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America Movil SAB de CV (NASDAQ:AMOV)

Q4 2012 Conference Call

February 13, 2013 10:00 am ET

Executives

Daniel Hajj Aboumrad – Chief Executive Officer

Carlos Jose Garcia Moreno Elizondo – Chief Financial and Administrative Officer

Oscar Von Hauske Solís – Chief Fixed Line Operations

Analysts

Alex García – Citibank

Dan Kwiatkowski – UBS Ltd.

Sean Glickenhaus – HSBC Securities USA, Inc.

Mauricio Fernandes – BofA Merril Lynch

Andrew Campbell – Credit Suisse

Alejandro Gallostra – BBVA Latam Research

Sumit Datta – New Street Research

Andrés Medina Mora – GBM Grupo Bursátil Mexicano SAB Casa de Bolsa

Andre Baggio – JPMorgan

Ric Prentiss – Raymond James & Associates, Inc.

Diego Aragão – Morgan Stanley

Operator

Welcome to the América Móvil Fourth Quarter 2012 Conference Call and Webcast. Joining us this morning is Daniel Hajj, Chief Executive Officer; Carlos Garcia Moreno, Chief Financial Officer; Oscar Von Hauske, Chief Operating Officer; and Carlos Robles, Chief Financial Officer of Telmex. My name is Shenera, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Daniel Hajj, Chief Executive Officer. Please proceed sir.

Carlos Garcia Moreno Elizondo

I will be taking the call from the beginning, it’s Carlos Garcia Moreno. Thank you all for participating in the call. We ended the year with 325.7 million accesses lines, 8.7% more than a year before. Our fixed line accesses includes 10.8% year-on-year on the back of PayTV and fixed broadband accesses, while our wireless subscriber base rose 8.2%.

We added 5.6 million wireless subscribers in the fourth quarter. After one-off disconnections of 1.5 million clients taking our net adds for the year to 19.8 million, which is 18% more than the prior year. Of the quarter’s net gains 1.8 million came from Brazil, because we got approximately half of the net additions of the market. 1.2 million from Mexico, and this is after disconnecting in Mexico 1 million. So after disconnecting 1 million, we got 1.2 million net. So total in the market that we obtained was 2.2 million, 753,000 from the U.S., and 409,000 from Colombia, with net additions more than doubling in Chile and the Caribbean.

Our postpaid base increased by 1.4 million clients in the fourth quarter. We added 1.3 million RGUs in the quarter bringing to 6.3 million the net RGUs adds for the year. Whereas financial volatility became more subdued in the fourth quarter, the uncertainty around the euro continued to subside, economic activity faced significant headwinds throughout the world with the recessionary situation in much of Europe appearing set to continue throughout 2013 and with the U.S. economy slowing down sharply. Some Latin American countries resented these trends.

América Móvil revenues reached 198 billion pesos in the quarter and 775 billion pesos in the full year. They were down 1.1% from the year earlier quarter in Mexican peso terms on account of the depreciation of various currencies versus the Mexican peso, particularly the U.S. dollar and the Brazilian real. Mobile data revenues continued to gain share of revenues and have come to represent one third of wireless revenues and 18% of total revenues.

At constant exchange rates service revenues were up 5.2% year-on-year and total revenues 5.8% compared to 6.1% and 6.5% in the third quarter. Service revenue growth improved from the prior quarter in all major regions except Mexico.

As regards of our main business lines, mobile data and PayTV were the drivers of revenue growth, with 33.3% and 20.2% respectively, while fixed line voice posted a 7.2% revenue decline continuing the trend seen over the last several quarters. Mobile voice revenues were down 1.7%, partly on account of the marked economic slowdown observed in several countries in the region particularly in Mexico that took place hand in hand with that of the U.S.

The quarter’s EBITDA totaled 61.7 billion pesos and that of the full year 260.7 billion pesos, with the quarter’s margin declining to 31.1% from 33.5% a year before. The reduction of the margin partly arises from the growth of PayTV and TracFone, that are lower margin businesses, but also reflects the continued migration to smartphones that has entailed somewhat larger subsidies and of course the OpEx effects of covering a large investment plan in place.

In reduction of the consolidated EBITDA margin you are dosing in Mexico and Brazil and there were even larger market declines in the U.S. or it came down 4.6 points and in Ecuador 3.24. So these countries together account for three quarters of our revenues in Mexico, Brazil, Ecuador and the U.S. The lower EBITDA margin was the main factor driving the all of the consolidated margin. The rise in of smartphones and accelerated subscriber growth were de facto in the U.S. and Ecuador where they account fully for the margin reduction. It is important basically to put in prospective, our growth in the U.S. has been very, very fast and in the U.S, the data services, it’s a relatively new part of the business, but it’s already doubled it’s data revenues year-on-year. And we are gaining a lot of share such that data is now accounting for approximately one-third of platforms owned 77% in another one year. So this is a new part of the business. Smartphone sales are becoming hugely important to continue to drive these data revenue growth.

In Mexico, our wireless EBITDA margin was similar to that of the prior year. It came up less than 1% and the difference is fully explained by subscriber acquisition costs. By wireline, we experienced a 6.5 points reduction, most of it’s spread-out throughout the year with Telmex passing on to its clients, the full benefits on the reduction in the connection rates, original benefits in the fifteen plans, while increasing the provision for peso bonds, and to vary network maintenance costs.

In Brazil, half of the margin reduction is explained by the increasing content costs. We registered a comprehensive financing charge of 10.5 billion pesos that included a foreign exchange loss of 4.8 billion pesos mostly resulting from the appreciation of the euro vis-à-vis other currencies. Our investments in Europe are carried at cost and are thus considered non-monetary assets. Whereas there is no mismatch in the currency position assets in Europe are funded with euro-denominated obligations, a cost nonetheless results when the euro appreciates given the non-monetary nature of the said assets and the monetary nature of the liabilities. For the full year financing charges, 19.5 billion pesos, were 35% lower than those observed in 2011, reflecting a swing in the foreign exchange position to a net gain of 7.4 billion pesos.

A net profit of 15.6 billion pesos was obtained in the fourth quarter that was equivalent to 20 peso cents per share and 30 dollar cents per ADR. It brought the net income for the year to 92.1 billion pesos, a figure that surpassed by 11% that of 2011.

Our net debt ended the year at 372 billion pesos, up from 332 billion pesos at the close of 2011. Our net borrowings helped fund the acquisition of ownership interests in various entities, including KPN and Telekom Austria that totaled 84.9 billion pesos. Our cash flow from operations allowed us to pay for capital expenditures of 131 billion pesos and to effect distributions to shareholders in the amount of 32.5 billion pesos.

With that, I would like to open the floor for questions and pass it back to the operator. Thank you all.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alex García with Citibank. Please proceed.

Alex García – Citibank

Good morning, Carlos, Good morning all. Carlos, could you share with us, when do you expect margins to stabilize from these investments in the network, in the expansion of smartphone base. I am sure that you guys believe that all these efforts will be fruitful in the future but, is there a time, where things may change the trend, this will be my first question, Thank you.

Carlos Jose Garcia Moreno Elizondo

Yeah. Thank you, Alex. I’d say that, we had now three different factors, where you have to consider, one of them is smartphone migration, is in part of the initial phase, smartphone migration is going to continue for a long time and the (inaudible) here is you know how we are going to be dealing with subsidy. As you see today data services are the big driver of revenue growth for América Móvil. And we have the costs that have been in terms of our subsidy describing relatively minimal because today data revenue growth has been driven only by that's more fraction of the postpaid that already have impact of smartphone. Just to give you an idea of reference, today not much more than 50%, 59% or so of postpaids, half are smartphones. That's where we are today. So that's for América Móvil as a whole, and this would be kind of weighted by the population by the subscribers in different countries, but what we have today is, roughly 50%, 55%, 59% of postpaid clients already smartphones. So we have to continue to migrate the other postpaid clients and at some point, we really are going to get to prepaid, but in prepaid today, we are not providing any subsidy.

I'll put up something of what Carlos is saying in terms of that subsidies, it’s very difficult to say where they are going to be because it’s all the subsidies are going to depend on how competitive is the market. So it will then depend a lot on the competitiveness of each market than which is going to be that subsidy on those as smartphones and so markets are more competitiveness and other markets are less competitiveness and that depends on the subsidy. Other thing that it’s very important is on the advertised – the networks that we’re putting. We are investing a lot and I think all those investments are going to end up giving us good profitability in the future and as Carlos was saying, the data has been –wireless data has been very important. One of our big drivers and we need to still invest in all these type of infrastructure. And the third one very important is that all overall what’s América Móvil, the structure of América Móvil.

We are reducing a little bit of our revenues on the voice. Voice has a big margin and there we’re growing a lot our revenues in TV in value-added services, in data and at this stage, they have a less margin that what we have on voice and I think as we were going to grow this type of services, I think EBITDA can control a little bit. But I think those are the main three drivers for EBITDA are the networks, are the structure of América Móvil and the subsidies. Other team on the structure on América Móvil is TracFone. TracFone even that we have a quarter that doesn’t look very good in terms of EBITDA, the year as Carlos was saying it was better, the EBITDA was better on last year. So accumulated EBITDA was I think around 10% and this type of companies are more or less what we think we can have on margins now.

Alex García – Citibank

Okay, okay now very clear. And the second question if possible, the topic that has been I mean circulating a lot is. Has AMX decided what a plans to do with the KPN capital increase in Europe? Is there anything you could share with us a timetable, whatever you could share with us will be welcome. And thank you for the answers.

Carlos Garcia Moreno Elizondo

As you point out this is something that has been from the table (inaudible) by the company that is intending to work it would more on the recapitalization effort. At present starting what really the company have said in terms of its imbursement and so on. And we will be coming out with a public statement in terms of how we view the position, we haven’t yet to the final solution, but we can tell you that we are going to have something by the beginning of next week.

Alex García – Citibank

Okay, great. Great, thanks for the answers.

Daniel Hajj Aboumrad

Thank you.

Carlos Garcia Moreno Elizondo

Thank you.

Operator

Your next question comes from the line of Dan Kwiatkowski with UBS. Please proceed.

Dan Kwiatkowski – UBS Ltd.

Hi. I got two questions. One is on what you expect to spend on CapEx in 2013, and mournfully what you expect to do with your free cash flow aside from the KPN issue, whether you reduced debt, whether you distribute more to shareholders than you did in 2012? That’s the first question.

Daniel Hajj Aboumrad

Well, in terms of CapEx I think we’re going to invest more or less what we invest last year. It’s going to be around $10 billion. It’s our budget. It could be a little bit more, a little bit less. But it’s more or less what we’ve been doing best. And in terms of the free cash flow, as Carlos is saying, on the KPN issue we’re going to decide what we’re going to do. We’re still starting what we’re going to do and our position, we’re going to give our position in a few days. So that’s more or less. The rest in the free cash flow where we’re going to use it as a share buybacks and dividends that the way we’re using last year and the years before depending on the cash flow, depending on our position. Acquisitions that maybe we can do this year. So it’s going to depend a lot know.

Dan Kwiatkowski – UBS Ltd.

Do you see any potential acquisitions on the horizon?

Daniel Hajj Aboumrad

No. We haven’t had any possible acquisition at this time.

Dan Kwiatkowski – UBS Ltd.

Okay. The second question is on Brazilian mobile, over the last two to three years, you’ve consistently lost share of revenues in the mobile business, and obviously that’s impacted your margins as well. Can you give us a sense of what the operating plan is for Brazilian mobile in particular and where you see margins delivering at?

Daniel Hajj Aboumrad

Let me explain to you, how I see Brazil and what we’re doing in Brazil. It was not for the last three years, may be for the last two years we have been decreasing a little bit of our EBITDA and some a little bit of our market share. What was happening? We decide on, the market was a very, very competitive. We saw very competitive market, and at the beginning of last year and a year before, we don’t want to get in a very tough competition. What we decide on [August] that we are going to reduce our prices, that we’re going to be much more competitive in the mobile side and it’s what we do on [August], what happen on [August] we can see that net adds are growing, that postpaid net adds assets are starting to grow.

Both that keeps us a little bit on our base, okay. We give much better prices to all our base, and that means that we have a reduction on revenue. It’s more or less what has happening at the last year, so at the beginning we decide not to reduce, not to resell competitive, what we decide in August to do and to be competitive. Our revenue per minute reduced 28% last year. So we think we are at this stage competitive. I feel that our gross adds are starting to come. We are gaining market share in prepaid and we’re starting to grow much better in postpaid. So I think we can see a much better year 2013 in Brazil in terms of – in the mobile side. And well, I don’t know, how is going to be the competition this year. But at this stage we feel much more comfortable with the operations and still a lot to do both, I feel that we’re making the right decisions in Brazil.

Dan Kwiatkowski – UBS Ltd.

Okay. Thanks very much.

Operator

Your next question comes from the line of Richard Dineen with HSBC. Please proceed.

Sean Glickenhaus – HSBC Securities USA, Inc.

Good morning. Hi, this is actually Sean Glickenhaus. Speaking of a lot to do in Brazil. Could you provide an update on what Anatel’s thoughts are in mobile network quality? We keep reading a lot of differing viewpoints on that. And furthermore, perhaps an update on the integration between fixed mobile. I know it’s been in the books for a long time, but my understanding was that it had taken longer than expected? Thank you.

Daniel Hajj Aboumrad

Well, I think in – there is a lot on the fourth quarter of last year on Anatel was the quality of the networks. So it has I slightly say, it has the growth on minutes and the competitiveness of the market makes that a lot and some of the networks get contested and it varies that a lot to Anatel, so Anatel decide to review that. I think I can talk about for América Móvil. And Claro I think we are making a good improvements on quality, and I think that even with that amount of news that are coming more, we feel that we have a much better network than what we have in last year. And I think Anatel is going to be really looking at the quality of the networks. We’re not going to let everybody to what they want to do, if they’re going to give bad quality to their subscribers. So I think it’s were Anatel is, and I think it’s reasonable that they will be very careful on the quality and the service for the customers.

On the fixed and mobile, I think we’re starting to see some promotions between fixed and mobile. We are doing some promotions between Net, Embratel and Claro. And still you need to do a lot on [CISP IT]. It’s very important to have very good technology or IT systems. BroadTel we’re working to do all those kind of promotions. We’re starting to see those promotions.

Sean Glickenhaus – HSBC Securities USA, Inc.

Great. Thank you very much.

Operator

Your next question comes from the line of Mauricio Fernandes with Bank of America. Please proceed.

Mauricio Fernandes – BofA Merril Lynch

Thank you. Good morning Carlos, Daniel. Good morning everyone. I’ve got a question on the – I think the strategy for increasing smartphone penetration, it makes a lot of sense. The benefit of wireless data at some point. We’ve been seeing margins for different reasons partially from PayTV, partially from TracFone. So businesses are growing faster with lower margins contributing to drag down the consolidated margin for América Móvil.

So I was wondering if Carlos [and Dan], if you could share with us some key metrics. You would look at to how long you, not just how long, but how deep you want to take this strategy into, how low the margins can go, what kind of payback you’re looking for on those smartphone subsidies, what kind of key metrics are you looking at to balance the right profitability with looking at the long-term strategy? Thank you.

Daniel Hajj Aboumrad

Yeah. Moreno, let me take that first part. I think we were talking a little while ago about the key factors that are playing on the margins, part of it has been smartphone migration, which is postpaid, part of it is what we calculate is spillover effect on (inaudible) of the DVR CapEx plan that we have currently in place, part of it is in the consolidated América Móvil. Obviously there’s certain business lines that have structurally lower margins and that means that greater margin from this (inaudible). So the margin should be trending down as the other businesses get seasonal.

But if you look at how much we have had in revenues, in the additional revenues coming from data services, say, over the last year, couple of years compared to the extra services that have been provided on devices, those are really minimal and are really not meaningful. And as Moreno was pointing out, the subsidies down the road will a function partly of the competitive situation in different markets, partly a perfection of the competitive situation in the market for smartphones itself. And if you think of it, the prices of smartphones have already fallen significantly over the last couple of years and we are likely going to continue to fall significantly over the next several years. We don’t believe that we can extrapolate from the margins that we have paid two years ago. (inaudible) be paid two years down the road or next year from a unit perspective.

So you are going to have a lot of people migrating, but we are seeing the expansion of the [revolution]. You can run the numbers yourself, but we can, we will be glad to have you (inaudible) if you want. The amount of additional revenues made possible plus our investments on the one-time, but trading the subsidies that we have channeled in our model. So we think that is, and we have traded for a long time, that is the leading long-term story of América Móvil. We believe in blended data.

We went to extreme of going to very transformational or transaction by buying fixed line assets in Mexico and South America. We believe that having this fixed line platform was of the essence we’re to provide good mobile data down the road, broadband data. And we think that the pitch of this business and with (inaudible) in terms of modulation of a few customers, because we only have half of our reported base, which means roughly total 11.7% or so of the total slides of América Móvil today using smartphones, only EBITDA, we have been able to drive a very significant growth in revenue. So this is the storage molecule and I’ll share with you our numbers, but basically we really think it’s very clear, the investment case.

Mauricio Fernandes – BofA Merril Lynch

Okay. I understand.

Daniel Hajj Aboumrad

And another point that I want to add, Mauricio, also is that in some countries where it’s having some slowdown on the economy. So that also is not going to be forever. Let’s see. We have been seeing that some part of our revenues are reducing and they are going to come when things get better. So we cannot stop doing our strategy on data, mobile data, TV because all of these products at the end of the day are going to have very good margins and we are going to have very good customers if we get that on time and in the right moment.

Carlos García Moreno Elizondo

Rather I think it’s important to note two things. In Brazil, obviously there was a very short slowdown in the economy in the first half of last year. We can see that both on the fixed line side and on the mobile side revenues have improved, okay. And in fixed line the bottom was in the second quarter. And now year-on-year we have positive revenue growth on the fixed line platform, and on both. I’m talking about both. And on mobile, I think the important quarter correlative was in the third quarter and we continue to evidence this trending offer.

In Mexico, however, as Daniel pointed out, we are facing an unexpected slowdown of the economy. It’s as unexpected now in Mexico, I think, was than in Brazil with a few reported. These have been now become a bit more evident by the (inaudible) in the U.S. As you know GDP in this last quarter in the U.S. actually declined and that factored in construction of capital spending and some corrections of inventory. Now that’s kind of an impact to Mexico. And if you look at what has been happening in Mexico, the government, the central bank has actually been more bullish.

They have been accelerating the disruption of interest rate and they are basically trying to manage the long-term in the U.S. But (inaudible) event, at least the event will be hosted and followed even more closely that the economy was already experiencing a downturn towards the end of last week and that is ultimately something that in the short-term has an impact on margins. And this type of strategy that we are taking, América Móvil is taking when it’s slowdown on economy it was a little bit more than all the other ones, but when things are better, I think, helps you more when things, that all the other companies. So we decided to do that and I think it’s the right decision that came out this year.

Mauricio Fernandes – BofA Merril Lynch

Okay. I appreciate that response, Carlos and Daniel.

Carlos García Moreno Elizondo

Thank you.

Daniel Hajj Aboumrad

Thank you, Mauricio.

Operator

Your next question comes from the line of Andrew Campbell with Credit Suisse. Please proceed.

Andrew Campbell – Credit Suisse

Yes. Thank you. I have two questions. The first is regarding asymmetric regulations and in particular in Columbia where you’ve seen the leveling of the off-net and on-net calls. Can you explain to us a little bit what impact that’s had on your business and how you’ve dealt with that commercially? And then the second question that I have is regarding the acquisition made in Mexico of the CA Asset and this is the median advertising business. If you could explain how that fits into the overall strategy of the company. Thank you.

Daniel Hajj Aboumrad

In Columbia, the asymmetric regulation was, [we’ll] not agree on that because we think that we are not making anything in the market that allow us to do asymmetric regulation, but well at the end of the day the regulator decides. [To do what, I think], came in two things. First that we have to pay for two years more interconnection to our competitors than what they pay us, okay. So that’s the first thing that they came. So for two years we are going to pay more interconnection than what they are going to pay us. They decide to reduce it and for us and not for them. So we paid them more than what they pay us for two years.

The second is that we are not allowed to differentiate on-net, off-net calls that price on on-net, off-net calls. I’m sorry the first, I forgot to tell you the first, in the first asymmetric thing that is the interconnection. They said that the competition has to pass it through the market that they shouldn’t stay with that amount of money. So we have to pass it through the market or make those investments in the rural area. So it’s what their regulation said. And the second is that we are not allowed to do off-net, on-net calls at different price. It’s more or less what is the asymmetric regulation in Columbia and we are deciding which are going to be our plan and how we’re going to deal with that, but it’s more or less what we have there. So that’s the first question.

The second question all of being important is that the MTRs in Columbia, the lowest Latin America, so Mexico and Columbia, one of the lowest interconnection rates in Latin America. So it’s only something that you should know. And on what we do with the company that we would buy from CA. I think a lot on the strategy on América Móvil because this company has a lot of assets, where you can advertise your products.

And in América Móvil, we have a lot of assets that we need to go out and sell in the market. We have TV channels in Columbia, while we have a lot of assets there. And this company I think is going to help us to organize and sell all our assets that we have in América Móvil. So I think that’s more or less the strategy that we have there. This company has a very good structure and advertising in Mexico and we’re going to do all these type of advertising also in all Latin America. So, that’s why, that’s the reason why we can sell a lot of advertising in Móvil, we can sell in channels of TV. We can sell a lot of things and this company and this people is going to help us to do that. So that’s really the reason on the strategy on buying that company.

Andrew Campbell – Credit Suisse

Okay, thank you.

Operator

Your next question comes from the line of Alejandro Gallostra with BBVA. Please proceed.

Alejandro Gallostra – BBVA Latam Research

Hi, good morning Daniela and Carlos. Let me ask you something which basically be willing to significantly increase the amount of handset subsidies, some measure to increase penetration of the smartphones in order to increase data consumption?

Unidentified Company Representative

The question here is how, of course, we don’t want to put any subsidies on the smartphones, but as I told you that subsidies they’re going to be willing will led us to the competition in the market. So as we can subsidize less, of course, we’re going to do a lot and we’re working a lot on that and in some places we have a much better quality of network. We have more coverage. So that will allow us to decide what’s going to be our subsidy, but we (inaudible) but in the other side as we just talk as we think that moving to the smartphones and bring more revenues on data and everything, it’s very important. So, we’re willing in will on how we can subsidize less, price of the smartphones are coming down fast, so maybe the subsidy is coming less and less everyday. But in the other side, what we cannot stop is to bring customers and good customers to use all our data platforms. So that’s why we are willing and that’s our job that we need to do day by day and country by country, you know.

Alejandro Gallostra – BBVA Latam Research

But basically you correct me if I’m wrong, but according to my numbers, the amount of subsidies has increased approximately 13% compared to the amount of subsidies to the amount that you have used to subsidize in the past six to eight quarters. It is a new amount of subsidy that we should be seeing going forward. It is what we are seeing according to competition.

Unidentified Company Representative

Remember that it’s Christmas and in Christmas seasonality, so people decide to buy more handsets and to change more handset. All those things that very important are new handsets that are coming in the market, so new handsets also decide and make people change and the pricing and the subsidy. So there is a lot. So the question is, are you, we’re willing to have these types of subsidies? No, we are not willing to have, but the decision is that we are willing to move our subscribers to smartphones and to use more data. That’s where we are. And we are going to do it at the best way for América Móvil trying to subsidize the...

Unidentified Company Representative

I think one thing that is keenly if you look at the numbers for Mexico, it seems number portability was implemented and this is five and a half years ago. Then it had gained 2 million clients. Of these 2 million clients over five-years, roughly 900,000 in last year. And they are all coming basically because of our ability to provide good coverage and very good data services. And not only in Mexico, you could see I think all overall, I cannot tell you in all the countries, I don’t have the numbers here, but almost in every country we have been gaining market share in number portability (inaudible) here in all the countries we’re gaining in number portability. That means only one thing that we have the best networks that we have the best coverage and we have the best services. And also we having a very good offer, you know. So that that’s really what is happening when you do good investments on good networks, you know.

Alejandro Gallostra – BBVA Latam Research

All right, thank you very much. And my second question is regarding the accounting policy for the impairment tests. I mean how is the policy through the current investments in KPN and Telekom Austria?

Unidentified Company Representative

(Inaudible) I think they are under the equity method and their accountability. We can review with you more closely what I don’t think we need to make an impairment.

Alejandro Gallostra – BBVA Latam Research

All right, thank you very much.

Unidentified Company Representative

Thank you.

Operator

You next question comes from the line of Sumit Datta with New Street Research. Please proceed.

Sumit Datta – New Street Research

Hi, I’ve got a question firstly on Mexican wireless please. You talked a little bit about the macro slowdown, which impacted the numbers in Q4. But then in terms of the overall slow down we saw in the revenue growth at Telcel. How much perhaps is coming from macro and how much is incremental competitive pressure in the Mexican market? May be you could talk a little bit more about some of those specifics, competitive dynamics we’ve seen in Q4 in that market please? And that…

Unidentified Company Representative

Let me...

Sumit Datta – New Street Research

Yeah, sorry.

Unidentified Company Representative

Let me answer here these questions. I don’t think we saw any difference in the fourth quarter than what we had been seen all the year. I think we have a very competitive market in Mexico. We have been competing very strong and we don’t see any difference. I think, I mean, the Carlos explained that, so I think we are seeing a slowdown on the economy, we’re seeing a slowdowns in the revenues, in the mobile voice revenues. And we have the numbers on January and still we think that this slowdown is coming. So we’re still thinking and still think some reductions there. So I think it’s nothing changed on the dynamics in the competition, what I think, what it’s changing is the economic situation in Mexico, you know.

Sumit Datta – New Street Research

Okay, thank you. It’s quite clear. And as a follow-up please, you talked a bit about regulatory changes in Columbia. What is your sense for the year ahead in Mexico’s to potential changes to either the termination rate regime and did the prospect of asymmetric regulation there. Have you got any outlook you can provide us with, please. Thank you

Daniel Hajj Aboumrad

I really don’t know where we’re still, a lot of people talking about a lot of things. There is going to be a new telecommunications low. We don’t know a lot on what is coming, and I hope that all this new law on telecommunications and older things that we’re related to would make and will create more investments and to grow their telecommunication businesses. I think it’s what we really need in Mexico and what we really need is to have more investments and Mexico needs to have much more investments than what they have today. So I hope that these decisions that they are going to take would be close related to make more investments and to develop more of the telecommunication sector. Specifically I don’t have anything on that.

Sumit Datta – New Street Research

And then the timing on the Telecom slot, do you have any sense is to when that might happen?

Daniel Hajj Aboumrad

No, I don’t know. They said that it’s going to be in the first six months of the year. So it’s what I’m hearing, but I really don’t know more from that now.

Sumit Datta – New Street Research

Okay. Thank you very much.

Daniel Hajj Aboumrad

Thank you.

Operator

Your next question comes from the line of Andrés Medina Mora with GBM. Please proceed.

Andrés Medina Mora – GBM Grupo Bursátil Mexicano SAB Casa de Bolsa

Thank you. I would just like to follow-up on a few things. First, where do you see your margins stabilizing? In Mexico, you mentioned there were some special events for this quarter. So where do you see them normalizing for the rest of the year and what percentage do you expect data to represent by the end of the following year? Thank you.

Carlos Garcia Moreno Elizondo

We don’t talk about specific margins, Andrés. So I think gross margin would be partly a function of where the economy would be, but we’re not seeing any extraordinary things. Certainly one we think that we want to drag last year was the (inaudible) of revenues from benefit from they are going to translate by Telmex to explain there was a (inaudible) that was affecting Telmex on last year. That’s not going to be any furthermore. I think we have had an increase in OpEx of Telmex that has to do with the Internet plan, allow that cash to do with the converting corporate lines into power Optik lines. And that’s dividend are so good and that was an important new element last year. I think we’re going to continue more that in this year. So we’re not going to tell (inaudible). So I think we’re not willing to look at any structural gains in the – and we currently talk to this. It’s basically going to be the economy. So far I can tell you that first few days of this year, the Mexican economy have said to be weak.

Andrés Medina Mora – GBM Grupo Bursátil Mexicano SAB Casa de Bolsa

Okay. Hello.

Operator

Your next question comes from the line of Andre Baggio with JPMorgan. Please proceed.

Andre Baggio – JPMorgan

Hi, Carlos. Two questions, one relates to data and CapEx. With the ongoing investments on data, do you think that it is possible to have CapEx as in presence of revenue, going down, going forward or do you think it’s will reach a level that should be more or less sustainable going forward?

Carlos Garcia Moreno Elizondo

The CapEx to sales [haven’t peaked] in 2011. It’s coming down and will continue to come down. It should be probably around the 15%, 14% of revenues and it should continue to trends over.

Andre Baggio – JPMorgan

Okay. And sorry, and the second question is that, with regards to the Mexican propose change or what’s is about to change or I just have a very well that, I think that’s Mexican should have a more investments, but what we have heard so far in the news, maybe coming from (inaudible) that’s the regulators wants more competition. Do you think that’s, is there a space to have more competition and have more investments at the same time?

Daniel Hajj Aboumrad

Yeah. Of course, depending what you mean about competition, we have enough competitors in Mexico, if there is other one who is coming, I don’t think it’s fair, but what we need is that the competition makes the investments okay, because what they want is that, you have more competition, but they use your networks, it’s that what they want on the Telmex side. So, what we really want is, really more competition, more competition not only on the market, more competition on investments, on networks, on (inaudible) on everything. So, it’s what that we really, I think would be good in Mexico, not more competition where nobody invest, and you have to give your network at some price and then you don’t gain anything know.

So the only thing that you gain is you moved strong customers to other networks, but you don’t do nothing know, it’s not the investments. What these set or needs in Mexico, I mean all the world, its investments look how much does, but I feel happy in the investment, and look how much that Mexico has in investments, Brazil is really having big investments in of all the companies there and Mexico not a lot of investments for the other companies now.

Carlos Garcia Moreno Elizondo

In the sense Andrea I mean it is (inaudible), but you see some changes in Europe or the European Union, the European commission. They are very important because beside what they have come to realize is that if you want to get to your objectives in terms of broadband coverage and broadband speech and so on. That requires investment and that’s where you need to support a system and environment that is confusing to this investment that’s – the change in Europe that took place I think in July of last year. It’s hugely important, because we basically goes to show that (inaudible), even in Europe have become aware of the importance of the investments to be able to [build the] infrastructure by the company.

Andre Baggio – JPMorgan

Okay, (inaudible).

Carlos Garcia Moreno Elizondo

What you need is more broadband, everybody is looking for more broadband. All the governments are looking for who everybody has broadband in the world. So what you need to do that is investments know. Even if it’s in peaks or in wireless or in the LTE or in – it’s investments.

Andre Baggio – JPMorgan

Okay. Thanks a lot Carlos.

Carlos Garcia Moreno Elizondo

Thank you.

Operator

Your next question comes from the line of Ric Prentiss with Raymond James. Please proceed.

Ric Prentiss – Raymond James & Associates, Inc.

Thanks, good morning. Two questions, speaking of investment, several of the operators in Latin America have started selling their towers. Telefonica and Nextel has discussions, Millicom. What do you think about selling your towers and is it different in Mexico versus some of your other markets?

Daniel Hajj Aboumrad

I think our strategy is not selling the towers, I think to sell the towers is to get expensive loan, because at the end of the day you sell, and then they rent it to you. So I think companies are selling the towers because they need money for investments. América Móvil is not in that way, so I don’t think as if you saw as good invest you are not seeing a good investment from selling the towers. It’s moving, they give you the money, but then you pay a rent on that and it doesn’t make any sense for us.

Oscar Von Hauske

(Inaudible) start review. This is not something you do on this, either you do not have access to market or somehow you need to reduce the upper end levels (inaudible) in the market. Very strong quarter we have in América Móvil. So we do not anticipate, to the extent that we do have access to market and to the extent that we don’t have anything that we need to – in order, we did not to want to show to you in terms of our leverage. To that extent, we do not need consider (inaudible).

Ric Prentiss – Raymond James & Associates, Inc.

Sure a company as long as you doesn’t need to. What about collocating on other towers as you’re trying and increase your broadband, increase your footprint? Does it make sense to rent space and set up building new towers?

Daniel Hajj Aboumrad

No, no. We are open to collocate and we are collocating in a lot of towers. So it’s not new. We have been doing that for a longtime. So we have our own towers both in the other where it’s difficult or doesn’t make sense for us to, or very expensive then we collocate or we [do] the ones or we’ve companies that to do that. So of course we are open to do that.

Ric Prentiss – Raymond James & Associates, Inc.

Makes sense. And second question is, in the United States, T-Mobile USA has been talking a lot about changing the subsidy model to either, call it, installment or renting the phone to reduce the amount of upfront cost, particularly for postpaid customers. What are your thoughts about that model, first in the U.S., and does it make sense to consider it in your markets in Latin America?

Daniel Hajj Aboumrad

Yeah, I think we need to be open to see all new ways to (inaudible) smartphone and try to subsidize that to our customers. So I don’t know exactly the model of T-Mobile, but in some places we are trying to do those things instead of subsidy. We subsidize with them. They pay on installments. So there is a lot of study that we are doing there.

Ric Prentiss – Raymond James & Associates, Inc.

So watching it for now, but maybe react to it in the future?

Daniel Hajj Aboumrad

Yeah, yeah. Of course, of course. Of course.

Ric Prentiss – Raymond James & Associates, Inc.

Great. Thank you.

Daniel Hajj Aboumrad

All right. Thank you, Prentiss.

Operator

Ladies and gentlemen, due to time constraints we have time for one more question. And your last question comes from the line of Diego Aragão with Morgan Stanley. Please proceed.

Diego Aragão – Morgan Stanley

Hi. Good morning, all. So my first question is regarding Brazil. Your margins fell to new lows and you have been saying that margins are being heated by the growth of PayTV and off-network investments, but what we want to know is, are you prepared to put, like, are you sticking to ground and tell us when do you think we should expect margins, start expanding on a year-on-year base in Brazil? Thanks.

Daniel Hajj Aboumrad

We’re not saying only that PayTV and the networks are there. What I explained also is that we decided to take a decision on (inaudible) that we’re going to reduce their prices to be more competitive in Brazil and that help us on reducing the churn and being more on track on our net adds there in the fourth quarter. You could see that in fourth quarter we grow some postpaid, we grow some prepaid and it’s where we are. So PayTV represents 24% of our revenues in Brazil and the year before represents 20%. So PayTV is growing, we have less margin.

Other thing also is smartphones. The smartphones also are doing that, but I’m feeling comfortable on our strategy in Brazil. I have being saying that and I think we are on the right direction. It’s not going to move from one side to the other one in one month, but I think we are on track. We are growing. We have very good postpaid customers. We’re growing in prepaid and that one give us a better revenue in the future.

Diego Aragão – Morgan Stanley

Okay. Thanks. And you (inaudible) I’ve second question.

Daniel Hajj Aboumrad

Remember one more thing. It’s interconnection, right every year are coming down. So also are heaping also the interconnection rate. So while you need to do that, but in our view I think the fourth quarter, you could see, much more, better customers in Claro brand segment.

Diego Aragão – Morgan Stanley

Okay.

Daniel Hajj Aboumrad

In PayTV we’re gaining a lot, we’re gaining maybe 50% of the apps in the market. So we are doing very well. And in Embratel, well in Embratel the long distance are reducing a lot and long distance are moving to local voice. But all the corporate customers were growing very good and we are doing maybe in Net and in Embratel, okay.

Diego Aragão – Morgan Stanley

Okay. Thanks. And just a second question, a follow-up actually on the CapEx, specifically for Brazil and Mexico. Should we expect CapEx increase on those countries?

Daniel Hajj Aboumrad

No. No, I think it’s going to be more or less what we have last year. I don’t see a big difference in any country that we’re investing more on some and less in the other one. So I think the 10 billion is going to be more or less divided in, like last year.

Diego Aragão – Morgan Stanley

Okay. Thanks.

Daniel Hajj Aboumrad

Thank you very much. Thank you everybody for being…

Operator

Ladies and gentlemen, this concludes the Q&A session for today. I would now like to turn the call back over to Mr. Daniel Hajj for any closing remarks.

Daniel Hajj Aboumrad

Well, I just want to thank for the call. And thanks everybody for their questions. Thank you very much.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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