INVESTOR DAY David Melcon Chief Financial Officer São Paulo March 15 th 2016
WE HAVE BEEN BUILDING SOLID FOUNDATIONS TO IMPROVE DIFFERENTIATION, GENERATE STRONG RESULTS AND ENHANCE INVESTOR CONFIDENCE R$ 35 billion of Capex, representing 20% of revenues, with focus on providing outstanding connectivity GVT acquisition creating unique positioning Acquiring unrivaled spectrum holdings in 4G (largest band in 2.5GHz + 700 MHz in key metropolitan areas) to support data traffic growth Leadership expansion in key customer segments (mobile postpaid and ultra broadband) Disciplined financial management with high dividend payout ratio (more than R$ 21 Bn, >30% of market cap) and limited leverage Well proven and experienced management For the last 5 years (2011-2015) 2
MAIN ECONOMIC HEADWINDS WERE ADDRESSED IN 2015 Inflation 2 Exchange Rate 2 Energy costs IPCA % 6.4 Average R$/US$ 10.7 6.7 2014 2015 2016 2.7 3.4 4.2 2014 2015 2016 Energy Tariff in R$ +40% EXPOSURE 1 BEFORE ACTIONS TAKEN 50% of Opex 8% of Opex 32% of Capex 16.5% of net debt 3% of Opex ACTIONS TAKEN Full renegotiation with suppliers with readjustment below inflation for 2016 Collective agreement with 7% wage readjustment Passing through the increase in cost of handsets Negotiation with main providers neutralizing FX impact in 2016 Debt fully hedged Replacement of equipment with short term payback Quick wins on efficiency activities Bad Debt Rate R$ 2.6% 1- % on 2015 base. 2- Source: Focus bulletin as of March, 04 th 2016. 2014 2015 3.3% 2.5% 263 341 272 2014 9M15 4Q15 Bad Debt Bad debt / net revenue 4% of Opex 3 Credit and collecting actions already driving bad debt to the previous year level
STILL WE SEE THE SECTOR AS RESILIENT TO SECULAR TRENDS AND SOME ECONOMIC IMPACTS 47 Million people (23% of the Brazilian population) with less than 14 years old² Large potential in new customers 1 51% of population with mobile data coverage but no usage Telecom services are perceived as more essential to consumers than energy and water What will be less consumed by Brazilians? 5 Lunch/Dinner/Snacks out of home 47.7% Telco sector 3 GDP shows resiliency even in recession periods 1Q15 2Q15 3Q15 4Q15 Brazilian GDP GDP-Telco sector/ict Brazilians demand more connectivity than in any other country 4 51% 13% 24% 25% 28% Brazil Japan UK US Global % of users that demand permanent connectivity Cinema 43.1% Supermarket 35.4% Bars and Restaurants 33.7% Clothes, shoes, accessories 31.6% Energy, water 20.4% Beauty Salon 13.5% Travels 13.4% Cellphone 13.2% 1 GSMA and IBGE. 2- IPC_Maps 2015. 3- Telco sector includes telecommunications, IT, audiovisual, press agencies and News services. 4- AT Kearney Analysis. 5- SPC Brasil (Service of Credit Protection) resource. 4
VIVO ACHIEVED SOLID REVENUE GROWTH, EBITDA EXPANSION AND STRONG CASH FLOW GENERATION IN 2015 Key Financial Highlights R$ million 2015¹ %YoY Net Operating Revenue² 42,133.7 4.8 Net Mobile Revenue² 25,136.2 6.2 Net Fixed Revenue 16,997.5 2.7 EBITDA 12,714.2 3.4 EBITDA Margin (%) 30.2% (0.4) p.p. Capex³ 8,318.8 (0.9) EBITDA CAPEX³ 4,395.4 12.6 Outperforming the market in Revenue growth Total revenues Excluding regulatory effects 2015 revenue grew 5.6% Mobile Mobile data representing 51% of MSR in 4Q15 Capturing 100% of incremental MSR of the sector in 2015 Fixed Outstanding growth in key revenue lines (FTTX and Pay TV) Resuming growth in SP area (ex. GVT) Solid EBITDA expansion in the year even with macro effects Growing OpCF while sustaining solid Capex level 1 Considers TEF Brasil + GVT figures as of January, 2014. 2- Includes net handset revenue. 3- Capex excluding licenses. 5
IN REVENUES, GROWING BUSINESSES MORE THAN COMPENSATE FOR THE REDUCTION IN TRADITIONAL ONES Revenue per product (R$ billion) 34.1% 2014 2015 +4.8% 5.6% Excluding regulatory effects 27.6% 16.6% Continuous delivery of data centric strategy Products with growth Products with no growth 16.6 20.4 23.7 21.8 23.0% -8.0% Mobile data & VAS -2.6% TV -8.6% UBB 2014 2015 Mobile data revenues surpassing mobile voice revenues since 2Q15 Improved trends in fixed voice due to smart pricing actions and 3P growth 2014 2015 Fixed voice Mobile voice 6
UPCOMING TERMINATION RATE CUT WILL REDUCE REVENUES WITH LIMITED IMPACT ON EBITDA Expected Tariffs reduction YEAR MTR FTR Tariff R$ cents Var. % 2014 25-25% 2015 17-33% Tariff R$ cents (TU-RL / TU-RIU) Var. % Estimated direct Revenue impact 785 500 275 2016 2017 2018 Incremental Impact R$ million Reducing impact on revenues 2016 11-37% 1.1/5-60% /-37% 2017 7-47% 0.6/2-50% /-59% 2018 4-47% 0.3/0.9-50% /-59% 2019 2-50% TU-RL and TU-RIU new tariffs became effective on February 24, 2016 Estimated direct EBITDA impact 190 110 20 2016 2017 2018 Incremental Impact R$ million Reduced exposure in EBITDA 7
IN A HIGHLY COMPETITIVE MARKET VIVO OUTPERFORMS PEERS WITH THE HIGHEST GROWTH IN REVENUE AND LARGEST EBITDA Vivo records the largest Market growth capturing the largest share of incremental value of the industry Share of total net revenue 1 Share of EBITDA 1-2.3% -12.1% 14% 22% +1.8% +4.8% 23% 26% 30% 34% 17% 34% Total net revenue evolution y-o-y Player 3 Player 2 Player 1 Vivo Positioned among the companies with highest market value in Brazil, the highest in the telecom sector 293 Ambev Market Cap Ibovespa (R$Bn) March 10 th 2016 181 Itaú Unibanco 3 rd position when excluding financial sector 6 th position in Brazil 1- Based on 2015 public information for two main operators. For a 3 rd one, based on the rolling 12 months ended in Sep/15. Does not exclude non recurrent effects. 2 Includes nominal amounts of net debt according to the last numbers published by the operators; 66 Vivo 8 Enterprise value 2 : Telecom (R$Bn) Mkt cap as of March 10th 2016 Mkt value 69 5 38 20 66 2 37 19 1 Vivo Tim Oi Net debt
WE WILL IMPROVE FURTHER OUR PROFITABILITY THROUGH FOUR MAIN LEVERS Synergies Simplification and efficiency Digitalization Capex allocation 9
OPERATIONAL SYNERGIES Already executed actions in 2015 to secure 30% of total NPV of best case scenario, with increasing EBITDA impact beginning in 2016 Base Case Best Case Already secured Total NPV from R$ 9.6 billion to R$ 16.1 billion 1 Revenue R$ 2.7 bn R$ 5.5 bn R$ 0.2 bn Opex R$ 3.9 bn R$ 6.6 bn R$ 2.9 bn Capex Capex savings avoidance 2 R$ 3.0 bn R$ 0.7 bn R$ 3.4 bn R$ 0.2 bn R$ 1.6 bn R$636 Million in 2015 70% of Run Rate Full Run Rate Leveraging of combined networks Migration of last mile circuits Sharing of Backbone Routes Fibering of mobile sites Avoiding investments in GVT s fiber footprint in SP Unification of advertising agencies and advertising budget Concluded in 2015 Rightsizing of the organization Anticipated from Jan/16 to Sep/15 Real 2015 2016 2017 2018 2019 2020 EBITDA increase Capex savings and avoidance 10 1- Does not include NPV of taxes in the amount of R$4.5 billion in the base case and 5.9 billion in the best case. 2- Includes opex avoidance in the capex
SIMPLIFICATION AND EFFICIENCY Initiatives accross the board to improve profitability Portfolio simplification reducing customer care costs Consolidation of IT platforms and applications Optimization of network infrastructure / field services B2C Mobile 1800 6-40% Insourcing of field services in SP leading to reduction in non-quality costs Old portfolio Current sales portfolio Fixed network simplification with VoIP in FTTH areas B2B 4300 Old portfolio 8 Current sales portfolio 2015 2018 40% reduction in the number of applications simplifying IT operations Unified installation process for 3P additions Avoiding copper expenditures Network sharing agreement for rural areas Prepaid offers with simpler structure Zero waste approach Program to achieve efficiency and operational excellence by implementing initiatives to reduce waste and attack performance gaps Best in class efficiency rate 11
DIGITALIZATION AND ANALYTICS Creating the tools and the incentives to transform customer experience and save costs COMMERCIAL BACKOFFICE Target online bills across mobile postpaid base Vivo Easy (first postpaid plan as an app in the market) E-CARE Incentivizing self care through use of Meu Vivo application Improving customer satisfaction and call center costs E-COMMERCE Accelerating use of virtual recharges Increasing B2B, 3P and mobile sales through online stores BIG DATA Leveraging on analytics and big data to transform business model and cost structure and maximize revenues 12
CAPEX ALLOCATION Superior capex ratio focused on improving growth R$ Billion Solid Capex evolution strengthened by Capex avoidance R$ Billion To be sustained in 2016 with focus on improving growth 9 9 8 8 8 8 8 20.9% 19.7% 8.4 8.3 22.0% 9.0 2014 2015 2015 including Capex avoidance Capex % Capex / Net Revenues Max. 8.7 1 2016 Capex Commercial 70% of Capex allocated to improve commercial growth and assure quality MAIN PROJECTS 3G capacity 4G coverage Backbone and Backhaul FTTX footprint FTTC Maintenance/Obligatory Improving returns with a new methodology to stablish capex trade-offs Continuous analysis of opportunities in sales of mobile towers Synchronize business outcomes with investment requirements Critical trade-offs: where we play to win (e.g. larger coverage x quality where it matters) Reprioritizing 30% of mobile capex based on big data information (geo localization of higher value customers) Assessing potential sales of mobile towers to improve efficiency and value generation 1- Excluding licenses 13
DISCIPLINED FINANCIAL MANAGEMENT DRIVING OpCF GROWTH AND STRONG CONVERSION IN FREE CASH FLOW OpCF (EBITDA-Capex) R$ Billion R$ Billion 3.9 4.4 4.4 77% Monetization of OpCF after working capital variation, financial interest and taxes 3.4 2014 2015 OpCF 2015 Free cash flow 2015 1 Growth in OpCF driven by EBITDA increase and stable investment level Solidly converting EBITDA Capex into free cash flow 1- Free Cash Flow after working capital variation, financial interest and taxes. 14
A SOLID CAPITAL STRUCTURE PROVIDING OPTIONALITY AND FLEXIBILITY FOR THE COMPANY Net Debt/EBITDA R$ billion 2014 2015 0.58 0.36 Low leverage and strong liquidity position with average investment yield (103% of CDI) higher than average cost of debt (93% of CDI) YOY -22.6% 4.6 YOY Vivo s solid balance sheet reflected in credit ratings, which persist above Brazil s rating 10.2-35.9% 5.6 YOY -6.8% 2015 Gross Debt Cash Net Debt 15
Between 0-2% Above 6% Low Dividend Yield 2016 High AN UNIQUE COMBINATION OF GROWTH AND VALUE DISTRIBUTION Synergies driving EBITDA growth superior to peers with dividend yield higher than more mature companies Dividends declared in the amount of more than R$21 billion (>30% of market cap) from 2011-2015 Europe AVG. 1 Between 0-2% Low EBITDA CAGR 2015-18 High Above 6% Source: Bloomberg. 1- Europe Average includes Telefónica, Deustche Telekom, Orange, Telecom Italia, Vodafone, British Telecom, Telenor, KPN, Swisscom, Telia-Sonera, Tele2, Telekom Austria and TDC. 16
PERSPECTIVES 2016-2018 Continued growth in Operating Cash Flow REVENUE EBITDA CAPEX Continued strong growth in key revenue lines (mobile data, UBB and TV) due to our value driven data centric strategy, outperforming the industry Recurrent margin improvement supported by synergies and efficiency Capex / revenues of up to 20% to be reassessed in 2017 depending on economic activity and potential optimization due to smart allocation initiative. Capex to descend in 2018 17
FINANCIAL TAKEAWAYS Unique Positioning Through sustained investment, M&A and a value driven commercial approach, we have built a matchless platform, including the right infrastructure, spectrum portfolio and customer mix to capture market value and evolve to service convergence Unique Strategy We have a robust plan to transform the company benefitting top line. Efficiency and simplification initiatives, digitalization and an improved capital allocation oriented for growth should enhance further our returns Unique Capital Structure Strong cash flow generation and solid debt position gives the company optionality and flexibility to chase growth while remunerating shareholders Vivo stands out in the market with an unique combination of EBITDA growth, shareholder remuneration and solid capital structure 18
DISCLAIMER These presentations may contain forward-looking statements concerning future prospects and objectives regarding growth of the subscriber base, a breakdown of the various services to be offered and their respective results. The exclusive purpose of such statements is to indicate how we intend to expand our business and they should therefore not be regarded as guarantees of future performance. Our actual results may differ materially from those contained in such forward-looking statements, due to a variety of factors, including Brazilian political and economic factors, the development of competitive technologies, access to the capital required to achieve those results, and the emergence of strong competition in the markets in which we operate. For a better understanding, we are presenting pro forma numbers combining Telefônica Brasil and GVT results for all financial and operational indicators for every period as of January, 2014.