Earnings Call: Q1 2019

May 8, 2019

Good morning, ladies and gentlemen. Welcome to KeyBAR2 Performance 2019 First Quarter Results Conference Call. We would like to inform you that the event is being recorded and all participants will be in a listen only mode in the company's presentation. There will be a replay for this call and the company's website. After Qubarts and remarks, we completed there will be a question and answer session for participants. At that time, for whom we'll be given. We highlight that the belief regarding the process, projections and goals of 2 tactical points, constitutes the belief and functions of the company's board of executive officers. Future considerations are not performance in warranties. That they involve risks and certainties and assumptions as we refer to events that may and may not occur. Investors should understand that internal and external factors to TIM Participa Science may affect better performance and lead to different results and days planned. Now, I'll turn the conference over to the CEO, Mr. Pietro, Naviola, so we can present the many messages for the first quarter everyone, and thanks for attending our conference call. This is our first opportunity to interact since I was appointed team passed a few, but I believe most of you know me from my prior terms in the year. Frank, It's an enormous pleasure to be back and lead the energy company. As I said, not long ago, I will be here at Chiyo to our team in turnaround phase, and we managed to put in place significant changes in payments that took the company to the French position it has today. So I'm really thrilled to be back and consolidate what we have accomplished between 2016 and 2017. My connection with Berlin is very special and goes beyond my job routine. So I intend to be here for a while. My mandate is to focus on execution and some adjustment in short term to prepare the company for the meeting and allowance where so many challenges and opportunities will occur for sure. I will comment on Q1 results, and I will let the help of the team to answer your question. During the Q And A session, since we took over at the beginning of April, and I may not be deeply aware of some of the specifics that happened in this period. Tim managed to put solid results even in face of past evidence coming from the new economic recovery and aggressive competition. In the first quarter, ADB continued to should help to grow at 5.3 percent year on year. One 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 mineralized was penalized showing the sound growth of 53% year on year, while mobile app presented receivers, up by 5% to 3% versus last year. The mobile segment is being impacted mostly by external challenges, receiving no support from economic recovery. On the opposite, annual GDP growth estimate are now below 1.3% for 2018. And in the first quarter, Constensus is pointing for a decrease in GDP. At the same time, consumer confidence is deteriorating once again, and and improvement remains high. Mobile prepaid is also being impacted by tough competitive dynamics as regional attack offers are becoming widespread. Moreover, other players are offering the aggressive intensive incentives for Singtel acquisition with first leg charge 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. Interestpaid competition is not as harsh as in prepaid, but we still see players taking steps towards ageless. As a consequence of these external challenges, together with some internal factors that we need for Jasper, Share rates in postpaid are being impacted, which combined with an hesitating approach on the threat of post migration, led for reduction in posted net additions. The reduction of this dynamic should take some months and depends on direct balance between quality and growth. In spite of that, The core of our operation strategy is still working. Postpaid Net Hudson Acquisition is on the rise. And the offset from control to theory drawing, both at double digit rates. The new prepaid plan in pretop It's showing some positive results. The Lansing call center are reducing as a consequence of a CPUhead offer. We trust it at gone up and, at the same time, prepaid ARPU is increased to 2%. Price rationality is key to maintain margins and returns on the right path. So we continue to believe competition should be about 7 innovation, quality and channels. Because as an industry, we cannot fund the risk of co deposing our services. Sure. Part of we are maintaining our sales of rationality, focusing on improving services and planning satisfaction to the next group, but we are assessing the evolution of the market. While mobile is showing the resilience increase of headwinds, we are performing as expected in other business fronts, such as in life. The first quarter was again marked by strong results with 50 teams driving the growth. The focus was concentrating in developing further the areas we started to cover last year. So in Q1, we added one additional city. But cover more than 100 and 75,000 households with active needs. Coverage expansion is helping TIM Live supports a vigorous customer base gain of more than 18% year over year. And reached nearly 490,000 connections. Now more than 25 of fields come from outside Rio and Sao Paulo. A portfolio that pretty much ISP Connection has seen content has to drive ARPU upward with another double digit growth. In the third quarter, more than 50% of sales come from clients choosing speeds of 100 megabits per second or more. As a result, in Life revenues grew 55 percent year on year, totaling BRL 134,000,000 or 50% of overall fixed revenues. This is the 9th quarter in a row, growing about 50% a great sign of consistency, strategy and execution. We flagged TIM Live another source of revenue that you are starting to explore more and more is related to hierarchy. We are investing to become the preferred partner for agribusiness solution using the Konnectarago initiative to promote 4G technology on 700 Megahertz in the country side of Brazil. Other IoT partnership will materialize in the near future, and we share with you the developments of business stream of revenues. The progress of our infrastructure is key for pursuing high leverage customer satisfaction And on 2 days, the long road ahead, all the sides concealed, we are in the right direction. Works on network function and digitalization projects are generating positive impacts in customer experience, as shown by NTS improvement in all segments and unapella and long satisfaction survey. On the network side, the highlights are The deployment of 4G on 700 Megahertz, which puts TIM in a unique position, more than 60 5% of the Uber population is covered with this additional layer of frequency that improves in those The reforming evolution continued to advance to cope with the data traffic growth in a capital efficient manner. We are accelerating the 2.1 Gigler Farming, reaching more than 160 Cities, while expanding further the utilization of the 1.8 giga, now in more than 2250 Municipalities. Lastly, on the fiber front, We're expanding our high capacity record to 66 percent of our sites and rolling out FTTH to 1,000,000 households. Additionally, on digital transformation arena, also extremely important to sustain our efficiency plan, results are consistent. Once again, doubling the billing numbers when comparing 3 years ago. He payments user held double digit. My team app usage expanded ad week, about 50% versus last year. Top ups are also becoming more digital. E surcharges, penetration increased by more than 7 percentage points. Now moving to the commercial details. As I pointed out earlier, the external environment is posing challenges to the businesses and at the same time, team need to retake ownership of some important position attributes. Nevertheless, the company managed to grow all revenue lines. As a separate piece, but seen 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. Business generation versus recent quarter was driven by mobile revenues. Mobile service revenue was mainly impacted by the reduction in the MTR, meaning the decrease of 50% in incoming revenues, with cloud generating 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 December. Postpaid in the first quarter represented 65% of revenue generated by clients come from less than 50% 2 years ago. This profile transformation continues throughout our mobile app performance, posting the solid 5.2% year on year growth. On the other side, even it's still negative, the decrease in prepaid is below the levels of the previous quarters, with the last month showing some signs of stabilization of activities users. The high point of the quarter was the efficiency performance, strong cost control and efficiency coming from the digitalization at compensates for software revenues. Normalized OpEx was down 0.2% once a day, the penetration and better than expected. This efficiency plan continued its high delivery standard reaching 25% completion as additional initiative, like the savings with lower cost relief and line. Real estate rental and content providers costs. All together, the more than compensated bad debt trend which is excluded, but our costs will have decreased by 2.4%. Regardless of 3% of gross revenue, seen the daily control level, bad debt disservice special chapter as it represents the main challenge we are facing in terms of the airway area group. Also because it is directly affected by the change in revenue mix, as I commented earlier. The Exxon plan set in place in the third quarter of the last year continues to be executed. Some actions already implemented such as the collection portal, the dedicated home center, and then you need to do payment or control plus. Other action, I feel yet to be fully applied. As commented in prior quarters, we expect to see the benefits of the actual plan in the second half of twenty nineteen. Our ability to manage our operation in an efficient manner was rewarded in this scenario of software revenues as we sustain a pretty strong EBITDA expansion with a consistent margin evolution. EBITDA reached BRL1.5 billion growing 5.3% year on year, with margin at 55.7%. A pro form a view, excluding IFRS 9 15 effects, margin arising solidly in the past 4 years, and this shows the structural strength of this company. ATDA minus CapEx also stood at the same pace, up by 4.7% to reach almost BRL 850,000,000. 1, net financial position reduced by close to BRL600 1,000,000 continuing to a liability of 0.55 times net debt to EBITDA. I will have my comments pointing the subject, adding some fundamental puts us in a position to enjoy fully the economic recovery whenever it is. Despite these short term challenges. Our strategy remains solid and with some adjustments, we can recover momentum. And rate needs growth, as I mentioned earlier, in needs to become attributes of our culture, that were key pillars for the success center around. Thank you. We will now open the floor for questions. Please, operator. Thank you, Mr. Peter. Now we will begin the Q And A section. First, we will take questions from analysts followed by the journalist, both in English. We ask each participant to restrict himself to two questions The first question comes from. Hello. Hi. The first one is related to the competitive environment. If you could elaborate a bit, you mentioned that you we are still seeing some other estimates in the market. How do you plan to react to that? That would be our first question. And second, on the bad debt performance, you mentioned that we should expect an improvement for second half of this year. That means that we should be stabilized with our current liabilities or should we expect the decline from current liabilities? And if you could just, at two points, which will be very interesting, because we'll mature in the second half of the year since as if I do this correctly, most of them actually start being connected by. Thank you. Okay. Hi, Susanna. Related to the competitive environment, what we are looking at We have more or less final credit off if we know that one is wholesale and the sale would be completed, but If you look at the situation divided the market back to postpaid and prepaid, what we see is that on the postpaid segment, we see One with the exception of Tim, one operator, bidirectional, and Tim is following this kind of rationality another operator that is a client price up only for the new customer and didn't apply to the customer base. And this is also perhaps one of the result of the performance, but it's still aggressive. And then the last two operator 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. And so we must be more clever to show the difference between price and quality. But in case, putting on the press on the advertising, the some price can generate some tubulars. If we move to the prepaid on the prepaid, I think that we are the most rational operators today. All the other are fighting on this area. Our point of view is that mainly on the prepaid, be too much aggressive, created the impact we had to pay sooner or later because the first customer that moved to this kind of offer. It's your own customer base. So the risk is that the market share that you have to get to offset the loss on your revenue on your revenues is too big. So we will continue to stay at the window try to understand how the market evolves. Really, the 2 answer, if we see something that can impact and are our positioning. But at this moment, we don't see this kind of situation Okay. But it it works right also another point that I tried to mention also in the 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 customer. None of you could stay one day without mobile connectivity. So it can define our service initial critical for the day to day life of all the of all our customers. In the meantime, we were able to transform this service for a shift service. Where the willingness to pay our customers, I think that all the operators must be focused to try to better explain and let her see to our customer, how much is important the service for their lives. Now when it needs to ask them to better elaborate on bad debt Thank you. Yes. You remember, also when we did the presentation of our plan, that with all the actions that were we're putting in place, we'll have to see the positive impact later this year, mostly on the second half. Maybe this first half was impacted mainly by the rate of collections that we have, 3 or 4 months ago, we think that going forward, you're right in the first quarter, a better result and maybe, in the 4th quarter some negative year on year numbers. Speaking in nominal terms, we expect to have lower numbers on on the second half of the day. And if you related this to the revenues, that we are expecting some additional growth the rate should go down. So, yes, that we have the same assumption that we gave you on the presentation of the plan. Hopefully, this will be the result of that. The next question comes from Mr. Fred Mendes, That is cool. Good morning, everyone, and thanks for the call. And also congratulations to Pietro, and I'll talk on that later. Just two questions here. The first one is, I mean, in terms of the strategy, should we expect any change in this strategy under your leadership in Timo in terms of the strategy trial for the team and also what are your thoughts on M And A. And Akilio and the second And the second point, in terms of the net adds and the postpaid segment, of course, the sector has always suffered also in the back of the market scenario, but we are seeing, let's say, highest roll down in team, while we want all the players gaining, 2 other players are gaining a market share. So just to what are your thoughts on that? I mean, should team do some future reserve strength in the near term? Or you believe that in the should be the number, those are the numbers that you should see throughout Japan. Thank you. Okay. Okay. Related to the strategy, We will not change our strategies. We can discuss about fine tuning on some assets and also recover an higher level of focus on execution. This was one of the key pillars. Keep in mind that also from your customer experience, premiums that is young, dynamic innovative. And let's recover the DNA but we never lost, but perhaps we can for sure improve. Just to give you an idea about the execution, because if not, we continue to talk about broadband. We cannot stay out of the market for 9 months without advertising on postpaid and control. We are back in May. We're starting at the fashion campaign on control. Each control and postpaid is one of the key elements. We might be back. For sure, the strategy that started already with Stefano that was strongly improve the customer satisfaction we continue and we have to continue to put effort on that in a market like that. It's important to have customers that are satisfied without a about your service, Freight, the churn increase. Then we'd like to start to explore also some new source of revenue. We mentioned in our speech about the IoT. I think that we will let some news also in May that we show how we are addressing the service. But we have to start to address some area that drops a rather cool petition with the other players. What I mean? Mobile advertising, financial services sometimes it's 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. That they don't found that our team starts to be the focus. We are on the right track we're taking Q2 well and yet to continue to perform and we were able to do also in the past. And This is also important to answer to you to the M and A question. What is important is that, and the repeat, our I will put to the answer that Stefano was used to put. In the next one year end up, something will happen on the market. And we must be ready with stronger PTI, strong number to play the right true in this M and A environment, starting that lock and change also on this point of view. Related to the net adds, what's happened is that, and this is something that it it's better to explain and elaborate more. When you look at our net adds or better to the net adds of all the appraisal, they are made by 2 components, growth, insurance. What is important for me to understand is that, what impacts in the same quarter on the revenues are mainly the close because the churn mainly involuntary churn is what come from customer that stopped to be in, charged. In the quarter before. I'm mentioning that also because in the this situation, what will happen is that you will see and recover all our numbers starting from Maine. We expect all scenarios to have, weak net debt, but it doesn't impact the revenues of the second quarter because it's the cancellation of involuntary customer that churn 3 months ago, I'd like, do not impact our revenues. The next question comes from Mr. Marcelix Santos, JP Morgan. Hi, Art. Good morning, Tutor. I have two questions. The first is, trying to send you a change from quarter quarter, you saw a reasonable deceleration in the prior growth and you commented besides the interconnection, we also commented learning the macro and the competition. What has rated the most from what has changed the most from the previous quarter because we already had a kind of tough macro and now already had tough competition in Brazil. So if you could just elaborate more on the more recent changes? And the second question would be, what about the outlook for reacceleration of revenues? I mean, what does need to happen for Q2 to grow a little bit more, maybe closer to inflation and where will that growth come 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 boom price that impact on the revenue if you look at the revenue, as we mentioned, we should we should be 2.4revenues year over year with the exception of the termination rates. If you don't consider that, then what is happening as a gene that was mentioned in the first quarter is impacted by some confirmation that you will see by the end of April, because as I was mentioning, usually, customer stop to be in voice and then are concerned with 3 3 months of the age. So part of this incineration comes also from the event that was something quite normal after a sewage drill that we had in the past quarters. Then if you look at also at our speed, keep in mind that the first quarter 2019 comes from a growth in the old 2018 of 2,000,000 net adds compared to a first quarter of 2018, that was exploit and leveraging a growth in terms of net debt of 3,000,000. But it's important to remember that our postpaid revenues are continued to grow 10%. So 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 it means it's important to understand, and we are perhaps the first operator that is trying to leverage on that, You cannot in agreement all the preclinical customer bills to control and postpaid because as part of all South American countries, there's a credit issue. So what we are working today with the offer that was launched impact of. He tried to better exploit what was our one of our weaknesses repaid. So if you ask about how we think that we, 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 reaccelerate on the postpaid. For sure, we can work much better in terms of churn and manage the discounted so called below the line discount for our customer base, but we are 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 Good morning to all of you. 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 Team Traiber. 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 harvested. Would you indicate one additional real more to mobile infrastructure or to fiber. Would you consider speeding up the money that you deploy fiber broadband, vis a vis mobile, of course. That also in light of the recent year between 1 large and 1 smaller player in terms of spectrum. That's my question. And welcome back. Okay. Thank you, Robert. I tried to summarize in this way. Our market is made by one competitor that is by far premium price, mainly on the potatoes, exacting sometimes in an operational way on the prepaid. That is a clear positioning. It's not the fastest is the operator that gives to everybody faster and there is this kind of positioning. That you had and the look and wish you the past. An operator that was the more dynamic one the most innovative one, but every 3, 4 months was able to come out in the market with some new offers. That doesn't mean reduced price. For new, marketing means also to find new ways to sell what you have. We have lost this DNA in the last 9 months, with the exceptional team, great thought. We were more or less stopped. There's no innovation, no new offer, and they're the field operator. I don't want to commend the financials of other operators. But it's clear when you look also to the level of EBITDA or some other player, it's clear that they put a lot of money for up not in the most efficient way. So if you stay stopped for 9 months and allow to be the operator, to cope with exactly all your marketing mix elements and to put more money, it's clear that you are with It's not being marketed. Look, we invented also a format of advertising campaign with singer, that was singing in the song, the elements of the offer. We outsource the marketing of this, The others were copying us. So 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. And this is my answer. Then it's clear that I don't I don't go through it to that there must be a strong focus on the customer satisfaction and the level of service that's yet to guarantee to our customer. When we move to the line, I think that it's important to understand also every reais that we put on the line, how much time take to be transformed in cash flow and margin compared to mobile. So there's no one answer. It really depends. By the moment, by the situation. So as is to be, we have enough money put in our budget. Investment in 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, which is very cheap. We have to be best, the company that is execute and, deliver what is promising. So the focus today is guaranteed the guidance of the plan for mobile and fixed. Stay in the boundaries of our guidance for CapEx and keep the best marginality in the Brazilian mobile market. Says for market, sir. The next question comes from Hi everyone. Thanks for the call. My question will be on the fixed line strategy and welcome back Pietro. But more specifically, which competitive pressures are you seeing on the FTTH strategy? And if you can also help us understand your views on the 5G, the upcoming auction and how disruptive do you think WPTX and fixed wireless broadband can be to your fixed line strategy. Thank you very much. I didn't catch the 3 questions. Could you repeat, please, Maria? Yeah. The first one is, those are on fixed. The first one is on the FTTH. Which competitor pressures are seeing from the from the incumbent players in the in the areas where you're calling. And the second one is on fixed wireless. If you think this can be disruptive to your broadband strategy. And what are your views on 5 g in the upcoming auction? Good. Let's start with the 5 g. It's clear that we are looking at Versace with the instructor. 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. And so it's better to have some auction in which the operator must take a commitment in terms of the time to deliver and to build the network and not to maximize the value of the license. That is clearly is something really important also in the future for new source of revenue. Everybody are discussing about call your P and L, this kind of stuff. Also, if it means in, across also, exchange of DNA, the conclusion when you discuss about other kind of services, sir, it's more related to a B2C, B2C consumer approach, while searching for the moment. We get fair of the 5 fixed wireless access, it's mainly B2B2C, such as a pretty different approach. Our corporate segment will be the most challenged one on this kind of area. We need to agree that 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 Novos 11 of fixed assets. So it's something that we are going to explore and we are dilating 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 colleagues in Italy that are working on this area And so in the following months, we are going to better study all the elements, but it's something that we are going to evaluate because it could be a differentiator. EPH at each teacher, we don't see particular consensus or problem in the competition FTTH. That is the area in which we are improving the most. So we continue to proceed in New Year. And we're looking at some number in the month it. I think that should be the other operator worried about our offer because we are the only one that has no legacy or content. I don't have to explain to you what is happening with today in Brazil. It's your experience on the day by day. To Netflix, Facebook that is starting to show Chantal's League and Coppali Bertadores, I think, and that with the digital, on TV that allow to see global, ATTV, FDT for free, Our approach is the one that, from our point of view, has less to risk I think that should be the other to have some more worries, sir, due to the fact that it is much more CapEx intensive and this based on a huge price and all the content models. Perfect. And 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 and A, but do you see room that, for example, you can increase your sharing agreements with or with any other market player? To strengthen your your fiber capacity? I need the stage to layout that can, more elaborate on that. But from a strategic point of view, asset are assets. If they are yellow, red, green, it's not apprenticeship, whatever help us to stay on our strategic track accelerating our competitiveness and our plan is something that we are going through that week. And that is related to I guess that the thing is the most active player in the market when you're talking about, infrastructure sharing. And, I'd like to, to remember that, first, we substitute the data, not a CV element. So a big part of our backbone in terms of hydroxy is already shared with the other player. After that, we removed a new, let's say, wave of the sharing for the active elements. So we started that with in the range sharing in 4g2.6 gigahertz. And after that, we promoted a new wave to do the same with Loy and Vivo on the same frequency. And then most recently, we expanded this agreement we feel it defrayed the processing of 1800. So, we are expecting this new wave for this kind of, of a sharing. But we see that it still helps some kind of opportunity in the marketing. What we are going to focus right now It's just related to 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 a 3 different method, but just one to avoid some duplicated of investment or cost in this region that we have a very, very low revenues. So we are trying to discuss with our partner to promote this kind of approach, and again, to be the most efficient you did you offer the, the investment. We know that the deal has a very, let's say, it's a region deal. Country and, economics view. So in this part of the country, it doesn't make sense to have a 2, 3 operators on the same city. So we are trying to, promote the discussion, and we really believe that as a, we still have this kind of leadership in terms of the dealer, too strong, and that you have a more and more, this kind of efficient. So answer yes. We believe on that. We are doing that, and we are seeing that there is some opportunity That is right to achieve. Ladies and gentlemen, we got any more questions. I would now like to turn the call over to Mr. Please introduce yourself. You may proceed. Hi. So, navigating in those 2 birds' water is not initiating. That is why I congratulate the entire team for the work. I come here with the mandate to change what needs to be corrected and to maintain what is working. But 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 you can meet soon. Thank you. The line can be disconnected from now on. For further information and details of the company please access our website. Hara. Team. Standby.