TIM - Q3 2022

Transcript

Operator (participant)

Bom dia, senhoras e senhores. Sejam bem-vindos à teleconferência de divulgação dos resultados do terceiro trimestre de 2022 da TIM S.A. Informamos que esse evento está sendo gravado e que todos os participantes da conferência estarão apenas ouvindo durante a apresentação. O replay desse evento estará disponível no website da companhia após o encerramento. Após as considerações da TIM S.A., haverá uma sessão de perguntas e respostas para participantes. Nesse momento, serão fornecidas instruções adicionais. Esclarecemos que declarações que possam ser feitas relativas às perspectivas, projeções e metas da TIM S.A. constituem-se crenças e premissas da diretoria da companhia. Considerações futuras não são garantias de desempenho. Elas envolvem riscos, incertezas e premissas, pois se referem a eventos que podem ou não ocorrer. Os investidores devem compreender que fatores internos e externos à TIM S.A. podem afetar o seu desempenho e conduzir a resultados diferentes dos planejados.

Agora, gostaria de passar a palavra para o senhor Alberto Griselli, Diretor-Presidente da TIM S.A., e senhora Camille Faria, Diretora Financeira e Diretora de Relações com Investidores, para que apresentem as principais mensagens do terceiro trimestre de 2022. Senhor Alberto, pode prosseguir.

Alberto Griselli (CEO)

Bom dia a todos e obrigado por participar da nossa teleconferência de resultados. Tenho o prazer de informar que tivemos mais um ótimo trimestre. Estamos apresentando números fortes em todas as linhas. Estamos crescendo de maneira sólida, mantendo nossa lucratividade de alto nível, ao mesmo tempo em que entregamos todas as iniciativas de transformação que planejamos para 2022. Temos agora uma empresa maior e melhor. Estamos no caminho da Next Generation Team apenas no início. Avançamos a passos largos em direção aos nossos objetivos. No terceiro trimestre, nossa receita cresceu mais de 24% ano a ano. Nosso EBITDA também apresentou grande aumento, acelerando quase 25% de crescimento anual, o que levou nossa margem a ultrapassar 48%.

No acumulado do ano, EBITDA menos CapEx cresceu 25%, com margem de fluxo de caixa acima de 25%. Até setembro, anunciamos cerca de BRL 1 bilhão em juros sobre capital próprio e estamos muito confortáveis para entregar nosso guidance de remuneração de BRL 2 milhões. Iniciativas estratégicas estão avançando de acordo com os planos. No 5G, nossa abordagem de rollout inteligente está nos dando a liderança na cobertura onde mais importa para a TIM. O processo de integração da Oi está evoluindo rapidamente e já estamos nos beneficiando de várias formas. As fases essenciais da integração já foram concluídas. A Frente ESG apresentou outras conquistas relevantes no terceiro trimestre. A Refinitiv reconheceu a TIM Brasil como a operadora de telecomunicações mais diversificada e inclusiva do mundo.

A TIM, como empregadora, foi premiada como uma das melhores empresas para se trabalhar, Great Place to Work, enquanto nossos clientes também nos deram ótimas pontuações no portal Reclame AQUI pela excelência no atendimento ao cliente. Além disso, estamos usando o poder da tecnologia para ajudar comunidades em desenvolvimento em parceria com a ONG Gerando Falcões. Quando dizemos que o ESG está incorporado.

Getting into additional detail in our revenue dynamics, we saw mobile service revenues grow close to 26% year-over-year, while fixed service was up by more than 8%, consolidating our service revenues at an expansion of 25% year-over-year. Once again, it is essential to highlight that this revenue performance was driven by more than just the Oi assets acquisition. Our organic performance continues to be helped by the positive net effect of price ups, benign macroenvironment and rational competition. Postpaid revenues continued with its solid expansion, up almost 26% year-over-year, with an ARPU of BRL 36 per client per month. Prepaid revenues rose more than 30% versus last year, pointing to an ARPU of close to BRL 13.

As expected, the average revenue per sub is being diluted by the acquired customer base with a lower ticket in both segments. With this, mobile blended ARPU stood at BRL 24.9. These metrics will show some quarters of volatility as we haven't started to clean up the acquired base. We expect to begin in November, and the process should take months to complete. Although much of our attention is focused on the integration process, we continue to innovate. As this is a fundamental part of our positioning and company DNA, we continue to bring novelties to our existing and new clients. During the quarter, TIM launched a partnership with LATAM and GOL Airlines to offer in-flight connectivity embedded in our postpaid TIM Black plans. We also expand our partnership with Amazon to provide content for prepaid and postpaid customers.

TIM Mobile and, as I mentioned earlier, the 5G launch is a success. The smart coverage approach and an assertive device strategy are delivering competitive differentiation and customer experience improvements. Our 5G coverage arrived in all state capitals with a particular focus on crucial markets like Curitiba, São Paulo and Rio de Janeiro. Today, we have more than our peers' combined number of antennas, giving TIM an edge over competitors. When we sum this up with the acceleration of 5G device penetration driven by TIM and big retailers, we already see 10% of traffic offload in major state capitals. The importance of this accelerated adoption comes from the potential savings in 4G CapEx and in better customer experience. It is early, but in the first measurements, 5G users have twice the NPS of customers using the older technology. Let's now move and go deeper into the integration of Oi assets.

As I mentioned earlier, integration is on track with network implementation proceeding at a solid pace, while client migration is starting to accelerate. On the network, the first two phases, roaming like and frequency availability, were completed while full integration should be achieved in early 2023. The migration of the acquired base to our system is occurring in waves to ensure we do it properly and with minimum impact on clients. Until September, we migrated 2.5 billion customers, and due to the complexity of the process, we should take the entire 12 months we plan to complete the entire process. On a separate initiative, the commissioning process is starting this month following a necessary system implementation that allow us to consolidate ERP functions for the acquired assets. We plan to decommission 400 sites in 2 months.

In 2023, an additional 3,000 sites will be shut down, leaving approximately 1,300 until December 2024. Lastly, on the M&A topic, as you probably saw in our communication during the quarter, we, together with the other two buyers, enter into a litigation process with Oi related to adjustments to the closing price and indemnities. The total amount under discussion is BRL 3.2 billion. The situation is developing on two fronts. One, in legal courts, where the judicial recovery judge determined the buyers to deposit the withheld amount of BRL 1.5 billion in an escrow account, which has been done a couple of weeks ago. The other, in the arbitration court of B3. The buyers initiated this path. The following topic is an update on B2B.

As we discussed during our investor day in May, we are focusing on selected verticals to offer a complete set of connectivity, IoT, and tech solution to Brazil's industry leaders. Three of these verticals are already showing promising opportunities. In agribusiness, the vertical we've been working in for longer, we offer solution to increase productivity, covering millions of hectares of crops and fields, doubling our coverage in the last 12 months. We started with solution based on 4G technology, but we already closed a few deals to develop 5G with groups like São Martinho. In logistics, we can positively impact lead times and fleet management, taking transportation efficiency to the next level. Again, we almost doubled the number of kilometers connected with IoT project, and we are starting a 5G initiative with BTP in Santos Port, the largest in Brazil.

With the utility sector, we can collaborate for smart lighting solutions, improving distribution and increasing automation. Over the last quarters, team increased the number of public smart lighting points ninefold, with NG one of the major partners in such initiatives. Changing gears to fixed service. TIM Live had another solid quarter amid its transition to a new operational model using I-Systems as its network growth platform. We grew revenues at around 12%, taking third quarter revenues to more than BRL 200 million. Fiber users represent more than 70% of the entire base, and the FTTC to FTTH migration is helping churn to reduce materially. Voluntary churn declined by 1.5 percentage points since the first quarter.

As a result of our efforts to grow sustainably with a high value service and portfolio, we maintain a strong FTTH ARPU level of close to BRL 98 despite competitive pressure. We resumed our footprint expansion in the first half, and in October, we added a new regional cluster center in Campinas, an important city in the countryside of São Paulo state. Now, I will pass the floor to Camille, our CFO, to review the financial results.

Camille Faria (CFO and IR Officer)

Thank you, Alberto, and good morning, everyone. As Alberto explained earlier, the third quarter was marked by improvements in all lines of our results. Our OpEx, although still pressured by the same elements we saw in the previous quarter, presented a deceleration when compared to second quarter, 24% versus 25% year-over-year. This trend reflects a larger company following the M&A transaction, but all cost lines remain under control. With revenues growing faster than in the second quarter and OpEx expanding slower, EBITDA dynamics accelerated. EBITDA for the quarter increased by 24.5% versus third quarter 2021, with a stable margin of 48%. Net of the I-Systems costs, we would have had more than 28% of EBITDA growth with a margin of 49.5%.

Of course, this record high EBITDA was driven by service revenue growth from organic performance and M&A, amid an environment of costs under pressure and carrying a lot of transitory effects. Looking ahead, it's always important to remember that we are carrying the burden of the temporary service agreement with Oi that will end in April of next year. We expect a much cleaner OpEx dynamic in 2023, as both impacts from the TSA and I-Systems will start to disappear. Last quarter, some of you became a bit worried about our bottom line dynamic. As we explained, there were many transitory and temporary effects. In the third quarter, some of these impacts already started to ease, but some will remain until we finish the asset integration and site decommissioning. Site leases continue to impact D&A and financial results significantly.

Despite starting the decommissioning in the fourth quarter, we will only benefit from it later in 2023 and 2024. As a result, net income came in line with the third quarter of 2021 at BRL 473 million. We feel very comfortable to fulfill our BRL 2 billion guidance of shareholder remuneration. Until December, we will announce a portion of the remaining BRL 1 billion in interest on capital, and the rest will be proposed as a dividend. If the I-Systems deal negatively impact our costs, it benefits us even more on the CapEx side, positively affecting Free Cash Flow. The saved CapEx is compensating for a good portion of our 5G rollout. Year to date, EBITDA minus CapEx is growing close to 25%, and the Free Cash Flow margin is exceeding 25%.

Our cash position remains solid even after the payment for Oi's assets. We closed the quarter with approximately BRL 3.7 billion in cash. Even after the court decision to transfer BRL 700 million to the escrow account, we will retain more than BRL 3 billion. This deposit will not impact our leverage guidance since we took into consideration the total payment to Oi. Additionally, our indebtedness level is comfortable. In the third quarter, the net debt to EBITDA ratio remained below 1.5x. Now I hand the call back to Alberto to complete the discussion related to the third quarter.

Alberto Griselli (CEO)

Thank you, Camille. It is fair to say we're executing firmly the plan we set ourselves to deliver in 2022. Despite a very tough and uncertain year, we expect to meet our financial and ESG targets. Our accomplishments in these first nine months confirm our progress to build the Next Generation Team, evolving step by step to become the best mobile operator in Brazil. Building this new chapter in team's history takes immense effort. I'd like to thank the entire team for their outstanding work and commitment. Additionally, we have a new executive team member. Fabiane Reschke joined TIM Brasil as the new legal officer. She has a vast experience both in telco and other industries, so I'd like to give her a warm welcome and wish her the luck and success. It is great to have her on board. Now let's open the floor for questions.

Please, operator.

Operator (participant)

Thank you, Mr. Alberto Griselli. We will now begin the Q&A session. First, we'll take questions from analysts, followed by the general public, both in English. If you are listening through webcast, your questions can be sent by chat. We ask each participant to restrict himself to two questions at a time. To ask a question, please press star one. To remove the question from the list, please press star two. Our first question comes from Marcelo Santos with JPMorgan.

Marcelo Santos (Senior Sell-side Equity Analyst covering LatAm TMT and Education)

Hi. Good morning, Alberto, Camille. Thanks for taking my questions. The first question is the ICMS impact. I wanted to understand better, especially on prepaid, where they decided to increase the allowances and not change prices. Did this impact already happen? How much of the quarter was impacted by ICMS? The second question would be about the litigation with Oi. How did this impact the P&L and the balance sheet, if in any way? Could you just describe how which parts moved because of this, for example, deposit in the escrow account? Did this impact, I don't know, earnings or taxes or anything? Thank you.

Alberto Griselli (CEO)

Hi, Marcelo. Let me start with the first question, and then I will hand over to Camille for the second one. When it comes to prepaid, we already implemented the measures for gross additions in the customer base.

Roughly it was August. Basically we followed, as already commented in many occasions, with a larger gigabyte benefits for our customer base. When you look at the combined effect, what you see already in the quarter is, let's say a positive impact of the ICMS reduction on the net revenues. At the same time, there is a reduction or sort of cannibalization in recharges, then thereafter translating revenues because we have a big chunk of our customers that recharge more than once. Basically the additional gigabytes or megabytes that were given to the clients cannibalize their recharges.

What you see in the quarter is the net effect of the better net income due to ICMS and the cannibalization of recharges due to the extra gigabyte that we are offering to the entire customer base, starting in August.

Marcelo Santos (Senior Sell-side Equity Analyst covering LatAm TMT and Education)

Thank you.

Camille Faria (CFO and IR Officer)

Hello? Is it working? Okay. Well, hi. Hi, Marcelo. Regarding your Oi question, right now, we have no impact yet from the BRL 700 million deposit that we did. That's our part that we did on the escrow account, on the P&L, because we took a conservative approach, and we left the transaction as initially recorded in our numbers. With respect to the balance sheet, you will not see that in September, of course, because the deposit was made in October. But as of October, we'll have roughly BRL 700 million of cash moving from our cash position to a judicial deposit.

As I mentioned in my speech, that will not impact our leverage guidance for the end of the year because when we developed the guidance, we were already accounting for the fact that we would have to pay the full price for Oi. That was before the price adjustment request.

Marcelo Santos (Senior Sell-side Equity Analyst covering LatAm TMT and Education)

Perfect. Thank you very much. Very clear.

Operator (participant)

The next question comes from Diego Aragao with Goldman Sachs.

Diego Aragao (Head of LatAm TMT and Education Equity Research)

Yes. Good morning, everybody. Thanks for taking my question. A quick one, from my side. I just want to get an updated view about your CapEx outlook and whether we should start thinking about potential change going forward. I mean, if we would think about, you know, the first Oi mobile integration process, secondly, initial results in 5G, and then the asset light model with this, you know, partnership with I-Systems. Are you seeing any major efficiencies at this point that could eventually lead to a downward revision of your annual guidance? This is the first question. My second question is related to the B2B business. If possible, can you just help us to understand the economics of these projects you are presenting?

If you can illustrate, for example, who is responsible for the related CapEx, you know, for network maintenance costs, how TIM's get paid in these type of projects, and lastly, what kind of margin you should achieve and the average level of return you are looking for, that would be great. Thank you.

Alberto Griselli (CEO)

Okay, Diego, these are two very long questions to answer during the call, but let's go with the first one, which is easier. When it comes to the CapEx on the third quarter, you see that we are a notch below BRL 1 billion, but we expect to catch up in the last quarter and close this year in line with the guidance that we gave to the market. There will be an acceleration in the last quarter. When you look at next year, basically what is going on is that what is being presented in Investor Day is happening.

Basically what we say at that time, that was May this year, that we were assuming that 5G take-up would be in line with 4G take-up as we saw it then in the last years. What is happening is that 5G take-up is going faster versus the 4G take-up, and this has a positive upside on CapEx for the next year. Basically, you got two big catalysts of CapEx efficiency. One is our frequencies and towers. The second is 4G offload due to 5G.

Since offload of 4G is proceeding ahead of what we planned, we're going to be able to to materialize the upside in 2023 and 2024, given the fact that what we expected to be necessary for 4G investment are no longer required. We mentioned an upside of BRL 600 million in the Investor Day. This is actually we see this materializing in the following years. We are still discussing now and finalizing the industrial plan for 2023, 2024, 2025, but the upside is coming along as we move with implementation of 5G. Same stuff for I-Systems. Basically, as you know, with I-Systems, we include a new OpEx line, and the benefit is a CapEx saving. Everything is moving according to plan.

It's what we say it is happening. This is for the first question. For the second question, this then we can maybe discuss it also in one-to-one meetings afterwards. Basically, there are two main business models for this B2B business. The first one, which is the one in place for 99% of our projects so far, it's basically a model whereby we sell technical services, connectivity and network services and network maintenance services to our customers. They paid for it, and we put a margin on top of it. This is sort of set up payments plus margin for us. Then there are the services that are running on top of this network technology that we are deploying.

Here the margin is, let's say, pretty high because it's telco services on top of the CapEx. The CapEx, by the way, is paid by the client. This is the main model that we've been deploying so far in 99% of our projects. This changes a bit when we look at, for example, the utility vertical that we just launched. In this case, this what we are discussing with our customers is network as a service. But this is, let's put this way, emerging. So far, the entirety of our projects are based on CapEx paid by the client, margin for us, and then services on top of this CapEx, high margin for us. Accretive on our EBITDA margin.

Diego Aragao (Head of LatAm TMT and Education Equity Research)

Super clear, Alberto. Thank you very much for your answers.

Operator (participant)

The next question comes from Leonardo Olmos with UBS BB.

Leonardo Olmos (Executive Director, Deputy Head of Brazil Research)

Hi. Good morning, everyone. I got two questions. The first one, just a quick recap on the decommission of the sites. You mentioned that you expect 400 sites in the remaining 2022, 3,000 sites in 2023, and 1,300 in 2024. Not sure I heard that part right. So just to recap that, and if you could tell what is the impact of fines that you expect from this decommission process. That's the first question. If I may ask the second after this. Thank you.

Alberto Griselli (CEO)

Decommissioning and fines, and let's go with this. Decommissioning is in the three steps that we just mentioned. You understood correctly what we said throughout the presentation. The 400 is not that we are expecting to do it. We are already doing it. Of these 400, last week, we were sort of 150 already implemented. We are putting together the machine to make this happen this year and next year. We are now ramping up the speed, and then we are going out to execute the speed next year. There is a specific organizational group within the organization that is in charge of this. The plan is, let's say, ready and is being executed. Your understanding is correct.

It's a small piece this year in, as we speak already, and in November, a big chunk next year and the remaining part in 2024. When it comes to the impact of the fees, the impact of the fees are already included in our numbers. Basically, the amount I will hand it over to Camille to give you the details about the numbers that is already in our balance sheet.

Camille Faria (CFO and IR Officer)

Thank you, Alberto. Leonardo, two-three effects here. The total amount of the expected fines was already included in our IFRS 16 debt, as of second quarter. It's roughly between BRL 600 million and BRL 700 million, and it's there already. In terms of cash, of course, it will be paid when we decommission the sites. In terms of our P&L, because it's part of our decommissioning plan, it's being amortized over time. In the P&L, you already see the effect of the fines. It's a linear amortization over the period of the decommissioning.

Leonardo Olmos (Executive Director, Deputy Head of Brazil Research)

Very good. Thank you very much. My second question, regarding Oi's client, can you please discuss the bad debt dynamics and if you plan to disconnect these clients eventually as a competitor did? Thank you.

Alberto Griselli (CEO)

Okay, Leonardo Olmos, let's say the bad debt dynamics are basically the normal bad debt dynamics of mobile operator. We got bad debt on their side. The delinquency rates on our clients, it's a bit higher than ours, and it's business as usual. Let's put it this way. When it comes to the disconnection, we are planning. We got a material number of customers that are inactive, so they do not generate traffic. They are not using the service. What is going to happen is that starting from November and this quarter, the current quarter and the next quarter, first quarter of next year, we are going to initiate the process of cleaning up this customer base. Basically, this is a cost avoidance opportunity on our side.

Basically, there are people and customer not using the service, but we got some costs attached to it, like taxes, license costs, etc. We are gonna initiate the clean up this month and carry out this according to time schedule this quarter, next one.

Leonardo Olmos (Executive Director, Deputy Head of Brazil Research)

All right. Thank you very much. Have a great day.

Operator (participant)

The next question comes from Marco Nardini with XP Investments.

Marco Nardini (Equity Research Analyst)

Hello, Alberto and Camille. Thank you for taking my questions. I actually have two on my side, if I may. The first one is regarding 5G FWA. I would like to know when the company intends to launch FWA plans, and when will we start to see its impacts on TIM's revenue? The second one is regarding company strategy on FTTH. The current company focus is capturing synergies with Oi and also 5G rollout. However, I would like to know if you could give us a little bit view on when could we expect major FTTH expansion, please. Thank you.

Alberto Griselli (CEO)

Okay, Marco, let's go to the first question in terms of FWA. In terms of FWA, you probably know we have been experimenting the technology in 4G. We launched three pilots last year in 5G, and we set out our view on this in our investor days. This view remain unchanged. Basically, it's an opportunity to leverage the available capacity of 5G. We believe this is an opportunity. There are a few barriers that needs to overcome to make it available in the consumer segment, which is basically a decent coverage of 5G, and we are addressing this in main capitals, for example, Rio de Janeiro, São Paulo, and Curitiba.

Let's say, let's put this way, the affordability issue, because today the CPE is still quite expensive for the consumer market. Nonetheless, the size of CPE is going to expand rapidly over the next years. We imagine that the affordability point could be addressed at the end of 2023, in the second half of 2023 and in 2024. This is an opportunity that we are going to attack for the consumer segment at that point of time, if the CPE size and therefore economies of scale make it viable for the consumer segment. It's a bit different for the corporate segment, whereby we already uses FWA for top clients that, for example, require the backup solutions. This is one use case for the...

It's a complementary backup solutions for top clients. Imagine the financial services bank branches. It's an emerging opportunity, so we already have some inroads. We expect this to scale up. It's not gonna be meaningful on our revenues in the short term. This is for, let's say, FWA. When it comes to FTTH, the expansion of FTTH, basically it's again in line with what we said in our investor day. We have a plan with I-Systems, whereby they deploy the network, FTTH network, and then we grow our customer base and revenues. This year, we opened two clusters, one in Joinville, in the first half and now in Campinas. We are proceeding according to this pace.

The pace of growth of our FTTH business is continuing, let's say, as is. Now, I believe this is, in the short term, the right approach because it allows us to combine both volume and value in a market which is quite, competitive. We've got 2% market share. We are growing. We got the highest ARPU in the sector, and so we are basically balancing and trading off the speed of growth versus the value that this growth generates for us.

Marco Nardini (Equity Research Analyst)

Perfect. Thank you.

Operator (participant)

The next question comes from Luca Brendini with Bank of America.

Luca Brendini (Equity Research Analyst)

Hi, good morning, everyone. Thank you for taking my question. Two questions from my side. First of all, if you could comment on what we should expect from depreciation and amortization in the coming quarters. It increased this quarter with the full three months of Oi acquisition. If you could comment what we can expect. Second, in terms of the ARPU for the Oi clients, I know it's probably difficult to say what is exactly from Oi or not right now, but are you already working on upselling those clients? Are you having any success on that, and what's the outlook for this? Thank you.

Alberto Griselli (CEO)

Okay. Let me, Luca, take the second one, and then we'll pass it to Camille for the first one. When it comes to the ARPU of Oi customers, as expected, the average ARPU is lower on both segments, and then the mix is more skewed versus prepaid and therefore, you see the effect of this in our ARPU dynamics and the decrease year-on-year. When you look at quarter-over-quarter, the decrease is due mainly by the fact that we got three full months this year and two months next year. Now we are totally focused on migrating smoothly the customers from Oi to our system, so from Oi to TIM. This is our priority. It is a complex and quite large exercise.

We are talking about 70 million of customers minus disconnection, so it's still a big number. This is our focus. There is of course the opportunity to monetize these clients in the future because they're based on tariff plans, which are amongst the lowest in the marketplace. Nonetheless, this is not our priority. As we speak, at this point in time, our priority is to migrate customers from the existing plans at Oi to equivalent or better plans in TIM Brasil. When it's done, we're gonna take care of monetization opportunity.

Camille Faria (CFO and IR Officer)

With respect to depreciation and amortization going forward, we're not giving exact guidance on that number, but just to give you a view of what's gonna happen, we are still carrying the burden of 7,200 towers that we got from Oi. The contracts of 700 to 1,000 towers. As we mentioned earlier, we are gonna decommission roughly 400 towers this year only. As you remember, we are required by CADE to try to sell 50% of our antennas, and we can't really decommission the towers while the sale process is ongoing. It started in July, as we publicly announced. We can only start massively decommissioning towers in 2023.

We'll still feel the burden of those additional towers for the remaining remainder of 2022 and for part of 2023. As we start to decommission the towers, then that burden's gonna ease over time. The process is expected to end by 2024. We won't really see a normalized rate in our D&A until 2025. Of course, easing over time as we decommission the towers.

Luca Brendini (Equity Research Analyst)

Perfect. Thank you.

Operator (participant)

The next question comes from Daniel Federle with Credit Suisse.

Daniel Federle (Head of Telecom, Media, Technology and Payments – Latin America Equity Research)

Hello, good morning, everyone. Thank you very much for taking my questions. The first one on the Q2's EBITDA margin increase quarter-over-quarter. I would like to understand if part of that is coming from synergies from Oi assets, and if those synergies are coming higher or faster than initially expected by the management. The second question is more like a quick follow-up on the ICMS topic. We are seeing the financials that the company is provisioning a portion of the ICMS that I understand to be like related to the timings mismatch between the reduction in the ICMS tax and the reduction in the billing. It was not totally clear if these provisions are being deducted from revenues or if those provisions are like an increase in costs.

Thank you very much.

Alberto Griselli (CEO)

Daniel, let me take the first one on the EBITDA margin. Basically it there are we are working across all the cost base items and this justify the margin expansion. When it comes to the Oi contribution, I say that the bottom line is as simple as that. In the second quarter, we got what we got and once we got it, we start working on this. I will give you an example. If you take the energy cost. The energy cost, we got all the base station with all the energy costs, and then once we got it, we start to switch off the energy costs for the BTS that we're going to decommission.

It's, I would say that you can take this as the fact that second quarter was the initial few months of this process. Now we're moving ahead. It's we are in line with what we are expected. We are not slower, we are not faster, and but we are working quite hard to make sure that the synergy so the contribution margin from Oi is what we expected. There are a number of opportunities that we're gonna capture, like for example, the taxes on the client base in the future. To this, you need to add the continuous job that we're doing consistently over our own cost base to drive the margin expansion that are a critical part of our guidelines and commitment.

I will pass it to Camille to discuss the BRL 100 million there.

Camille Faria (CFO and IR Officer)

Hi, Daniel. Regarding ICMS. First, your statement is correct, that provision is a result of the time mismatch between the moment in which we started to collect ICMS at a lower rate and the moment in which we reflected that reduction in the clients' bills. It is a deduction of our revenues, both gross and net revenues, of course. It's an impact on revenues. Our revenues do not reflect that additional ICMS.

Daniel Federle (Head of Telecom, Media, Technology and Payments – Latin America Equity Research)

Okay, thank you very much.

Operator (participant)

Ladies and gentlemen, as a reminder, if you'd like to make a question, please press star one. Thank you. Without any more questions from analysts, I would like to return the word to Alberto Griselli for his final remarks. Please, Mr. Alberto, you may proceed.

Alberto Griselli (CEO)

Now thank you everybody for attending our conference call. We have been very pleased to discuss with you the advance on our plans and our commitment to execute the value generation opportunities that we've been discussing this year. I want to thank once again the entire team for the huge effort that is being put in place over a huge number of initiatives that are running in parallel to transform TIM into the Next Generation Team. Thanks to everybody.

Operator (participant)

Thus, we conclude the third quarter of 2022 conference call of TIM S.A. For further information and details of the company, please access our website, tim.com.br/ri. You may disconnect from now on. Thank you once again, and have a nice day.