America Movil SAB de CV

BMV:AMXB

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, and welcome to América Móvil Fourth Quarter 2017 Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Miss Daniela Lecuona, Head of Investor Relations. Please go ahead, ma'am.

[Daniela Lecuona Torras, executive]

Thank you. Good morning, everyone. Thanks for joining us in our fourth quarter conference call. We are here on the line with Mr. Daniel Hajj, our Chief Executive Officer; Mr. Carlos García Moreno, Chief Financial Officer; Mr. Oscar Von Hauske, Chief Operating Officer; and also from Telmex, Mr. Carlos Robles, our CFO.

For those of you who are following on the webcast, please make sure to refresh your browser so you have access to the slides.

Daniel?

[Daniel Hajj Aboumrad, executive]

Yes, thank you, Daniela. Welcome, everyone, to this fourth quarter América Móvil report. Carlos is going to make a presentation of the results. Carlos, you can...

[Carlos Jose Garcia Moreno Elizondo, executive]

Thank you, Daniel. Good morning, everyone. The last quarter of 2017 ended on a strong note with inflation seemingly well contained and economic growth speeding up in most of the world, both in developed and in emerging countries. With commodity prices firming up, several Latin American countries saw new stimulus for expansion, particularly in Brazil that is recovering from a long and deep recession.

In Central and Eastern Europe, the region stood to benefit from the overall economic recovery in Western Europe that have been remarkably strong in bordering countries such as Germany and Austria.

The positive economic momentum had us posting good revenue and EBITDA growth very much across the board, with data services leading the way on both the mobile and the fixed-line platforms.

Mobile ARPUs rose practically everywhere beefed up by data revenues.

The investment we made over the last several years on convergence, including the deployment of fiber optic and the expansion of our 4G footprint, have provided us with the fastest data networks in our region. That gives us a competitive edge on our main business segments and in most countries has helped us strengthen our position.

We ended 2017 with 362 million accesses, slightly less than a year before, with our mobile postpaid and fixed-broadband accesses increasing 6.4% and 4.2%, and mobile prepaid and PayTV accesses falling by approximately 2.6% each. Those of you that are looking at our chart presentation, you will see this in the first chart.

In fixed voice accesses we lost 1.9% as people moved from -- moved to triple-play packages or to postpaid mobile services.

In mobile postpaid, we added 1.7 million subscribers in the fourth quarter, 1 million in Brazil, 206,000 in Mexico and 109,000 in Austria, to finish year with 70.6 million subs.

Our postpaid net adds surpassed those of the year before by 26.6%. In fixed broadband we gained 321,000 clients in the quarter.

Our revenue totaled MXN 264 billion in the fourth quarter. They were down 2% in Mexican peso terms on account of foreign exchange rate movements. But at constant exchange rates, revenues were up 0.5%, and service revenues were rising 1.4%. Service revenue growth was driven by postpaid revenues that were up 9.5% constant exchange rate. Prepaid data, which was up 9.7% and fixed-broadband revenues that rose 5.8%. Mobile data were the main driver overall, with our -- the traffic on our networks increasing 66% over the year.

By regions, the most dynamic one was the South American block, with service revenue growth of 4.5% at constant exchange rates, followed by Mexico with 3.3%, which has recovered significantly from a year ago.

Mobile ARPUs were up, as we said before, in most operations, with Mexico's increasing 7.2%, Brazil, 10.2% and Chile at 2.8%, even the U.S. increased 2.4%.

Fourth quarter EBITDA totaled MXN 70.2 billion. It was up 6.8% in Mexican peso terms and 9.8% at constant exchange rates, compared to 1.3% in the prior quarter. Quarter EBITDA was hit by the natural disasters in Mexico and Puerto Rico.

In South America, EBITDA rose 13%, 13.5% at constant exchange rates, followed by Mexico with 13.5% and Central America with 7.8%.

EBITDA margins were up in most of our operations from the year before, with Mexico's increasing by 4.1 percentage points, Brazil by 2.9, Ecuador by 3.9 and Peru by 6.5 points.

Our consolidated figures reflect the major loss of revenues in Puerto Rico, which was minus 16% year-on-year, in the aftermath of the hurricane that battered the island in September. The revenue decline, mostly to do with the lack of electrical power throughout the island and its impact on fixed-line telephony, resulted in an even greater drag on consolidated EBITDA, as that operation's EBITDA margin plummeted to minus 3.5% in the fourth quarter from 21.6% in the second one. So we went from having a positive EBITDA in Puerto Rico to carrying an EBITDA loss in the fourth quarter.

Excluding Puerto Rico, our consolidated service revenues expanded 1.9% year-on-year, and our EBITDA increased 12%. So consolidated EBITDA of América Móvil, excluding Puerto Rico, was up 12% at constant exchange rates last year -- last quarter.

And just looking at a mid-dive in Mexico and Brazil, that you will see in the charts where we are presenting, you can see that in Mexico, EBITDA was up 13.5% year-on-year with still revenue growth, driven by data revenues. Postpaid net adds of 206,000 that we mentioned before was slightly higher than what we had in third quarter, but we're seeing normal first quarter, so we are seeing good growth in postpaid market. ARPU, as you can see in the chart again, have been increasing consistently over the last several quarters. So last quarter was up 7.2% year-on-year.

Now looking at Brazil. EBITDA was up 11.6% year-on-year. Data revenues, up 42%. Again, postpaid also prepaid, but very significant postpaid. You can see at the bottom in the next chart, bottom chart, postpaid net adds have been increasing consistently over the last quarters, particularly the second half of the year was very strong. And from a year before, we have roughly doubled the net share of adds -- of postpaid net adds in the market, okay? And you can see also in the chart that ARPUs have been trending up in Brazil and will continue to trend up in our view.

Now our operating profit came in at MXN 28.6 billion, having increased 10.9% from the year earlier quarter. Relative to total revenues, it grows from 9.6% a year before to 10.8% level of operating profit slightly increasing the margin.

We posted a comprehensive financing cost of MXN 37 billion in the quarter, which was almost wholly determined by foreign exchange losses, arising from the depreciation of the Mexican peso versus the U.S. dollar and the euro in the quarter. A year before, comprehensive financing cost had totaled MXN 28 billion. But for the full year 2017, comprehensive financing cost was down 50% from the year before to MXN 43 billion. We had a net loss of MXN 11 billion in the fourth quarter but a net profit of MXN 29 billion for the full year.

And here allow me just to make the case that sometimes we have very significant moves in a given quarter, but that have an impact. But for instance, the move last quarter was basically the peso over the last few days of December was shooting up, but it has basically recovered. Today, we are at the levels where we had before this increase in the peso. So all of the FX moves of the last quarter have already been erased.

And finally on net debt. Our net debt was down by MXN 15 billion in 2017 to MXN 614 billion. This is what you get if you look at our balance sheet. This period reflects the flow reduction in net debt. This is the actual payments of debt that we made in the year, of net debt of MXN 47.9 billion. But then we have to add the effect of the Colombian ruling, the equivalent of MXN 18.5 billion. And then we had the impact of foreign exchange valuations throughout the year and that's how you get to the MXN 615 billion for the year of net debt, end of December.

Now relative to EBITDA, net debt stood at 2.0x, is slightly better in dollar terms, measured in dollar terms than what we had the prior quarter.

So with that, I will turn it back to Daniela, so she can lead the Q&A session. Thank you.

[Daniela Lecuona Torras, executive]

Thank you, Carlos. We are ready to take the first question.

[Operator]

[Operator Instructions] Our first question comes from Amir Rozwadowski with Barclays.

[Amir Rozwadowski, analyst]

I was wondering, can you provide us an update on the competitive landscape in Mexico? It seems though pricing continues to see positive trends. What do you believe is principally driving that improvement? Is it sort of competitive behavior? Or is it, as you mentioned, some of the data traffic growth you've seen? And specifically, I was also wondering any update on your thoughts around potential competitive changes with respect to Red Compartida and how we should think about that impacting the market as you see it over the next year or 2?

[Daniel Hajj Aboumrad, executive]

Talking a little bit about Mexico, what we -- first of all, I want to say that we have been making a lot of work in Mexico. We have been controlling our cost, improving our networks, changing some technology, so state-of-the-art technology is giving us a better cost and efficiency. More coverage, we do a lot of new cell sites last year that gave us better coverage. And we are moving a lot of our customers to our 4G network. So the perception that you could see of our customers in Mexico, it's very good. So it's improving. We have a indicator called Net Promoter Score. And in this indicator, people is very happy and improving the way they are talking about Telcel and the network of Telcel. So that's something that we have been doing for the last year, 1.5 years. And also the control of the costs that we are having has been very important. Second, I think in the market, as the market is more stable, I don't think we are improving prices, but the prices has been more stable. And we are doing a lot on our distribution network. We've been very careful that the new activations that we have been doing are good activations, are profitable activations, because sometimes we see that you can activate a lot of subscribers, but they never consume or they consume or they use you as a card instead of being as a new customer. So we have been very careful and improving a lot all the way. We have the retail, the distribution, we have our own customers, we have our own stores, and we have been improving and working very hard on doing that. So that's what I see that happened last year. For this year, I also see a very stable competition. I don't see because, as I told you in the last conference call, and I can tell you today is the prices that we have in Mexico are lower than the prices than a lot of countries around the world. Even in the U.S., we are much lower in our plans that what we have there. And I don't think or I don't see that we are going to go lower. But well, you never know competition. But I think the market for 2018 could be more stable in Mexico. And what is happening is that people is starting to consume more data, using more data. And that is what is giving us a better ARPU, using that, we -- the lowest I think, we get in ARPU is MXN 116. Today, we are at MXN 142. So the increase in ARPU has been very good in our customers. So that's what I see. We have been giving -- as I told you, moving a lot of our subscribers from 2G to 3G and then from 3G to 4G. And we are financing the handsets. We are giving them new applications. So I think Mexico, is all the work that we have been doing, it's in a good shape right now, Mexico.

[Amir Rozwadowski, analyst]

And then just the follow-up in terms of Red Compartida and how you're thinking about the potential shift in competitive landscape as that ramps?

[Daniel Hajj Aboumrad, executive]

Well, Red Compartida is working, I think they are developing their network. Still, well, they have been -- I don't know if 1G are working on the network. So I don't think they have a big coverage -- or at this moment. So well, I don't understand really what's their business plan and how they are going to do it. But I'm sure that it's a new competition, a new competitor. And we need to see what they are going to do. Today, they are very small in the market, but I'm sure they are going to grow in the future. I think they are going to sell wholesale. They are not allowed to sell directly to the customer, so what they are going to do, in my view, is get a lot of MVNOs in their network. And well, I think that's more or less their business plan. We are improving, getting good coverage, good network. We just bought, last year, 60 megahertz of spectrum and 2.5 for giga. We're using that right now. So it's -- we are giving good speed, good quality. So we are in good shape right now.

[Operator]

Our next question comes from Leonardo Olmos with Santander.

[Leonardo Olmos, analyst]

My first question is regarding the talk we had on Investor Day last year. You are very close today at this level, the goal in this level 1.5x net debt-to-EBITDA. And therefore, you said that probably you have 100% of cash flow or a big part of it is going to distributions. And my question is, when could that happen? And if that could happen, which kind of amount of increase on distribution are we to expect?

[Carlos Jose Garcia Moreno Elizondo, executive]

Well, I think the -- what we had in the Investor Day was simply a projection of how things would be expected to evolve over the next few years and [indiscernible] to the extent that we can review the leverage to our target of 1.5x net debt-to-EBITDA, which we have been very consistent about for quite some time. Once we do that and in the absence of any applications, then there is no other outlet for the cash flow of the company than distributions, right? So I think the -- partly, this may depend on exchange rates and, obviously, barring things like the Colombian situation of last year, we would expect that the combination of good EBITDA growth that we are having and consistent reductions in debt, that we expect to have also this year, should put us in a good position to get to our leverage target, I would say, within the next couple of years. Definitely, before the end of next year.

[Leonardo Olmos, analyst]

Okay. And my second question is very -- it's a bit more specific, it's about fixed-services strategy in Mexico. You had some additions on fixed broadband but still we see top line on fixed service is negative. What's the strategy going forward, including deployment or upgrading the fixed broadband network? And how do you couple that with PayTV bundling eventually? How do you plan to do the fixed services in Mex? How do you see that in the coming years?

[Daniel Hajj Aboumrad, executive]

I think you have to see -- if you see the revenue -- the service revenue from last quarter up to this quarter, basically they are flat compared to the revenues of the third quarter. These -- the revenues had been stabilizing for the last 3 quarters. Basically last year, compared to this year, it was a reduction in some international traffic with operators. And what we are looking forward is to continue to increase the quality of our products and continue to increase the value-added service for our customers, so that we can sustain and with the competitive -- competition of our products. So looking forward, our focus will be on quality and will be in increasing the value-added service for the customers.

[Operator]

Our next question comes from Rodrigo Villanueva with Merrill Lynch.

[Rodrigo Villanueva, analyst]

Daniel and Carlos, my question is related to the functional separation of Telmex. I was wondering if you could share with us, which do you think will be the terms and conditions for this functional separation? And when would you expect this functional separation to be concluded?

[Daniel Hajj Aboumrad, executive]

Well, it's still in discussions, Rodrigo. We still doesn't know how this is going to end. We're still discussing. What looks like is at the end of this month, maybe March, we'll have -- we will have a decision, so it will be soon, but still, we doesn't have anything yet.

[Rodrigo Villanueva, analyst]

And regarding the spectrum auctions of 2.5 gigahertz in Mexico, what are your thoughts about these? Are you expecting to participate in these auctions? Or are you going to be blocked by the regulator?

[Daniel Hajj Aboumrad, executive]

No. The -- I think the rules, the bidding rules are already out. We are not allowed to participate in the first round. We are allowed to participate in the second round. And we are starting what to do. Remember, last year, we buy 60 megahertz of the spectrum. They are not covered nationwide. We still have some state meeting, not too much, but I think we have around 85% to 90% of the coverage of all Mexico. But we are starting what to do. I think the rules, we don't like a lot the rules, how they end, the bidding rules. But we are starting what to do and how to do it. We are allowed to participate in the second round, not in the first round.

[Operator]

Our next question comes from Andre Baggio with JPMorgan.

[Andre Baggio, analyst]

So first question I have is that, we have seen a significant improvement in margins in Mexico. It's been a long time that we saw that before. Do you think that we should see is a continuously broad margin improvement, like there is scope in your view to continue having efficiency in acquisition cost and other stuff, so that we could see better margins in '18 than '17?

[Daniel Hajj Aboumrad, executive]

Difficult to say because, well, we are doing a lot of work in the cost cutting. We are moving to the digital transformation. We are investing in a lot of new technology that will give us a better cost coverage. In the other side, the people is consuming more. Prices are more stable, so I think we are in a good path in Mexico. And well, we did -- we are in the first step. You are asking me, if we're going to have another step in terms of margins, EBITDA margins. And maybe yes, what -- well, we have to consolidate what we have right now in the market and see. It's going to be very important to see the consumption of the people. Economies will help a lot, so if people start to consume more and spend more money with us, then I think it's -- of course, we are going to have a much better -- an increase on EBITDA -- another increase on EBITDA. So that's why -- that's how I see the market in 2018.

[Andre Baggio, analyst]

Perfect and the second question is...

[Daniel Hajj Aboumrad, executive]

So we have some good news about the interconnection rate. We are charging interconnection. In the other side, we have some new expenses, because we buy some frequencies last year, and so we have to pay some fees, starting to pay some fees this year. So well, all overall, we are doing a lot of things. But I think we can sustain what we have achieved at this moment.

[Andre Baggio, analyst]

Perfect. The second question I have is regarding Brazil. In Brazil, we are seeing some very good trends in terms of mobile, let's say, growing almost 10%. On the other hand, wireline, which I understand is mostly the cable company Net Servicos is now shrinking at roughly 2%. So what can be done in order for this big piece of the Brazilian revenues, which is more -- which is the wireline to resume growth? Is this more investments? Is it recovery of the economy? What do you have in your mind?

[Daniel Hajj Aboumrad, executive]

Well, I think you have to divide NET, and I'll start and talk a little bit more about that, into the cable company and the DTH, direct-to-home, the satellite. I think, in the cable company, we are doing very good. We are doing more quad plays. We are with broadband, we're fixed, TV and also with mobile, it's helping us a lot. We have been doing that for maybe 2 years and it's helping us a lot with the churn. So I think even in the cable company, we are gaining market share. So we are doing good in the cable company. And we are having a little bit of disconnections in the satellite business. Well, the satellite business, we want to be very careful because what we don't want is to spend money in acquisition. People get it and then they use it for a couple of months or 3 or 4 or 5 months. So we want to have a good strategy on the satellite, and we are moving on that. We are changing. We put a new person in charge in Brazil of the satellite business. And I think, this year, we are going to see improvement. But if you see cable, net cable company, we are gaining market share. And what is important is in my view, if the economy of Brazil recovers that then you are going to see a good recovery in broadband and in net service. Oscar can expand a little bit on that now.

[Oscar Von Hauske Solís, executive]

Yes, sure would. Thank you again. If you break down the fixed revenues, you have different products. We've been doing pretty well in fixed-broadband. I mean, we are growing, and we are gaining market share. If you see PayTV cable is steady. I mean -- and the market is steady. When you look satellite TV and you look all the revenues of PayTV, all the market decreased close to 1.7% year-over-year. We decreased the same path, so we are keeping the market share on PayTV business. But what is really decreasing strongly is long distance. I mean, the long distance, national, international, has decreased 26% in 1 year. And to be honest, we won a little bit of market share, but the decrease was too high. And as well, local voice has been decreasing because the people, as you know, is using different sources to get that product like it could be WhatsApp, IP or whatever. So there is an evolution. But I totally agree with Daniel that if the economy recovers, we will see different figures in satellite TV and as well on fixed. So we are expecting that. And we believe this year, we'll see getting better on the last quarter of the economy. So we're really focused on -- and the problems that we've been pushing in the market is quad play. I mean, we believe the bundles are the ones that are taking place. So we are really successful to bundle the products.

[Operator]

The next question comes from Walter Piecyk of BTIG.

[Walter Piecyk, analyst]

Carlos, in Mexico, your service revenue was up 8%. ARPUs were up 7%. I think in your prepared comments, you talked about in 2017 about adding cell sites. Is that still going to be the plan for Mexico and some of these other markets which we're also seeing increased ARPU? And maybe you can give us an update on your CapEx plans for 2018 versus the -- I think you spent about MXN 7.2 billion in 2017?

[Daniel Hajj Aboumrad, executive]

I think talking about CapEx, I think the guidance for this year would be around MXN 8 billion. It's what we're expecting to have. We want to accelerate a little bit some things in Brazil, let's say, the modernization in Brazil. We have something in Argentina that we're going to pass 1 million home passes for doing TV and broadband. Also, in Mexico, we have some coverage issues. So I think we're going to increase a little bit between 5% and 10% of what we do last year. We're finalizing the CapEx for this year. And we have been very disciplined in CapEx, in costs. Everything that I explained that we're doing in Mexico, we're doing that in Brazil. We have a very cost control and expenses that we're taking care there in Brazil and very disciplined. And I think with everything that we're doing in the networks, plus, we're being very efficient in costs, so I think we're going to have a good year. So...

[Walter Piecyk, analyst]

So Daniel, that doesn't include spectrum, I assume? And then for Brazil, when you say network modernization, does that mean adding cell sites or just replacing the equipment on existing cell sites?

[Daniel Hajj Aboumrad, executive]

When I talk about modernization, we're adding equipment or modernizing all the equipment to a new cell site. But we are also doing -- we're going to do maybe another 2,000, 1,500 cell sites. So I don't have the number exactly, but...

[Walter Piecyk, analyst]

In Brazil? In Brazil? Well, in addition to what you're doing in Mexico? Got it.

[Daniel Hajj Aboumrad, executive]

In addition of what we're doing in Mexico. So everything is going to be covered by this total CapEx that I'm saying. This CapEx is going to include frequencies if we are going to buy some frequencies, and modernization, more fiber, photonics. Photonics is very important. Photonics is about the new technology that we have been saying. It's consolidating all the IP and being much more efficient in the cost for data. So we're doing a lot of things, and everything is included in the number that I just said.

[Walter Piecyk, analyst]

So I think you added 800 cell sites or so in Mexico last year. Are you going to add a similar amount this year or maybe more?

[Daniel Hajj Aboumrad, executive]

I don't know exactly if they're going to be 800, but there's going to be not -- more or less that's out there, around 800. Some of them are going to be for capacity. Others are going to be for coverage. Others are going to be indoor. So while we have a set of things, what we want -- and at the end of the day, what we want is to have the best quality in our networks in each country, and we're working to do that. So I think that preference of the customers is going to be because of the quality coverage, speed of the service that we give. And that's what we're aiming and working for.

[Cesar Medina, analyst]

Great. Daniel, if you don't mind, just one last question. In Austria, they're going to auction off 3.4 gigahertz spectrum. Is this -- do you have plans to use this? How do you plan to deploy like small cell deployment fixed wireless? What are the plans in Austria for that spectrum if you intend on bidding on it?

[Daniel Hajj Aboumrad, executive]

We are reviewing, and then making the analysis on that. And I don't have an answer right now because we are working and defining what to do. And soon, we can have a decision there.

[Operator]

The next question comes from Daniel Federle with Credit Suisse.

[Daniel Federle, analyst]

The first one is related to the cost and cutting efforts announced in the Investor Day last year. It seems to be like a 3-year plan. So I was wondering if you could tell us if which countries are more advanced in this initiative, and if they contributed significantly to 4Q results already. And if I may, the second question is related to Mexico. You have been mentioning this issue with the international long-distance calls. If you could give us an indication of the magnitude of those impacts, and if it's expected to worsen or to improve the new MTR rates in 2018?

[Daniel Hajj Aboumrad, executive]

The first question is about the modernization of the networks or the modernization of the new products is the question?

[Daniel Federle, analyst]

The first question is related to the cost-cutting efforts across the group, okay, which countries are more advanced in this?

[Daniel Hajj Aboumrad, executive]

I think if you ask me that, well, we are advancing in all of them, but it's not sufficient. So I think, this year, we're going still -- we're working very hard on that. We've got specific projects in each country. So there are different -- and it's not cost-cutting plan, it's also being more efficient. So we capitalize digital transformation, we call it, is a plan that we're going to do in all the -- we're doing, not we're going to do, we're doing in all the country. And it's going to give us much efficiencies in everything. And not only efficiencies, it's going to be much easy for all our customers to deal with us. So in our customer care centers, in our web pages, in our invoices, in the apps, in everything. So we're having a good project there. Plus, in -- it goes from purchasing and acquisitions, we're working very hard on that, to all these new projects, infrastructure projects. I don't know, Oscar, if you want to add other projects that we're having.

[Oscar Von Hauske Solís, executive]

No. As you mentioned, the digital transformation goals to e-care, e-billing, e-supporting, try to digitalize all the interaction with the customers. It could be in our commercial offices, in the IVRs, in the web page, in the applications, through monitoring their social networks in order to really be fast to support the customers. So we are sending our 360 view of the customers, digitalizing as much as we can all these interactions is one. Daniel mentioned we are doing it in the network, trying to reduce the cost to handle data traffic in the network. That's photonics. We are getting closer, the fiber to customers. We are doing a lot of catching and peering to review the cost of the company's network. So it has different efforts and definitely in each of the country, depend in the needs of the different countries.

[Daniel Hajj Aboumrad, executive]

And these efforts are also coming with new net sale plans, commercial plans by an example, in Brazil, something that is working very, very good is we call them Pasaporte America. That is you can take your phone to all Latin America without charging any roaming or anything. So in Central America, we're having that. In Mexico, we have it with U.S. and Canada. So with all these things that we're doing, we are also doing new things in the commercial side. So there's a big plan that we're having on that.

[Daniel Federle, analyst]

Okay. And related to the second question...

[Daniel Hajj Aboumrad, executive]

Second question, no, that's only the first. Just regarding the matter of long distance, as I mentioned during the third quarter compared to the fourth quarter, the revenues coming from the long-distance have already stabilized. They are 1.2% above the third quarter revenues. So going forward, these might be the trends that we will be looking forward. It's important to remember that in 2018, we are going to further reduce the call pay for our customers. Therefore, that decrease in the tariff would be to enhance the products that we have. And therefore, you might see an impact in other revenues, all the voice revenues.

[Operator]

The next question comes from Julio Arciniegas with RBC.

[Julio Arciniegas, analyst]

Regarding Colombia, what should we expect from mobile ARPU in Colombia as each one of the few countries where ARPU is declining? Is this ARPU performance related to less mobile data takeup versus other countries? Or it's just pricing pressure? And my second question is regarding Puerto Rico. When do we expect to have the fixed service fully restored?

[Daniel Hajj Aboumrad, executive]

Well, in Colombia, let's divide to the peaks. I think it's growing very well. We're growing. We're doing very good in broadband, in TV. Our margins are expanding. I think we have a very good technology. And the people where we're pulling our services is very happy. So we're doing very good. The people -- what people thinks about the service is excellent. So we're growing, and we're doing very good. In the other side in the mobile, in the mobile, it's being more competition. It's tough. In the postpaid, we have been having some problems with some acquisitions of some customers. But we are changing some plans, some ways of doing that from people that is getting -- and we are acquiring some customers that, at the end, they are not consuming what we feel they are going to consume. So we're changing a little bit on that. In prepaid, the market is difficult because rates are going down, more social networks, more of that. But I think in this year, I think it's going to be more stable, and we're going to do much better. I have a good view in the future for Colombia. We're working also hard in efficiencies, in controls. And we are -- I think we can see some improvements in the year. The margins are not bad. The margins are around 40%. So it's difficult to increase a good margin. But we're doing a lot of things to improve that.

[Carlos Jose Garcia Moreno Elizondo, executive]

To the quarter that Daniel is mentioning, the fixed revenues in Colombia, service revenues are up 10% year-on-year. But mobile revenue was up. So it indicates that fixed is growing very, very well. But the mobile market has had more issues, including regulatory, and I think that that's something that we need to shake off.

[Julio Arciniegas, analyst]

And regarding Puerto Rico?

[Daniel Hajj Aboumrad, executive]

Puerto Rico, look, Puerto Rico, I think we've had a very tough fourth quarter. It's because the hurricane was -- I think it was in September, mid of September. So really, the tough situation was in October and November. So we have a tough quarter, even negative in EBITDA or what we have in the quarter, because we have to give to our customers a lot of credit notes, and we have to spend a lot of money reestablishing all our networks. Today, we have the mobile network maybe 99% working. It's doing good. We do a lot of work to reestablish everything there, even that the energy is not 100% working. So we are having 99% of our network working. We have big fiber optic rings that we also recover during the last quarter. And in those places, in those sectors, we're okay. In the peaks, still we are working very hard in the peaks. And I think it's going to take us a little bit of time to do that. We are, let's say, renewing some part of our fixed network. So in places where we don't have the peak service already peaks, we're giving them some wireless phones for them to use them. Competition is tough. But I think first quarter, you're going to see a recovery of what we are having last quarter, so in terms of revenues and EBITDA, I think. But still we are putting a lot of money in this fixed network to reestablish everything. So I hope that in the second quarter of this year, we should be as normal as what we have last year. But still, this quarter, we're going to do so much better than the last one. But still, we're going to do some expenses to reestablish everything. I think that we are much better than the competitors right now with, but much better than what -- some of our competitors are doing.

[Operator]

Our next question comes from Soomit Datta with New Street Research.

[Soomit Datta, analyst]

Two or three questions, please. Just first, a couple on Mexico. Can you comment at all on Blue Telecomm, which I think is pushing increasingly nationwide? Or is it backed by Televisa? At the moment, it still seems to be a slightly tentative process, but I just wondered whether you've seen any impact yet or if you have any thoughts on what impact that might have on the fixed business.

[Daniel Hajj Aboumrad, executive]

I don't get your -- no, sorry. Can you...

[Soomit Datta, analyst]

Sure. Sorry, I'll repeat it, yes. I was asking a question on competition in Mexican fixed. Blue Telecomm, I think, have pushed more nationwide in the last couple of weeks or so. I wondered what impact you thought that might have on your fixed business, Telmex, in 2018.

[Daniel Hajj Aboumrad, executive]

Well, I think we -- Carlos can talk a little bit more on that. But I think in Mexico, we're having a lot of competition all around. If Televisa is entering in new markets, well, I think they are already in a lot of markets. So I don't see like a new competition or a specific competition. And we have been having competitions all over also. That's our discussion with the regulators. The competition is there, and there's a big competition. So that's some of the discussions that we're having with them. So where it's not -- where we don't have -- where they don't have competition is in TV, and that's where we need to have that concession to have TV in Mexico. There's no competition there, okay?

[Soomit Datta, analyst]

Okay. And then just a follow-up, please. Just back to Red Compartida, are you planning on using the network yourselves? Have you had any discussions there regarding wholesale pricing? Are you keen to start deploying 700 or start using the 700 spectrum via their network this year?

[Daniel Hajj Aboumrad, executive]

Well, I think 700 is a very good frequency because you have a lot of coverage, and it's good for the wireless. And Red Compartida is going to be another competitor. And well, we're going to compete against them. And as -- the way we think we can compete, as I told you, is with good service, with good network, good coverage, a lot of speed, quality in the service, and that's where we're going to compete. So that's mainly what we have.

[Soomit Datta, analyst]

So does that mean you're not going to use their network?

[Daniel Hajj Aboumrad, executive]

We're not planning -- your question is if I'm going to use Altán Redes, no, I don't think we're planning to use Altán. It doesn't make sense. It's not because I don't want, it's because I don't think they are going to give me something that I don't have. So I have good network, good quality, better coverage than them. So it's -- no, I don't think we're going to use Altán Redes.

[Operator]

The next question comes from Carlos de Legarreta

With GBM.

[Carlos de Legarreta Diaz, analyst]

My questions are regarding the U.S. The first will be, what is the potential impact from the fiscal reform? And the second would be regarding the SafeLink program. We saw a number of disconnections this quarter, and I'm just wondering if this should be a one-off or we should see more going forward.

[Daniel Hajj Aboumrad, executive]

No, I think in the Straight Talk program, I think we have been -- SafeLink program, we have been disconnecting some of the subscribers. It's a program, it's a lifeline program that the government is subsidizing to some customers. They changed some rules in this program, and that's why we are disconnecting a lot of them because their rules changed. And then you have to add a lot more data. So I think the program is starting to be a little bit more complicated, and that's the reason why we're disconnecting a lot of them in SafeLink. But in U.S., we have other brands, other straight ops into mobile, Page Plus, total wireless. So a lot of these brands with higher ARPUs, we are improving. Competition is tough. Every month or every 2 months, you have to add more and more data to the plans. But I think we are doing good in these other plans. And this year, we're going to gain subscribers in all of these plans. And I still think that in SafeLink, we are going to still disconnect for some months customers that they are not consuming or they are not using this service. So that's more or less what is happening in U.S. in platform. Competition in prepaid is becoming more aggressive. So you have to add more service, more data, more things to your plans. And that's -- well, that's what is happening all around Latin America.

[Carlos Jose Garcia Moreno Elizondo, executive]

Just to add to what Daniel is saying. In the case of Straight Talk, which is the main brand of the company, we have introduced recently a new $50 plan that has unlimited voice, unlimited data, unlimited SMS, and we've got tremendous acceptance. So I think, again, we have our main brand, and we have a good expectation that it can continue to do well, with basic advantage sold exclusively through Wal-Mart.

[Carlos de Legarreta Diaz, analyst]

And regarding the tax reform, I mean, is that -- does that change anything that you guys are planning to do in the U.S.?

[Daniel Hajj Aboumrad, executive]

I think it -- other than it reduces the tax rate from 35 or thereabouts to 21, I'd say that one question is it reduces the tax rate, but reduces also the deductions, in some cases, that we're going to have. So it's not going to be as high as 35 to 21. Carlos?

[Carlos Jose Garcia Moreno Elizondo, executive]

That's right, but maybe the applicable tax rate will be coming down significantly. And so the issue at the end of the day is a dividend thrown back to Mexico. Then there's particularly no change in the tax regime. So that's the things that we need to understand better to see if there are going to be any changes also in the tax laws in Mexico.

[Operator]

The next question comes from Masha Kahn with Deutsche Bank.

[Maria Kahn, analyst]

I've got a quick question on Colombia. When do you expect to get 700 megahertz spectrum? And what's the update or the latest in the auction there? And the second question is on financing handsets versus and doing subsidies in the past. If you could just probably estimate the impact on moving to financing, and whether you've seen any pickup in bad debt, that would really help.

[Daniel Hajj Aboumrad, executive]

I don't hear you very well, but the first question is about the spectrum in Colombia. Well...

[Maria Kahn, analyst]

Colombia, 700.

[Daniel Hajj Aboumrad, executive]

That 700 spectrum in Colombia, I think we are interested in that spectrum. We are discussing with them the bidding process and the rules that they are going to put for that spectrum. So we are in that moment discussing with the regulator. But of course, we are interested in the 700 spectrum in Colombia. It's a good spectrum. And that's good for us and good for Colombia because then we're going to be allowed to give more speed, more coverage to all the Colombian people. So both gains. So I hope we can get good, let's say, rules in this spectrum. And in the financing, in the handsets, we have been financing handsets for maybe 2 years. And it's been good. I think what helped us to give a better handset to the customer. And then with a better handset, the customer can use more data and do more things, more applications. And we're doing that maybe all around Latin America, every place in Latin America. And in some places, we have a little bit higher bad debt than in other ones. But all overall, our program has been very successful and very good.

[Maria Kahn, analyst]

Okay. So the 700 is expected this year most likely, right? And it's not part of your CapEx guidance?

[Daniel Hajj Aboumrad, executive]

Yes, yes, yes. I hope so it will be this year. So the government still doesn't say exactly when it's going to be, but I hope it would be this year. And everything that we are discussing is going to be inside this budget that we have.

[Maria Kahn, analyst]

So that's included in the MXN 8 billion CapEx guidance, that spectrum?

[Daniel Hajj Aboumrad, executive]

Yes, yes.

[Operator]

The next question comes from Maria Azevedo with UBS.

[Maria Tereza Azevedo, analyst]

I would like to know if you see any opportunities in Brazil in terms of potential M&A, but not only M&A, also in terms of network sharing agreement and infrastructure sharing with Oi and the other players? And if you have any expectations of 5G spectrum auction or even participating on the 700 leftover that Brazil regulator has made comments about?

[Daniel Hajj Aboumrad, executive]

The first one about the 5G, I think it's too early. We are launching our 4.5 network in Brazil, very successful. We are the first one to launch the 4.5G network. And we are happy. Our customers are very happy with that. M&A, well, M&A -- I don't hear a lot of things on M&A right now. I think Oi has already restructured some part of their debt. So if they are going to -- having a share agreement with some of us, I don't know. There is still -- we haven't talked with them at this moment. We are open always to discuss everything with everybody. And I don't know what's going to be the strategy of Oi at this moment. But well, I think, Oi, they, maybe for 2 or 3 years, has been trying to restructure their debt and doing that. So in my view, they still have a lot of things to do at this moment. So, well, that's how I see the things in Brazil. Brazil, a lot of competition, not crazy competition, but a lot of competition. So Brazil is still a very competitive place. And I hope that the economy will recover fast, so that will be very good for all the sector.

[Operator]

Our last question comes from Alejandro Gallostra with BBVA.

[Alejandro Gallostra, analyst]

I have a question on the cost-cutting initiatives that you're implementing in Mexico and the margin improvements that you expect. I was specifically wondering, how much of that should come from the new interconnection rates if you plan to keep all of these savings? Or do you plan to transfer some of them to the customers, and perhaps if you could quantify the margin improvement in Mexico? And second, I was also wondering, what are your views of a potential change in Mexican government? More specifically if AMLO were to win, would you expect significant changes in the industry?

[Daniel Hajj Aboumrad, executive]

The first one is we don't see if I understand your question because we don't do things because, let's say, what you are saying is how much of the interconnection rates that we're getting is moving to the customer. So we don't see or we don't do things that way. We have been implementing a digital transformation customer care plan, better network plans in 1 or 2 years and improving and improving, and that's not because of the interconnection rate. So we have been doing that for a long time. And we are going to still doing that because I think that's the future of the company, not because they give us interconnection or we don't have interconnection. So that's different. So we're looking long term. I mean, best thing for our customers are for the long term of the company. So that's what we're doing. And we are -- in América Móvil, we are not -- we are, as retail, investing in Mexico. And independence of who's winning or who will win, we are going to invest on what we're going to do, what we need to do to have the best network, the best distribution, the best brand, good customer care centers, we have around 400 today, and we are remodeling them and making our customers to get in and have a good experience there. So we are doing a lot of investments, and we're doing that for the long term. So we're not moving anything because elections or not elections.

[Alejandro Gallostra, analyst]

So I understand that most of the margin improvements and operating improvements in Mexico will come from all these strategies that you just mentioned. I was just wondering how that compares to the margin improvement that you should get from the new interconnection rates if this should be a significant improvement, a significant portion of the EBITDA margin improvement that you expect? Or if most of the improvements should come from all the strategies that you just mentioned?

[Daniel Hajj Aboumrad, executive]

I think the improvement that you see is cost-cutting efficiencies, more consumption. Look, the ARPUs of the people, it's consuming more. In the cost-cutting, it's a little bit interconnection, but then we have to pay fees for the new frequencies. So, well, it's different. So all overall, it's giving us -- it's not only one thing that we're doing. We are doing a lot of things and, all overall, is giving us this improvement on EBITDA. So that's -- I don't have it separate how much and what percentages because each of the things, no, I don't have it that way.

[Alejandro Gallostra, analyst]

Just to clarify, my second question, do you think that the change in government would significantly change the dynamics in the industry? Or do you think that these dynamics would stay pretty much the same? Nothing significantly would change?

[Daniel Hajj Aboumrad, executive]

No. As I said, we're investing for the long term, not investing for the short term. And when you invest for the long term, then you have your investments done for a long time. So that's the only thing I can tell you. So depending on who wins, what we really care is about our customers. So we're investing in Mexico, in our customers, and that's the plan we're having for 2018. And that's the plan for the last 10 years that we have been having now.

[Daniela Lecuona Torras, executive]

Thank you. This was the last question. We thank everyone on the line. Go ahead, Loreta.

[Operator]

Sorry, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Daniel Hajj for any closing remarks. Please go ahead, sir.

[Daniel Hajj Aboumrad, executive]

Thank you, everybody, for being in the call, and thank you, Loreta. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.