Earnings Call Transcript - VIV Q4 2020

Operator, Operator

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the Telefónica Brasil Fourth Quarter of 2020 and 2020 Earnings Conference Call. Today with us representing the management of Telefónica Brasil, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Luis Plaster, IR Director. We also have a simultaneous webcast with slide presentation on the internet that can be accessed at the website www.telefonica.com.br/ir. There will be a replay facility for this call on the website. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reforming Act of 1996. Forward-looking statements are based on the company’s management beliefs and assumptions and on information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the company’s future results and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Luis Plaster, Investor Relations Director of Telefónica Brasil. Mr. Plaster, you may begin your conference.

Luis Plaster, Investor Relations Director

Thank you. Good morning, and welcome to Telefónica Brasil’s Conference Call to discuss 2020 fourth quarter and full year results. The call will be divided as follows: First, our CEO, Christian Gebara, will give you an overview of our operational and financial performance. Then our CFO, David Melcon, will comment on the acquisition of Oi’s mobile assets, our cost and CapEx management, and our shareholder remuneration for 2020. To conclude, Christian will comment on our ESG initiatives and then move to the Q&A. Now, I hand it over to Chris.

Christian Gebara, CEO

Thank you, Plaster. Good morning, everyone, and thank you for attending our earnings call. I would like to start by giving an overview of 2020. The pandemic has accelerated Brazil’s digital transformation which confirms the importance of our services. During this challenging year, Vivo delivered a solid set of results, driven by the increased demand for our high-quality and reliable connectivity. Our purpose of digitalizing to bring closer has never been so appropriate. We ended the year with 95 million access. In mobiles, we added four million customers, ending 2020 with Vivo’s market share at historic heights of 33.6%. Our fiber deployment continued at full speed, reaching 15.7 million home passed, an increase of 4.7 million HPs, which is more than double what we did in 2019. FTTH revenues increased by 52.9% year-over-year in the fourth quarter. In terms of profitability and despite the headwinds of the temporary confinement measures, our resilient EBITDA totaled BRL 17.8 billion. The EBITDA margin increased 0.2 percentage points year-over-year, reaching 41.3% due to the performance of our growing business and effective cost management that I will elaborate on later in the presentation. We were also able to deliver our highest ever level of free cash flow, BRL 9.6 billion, growing 12.6% year-over-year. All these factors allowed us to propose a shareholder remuneration of BRL 5.4 billion for the year, with a payout of 113.6% and a dividend yield of 7%, which is more than 3x higher than the local interest rates. Moving to Slide 4, you can see that the recovery of revenues in key segments was consistent throughout 2020. Postpaid revenues grew 4.9% quarter-over-quarter due to the acceleration of net additions and continued execution of our More for More strategy. Prepaid also continued to outperform with revenues increasing 4.3% quarter-over-quarter, driven by a robust level of net additions and recurring top-ups. FTTH revenues rose 8.2% quarter-over-quarter, supported by the constant growth of the customer base and migration to higher speeds. Lastly, handset sales continued to recover, growing 14% compared to the previous quarter. This performance benefited from improved commercial activity and the success of our end-of-the-year campaigns like Black Friday. On Slide 5, we saw the transformation of Vivo’s revenue profile, which validates our positive outlook for the future. We divided our total revenues into two categories: core and noncore businesses. Our core businesses are based on high-speed connectivity, both fixed and mobile, which is a key enabler for digital services. The results indicate that Vivo is increasing its relevance in today’s cutting-edge technologies like fiber, and is in the best position to explore the full potential of customers’ digital lives. Vivo’s core businesses include mobile, handsets, FTTx, IPTV, digital services, and data & ICT. These segments represent 88% of our total revenues and grew 3.2% year-over-year, mainly due to the positive results for FTTH and consistent performance in mobile. The noncore businesses, which represent 12% of revenues, dropped 26.4% year-over-year, being made up of mature legacy technologies that we have strategically decided to deprioritize. The fixed-to-mobile substitution and the voice-to-data migration are consolidated realities with no going back. We no longer foster the commercialization of ADSL, which is an obsolete technology, and we stopped actively selling DTH back in mid-2019. As a result, from now on, we’ll focus our presentations on the core business to better convey the company that lives today and the future that we foresee. On Slide 6, you can see that total mobile revenues increased 1.6% year-over-year despite the impact of the pandemic on handset sales. Prepaid revenues grew 7.3%, driven by an impressive volume of net additions and continued efforts related to customer base management. The postpaid segment, which accounts for 57% of access and 80% of mobile services revenues, was up 0.9% year-over-year and showed ARPU improvement. We continue to execute our More for More strategy and are combining data with a complete portfolio of co-branded digital services. These actions are paying off, and we are optimistic going forward. Turning to Slide 7, we also again reaffirmed our mobile leadership, and our market share remains at historic highs, reaching 33.6% in December of 2020. Postpaid churn saw a reduction of 0.53 percentage points year-over-year and stands at the lowest level in five years. On the bottom left-hand side of the slide, we show the breakdown of postpaid additions and how they have been improving. In the fourth quarter of 2020, we had 638,000 net adds. Prepaid also had another strong quarter of net additions, 905,000, which indicates how quality connectivity is increasingly important across all segments. On Slide 8, we show the performance of our core fixed business that grew 9.1% year-over-year. The data & ICT line decreased 4.2% due to many companies postponing investments during the pandemic. However, we are convinced that Vivo’s revamped B2B portfolio puts us in a privileged position to capture this opportunity as soon as the economy picks up. FTTx revenues were up 13.8%, driven by the relevance of FTTH, which represents 73% of these revenues. FTTH is our main growth catalyst, delivering an impressive 52.9% revenue increase year-over-year and a compound annual growth of 45% in the recent past. As we expand our FTTH footprint, IPTV access and revenues also grow. During the last two years, IPTV revenues posted a compound annual growth rate of 25% confirming the appeal of a high-speed broadband and content platform. Moving to Slide 9, you can see the ramp-up of our fiber access and the constantly improving quality of our customer base. Our fiber products continue to attract more customers, resulting in a 36% increase in FTTH access year-over-year. We also saw a substantial increase in FTTH ARPU, 13% year-over-year, mainly related to the demand for higher speeds. Moving to the right-hand side of the slide, we present the acceleration of FTTH net adds that totaled 248,000 in the fourth quarter of 2020, 1.7x higher than the previous year. I would also like to highlight the high-value profile of last quarter’s FTTH gross adds. More than 35% were convergent customers. Approximately 30% were on speeds of 300 megabits. Approximately 20% were sold together with IPTV. And more than 25% were bundled with OTTs like Netflix and Disney+. On Slide 10, we show how our fiber deployment continues accelerating. As mentioned, we ended 2020 with 15.7 million home passed, an increase of 4.7 million year-over-year. By year-end, our fiber footprint covered 266 cities, reinforcing our commitment to offering a best-in-class experience across Brazil. The cities we launched over the last two years have already achieved expected penetration rates, confirming the accuracy of our strategic fiber deployment plan. Vivo has the largest FTTH footprint in Latin America, which is equivalent to the sum of home passed in the UK, Germany, Netherlands, and Australia. We also lead in terms of homes connected with a 20.3% market share in FTTH, which is more than six percentage points ahead of the second player. But we still see that there is room for further fiber growth in Brazil, and we plan to reach at least 24 million home passed by the end of 2024. One of the ways that we’ll be doing this is by launching an independent neutral fiber network. The initiative is progressing well. We have entered an advanced phase of negotiations together with Telefónica Infra and a major international investor and expect to sign in the near future. Vivo will be the anchor tenant carving out 1.6 million brownfield home passed, and the target is to reach at least 5.5 million home passed with FTTH in four years. We will keep you updated as soon as there are further developments. Moving to Slide 11, we would like to share some KPIs that illustrate Vivo's initial success in expanding its portfolio beyond traditional telco services. One of our key initiatives is Vivo Money, our 100% digital personal loan platform. Vivo Money is in its early stages, but since launch in October, we have seen positive results. New contracts per month increased 2.5x, and monthly credit origination grew 2.4x in just two months. Vivo Money stepped up not only for simple and quick lending but also for its focus on high-quality mobile customers with a digital profile. We’re seeing that Vivo Money is attracting customers that demonstrate higher adoption of our Meu Vivo chat. Another process developed in the fourth quarter was our digital marketplace, loja.vivo.com.br, launched in July 2020. We had an increase of 6.7x in gross merchandise value quarter-over-quarter. Loja Vivo is key to our strategy of becoming a one-stop shop for our customers’ technology and connectivity needs. Vivo Empresas is a digital hub for B2B, delivering a unique set of corporate solutions. Our Cloud and Cyber Security segments proved how resilient we are despite this year’s economic downturn, growing revenues 77% and 116%, respectively. Another initiative, Vivo Ads, our digital advertising platform, saw its revenues grow 14% year-over-year. In August, we launched a self-service sales channel aimed at expanding our reach to small and medium enterprises, making it possible for them to access mobile marketing campaigns. To conclude, the Terra Portal remains the third largest portal in the country with BRL 211 million per month in 2020, an increase of 35% year-over-year due to improved media coverage, which also contributed to Vivo Ads revenues. Now I’d like to pass it over to David, our CFO.

David Melcon, CFO

Good morning, everyone, and thank you, Christian. Moving to Slide 12, I would like to present a brief overview of the acquisition of Oi’s mobile assets. This opportunity will consolidate Vivo’s leadership in quality of services, which is one of our historic strengths, and contribute to the generation of additional value for shareholders through the capture of synergies. The joint bid that won the auction on December 14, 2020, was set at BRL 16.5 billion, of which we paid BRL 5.5 billion. [Technical Difficulty] Okay. Thank you. Let’s continue with Slide 12. So these are the key milestones of the overall decision process, and we are confident that the transaction will be completed by the end of 2021. As you can see on the bottom left-hand side of the slide, this represents a unique opportunity for Vivo. With the utilization of spectrum frequencies, we will strengthen our value offering and, through the acquisition of customers in regions where we have a lower market share, we will be able to use our network better and broaden our customer base. Additionally, OpEx and CapEx synergies will certainly be enhanced by a solid track record of previous integrations, such as the case with the acquisition of GVT in 2015. Furthermore, this movement is positive, not only for Vivo but for the telco industry and Brazilian society as a whole. There will be a mass upgrade in customer experience given the improvement of network usage in all corners of the country and further acceleration of investments dedicated to infrastructure and innovation to advance Brazil’s digitalization process. Turning to Slide 13, we saw our continuous commitment to improving our cost structure; recurring costs, excluding cost of goods sold, contracted by 4.2% year-over-year in nominal terms. In order to discount the effect of inflation, we will see an even more impressive 8.7% decrease. G&A and personnel costs were benefited by ongoing optimization initiatives and temporary government measures such as payroll subsidies. Commercial expenses saw a 9.2% reduction, driven by our digitalization and simplification efforts. Another positive factor has been the greater use of digital channels across our customer base, decreasing expenses related to commission, call center, billing, and advertising. The provision for bad debt also dropped 9% year-over-year, reflecting our customers’ concern to maintain their payments up-to-date as well as the measures we have implemented, such as offering the option to pay in installments. The cost of services rendered decreased 10% year-over-year due to higher interconnection costs and valuable regulatory fees impacted by the acceleration of the mobile customer base and the growing demand for digital services through partnerships. As a result, our recurring EBITDA totaled almost BRL 4.9 billion in the fourth quarter of 2020, with a margin of 43.6%. On Slide 14, we present figures from our digitalization and simplification fronts that are key drivers for sequential cost contraction and improved customer experience. In December, e-billing penetration hit 84%, a significant 12 percentage point increase year-over-year, while payments made through digital platforms now represent 64% of collections. Presently, we started offering digital technical support, and this new way of caring for our customers already represents 25% of the overall technical support. We were able to reduce call center costs by 24% in 2020 through the growing use of channels like Vivo, artificial intelligence with Aura, and a selection of WhatsApp solutions. The enhanced acceptance from our customers for digital options was also seen in prepaid top-ups and B2C sales. In December 2020, 37% of the charges were made through digital platforms. And our B2B digital sales increased 61% year-over-year, even though there is still room to advance in the digitalization journey, both internally, performing our back offices and in how we interact and serve our customers. On the right-hand side of the slide, you can see that since 2017, we delivered OpEx savings of BRL 1.5 billion. Our OpEx savings improved sequentially from BRL 394 million in 2019 to BRL 624 million in 2020. We ended the year having reached 94% of our 2021 target of BRL 1.6 billion. But let me again reinforce that we are confident that we can do even more. Moving to Slide 15, on the left-hand side of the slide, we can see the performance of our smart CapEx allocation. Our CapEx ratio decreased 1.9 percentage points year-over-year, and our CapEx decreased 11.9% in relation to the previous year. Regardless of the reduction in CapEx, we invested even more in FTTH and cutting-edge technologies in general. Growing technologies account for 70% of our total CapEx investment. I would also like to share more details regarding our network sharing agreement with partners, which is divided into three main products. In 4G coverage expansion, we have already reached 348 new cities, and we expect to close the first semester of the year with 730 cities covered, half for each operator. On the other front, we have network consolidation that will result in a single-grid model, focused on cities below 30,000 in EBITDA. We are currently carrying out a pilot in 50 cities, which will be completed during 2021, and I will then be able to define the next asset. The full potential of this front involves extending the model to 1,600 cities. Lastly, we have the 2G network shutdown, which means that each operator will switch off half of the 2G sites. The alignment phase is ongoing, and rollout is expected for the third quarter. Through network sharing, we will enhance 4G coverage and achieve better network capacity and OpEx and CapEx efficiency. We are enthusiastic about the future of this agreement and our commitment to quality and optimizing our investment. Turning to the next slide, I’m happy to report the conclusion of the unification of share classes. Since November 23 this year, we are trading with only the B3 tickers in the Brazilian market, while our ADR’s ticker remains unchanged. This represents a significant step towards a greater level of governance, granting all shareholders tag-along and voting rights. I would also like to give you an update about the share buyback program. So far, we have acquired 1.3 million shares for a total value of BRL 58 million. We continue to be active, and the program will be in place until January 2022. Finally, enforcing our commitment to our shareholders, we are proposing a remuneration of BRL 5.4 billion for 2020, which represents a payout of 113% and a gross amount of BRL 3.2 per share. Our dividend yield stands at 7%, more than 3x the local interest rate. The payment of this amount will be divided into two tranches: the first tranche of BRL 2.6 billion will be paid on July 13, and the second tranche of BRL 2.8 billion will be paid on October 5, 2021. This remuneration has been proposed by the Board of Directors and is pending the necessary approvals by the General Shareholders’ Meeting to be held on April 15. And finally, moving to Slide 17, you can see that our efficient financial management and CapEx allocation continue to have a positive impact on cash generation. We ended the year with BRL 9.6 billion of free cash flow, our highest level ever. This result, in combination with a low leverage, is what allowed us to consistently invest in our core business, consolidate Vivo’s leadership, and look to the future with a positive perspective. Thank you. And now I pass the word back to Christian.

Christian Gebara, CEO

Thank you, David. To conclude today’s presentation, I would like to comment on the progress and some of the results around our commitment to ESG. Regarding our environmental initiatives, Recycle with Vivo collected 7.7 tons of electronic waste in 2020, an increase of 15% in comparison to 2019. Vivo, in its first local submission to the Carbon Disclosure Project, received the best grade in the assessment and was included in its prestigious A list. As for our social actions, Fundação Telefónica Vivo invested BRL 59.4 million in education last year, benefiting 2.4 million students and teachers. In response to the ongoing pandemic, there was also an additional investment of BRL 36.6 million in donations, totaling BRL 96 million in 2020. Last month, Vivo also donated through Fundação Telefónica an additional BRL 300,000 for the purchase of medical equipment in the state of Amazonas. Vivo was also recognized for its commitment to promoting diversity and social inclusion by winning the CNN Notable Awards in the diversity category. Another important achievement is the fact that we were classified as Industry Mover in S&P’s Sustainability Yearbook. Finally, Vivo maintained its listing in the main ESG indexes like Corporate Sustainability Index and Carbon Efficient Index, and our compliance program obtained the DSC 10,000 certificates, guaranteeing our conformity with Brazilian anti-corruption laws and regulations. These are just a few examples of how Vivo seeks to be a protagonist in promoting sustainable development contributing to our society. Thank you, and we can now move to Q&A.

Operator, Operator

Thank you. The floor is now open for questions. Our first question comes from Fred Mendes, Bradesco BBI.

Fred Mendes, Analyst

Hello, good morning everyone. I have two questions here. I mean, the first one related to the FTTH, a strong increase again in the ARPU. And it looks like the higher speed products like the 300 megabits are driving this growth. So in the first question here, do you see room to increase the ARPU above BRL 90, which is the average that we have here? And then on the same topic, if these clients that you are adding have very strong net addition again, if you are getting clients from the competition or if that’s based on upgrade from the corporate clients that you already have?

Christian Gebara, CEO

Fred, that’s Christian. Regarding the second question about the net adds, most of it is new customers that are coming in. So most of the net adds are coming from new customers, as well as new cities that we enter or penetration of the existing network. So most of it is coming from new customers. Regarding ARPU, yes, as you correctly stated, ARPU is improving for two reasons. We are selling more, the mix of high-speed 300 is growing, and we still see room for growing even more. We are also blending together with our broadband offer OTTs, such as Netflix, which has been very successful. We added Disney+, and we’re going to add others in the near future. So blending content with fiber is a strategy going forward that we are going to follow, and also increasing and improving the mix of higher-speed offerings will also be central to our strategy. So ARPU may continue with this positive trend.

Fred Mendes, Analyst

And if I may, just a quick follow-up. You briefly mentioned about the carve-out process during the beginning of the presentation, but can you give us a little bit more detail on that?

Christian Gebara, CEO

Okay, Fred. So as we ended the year with 15.7 million home passed, out of these 15.7 million, we’re going to carve out 1.6 million. We’re going to contribute these to a new independent and neutral fiber network in Brazil. Vivo is contributing this 1.6 million brownfield HPs, with an international investor as a partner and Telefónica Infra, part of the Telefónica Group, also as a partner in this vehicle and in this company. The objective is to end 2024 with a network of more than 5.5 million HPs that contribute to the 24 million HPs that we mentioned also in this presentation. This will combine organic growth from Vivo with the 5.5% originating from the neutral network.

Leonardo Olmos, Analyst

Hi, good morning everyone. My question is on mobile. We noticed a very wide range of net additions in the quarter, a max with over three million subs to 300,000, so my question is: I want to understand your strategy on net additions in the fourth quarter of 2020? What was it? And how do you see that right now in 2021?

Christian Gebara, CEO

Leonardo, this is Christian. As we stated at the beginning, we are seeing a recovery. I will talk about postpaid first and then we can discuss prepaid. In the postpaid segment, after the difficult months of March and April, we saw a reopening of the economy. When the reopening occurred, we also opened our stores and physical channels, and we notice a better mood for customers to visit malls and stores to buy telecom services or technology services. So, I believe we were able to capture this positive trend as the economy reopened and our channels became active again. I also believe that our superior quality and customer experience drove the decision for some customers to select Vivo as their operator, which is evident in our reduced churn rate as well. Our churn in postpaid was one of the lowest in the last five years. That is a positive metric. We’ve been innovating our offer as well, especially with the Selfie plan, which combines data with an OTT on a value-added service level. We have strong partnerships in this segment and launched it just after the pandemic started in May-June. Partnerships with Happy for delivery, Netflix for video, Spotify for music, and Premier for football, as well as Disney+, and we are about to launch new partnerships. This integration of content plus data stands out as a very positive initiative. We are also successfully migrating prepaid to postpaid. Our net debt in the prepaid segment was strong in the third quarter, giving us room for migration to hybrid plans, and that is going to pay off in the long term. Overall, we are recovering our business with more mobility than before. Many people are purchasing new SIM cards, which allows us to capture those new customers consistently. Once again, quality and coverage are key strengths for us.

Leonardo Olmos, Analyst

You mentioned that migration from prepaid to postpaid or hybrid plans. Looking at your own base, especially considering the new prepaid growth recently, how long do you think that can continue? How many more clients do you think you can migrate from prepaid to hybrid or postpaid?

Christian Gebara, CEO

Leonardo, prepaid continues to increase. While we keep bringing customers in, there’s always room for migration. I cannot tell you how long this will last; it’s more about our ability to create very appealing offers that meet the customers' needs. Currently, our percentage of postpaid customers is already quite high, and we’re putting a lot of effort into effectively transitioning customers from prepaid to postpaid. Today, we have 45 million access in postpaid and 34 million access in prepaid, with 35 million in prepaid having been added just last quarter. We will continue to work on migrating customers to enhance our offerings.

Marcelo Santos, Analyst

Hi, good morning. Thank you for taking my questions. I would like to explore a little bit more the digital initiatives you presented on Slide 11, Vivo Money and Vivo Marketplace. I wonder if you could give a little bit more detail on Vivo Money. How far has this been running as a fully implemented initiative? I understand you ran it as a pilot for a while, but is it available to all? What are the main hurdles to grow? Are you considering alternatives for funding? Do you foresee launching some kind of technical solutions? Any data you could share about losses or delinquency would also be interesting. On the Marketplace, how are you handling the channels? Are you primarily using the app, or is it more through the internet? What incentives are you providing to bring sellers? How do you manage logistics? Any additional color on these initiatives would be greatly appreciated.

Christian Gebara, CEO

Marcelo, you asked great questions. To start, we strongly believe in our ability to leverage digital services through our customer base, channel capillarity, both physical and online, our big data capabilities, and the strength of our brand. Vivo Money, which we included in this presentation, is one of many examples of how we are exploring various sectors and verticals. Financial services is one of them, hardware and accessories is another, and health and education are also areas we are working on. Vivo Money has been actively worked on for a long time. We launched it commercially in a segmented approach in October and initially offered it to hybrid and postpaid customers. We have not yet addressed prepaid customers. The loans we are offering range from BRL 1,000 to BRL 30,000 and are entirely digital, as you asked. We typically do this through push marketing campaigns where customers can click and receive credit, along with SMS initiatives to engage customers in need of a loan. Our rates are designed to be competitive compared to similar companies offering credit outside the banking sector. We are currently self-funding through FDIC, but we are going to add more partners as we grow. For context, we started with a certain number in October which was multiplied by 2.5 in December as we expand awareness of the service. We are taking a cautious approach and not doing massive marketing at this point, but rather growing incrementally. That’s only one piece of our broader financial services strategy. We plan to reveal additional financial services in the future. Regarding our e-commerce marketplace, we are focusing on our core technology services while opening up to become a marketplace. That means we not only sell our core services and smartphones but also expand to additional accessories, items for home, etc. We believe we can provide a more expansive range through this marketplace approach. What we have noted is a significant increase in gross merchandise value, which reflects our customers' growing acceptance of digital solutions, and we will continue to enhance this area. If there are more specific questions, I would be happy to address them.

Susana Salaru, Analyst

Hi, good morning. Thank you for taking our questions. We have two. The first question is related to the FTTH growth, which is expanding very quickly. Our question is regarding your pricing strategy. Are you looking to be more aggressive to maintain this growth level going forward? That would be our first question. The second question is related to prepaid top-ups. How much more do you believe that you can increase digital top-ups? I’m asking this because we understand that the acute costs in prepaid are largely due to top-up expenses. How do you see the percentage of digital versus non-digital top-ups in two years?

Christian Gebara, CEO

So, Susana, I think I got your first question regarding FTTH. We are indeed the largest fiber network in the country. Last year, we acquired 4.7 million new homes and nearly one million new customers. We have an ambitious plan to expand into more cities. We are overlaying some of our ADSL and FTTC networks where we see opportunity. We still haven’t played on convergence yet. We can leverage this aspect and our strong market share in mobile. We are forming solid partnerships with OTTs to enhance our FTTH offerings. I believe there is significant room for growth. As for the digital top-ups, we have been steadily increasing our footprint and digital channels. It’s challenging for me to pinpoint just how far we can go, but the growth trajectory is clear. We see more digital payment options coming into play, and more people are acquiring credit cards, which is facilitating the move to digital channels. There are new wallets launching in the market that also help digital penetration. The growth we see here is interconnected with the rise of digital payment methods. I am optimistic that the digital penetration we’re at now will only grow higher in the coming years. We consistently work toward enhancing our digital capabilities and response systems, and I believe we can drive those top-up percentages higher.

Soomit Datta, Analyst

Yes. Hi there. Thanks for taking my questions. First of all, on Oi, we have quite a bit of guidance from your kind of peers, Telecom Italia last night on how their business would look with Oi. I guess you’re not giving anything specific, but I wondered if you could add a bit of color as to the direction of numbers when we think about incorporating Oi, especially since they’ve guided up to some incremental CapEx in 2021 ahead of the deal close? I wondered if you would see a similar step-up in CapEx for preparation?

Christian Gebara, CEO

Thank you for your question, Soomit. As you mentioned, we are not providing much more information about Oi’s acquisition at this stage. What I can share is that this process we’re undergoing has the potential to extend our customer base without incurring additional costs, as these customers will be serviced by our existing network. In regions where we have lower market share, we can utilize our superior coverage and network quality more efficiently. Regarding CapEx, we don’t anticipate additional CapEx for this year as it will be absorbed within our existing project scope. We aim to maintain our focus on delivering effective fiber solutions in line with prior strategies. I’ll pass it over to David for more specific information on the financial aspects.

David Melcon, CFO

Yes. Thank you, Soomit. This is David. To answer your question, we are continuing with our policy to distribute 100% of net income. This year, we have additionally distributed BRL 600 million of reserves that we had on the balance sheet, which results in a very attractive shareholder remuneration, resulting in a dividend yield of around 7%, which is three times the current local interest rate. Given our expected very strong free cash flow generation of over BRL 9 billion this year, we will still have excess cash that could be used partially for the final acquisition of Oi’s assets, which we hope to finalize by year-end. Furthermore, we will likely participate in the upcoming 5G spectrum auction. We believe we can leverage our strong balance sheet and low interest rate environment to fund future opportunities while continuing to reward our shareholders.

Soomit Datta, Analyst

That’s really helpful. Just a very quick follow-up—what is your latest expectation for the 5G auction in terms of structuring cash upfront or wrapped into future coverage? And what is your expectation for timing?

Christian Gebara, CEO

On 5G, we expect to have it by mid-year. However, we are still waiting for Anatel to clarify the rules for the auction process. There have been some discussions, and we hope to receive some information soon that will help us develop our strategy for this auction. The overall expectation is to have a clear sight of the costs and obligations attached to it and to prepare accordingly. Once we have this decision made by Anatel, we can organize our plans for cash allocation and investment.

Maria Teresa Azevedo, Analyst

Hi, thank you for the question. Just a follow-up on the previous question about 5G. Can you please comment on your 5G strategy plans? Are you focusing more on mobile personal mobility or fixed wireless access? Do you expect early adoption for B2B automation and IoT? And do you see any opportunities regarding ARPU or cost efficiencies from 5G networks through virtualization?

Christian Gebara, CEO

Maria, it’s difficult for us to share our specific strategies surrounding 5G at this stage. However, we can confirm that we are evaluating multiple angles, including personal mobility and fixed wireless access with a focus on B2B automation and IoT opportunities. We foresee that 5G will facilitate a range of new functionalities where high data velocity will allow for new applications that may not be feasible with 4G. This includes gaming and many other entertainment solutions. We see a broad spectrum of new applications for both B2B and B2C sectors, especially in smart cities. Of course, 5G will also require significant infrastructure expansion, but we are evaluating how we can incorporate both internal development and potential partnerships to optimize costs and improve efficiency with advanced technologies. I wanted to add regarding the fiber spin-off process; it is indeed in advanced stages with the potential to drive a lower CapEx impact on our balance sheet. It will be structured similarly to the partnerships we have with other infrastructure providers, focusing on reducing costs while maximizing our market position. The aim is for us to be a reliable anchor tenant within this new network and allow organic growth from our existing customer base.

Alejandro Gallostra, Analyst

Hi, good morning everyone. This is Alejandro. Thank you very much for taking my question. You mentioned at the beginning of the call that most of the new subscribers in FTTH come from new customers. However, the pace of these connections from other technologies is still outpacing the number of net additions in FTTH. Even though you benefit from entering new regions with FTTH, why do you think customers from other technologies are migrating to other companies? What is lacking in your offering that might cause this? What initiatives are you taking to increase customer retention?

Christian Gebara, CEO

To clarify, most of the customers we are bringing to FTTH are indeed new customers. However, as you point out, the areas are not the same. There are markets where we do not have FTTH deployed. In places where we have ADSL customers, if they find an alternative fiber provider for higher speeds, they’ll often migrate away. Additionally, I can say we are working hard to retain those customers but some consumers are willing to switch for better services. Where we successfully deploy, we can see migrations from ADSL and FTTC, but retaining existing customers in a competitive marketplace is challenging at times. Our offering is focused on quality and affordability; however, the acceleration of fiber speeds is a clear opportunity, and this will be a critical driver for keeping customers aligned with our offerings. As for how long it will take to cover regions previously served only by FTTC, it depends on the areas we deem strategically valuable for deployment. While we are deploying FTTH extensively, it’s important to balance investment against market potential. This is an ongoing analysis. Thank you all for joining our call today. If you have any additional questions, please reach out to our IR team. I hope to see you soon in the first quarter results release in April. Thank you very much.

Operator, Operator

Thank you. This concludes today’s Telefónica Brasil 4Q 2020 Results conference call. You may disconnect your lines at this time. Have a great day.