Good morning, ladies and gentlemen. Welcome to TIM Participações 2019 first quarter results 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 TIM Participações remarks are completed, there will be a question and answer session for participants. At that time, further instruction will be given. We highlight participants that they will need regarding the prospects, projections and goals of TIM Participações constitutes the beliefs and assumptions of the company board as of today's rosters. Future considerations are not performance warranties. They will involve risks, uncertainties, and assumptions as we refer to events that may or may not occur.
Investors should understand that internal and external factors to TIM Participações may affect their performance and lead to different results than those planned. To the participant that's listening to this call, please press star zero to reach the operator. Now I will turn the conference over to the CEO, Mr. Pietro Labriola, so he can present the main messages for the first quarter of 2019. Mr. Pietro, you may proceed.
Everyone, thanks for attending our conference call. This is our first opportunity to interact since I was appointed TIM Participações, I believe most of you know me from my prior terms in Brazil. Well, it's an enormous pleasure to be back and lead this amazing company. As I said, not long ago, I was here at TIM to help TIM in its turnaround phase, we managed to put in place significant changes and improvements that took the company to the strong position it has today. I'm really thrilled to be back and consolidate what we have accomplished between 2016 and 2018. My connection with Brazil is very special and goes beyond my job with TIM, I intend to be here for a while.
My mandate is to focus on execution, some adjustment in short term to prepare the company for the medium and long run, where so many challenges and opportunities will occur for sure. I will comment on Q1 results, I will have the help of the team to answer your questions during the Q&A session since I took over at the beginning of April, I may not be deeply aware of some of the specifics that happened in this period. TIM managed to post solid results, even in face of tough headwinds coming from the slow economic recovery and aggressive competition. In the first quarter, EBT continued to show healthy growth at 5.3% year-on-year, while margin expanded 120 basis points to 35.7%. This performance is mostly explained by strong results in cost control, with OpEx down 0.2%.
On the revenue side, the main highlights was TIM Live , showing a sound growth of 35% year-over-year, while mobile ARPU presented resilience up by 5.3% year-over-year. The mobile segment is being impacted mostly by external challenges, receiving no support from economic recovery. On the opposite, annual GDP growth estimates are now below 1.5% for 2019. In the first quarter, consensus is pointing to a decrease in GDP. At the same time, consumer confidence is deteriorating once again, and unemployment remains high. Mobile prepaid is also being impacted by tough competitive dynamics as regional attack offers are becoming widespread. Moreover, other players are offering aggressive intensive incentives for SIM card acquisition with first recharge for free. Nevertheless, this aggressiveness seems to be impacting more our competitors than ourselves since in the last 12 months, our prepaid net disconnection were the lowest.
In postpaid, competition is not as harsh as in prepaid, we still see players taking steps towards aggressiveness. As a consequence of these external challenges, together with some internal factors that needs adjustment, churn rates in postpaid are being impacted, which combined with an hesitating approach on the prep to post migration led to a reduction in postpaid net addition. The reduction of this dynamic should take some months and depends on the right balance between quality and growth. Despite all that, the core of our operational strategy is still working. Postpaid new customer acquisition is on the rise and the ARPU from control to pure is growing both at double-digit rates. The new prepaid plan, TIM Pré TOP, is showing some positive results. Demands and concerns are reducing as a consequence of a shifting side offer.
Recharge ticket going up, at the same time, prepaid ARPU is increasing growth to 2%. Price rationality is key to maintain margins and returns on the right path. We continue to believe competition should be about services, innovation, quality, and channels. As an industry, we cannot run the risk of commoditizing our services. So far, we are maintaining our sense of rationality, focusing on improving services and client satisfaction to generate growth, we are assessing the evolution of the market. While mobile is showing resilience in face of headwinds, we are performing as expected in other business fronts, such as TIM Live. The first quarter was again marked by strong results, with FTTH driving the growth. The focus was concentrating on developing further the areas we started to cover last year.
In Q1, we added one additional city, covered more than 175,000 households with FTTH. Coverage expansion is helping TIM Live support a vigorous customer base gain of more than 18% year-over-year and reach nearly 490,000 connections. Now, more than 25% of sales come from outside Rio and São Paulo. A portfolio that privileged higher speed connection and streaming content helps drive ARPU upward with another double-digit growth. In the first quarter, more than 50% of sales come from clients choosing speeds of 100 megabits per second or more. As a result, TIM Live revenues grew 55% year-over-year, totaling BRL 112 million or 50% of overall fixed revenues. This is the ninth quarter in a row growing above 50%, a great sign of consistency in strategy and execution.
Besides TIM Live, another source of revenue that we are starting to explore more and more is related to IoT. We are investing to become the preferred partner for agribusiness solutions using the ConectarAGRO initiative to promote 4G technology on 700 MHz in the countryside of Brazil. Other IoT partnership will materialize in the near future, and we will share with you the developments of this new stream of revenues. The progress of our infrastructure is key for pursuing high-level customer satisfaction, and although there is a long road ahead, all the signs confirm we are in the right direction. Works on network expansion and digitalization projects are generating positive impacts in customer experience, as shown by NPS improvement in all segments and Anatel annual satisfaction survey. On the network side, the highlights are: the deployment of 4G on 700 MHz, which puts TIM in a unique position.
More than 65% of the urban population is covered with this additional layer of frequency that improves indoor signal. The refarming evolution continue to help us to cope with the data traffic growth in a CapEx-efficient manner. We are accelerating the 2.1 GHz refarming, reaching more than 260 cities, while expanding further the utilization of the 1.8 GHz, now in more than 2,250 municipalities. Lastly, on the fiber front, we are expanding our high capacity backhaul to 66% of our sites and rolling out FTTH to 1.3 million households. Additionally, on digital transformation arena, also extremely important to sustain our efficiency plan, results are consistent. Once again, doubling e-billing numbers when compared to a year ago. e-payment users grew double digits. MyTIM app usage expanded heavily, above 50% versus last year. Top apps are also becoming more digital. e-recharges penetration increased by more than seven percentage points.
As I pointed out earlier, the external environment is posing challenges to the businesses and at the same time, TIM needs to retake ownership of some important position attributes. Nevertheless, the company managed to grow all revenue lines at a softer pace, but still on the positive side, showing its resilient operation. In the quarter, top line was up 1.7%, with service revenue growing 1% year-on-year. Revenue generation versus recent quarter was driven by mobile revenues. Mobile service revenue was mainly impacted by the reduction in the MTR, meaning a decrease of 50% in incoming revenues, with client-generated revenues growing 2.3% year-over-year.
Client-generated performance was a combination of high single-digit increase in postpaid, while prepaid decreased at the same time, at the same rate. Postpaid in the first quarter represented 65% of revenue generated by clients, down from less than 50% two years ago. This profile transformation continues to help our mobile ARPU performance, posting a solid 5.2% year-on-year growth. On the other side, even if still negative, the decrease in prepaid is below the levels of the previous quarters, with the last month showing some signs of stabilization of active users. The high point of the quarter was efficiency performance. Strong cost control and efficiency coming from digitalization helped compensate for softer revenues. Normalized OpEx was down 0.2%, once again demonstrating and better than expected.
TIM's efficiency plan continued its high delivery standard, reaching 25% completion as traditional initiatives led to savings with lower cost release aligned, real estate rental, and content providers costs. Altogether, they more than compensated bad debt trend, which if excluded, our costs would have decreased by 2.4%. Regardless of seeing 0.3% of gross revenue, still a very controlled level, bad debt deserves a special chapter as it represents the main challenge we are facing in terms of year-over-year growth, also because it is directly affected by the change in revenue mix, as I commented earlier. The action plan set in place in the third quarter of the last year continues to be executed. Some actions were already implemented, such as the collection portal, the dedicated call center, and the new method of payment for Controle Plus. Other actions are still yet to be fully applied.
As commented entire quarter, we expect to see the benefits of the action plan in the second half of 2019. Our ability to manage our operation in an efficiently manner was rewarded in this scenario of softer revenues as we sustained a pretty solid EBITDA expansion with a consistent margin evolution. EBITDA reached BRL 1.5 billion, growing 5.3% year-on-year, with margin at 35.7%. In a pro forma view, excluding ICMS nine and 15 FX, margin are rising solidly in the past four years, and this shows the structural strength of this company. EBITDA minus CapEx also stood at the same pace, up by 4.7% to reach almost BRL 850 million. While net financial position reduced by close to BRL 600 million, contributing to a leverage of 0.35 times net debt to EBITDA.
I will end my comments pointing the fact that having strong fundamentals puts us in a position to enjoy fully the economic recovery whenever it hits, despite these short-term challenges. Our strategy remains solid and with some adjustment we can recover momentum. To regain growth, as I mentioned earlier, TIM needs to reclaim attributes and retail culture that were key pillars for the successful turnaround. Thank you. We will now open the floor for questions. Please, operator.
Thank you, Mr. Pietro. Now we will begin the Q&A section. First, we will take questions from analysts, followed by the journalists, both in English. We ask each participant to restrict himself to two questions at a time. To ask a question, please press star one. To remove the question from the list, press star two. The first question comes from Ms. Susana Salaru, Itaú.
Hi, guys. Good morning. Thank you for taking our questions. The first one is related to the competitive environment. If you could elaborate a bit, Pietro, you mentioned that you are still seeing some aggressiveness in the market. How do you plan to react to that? That would be our first question. Second, on the bad debt performance, you mentioned that we should expect an improvement for the second half of this year. That means that we should stabilize at current levels or should expect to decline from current levels? If you could just pinpoint which will be the initiative that will mature in the second half of the year, since, if I understood correctly, most of them actually started being implemented quite often last year. Thank you.
Okay. Hi, Susana. Related to the competitive environment, what we're looking at, we have more or less five operators if we know that one is on sale and the sale will be completed. If you look at the situation, divide the market by 2, postpaid and prepaid. What we see is that on the postpaid segment, we see, with the exception of TIM, one operator very rational, and TIM is following this kind of rationality. Another operator that is applying price up only for the new customer and didn't apply to the customer base, and this is also perhaps one of the results of the performance. It's still aggressive. The last 2 operators that are quite aggressive. I'm not worried about aggressiveness of these last 2, because also their network capability are very limited in terms of 4G.
We must be more clever to show the difference between price and quality. In any case, putting on the press, on the advertising some price can generate some turbulence. If we move to the prepaid, on the prepaid, I think that we are the most rational operators today. All the others are fighting on this area. Our point of view is that mainly on the prepaid, being too much aggressive, creates a bill that you have to pay sooner or later, because the first customer that moves to this kind of offer, it's your own customer base. The risk is that the market share that you have to gain to offset the loss on your revenue is too big. We will continue to stay at the window, try to understand how the market evolves.
Ready to answer if we see something that can impact and hurt our positioning. At this moment, we don't see this kind of situation. Okay, I want to add also another point that I tried to mention also in my speech. The mistake of our industry is to continue to compete on price. Theoretically, this is an industry that has an asset. Our services is mission-critical for our customers. None of you could stay 1 day without mobile connectivity. We can define our service mission-critical for the day-to-day life of all our customers. In the meantime, we were able to transform this service for a cheap service, where the willingness to pay of our customers is below. I think that all the operators must be focused to try to better explain and let perceive to our customer how much is important this service for their lives.
Now I leave the stage to Adrian to better elaborate on the debt.
Thank you.
Sorry, Susana.
Hi, Adrian.
Yes. You remember that we mentioned, also when we did the presentation of our plan, that the bad debt with all the actions that we were putting in place will have the positive impact later this year, mostly on the second half. Clearly, this first half was impacted mainly by the rate of collections that we have three or four months ago. We think that going forward, already the first quarter has better results and maybe in the fourth quarter, some negative year-on-year numbers. Speaking in nominal terms, we expect to have lower numbers on the second half, clearly. If you related this to the revenues that we are expecting some additional growth, the rates should go down. Yes, we have the same assumption that we gave you on presentation of the plan. Hopefully, this will be the best second half.
Perfect. Thank you, Adrian. Back to you.
The next question comes from Mr. Fred Mendes, Bradesco.
Good morning, everyone, and thanks for the call and also congratulations, Pietro, on your new role and welcome back, Pietro. Just two questions here. The first one in terms of the strategy, should we expect any change in the strategy under your leadership in terms of the strategy itself and the team and also what are your thoughts on M&A? Actually on the second point, in terms of the net adds on the postpaid segment, of course, the sector as a whole is suffering also in the back of the macro scenario. We are seeing, let's say, higher slowdown in TIM, while other players gaining-- two other players are gaining on market share. Just what are your thoughts on that? Should TIM do something to revert the trend in the near term, or you believe that those are the numbers that we should see throughout 2019?
Thank you.
Okay. Related to the strategy, we will not change our strategy. We can discuss about fine-tuning on some aspects and also recover a higher level of focus on execution. This was one of the key pillars. Keep in mind that also from your customer experience, TIM is a company that is young, dynamic, innovative, and we have to recover the DNA that we never lost, but perhaps we can for sure improve. Just to give you an idea about execution, because if not, we continue to talk about slogan. We cannot stay out of the market for nine months without advertising on postpaid and control. We are back. In May, we started an advertising campaign on control. If control and postpaid is one of the key elements, we must be back. For sure, the strategy that started already with Stefano, that was strongly improve the customer satisfaction.
We have to continue to put effort on that. In a market like that, it's important that customers are satisfied about your service to avoid the churn increase. We have to start to explore also some new source of revenue. We mentioned in our speech about the IoT. I think that we will have some news also in May, that will show how we are addressing the service. We have to start to address some area that perhaps are area of co-opetition with the other players. What I mean, mobile advertising, financial services, sometimes is not a matter of competition, but it's a matter of cooperation among all of us, because it's a way to start reduce the focus on the price competition on traditional services, moving towards new source of revenue. I don't want that our team starts to be defocused.
We are on the right track. We have to execute well, we have to continue to perform in the way we were able to do also in the past. This is also important to answer to you to the M&A question. What is important is that, and I repeat, I will put the answer that Stefano was used to put. In the next one year and half, something will happen on the market, and we must be ready with strong TTI, strong numbers, to play the right role in this M&A environment. I think that nothing change also on this point of view. Related to the net adds, what's happened is that, this is something that it's better to explain and elaborate more.
When you look at our net adds or better to the net adds of all the operators, they are made by two components: growth and churn. What is important for you to understand is that what impacts in the same quarter on the revenues are mainly the growth. Because the churn, mainly the involuntary churn, is what come from customer that stopped to be charged in the quarter before. I'm mentioning that also because in this situation, what will happen is that you will see a recover of our numbers starting from May. We expect also in April to have a weak net adds, but it doesn't impact the revenues of the second quarter because it's the cancellation of involuntary customer, the churn three months ago and that do not impact our revenues.
That doesn't. It's very clear.
Okay.
Thank you.
The next question comes from Mr. Marcelo Santos, JP Morgan.
Hi. Good morning to you. I have two questions. The first is trying to understand what changed from quarter to quarter. You saw a reasonable deceleration in mobile growth, and you commented besides the interconnection, you also commented maybe the macro and the competition. What has changed the most from the previous quarter? Because you already had a kind of tough macro, and you already had tough competition in retail. If you could just elaborate more on the more recent changes. The second question would be, what about the outlook for re-acceleration of revenues? I mean, what does need to happen for TIM to go a little bit more, maybe closer to inflation, and where will that growth comes from?
Okay. Thank you, Marcelo. Related to the deceleration, what is important is that, as we mentioned in the speech, part of this deceleration is also related to the change in the [audio distortion] price that impact on the revenue. If you look at the revenue, as we mentioned, we should do 2.4% revenues year-over-year, with the exception of the termination rates, if you don't consider that. What is happening, as again, I was mentioning, the first quarter is impacted by some cancellation that you will see by the end of April. Because as I was mentioning, usually customer stop to be invoiced and then are canceled with three months of delay. Part of this deceleration comes also from this event. That was something quite normal after a so huge growth that we had in the past quarters.
If you look also at our speed, keep in mind that the first quarter 2019 come from a growth in the whole 2018 of 2 million effects, compared to a first quarter of 2018 that was exploiting and leveraging a growth in terms of net adds of 3 million. It's important to remember that our postpaid revenues are continuing to grow 10%. This is an important element. Perhaps we are moving towards a scenario in which we will start to have some good surprise in the following quarter also by prepaid. What I mean, it's important to understand, and we are perhaps the first operator that is trying to leverage on that. You cannot migrate all the prepaid customer base to control and postpaid, because as part of all South American country, there's a credit issue.
What we are working today with the offer that was launched in TIM Pré TOP, we try to better exploit what was one of our weakness, prepaid. If you asked us how we think that we are able to manage and guarantee the guidance that we are confirming also on revenues, is for sure to work better on the postpaid. I mentioned that we have also to re-accelerate on the postpaid. For sure, we can work much better in terms of churn and manage the so-called below the line discount for our customer base. We have also to put the right pressure on the growth on the prepaid to guarantee, again, the guidance on the service revenue that we are confirming also in this call.
Perfect. Thank you.
The next question comes from Mr. Valder Nogueira , Santander.
Good morning to all of you. Pietro, without having to depend on competitors' rationality movements, how do you believe you can further protect your mobile service revenue trends? That's the first question. The second question is, you have done a great job in expanding TIM Fiber, and you have mentioned in your speech that you're going beyond the regional areas, going to outside the state capitals, which is a market that is there to be harvest. Would you dedicate one additional BRL more to mobile infrastructure or to fiber? Would you consider speeding up the money that you deploy in fiber broadband vis-a-vis mobile? Of course, that also in light of the recent deal between one larger and one smaller player in terms of spectrum. That's my question, and welcome back.
Okay. Thank you, Valter. I try to summarize in this way. Our market is made by one competitor that is by far premium price, mainly on the postpaid, also is acting sometimes in an irrational way on the prepaid. That is a clear positioning. It's not the fastest, is the operator that gives everybody trust, and this kind of positioning. You add, and look, I'm using the past, an operator that was the most dynamic one, the most innovative one, that every three, four months was able to come out in the market with some new offers. That doesn't mean reduced price. What new? Marketing means also to find new ways to sell what you have. We have lost this DNA in the last nine months, with the exception of TIM Pré TOP. We were more or less stopped. There's no innovation, no new offer.
There is a third operator. I don't want to comment the financials of other operators. It's clear when you look also to the level of EBITDA of some other player, it's clear that they put a lot of money, perhaps not in the most efficient way. If you stay stopped for nine months and allow to this operator to copy exactly all your marketing mix element and to put more money, it's clear that you are weaker. It's not me, but if you look, we invented also a format of advertising campaign with singer that was singing in the song, the element of the offer. We outsourced the marketing of the industry. The other were copying us. Our DNA and our destiny is to continue to be the most agile mobile operator in the market.
If we continue to act like that, for sure, we are able to find some different elements to avoid the competition based only on the price. This is my answer. It's clear that I don't go to a deal that there must be a strong focus on the customer satisfaction and the level of service that we have to guarantee to our customers. When we move to TIM Live, I think that it's important to understand also every real that we put on TIM Live, how much time take to be transformed in cash flow and margin compared to mobile. There's no one answer. It really depends by the moment, by the situation. As is today, we have enough money put in our budget, investing in TIM Live.
We need to continue to perform. We have to avoid to do something that is too big compared to what is our capacity to deliver. It is very clear. We have to be back the company that is execute and deliver what is promising. The focus today is guarantee the guidance of the plan on mobile and fixed, stay in the boundaries of our guidance for CapEx, and keep the best marginality in the Brazilian mobile market. Telco market, sorry.
Okay, clear enough. Thank you, sir.
The next question comes from Maria Tereza Azevedo, UBS.
Hi, everyone. Thank you for the call. My question will be on the fixed line strategy and welcome back, Pietro. More specifically, which competitive pressures are you seeing on the FTTH strategy? If you can also help us understand your views on the 5G, the upcoming auction, and how disruptive you think WTTx and fixed wireless broadband can be to your fixed line strategy. Thank you very much.
I didn't catch the three questions. Could you repeat please, Maria?
Yeah, both are on fixed. The first one is on the FTTH, which competitor pressures you're seeing from the incumbent players in the areas where you're going. The second one is on fixed wireless, if you think this can be disruptive to your broadband strategy. What are your views on 5G and the upcoming auction?
Good. Let's start with 5G. It's clear that we are looking at 5G with interest. We must be clear, we don't like and we don't consider the Italian auction as a benchmark.
I think that Brazil is a country that needs to increase digitalization of the country. It's better to have some auction in which the operator must take a commitment in terms of time to deliver and to build the network and not to maximize the value of the license. 5G clearly is something really important also in the future for new source of revenue. Everybody are discussing about IoT and all this kind of stuff. Also, it means in a part also a change of DNA, because usually when you discuss about other kind of services, it's more related to a B2C, business to consumer approach, while 5G for the moment, with the exception of the fixed wireless access, it's mainly B2B2C, such a complete different approach. Our corporate segment will be the most challenged one on this kind of area.
Related with the fixed wireless access, this is something that we are looking with interest because, as you can understand also, we are, let me say, the operator with the lowest level of fixed assets. It's something that we are going to explore, and we are evaluating also to better understand the technology and the way in which you can work. On this area, keep in mind that we can capitalize also on the experience of our colleague in Italy that are working on this area. In the following months, we are going to better study all these elements. It's something that we are going to evaluate because could be a differentiator. FTTH, at this stage, we don't see particular concerns or problem in the competition at FTTH. That is the area in which we are improving the most.
We continue to proceed in this area. Looking at some number in the market, I think that should be the other operator worried about our offer, because we are the only one that has no legacy on content. I don't have to explain to you what is happening today in Brazil. It's your experience on the day by day. Netflix, Facebook that is starting to show Champions League and the Copa Libertadores, I think and that with the digital on TV that allow to see Globo, RedeTV!, SBT for free, our approach is the one that from our point of view has less risk. I think that should be the others who have some more worries due to the fact that is much more CapEx intensive and is based on a huge price and on content model.
Perfect. Just as a follow-up question, can you please comment if you do see any opportunities in terms of infrastructure sharing? You mentioned about M&A, but do you see room that, for example, you can increase your sharing agreements with Oi or with any other market player to strengthen your fiber capacity? Thank you.
I leave the stage to Leo that can more elaborate on that. From a strategic point of view, asset are asset. If they are yellow, red, green, is not a prime issue. Whatever help us to stay on our strategic track, accelerating our competitiveness and our plan is something that we are going to evaluate, and I leave it to Leo to answer.
Good morning, Maria Tereza. First, I guess that TIM is the most active player in the market when you're talking about infrastructure sharing. I'd like to remember that first, we started to do that in a passive element. A big part of our backbone in terms of fiber optics is already shared with the other players. After that, we promote a new, let's say, wave of the sharing for the active elements. We started that with Oi, in the RAN sharing in 4G, 2.6 GHz. After that, we promoted a new wave to do the same with Oi and Vivo on the same frequency. Most recently, we extended this agreement with Oi in the frequency of 1800. We are starting this new wave for this kind of sharing, but we see that we still have some kind of opportunity in the market.
What we are most focused right now is to promote the discussion to have what we call the single grid, that is in the cities below some range, for example, 30,000 inhabitants, to have not just the three different methods, but just one, to avoid some duplications of investment or cost in this region that we have very low revenues. We are trying to discuss with our partner to promote this kind of approach, and again, to be the most efficient usage of the investment. We know that Brazil has a very heterogeneous country in the economics view. In this part of the country, it doesn't make sense to have two, three operators in the same city.
We are trying to promote the discussion, and we really believe that we still have this kind of leadership in terms of viewers to be stronger and to have more of this kind of efficiency. Answer, yes, we believe in that. We are doing that, and we are seeing that there is some opportunity that we try to achieve. Thank you.
Perfect. Thank you very much, Leo and Pietro.
Ladies and gentlemen, as a reminder, to ask a question, please press star one. Ladies and gentlemen, without any more questions, I will turn to Mr. Pietro Labriola for his final remarks. Please, Mr. Pietro, you may proceed.
Hi. Navigating in those turbulent waters is not an easy thing. That is why I congratulate the entire team for their work. I come here with the mandate to change what needs to be corrected and to maintain what is working. Above all, I come to support them to never lose the focus of our DNA, innovation, and agility. Together, we can accomplish great things as we've done it in the past. Thank you once again for participating in our conference call. Have a great day, and I hope we can meet soon. Thank you.