TIM Q2 2023 Earnings Call Transcript

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August 1, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Team SAE 2023 Second Quarter Results Conference Call. We would like to inform you that this event is being recorded and all participants will be in a listen only mode during the company's presentation. There will be a replay for this call on the company's website. After team S. A.

Operator

Remarks are completed, there will be a question and answer session for At that time, further instructions will be given. We highlight that statements that may be made regarding the prospects, Projections and goals of Team S. A. Constitute the beliefs and assumptions of the company's Board of Executive Officers. Future considerations are not performance warranties.

Operator

They involve risks, uncertainties and assumptions as they refer to events that may or may not Investors should understand that internal and external factors to TIM S. A. May affect their performance and lead to different results than those planned. Now, I'll turn the conference over to the CEO, Mr. Alberto Griselli, CEO of Team S.

Operator

A. And to Ms. Andrea Villegas, Chief Financial Officer, to present the main messages for the Q2 of 2023. Please, Mr. Roberto, you may proceed.

Speaker 1

Good morning, everyone, and thanks for attending our conference call. Outstanding achievements and rock solid results mark the 2nd quarter, driven by the sharp execution of our plan. Our top line rose more than 9% year over year with EBITDA growing above 17%. This combination led to a margin expansion of more than 300 basis points. Our operating free cash flow grew more than 65 Trends were achieved jointly with the aforementioned financial highlights.

Speaker 1

ARPU, Churn and Network Quality presented their best On the ESG front, it is worth highlighting that TIM was certified once again as a great place to work, Achieving a favorability of more than 90% with solid improvements versus last year. In this context, we were also recognized as one of the best companies for inclusive work experience. Under the scope of the environmental pillar, we are executing 2 initiatives that impact energy consumption. The first is related to transforming our sources to renewable energy proprietary plants. Under this project, we closed the quarter with 87 plants.

Speaker 1

The second initiative addresses Energy consumption by developing smart public lighting solutions that drastically reduce the usage of electricity by municipalities. The integration of ESG aspects into our business dynamics and how we can promote social impact while developing and selling solutions to our client It's a relevant part of our strategy. In TIM Agro, for example, we are taking connectivity to the countryside of Brazil, Covering 90,000 rural properties, more than 220 public schools and 65 basic health units. While in the education vertical of our customer platform strategy, we provided courses to 450,000 people Total service revenues grew 9.5% year on year in the 2nd quarter with a relevant contribution from mobile services That expanded by 9.7%. This performance was driven by inflation recovery and improved Customer based dynamics and the scenario of rational competition.

Speaker 1

ARPU was also positively impacted reaching an all time high level of BRL29.2 per month, growing 13% versus last year. When looking at the mobile segments individually, we saw Postpaid revenues growing significantly, up by more than 10% year over year with an ARPU excluding machine to machine lines of almost As anticipated, we returned to positive net addition in this quarter after the cleanup And adjustment of former Oi customer base. Postpaid churn scored the lowest mark in 12 quarters. In prepaid, revenue expanded at a sound pace of close to 12% versus Q2 2022, leading to an ARPU above BRL14. Following this remarkable mobile performance, we now have the highest mobile ARPU in Brazil In prepaid, postpaid and also blended, migration and up sales movements grew 28% versus Q2 2022 and are playing an essential role in consolidating our ARPU leadership.

Speaker 1

To better understand What is behind these results? We need to recover concepts from our 2022 Investor Day. We are developing our value proposition according to 3 pillars, best offer, best service and best network. And in all of 3 of them, we are delivering what we promised. As probably most of you saw last week, We extended our exclusive partnership with Apple and launched Apple I bundle in our high end TIMBLAC plants.

Speaker 1

We are the 3rd operator in the world to launch such an initiative and the 1st and only operator in Latin America. This is a clear evidence of how we play the game of innovation as a core differentiator to deliver the best offer to Brazilian customers. Our journey towards customer experience excellence is long, but we are doing it step by step to achieve the best service. Results from the Reclania Key Portal, Procom Agency and Anatel point to a significant improvement in all experience metrics. In June, What seemed impossible a couple of years ago is now a reality.

Speaker 1

TIM is providing the best quality on Brazil's Largest Mobile Network. And we have the evidence to show. OpenSignal awarded us as the number one operator in Consistent Quality Index, A metric that combines a set of critical indicators to measure network quality across a variety of commonly used and demanding applications. On top of that, we are also leading 5 gs with 40% more sites than the 2nd place. Our value proposition evolution is clear, but the average client must also perceive that and perception change is a marathon Where consistency is more important than Sprint's, the good news is that the first signs of change are emerging.

Speaker 1

As I mentioned earlier, in the Q2, we had the best churn level in years and mid quarter of inflation recovery in certain offers. Also, bad debt is historically low, representing 1.8% of our net revenues and our overall NPS improved by Four points versus the Q1. With this, I'll wrap up the explanation on mobile performance and we can now move next to fixed services. In fixed, the growth driver remained Team Ultrafibra with a solid performance. Fixed broadband revenues went back to double digit expansion.

Speaker 1

Broadband ARPU grew year over year for the 18th consecutive quarter, reaching almost BRL 95. Our broadband continues to be driven by the successful migration from FTTC to FTTH and accelerated net addition Following the geographical expansion to Parana and Santa Catarina States. We closed the quarter with a client base beyond 760,000 connections, adding 38,000 clients in those new regions. We are still fine tuning the model, but the results are encouraging. Additionally, we are following a similar approach to the one that we use in mobile, Staying away from price competition and focusing our differentiators on offering innovation and quality of service.

Speaker 1

With this in mind, we expanded our portfolio with a new 2 giga speed plan. Until now, we have been successful, But the overall broadband market is still very price oriented. I will now pass the floor to Andrea to review the financial results.

Speaker 2

Thank you, Alberto. Good morning, everyone. As Alberto just explained, this second quarter was very strong across all lines of our results. Our performance continued to be driven by the positive effects of the M and A integration as well as the organic growth. Our OpEx continued to decelerate and is now growing below inflation.

Speaker 2

In addition, During the quarter, our TSA agreement with Oi ended, which is helping us reduce cost and eliminate some pressure. The combination of strong revenues and solid OpEx dynamic resulted in a double digit growth of our EBITDA in the quarter. We grew more than 17% in a year over year basis and suppressed BRL2.9 billion. Our EBITDA margin expanded by 3 40 basis points in the quarter, and we recorded the highest margin on the record at 50%. It is important to mention that the second quarter was the first one without the negative effects That were impacting the trends of our cost.

Speaker 2

The TSA cost was eliminated in April, and now we have an apples to apples comparison with our suppliers. As a result, we are now ready to accelerate the site's dismantling. By the end of the quarter, we had eliminated over 2 thirds of the planned site for the year. Of course, there is a delay between the fiscal decommissioning and seeing its financial impact. However, we have already seen Some initial positive effects in the 2nd quarter.

Speaker 2

We paid BRL 57 1,000,000 in decommissioning fines, But the pace of increase in our lease costs has slowed down on a year on year comparison and started to decline on a sequential basis. As a result, our EBITDA after lease increased 21% year over year. During the disclosure of our guidance at the beginning of the year, We explained that we expect the effects from the decommission to pick up in the second half of the year as more sites are eliminated. We are happy with the progress we already made in this project so far. The strong operational and financial performance Add to our bottom line, totally BRL640 1,000,000, which is almost double the amount of what we registered in the second It's important to remind you that the transitory impacts we addressed In recent quarters, it started to decrease, including lease impact on both G and A and financial expenses.

Speaker 2

And a reduction in the tax burden as we resumed the distribution of interest on capital. Free cash flow for the Q2 was also strong. Our EBITDA after lease minus CapEx was up 6%, 7%, Totally BRL1.2 billion. Our cash position also rose by 46% year over year, We ended the quarter at BRL3.3 billion. The 2nd quarter allowed us To strengthen our financial position and improve our leverage level, the net debt to EBITDA ratio decreased to 1.4 And total net debt, including leases, amounted to BRL15.3 billion.

Speaker 2

This sustainable trend leave us Now, I hand the call back to Albert.

Speaker 1

Thank you, Andrea. I'm very pleased with the first half of the year as we were able to achieve so many things. We completed our integration, Achieved network leadership, improved customer experience and delivered important milestone in ESG. While posting solid results that put us more than on track to reach our guidance, actually, it is fair to see some upside risk to our full year numbers, but this will depend on several factors, some of them we control, but some we don't. That is why our focus on mobile for the coming quarters won't change.

Speaker 1

Execution to capture oil synergies, Recover inflation in a more rational and value based competitive environment, while using the other marketing mix tools Differentiate from our competitors, finally leading 5 gs deployment to both support positioning and CapEx efficiency. For fixed broadband, we continue using the asset light model to expand by tuning this approach in new markets while we migrate from FTTC to FTTH. The second half for the customer platform initiatives will be more exciting. We are Accelerating the implementation of the Cartao de Todos Health Partnership, a new partnership will be launched. Lastly, we will continue to evolve our B2B verticals.

Speaker 1

We are increasing the penetration of our solution to consolidate our leadership While we mature the different business models. Ending my comments, I want to thank the world team What a great job done so far. For the second half, we know what the challenges are. We have a clear plan And we will maintain focus on its execution. Let's now open the floor for questions.

Speaker 1

Please, operator.

Operator

Thank you, Mr. Alberto. Now we will begin the Q and A section. First, we will take questions from analysts followed by general public, both in English. If you're listening through the webcast, your questions can be sent by chat.

Operator

Please hold while we collect questions. The first question comes with Marcelo Santos with JPMorgan, please go ahead.

Speaker 3

Hi, good morning, Alberto, Andrea. Thanks for taking the questions. My first question is regarding the sustainability of margins. You had a very strong margin increase this quarter. If you could please comment how this translates to the next couple of quarters, if there are some The facts that should not be sustained or if they are, this is the first question.

Speaker 3

And the second question is regarding the very low churn in postpaid. Could you please Explain what is causing this churn to be so low? What are the main sources of this improvement we are seeing? Thank you.

Speaker 1

We have been discussing for a while our guidance So whereby we were planning margin expansion because we were assuming in our guidance EBITDA growing double digits versus revenues growing high single digit. And so everything that is going on with exception on We can discuss this a bit. It's organic. So it means that there are a number of things that we're doing on the EBITDA margin to increase the productivity of our resources. And if you look at these from, Let's say, a logical point of view, we have a few levers in place.

Speaker 1

The first of which is the fact that Costs related to Oi start to disappear, start in the second quarter. Then we have a number of productivity increase Related to the increased productivity of the Oi customer base that we are capturing over time, so the cost to serve them. And third, we have a significant number of initiatives within the company From innovation to business process, remodeling and discipline to better allocate our cost base and so increase productivity. On the EBITDA level, so we got margin of improvements going forward. When you look at the after lease also because the decommissioning is proceeding a bit ahead of schedule and this will support a further margin expansion on that line also.

Speaker 1

So all in all, we are quite confident that the profitability can be sustained and expanded. On the low churn on postpaid, I think that there are, Marcelo, a number Of factors to be taken into account. So generally, this is quite a remarkable achievement Because we are getting the lowest churn on postpaid in the quarter of the implementation of our more for more strategy And generally, this tends to put a bit more, let's say, A bit more pressure on the churn level in the quarter that we executed, if you look for example last year, churn level in the second quarter. So I think that there are a number of factors in place here. So the first one is related to the more rational competitive environment And the fact that we adjusted our postpaid offer portfolio in the Q1 before the implementation of the More for More strategy.

Speaker 1

And the second one is related to the numerous initiatives that we are implementing to increase the quality of So this is a continuous effort and is going to improve going forward And it's basically related to the quality of the value proposition that we offer to our customer base that generally tends to increase their lifetime with us. For example, in this quarter, we just launched the Apple I initiatives. The second set of initiatives is related to the quality of service that we can that can Into the category of customer relations and there you got a number of improvement on Alatell, reclam Yaqui consumer protection agency and so customers start And the third one is the fact that we are also working quite hard to improve The quality of our network, let's put this way, our technical service. So the fact that we've been awarded in July the best networks in terms Quality or perceived quality is another important initiative. So all this combined tends to increase Our ability to retain customers and afford to reduce churn.

Speaker 1

I don't know if I've been exhausted in the answer.

Operator

The next question comes with Bernardo Gutman with XP. Please go ahead.

Speaker 4

Hi, good morning, everyone. Thanks for taking my question. Actually, I have 2 on my side. The first question is related to dividends. If you could provide us an update for dividend distribution for this year, it seems like you are on track to generate a lot of cash, Probably at a faster pace than the guidance provided of BRL2.3 billion.

Speaker 4

So I just want to understand if there is room for Potential one side here in terms of dividend distribution. And the second one is related to the tax reform. I would appreciate it if you could make a general comment about the proposal under discussion for the sector. Thank you.

Speaker 1

Okay, Bernardo. When it comes to dividends, so we just remembering when We met for our guidance early this year, we gave a BRL2.3 billion as the new floor of our shareholder remuneration for 2023 and then a continuous improvement going forward. When you look at the way we are executing the plan, Basically, we are trying to improve again. We are improving as a matter of fact. Are they listening to me or the line is Yes.

Speaker 1

Okay. Okay.

Speaker 4

Yes. I can hear you.

Speaker 1

Sorry, because here the system sort of appear to be went out. And so Bernardo, so when I look at the performance of Our plan to date will see a number of upside risks. Of course, there are still uncertainties related to, for example, the macro environment, But there are a number of things that are going according or better versus our plan. Our focus or main focus is to increase Free cash flow and operating free cash flow margin and we see upside risk here versus our guidance. So basically, we are now in the process of analyzing the numbers and discussing this among ourselves, but there is a risk of upside review of When it comes to the tax reform, I think here we see this In the phases that have been discussed in terms of the VAT reform That has been that just passed and that is going to be discussed in the Senate, whereby we see that need to actually Bernardo, the big point here, we need to wait for the actual numbers to take a stance on what the impact is going to be So far the discussion is going according to what has been anticipated, so there is no surprise, Whereby the other component of the tax reform that is related to corporate taxation and dividends, It's a bit further on.

Speaker 1

So our understanding is that to make a precise call of what the implications are going to be that we are Closely monitored as a sector, we need to wait for the actual tax rate to be defined. This is going to happen Probably the next year, there is a transition period that should be soft for the next couple of years. And But I would say that we need to be a bit more to give a final answer on this.

Operator

The next question comes with Vitor Tomita with Goldman Sachs. Please go ahead.

Speaker 5

Hello, good morning all and thanks for taking our questions. My first question would be a quick follow-up on Marcelo's earlier question. Looking on costs, Looking aside from the end of the TSA, should the sales and marketing line, which improved quite a bit this quarter, should we assume And I know there were tough easier comps versus last year, but should we assume this quarter's level of sales and marketing expenses As a recurring baseline for future quarters, in particular, should we expect marketing activity to pick up in the 3rd quarter Relative to the second or a similar level? And a second question from us would be on if you could provide an update on how you view the possibility of price readjustments in prepaid or additional Price readjustments in postpaid this year following the recent readjustments you made. Thank you.

Speaker 1

Okay, Victor. So on the first ones, in terms of sales activity, this is pretty much dependent on the number of launches Our commercial initiatives that we are running on each quarter. So if you look at, for example, the current quarter, so we just Happened to launch a significant campaign with Apple One, which is the exclusive partnership. So you see A number of advertising around, you will see some subsidies in our point of sales. So we have, at the moment, a very appealing proposition for our black phosphate plants.

Speaker 1

And so this is much dependent, therefore, this line of costs on the activities that we are running. So for example, I would expect that this Because of the launch of the Airport One campaign is going to be heavier versus the previous quarters where we didn't launch Anything, let's say, let's put this way, special. And we've got more special things coming up for the last quarter also. And so I would say that the second half in terms of commercial activities and initiatives is likely to be more, let's say, intensive versus the first half. This is for the first question in terms of marketing and sales expenses.

Speaker 1

When it comes To the price adjustment topic, I would say the following. So, the overall Competitive environment is moving versus a value based, at least what we are doing, competitive dynamics. So our approach is always to provide more for more offers and value proposition to our customers. And in the first half, we pretty much concentrated on postpaid and we are culminating with the Apple I launch. So we make it let's say, we deliver more value to our customers and prices are adjusted accordingly.

Speaker 1

I would say that the bulk of adjustment and fine tuning of our postpaid offer is completed now. So we did Something on the enterprises in the Q1, we are doing we did we carried out the more for more strategy in the Q2. So The residual opportunities are, let's say, they got much less impact versus what we did in the first half. So we are turning our attention into prepaid. And we are going to follow the same approach whereby we upgrade the value proposition to our customers and we're going to command some price revision accordingly.

Speaker 1

So we did list this last year, for example, including Amazon Prime and all our recharges and we are planning something starting the second half As well, so the focus of the second half of the year is going to be more concentrated on prepaid.

Speaker 5

Very clear. Thank you very much.

Operator

The next question comes with Freddie Mendes with Bank of America. Please go ahead.

Speaker 6

Hello. Good morning, everyone, and thanks for the call here. I have two questions here as well. I mean, the first On the working capital line, we see a major impact in the line of suppliers, dollars 1,300,000,000 on this quarter. It looks like you paid this amount.

Speaker 6

So just trying and when I look at the 2nd Q 'twenty two, I didn't see these impacts. So just wondering if you took advantage of some type of opportunity in terms of the FX Or something in this line, just trying to understand the working capital here. This will be the first one. And then on the second one, I think it's more like a question on the strategy. When I look at the ARPU, you already have the highest ARPU in the street, looks like one of the highest.

Speaker 6

And when I look at the net adds, I mean, it has been very the last 3 months, it's true. But over the last years, it hasn't been as strong. I mean, when I look forward, where should I see most of the growth 14 for the next, let's say, the next years. Thank you very much.

Speaker 7

Good morning, Fred. Thank you for the question. Related to the working capital, There are some dynamics that pressure our capital this 1st semester like you mentioned. And the major impact It's related to the vendors. And this is related to our Sasanabe, in our business, if you see past years happen the same and we expect The second part of the year, less pressure on this item.

Speaker 1

Go on the Fred, on the second one on the ARPU. So yes, we achieved the ARPU leadership on both Prepaid and postpaid, that's true. That's a nice achievement on our side. And when I go forward and I look At the revenue dynamic of the sector and of TIM Brazil, Here, what we always said is that we want to grow on a balanced way in terms of customer base growth and ARPU Growth. So when it comes to ARPU Growth, of course, the main Strategies related to the value based competition, so providing something more for the customers to be able to command a higher price.

Speaker 1

And when it goes to the customer base, I think that the answer is a bit different between postpaid and prepaid. So If you look in general at our customer base dynamics on postpaid, you're right. We've been running a number of quarters with negative postpaid additions and the numbers have been a bit mixed up by the Oil Post merger integration and we signaled over the last quarters that in the second quarter we would have come To positive net additions, so this is the results of this quarter confirm that we are now in the positive net addition territory. And we expect to move forward on a positive space for the next quarters. And when you look at the absolute number of net additions, I think that the number that needs to be taken into account is the relative ratio between net additions Customer base, because on postpaid, we got the 3 of us, a different customer base.

Speaker 1

And so when you look at growth, I think that It's better to lose at relative numbers versus our customer basis versus absolute numbers, Because this put everything into perspective and this translate into the year on year growth and quarter on quarter growth, both positive for us in this quarter. So on the customer base, we want to grow the customer base for postpaid. And since we have the lowest market We think that there is a space to grow there, whereby on a value based proposition, we intend Increase ARPU providing better services to our customers. For postpaid, I was mentioning before for Marcel and Victor, The exercise has been closed whereby for prepaid, there might be some additional Update for the second half. So at the end of the day, we've been always running on a mixed growth approach, Customer base and ARPU, the oil integration sort of made it difficult to read through these dynamics.

Speaker 1

And I think from this quarter onwards, you will be able to see again that our top line is going to be driven by both ARPU growth And customer base growth.

Speaker 6

Perfect. Very clear, Alberto. Thank you. Thank you, Andrea.

Operator

The next question comes with Leonardo Olmos with UBS. Please go ahead.

Speaker 5

Hi, good morning, everyone. So a couple of questions from my side. First, lease expenses and the decommissioning process, You touched that a little bit before. Can you provide some idea on what should we expect in the second half of twenty twenty three? And provide some Update on the number of towers, how is that going?

Speaker 5

And the second question is regarding the Basically asking for an update on the agreement with Neutron Networks, particularly VITA. Thank you.

Speaker 1

Okay. On the lease expenses, I think, Leonardo, that we have some upside risk. We are moving ahead of our plan. So as of today, as Andres was mentioning in his speech, we Around 70% of the plan already executed. This is going to be a bit less relevant This year because the number needs to pile up, but it's going to provide us some upside on the entry speed for the following years.

Speaker 1

And we are likely to provide a better focus on the progress in the next quarter. We are now left with the hardest tower the commissioning, so the let's say the easy part or the easier part because it was now easier, we have the commissioning 1,000 of towers This year, but basically we are happy with the results and we are ahead of schedule. So it's a positive upside risk on this line, More profound in the following years, a lesson this year because of the piling up of the exercise. But already in this quarter, you can appreciate Positive dynamics, as Andra was saying. When it comes to the NetSol network, we have been we carried out a quite successful launch It's Santa Catarina.

Speaker 1

We are very pleased with the commercial results of our operations. We are now fine tuning The model at a larger scale, the benefit Ovid is related to the fact that since we don't need to build the network, we can operate in a mobile like fashion. So our go to market is simpler and this should translate into a better quality of our commercial operations. So at this point in time, we are happy with our speed. We increased our net addition to something like 30 to something like 30 ks per quarter.

Speaker 1

We are likely to run at this speed in the following quarters and We are fine tuning the machine to be able to scale up when the competitive environment is going to be a bit more attractive versus today.

Speaker 5

Sounds great. Thank you very much. Have a great day.

Operator

Thank you. Ladies and gentlemen, without any more questions, I am returning to Mr. Alberto Grisele for his final remarks. Please, Mr. Alberto, you may proceed.

Speaker 1

Thank you, everybody. So my closing remark, Considering this exciting World Cup atmosphere, I'm going to play a little football coach here today. Half time is over. Guys, we need to go back on the field to secure our victory in the second half of the game. See you soon.

Speaker 1

Bye.

Operator

Thus, we conclude the Q2 of 2023 conference call of TIM S. A. For further information and details of the company, Please access our website, team.com.brir. You can disconnect from now on. Thank you once again.

Operator

Have a good day.

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