Earnings Call: Q3 2018

Nov 7, 2018

Good morning, ladies and gentlemen. Welcome to TIM Participacines 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 Participa's remarks are completed, There will be a question and answer session for participants. At the time, further instructions will be given. We highlight that statements that we made Regarding the prospects, projections and goals of TIM Participaes, 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 should impact CPascience may affect their performance and lead to star 0 to reach the operator. Now I'll turn the conference over to the CEO, Mr. Sunny Fogle, so he can present the main messages for the third quarter of 2018. Good morning, everyone, and thanks for attending our earnings release conference call. This is the 1st formal opportunities to interact with the financial community since I was appointed CEO. It's an honor to be part of this strong group. Tim Brazil has significant opportunities ahead, which makes this moment special for all of us. Over the last 100 days, I drove deeply into in Brazil. 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 team 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 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 14 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 of employees, and the one with the highest shareholder returns. Moving now to results. In my first quarter team, I had the privilege of delivering solid results with significantly better than 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 base, growing 4.4% year on year and reaching R4.3 billion dollars. This quarter, the main contributors to growth were mobile client generated revenues, up 3.1% and the outstanding expansion of 36 percent in TIM Live revenues, both year on year comparisons. Mobile dynamics continued to be driven by ARPU and the expansion of high value customer base. Our mobile ARPU reached R22.6 growing more than 10% when compared to life. While we continue to lead the human postpaid net additions, The transformation of our mobile customer base through migration and app sale 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 combined launched in September. The high segment of postpaid was in a harsh environment. Since the beginning of the year, Pure Postpaid competition increased. As a reaction, in place, more focus on lock in offers to improve loyalty and securitization of its clients. This strategy is working well, and the number of customers with a locking 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 seem to have easy, but we are yet to confirm this as we approach important promotional dates in November December. Prepaid competition on the other hand seems to be rising. The launch of aggressive offers in the last 2 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 Pin Life. During the third quarter, we reached travel municipalities with our ultra broadband proposition. And 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 6 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 3200 Cities. Our focus in deploying the 700 Megahertz put us in a unique position. 56% of the urban population already counts with this additional layer of frequency to use 4G. In Slide 7, we included a charge showing the positive impact of the 700 implementation. In parallel with the 700, we continue to carry our spectrum efficiency program, now refarming portions of the 2.1 gigahertz in the northeast. The refining 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 voice over LTE Technology, now with more than 2000 Cities and 8,000,000 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. And this number should go up with the accelerated deployment of of the 700 Megahertz and the refarming of the 2.1 giga. Finally, I want to celebrate our leadership in ISP ranking with the fastest 6 broadband speed to watch Netflix content. So if you want to have an outstanding experience watching Netflix in Brazil, you gotta have TIM Live. Having a more digital and self-service approach is also part of better handling our customer base, with the additional benefit of cost reductions. In this context, the institutional 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 a payment evolution. The ever evolving IVR and my team app keep offering clients ways of self-service. Please note recharge channels continue to advance. In the last 12 months, the mix has improved by 6 percentage points. Besides those network and digital departments, we are adjusting the organization to have an end to end view of the customer experience. We have new leadership to receive adjustments on the customer care front. Mr. Mordai has just joined with 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 Halal Captivir. With that, we not only benefit from synergies, but also increase our focus on the customer experience and strong execution. A solid start point, combining with 1st the evolution of the company culture concerning a customer centric approach. 2nd, the servant leadership approach. Connected with customers and employees. And 3rd, improve the customer and risk management analytics. We will enable team 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. But it's clear we have a long road ahead of us. This only motivates all of us and final 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 other 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. That 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 Air Force on the collection front that are showing early positive signs and will now further invest on credit capabilities and analytics to maintain and expand growth with improved delinquency 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 preparing expenses debt. We delivered on 3rd Q a significant corporate structure simplification, much more efficient to shareholders. And we completed the analysis on fiscal credits that are pending to be booked over next quarters. As described until now, solid execution lead to resilient revenues and control costs that combined produce a brilliant EBITDA of BRL1.7 billion. Once again, a record high number. Year on year comparisons at a solid high single digit growth while margin expands 150 basis points to another record of 38.9%. Among the highest in the industry. Normalized net income in the 1st 9 months of the year totaled BRL973,000,000, growing 54% year on year. The 3rd quarter contributed with $388,000,000. CapEx evolution is showing a strong dynamic throughout the year. Some in R2.6 billion dollars after 9 months. In this scenario, EBITDA means CapEx grew 45% year on year, reaching R753 $1,000,000 in the third quarter. Operating free cash flow year to date, expanding R485 $185,000,000 totally more than R1.2 billion dollars. I'd like to highlight the positive results in the 3rd quarter and our ability to execute. Our view is to close the year solidly and start 2019 at a good pace. I closed my initial comments, reinforced my commitment to help Tim Brazil evolve to be the best operator in the industry. 3 pillars will be key to achieve this. Having the most engaged and creative group, been the service provider most loved by clients, and the most profitable operator in sector. We will now open the floor for questions. Please, operator. Thank you, Mr. Sunny. We will now begin the Q And 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. Our first question comes from Andre Badio, JP Morgan. Good morning, Sami. So I have two questions. First one relates to the revenue. We saw deceleration. So what kind of levers do you think that you can use in order to prevent further deceleration from current levels? Thanks for the question We continue to focus on execution of a strategy, upgrade from prepaid to postpaid is successful and continue to evolve. As we entered the last quarter, is seasonally very positive for us. So we are focused on execution. And I 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 there's also, positive upside to the future. Okay. Thanks, Timmy. The other thing that we have saw very good results on the cost cutting and we welcome that for sure. We think it's a we can continue into next year or 2. So do you think there's more space for managing efficiency, Tim? Hi, Andre. I'm Marin Calaso CFO. Yes, as you know, 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 1,700,000,000 for 2020 compared to the base of 2016. Today, we are ahead of our plan of 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 we will try to have additional challenges and to increase our targets, but And again, as we said a few times, it's not only a matter of normal efficiency or our cost contention. It's also a matter of what the digitization of all the processes brings into not only in terms of customer experience, but also in terms of cost. So we are focusing that, we think that, we should have additional services of efficiencies going forward. The next question comes from Diego Aragao, Goldman Sachs. So 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 team So my question for you is what's, or what are your main priorities for the next 2 years, main targets and what do you need to be to get to these goals. Thank you very much. One side we are investing a lot is the customer experience custom 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 max level in terms of churn in the industry and, Jim, for sure. So definitely, we're investing 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 engagement with them. Talk more internally, we invest on on our people. We're gonna attract and maintain the best and most talented people in the industry so that we can deliver this defactional service to the client. Finally, but not least importantly, we want it to be the most profitable operator in the industry. We are already parting from very high standpoint but 3 4C for the next years, as you ask, opportunities to go to a max step. So those are the the 3 main pillars. Our customers, our people, and our return to shareholder. Very good, your Sami. Thank you very much. And if I may, my second question is related to in market M and 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 income in the country always, it will be great. Hey, Jacob. We are always looking to assets. Okay? And we'll do what makes strategic fit and valuation fit. So I I'll not comment specifically on any of those 2 because those 2, you know, falls under this umbrella. You know, are they do they make sense strategically for us and are they in the right evaluation? Okay. Thank you. The next question comes from Maria Theresa Vedou, 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 terms of top line growth. But can you share with us your views so far in the fourth quarter? Do you see better performance of the prepaid surcharges or higher data usage And what is your view on the competitive environment for this rest of the year in mobile? 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're working hard on this, to perform. And in terms of competition, do you think it's rational or do you see any threats from your competitors? I mentioned, in the postpaid, we are we saw our early signs of, you know, more accommodation On prepaid, on the other hand, we saw the last 45 days, a more dynamic environment that can impact the entire sector. Perfect. Thank you. And then my follow-up question would be on the fixed side. You're executing very well on chain wise. Do you see any room to accelerate church and live expansion and maybe increase your CapEx allocation towards 6 months? Thank you. Okay. Oh, King White is definitely a priority for us. We deployed CapEx in those cities, 12 cities, now 13 cities. They are upside from the cabs 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 Theresa, 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. But we are stick to our plan. We are very happy that, as Sami mentioned before, on average, we're performing better than we projected, but we have a lot to do, not only in terms of the permit, but in terms of internal process. It's important to make it with profitability, every bit. Especially this one because you know that, that repayments on this basis are higher than the mobile. So Again, you need to be we need to be very careful with the allocation of our CapEx and that's where we are. Our next question comes from Walter Piecyk BTIG. Thanks. First, Joe, on the strategy question, I know you were saying that 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 OI type of situation, but that would seem like an autopilot for the company. Could you please comment on that? Hi, it's Adrian. We've 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, which is a lot of farmings. We started the refiling of over 2.1, just frequency, maybe later, lurking. And, can you go further on this? On the fixed side, it's, 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. And that's our strategy. Of course, on the fixed side, there is a lot regarding the fiber networks in terms of 502 City or in terms of, or backbone. There are several opportunities in the market. Then 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 Merco buying, on the fixed. So I think that was that's a helpful answer. Thank you. A similar question is on your investment. If you look back in 2016, CapEx as a percent of just the service revenue, not the total revenue, it was about was over 30% And 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 an Xcel at a low price, there might be some more investment for spectrum, but in the long term, is it possible to get CapEx as a ratio of revenue down below 15% mean, elsewhere or throughout the world, you see operators are able to do this. Obviously, those operators, a lot of those operators have higher ARPUs and the tax situation is maybe a little different, but where 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 this 3 years. So 2018, 2020 of, of something around BRL12 1,000,000,000. And that's assuming that our guidance for 2020s was something around 20 percent, of service revenues. I think that 50% on revenues, it's a number of the past, in a lot of of operators. And again, in our case, you need to see what we are doing also on our EBITDA. So we try to focus also in terms of operating free cash flow. So that's why we gave our guidance for 2020 of an EBITDA minus CapEx of 20%. So, okay, I think seen your aggressive 50% is not on our mind. We will try to reach our target of 2020 or something around 20%. But if you bought Nextel, I assume that 3 year target might increase because you'd need to invest in that network? I'll pass the floor today, but let me tell you that increasing your spectrum allows you to control your investments. Because have you had capacity with Spectrum or with additional sites. But I'll leave the floor to Leo to answer this question. Hi, Arthur. Is Loke up the city? In fact, let's see, all the integration among the industrial companies have some kind of CapEx that has to be but on the app that you capture a future value. Alright? So the same will happen if you bring some assets. It can be Nextel or whatever. But again, what you 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 an easy, in long term. So we will analyze that very carefully. Talking about a little bit about the the spectrum, what we'd like to highlight is that, what we have learned in the last years is that, respect to is always, a great news from the engineer perspective, let's say, but 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. And, again, we are the 1st in the unique company in Brazil to use the 2.1 gigahertz refirm a data from the 3 g 2 4 gs, which is data in a lot of cities in our cities, specifically, in San Carlos. The result is very, very good. And now we, think you should have a news from the, regulator and the answer to us here in Brazil that we have approved to evolve our sharing from the moron to Martin. Or means that we probably have something around the 30 percent more capacity over the existing spectrum of a 2.6 gigahertz. This is the concern that we have with you. So again, if you have an opportunity to have a more inspection, 52252 is not a valid extension. Reconnecting caller. Alright. Sorry for that. Going ahead. So, again, if you have a more spectrum, you use that in the better, way possible, But with 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. The next question comes from Diego Aragao, Goldman Sachs. Hi. Thank you for the follow-up questions. So actually, just to follow-up on what Lyle said about the 2.1. I just want to understand whether you are using this frequency for 4 g. And, you know, how is the handset market for for the 2.1. So 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, Teresino. That is a capital city in Northwest, and then now we'll have that in all the Capital Series in Northwest. It's specifically in 2 main cities. That is Salvador and, Fortaleza We already are using 10 megahertz from 2.1. That I it was refinement from the 3 g to 4 g. The second question about the handsets, it had already 80% ish 80% of our devices support this frequency. So it's a very good opportunity for us. Just to highlight one number, that is in the presentation, In Fostaleza City, we already have a 30% off the total of 4 g Treski, 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. So it's very picky to to launch. And it is the same way that we had in the 1800. Talking about the throughput. In Fortaleza, the throughput goes more than 30% with this new frequency. And now we are moving this kind of movement from the north east for south and south east. Why do we can do that? Because, again, I have, some information. Reconnecting network. And remember that we launched the default voice over IP and now we already overpass 80,000,000 customer using that. With these 2 movements, we started to have the decline of the usage in 3 g network. So it's that we have the opportunity to move the frequency, especially from PG to 4 gs. Okay? Yes. So just, if I may, so what is easier for you to reform? The 1.8 or the 2.1? Now we are reforming the 2.2.1 gigahertz. From 3 g to 4 g. Okay. Alright. Thank you. Without any more questions from analysts, we would now like to start the Q And A session with a press in English. So the first question comes from Paradigm The journalist is Bruno Maral, and he is asking about the 2.1 V for me. And, what are the plans to coverage beyond the Northeast. I believe this do not have the capability or CTIO will answer this question. Please, Lyle. 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 44 g technology. And avoid that because now more than 85% of the total traffic in our network is already generated by 4 g devices. We did a data in Northeast. Now we are preparing the network in other cities as, the Lorizanshi Curiciba and the Florianopolis to go on the same direction. So we are preparing all the adjustments on the network to refarming these diseases. It's probably will happen in the, first acquirer on the next few years. But, again, I'd like to highlight that, it is just possible because we did in the past the rough investment in the reforming of the 1800 and to, usage in a very, very aggressive way, let's say, the 700. Because it's that we had a continuous coverage in 4 g and we can maintain, the customer more in 4G than in other technologies. Our point on that is very simple. If the clients already did the investment on their smartphone to upgrade it for 4 gs, we have almost the obligation to do the same on the network side, and 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 prevent to accelerate the migration from prepaid to postpaid segment. This question is our CEO, Sami Fogou will answer. Please, Sami. Thanks, Isabelle, for the question. We continue our strategy that is not only prepaid to controllity, controllity to postpaid, but also controllity to a higher controller contrary to pure and pure to a higher peer. So, actually, I'm maintaining the pace, with those internal movements as well. Ladies and gentlemen, without any more questions, I am returning to Mr. Sandy Fogle to his final remarks. Please be present. You may proceed. Thanks all for attending today's conference call. See you soon. And next quarter, we'll be here again. Thanks. Thus, we conclude the 3rd Quarter 2018 Conference Call of TIM Participacoes. Your lines can now be disconnected. For further information and details of the company, please access our website, www.team.com.brir. Take the opportunity to the whole team IRF available for download for Android and iOS flight affirms. Thank you.