Good morning, ladies and gentlemen. Welcome to TIM Participações 2018 third 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 instructions will be given. We highlight that statements that we made regarding the prospects, projections, and goals of TIM Participações constitute the beliefs and assumptions of the company's Board of Executive Officers. Future considerations are not performance warranties. They involve risks, uncertainties, and assumptions as they 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.
Should any participant need assistance during the call, please press star zero to reach the operator. I'll turn the conference over to the CEO, Mr. Sami Foguel, so he can present the main messages for the third quarter of 2018. Please, Mr. Sami, you may proceed.
Good morning, everyone, thanks for attending our earnings release conference call. This is the first formal opportunity to interact with the financial community since I was appointed CEO. It's an honor to be part of this strong group. TIM Brasil has significant opportunities ahead, which makes this moment special for all of us. Over the last 100 days, I dove deeply into TIM Brasil. I visited stores, call centers, and operational areas. I spoke with hundreds of employees. I also dedicated significant time talking and obtaining feedback from clients. Additionally, I engaged with the regulator, press, and financial community. I got feedback from all of them on how to make TIM an even better operator. I found a strong and vibrant leadership team engaged on doing the right thing and continuing the positive transformation.
At the same time, I brought new leadership to our customer care area with a recognized track record on customer experience and efficiency. Together with a renovated CTIO structure, we are already working in several war rooms to improve customer experience and efficiency across the board. My vision for TIM is one of evolution, not revolution. We are building on a strong base to become the best operator in Brazil, the one customers love the most, the one with the highest engagement level for employees, and the one with the highest shareholder returns. Moving now to results. In my first quarter at TIM, I had the privilege of delivering solid results with significant EBITDA and margin growth, solid free cash flow expansion, resilient revenues, important operational and network metrics, and renovated focus in customer experience.
Despite a tougher macroeconomic environment and increasing competition level, total net revenues maintained a solid pace, growing 4.4% year-on-year and reaching BRL 4.3 billion. This quarter, the main contributors to growth were mobile client generated revenues up 3.1% and the outstanding expansion of 36% in TIM Live revenues, both year-on-year comparisons. Mobile dynamics continue to be driven by ARPU and the expansion of high-value customer base. Our mobile ARPU reached BRL 22.6, growing more than 10% when compared to last year, while we continued to lead the human postpaid net additions. The transformation of our mobile customer base through migration and upsell processes continue to be key. Our hybrid segment maintains a very solid performance, with ARPU growing close to 8% year-on-year and acquisition numbers rising 11% quarter-over-quarter. One important drive for this performance was the offer and success campaign launched in September.
The segment of postpaid was in a harsher environment. Since the beginning of the year, pure postpaid competition increased. As a reaction, TIM placed more focus on lock-in offers to improve loyalty and secure retention of its clients. This strategy is working well, and the number of customers with a lock-in offer grew by threefold. A large portion of these customers became pure postpaid through upsell processes, showing that controlling to pure migration are resilient. At the end of third quarter, competitive pressure in postpaid seemed to have eased, but we are yet to confirm this as we approach important promotional dates in November and December. Prepaid competition, on the other hand, seems to be rising. The launch of aggressive offers in the last two months can weaken trends for the entire sector.
Nonetheless, in the third quarter, the main impact for prepaid performance came from macro environment and unemployment rates, especially at the bottom of the pyramid. If the mobile operation was marked by resilience and growth, on the fixed business front, we keep having exciting news with TIM Live. During the third quarter, we reached 12 municipalities with our ultra-broadband proposition. In the beginning of October, we launched TIM Live in the new state capital. So now we are also present in Manaus. When we arrive in those new cities with a connection that is six times faster than the average speed in the market, and with solid content offers, our proposition is well-received by customers. On average, we are outperforming our business plans with identified opportunities to perform even better. Along with the geographical expansion, we are maintaining a strong execution to sustain TIM Live's robust revenue.
Supporting by mobile and fixed expansion while coping with the data boom requires a rock-solid execution of the network development plan. We are again delivering strong results that are positively impacting the customer experience. We are maintaining our leadership in 4G coverage with close to 3,200 cities. Our focus in deploying the 700 MHz put us in a unique position. 56% of the urban population already counts with this additional layer of frequency to use 4G. In slide seven, we included a chart showing the positive impact of the 700 implementation. In parallel with the 700, we continue to carry our spectral efficiency program, now farming portions of the 2.1 GHz in the Northeast. The farming was implemented in more than 180 cities. On the fiber front, we keep accelerating the FTTH rollout, almost doubling our coverage to 761,000 households.
We continue pushing the deployment of VoLTE technology, now with more than 2,000 cities and 8 million users. I want to highlight our leadership in 4G coverage, and the best way to represent this is our availability. We are the only mobile operator in Brazil to keep our clients more than 75% of the time on the 4G. This number should go up with the accelerated deployment of the 700 MHz and the refarming of the 2.1 GHz. Finally, I want to celebrate our leadership in ISP ranking with the fastest fixed broadband speed to watch Netflix content. If you want to have an outstanding experience watching Netflix in Brazil, you got to have TIM Live. Having a more digital and self-service approach is also part of better attending our customer base with the additional benefit of cost reductions.
In this context, the digital transformation program is showing strong results across the board. e-billing grew 48% year to date, reaching 40% penetration in the third quarter. We continue to see e-payment evolution. The ever-evolving IVR and MyTIM app keep offering clients ways of self-service. Digital recharge channels continue to advance. In the last 12 months, the mix has improved by 6 percentage points. Besides those network and digital developments, we are adjusting the organization to have an end-to-end view of the customer experience. We have new leadership to receive the adjustments on the customer care front. Mr. Mordoh has just joined our team and has great experience and track record in improving the customer experience and efficiency in the telecom industry. We also integrated IT with network under the leadership of Leonardo Capdeville.
With that, we not only benefit from synergies, but also increase our focus on the customer experience and strong execution. A solid starting point, combining with, first, the evolution of the company culture concerning a customer-centric approach. Second, the servant leadership approach, connected with customers and employees. Third, improved customer and risk management analytics will enable teams to make this journey to differentiate itself from the rest. Indications we are in the right direction are emerging. NPS, preference, and satisfaction are showing early signs of improvement. It's clear we have a long road ahead of us. This only motivates all of us and finds strong opportunity to be captured. Talking about costs. The combination of the digitalization program with our efficiency plan led to a total OPEX that remains healthy and under control. In the third quarter, costs were up by only 1.8% year-on-year.
We are growing under inflation and performing better than expected in terms of our guidance. We closed the quarter at more than 100% of our savings target for 2018. Among our OPEX trends, it's worth explaining bad debt dynamics as it is the main contributor to growth. Bad debt represents about 2% of gross revenues and is in line with the industry levels. Nonetheless, we believe we can do better. Growing from a prepaid to a postpaid operator requires a next step expertise on risk management. We launched efforts on the collection front that are showing early positive signs. We will now further invest on credit capabilities and analytics to maintain and expand growth with improved delinquents control. Finally, we understand and work on efficiency in a broad sense. Efficiency comes from cost control, but also from financial and fiscal initiatives. We are repaying expensive debt.
We delivered on third Q, a significant corporate structure simplification, much more efficient to shareholders. We completed the analysis on fiscal credits that are pending to be booked over the next quarters. As described until now, solid execution led to resilient revenues and controlled costs that combined produce a brilliant EBITDA of BRL 1.7 billion. Once again, a record-high number. Year-on-year comparisons had a solid high single-digit growth while margin expanded 150 basis points to another record of 38.9%, among the highest in the industry. Normalized net income in the first nine months of the year totaled BRL 973 million, growing 54% year-on-year. The third quarter contributed with BRL 388 million. CapEx evolution is showing a strong dynamic throughout the year, summing BRL 2.6 billion after nine months. In this scenario, EBITDA minus CapEx grew 45% year-on-year, reaching BRL 753 million in the third quarter.
Operating free cash flow year to date expanding BRL 485 million, totaling more than BRL 1.2 billion. I'd like to highlight the positive results in the third quarter and our ability to execute. Our view is to close the year solidly and start 2019 at a good pace. I close my initial comments, reinforce my commitment to help TIM Brasil evolve to be the best operator in the industry. Three pillars will be key to achieve this. Having the most engaged and creative group, being the service provider most loved by clients, and being the most profitable operator in the sector. We'll now open the floor for questions. Please, operator.
Thank you, Mr. Sami. We'll now begin the Q&A session. First, we'll take questions from analysts, followed by 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, and to remove the question from the list, press star two. Our first question comes from André Baggio, JPMorgan.
Good morning, Sami. I have two questions. First one relates to the revenue. We saw deceleration. Which kind of levers do you think you can use in order to prevent further deceleration from current levels?
Thanks for the question. We continue to focus on the execution of our strategy. Upgrade from prepaid to postpaid is successful and continue to evolve. As we enter the last quarter, it's seasonally very positive for us, so we are focused on execution. Also work on prepaid and postpaid product and offering, which are promising to next quarters. Talking about Live, I think Live has a very positive trend and is also a positive upside to the future.
Okay. Thanks, Sami. The other thing that we have saw very good results on the cost-cutting and we welcome that for sure. Do you think that transfer can continue into next year or two? Do you think there's more space for managing efficiency at TIM?
Hi, Andre. I'm Mario Girasole, CFO. Yes, we discussed a lot about our efficiency plan that was increased a couple of times. You know that our target of efficiency is something around BRL 1.7 billion for 2020 compared to base of 2016. Today we are ahead of our plan this year. If you saw the numbers, we are around 104% of what we project for the whole year. There is still work to do, but we feel that there is still a lot of room to reach higher levels of efficiency. We maintain our target of efficiency for next years. We are working on our next plan in this month. We think that we will try to have additional challenges and to increase our targets.
Again, as we said a few times, it's not only a matter of normal efficiency or cost contention, it's also a matter of what the digitalization of all the processes brings in also, not only in terms of customer experience, but also in terms of costs. We are focused on that. We think that we should have additional sources of efficiencies going forward.
Okay, thanks a lot.
The next question comes from Diego Aragão, Goldman Sachs.
Hey, good morning, everybody. Thanks for taking my question. My first question is for Sami. On your opening remarks, you mentioned that you don't want to reinvent the business, but rather to work on the evolution of TIM. My question for you is, what are your main priorities for the next two years, main targets, and what do you need to do to get to these goals? Thank you very much.
Thanks, Diego. One side we are investing a lot is the customer experience, customer cycle. This is very important, and this can have a positive impact, not only on efficiency but also on churn. We need to go to the next level in terms of churn in the industry, in TIM for sure. Definitely, we're invest on that. As a part of that, the digital channels are very important. We need to continue improving the digital journey of our clients, the ability for self-serve, and the ability for them to go to a new level of engagement with TIM. Talking more internally, we're investing on our people. We want to attract and maintain the best and most talented people in the industry so that we can deliver this exceptional service to the client. Finally, not least importantly, we want to be the most profitable operator in the industry.
We are already parting for a very high standpoint, but we foresee for the next years, as you asked, opportunities to go to the next step. Those are the three main pillars. Our customers, our people, and our return to shareholders.
Very clear, Sami. Thank you very much. If I may, my second question is related to market M&A. Just want to get your view for potential consolidation in the country, and more specifically, if you can just walk through your views for both Nextel and also for the largest incumbent in the country, Oi. It will be great. Thank you.
Hey, Diego. We are always looking to assets, okay? We'll do what makes strategic fit and valuation fit. I'll not comment specifically on any of those two because those two falls under this umbrella. Do they make sense strategically for us, and are they in the right valuation?
Okay, thank you.
The next question comes from Maria Tereza Azevedo, Banco UBS.
Hi, everyone. Thank you for the question. My first question is on the mobile side. You are pretty much in line to meet your guidance in terms of top-line growth, can you share with us your view so far on the fourth quarter? Do you see better performance of the prepaid recharges or higher data usage? What is your view on the competitive environment for this rest of the year in mobile? Thank you.
Okay, thanks for the question. We are focused on execution. We're very focused on the execution. We have a strong quarter ahead of us in terms of seasonality, so we are working hard on this to perform.
In terms of competition, do you think it's rational, or do you see any threats from your competitors?
Competition, I mentioned in the postpaid, we saw early signs of more accommodation. On prepaid, on the other hand, we saw over the last 45 days, a more dynamic environment that can impact the entire sector.
Perfect. Thank you. My follow-up question would be on the fixed side. You're executing very well on TIM Live. Do you see any room to accelerate your TIM Live expansion and maybe increase your CapEx allocation towards fixed line? Thank you.
Okay. TIM Live is definitely a priority for us. We deployed CapEx in those cities, 12 cities, now 13 cities. There are upsides from the CapEx already deployed, of course, that should be extracted. We should be mindful in terms of CapEx and CapEx allocation, but also continue to grow.
Okay. Thank you very much.
Maria Tereza, let me add something because your question, if we will accelerate or we can accelerate the deployment of TIM Live. You know that we always try to see this business very carefully, because you need to be very careful on how you grow. We will try to grow in a very strong way, but very carefully, keeping our base. We feel that we need to prepare a lot our machine in order to continue to deploy this network. We are stick to our plan. We are very happy that, as Sami's mentioned before, on average, we're performing better than we projected. We have a lot to do, not only in terms of the partner, but in terms of internal process. It's important to make it with profitability, every business, especially this one, because you know that repayments on this business are higher than the mobile.
Again, we need to be very careful with the allocation of our CapEx, and that's where we are.
Perfect. Thank you very much.
Our next question comes from Walter Piecyk, BTIG.
Thanks. First, on the strategy question, I know you were saying that you're going to look to see what makes sense from a valuation standpoint and strategy, but all things equal, is more spectrum more interesting than getting a fixed business where you can have a more integrated approach? I would think that having fixed added through Oi would be more compelling. I know it's not an either or type of situation, but that would seem like a higher priority for the company. Could you please comment on that?
I'd say, Walter. We talked several times about this. Of course, spectrum, in terms of needs, is a priority. We are working a lot on our own spectrum to be much more efficient. We did a lot of reforms. We started the reforming of 2.1 GHz frequency. Maybe later, Leo can go further on this. On the fixed side, it's more difficult because we always said that we want to grow on the fixed side, especially on the consumer side, in an organic way. That's our strategy. Of course, on the fixed side, there is a lot regarding the fiber networks in terms of Fiber to the Curb or in terms of backbone. There are several opportunities in the market. Again, we are focused on our own strategy and trying to grow in an organic way on the fixed.
It's always an analysis of make or buy on the fixed.
That's a helpful answer.
Sorry?
I said that's a helpful answer. Thank you. A similar question is on your capital investment. If you look back in 2016, CapEx as a percent of just the service revenue, not the total revenue, was over 30%. Between your revenue growth and the reductions in capital, it's down to 23%, despite some moves in currency. I understand that if you did have the opportunity to buy Nextel at a low price, there might be some more investment for spectrum. In the long term, is it possible to get CapEx as a ratio of revenue down below 15%? Elsewhere or throughout the world, you see operators are able to do this. Obviously, a lot of those operators have higher ARPU, and the tax situation is maybe a little different. What do you think the long-term target is for capital investment as a percent of service revenue?
You know that we gave a guidance for CapEx for these three years, 2018-2020, of something around BRL 12 billion. That's assuming that our guidance for 2020 was something around 20% of service revenues. I think that 50% on revenues, it's a number of the past in a lot of operators. Again, in our case, you need to see what we are doing also on our EBITDA. We try to focus also in terms of operating cash flow. That's why we gave a guidance for 2020 of an EBITDA minus CapEx of 20%.
Great. Thanks very much.
Asking your question, 50% is not on our mind. We will try to reach our target of 2020 of something around 20%.
If you bought Nextel, I assume that three-year target might increase because you'd need to invest in that network.
I'll pass the floor to Leo, let me tell you that increasing your spectrum allows you to control your investments because [audio distortion] has capacity with spectrum or with additional sites. I leave the floor to Leo to answer this question.
Hi, Walter. It's Leo Capdeville. In fact, let's see. All the integration among industrial companies have some kind of CapEx that has to be put on data to capture a future value. The same will happen if you bring some assets. Can be Nextel or whatever. Again, what we see as Adrian comment is that when we make this kind of movement, is because it makes sense not just in a short, but in a medium and long term. We will analyze that very carefully. Talking a little bit about the spectrum, what we'd like to highlight is that what we have learned in the last years is that spectrum is always a great news from the engineering perspective, let's say. There are a lot of ways to use in a more efficient, the spectrum that we already have. We did that in 1800.
We are now do the same in 700. Again, we are the first and the unique company in Brazil to use the 2.1 GHz, we farm data from the 3G to 4G. We did that in a lot of cities, in Northeast specifically, in some capitals. The result is very good. Now we seem to have news from the regulator and the antitrust here in Brazil that we have approved to evolve our RAN sharing from the MORAN to MOCN, what means that we probably have something around 30% more capacity over the existing spectrum of a 2.6 GHz. This is a RAN sharing that we have with Oi. Again, if you have the opportunity to have more spectrum, that is the better way.
Five two. Five two is not a valid extension. Reconnecting caller.
All right, sorry for that. Going ahead. Again, if you have more spectrum, you use that in the better way possible. With the spectrum that we already are using, we are discovering day by day a new efficient way to use data to provide the better customer experience. Okay, just that. Thank you.
Thanks a lot.
The next question comes from Diego Aragão, Goldman Sachs.
Hi, thank you for the follow-up questions. Actually, just to follow up on what Leo said about the 2.1, I just want to understand whether you are using this frequency for 4G, and how is the handset market for the 2.1. Just want to clearly understand what you can do with the 2.1. Thank you.
Hi, Diego. In fact, we started to use the 2.1 in Teresina. That is a capital city in Northeast. Now we have data in all the capital cities in Northeast. Specifically, in two main cities, that is Salvador and Fortaleza, we already are using 10 megahertz from 2.1 data. It was refarmed from the 3G to 4G. The second question about the handsets, we have already 80% of our devices support this frequency. It's a very good opportunity for us. Just to highlight one number that is in the presentation. In Fortaleza city, we already have 30% of the total 4G traffic carrying on 2.1 gigahertz network. The good of that is that the equipment is exactly the same. We just make a movement in terms of software approach.
It's very quickly to launch, and it is the same wave that we had in the 1800. Talking about the throughput in Fortaleza, the throughput growth more than 30% with this new frequency. Now we are moving this kind of movement from the Northeast for South and Southeast. Why we can do that? Because, again, as some
Reconnecting
network. Remember that we launched the VoLTE, voice over LTE, and now we already overpass 8 million customers using that. With these two movements, we started to have the decline of the usage in 3G network. With that, we have the opportunity to move the frequency spectrum from 3G to 4G. Okay?
Understood. Just if I may, so what is easier for you to refarm, the 1.8 or the 2.1?
Now we are refarming the 2.1 GHz from 3G to 4G.
Okay. All right. Thank you.
Again, if you want to pose a question, please press star one. Without any more questions from analysts, we would now like to start the Q&A session with the press in English.
The first question comes from Teletime. The journalist is Bruno Amaral, and he is asking about the 2.1 refarming and what are the plans to cover beyond the Northeast. I believe this is Leonardo Capdeville, our CTO, will answer this question. Please, Leo.
Hi, Bruno. What I can anticipate is that our idea in the future is that probably the most part of the spectrum will be, let's say, switch on 4G technology. Why that? Because now more than 85% of the total traffic in our network is already generated by 4G devices. We did that in Northeast. Now we are preparing the network in other cities as Belo Horizonte, Curitiba, and Florianopolis to go on the same direction. We are preparing all the adjustments on the network to refarm these cities. It probably will happen in the first quarter of the next years. Again, I'd like to highlight that it is just possible because we did in the past the right investment in the refarming of the 1800 and to usage in a very aggressive way, let's say, the 700.
With that, we have a continuous coverage in 4G, and we can maintain the customer more in 4G than in other technologies. Our point on that is very simple. If the client already did the investment on their smartphone to upgrade it for 4G, we have almost the obligation to do the same on the network side. It is what we are doing.
The next question comes from Mobile Time. The journalist is Isabelle, and she wants some clarification on how we pretend to accelerate the migration from prepaid to postpaid segment. These questions our CEO, Sami Foguel, will answer. Please, Sami.
Thanks, Isabelle, for the question. We continue our strategy that is not only prepaid to Controle , Controle to postpaid, but also Controle to a higher Controle to pure, and pure to a higher pure. Actually, I'm maintaining the pace with those internal movements as well.
Ladies and gentlemen, without any more questions, I am returning to Mr. Sami Foguel to his final remarks. Please, Mr. Sami, you may proceed.
Thanks all for attending today conference call. See you soon, next quarter we'll be here again. Thanks.
Thus, we conclude the third quarter 2018 conference call of TIM Participações. Your lines can now be disconnected. For further information and details of the company, please access our website, www.tim.com.br/ir, and take the opportunity to download TIM IR app, available for download for Android and iOS platforms. Thank you.