TIM - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to TIM S.A. 2023 second quarter results conference call. We would like to inform you that this event is being recorded, and all participants will be in a listen-only mode during the company's presentation. There will be a replay for this call on the company's website. After TIM S.A. 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 may be made regarding the prospects, projections, and goals of TIM S.A. constitutes 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 S.A. may affect their performance and lead to different results than those planned. Should any participant need assistance during this call, please press star 0 to reach the operator. Now, I'll turn the conference over to the CEO, Mr. Alberto Griselli, CEO of TIM S.A., and to Ms. Andrea Viegas, Chief Financial Officer, to present the main messages for the second quarter of 2023. Please, Mr. Alberto, you may proceed.

Alberto Griselli (CEO)

Good morning, everyone, thanks for attending our conference call. Outstanding achievements and rock-solid results mark the second quarter, driven by the sharp execution of our plan. Our top line rose more than 9% year-over-year, with EBITDA growing above 17%. This combination led to a margin expansion of more than 300 basis points. Our operating free cash flow grew more than 65% versus the second quarter of 2022, the net income more than doubled. Strong operational trends were achieved jointly with the aforementioned financial highlights. ARPU, churn, and network quality presented their best performances in years. On the ESG front, it is worth highlighting that TIM was certified once again as a Great Place to Work, achieving a favorability of more than 90%, with solid improvements versus last year.

In this context, we were also recognized as one of the best companies for inclusive work experience. Under the scope of the environmental pillar, we are executing two initiatives that impact energy consumption. The first is related to transforming our sources to renewable energy proprietary plants. Under this project, we closed the quarter with 87 plants. The second initiative addresses energy consumption by developing smart public lighting solutions that drastically reduce the usage of electricity by municipalities. The integration of ESG aspects into our business dynamics and how we can promote social impact while developing and selling solutions to our client, is a relevant part of our strategy. In TIM Agro, for example, we are taking connectivity to the countryside of Brazil, covering 90,000 rural properties, more than 220 public schools, and 65 basic health units.

While in the education vertical of our customer platform strategy, we provided courses to 450,000 people to improve their education or develop their careers. Going over the details of our business performance, I want to highlight our revenue dynamics. Total service revenues grew 9.5% year-over-year in the second quarter, with a relevant contribution from mobile services that expanded by 9.7%. This performance was driven by inflation recovery and improved customer base dynamics and the scenario of rational competition. ARPU was also positively impacted, reaching an all-time high level of BRL 29.2 per month, growing 13% versus last year. When looking at the mobile segments individually, we saw postpaid revenues growing significantly, up by more than 10% year-over-year, with an ARPU excluding machine-to-machine lines of almost BRL 52.

As anticipated, we returned to positive net addition in this quarter after the cleanup and adjustment of former Oi customer base. Postpaid churn scored the lowest mark in 12 quarters. In prepaid, revenue expanded at a sound pace of close to 12% versus second quarter 2022, leading to an ARPU above BRL 14. Following this remarkable mobile performance, we now have the highest mobile ARPU in Brazil, in prepaid, postpaid, and also blended. Migration and upsells movements grew 28% versus second quarter 2022, and are playing an essential role in consolidating our ARPU leadership. To better understand what is behind these results, we need to recover concepts from our 2022 Investor Day. We are developing our value proposition according to three pillars: best offer, best service, and best network. In all of three of them, we are delivering what we promised.

As probably most of you saw last week, we extended our exclusive partnership with Apple and launched Apple One bundle in our high-end TIM Black plans. We are the third operator in the world to launch such an initiative, and the first and only operator in Latin America. This is a clear evidence of how we play the game of innovation as a core differentiator to deliver the best offer to Brazilian customers. Our journey towards customer experience excellence is long, but we are doing it step by step to achieve the best service. Results from the Reclame Aqui portal, Procon agency, and Anatel point to a significant improvement in all experience metrics. In June, we won the Selo de Resolução award from the São Paulo Consumer Protection Agency. We are the only Brazilian company to ever achieve such a recognition.

What seemed impossible 2 years ago is now a reality. TIM is providing the best quality on Brazil's largest mobile network. We have the evidence to show. Opensignal awarded us as the number one operator in Consistent Quality index, a metric that combines a set of critical indicators to measure network quality across a variety of commonly used and demanding applications. On top of that, we are also leading in 5G with 40% more sites than the second place. Our value proposition evolution is clear. The average client must also perceive that. Perception change is a marathon where consistency is more important than sprints. The good news is that the first signs of change are emerging. As I mentioned earlier, in the second quarter, we had the best churn level in years, amid a quarter of inflation recovery in certain offers.

The debt is historically low, representing 1.8% of our net revenues, and our overall NPS improved by 4 points versus the first quarter. With this, I wrap up the explanation on mobile performance, and we can now move next to fixed services. In fixed, the growth driver remained TIM Ultrafibra, with a solid performance. Fixed broadband revenues went back to double-digit expansion. Broadband ARPU grew year-over-year for the 18th consecutive quarter, reaching almost BRL 95. Our broadband continues to be driven by the successful migration from FTTC to FTTH, and accelerated net addition following the geographical expansion to Paraná and Santa Catarina states. We closed the quarter with a client base beyond 760,000 connections, adding 38,000 clients in those new regions. We are still fine-tuning the model, but the results are encouraging.

Additionally, we are following a similar approach to the one that we use in mobile, staying away from price competition and focusing our differentiators on offer innovation and quality of service. With this in mind, we expanded our portfolio with a new 2 giga speed plan. Until now, we have been successful. The overall broadband market is still very price oriented. I will now pass the floor to Andrea to review the financial results.

Andrea Viegas (EVP and CFO)

Thank you, Alberto. Good morning, everyone. As Alberto just explained, this second quarter was very strong across all lines of our results. Our performance continued to be driven by the positive effects of the M&A integration, as well as the organic growth. Our OpEx continued to decelerate and is now growing below inflation. In addition, during the quarter, our TSA agreement with Oi ended, which is helping us reduce cost and eliminate some pressure. The combination of strong revenues and solid OpEx dynamic resulted in a double-digit growth of our EBITDA in the quarter. We grew more than 17% in a year-over-year basis and surpassed R$2.9 billion. Our EBITDA margin expanded by 340 basis points in the quarter, and we recorded the highest margin on the record at 50%.

It is important to mention that the second quarter was the first one without the negative effects that were impacting the trends of our cost. The TSA cost was eliminated in April. Now we have an apples-to-apples comparison related to the fiber last mile rental. In terms of our decommissioning program, we are now seeing the benefits following our M&A. We were able to optimize our process during the quarter and have already adjusted the dynamics with our suppliers. As a result, we are now ready to accelerate the site dismantling. By the end of the quarter, we had eliminated over two-thirds of the planned sites for the year. Of course, there is a delay between the physical decommissioning and seeing its financial impact. However, we have already seen some initial positive effects in the second quarter.

We paid 57 million reais in decommissioning fines, but the pace of increase in our lease cost has slowing down on a year-on-year comparison and started to decline on a sequential basis. As a result, our EBITDA after lease increased 21% year-over-year. During the disclose of our guidance at the beginning of the year, we explained that we expect the effects from the decommission to pick up in the second half of the year, as more sites are eliminated. We are happy with the progress we already made in this project so far. The strong operational and financial performance added to our bottom line, totally 640 million reais, which is almost double the amount of what we registered in the second quarter of last year.

It's important to remind you that the transitory impacts we addressed in recent quarters are starting to decrease, including lease impact on both D&A and financial expenses. We are also seeing less on impact of the monetary adjustment related to the 5G license, and a reduction in the tax burden as we resumed the distribution of interest on capital. Free cash flow for the second quarter was also strong. Our EBITDA after lease, minus CapEx, was up 67%, totally BRL 1.2 billion. Our cash position also rose by 46% year-over-year, ended the quarter at BRL 3.3 billion. The second quarter allowed us to strengthen our financial position and improve our leverage level. The net debt to EBITDA ratio decreased to 1.4 times, and total net debt, including leases, amounted to BRL 15.3 billion.

This sustainable trend leave us comfortable in a scenario of high interest rates. I hand the call back to Alberto.

Alberto Griselli (CEO)

Thank you, Andrea. I'm very pleased with the first half of the year, as we were able to achieve so many things. We completed our integration, achieved network leadership, improved customer experience, and delivered important milestone in ESG, while posting rock-solid results that put us more than on track to reach our guidance. It is fair to see some upside risk to our full year numbers, but this will depend on several factors, some of them we control, but some we don't. That is why our focus on mobile for the coming quarters won't change. Execution to capture all synergies, recover inflation in a more rational and value-based competitive environment, while using the other marketing mix tools to differentiate from our competitors. Leading 5G deployment to both support positioning and CapEx efficiency.

For fixed broadband, we'll continue using the asset-light model to expand by tuning this approach in new markets while we migrate from FTTC to FTTH. The second half for the customer platform initiatives will be more exciting. We are accelerating the implementation of the Cartão de Todos health partnership, and new partnership will be launched. Lastly, we will continue to evolve our B2B verticals. We are increasing the penetration of our solution to consolidate our leadership in key verticals, while we mature the different business models. Ending my comments, I want to thank the whole team for the great job done so far. For the second half, we know what the challenges are, we have a clear plan, and we will maintain focus on its execution. Let's now open the floor for questions. Please, operator?

Operator (participant)

Thank you, Mr. Alberto. Now we will begin the Q&A section. First, we will take questions from analysts, followed by general public, both in English. If you're listening through the webcast, your questions can be sent by chat. Please hold while we collect the questions. We ask each participant to restrict themselves to two questions at a time. To ask a question, please press star one, and to remove the question from the list, please press star two. The first question comes with Marcelo Santos, with JPMorgan. Please, go ahead.

Marcelo Santos (Senior Sell-side Equity Analyst)

Hi, good morning, Roberto, Andrea, thanks for taking the, the questions. My first question is regarding the sustainability of margins. You had a very strong margin increase this quarter. If you could please comment how this translates to the next couple of quarters, if there are some effects that should not be sustained or if they are? This is the first question. The second question is regarding the very low churn in postpaid. Could you please explain what is causing this churn to be so low? What are the main sources of this improvement we are seeing? Thank you.

Alberto Griselli (CEO)

We have been discussing for a while our guidance, whereby we were planning margin expansion, because we were assuming in our guidance, EBITDA growing double digits versus revenues growing high single digit. Everything that is going on with exceptional Difal, we can discuss this a bit, it's organic. It means that there are a number of things that we're doing on the EBITDA margin to increase the productivity of our our our resources. If you look at these from let's say a logical point of view, we have a few levers in place, the first of which is the fact that costs related to Oi start to disappear starting the second quarter.

We have a number of a productivity increase related to the increased productivity of the Oi customer base that we are capturing over time, so the cost to serve them. Third, we have a a significant number of initiatives within the company from innovation to business process remodeling and discipline to better allocate our cost base and so increase productivity on the EBITDA level. We've got margin of improvements going forward. When you look at the after lease, also because the decommissioning process is proceeding a bit ahead of schedule, and this will support a further margin expansion on that line also. All in all, we are quite confident that the profitability can be sustained and expanded.

On the low churn on postpaid, I think that there are, Marcelo, a number of factors to be taken into account. Generally, this is quite a remarkable achievement because we are getting the lowest churn on postpaid in the quarter of the implementation of our more for more strategy. Generally, this tends to put a bit more, let's say, a bit more pressure on the churn level in the quarter that we executed. If you look, for example, last year, churn level in the second quarter. I think that there are a number of factors in place here.

The first one is related to the more rational, competitive environment, and the fact that we adjusted our postpaid offer portfolio in the first quarter before the implementation of the more for more strategy. The second one is related to the numerous initiatives that we are implementing to increase the quality of service perceived by our customers. This is a continuous effort and is going to improve going forward. It's basically related to the quality of the value proposition that we offer to our customer base, that generally tends to increase their lifetime with us. For example, in this quarter, we just launched the Apple One initiatives. The second set of initiatives is related to the quality of service that we that can fall into the category of customer relations.

There, you got a number of improvement on Anatel, Reclame Aqui, Procon, and so customers starts to perceive that. The third one is the fact that we are also working quite hard to improve the quality of our network. Let, let's put it this way, our technical service. The fact that we've been awarded in July the best networks in terms of quality, of perceived quality, is another important initiative. All these combined tends to increase our ability to retain customers and therefore to reduce churn. Marcelo, I don't know if I've been exhausted in the answer?

Marcelo Santos (Senior Sell-side Equity Analyst)

No, it's very, very clear. Thank you very much.

Alberto Griselli (CEO)

Yeah, thank you.

Operator (participant)

The next question comes with Bernardo Guttmann with XP. Please go ahead.

Bernardo Guttmann (Head of TMT and Financial Sector)

Hi, good morning, everyone. Thanks for taking my question. Actually, I have 2 on my side. The first question is related to dividends. If you could provide us an update for our dividend distribution for this year? It seems like you are on track to generate a lot of cash, probably at a faster pace than the guidance provided of $2.3 billion. I just want to understand if there is room for potential upside here in terms of dividend distribution. The second one is related to the tax reform. I would appreciate it if you could make a general comment about the proposal under discussion for the sector. Thank you.

Alberto Griselli (CEO)

Bernardo, when it comes to dividends, we, just remembering, when we met for our guidance earliest this year, we gave a R$2.3 billion as the new floor of our shareholder remuneration for 2023, and then a continuous improvement going forward. When you look at the way we are executing the plan, basically, we are trying to improving it. We are improving as a matter of fact, are they listening to me or the line is-

Bernardo Guttmann (Head of TMT and Financial Sector)

Yeah.

Alberto Griselli (CEO)

Yeah, okay, okay.

Bernardo Guttmann (Head of TMT and Financial Sector)

Yes, I can hear you.

Alberto Griselli (CEO)

Sorry, because here this is sort of appear to be to be went out. Bernardo, when I look at the performance of our plan to date, we see a number of upside risks. Of course, there are still uncertainties related to, for example, the microenvironment, but there are a number of things that are going according or better versus our plan. Our focus, our main focus, is to increase free cash flow and operating free cash flow margin. We see upside risk here versus our guidance. Basically, we are now in the process of analyzing the numbers and discussing this among ourselves, but there is a risk of upside review of shareholder remuneration.

When it comes to the tax reform, I think here, we see this in, in, the, the, in, in the, in the phases that are being discussed in terms of the VAT reform that has been, that just passed, and is going to be discussed in the Senate, whereby we see that, we need to actually, Bernardo, the, the big point here, we need to wait for the actual, the actual numbers, to take a stance, on what the impact, is going to be for us. So far, the discussion is going according to what has been anticipated, so there is no surprise.

Whereby the other component of the tax reform that is related to corporate taxation and dividends, it's a bit farther on. Our understanding is that to make a precise call of what the implications are going to be, that we are closely monitor as a sector, we need to wait for the actual tax rate to be defined. This is gonna happen probably the next year. There is a transition period that should be soft for the next couple of years. I would say that we need to be a bit more to give a final stance on this.

Bernardo Guttmann (Head of TMT and Financial Sector)

Okay, very clear. Thank you, Alberto.

Operator (participant)

Thank you. The next question comes with Vitor Tomita with Goldman Sachs. Please go ahead.

Vitor Tomita (Former VP of Equity Research)

Hello, good morning, all, and thanks for taking our questions. My first question would be a quick follow-up on Marcelo's earlier question. Looking on costs, looking aside from the end of the TSA, to the sales and marketing line, which improved quite a bit this quarter. I know there were tough, easier comps versus last year, but should we assume this quarter's level of sales and marketing expenses as a recurring baseline for future quarters? In particular, should we expect marketing activity to pick up in the third quarter relative to the second, or a similar level? A second question from us would be on if you could provide an update on how you view the possibility of price readjustments in prepaid or additional price readjustments in postpaid this year, following the recent readjustments you made. Thank you.

Alberto Griselli (CEO)

Okay, Victor. On the first ones, in terms of sales activity, this is pretty much dependent on the number of launches and commercial initiatives that we are running on each quarter. If you look at, for example, the current quarter, we just happened to launch a significant campaign with Apple One, which is the exclusive partnership. You see a number of advertisement around. You will see some subsidies in our point of sales. We have at the moment a very appealing proposition for our black postpaid plans. This is much dependent, therefore, this line of costs on the activities that we are running.

For example, I would expect that this quarter, because of the launch of the Apple One campaign is gonna be heavier versus the previous quarters, where we didn't launch anything, let's say, let's put this way, special. We got more special things coming up for the last quarter also. So I would say that the second half, in terms of commercial activities and initiatives, is likely to be more, let's say, intensive versus the first half. This is for the first question in terms of the marketing and sales expenses. When it comes to the price adjustment topic, I would say the following: The overall competitive environment is moving versus a value-based, at least what we are doing, competitive dynamics.

Our approach is always to provide more for more offers and value proposition to our customers. In the first half, we pretty much concentrated on postpaid, and we are culminating with the Apple One launch, so we make it, let's say we deliver more value to our customers, and prices are adjusted accordingly. I would say that the bulk of adjustment and fine-tuning of our postpaid offer is completed now. We did something on the enterprises in the first quarter. We are doing, we did, we carried out the more for more strategy in the second quarter, the residual opportunities are, let's say, they've got much less impact versus what we did in the first half.

And so we are turning our attention into prepaid, and we are going to follow the same approach, whereby we're gonna upgrade the value proposition to our customers, and we're gonna command some price revision accordingly. We did this, this last year, for example, including Amazon Prime in all our recharges, and we are planning something starting this second half as well. The focus of the second half of the year is going to be more concentrated on prepaid.

Vitor Tomita (Former VP of Equity Research)

Very clear. Thank you very much.

Operator (participant)

The next question comes with Fred Mendes with Bank of America. Please go ahead.

Fred Mendes (Former Managing Director)

Hello, good morning, everyone, and thanks, thanks for the call here. I have two questions here as well. I mean, the first one on the working capital line. We see a major impact in the line of suppliers, BRL 1.3 billion on this quarter. Looks like you paid this amount. So, when I look at 2Q22, I didn't see this, this impact, so just wondering if you took advantage of some type of opportunity in terms of the FX or something in this line? Just trying to understand the working capital here. This will be the first one. Then on the second one, I think is more like a, a question on the strategy...

When I look at the ARPU, you already have the highest ARPU in the street, looks like, one of the highest. When I look at the net adds, I mean, it has been better in the last three months, it's true, but over the last years it hasn't been as strong. I mean, when I look forward, where should I see most of the growth for TIM for the next, let's say, the next years? Thank you very much.

Andrea Viegas (EVP and CFO)

Good morning. Good morning, Fred. Thank you for the question. Related to the working capital, there are some dynamics that pressure our working capital this first semester, like you mentioned. The major, major impact is related to the vendors. It is, this is related to our seasonality, seasonality in our business. If you see it, past years happened the same, and we expect the second part of the year, less pressure on this item.

Alberto Griselli (CEO)

Go on the, Fred, on the second one, on the ARPU. Yes, we achieved the ARPU leadership on both prepaid and postpaid. That's true, that's a nice achievement on our side. When I, when I go forward and I look forward at the revenue dynamic of the sector and of TIM Brasil, I, here, what we always said is that we want to grow on a balanced way in terms of customer base growth and ARPU growth. When it comes to ARPU growth, of course, the main strategy is related to the value-based competition, so providing something more for the customers to be able to command a higher price.

When it goes to the customer base, I think that the answer is a bit different between postpaid and prepaid. If you look in general at our customer base dynamics on postpaid, you are right. We've been running a number of quarters with negative postpaid additions, and the number has been a bit mixed up by the Oi post-merger integration. We signaled over the last quarters, that in the second quarter we would come to positive net additions. This is the results of this quarter confirm that we are now in the positive net addition territory. We expect to move forward on a positive on a positive space for the next quarters.

When you look at the absolute number of net additions, I think that a number that needs to be taken into account is the relative ratio between the net additions and customer base. Because on postpaid, we got, the 3 of us, a different customer base. When you look at growth, I think that it's better to look at relative numbers versus our customer bases versus absolute numbers, because this put everything into perspective, and this translate into the year-on-year growth and quarter-on-quarter growth. They are both positive for us in this quarter. On the customer base, we want to grow the customer base for postpaid, since we have the lowest market share, we think that there is a space to grow there.

Whereby, on a value-based proposition, we intend to increase ARPU, providing better services to our customers. For postpaid, I was mentioning before, for Marcel and Victor, the exercise has been closed, whereby for prepaid, there might be some additional update for the second half. At the end of the day, we've been always running on a mixed growth approach, customer base and ARPU. The all integration sort of made it re- difficult to read through these dynamics, and I think that from this quarter onwards, you will be able to see again that our top line is gonna to be driven by both ARPU growth and customer base growth.

Fred Mendes (Former Managing Director)

Perfect. Very, very clear, Alberto. Thank you. Thank you, Andrea.

Operator (participant)

The next question comes with Leonardo Olmos with UBS. Please go ahead.

Leonardo Olmos (Deputy Head Of Brazil Research)

Hi, good morning, everyone. A couple of questions from my side. First, lease expenses and the decommissioning process, you touched that a little bit before. Can you, can you provide some idea on what should we expect in the second half of 2023? And provide some update on the number of towers, how, how, how is that going? The second question is regarding the... Basically asking for an update on the agreement with neutral network, particularly, V.tal. Thank you.

Alberto Griselli (CEO)

Okay. On the lease expenses, I think, Leonardo, that we have some upside risk. We are moving ahead of our plan, so as of today, as Andrea was mentioning in her speech, we are at around 70% of the plan already executed. This is going to be a bit less relevant for this year, because the number needs to pile up, but it's gonna provide us some upside on the entry speed for the following years. We are likely to provide a better focus on the progress in the next quarter. We are now left with the hardest tower to decommission, so the, let's say, the easy part or the easier part, because it was not easy. We have this decommissioning 1,000 of towers this year.

Basically, we are happy with the results, and we, we are ahead of schedule. It's positive upside risk on this line, more profound in the following years, less on this year because of the piling up of the exercise. Already in this quarter, you can appreciate a positive dynamics, as Andrea was saying. When it comes to the neutral network, we have been, we carried out a quite successful launch in Paraná and Santa Catarina. We are very pleased with the commercial results of our operations. We are now fine-tuning the, the model at a larger scale.

The benefit of it is related to the fact that since we don't need to build the network, we can operate in a mobile-like fashion, so our go-to-market is simpler, and this should translate into a better quality of our commercial operations. At this point in time, we are happy with our speed. We increased our net addition to something like 30K per quarter. We are likely to run at this speed in the following quarters, and we are fine-tuning the machine to be able to scale up when the competitive environment gonna be a bit more attractive versus today.

Leonardo Olmos (Deputy Head Of Brazil Research)

Sounds great. Thank you very much. Have a great day.

Alberto Griselli (CEO)

Alberto?

Operator (participant)

Thank you. Once again, if you wish to ask a question, please press star then 1. Ladies and gentlemen, without any more questions, I am returning to Mr. Alberto Griselli for his final remarks. Please, Mr. Alberto, you may proceed.

Alberto Griselli (CEO)

Thank you, everybody. My closing remark, considering this exciting World Cup atmosphere, I'm going to play a little football coach here today. Half time is over. Guys, we need to go back on the field to secure our victory in the second half of the game. See you soon. Bye.

Operator (participant)

Thus, we conclude the second quarter of 2023 conference call of TIM S.A. For further information and details of the company, please access our website, tim.com.br/ir. You can disconnect from now on. Thank you once again. Have a good day.