on this front. Thanks..

Hi, Bernardo, this is Christian, I got go to the second view of the first I think we have -- we gave a lot of clarity related to OpEx and CapEx. For the moment, we believe that it's while we can assume as a very strong and very reliable number, and it's a very high number for synergist.

So we understand that sort of in discussing the best network in the Northeast mainly where we are getting 12 points most of the 12 point 5 million customers where we have not only the best internet, mobile network but also the best channels, both offline and online and all the other assets that Vivo can leverage to offer to this customers, it's a lot to.

So we are very confident of the ability to capture all of this. And add to that the frequency there we are getting nationally that will offer as a much better services and CAPEX avoidance for the whole geography.

Now, of course, we do also believe that going forward, our ability to cross sell, or sell much more services to discuss them are base, considering that we can offer a convergent offer fixed Plus mobile that we can offer digital services that we can also call this ecosystem that we are deploying in health in education, entertainment, that can also be very attractive.

Also, the financial services that we are deploying people, mainly people be could also be very beneficial to this type of customers. Consider they are mostly a hybrid and prepaid. But for the moment, I think we are fine with and very positive the synergies that we presented that we will certainly captured.

But of course, we believe there are upsides going forward in managing better this customer base. And also, why not capture more customers around the around the country that may choose people as their preferred provider. Regarding margins I give to the UI, and then there's anything a compliment.

So regarding the margins, I mean, if you look to the margin, we have this quarter, it's almost 40%. Now, which is a very, very small margin.

And if you look to the details of the cost, you see one-third of the cost, somehow link to the new sales revenue that we have around B2B and also good to good assaults on equipment enhancement now so the more we grow on those costs, the more we will grow some revenue.

That's why we have a record growth and revenue for the last six years not as we are growing 4.6.

But it will look to the cost of preparation, the rest of the costs that represent around 70% or 69% of the total cost, you see that mainly the only code which is growing how to do with personnel commercial infrastructure costs on the on the race on the on the other one, particularly commercial infrastructure is almost flattish, DNA also down but they will down.

So we see that December these are potential and the team here is working very hard to accelerate the digitalization that is it helping us to reduce costs, and also improve the quality of our service now for the future, we see that some of those trends will continue to continue digitalization, there is still plenty of space in both in back office and front office.

But on top of that, I think we also tend in the mix of the costs of things that before used to be CapEx. Now they're turning to into OpEx. Now, and that makes you an example on the deployment on fiber on this neutral fiber network. We are seeing that now we are reducing our intensity in Cafe, which is very good news in terms of return on capital.

But we're not growing as much as we were going before on the margin also. Now we suggest that it's better to look to operating capital margin, that if you look to the case of evil, this quarter, we are showing 23.2% which is again we believe record in our in our industry. And we are growing also year over year that is worth 3.1.

And as you mentioned and Christian mentioned the synergies the synergy that we have they have to do with OPEX and CAPEX. That means that we will be able to have incremental revenue coming from the revenue from customer promoting without only limited cost in both OpEx and CapEx.

So two figures, these are the margin that will benefit from the integration. So they actually dataspace our operating cash flow no apart from the margin of 23.2%. We had a growth of 4.8% year over year. So that also contributes to what you just said about the view on the operating cash flow. Thanks. .

Our first question comes from Leonardo Olmos, UBS..

Hi, good morning, everyone. I have a couple of questions. The first one is more strategic and the second is more financial.

The first one is regarding Vivo money if you could discuss the growth in credit portfolio and what's the potential see in this product? And also Vivo ventures kind of similar question what type of investments that you see that are on your ROI pipeline? What can you tell us more about Vivo ventures? In the second question is related to financial expenses.

It was way above what we expected and we want to understand if we should expect similar net financial expenses in the coming quarters and talking about 0.5 billion in the first quarter, should you expect 2 billion from net financial expenses for the full year ‘22. Thank you..

So this is Christian, I will start with Vivo money Vivo ventures. Then I had it to David. Okay. So people money, I don't know how much details you need, but we launched in October 2020. Okay, so we've been very conservative in deploying the service because we want to do it in right, especially because we are normally dealing with our own customer base.

So once we get into the financial service, we need to do that in a way that we preserve the customer experience that this customer they have when they are dealing with Vivo. No, or the credit branches from 1000 to 50,000. That's the maximum in the first quarter of ‘22, the number of contracts that grew 4.7%.

So we are now more than 10,000 customers already using the services. And we already lent 52 million. Okay, it doesn't matter this model as where we stand right now.

So there's what we, we are growing the origination of new contracts, and we are growing also, in the money that we are lending to customers know, what we are trying to do here, apart from lending money is trying to associate this with our portfolio.

Here, I'm talking about devices and accessories, how can I use this platform to leverage the sales of handsets and devices in our own stores, online and offline.

So we started doing that right now just started as an auction for payment of a new device, of course, they need to go through our credit approval, and that we're being conservative, as I said, considering the situation that we face in Brazil in credit. So far, the funds that are raising approval, which are for the moment, we are the only participant.

So we may consider having other participants, but for the moment, we are doing that with our own funds. So that's the situation that we have for people money, it's growing. And we've been trying new segmentations and also a new type of combined value proposition, as I said, together with the sale of the devices.

Going to go the second for the first Okay, second part of the first question. If you don't have any more questions. If you look ventures. And we announced in April 11.

So that the creation, our corporate venture capital fund, here in Brazil, when we have wider that it's very relevant, but very focused in in seed money, okay, so we invested on average 1.5 million, and was in the very seed stage of companies.

And we did that we successful investments mentioned in an audit, the recent ones are deserts in education, Gabriel in insecurity, Olivia in financial tech, [indiscernible] in HR, among others.

And we realize also that apart from the investment that was very limited because it didn't have a defined end, we didn't have the strategy of going in the growth stage that could have an opportunity also to follow some of these investments in the growth stage in the next stage of the development, consider that most of them were very successful.

Also, we realize that most of these companies when they were successful, they were leverage us in people's assets.

So they were connecting to us, we could be also a customer of this company, not only for our own services, or the case of debit and as an HR company, but also blending their services over a value proposition in the case of or other that we are planning to do in the near future.

So getting money from people has two value not only the money by itself, but also being having the access of assets that we'll go over that is our customer base, our building capability and this ramp up our brand. So we decided to do more and go to the next stage that is the growth stage.

So we established essential federal funds, there's going to be over five years 320 million reais, the ticket here will be large higher than ever higher than the one that I told you about while there was about 1.5. Here we're doing about 15 to 20 million tickets per company. We expect to get up to 20% of stake in this company.

So pre money valuation we're considering here between 100 and 200 million reais. The focus will be mainly in the b2c ecosystem. So we're talking about entertainment we're talking about health education, logistic and ecommerce platform, like smart home connectivity, so everything related to the vision that you also presented in our b2c ecosystem.

So if I have answered your questions I will give to David. And I compliment anything in about the other.

Yes, very much. Thank you. .

Hi. So let me let me answer the second one. I mean, you're right, as you say, the financial expenses in the quarter are growing about 60% year over year. And let me give you spend your what are the key returns and then we can talk about what should be the -- I mean, the outlook for the future now.

So the first reason why those costs are going up is because you know, the, the local interest rate has gone up. So if you look the interest rates one year ago, the first quarter last year we acquired a 5g frequency and this of course did And, of course, this has an impact on financial expenses.

When you look to the IFRS 16, which has the depth coming from infrastructure is on a flattish, even though we will increase it slightly 700 million year-over-year. And then the fourth one, the four reasons why last quarter going up is to do with the monetary update of some of the non-financial liabilities that we have in our balance sheet.

Now, particularly when we talk about provisions, and so on, we need to update the provisions every quarter based on interest rate, but these are not cash items. So, because if you look to the evolution of the free cash flow, we are saying that we have a growth of 12%. So having a higher financial expenses doesn't need to be a negative thing.

So, we are investing, we are improving the capital structure of the company, we are bringing an asset that will generate even more value to our shareholders. Now, here we are talking about 5g.

And we are about also we show in the next quarter the acquisition of oil, but at the same time, our free cash flow is going up with a better mix in our balance sheet. So this course will continue going up through the year.

But all in all, we believe that this is I mean this is positive for shareholders and this we are generating value as we are acquiring assets that will bring a higher return..

Very clear. Thank you. Thank you, Chris. Have a great day..

Thank you. Our next question comes from Victor Ricciuti from Credit Suisse..

Good morning, everyone. Thanks for taking my question. I have two from my side, the first one regarding repricing. So as inflation has not decreased yet, what are people's plan around repricing for 2022 and final repricing pure cost stayed more actively this year? Or should it be seen more on their control plan? And the second one is regarding B2B.

So people have been reporting strong growth in his business. And you've stated that they're expected to continue growing in the future. But as B2B has an interesting growth over the margin, how do you see margins going forward? Should it should we see it partially offsetting the benefits from Oi? Thank you. .

Victor this is Christian. B2B, we are very positive about our strategy. As I said before, we have the best channel omni channel. So we have like to have an idea 5000 B2B reps, visiting customers. And we as we stated a long time ago, our strategy here is to be the technology partner of this customers.

So we're going to be on connectivity, although connectivity is still relevant. And you could see that our data revenue has also increased. We are selling much, many more services now.

And here the focus will be naming cloud IoT and cyber actually Telefonica no established three companies that we have here in Brazil as well, one very focused at the tech, one focus on cyber, another one in IoT and the third one in cloud. So the services are going to be part of the value proposition.

Yes, you're right, the margin is lower, but they are the most of them, the capex is almost inexistent. So as we stated before, we should look for operating cash flow, we may give up some margin in EBITA. But in operating cash flow, we're going to contribute a lot to the future of the company.

And our Moreover, we are developing a very strong relationship with this customers. And that will be all may be the sole technology provider. So when we see in our number, almost like 100% growth in cloud, even if you're selling hyper scalars, we're combining that as managed services.

So that's why we have the differentiation relationship and the credibility to be there help the customer not only buying the service but implementing the services in their company. So positive continue with the strategy, happy with the number that we have in the last 12 months. 2.2 billion reais is in digital service for B2B.

Although margins are much lower than the U.S. used for connectivity to capex is also a different story from audio. You'll also want to deploy 5g or fiber. So that was the first one. The second one is repricing you're talking about repricing of all services..

Yes, exactly. What are they will turn around repricing for 2022, and video panel being more active on both repricing or should we seen happening more on control plants..

So we are doing like the inflation repricing in both we're doing with the strategic part of hybrid already this quarter and we're going do more in the maybe between the second and the third quarter. In postpaid we're also doing in the in the second to the third quarter and repricing following the contract that we have. And we're doing also in fiber.

Now we did part of it in the beginning and we're going to do also that along the year. So we are reflecting repricing as inflation is going up. In the prepaid, although our ARPU increase our revenues increase.

We believe there is opportunity of repricing so we need to follow the market and also is expecting competitors to follow this trend of also repricing prepaid upon inflation. I think there's the segment where the market hasn't followed inflation evolution so far..

Very clear. Thank you..

Our next question comes from Marcelo Santos with JPMorgan..

Hi, good morning. Thank you for the question. I think the first the first question would be about the sustainability of the pace of net ads in fiber, we have seen some of your competitors’ claim that the current environment is tough and to attract quality customers, you need to be in a lower number. But you continue to add at a healthy pace.

How do you see this going forward given this macroeconomic environment? And the second question is more on the mobile so we were gaining on prepaid to hybrid migration.

But given this inflationary environment, how do you see this continuing? Is there still further space or your prepaid base already? Pretty small? So are we reaching the limit? Or is there further space. These are two questions? Thank you..

David will give the second and I’ll go to the first. Our prepaid base is not small. No, I wouldn't say that. We have we grow prepaid a base. So we have 334.4 million customers. And actually, we are also receiving customers so I would say that our prepaid basis is very relevant.

And if you consider our mobile customer base, we grew in this quarter we have in year 7.1% 2.2% in prepaid, and 10.6% and postpaid.

Of course, we still have the strategy and I think a very successful strategy of migrate prepaid to postpaid or prepaid to hybrid in this case, and we believe that there's room to continue doing that and we are very happy to be still very attractive as the destination of prepaid customers, because we are growing our customer base.

So we continue doing that, and we're going to continue to do, we also did the migration from prepaid to hybrid, but also attracting customers from pure postpaid. So, as you see, I think also the presentation will show that the net portability of Vivo is growing now is growing much more than it grew in the year before.

So, we multiply like the number that we had in the first quarter of ‘21 by 2.1 times.

So it also shows that we attracted also for customers not only turn our own customer base, but customers coming from the other operators and the postpaid churn also even in this complicated micro economic environment that you said, we still keep post postpaid in 1.2%. So if I will ask myself, you have more questions. I come back to mobile.

In the FTTH we are number one company in the FTTH deployment. So we reached 20.5 million home best. We are in 341 cities we also increased by 1.1 million the number of customers connected with our FTTH services.

So although there is competition of course, there is a macro impact, maybe the other competitors that are giving you the out the overview of the market, they don't have the same footprint that we do, and also the possibility of blend together fiber with mobile and digital services.

So even if the situation the micro is challenging for everyone, we believe we have assets that are difficult to replicate at the moment, especially the composition of our value proposition, the footprint of our channel, that is a 1700 stores the door to door, the ecommerce and the app review.

And also the combination of digital services that we have partnerships of many and the most relevant video what so if you see the numbers of share evolution of share in FTTH market in the last month, you could see although the market didn't grow the way you used to do in the best reviews kept finisher for another operators..

Perfect, very clear. Thank you very much..

Our next question is from Joshua Mills, BNP Paribas. Please proceed..

Hi, guys, thank you for the question, just a couple of my side. The first would just be on the inflation effect.

So if you could, firstly, talk about how the mechanism for putting through inflation linked prices, to your contracts works this time period, then automatic thing? Or do you have to go out and ask them voluntarily to take those services, it sounds like everyone in the market is putting prices up.

So it shouldn't be an issue, but just bear county on that mechanism, which is great.

And then secondly, talking about the impact of inflation on your cost base, you talk about the impact on labor costs this year, how should we expect that to develop into the second half of 2022? And also 2023, given where Brazil inflation is? And when you make the agreements with your workers? Is there any contract term in there already, which directly links payment to inflation? Thank you very much,.

Josh, this is Christian, I will start with the first question. I think the revenue mix that we have is unique here in Brazil, the accuracy of payments that receive from most of our services. So the penetration of postpaid fixed services in people's total revenue is much higher than any other. So we can say that 80% of our revenues are recurrent.

So people paying the bill with a monthly fee. In this case, we have by contract, the right of increase price with inflation, so we are covered in this sense. Of course, there's also handset prices that are always driven not only by inflation, but dollar price exchange rate.

And we've been always giving it in the price point there to sell it though, because we could not absorb this exchange or inflation evolution.

What we don't have one to represent associated with inflation that I've described before is the prepaid revenue that in our case represents less than what all the others are revenues that I described before in prepaid. It depends more in the market dynamics. We believe we should increase price. Price has been very similar in the last years.

And there is opportunity regarding the inflation that is now in its peak to increase prices in this segment as well. Although all the rest by contract, we have the ability to increase and been doing so in the last quarters. If I answer your questions in revenues, I will give it to David to talk a little bit more about cost..

Hi, as I mentioned before, I mean, we have the ability to be able to being also part of a large group, Telefonica to negotiate some of the costs with vendors allowing us to, to have some of them down year over year despite having an inflation in particular talking about the labor cost and personal cost.

Here we are trying to renegotiate every year and this year will be September no unfortunately, we cannot disclose any information, but it's something that we will we will start putting few months to see what will be the impact for the future. No, but we cannot disclose anything at that moment..

So maybe just one very small follow up on energy costs, which quite a few Telcos have talked about as a rising headwinds. How exposed are you there into -- have any hedging mechanisms in place, should energy costs rise in future..

So regarding energy cost, even though I mean there's a pressure on that one here, we have been working over the last few years to be in a company more sustainable, but at the same time to have also some savings, no way.

So, we have already having a high percentage of our energy coming from different alternative sources that bring the unitary cost significantly below what should be the market now. So we are heading here with the local market on different instruments. So we have not been penalized, perhaps shoulder to shoulder market shoulder companies on that one.

Now, even though it's a relevant call for a base, but it's a cost that we are managing to have it below inflation. .

Awesome, thanks very much..

Our next question comes from Freddie Mendes, Bank of America..

Hello, good morning, everyone. And thanks for the call. I have two questions as well. I think the first one is more like a follow up from the last questions about the mobile front. That it's more like a reconciliation as well.

I mean, when I when I look at the numbers, I mean, you increase your base of clients on the postpaid by seven and a half year over year, and mobile search revenue grow for that 6%. And you have a price increase in July to have returns of 8%.

So just I mean, once I look at the net ads, or the post-pay net ads, it looks like they are entering at a very, very low price. I do understand that is upsetting. They usually enter at a very low price, but just want to get a view from you at which level these guys are entering.

Or if in order to get to sell the [indiscernible] bundle, you will eventually give us some price on the post page to get a higher overall yield. There'll be my first question. And also, as a follow up pretty much from this one.

If you keep net as at the same level, we should see mobile services revenue growth, acceleration over the next quarters as you increase price, right. It should be and I know that you don't give a guidance, but that should be the trend as long as you keep them at as at the same level. Thank you..

Hi, Fred, this is Christian, yes, maybe your population is correct or not even trend regarding the additions of new customer, no, they are not entering in a very low price. That's not correct. I think the mix, if you consider postpaid there is a combination of mix that the hybrid is growing faster, and it's contributing to the effect of ARPU.

But it's not that we are lowering price. And also the impact of the convergence is that at the moment affecting the mobile ARPU, although we are very focused in customer ARPU.

And we're going to do more of this and try to give you more clarity on these numbers, because we went to having this very large customer base, trying to sell more customers, so more service to the same customers. So we're going to do that fiber and mobile and digital services. At this moment.

What we could show you is that yes, we had a very strong commercial activity, both prepaid and postpaid in the postpaid to increase migration from prepaid to hybrid. But also we capture a lot of customers from the market, as I said before, to portability went up.

So it's more of a mix, Harbin and postpaid, rather than the entry point being low, and also the price increase, we didn't do all of the price increase that we're expecting, we are following the right timing of the contracts to do price increase.

So there are some price increase, still to be done in hybrid pure possibly this year, that may impact the total revenues, but we are very positive our commercial attractiveness and the ability to capture more customers, and also migrate customers from prepaid to postpaid.

And the previous question they were asking, the base is still very large, and it's getting larger, and giving us the ability to have a lake to be able to migrate more. That's a big question. So we are positive about the future..

Perfect, perfect thanking Christian, a very, very clear if I may just a follow up here. Just try to understand the dynamics. When you have a price increase. Let's say you have a price increase to 50% of your base.

Do you see usually a lot of downgrades of the plan which means that you give them the price increase? Let's say that goes to your base but actually the client it takes a lower ticket plan it doesn't count as a churn.

Is that something that helps? That happens a lot? Are you actually once you have a price increase that the impact of the price increase is much higher than these, let's say downgrade of plants in your interface? Thank you..

Yes. You answered the question. Yes. And Fred, yes, it's higher than downgrade. Are we had auto rate since the beginning is no, not only now, I think we'd be able to manage it better. And but there's some feel, yes. But the impact is more positive than negative. And I think that's the dynamics.

What we've been now trying to do more is how do you increase price and what are you offering so we are going to digital services combination, that is also helpful, because in the past, as was remember what give more data now sometimes you do that, but then we need to plan things out now. So that we are doing upgrades with digital services.

And now you're trying to do also combination with the fixed. So that gives us room to do upgrades of ARPU, ARPU of the customer and not ARPU of the services and keeping the customer much more loyal..

Perfect, typically clear. Thank you very much. .

The question answer session is concluded. Please, Mr. Christian Gebara. There is no questions Gebara? Go ahead..

So thank you, everyone, for joining our call. We are very happy and positive about the good start of 2022. And I'm very enthusiastic about the rest of the year given our strength in the commercial activity and portfolio. And the strategy that we defined some years ago, being placed right now, given this great outcome.

So any other question that you may have? Our team here is totally available to answer that. So thank you once again..

Thank you. This concludes today's Telefonica Brazil first quarter 2022 results conference call. You may disconnect your lines at this time. Have a nice day..