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Telefonos de Mexico, S.A.B. de C.V. (NYSE:TMX)

Q3 2007 Earnings Call

October 23, 2007 10:00 pm ET

Executives

Rui Echavarra - IR Officer

Adolfo Cerezo - CFO

Analysts

Andrew Campbell - Credit Suisse

Vera Rossi - Morgan Stanley

Miguel Garcia - Deutsche Bank

Patrick Grenham - Citigroup

StanleyMartinez -Legal and General Investments

Rizwan Ali - Deutsche Bank

Henry Cobbe - Nevsky Capital

Operator

Good day, ladies and gentlemen,and welcome to the Third Quarter 2007 Telefonos de Mexico Earnings Call. Myname is Alicia, and I'll be your operator for today. At this time, allparticipants are in a listen-only mode. We will conduct a question-and-answersession towards the end of this conference. (Operator Instructions). As areminder this conference is being recorded for replay purposes.

I would now like to introduce Mr.Rui Echavarra, Investor Relations Officer, and Mr. Adolfo Cerezo, ChiefFinancial Officer. Mr. Echavarra, you may begin.

Rui Echavarra

Thank you. Good morning, and thankyou for joining us on this conference call to discuss our third quarterresults. As is our practice, our prepared remarks are supported by slides onour website. If you have not logged in, please click on www.TELMEX.com/investors.

We will begin with ourforward-looking statements. During the course of this conference call and it’squestion-and-answer session, we may make statements that constituteprojections, expectations, beliefs and similar forward-looking statements.TELMEX's actual results could differ materially from results anticipated orprojected in any such forward-looking statements.

Additional detailed informationconcerning important factors that could affect the company's performance isreadily available in TELMEX's Form 20-F and other filings with the Securitiesand Exchange Commission. These documents are available on both the SEC's andTELMEX's website.

Now, I will turn the call over toour CFO, Adolfo Cerezo.

Adolfo Cerezo

Thank you, Rui.Good morning, everyone. At the end of the third quarter TELMEX had 18.157million lines in service. That represents 21% of Mexico's telecommunications marketof fixed, mobile and voice services including those also by the cablecompanies. 9.8 million of our lines are in areas where there is competition.Our cable companies have market presence. Those 9.8 million lines represent 46%of the fixed voice services market in Mexico. The remaining 8.3 millionTELMEX lines which account for 39% of the fixed voice services market are inareas where our competitors do not choose to operate.

In this quarter,these customers generated revenues of 5.8 billion Pesos and an operating lossof 708 million Pesos. We have recognized that these areas, that do not attractcompetitors, are different from other market segments. Even so, TELMEX respectsthese customers, as part of our commitment to serving all of Mexico.

Therefore, towork effectively with the particular characteristics of these market segments,we have created the non-served communities by competition business unit, which willoperate and report independently within TELMEX with the objective of meetingtheir needs in an efficient manner.

We continue tomake computers available for sales in our TELMEX stores. We offer financing forup to three years and customers can choose their loan plans, starting atmonthly payments of 183 Pesos without Value Added Tax. Additionally, customerswho sign up for our internet service receive a 20% discount on their computerpayments.

These efforts contributeto growth in broadband services, recognizing that low computer penetration inthe country is one of the main obstacles to growth in that market. These plansare a major reason that we have sold more than 240,000 computers in our TELMEXstores throughout this year.

In the thirdquarter, we added 296,000 broadband Infinitum ADSL accounts in Mexico, bringingthe total to approximately 2.7 million services. Of the total of 3.1 millioninternet users, 85% are broadband Infinitum users. In Mexico now,close to 13% of homes have access to broadband services. There is still a lot ofroom for growth in that market. But our efforts to expand broadband usage arehaving a positive impact. The pace of broadband growth in Mexico is among the highest of allcountries that are members of the OECD, according to it's Communication Outlook2007 Report.

In the quarter, we launched a newservice package that we are calling Todo México sin límites or all Mexicowithout limits. For a fixed monthly fee of 869 Pesos without value added tax, customersget fixed line rent, unlimited local calls and domestic long distance minutes,as well as access to an Infinitum account and digital services. The new packagecontinues our emphasis on matching service we choose with customer preferences.Packages also give us more predictable revenue strength. So this is anotherwin-win situation in how TELMEX works with customers.

Here is another example. Nineyears ago, Mexicohad 2200 Local Service Areas, that number has dropped to 397. Each LocalService Area now averages 5000 square kilometers where more than 260,000inhabitants are served. Those statistics compare favorably with Local ServiceArea figures in other countries.

Even so, we are taking a novelstep to improve the Local Service Areas arrangement for our customers. On the [ournew] program announced this month, customers can take advantage of our domesticlong distance price per minute of 0.50 Mexican cents, in 174 neighboringcities. This initiative reduces the long distance cost for our customers approximately58% in these cities.

We have been following theprogress of the Convergence program in Mexico. In these conversations we [getinvestments], so let me bring you up to date. The bases for the convergence ofnetworks and related requirements was established on the October 3, 2006 Acuerdode Convergencia or Convergence Agreement, as part of achieving interconnectionand interoperability of networks.

To-date, TELMEX has signed 16 interconnectionagreements, with different cable companies. We also have carried outinvestments and modifications in our telecommunications network in a timelymanner to meet the requirements.

On the other hand, the objectivesestablished by the Federal Government regarding Competition, Convergence andCoverage are desirable for the rapid development of telecommunications, andwill surely increase investments and penetration of telecommunications services.That will bring broader service offering and improving prices for consumers in Mexico.The achievement of these objectives will reduce the significant lag in offeringintegrated services, coverage and penetration of data and video in Mexico. Thenews release that we issued yesterday afternoon provides details of TELMEXperformance in the third quarter.

We just spent most of our timethis morning on how the telephone market in Mexicois changing and in our operations in Latin America.As I described earlier TELMEX is a company that understands each market andmakes the necessary adjustments to succeed, and those markets change. Our growthdrivers now are data, mostly service packages and international operations.

At the same time we aresuccessfully managing our business in the maturing market in Mexico, all thewhile maintaining our commitment to advance our country's telecommunicationsinfrastructure. The many challenging dynamics of the business were evident inthe third quarter results. I will discuss our operations in Latin American [multi-trade]in a moment. But let met start with another view of our business in Mexico withparticular emphasis on broadband.

The keys to market leadership areour network capabilities and the value our services provide to customers,particularly in the residential and small business market segments. Customersare attracted to multi-service packages. Customers like their value and webenefit from the predictable and recurring revenue stream.

At the end of September, we hadcustomers participating in more than 3 million telecommunications packages. Thatis 21% more than a year ago. The revenues generated by packages have increased42% from the year earlier level.

As I mentioned, our Infinitumbroadband offer continues to be a major attraction for customers. They haveparticipated in the survey directly or signing up for a package that includesboth ADSL and our voice services. At the same time, as we have increased demandfor that service, we have adjusted prices to reflect market conditions.

In April, we reduced broadbandprices, which was one of the reasons why internet revenues went up only 3.5% inthe third quarter, compared with the year earlier. In the corporate data marketDSL line equivalency increased 17%, bringing the total to 2.6 million Pesos. Ourrevenues increased a little over 2%.

Local traffic and domestic longdistance declined 6% and almost 1% respectively, from a year ago. Althoughinternational long distance traffic gained from last year's level. Even when wesee year-over-year declines in usage, it is important to mention that ourproducts and services, which generate fixed monthly revenues, continue toincrease.

We have a very substantialcustomer base using our telecom platform, becoming acquainted with TELMEX commitmentto excellent service as we [spawn] into new service offerings.

Moreover, our telecom platformsupported a strong increase in interconnection traffic, which gained almost 16%over the year earlier period to 11.7 billion minutes that is an indication ofthe multiplying effect TELMEX has in the Mexican telecom industry.

The third quarter turned in an operatingmargin of 36.9% in Mexicoand an EBITDA margin of 50.3%. Although the numbers are important, the keypoints to draw from the statistics are that, our market is evolving rapidly. TELMEXunderstands the changes and we manage our business to make the most of marketrealities.

Now, I will give you an overviewof our operations in Latin America. Then I'llreview the consolidated resources and we'll open the call to your questions.

Our Latin operations as a wholeperformed very well. Revenues were up 11%, and EBITDA totaled the equivalent ofUS$329 million. More important, our customer base has grown substantially. Havingsaid that then I will focus my remarks on Braziland Colombia.In Brazil,we continue [to work up] Embratel from a long distance company to an integratedtelecommunications company. The Telefonos is achieving the signed results. Longdistance represented 54% of total revenues in the quarter just ended, comparedwith 65% to the year's ago.

Embratel also is focused onconsolidating each position in the corporate data business, and expanding itslocal service offering in the mass market, with initiatives produced increasesof almost 30% in line equivalents and 31% in lines in service in the thirdquarter. Libre our local service brand in Brazil has more than 1 millionlines in service, an increase of almost 34% compared with last year.

Additionally, on September 30,the company provided Net Fone triple play services through Net Services to469,000 customers. This initiative led by the growth in lines in servicetranslated to a 6% increase in revenues compared with a year ago. Local servicerevenues increased 37% offsetting a 1.5% decline in domestic long distancerevenues.

We have enhanced our managementteam in Brazil,which is evident in the approach to costs as well as significant year-over-yearimprovement immediately on operating margin.

As a matter of fact, Brazil iscontributing 27% of consolidated revenues and almost 17% to consolidatedEBITDA. Costs and expenses declined almost 21% largely, because the '06 quarterincluded a non recurring facts related charge. Without that charge, costs wereessentially flat compared with a year ago. More efficient use of resourcesoffset higher personnel and telephone handset expenses necessary for growingthe local service market.

The absence of the tax relatedcharge contributed to our semi EBITDA from slightly negative cash flow in the'06 period to positive cash flow of 575 million Reais in this year's thirdquarter, reducing our margin of 26.4%. Operating income was 294 million Reais with13.5% margin.

In Columbia, our efforts in the data businesshave been focused on the corporate and SME segments. The story is similar to Brazil, in that the number of line equivalentshas increased 67%, which have made a strong push in Columbia to acquire and integrate the cableTV companies, so that we are in a good position to offer triple play in ameaningful way.

On October 10, we completed anacquisition of Cablecentro and Satelcaribe, adding them to our existingproperties from Superview, TV Cable and Cable Pacifico. TELMEX entities nowpassed more than a 2.5 million homes. The data market and cable TV emphasisalmost tripled revenues in Columbiayear-over-year. However, cost and expenses increased as we move to integratecable TV companies and added personnel to sell to the small and medium sizedbusiness markets. The EBITDA strength was encouraging, totaling 20.8 billionColumbian Pesos and producing 16.3% margin.

Now, I will summarize TELMEXconsolidated results, consolidated revenues increased, 2.1% from a year agototaling 48 billion Pesos. Three factors were primarily responsible for theimprovement. One, internet access revenues increased almost 9%. Two,interconnection revenues rose 16% mainly due to domestic and international longdistance calling party base and three, other revenues primarily reflecting the [contribution]of TELMEX stores and Yellow Pages gained 34%.

Our relentless cost controlefforts, along with the absence of the non-recurring charge in the '06 periodrelated to Brazil,ICMS tax enabled us to reduce cost 3.3% entering third quarter. Operatingincome increased 18% with a margin of 21.4% and EBITDA increased 11% with amargin of 42.5%.

Net income reached 9.3 billion Pesos,38% more than in the third quarter of last year. First, you can see that TELMEXachieved a strong border line performance in the third quarter. It isespecially a significant accomplishment given that our markets are highly competitiveand are undergoing accelerated regulatory and technological change. Our [superset] comps form the core principles that have always guided our business. We focuson the customer. We make sure our telecom platform supports a mixed marketabletechnological advanced, so that we can also heed to the consumer at attractiveprices and at the right time for the market. We manage our financial resourceswisely to take advantage of growth opportunities. In short, we operate TELMEX tobuild value for both customers and shareholders. Thank you for your interest inTELMEX and now we will take your questions. Alicia.

Question-and-Answer Session

Operator

(Operator Instructions). And thefirst question comes from the line of Andrew Campbell with Credit Suisse.Please proceed.

Andrew Campbell - Credit Suisse

Yes, good morning. My question isabout the very strong growth that you saw in Brazil, particularly with locallines, and I understand the Net Fone growth is part of the triple play at net,but I wanted to ask about the other local line growth that you areexperiencing. And could you give us a little more color on what products youare selling? Is this the leeway product that was from Libre? Are these reallycorporate lines of which you are connecting more customers, and with actualfixed infrastructure, but where is the rest of this line growth coming from ifit's not related to Net Fone?

Adolfo Cerezo

Okay, Andy. Let me start with theend of your questions. Yes, in terms of the local market, it's a combinationand the Libre brand, you're right it came from [Besca] as probably you'llremember. We decided a year ago to reshape the whole business for localservices. Once we had our (inaudible) technology, we decided to acceleratethis, and that's the reason. Because we have more than 1 million uses ofe-service, probably the people remember in the beginning that we used to keepthe handsets for free. We decided to stop that practice and now, in fact, weare selling the handsets, and the business is growing.

In addition to that, we have thecorporate, the corporate business, which basically brings you to the $1.2million figure and that's a [prepaid] line. The prepaid line revenues are alsotaking account in the revenue-lining in Brazil. So those are growing veryfast, and Libre is growing at a pace of 34%, in terms of revenue generatingunits. On the prepaid line, it's growing at a pace of 30%, so those are goodindicators of how this business grows. The rest of the business is the internetbusiness and the data business and that continues to grow as well. It's beencomplimented with the Star One business and the satellite business which lastyear were not so good. This year the performance has been better, and becausewhen we compare the use, it looks better.

Andrew Campbell - Credit Suisse

Okay. I understand, just as afollow-up to the Libre product, so do you believe that will continue to be an importantsource of growth, the idea that's still going to be one of the core localservice offerings that you have here?

Adolfo Cerezo

I think so, based on the trendthat we have seen. Based on how the Brazilian market looks, I think so weshould rely on growth based on the Libre activity.

Andrew Campbell - Credit Suisse

Okay. Thanks. It was helpful.

Adolfo Cerezo

Welcome.

Operator

The next question comes from theline of Vera Rossi with Morgan Stanley. Please proceed.

Vera Rossi - Morgan Stanley

Thank you. In terms of EBITDAmargins in Brazil,where do you expect your margins to be in the next two years? Today you are inthe mid 20s, what levels do you think it could increase from the currentlevels? Thank you.

Adolfo Cerezo

Brazil is currently moving in theregion of 26% for the EBITDA margin. The cumulative figures…Also we are closeto 26, in the quarter it was 26.4%, and for the nine months it was 25.8%. It ishard to predict how it will look in two years, but I can tell you that based onthe company performance, I don't have any doubt that we should see a positivetrend in the EBITDA margin and the rational is simple.

The customer base continues togrow and the company is taking care of operating costs. We know that animportant portion of all costs in Embratel depends on interconnection costs.They are going down, and they have been used to in a rightly way.

As long as we can push for newservices like the Net Fone, in this case, that will add to the margin.

Vera Rossi - Morgan Stanley

Do you expect margins to go above30% at some point?

Adolfo Cerezo

I am not alluding to playing witha crystal ball, so I would rather say I would like to see, but it will dependon a number of things.

Vera Rossi - Morgan Stanley

And what things should we bepaying attention to, aside from the interconnection rates?

Adolfo Cerezo

It always has to do with rates inBrazil,yes. That's one of the cases, but it also has to do with Embratel's ability toconsolidate, to integrate these services, and to expand in the mass market.That's a challenge that Brazilhas.

Vera Rossi - Morgan Stanley

Okay, I have one question about Mexico.Can you talk -- give us an update about the IPTV that you expected to launchnow in the third or four quarter, and whether or not you already launched IPTVin Mexico?

Adolfo Cerezo

There are some dates that we haveto comply with before launching IPTV in Mexico. Let me take the opportunityto comment again, based on your question. June of this year, June 12, thisyear, they say, our telecommunication commission COFETEL issued in the officialgazette. They are the solution that establishes the rule to implement theportability of geographical and non-geographical numbers by portability.Because there are three present conditions that TELMEX has to comply with inorder to provide IPTV solutions or services such as that. Portability is one ofthem; and interconnection and interoperability are the other two. Theseportability resolutions established technical and operative specifications, butfinally this publication of a portability resolution appeared in September.

And then we have to wait for thepublication of these resolutions, and the process began on September 20. Basedon that, the process, if fair, should end in November this year but we've beenwaiting for additional information. We are still waiting for the technical andoperative specifications, which are supposed to be published in November. Inthat case, on that we'll take portability to begin next year. So, what I cantell you, our next slide is TELMEX has invested, what its needed for complyingwith the portability requirements that a figure close to US$60 million.

We are ready and we are waitingfor that. In the mean time, we have been discussing different issues, one ofthem is decent rules, these portability rules are not so clear. In our point ofview are absurd for TELMEX. We do not agree in generating incentives for nopayment of the past due balances on the current rules, because they are notclear. They could mean that, once a customer has decided to move from onetelecom operator to another and taking his or her number and the rules are[variant] to you, in order to take off the balance date. But, as I say, that'staking a lot of time. We are still waiting for the technical and operativespecifications. So, but on line you have to wait until next year to see TELMEXproviding IPTV services.

Vera Rossi - Morgan Stanley

Okay. Just I need to see ifunderstood correctly. You won't be able to offer IPTV until number portabilityis in place, is that correct? Or until the rules?

Adolfo Cerezo

That's correct.

Vera Rossi - Morgan Stanley

Okay. It's not until the rulesare clear?

Adolfo Cerezo

That's correct.

Vera Rossi - Morgan Stanley

It's until it's in place so tillone customer from one of your competitors can move to your network or viceversa?

Adolfo Cerezo

That's correct. I mean assuming-- our assumptions is that which I've already complied with other twoconditions to reduce, we have signing a connection agreement oninteroperability I means it's over.

Vera Rossi - Morgan Stanley

The other two items,interconnection and interoperability have read the result or not yet?

Adolfo Cerezo

Yes, we have read the result inour view.

Vera Rossi - Morgan Stanley

In your view, but in terms of theregulator view?

Adolfo Cerezo

Ask them.

Vera Rossi - Morgan Stanley

Okay. Thanks.

Adolfo Cerezo

You are welcome Vera.

Operator

The next question comes from theline of Miguel Garcia with Deutsche Bank. Please proceed.

Miguel Garcia - Deutsche Bank

Hi. Thank you, I wanted to focuson the other revenue line in Mexico,it grew 22% from last year when you also have Yellow Pages sales and PC sales.Could you give us a quick breakdown on this revenue and what's generating thisfast growth? Also in terms of the Colombian operations they have been reportinghigh volatility in margins probably due to the consolidation of the cableoperations, do you think it's reasonable to expect in the longer term marginsof in the mid 30% I mean based on all their cable operations in the region?

Adolfo Cerezo

Good day Miguel, other revenuesin TELMEX mainly two components which I mean they do define the behavior ofthese lines. The TELMEX stores, we have been in the process of remodeling ourTELMEX stores since a year ago. We continue modernizing them, and attractingcustomers. They use not to visit our stores.

So, that's been the trigger forselling the amount of computers that we have sold this year 240,000 computersand that's one good reason because you have seen growth on DSL. Yellow Pages isanother important driver. So, those are the two main issues that define growth,what I can tell you is that, what we have seen is that, we continue observinggrowth in TELMEX stores line, so that's a good indicator for our business.

Then Columbia,Columbia atthis time, we are in the process of integrating the different cable companiesthat we have acquired. That's an interesting challenge. It's an interestingchallenge because of our different companies and different kind oforganizations. And the idea is that we have to continue the business, and wehave to continue providing services to our customers in Columbia. And in the mean time, to upgradethe network, what I can tell you is that, at this time in Columbia, it's bi-directional in thesenetwork, it's 17%.

We have to spend a lot forincreasing, excuse me, it's only one third of the network, its bi-directionalnetwork. So, we have to spend for upgrading the network and for evolving itinto a bi-directional way. As I said, we are passing more than 2.5 millionhomes. We should be close to 3 million homes at the end of this year and I thinkit will grow larger in '08. So, that means CapEx for Colombia next year.

And that also brings someoperating and maintenance cost but that's part of the business. We know that weare contemplating that, this is not a model as reducing the number of heads inthis business or adding more users. It's not as simple as such. So, it willtake time but on line. Sure, we should see an increasing margins not as fast asI would like to see then not in '08 because the year will take most of ourefforts in concluding these consolidation process and accelerating offering fortriple-play and dual-play in Colombia.I should advise to wait until '09 to see margins going out dramatically.

Miguel Garcia -Deutsche Bank

Okay. Thank you. Now if I may, based onthe fact that sales of PC and Yellow Pages are in all revenues, something thatmight be only a short-term, do you think that you can maintain margins inMexico above the 50% that you reported this quarter or we should expect basedon the migration to wireless and voice over IP a slow erosion in the future?

Adolfo Cerezo

This year, we experienced erosionin our margins and that's because the calling party pays revenues, they areknown as good to us, as rest of our revenues, so margins are lower so as longas, we had an important in flue coming from calling party pays revenue thataffected all margins this year. And as we reached 50% figure in the quarter,the cumulative figure was 49.5%, the second quarter we were below 50% in lineand we continue with our efforts for controlling and reducing operating cost.So, what I can tell you is, as long as we can have a positive growth inrevenues, growth is always positive. As long as we have growth in our revenues,and as long as we continuing to controlling our expenses. I cannot say that 50will be reached, but will be close to that in fees.

Miguel Garcia -Deutsche Bank

Okay. Thank you.

Adolfo Cerezo

You are welcome.

Operator

The next question comes from theline of Patrick Grenham with Citi. Please proceed.

Patrick Grenham - Citigroup

Good morning. Could you just talka little bit about first of all the clean up of the base? And secondly, how areyou going to deploy capital between the core competitive part of the businessand the connect part of the business? How are you going to see that in Mexico,they are both Mexican question?

And then on the Brazilianbusiness, you mentioned that the growth in West Brazil,you do have line growth that's apart from growth that's happening through net.How do you see that going in the future do you think what percentage ofEmbratel's local service growth will be on its own path? And what percentage doyou think will be through that?

Adolfo Cerezo

Okay. Let's start with theBrazilian side. Net has been growing faster, that's because the new servicethat we've introduced jointly probably you'll remember that a year ago, inOctober, we had 139,000 Net Fone users in Brazil. So 139,000, and now we aretalking about 470,000 users. So, that business grows really fast and anotheropportunity that we have is that we found that delivery business in Brazil andthat it was not well attended, we could operate it in a better way and as Iexplained earlier, the decision was made in order to stop it in the way, it wasimplemented.

We have to reshape the technicalplatform, to introduce a new one, and to market it in a more aggressive anddifferent way. We are using call center, we added people that's because Iexplained it, and that's when we deal with expenses side in Brazil. We said okay, take in, takeout the tax impact you will see that cost are basically flat. On the way toexplain that is because we added personally for marketing efforts and we addedcharges coming from handsets that were sold.

So, this is a new door that hasbeen opened in the case of Embratel. Now, if the mass market that is sayingthat it has potential to grow. There is no way, again to saying that we couldsustain the current trend. But again, what I can't say is that yes, we areputting our efforts to keep these trend of growth and that's an interestingmarket. And that compliments the portfolio of services that Embratel has orthat's adding revenues and it has positive impact at the EBITDA level. So, wewill continue pushing for that. At the same time that net services willcontinue pushing for Net Fone. Those are different markets. That's in [Western]Brazil.Brazilhas enormous room for growth. We are dealing with different markets [why]should they overlap in some cases. But at this point there are different strategies,different market strategies, we have different kind of users and in both casesthey are growing.

Patrick Grenham - Citigroup

And is (inaudible) is really abusiness. Is that a business product now or is that a residential product orhow are you separating them?

Adolfo Cerezo

It is a business, it is abusiness.

Patrick Grenham - Citigroup

It's only a business product now.

Adolfo Cerezo

Yes it is.

Patrick Grenham - Citigroup

Okay. And on the Mexicanbusiness, you are separating at the CONAT. How are you separating the CapExthere?

Adolfo Cerezo

The CapEx and the CONAT case it'sbasically maintenance CapEx. At the beginning that's what we have decided toallocate, but we wanted to support this business. We are talking about a lot oflines and the idea is to support them. I don't want to give you a wrong figure,because I don't have it. What I can tell you is the way in which we allocatedCapEx for CONAT, is based on all the maintenance CapEx needed, it's beenallocated in CONAT.

Patrick Grenham - Citigroup

Alright, what percentage of yourMexican CapEx would be in that business do you think?

Adolfo Cerezo

Let me guess in generalmaintenance business in Mexicoit goes for 45% at the total CapEx. Total CapEx in Mexico is in the region of US$1.1billion, so I'll take 45% of that. And then go 50:50, which I mean maintenancebusiness it does not distinguish between good or not as good lines. Theyrequired the same kind of maintenance business.

Patrick Grenham - Citigroup

So, we are talking about US$250million or so?

Adolfo Cerezo

Yes, sir.

Patrick Grenham - Citigroup

Okay, great. Thank you.

Adolfo Cerezo

You welcome, Patrick.

Operator

The next question comes from theline [Stanley Martinez] with Legal and General Investments. Please proceed.

Stanley Martinez- Legal and General Investments

Thank you. Good morning Adolfoand good morning Rui. I've a question, a follow-up on the Columbian operations.I realized it's early in your budgeting cycle for next year, but do you haveany preliminary estimate for the Columbian CapEx, for the integration of thecable properties with you're using operations in Columbia. And also on interconnection, itlooked like sequentially you had a lower interconnection cost than I hadexpected and some lower sequential growth in interconnection minutes of usegrowth. Should we be anticipating a lower incremental impact from nationalcalling party pays in the future quarters? And then I just have one briefquestion on the tax rate, it was lower than I'd expected this quarter, and I amwondering whether TELMEX is applying some NOLs from Brazil and what impact thatmight have on consolidated effective taxes at the group level going forward?Thanks.

Adolfo Cerezo

Okay Stanley. Let me start with the ColumbianCapEx. Growth across the years, this year its US$200 million that's theestimated Columbian CapEx, that includes of course CapEx for the cable company.Next year in the region of US$300 million mainly focused on, as I had explainedbefore upgrading the network, taking it to a bidirectional way, and alsoexpanding the network. And then your question is on lower interconnection cost.Was that question part of a Columbiamarket or?

Stanley Martinez- Legal and General Investments

No I'm sorry is it in Mexicowhere we saw that you just had lower sequential growth in interconnectionminutes at least relative to Q1 and Q2 and wondering whether we should beanticipating as you move further away from the implementation of nationalcaller party pays whether that affects in terms of sequential interconnectionminutes of use growth is going to start to flatten out.

Adolfo Cerezo

Okay. This is the way on how themarket reacts. Calling party pays for long distance purposes, I mean domesticand international it was introduced in November last year. And so theeconomists are -- all these people behind desks that they only love to seepapers and books, they assume that elasticity is the only variable that worksin this market. Okay, at the beginning, yes, that's the case. But then themarket is alive so the market wants to have realized and the market is onlycost [bars]. There are players, I mean operators, so each one will take thebest alternative that satisfies their purposes.

In other way, the customers willlook for the less expensive alternative. But also that applies for telecomoperators. So what we are seeing is that we balance this year as we have hadgrowth in minutes, but at the same time, mobile line operators and othertelecos they are taking advantage of that and they are looking for heavy userson promoting different alternatives. But more important is the market itselfwhich is digesting these changes and what you are seeing is the trend for that.

Internal the rates, for thecalling party pays system they will be reduced in the years ahead, it's beenannounced. So for example the local calling party pays rate. This year is 1.85Pesos. It's been split 1.34 Pesos they go to the mobile company and 0.51 Pesosgo to the fixed line operator TELMEX in our case. This rate will go down to1.72 Pesos next year, 1.60 Pesos in '09 and 1.51 Pesos in 2010 year.

The tax rate, this year we'vebeen dealing with a figure which I would advice to see between 34% and 35%that's now in our estimation the range for the TELMEX effective rate this year.

Stanley Martinez- Legal and General Investments

And as you continue to -- isthere a potential though as your earnings at Embratel and some of the other[non-ILEC] operations grow as a proportion of group operating earnings for thattax rate to come down because you will be applying net operating losses at eachof the individual countries against their income in those countries. Could thatpotentially bring that rate down into the low 30s perhaps?

Adolfo Cerezo

Perhaps, but you have to go indetail for each country. Let me give you the example of Brazil. It doesn't matter if youhave losses coming from previous years. In Brazil, there are strategic rulesyou have to have first a taxable basis to apply it and second you cannot usemore than 30% of the taxable basis to take advantage of previous losses. So itwill take time, it's not as easy as it looks and then we have to analyze theother country, but yes in generally in theory once we can take advantage ofthese previous year losses and that could benefit our effective tax rate in thefuture.

Stanley Martinez- Legal and General Investments

I'll look forward to it. Wellthank you very much for your time Adolfo.

Adolfo Cerezo

You are welcome Stanley.

Operator

The next question comes from theline of Rizwan Ali with Deutsche Bank. Please proceed.

Rizwan Ali - Deutsche Bank

Good morning. My question wasrelated to your margins in Mexico.As you launch IPTV services, we've seen in Chile, CDCs margin go down quite abit. So, should we expect something similar in Mexico's growth for you? And thesecond question is this split between have CONAT and other lines that you have.Was it is a regulatory requirement and at some point are you going to arguewith COFETEL to give you different tariff structures for where you havecompetition, where you don't have competition?

Adolfo Cerezo

Okay, Rizwan. IPTV, let's say,that it's not a rule of some but always when we are launching in service and aslong as we cannot reach the critical mass number. Yes, we will be expectingmargins in general. I'm not an expert in this business but I've been in thisbusiness for quite a long time. So, what I can tell you is that, as long as inthis business we can see figures in the regions of the 100,000 then we couldstart thinking about not being too far from breakeven. Once we have figures inthe region of mediums then the business begins and that's when we can add tothe bottom line.

If we isolate the business the TVbusiness, this thing has happened in Brazil, I mean margins were not asgood at the beginning and they are improving. We're expecting to see this samein Columbia and that should be the case in Mexicoalso. So yes in the short-term that could affect, it will depend on our abilityto grow the business and to reach a reasonable in order to compensate thismargin effect. But hard to estimate at this time, I prefer not to give anyfigure. The CONAT strategy, the CONAT strategy calls for a first -- thecommitment that we have in Mexicoto provide service to every Mexican.

Second that we have invested asubstantial amount of money in fixed assets I mean we are not looking forsomeone to lease this facility or to block in some area and try to pay formarginal cost. This is a business in which we are committed and [we havedecided to invest a lot]. So but at the same time we decided that it was worthto pay attention to the business and not to disturb, not to forget that we havegot so much in this business and thinking about different rates, no I don't thinkso. I mean that's something that we don't have in mind at this time, but weassure you that this is a sensitive business even though we have a lot oflines. Its 8.3 million lines, we are making only less than 6 billion Pesos fromrevenues and now we are loosing the operating level. So, the message of thisis, this is a sensitive business and it's also part of Mexico.

I mean, it's a way in which arematuring markets and that's because they use the word maturing. This is not amature market, this is a market that can be treated to with the same rules thatwe're applied in the matured markets and incidentally most of them are[afraid]. This is a market that needs to grow. This is a market in which atthis time the idea is not to fight for a piece of the cake, but to increase thesize of the cake. Also I mean we have to refocus then and that's because wedecided to create this business unit to pay attention to these customers thatthe next CONAT will have.

Rizwan Ali - Deutsche Bank

Thank you.

Adolfo Cerezo

You are welcome Rizwan

Operator

The next question comes from theline of Henry Cobbe with Nevsky Capital. Please proceed

Henry Cobbe - Nevsky Capital

Hi there, thanks so much for thecall. Just a couple of questions, the first is on your affiliate income is thatmostly from (inaudible)? The second question is just on the fight of thebuyback fund. You still have a large buyback fund even after the buyback youhave done in third quarter? Do you aim to exhaust this by the time of the nextmeeting in April? Certainly, just could you summarize the CapEx budget for thisyear and next year, perhaps by region? And lastly just on IPTV whether -- howmuch of the plan would involve rolling out fiber, the fiber network or will itonly exist in kind of copper?

Adolfo Cerezo

Okay, Henry. Let me look throughmy figures. Let me start with the last one we will go for the resultant, theIPTV project. The IPTV project -- the driver usually -- the amount of megabitsthat you have to provide to users in order to give only channels that areexpected on that kind of the quality that also we expect into receive and basedon that our plan goes for basically fiber-to-the-node in some cases. When itmakes sense from the economic point of view with the [big] fiber-to-the-home butthose are just a few cases but if we are doing a fiber-to-the-node project. Soin order to decrease substantially the distance for the corporate line and tobe sure that we can provide all the megabits needed for our offer and it's tooearly to say something more than and I will prefer not to comment on specificson how these networks -- on how the concept of these network looks but it's a fiber-to-the-node.

The CapEx let me -- in CapEx thisyear, Mexico US$1.1 billionall of the Net, BrazilUS$650 million, Columbia US$200 million and Argentina [US$60] million, Peru US$30 million, Chile US$80 million, and that's thetotal. Next year, the ballpark estimation that we have at this time, Mexico US$1.1 billion, Brazil is US$700 million, ColumbiaUS$300 million, ArgentinaUS$60 million and we have to consider Ecuador next year. We acquired asmall company in Ecuadorand we have to grow this company and so we are expecting to spend -- to investUS$70 million. Peru, Peru also we acquired a couple of cable companiesthe small ones, so Peruwill take a US$100 million next year. Chile,Chile also because, weacquired a DTH company, we should expect to invest a US$100 million in Chilenext year.

Henry Cobbe - Nevsky Capital

The Ecuador number was how much?

Adolfo Cerezo

Ecuador 70.

Henry Cobbe - NevskyCapital

And the affiliate income?

Adolfo Cerezo

The income from Net in specialterms, while in dollar terms, which is maybe this year is in the region ofUS$25 million, US$27 million that's the participation in Net that we arereflecting in our consolidated figures in the quarter.

Henry Cobbe - Nevsky Capital

And is that included in theequity and results of affiliate's line?

Adolfo Cerezo

Yes and in the balance and thenthat it goes to…

Henry Cobbe - Nevsky Capital

And what are the other companiesin the affiliate line. Just because it seems that -- in third quarter you had285 million Pesos of affiliate income and a net 41% of -- 38% of the net was 45million Pesos so, you are just going to work out with the other 240 millionPesos?

Adolfo Cerezo

I think we have to go in detailto break it down. We don't have it at this time. So we'll look for you andwe'll provide that later just cant' review it if you don't mind.

Henry Cobbe - Nevsky Capital

Okay. Also you will have tosegregate the breakdown of the interconnection revenues a step between [callingparty pays] and fixed line interconnection I think you usually set the dataafter the quarter results?

Adolfo Cerezo

Let me look for that.

Henry Cobbe - Nevsky Capital

And there is between local andlong distance and international CPP?

Adolfo Cerezo

Interconnection it's a 5.6figure.

Henry Cobbe - Nevsky Capital

Yes.

Adolfo Cerezo

Okay. Telecom operators to mobileoperators 567, and the balancing goes to calling party pays [differentpenalties] local and long distance.

Henry Cobbe - Nevsky Capital

407 was long distance and 167 wasmobile? And what was the spilt of the calling party pays in terms of local DLDand ILD?

Adolfo Cerezo

3.5 for local, 3.5 billion forlocal, 1 billion for domestic long distance and the rest goes for internationallong distance.

Henry Cobbe - Nevsky Capital

Okay

Adolfo Cerezo

And finally the buyback, thebuyback here we still have room for the buyback, based on the current strengththat we have. We have been buying the TELMEX shares at a pace of 4 millionTELMEX shares. TELMEX shares not ADRs per day all this time, that gives usenough room to reach April next year and I don't have a good idea at this timewhat the TELMEX Board will decide on the buyback but as long as we have goodidea and that should happen in the end of March. We will announce that ofcourse.

Henry Cobbe - Nevsky Capital

But I mean typically you drawdown the buyback funds by the time of AGM. But at the moment the buyback fundsstill seem such a long way to go before even at 4 million shares a day. You arenot going to draw it down by April so, would you be aiming to get it down to Imean to the 10 billion level by April?

Adolfo Cerezo

The buyback reflects our thoughtson TELMEX shares. But the buyback also is being used like an internal variablethat we can control. As long as we don't have better alternative to put thecash that TELMEX generates, we go for the buyback. Of course, that has an implicitpoint, which in my view it's obvious for all of you, as long as we continuebuying out our shares because we are convinced that there is intrinsic value inour shift. If we don't think so, I have studied several times and we'll repeatit, this is not a charity business, that's because we separated the TELMEX foundation.So, if we continue buying our share back because we know that there is value.We know that we have to look for other alternatives and once we've found one ofthem, we can reallocate some of these phones and to go for [summer procedures]or to go for upgrading or expanding the telecom platform in several countriesat the same time and then we'll continue buying shares back, it could affectthe level that the message is there, we are confident in our company and thatwe are confident in the fundamentals these company has, that's been reflectedin the buyback activity.

Henry Cobbe - Nevsky Capital

Okay.

Adolfo Cerezo

Okay. You're welcome. Andprobably we have specious for one additional question. Operator?

Operator

At this time, we have no additionalquestions in the queue, sir.

Adolfo Cerezo

Okay. Great. So, we appreciateall your time. Have a good day. Thank you very much.

Operator

Ladies and gentleman, thank youfor today's conference. This now concludes the presentation and you may nowdisconnect. Good day.

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Source: Telefonos Q3 2007 Earnings Call Transcript

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