TIM Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 7, 2024

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to China Sea 2023 4th quarter results video conference call. We would like to inform you that this event is being recorded and all participants will be in listen only mode during the company's presentation. There will be a replay for this call on the company's website. After China SE remarks are completed, There will be a question and answer section for participants.

Operator

At that time, further instructions will be given.

Speaker 1

Hello, everyone, and welcome to TNSA's earnings conference for the Q4 and full year 2023. Thank you for joining us. I'm Vicente Ferreira, Head of Investor Relations. Today, we'll share our highlights on video and then We'll begin our live Q and A session with our CEO, Alberto Griselli and our CFO, Andrea Villegas. Before we can discuss our results and new guidance, I remind you that management may make and this presentation may contain forward looking statements.

Speaker 1

So, please refer to the disclaimer on the screen, which will also be available in our earnings materials and our Investor Relations website. With that, we move to our results.

Speaker 2

Hi to everyone. I'm Alberto Griselli, CEO of TIM in Brazil. I'm very pleased that 2023 was an outstanding year with great achievements and record high results. As we explained during our Investor Day in November, the Brazilian mobile market is healthier than ever, supporting a more formal strategy. New market dynamics and favorable demand are driving our results to improve across the board.

Speaker 2

Our service revenues grew in 2023 10.7 percent year on year, totaling more than BRL 23,000,000,000. With costs under control, our EBITDA grew more than 14% to reach the highest number in our history, BRL 11,700,000,000. In this context, our 2023 margin expanded to almost 49%, the highest among the large telco in Brazil and Latin America. Another metric that measures our efficiency in allocating resources is the CapEx to save ratio. We closed 2023 with the best result ever, just below 19%, contributing to our operating free cash flow growing more 10 58% year on year, summing to BRL 4,200,000,000.

Speaker 2

To complete this small summary, our net income rose to BRL 2,700,000,000 after expanding more than 50% year over year. These results explain why At strong numbers, we are developing the best value proposition based on the 3Bs strategy: best service, best network and best offer. During 2023, we work extensively to deliver improvements in customer experience. We seek the best service by digitalizing the interaction to accelerate and improve demand resolution. And we are best in class in all resolution rankings of Brazil.

Speaker 2

At the same time, if a Human attendant services a client. The satisfaction with this interaction must be best in class, and we can deliver that. Call center NPS improved more than 40% in the 4th quarter. Meanwhile, we are consolidating our leadership in network coverage and quality in Brazil. We have the largest 4 gs and 5 gs coverage, being the only operator to cover all the city of Brazil.

Speaker 2

Our network was also the most awarded among the Brazilian operators. We ranked number 1 in consistent quality, the most relevant KPI to measure a customer's actual experience. To complete, we are innovating to create the best offer, Leveraging new concepts and partnership to generate novelty and distinctiveness. We have launched the first trial offer in Latin America to encourage We expect this tool to be relevant in changing clients' perception of our quality. We just launched commercially our partnership with Ambev.

Speaker 2

We are expanding the benefits for prepaid customers using the cash back in the Z delivery app as a loyalty tool, and it is working. Today, we have the highest blended ARPU in the industry, close to BRL30 and growing nearly 13% year over year. We saw a similar performance in postpaid and prepaid ARPUs, which expanded at mid teens pace in 2023. At the same time, we are improving churn in postpaid, increasing upsell results with upward migrations and seeing a rise in prepaid spending. Behind these financial and operational numbers is a clear strategy, though, to craft the next generation team.

Speaker 2

Under this framework, the 4 pillars, Mobile, B2B, broadband and efficiency are developed integrating our people, society and the environment into our business strategy. Examples of that are the project in business, B2B, where we develop a new growth avenue and connectivity to countries out of Brazil also produce positive social and environmental impacts. The partnership with Cartao de Todos helps us differentiate our offer to telco customers while providing access to affordable health services. This integration prepares our It's chief practice is to be recognized as one of the most developed in the country. Team ranked 12th among the best companies to work for in Brazil in the Great Place TO Work selection.

Speaker 2

Sustainalytics also awarded us as ESG Industry Top Rated. Standard and Poor's listed team among the most sustainable telco company in the world. And last but not least, we are the most diverse and inclusive company in Latin America and the number one telco in the world ranked by Refinitiv. Our CFO, Andrea, will now provide additional details on our financial performance.

Speaker 3

Hello to all. I'm Andrea Viega, CFO of China in Brazil. To read some numbers and go above our original target for 2023, We closed the year at an excellent pace. In the Q4, SaaS revenue grew more than 7% year on year, with mobile raising 7.6%, while broadband expanded 9.5%. With costs under control and reaping the benefits of the M and A transaction, our EBITDA grew in the quarter by 7.5 percent R2.5 billion dollars This performance benefits massively from the sharp execution of our decommissioned project.

Speaker 3

We ended the year Of a better depreciation number due to lease reduction and the tax shield generated by the interest On capital, our net income presents a robust expansion of more than 50% year over year. With this, net profit reached one of the highest results in TIM's history, summing R900 $1,000,000 in the 4th quarter. Additionally, we saw a vigorous cash generation in the 4th quarter with operational free cash flow growing more than 50 percent year over year and margin expanding to nearly 19%. For the full year, EBITDA after leasing minus CapEx Our revenues stood close to 18%. With a strong cash position, our net debt fell to R11.6 dollars 1,000,000,000, taking our leverage ratio to 1 time EBITDA.

Speaker 3

All those numbers confirm what a remarkable year we had in 2020 To wrap up this results discussion, I hand it back to Albert.

Speaker 2

When we started the year, we set challenging but achievable targets. As we executed our plan, results began to come faster, which led to the best performance of Teams' history in many KPIs. We completed a quarter of a century of existence over delivering on every front. We set ourselves to grow high single digit in service revenue and delivered double digit, proving our ability to operate multiple revenue levers. We forecasted low double digit growth for EBITDA and close 2023 with mid teens showing significant operational leverage.

Speaker 2

Our CapEx on revenue was expected to go just below 20%. Strategy. The expectation for operating free cash flow was double digit growth and we delivered close to 60% expansion. We initially pointed to BRL 2,300,000,000 for shareholder remuneration, but we decided to raise our target in November to more than BRL 2,900,000,000 and delivered on that. These notable achievements have been made possible by the contribution of every team employee and am proud to lead the team of committed and hardworking colleagues with an engagement level of above 90%.

Speaker 2

2023 was an outstanding year, but we are already in 2024 and on a long journey to become the most preferred telco. We are updating our guidance to adjust to new market condition and the macro environment. Service revenues are expected to grow above inflation and notch faster than last year's plan. EBITDA is forecasted to Staying a solid growth pace with a positive margin contribution. Nominal CapEx should remain broadly stable with a clear focus on developing infrastructure to drive revenue growth.

Speaker 2

For operating free cash flow, we confirm the growth pace we set during the old plan. On March 7, the TIM Group will host the Capital Market Day in Italy. We plan to disclose an updated target for shareholder remuneration there, among other elements that complement our strategic plan. Please join us in this event that will set the direction of a new team group. Now let's move to the live

Operator

If you wish to ask a question, please click on raise hit button. If your question has already been answered, you can leave the queue by clicking on the same button. Our first question comes from Marcelo Santos from JPMorgan. Please, Mr. Marcelo, your microphone is open.

Speaker 4

Hi. Thank you for allowing us to ask questions. Thank you for the presentation. My first question is regarding sources of growth going forward in mobile revenues. In the past couple of years, Expected to continue in the coming years or should we see more growth on the volume side and a little bit less on ARPU?

Speaker 4

Just wanted to see your thoughts there. And the second question is regarding the pricing environment. How do you see that for 2024? Thank you.

Speaker 2

Okay. Thank you, Marcelo. So let me address the two questions. And so when we look at the revenue growth dynamic, We look at that in a we've got a number of different levers in our hand. So you got the volume, you got the more formal strategy Control to Postpaid.

Speaker 2

So when you look at the way we want to move forward is basically a mixture of all these elements. So when you say that we focus more on ARPU versus volume, it depends a bit on which horizon, the temporal horizon you're looking at. So if you look at the performance for postpaid after the migration that ended In the Q1 last year, you would see that our postpaid growth quarter on quarter, it's difficult to see still year on year, is basically driven by The composition and the blending of all these three levers. So we are growing in volumes. We are growing because of the more for more strategy and then I will go into the second question.

Speaker 2

And we are growing impacting the ARPU basically by migrating customers to better plan where they have the right benefits for the price that they're paying for. So looking forward, I see in post In prepaid, the situation is a bit different because basically the market is sort of evenly divided by the 3 operators. And therefore, I think that the price lever is going to be more predominant for that specific segment. So when you go then to the competitive dynamics channel. And if we look at what we did in 2023, it's something that we want to do in 2024.

Speaker 2

So Just recapping what happened last year. Last year in the Q2, we applied our more formal strategy for postpaid, both on what we call front book and back book prices. So this happened in the Q2 last year. This year is roughly or we intend to do this year is roughly similar. So in the second quarter this year, The decision has not been taken yet for prepaid.

Speaker 2

We just did a move recently. So we need to see what the customer reaction is, what's the competitors' reaction is and then We made a final decision, but the plan that we're looking for is to do some further adjustment by the end of this year. So basically, at the same timing we did it last year.

Speaker 4

Thank you. And what about control?

Speaker 2

Control is going to be when I say postpaid, it's pure postpaid and Control. So we're going to do the 2 things together in the second quarter as we did last year. And it's going to be inflation plus on a more for more strategy. Just adding a bit more on that, you know that we provide extra benefits to our customers where we do these movements. So it's going to happen in the Q2 this year for control and postpaid exactly as it happened last year in the second quarter.

Speaker 4

Perfect. Thank you very much.

Operator

Our next question comes from Leonardo Olmos from UBS.

Speaker 5

Good to see you all in face to face when answering our questions. So I've got a couple of questions here. The first one is a double click on Marcel's question on mobile. In terms of where do you see the most opportunities to better monetize your plans? So We heard you and competitors talking a lot about prepaid and social media having unlimited data allowance and maybe cross selling with other subscriptions.

Speaker 5

Where do you see the opportunities in terms of products and how the packaging of your plans could be done in 2024. That's my first question. I'll do the other after you answer. Thank you.

Speaker 2

Okay. So Leonardo, thanks for your nice comments at the beginning of your question. So when we look at the way we what we are If you look what we shared at the Investor Day in November, basically is that we see favorable conditions on the demand side. So If you look at demand, and this is across the board, across all plants, basically we see an essential services That is sort of cheap and utilization use is fairly low, especially in the prepaid and control. So there is actual opportunity to implement the more for more strategy.

Speaker 2

So the more for more strategy, it's a combination of a number of elements. And I think that when so basically, it's an extra data allowance, especially for lower end plans as well prepaid and control Because there is a limited use still compared to other markets, and so there is the opportunity to monetize that. And then there is another set of services that is related to the digital life of our customers that we are constantly including into our portfolio. And then there is the final item, which is OTT, which is I will address as the last one. So the more formal strategy in terms of increased the allowance, this is what we have been doing over the last years.

Speaker 2

And I think we will keep on doing this going forward across the board, even because when you look at prepaid and postpaid, we need to maintain a coherence of the plants among themselves. So if we move something, we need to upgrade the other side of it. So if we move control, then we need to upgrade prepaid to have the right incentives than to move customers from one plant to the other one. So the more for more strategy on data usage is fairly unchanged. Then what we are doing with success is to providing extra benefits to our customers Without impacting that much our margins, like for example, the last one that we launched with Ambev, whereby if any prepaid customers at TIMS Brazil recharges, it gets back a cashback in Z Delivery product.

Speaker 2

Remember that last year we introduced a Prime Video for prepaid. So today if you are a prepaid, you have When you do a recharge, you've got access to prime video for those for the length of the offer for the recharge. And then starting from January, you also have the benefit from Z delivery. That tends to manifest in a longer lifetime of the customer with us, Soul Chain Reduction. The other way to monetize is to engage our partners in some kind of equity or commercial terms like Cartao Ditados, for example, that we launched last year.

Speaker 2

So in terms of Cartao Ditados, which is more similar to C6 or what we are doing with other digital services whereby we get the benefits of the partnership, Part is handed over to the customers and part is an extra revenues for us. So it's another way to monetize our customer base. So So even we give the benefits, all of it to the customer like Ambev or part of these benefits comes to us in terms of either Equity or Commissioning Revenues. When it goes so, Laurent, I don't know if I managed to make myself clear, but these are the levers that we use. And Yes.

Speaker 2

Okay. So then there is another one that it's We have been using for a while. We started with the migration of prepaid to control. So basically, we look at the profiling of our customer base. We see people that may perceive the benefits to move to a larger plan and we migrate like prepaid to control, but we do a lot of control to postpaid also.

Speaker 2

So you don't see in the number pure postpaid customer base evolution, but it's been growing double digit for a while. And this tends to increase our postpaid ARPU as a blended number. The last one that has been on the news and has been discussed by the sector and by us for some time is the OTT. So as you all know, we got a zero rate on a number of plans. And this is something that has been introduced in the market a few years ago where the OTT was a novelty.

Speaker 2

And at the same time, it was a novelty with a low consumption of data. Over the last years, things changed Because everybody now is offering these OTT services, the customer doesn't perceive the value, which is because it's included in the debt allowance. And at the same time, we have some, let's say, negative effect in our network planning stuff. And this makes our capital allocation less efficient and less difficult to control because things happen without our knowledge. So basically, We just have an increase in traffic.

Speaker 2

So what has been going on for some time is the our intent to reduce OTT And we need to do this in a way that is viable and acceptable to the customer base. So a couple of years ago, we take away Facebook from prepaid and we substituted the services with Prime Video and with the delivery on Cartao de Todos more recently. And so we are planning to move ahead with this strategy and reduce our dependence on 0 rate, making this in, let's say, in settable way for customers. So we're going to start probably in plants where the effect can be compensated with another set of benefits.

Speaker 5

Perfect, Alba. That was the point of my question. Happy to hear about the timing of the Z delivery promotions since we're so close to Carnival. My second question, if I may, about leasing, very positive surprise on the numbers, 7 And below our figures, the cash generation was way above what we expected. But when we look at 2024, What's your expectations on decommissioning and how can we conciliate that with the 5 gs increasing coverage?

Speaker 5

Thanks.

Speaker 2

Okay. I will ask Andrea to address this first and then let me start with a more general comments on the leases. When you look at the leases, This is a sort of one off exercise, right? And we got the towers and the equipment from And we are we've been decommissioning at a quite fair pace what was not useful to us. At the same time, you have contractual adjustment of that cost base because part of this cost needs to be adjusted by inflation basically.

Speaker 2

And you have an increased footprint. So we reached all municipalities with 4 gs, But nonetheless, especially in B2B and some kind of obligation, we need to put more aside on the ground. And So our footprint increases over time. And then as you correctly mentioned, you've got 5 gs also. So the effect of 5 gs is that we need to put in additional antennas on our towers.

Speaker 2

So depending on the contract, this is additional wind space and so additional costs at the end of the day. And then there are potential minus that we've been discussing in the Investor Day, which are related to the fact that We have ongoing initiatives to optimize this cost from technical innovation to negotiation with our partners, so that our companies. We got the 4 gs RAN sharing agreement with Vivo that has been reactivated, let's put it this way, that of course reduce resources. And so you've got all these set of movements. Some are positive and some are negative.

Speaker 2

Of course, what we want to ensure is the sustainability of this cost line over time as we increase our footprint and deploying new technology to improve the quality of service to our customers. And so we've got all these initiatives that Basically, we are putting in place to compensate or to partially compensate for the cost pressure that we have either for price adjustment, either for increased footprint on our network. Of course, the lower inflation is something that is positive with going forward because it's been negative or Fairly negative over the last years, looking more positive a year to go. And so basically, What we want to have is delivering our plate in our hands to ensure the sustainability and the optimization of the cost line. And so we got a robust plan in place.

Speaker 2

I will ask Andre to elaborate on the commissioning plan that is going quite well.

Speaker 3

Alberto almost said everything, but related to the commission, in the fiscal terms, we finished. So we have very good results in this quarter. We will continue to have some good results in the Q1. But As Alberto mentioned, we have the price adjustment in February, March. We have the huge impact of this price adjustment.

Speaker 3

And also 5 gs, although not necessarily generates new sites, we have to occupy more space on the site. So we have some kind of adjustment in these experiences. But what we expect from now on is to continue To look forward to another ways of again, putting in the lease sites, The lead side of our negotiations, especially with the major contracts that we still have.

Speaker 5

Very interesting. Okay. Thank you very much, Alberto, Andre, Vincente and Luisa. Have a great day.

Speaker 2

Thank you, Leo.

Operator

Our next question comes from Fred Manges from Bank of America. Please, Mr. Menjes, your microphone is open.

Speaker 6

Hello. Good morning, everyone, and thanks for the call. I have two questions here as well. The first one is on CapEx, especially on the guidance. It was slightly ahead slightly above where we had.

Speaker 6

I guess we are on the bullish front. But just trying to understand if there is like a line you're going to be focusing more, let's say, IT or 5 gs that could eventually Playing this, let's say, higher CapEx at least from our expectation or if that's basically a network improvement, basically business as usual. This will be the first one. And then the second one, if you can just comment on Alberto, how is going to be the structure that now that Leonardo Capital Vivo went to TI? If you continue to help on the operations from there, you're going to have a new structure, anything you can comment on that, I think it would be great for us.

Speaker 6

Thank you.

Speaker 2

Okay. Let me take the first the second one and then I will ask Andrea to discuss a bit about CapEx. So when it comes to the structure of the CTO, the CTO And so basically, it's this is something that has happened. I think it was either last year or the beginning of this year. I don't remember more.

Speaker 2

But basically, what happened is that Marco Di Costanzo and was the former Chief Technology Officer and Awana Matar, which was the former Chief Information Officer, are now reporting directly to me. So these are 2 executives that have been with us for many, many years. And so the structure has been Basically, I move from one report to 2 report. Our strategy doesn't change as a result of that, of course, so we've got in full continuity. And so our focus is always in terms of correct capital allocation and leadership in network quality of service.

Speaker 2

And when it comes to the IT, it's innovation and strong support on our go to market. So this has been already done, Fred, And the executives that have been promoted has been with us for, I think, 20 years, both of them.

Speaker 3

Yes. Helix, I have facilitated our guidance. The CapEx maintains More or less, the previous guidance that we already said 4.4, 4.6 On the CapEx, we still want remains with the 5 gs deployment quality. And remember that in IT, we have a component on CapEx and then we also have OpEx related to the cloud.

Speaker 6

Perfect, perfect. Very clear. Thank you. Thank you, Alberto. Thank you, Andreas.

Speaker 6

This is Angela. Good day.

Operator

Our next question comes from Victor Tomte from Goldman Sachs. Please, Mr. Tomte, your microphone is open.

Speaker 7

Hello. Good morning, all, and thanks for taking our questions. Two questions from our side as well. The first one is regarding the 2026 revenue growth guidance, the longer term guidance. Does that already assume a relevant contribution from your B2B strategy or other fronts?

Speaker 7

Or Are those more of a longer term driver and in those 3 years the growth is likely to be primarily driven by mobile? And the second question from our side is on migration of users from prepaid to controller plans, which you mentioned, just now. You've been doing that for a long time at this point. So how much more room do you see to increase the percentage of postpaid in your user base? And how high do you believe that percentage could get in the longer term as you continue to capitalize on this driver?

Speaker 7

Thank you.

Speaker 2

Vito, sorry, we lost your question. For some reason, you got frozen. I don't know if on your side or on our side. May I ask you to repeat the question? Sure.

Speaker 7

No problem. So the first question would be on the longer term 2026 revenue growth guidance. Does that guidance already assume a relevant contribution from your B2B strategy or is that more of a longer term driver. And the second question would be on migration of users from prepaid to control, which you mentioned just now. You've been doing that for a long time at this point.

Speaker 7

So how much more room do you see to increase the percentage of postpaid in your user base? And how high do you believe that percentage could get eventually? Thank you.

Speaker 2

Okay. So, Victor, on the first one, We don't share the exact breakdown of the different components of our revenue drivers. So you will see that basically we're growing so let me give you a piece of information. So The assumption on inflation on our plan at this point in time is around 4% this year for EPCA and then going down to 3.5% in the years ago. So the main assumption is that we'll be able to grow consistently above inflation in the short term and in 2025, 2020 6 already.

Speaker 2

And so this is driven by the overall portfolio of our revenue generation initiatives. So of course, we have mobile, which is the our We got some kind of high single digit broadband and we got a customer platform. And so when you look at, for example, B2B, to go to your specific question, we shared with you In November that we have contracted revenues of DKK300 1,000,000 over the last 18 months. So this year, we shared in the presentation that we're having 200 additional contracted revenues in 2023, sorry. And but these contracted revenues extend on a period of, let's say, 5 years.

Speaker 2

And so they will build up over time. And so we are starting from almost 0 as we show in November, a couple of years ago, and we are quickly ramping up. So if you move to the end of the forecasting period and you keep the speed of our growth and you pile it up over time, you have a sense of the composition of the B2B revenues that we are expecting at the end of our triannual plan. And so this is basically something that can contribute to point something to our growth revenue. So Overall, it's not going to be small compared to mobile, but in terms of all the initiatives, broadband, B2B and the customer platform are important for the speed of revenue growth.

Speaker 2

The second one guys, what's the second one was? Migration. The migration, okay. So the migration is you are correct. The migration is something that we have been doing for a while, but I would say that we will keep So there is always something new.

Speaker 2

So for example, we've been working extensively on the Oi customer base over the last 12 months. And there was a sort of new link. If you look at the churn market, it's quite dynamic. So you've got people that improve their, Let's say, economic conditions and therefore are more where we have the opportunity to move them up. So if you consider the macro environment, the fact that the purchasing power of Brazilians over time is going to improve according to the scenario that we are looking at today and the dynamism of that specific segment.

Speaker 2

I think that we will continue to migrate prepaid to control customer at the speed that we are used to in the last 12 months.

Operator

Our next question comes from Marco Nardini from XP. Please Mr. Nardini, your microphone is open.

Speaker 8

Hello. Good morning. Thank you for taking my questions. I actually have 2 here on my side. This quarter, you delivered a solid EBITDA margin alongside the highest ARPU and also reported strong guidance in top line and EBITDA growth going forward.

Speaker 8

Could you provide insights into the expected margin dynamics growth in TMT Multafibra, but its contribution to consolidated revenues remain relatively low. What do you expect on fixed broadband growth in 2024. Can you expect some M and A here or do you believe that there's still room within this asset light model? Thank you.

Speaker 2

I will ask Andrea to address the first one. I will take the second one.

Speaker 3

Hi, Marco. Related to the EBITDA margin, We still want to continue to grow, but especially on the EBITDA after lease margin There, where we expect more results because the commission and all these effects that we already mentioned. But we will continue with our focus in growing with more

Speaker 2

Some variable costs are related to that. We got a scenario of lower inflation at least versus previous years and our commitment to increase operating free cash flow at the end of the day and this then will be broken down at the EBITDA level and the EBITDA of the lease level and the CapEx in terms of capital allocation. Going to your second questions in terms of broadband, Let me take a step back in terms of where we stand or where what we see in terms of market dynamics, where we stand. So When you look at broadband, you know that basically we got a 2% revenue share in the specific market And that is quite competitive at this point in time. 1 of the large player just lowered prices a couple of weeks ago on the entry levels at plants.

Speaker 2

And so the market remains competitive. We don't see any impact on not being convergent at this point in time, and this is primarily because The market is highly fragmented. And so more than 50%, say almost 75% of the market share is in the hands of a single business ISP. So convergence is not a problem for our mobile business. And at the end of the day, we are sort of a pure mobile company because it's the majority of our revenues And profits and cash flow come from mobile, but we are underrepresented on broadband.

Speaker 2

Given the strength of our brand and the credibility of team. Broadband is a nice adjacent market for us where we could command a higher revenue share or market share. But we are not just looking for revenue growth. So in a context of market dynamics that are quite competitive, this is A bit more challenging value proposition. So if you look at, for example, the evolution of our net additions over the last months, you will see that we decreased them a bit.

Speaker 2

And this is primarily because we decided to optimize our commercial footprint, taking away some of our, let's say, partners that were a bit more pushy and therefore didn't ensure the level of quality of gross addition that we are after. So we are rebalancing a bit our commercial footprint and that impact the gross additions when you do a measure like that and the positive impact, which is churn reduction, is going to happen a few months down the road. So we are not looking just for growth, but we are looking for profitable growth and the market conditions Today make this a bit more challenging. Nonetheless, we think we have a quite distinctive approach. If you look at our ARPU, it's the highest in the market.

Speaker 2

If you look at our NPS, it's the highest in the market. If you look at 3rd party measurement of quality of service, especially network reliability, according to Obel's signal, we got the highest consistent quality. Of course, as we shared in November, we are open and we are active. We have an active stance on non organic opportunities. And so we are looking at that.

Speaker 2

And if something attractive comes along, we will look at it.

Speaker 8

Perfect. Thank you.

Operator

Once again, If you wish to ask a question, use the raise hand button or type it down on the Q and A button. Wait while we pull for questions. Our next question comes from Carlos G. Ligarita from Itau BBA. Please, Mr.

Operator

Carlos, your microphone is open.

Speaker 9

Two questions here. I'm very

Speaker 2

grateful.

Operator

Mr. Carlos, we lost your the beginning of your question. Please, if you can repeat.

Speaker 9

Sure, sure. I was just reading them. Thank you. The first question is On the equipment side, I understand obviously it's a small part of the business, but I was just trying to understand, you do seem to have in the 4th quarter A nice increase in the volume of handsets sold, yet the revenue contribution is actually lower year over year. So I understand handsets are not the only equipment that you sell, but if you could talk about a little bit of how to reconcile this and what to expect going forward.

Speaker 9

And secondly, double clicking on broadband, or fixed broadband, I mean, is The penetration that you have of customers over total home spas is relatively low. And I don't know if you Conceptualized target penetration rates as a target for Tim. But if you could talk about If you have this metric in mind as a target number in the near future or in what timeframe that could also be very helpful. Thank you.

Speaker 2

Okay. So, I will go with the first one on a more commercial terms and will leave Andrea to comment on the numbers that you see. So when it comes to the to our commercial approach on handsets, So basically, we do we implement our commercial policies with 3 potential benefits in mind. So the first one is being attractive to competitors' customers. So Basically, we want to put together a nice offer for potential customers interested to switch.

Speaker 2

So this is the first objective. And this is, for example, the Apple One initiative that we launched the Q3 last year. The second objective that we are looking at is We want to increase the life cycle of those customers in our customer base that decide To apply to that specific offer with the handset included. And the third one is the ARPU uplift. So generally, we tend to apply subsidies in the highest plants because we can generate the ARPU uplift and we know that the quality of these either acquisitions or let's say Not retention is cross selling to our customer base have the best quality.

Speaker 2

And so in the quarters, we generally Put together these 3 components depending on the moment. And specifically in the last quarter, we've been a bit more aggressive on subsidies and the specific performance of that quarter and because we are always assessing our goals. And if we need to do some fine tuning or adjustment to our commercial strategy. And if you look at the overall numbers of the years, I will leave this to Andrea.

Speaker 3

Yes. In the last quarter, we have this Seasonality because consider that we have the Black Friday and the Christmas period. So we concentrate subsidy in this part of the year. When you look for the total year, we have more volume this year related to 2022. So for the full year, we have an increase in revenue and costs.

Speaker 3

But for the 4th quarters, We have the seasonality of these 2 big commercial points.

Speaker 2

Carlos, going to the second question was about penetration of broadband. So when you look at our model, which is basically we're an MVNO of broadband, right, because we operate on an asset light model. And One of the benefits is that generally we are less interested with the occupancy rates because these are not part of our contracts and this is actually an advantage. So we can operate on a larger footprint. So it's like we launch a larger network and we take the customers on a larger footprint without having the need of increasing penetration and take up rates on the specific district of that specific city and that generally puts a lot of commercial pressure on filling up the network quickly in order to have payback.

Speaker 2

So this is actually one of the main benefit of the asset light model and this is also the reason why We are rebalancing a bit our go to market approach in terms of commercial networks because we want to rely more on a pool component versus the push component. So not having the need or the not we don't need to be worried On filling up the network very quickly, we generally want to have a mobile like go to market approach, which is quite aligned to what we know how to do well. And at the end of the day, this ensure quality that ensure a better trade off in between revenue growth and profitability.

Speaker 9

That's super clear. I really appreciate your comments and I will also praise the formatting like very efficient. Good to see you everybody.

Operator

Our next question comes from Fanny Kanumuri from HSBC.

Speaker 10

Or in a sense that, did you already know do you already know the decision and you're just going to take some time before revealing the decision or We're still waiting for some other actions happening outside to finalize the shareholder remuneration.

Speaker 2

We are finalizing, Fani, the number with our in the discussion that we have with internally. And the message here is that we in the previous guidance, we say that continuous improvement in shareholder remuneration. So this is what we have been doing over the last many years. We moved from 1 to 2, then 2.3 in November. We since our plan was going faster With in respect to the to what we initially planned, we moved from 2.3 to 2.9.

Speaker 2

And so we are entering 2024 at a faster speed and we are finalizing the number and we just communicate the new floor December March.

Speaker 10

Thanks for that Alberto. The second question is largely related to your operating free cash flow after leases. The margin is at around 18% this

Speaker 3

Well, respecting that we will grow in the coming years. So like we put in the guidance In a double digit, it's growing. But what we expect is the continuous of the growing in the coming years.

Speaker 1

If I may, Andre, I think we have released a pretty broad guidance as we usually do. We have 5 to 6 KPIs that we expect at least to help you to model our business. Of course, unfortunately, we cannot give guidance on every single KPI. So this one we are missing, Fani. We will let you guys calculate that.

Speaker 1

Considering what we expect on revenues, considering what we expect on EBITDA and EBITDA after lease minus CapEx, I think It's not going to be that tough. And if you guys need any additional help on qualitative elements, we can

Operator

Our next question comes from Gabriel D'olima from Morgan Stanley. Please, Mr. Thalima, your microphone is open.

Speaker 11

Thank you. Two questions on my hand. First, anything you're seeing in the first quarter of 2024. That's worth highlighting in terms of the market. You already did the you have the offer of the On the M and A question, you were looking to when you say you're active, you mean that you are You are looking at everything in the market or your approach is to smaller companies and things like this.

Speaker 11

Just wanted to get a sense if, for instance, the Oi assets that are on sale is an opportunity for China as well.

Speaker 2

Okay. So let me go with the first question. So when you look at the Q1, the Q1 is generally a very seasonal quarter Because you've got people coming back from holidays in January. We've got an early Carnival in Brazil in February. And so everything is moving ahead according to our plans.

Speaker 2

So no specific, let's say, element of discontinuity versus what we saw in the Q1 in previous years. What we have versus last year is that at this time last year, we didn't have Any communication or commercial activities going on? So if you look at what we did in 2023, in the Q1, We were not having specific campaigns. In this quarter, on the opposite, We have what we call a summer campaign and which is the Z delivery campaign and we Announced the partnership in November. We are implementing it now in January because it fits well with the necessity of recharge and getting a cold drink associated.

Speaker 2

So we have more commercial activities on our side. We just launched the delivery. Results to date are pretty good. And when it comes to the test drive, Let me elaborate a bit on the commercial intent of that campaign. So When you look at our positioning on the quality of service, basically, you can see that We closed over the last years the gap that we have with our competitors in terms of quality, actual quality delivered to our customers.

Speaker 2

And we have been consolidating since June last year Our position in leadership and we look at this KPI, which is called excellent quality of service as the main indicator is measured by OpenSignal. Now, nonetheless, there is a mismatch that exists between our actual performance and the perception of our customers. And so when you look at the communication initiatives in the marketplace, Every competitor has its angle. And so we are looking always to different angles to market our network superiority in coverage, in quality, in 5 gs and the test drive, it's So it's a new sort of communication campaign that whereby basically we put the final test on consumer hands. And so we invite customers to test our network.

Speaker 2

It's more of a communication, let's say, original communication campaign than a product where we want to do a lot of gross additions. Of course, every time there is an event with a number of significant number of customers And we generally use to put this in place. The response is quite nice, but it applies on specific circumstances, like for example, carminal in a few days. And so this is for the Q1 commercial activities, put it this way. Going back to the our active stance.

Speaker 2

So in this point in the market, basically got A lot of companies that are out for they want to be acquired by somebody. And so it's not like we are looking out and we are reaching out to buy somebody because there are a lot of people that are looking to be acquired. And so what we are doing is that we don't need to go actively outside looking for targets because they are all coming to us. And so we are analyzing all the opportunities that are presented to us Let's put it away with the caveats that I mentioned in the previous questions whereby the market is actually not quite attractive. It's full of players.

Speaker 2

We don't we like to be a pure mobile player at the end of the day. I think that our strategy is quite neat. We got a growth opportunity in front of us and we can capture it when we want. And but It's not just a revenue growth opportunity, it needs to be to us an opportunity to increase revenues and free cash flow margin at the end of the day.

Operator

Our next question comes from David Lopez Strong New Street Research. Please Mr. Lopez, your microphone is open.

Speaker 4

Hi, hello. Thank you for taking my questions and congratulations on a solid set of results. I just had one on the balance sheet, please. Your net leverage is quite low now. I was wondering what is the optimal Leverage in the future.

Speaker 4

I know you cannot comment much on the shareholder remuneration today, but should we expect leverage to continue to go Close to 0 or is it going to go up at some point and what would be the optimal level please?

Speaker 3

Hi, Deb. Yes, our leverage is really very low after the acquisition of Oi. And we are in this very good results. And For now, we will still continue the same path. Of course, we We'll have some discussions about what happens if we have a change in the income taxes From the government and when we have this information, we will start some position about our capital infrastructure.

Speaker 3

But for now, we are not thinking about changing our leverage situation.

Speaker 2

Maybe it's for adding, David, that there is another discussion that you guys are quite interested in in previous quarter that was the interest on equity and that could be a trigger to rethink something Since the discussion now has been postponed for potential implementation at the earliest in 2025, That's another element that is part of our discussion that when we look at that. And today, we got a pretty nice instrument to address effective tax rate and support our increased shareholder remuneration. Of course, there's been a lot of discussion here if this instrument was going to exist in the future or being modified in the future. And so this is something that has been started internally, but since, let's say, the discussion has been postponed, it's something that is going to be probably discuss again throughout the 2024 when we see progress in the government news on this front, let's put this way.

Speaker 4

Okay, yes. Thank you very much. Very clear.

Operator

Our next question comes from Philip Chang from Santander. Please Mr. Chang, your microphone is open.

Speaker 12

Hi, good morning everyone. Thank you for taking my question. Quick question on my side. I just wanted to understand if there is any update on the fiscal payment discussions and if you are still working with the base case of not having to pay for this year. So just wanted to see if there's any update there.

Speaker 12

Thank you.

Speaker 3

Hi, Sheng. We are still in the same position. Nothing changed related to the fixed payments. So we were one thing our previous position.

Speaker 12

Perfect. If I may just do one quick follow-up. I just wanted to understand in the mobile segment, How the performance has been on the high end consumers, right? Just wanted to understand if given that you have now the highest ARPU in the market, How do you see your relative performance among high end customers, right, pure postpaid? If you have been able to gain a lot of traction there, Has this been an important driver here for ARPU expansion?

Speaker 12

And eventually, if we should continue to see this as an important driver for service revenue growth going forward?

Speaker 2

Jack, this is a very good question because at the end of the day when you look at postpaid, we got 22% market share and market leader is 40 So this is an area where we can grow. I mentioned in the previous answer that we are doing quite well. So if you look at we have when you look at postpaid, we divide the plants in 2 families. 1, we call it internally like pure postpaid, which is basically something above BRL100 and the other one is hybrid plants that we call internally control. And we have been growing double digit on the pure postpaid.

Speaker 2

And all the efforts that we are doing on our commercial strategy that is based on the famous 3B, best service, best network and best offer It's exactly to increase the perception among the high value customers that we have these 3 Bs with us and therefore to attract them. So it's a journey because to change perception it takes time. We are putting all the elements together and like in the test drive that I just mentioned in the previous question to Carlos, Basically, we are working to improve our position in the high segment. And When you look at the hard number, it looks good because we're going double digit, but I think there is a long journey to go in front of us. When you look at additionally some of the things that we have been doing on our offer, the Apple partnership It's exactly driven by our intention to increase the perception with high value customers.

Speaker 2

When you look at you live in Brazil. So if you fly domestic GOL and LATAM, our TIM Black customers. So TIM Black is the high level plant family that we have here, include free communication in the flights on us. If you look at 1 of what was considered, let's say, a gap in our Hypos plants offer that was international roaming. We closed the gap last year and now we got the most attractive international roaming offer.

Speaker 2

So we are doing a number of initiatives to sustain our quest to increase our position in the high end customers.

Speaker 12

Very clear. Thank you, Alberto, Andrea, Pisencho and Luisa, and congratulations on the strong 4th quarter results. Thank

Speaker 4

you, Olivier. Thank

Operator

you. Lindsay, ladies and gentlemen, Since there are no further questions, I'm returning the floor to Mr. Alberto Crisale for his final remarks. Please, Mr. Crisale, you may proceed.

Speaker 2

So guys, thank you to everybody for staying with us. I hope you like the new format that we put together. I invite all of you to participate to the our to the new group, to Telecom Italia Group Capital Day, the 7th March. And I'm looking forward to meeting all of you in the one to one meetings that we have in the following days.

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Earnings Conference Call
TIM Q4 2023
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