TIM S.A. (TIMS3) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to TIM Participações 2020 Second Quarter Results Conference Call. We would like to inform that this event is being recorded. [Operator Instructions] We highlight that statements that may be regarding the prospects, projections and goals of Tim Participações constitute the beliefs and assumptions of the company's Board of executives of officers. Future considerations are not performance warranties. They involve risks, uncertainties and assumptions as they refer to events that may or may not occur. Investors should understand that internal and external factors to TIM Participações may affect their performance and lead to different results than those planned. [Operator Instructions] Now I'll turn the conference over to the CEO, Mr. Pietro Labriola, so he can present the main message for the second quarter of 2020. Please, Mr. Pietro, you may proceed.

Good morning, everyone, and thanks for attending our second quarter conference call. This quarter was full of very serious and important event. We saw the pandemic impacting significantly the lives of everyone in Brazil as well as the economy. At TIM, we adapted quickly to the new reality and managed to keep focus on the business. More recently, new developments in the market consolidation front emerged. So we have a lot to discuss today on the organic side of our business. But I'm sure you have many questions concerning our binding offer on the mobile asset of Oi group. So I will make some quick comments on this topic before we start. First of all, it is important to realize that despite the significant value we see in this potential transaction. For sure, this is not a do or die situation. Of course, we can benefit meaningfully from adding more spectrum capacity, more infrastructure and more scale. But in the past year, we succeeded in turning TIM Brazil around and develop our business quite well, managing the spectrum gap in a clever way, allowing us to have the best 4G coverage experience in the country. You will notice during my comments and in our presentation, that we have all the condition to thrive, independent of the outcome of this negotiation. Having clarified that, this nice to have transaction can generate significant value at the condition we are offering as to all the parties involved. Anyway, we would like to wait for the conclusion since this is a long and complex process. Coming back to the organic core. Last quarter, I started in my comments talking about the increase in the uncertainty level we need to operate in nowadays. Despite that, I believe we once again show our capacity to adapt and be resilient when facing the challenges posed by the external environment. Consequently, we are delivering positive number to our shareholders. We divided the presentation in the same way we are approaching our reality, managing the challenging present, but at the same time, preparing for the future. So my comment will follow a similar flow. The second quarter was marked by strong execution on cost in order to face the impact from the pandemic that is flattening with high numbers of infection and death, while the economy start to reopen. It is always worth mentioning to our foreign audience that Brazil needs to be understood as a continent with the size of Europe, having state that are similar to entire countries. So it's quite logical to have regions in different stages of the pandemic and economic recovery that is also uneven. Our solid performance in cost efficiency led to OpEx declining almost 15% year-over-year, with a large contribution from the positive bad debt trend. Therefore, EBITDA growth remained positive, up close to 1% versus second quarter '19 and with a margin near 50%. EBITDA minus CapEx also had a strong performance, growing close to 50% year-over-year. Other remarkable achievement during the quarter were the signing of the ANATEL TAC and the free software under the partnership with C6 Bank. As expected, mobile service revenue were down in the second quarter, but mobile ARPU remained positive, growing close to 1% versus last year as a combination of positive human postpaid ARPU and negative prepaid ARPU. As explained in the first quarter, prepaid recharges were impacted by the pandemic despite showing a recovery towards the end of the quarter, trend that is being confirmed in July with the levels almost aligned with same month of the last year. We expect to see a continuous recovery in recharges spending as we enter the third quarter. But we like to understand how this recovery will hold after the Federal aid checks are withdrawn. The postpaid also confirmed our expectation with commercial activities impacted by closed stores. Gross addition and upgrade declined when compared to the pre-COVID level, but this was also the case for the voluntary churn. Today, we have approximately 80% of our stores open. But considering the limitation implemented by municipalities and states, we are running 50% to 40% of our full capacity. On the fixed front, TIM Live's consistency in delivering solid performance was once again confirmed. We closed the quarter with this unit representing close to 4% of our service revenue. TIM Live start to grow almost 8%, and we added 100,000 new clients in the last 12 months. This is a consequence of high-value proposition and coverage expansion. As we did not stop the rollout of our fiber network because of the COVID crisis, we were able to launch FTTH coverage in Belo Horizonte and Brasilia, reaching a total of 5.7 million households covered in the country, of which 2.8 million with fiber technology. Other fiber-based infrastructure also expanded, such as our backbone and backhaul that grow to 104,000 kilometers, and our fiber-to-the-city project reached more than 900 municipalities. The mobile network continued to be developed, adapting to the changes in traffic profile. And one more, TIM's 4G coverage was evaluated as having the best experience in Brazil with the highest availability and very well positioned in all the metrics. During this period of social distance measures, our digital transformation process helped the company to face important challenges through the acceleration of our digital journeys project deliveries. During the pandemic period, we accelerated 100-plus initiatives to prioritize digital experience. As a result, we accelerated the adoption of ESAs in all the product lines, postpaid, control, TIM Live and prepaid recharges. In the meantime, our caring processes become more self-service with non-human interaction growing 75%, driven by the new cognitive IVR. The new system answered more than 3 million calls after the launch. Usage of Meu TIM app grew double digit, helping e-bill and e-payment metrics also to grow solidly. Entering the future, I'd like to highlight the initiative that will contribute organically to a self-sufficient development of our network infrastructure. We put forth a commitment to which 100% of Brazil's municipalities with 4G until 2023, bringing to those cities the great 4G TIM experience. To achieve that, we plan to leverage on 4 major projects that are starting to be implemented. The first one, the implementation of the measure agreed following the signing of the TAC or Conduct Adjustment Term. Under this commitment, we will expand our coverage, adding more than 1,300 new cities and also implementing fiber backhaul to more than 230 cities. Second, as you all know, our network sharing agreement was fully approved. So we are moving to the 3 phases of the implementation. It will be a step-by-step project with significant impact for mobile coverage and capacity. Third, the new project of unplugged site uses a Network as a service approach to close coverage gaps in areas of difficult access or roads and highways. Fourth, after several large network tests in the past year, we are moving to the implementation phase of 4G massive MIMO. This project can boost our capacity by 3x in area where it will be implemented. We expect to have 200 city already benefiting from this in 2020. On another front and continue with our strategic approach to 5G, we expect to launch commercially our 3 cities to explore opportunities with fixed and wireless active broadband services. For sure, we will leverage on the experience we gather from the trials with WTTX. A high-quality network will help the transition from volume to value that we expect to continue to execute in the upcoming quarters and years. As key pillars in the transition, a new brand signature was developed and repositioning the portfolio is being implemented. We want to position our office away from the mainly priced per giga competition. So on prepaid, we will focus on convenience, on the control in the new experience. On the postpaid, we'll be further developed as a family entertainment and service app, while TIM Live broadband, we focus on the freedom to choose content. In the B2B, our top clients will be approached with integrated service under the strategic vertical defined in 3-year plan. As you will know, agrobusiness -- agribusiness is the most developed so far. For the B2C, we plan to leverage on the partnership with C6 bank to develop differentiation. Already in July, we launched the 3 set of products combining telco and financial services. In the first 3 weeks, daily average new accounts were multiplied by 8x, reaching around 200,000 new accounts. TIM's share of recharge was boosted to more than 50%, and our website visit reached a record high after the launch. In the next month, new developments will come to TIM Black plan, always focusing on the combination of benefit. It is always worth remembering, we intend to create value with this partnership in 2 ways. With direct compensation related to active accounts from -- coming from TIM's client base. This compensation comes in the form of activation fees and equity stake subject to reaching certain goals. And with increased customer loyalty and consequently, churn reduction, offering differentiation and cost saving with recharge and payment fees. Still under the section, preparation for the future, we believe significant value can be created through 4 projects, 2 of them I have already mentioned earlier, the network sharing agreement and TAC. With the network sharing agreement, besides the improvement in customer experience, we will create value in the form of CapEx and OpEx saving. Each phase of the project will have its contribution. But the last one related to the full single grid city below 30,000 inhabitants is key to unlock material efficiency. In the TAC, additional to the expansion of coverage, the company has agreed with Anatel to exchange BRL 639 million in sanction for investments, reducing its contingency border. Similar projects concerned the creation and the consolidation of a near-term infrastructure vehicle to accelerate FTTH rollout. The process of finding a partner and signing an agreement is expected to happen by year-end. TIM has received several indication of interest, and we plan to shortlist them before entering in the retail negotiation. The last project is related to the final step of a long process of corporate simplification. With this project, the company plans to generate operational tax efficiencies after the merge of TIM Participações into TIM S.A. After the conclusion of this incorporation, TIM S.A. will be the sole listed company. Quickly going over some financial trend. As I mentioned earlier, we were already expecting a decrease in revenues, and our net service revenue confirmed this by coming down 3.4% versus last year. In order to compensate this performance, we reinforced cost control and efficiency measures, making OpEx to fall close to 15% year-over-year. This strong performance is explained by improvements coming from lower volume related to the pandemic. Second, better operational performance, such as bad debt. And the last, reduction in discretionary expenses. Bad debt is worth going in a little bit of detail. This line [ alone ] was down 15.6%, bringing the nominal number back to 2018 levels. This can be explained by structural changes implemented and the improvement in the collection curves since the end of the last year. Despite having revenues declining, OpEx performance more than offset the impact, maintaining EBITDA on the positive side with 0.9% year-over-year growth. EBITDA margin also expanded by almost 400 basis points. The last 12-month operating free cash flow grew more than 40% when you compared to recent periods, showing a clear evolution on the cash generation side. I also take the opportunity to reaffirm our EBITDA minus CapEx of revenues guidance of above 20% with a mid-single-digit growth in EBITDA minus CapEx. Both metrics are being met in a year-to-date view. As I finish my comments, I'd like to point out the resilience of the company that managed to perform decently during this crisis. We will continue to focus on the sustainability of the business with a rational approach and solid execution. The new reality emerging in the second half of the year will create significant challenges, but focus on execution, a clear strategy, we confirm TIM's solid organic path. Thank you. We will now open for questions. Please, operator.

[Operator Instructions] Our first question comes from Mr. Fred Mendes from Bradesco BBI.

I have 2 questions here to start. The first one, we saw an increase in ARPU of almost 12% year-over-year. So I'm just trying to understand how important are the stores that they were basically closed throughout the quarter. How important is the fact that these stores are open for you to upsell to your client base? And then obviously, in this quarter, there was a negative impact. So that will be my first one. And then my second one, I guess, is much more like a strategic question. Let's say, in a hypothetical scenario, TIM does not get the spectrum from Oi's mobile operation, should we see some sort of change in the company's strategy? I mean my main point here is how can you compensate for the potential of spectrum that you'd have versus the other players in this scenario?

Fred, let's start with the second question, that is our strategic path. It's important to remember that we already stated in the previous call that the possible market consolidation, it's for us an opportunity, but it's not a do or die option. We always mentioned that we were proceeding in parallel with our strategy, working, as I mentioned during my speech, on the use of new technology, as is the case of massive MIMO, where we will be the first player in Brazil to use this new version of massive MIMO that can improve by 3x the network efficiency. We are working with the network sharing with Vivo that finally was approved by the CADE. Let's remember that we always told that there are always the opportunity of the upcoming law -- sorry, auction for the 5G and the 700 megahertz. And what is important is perhaps to underline that we have already demonstrated in the last year, as we were able in the past to exploit in the best possible way the frequencies at our disposal. So it's clear that if market consolidation happens and there is a possibility to acquire from the sale of Oi mobile frequencies, it's, for sure, a good opportunity, but this is not the only way that can allow us to further proceed with our strategy. But I leave the stage to Leo to give some more colors about how we can exploit better the existing frequencies, and how we can move in the future.

Fred, just complement what Pietro mentioned, we have tested on field the massive MIMO and the results were very, very interesting in terms of improved capacity with the existing network. We have to highlight that, I guess, that in the, let's say, last month, all the society and some public administration considering telco as essential services. With that, we saw some kind of improvement in terms of rule in important cities, let's say, to give more freedom for new towers. What is good, because we can use that in the sense for density where it makes sense and that we can highlight, for example, Belo Horizonte or Curitiba, Brasilia and Porto Alegre, that cities that now we are seeing, let's say, a very, very interesting opportunity to deploy sites. The last is Pietro mentioned about the new frequency spectrum auction. And it is interesting to highlight that we are seeing the 700, but at the same time, the 2.3 gigahertz is a very interesting spectrum that will be available on this auction. Just that you will give you a number today, more than 20% of our devices, smartphones already are supportive for these 2.3 gigahertz. So again, we have data on the past about the refarming to use a new spectrum and that you use, let's say, the most advanced technology, and we are prepared to do that again. So I guess that our track record when we did the leapfrog from the 2G to 4G, we can use all these expertise to have this, let's say, organic plan to support the upcoming capacity.

Fred, coming back then to your first question that is related to our capability to continue to upsell our customer base before to leave the stage to Alberto that is leading all these part in our company, I would like to point out some elements to remember our strategy. I remember that we started to talk about the importance to move from volume to value. And we discussed in unsuspected times that for us, was more important to get new customer with a reliable profile than to get net positive net adds at any cost. Why I'm allotting that? Because during the call, for sure, will arise question related to our improvement in the bad debt. And you have to remember that we started to -- told in the third quarter of the last year that our bad debt should be improved by an improvement of our processes, but also due to a rationalization of our commercial approach. We did a great job in this period closing sale channel with not the best trade-off in terms of acquisition cost and quality of the customer. And it will be reflected also in the following months about our result. Last but not least, aim that your question is coming also to understand better, we can continue to grow in terms of ARPU. It's important to remember that on the postpaid, in the comparison year-over-year, we were unable to apply our price up, yearly price up, that will arrive more ahead in the year. So the comparison with the last year in some way is not completely fair. But again, we are satisfied about our results, and they are completely in line with what we were imaging. But I leave the stage to Alberto to give you more details about our channels.

This is Alberto speaking. Just adding on Pietro's comments. Basically, we work our customer base and try to cross-sell and upsell across all channels. So they mean stores, of course, but -- or our BTL channels as well. So during this pandemic, of course, we lose traction in the store because they were closed, but we continue to work on these activities of cross upsell our customer base through our digital channels and our inbound and outbound channels. And this is something that the BTL marketing approach is quite a priority to our strategy. And these channels, they were up and working during the pandemic and continued in this effort.

Very clear important information. If you allow me just one very quick point on the bad debt. Definitely was impressive. Just how important was the improvement in billing here? Or do you think there was much more a choice of, let's say, a more robust customer base? Or you think that the billing made a major contribution for this improvement?

Fred, I'm very happy to say that we are confirming again what we told in the third quarter of the last year. We told that the third quarter should be the worst one. We try to explain as the bad debt process need time to show the results because once you start to improve, it takes at least 6 months to see the final result. For sure, we were able to improve all our internal processes that is a good part of this activity. But in the meantime, as we mentioned, we didn't want to acquire customer at any cost. And I think that this is something that will be better understood by the market once we will be out from the COVID because we start to have also an improvement on the prepaid. Because if you remember, we always told that there are opportunity on the prepaid to have an ARPU growth evolving to transform all the customer in control customer.

Our next question comes from Mr. Marcelo Santos from JPMorgan.

The first question is a follow-up on Fred on the bad debt. So just to clarify, you improved your bad debt processes. You were being more cautious on acquiring clients. So assuming a normalization of the economy, now you would be feeling ready to really accelerate customer acquisition. That's it. I mean you would be willing to take more risk given that you improved your bad debt? Just wanted to clarify that. I mean assuming a normalization of the economy? And the second question would be on the infrastructure business. So what kind of goals do you have in terms of deployment? What kind -- what parts of the network would you put inside this neutral network? If you could just provide a little bit more detail on this initiative, please?

Marcelo, about the bad debt, as I was explaining to Fred, for sure, there's a main part of the improvement that is coming from our process improvement because the last year, we clearly stated that we have some problem in our processes. And now we are proceeding very well. I want to add also that if you look at the collection curves that we put in the presentation, it's quite clear that this is not a onetime event because all the curves show a further improvement. So we expect to further improve the number in the next quarters. Related to the second part of your question, related always to the bad debt. I shouldn't use the word conscious. What we did was to improve also, thanks to the new technology, artificial intelligence, Big Data, our capacity to better understand our customer profiling, reducing the level of risk. In this period, what we did was to further improve all our capacity. And what is important to show is that the result that we are having today is not because yesterday, we start to work on this technology. But it was the preparation that we did the last year that now is showing its result. But in any case, trying to leverage this COVID situation, we had also the time to look in a better way to all our sales channel mix. And what we did with Alberto [ and Adrian ] was to have a better understanding about which are, by channel, the best trade-off in terms of acquisition cost and customer ARPU. And this is something that you will see and will be reflected in our numbers in the following quarters. About infrastructure business, I leave the stage to Adrian that is leading the process to give the details.

Marcelo, good morning, everyone. Yes, regarding our open vehicle, try to call it open and not neutral because it's slightly different in terms of what it means because this vehicle will be driven or the deployment of the network that this vehicle will do will be driven by our needs in terms of which markets we want to address, how we want to do it. So then, yes, after an exclusivity period, those networks could be open. But it's different than a neutral vehicle at the end. So basically, what we are thinking is to spin-off all of our last mile network today on this new company. Basically, today, all of our deployments of FTTC and the new deployments of FTTH, starting from the optic and obviously, including the customer connection. After that, all the new deployments will be obviously in greenfield. So it's basically our -- the network that today is strictly dedicated to our TIM Live business. We are not including any other assets. What we will have, and we are defining these in the following weeks, probably this new vehicle also will be able to deploy some FTTS, so fiber-to-the-site, or probably, also FTTCity fiber networks, always in greenfield. We will not include in the vehicle our actual FTTS or FTTCity assets.

Our next question comes from Mr. Rodrigo Villanueva.

I have a couple of questions. The first one is related to your wireless revenue growth. I was wondering if you could explain a little bit more on what could be behind the softer growth that you had relative to Vivo and Claro. And secondly, following the new binding offer for Oi mobile earlier this week, is there any potential time line that you could share with us regarding next steps to watch?

Rodrigo, about the wireless revenue growth and -- which is the outlook for the next quarter, it's important to say that exactly as we mentioned, we are seeing a further improvement in the trend. Keep in mind that July, I can share with you a first preview, should be the second best month in the year on the prepaid recharges with a year-over-year that is going to close the gap and becoming very close to 0. We are discussing about something minus 2%. It shows the -- a fast recovery on this area. And we expect further improvement because in the middle of August, what we will do is that we will launch our new offer on the prepaid and always to share with you our strategy. It will be a new offer that is not based on a giga price competition, but more on a concept of convenience for the customer, adding some elements. This is in line with our strategy that is to compete not on price, going beyond connectivity. Related to the postpaid, we think and we foresee further improvement in the next quarter also because we start to apply our yearly price up that we have to remember that we already communicated to the customer base in February. And so it will not be an issue to be repeated in the first quarter of the next year, just to start to speak about the possible 2021 trend. In terms of evolution of our offer, the first signs that are coming from the offer that we had under control are very positive, and I leave Alberto to give some more colors. And in the meantime, we are going to further improve our postpaid offer, where we are not discussing about a review because we are very happy that what we launched 1 year and out 2 years ago with TIM Black family, define that as an entertainment hub, it seems that it's becoming a market standard. So it confirms that we are on the right path in terms of the evolution. Before to leave the stage to Alberto, all in all, we see -- we foresee improvement in the following quarters, both on prepaid and on postpaid, with the strategy that is completely aligned with what we mentioned in our plan. So Alberto.

Rodrigo, just adding a few points on the control plan that we just launched from a positioning and strategic point of view, it follows this positioning whereby we try to add incremental values to the customers beyond giga. And so we hit a number of records since the launch date. So Pietro mentioned the number of visits, can add the number of digital transactions. We've been quite successful both in growth adds and on the customer base. So we've got more than 200,000 accounts open on our customer base overall. And it's difficult to have a metric in terms of comparison of gross addition because we have the commercial footprint that open up and closes during this period. But all in all, on a comparable basis, I can share that we increased gross addition on a double-digit percentage after the launch.

Coming back to your second question related to the time line of the process, we don't foresee any delay in the process. We are imaging that, in any case, the process will be finalized by the end of this year and then they will go through the regulatory and antitrust step for the approval. So now everything is in the hands of the seller that have to do its own evaluation, have to confirm the date of the creditor meeting and all the rest will proceed as was planned.

Our next question comes from Mr. Diego Aragão from Goldman Sachs.

Two questions, if I may. The first question is regarding the network swap agreements between TIM and its peers, particularly with Oi. Given that Oi mobile business is in a sales process and the component infrastructure will be part of a separate business unit, I would like to know the amount of network swap agreements between TIM and Oi. For instance, how much these agreements represent and understand what will happen with this swap agreements when and as Oi mobile business is sold?

So about the swap, and then I'll leave to Leo and Mario to give more details. Keep in mind that they are in place. What will happen is that once they will be extinguished or when they will reach the expiration date, keep in mind that there is the possibility on both sides to renew them if both party and we have no interest to avoid to renew debt because we are satisfied about the situation or we can evaluate to do this swap where it is possible with other players. So the swap is not, in our mind, any kind of issue. It's business as usual, and it is in the interest of both parties to proceed, but then I leave to Mario and Leo, if they want to add something.

No, just bring some colors. The main agreement that we have with Oi is related the way to the RAN sharing agreement. This agreement has all the base in terms of KPI, quality and some kind of obligation from the both sides. So we have followed that. During the, let's say, the process, the Chapter 11 process that Oi is moving on, so it's going well. We don't have perceived any kind of degradation in terms of quality. So first Oi will be with all the attention to keep then to guarantee the quality for our customers. So we are -- again, we are under of certain conditions of quality in the both sides, we and Oi. And we all follow that day by day. But to now, we don't have any kind of, let's say, new comments or new issues should be treated on that.

But just to follow-up and just to make sure that I understood correctly. So when we refer to those swaps, are those swaps with Oi mobile business? Or do you have like agreements with now this Oi infrastructure? And let's say that we've -- the group formed by TIM, Claro and Vivo buys Oi mobile business, I mean, I would imagine those swaps should disappear, but there might be like some costs related to it, right? So I just want to understand how much those costs could be and how this should be treated in the case that, for instance, you end up buying Oi or if someone else buys Oi Mobile?

Well, what we can disclose on that is that, first, the swap over fiber is not on the mobile business. It will be on the UPI infrastructure, all right? So this is one point. The second is the swap is, let's say, regard the balances. So the swap, we received and we offer the same amount of kilometers of fiber. So there is, let's say, a bit in the near term on this kind of agreement. So it's based again on balance. And this contract, I understand that we will be under the infrastructure UPI, not mobile UPI. So looking at that, we don't expect any kind of, let's say, rupture or any kind of issue over this contract because, again, we are receiving and offering fiber on the same amount of quantity, okay? So we don't expect any kind of significant change on this contract.

Okay. And look, my second question is just like a follow-up on Marcelo's question. In fact, I just want to understand how the current regulatory framework talks to the spin-off of fiber? I'm asking this because now that we have all companies and all companies are working to launch or planning to spin-off the fiber business, I'm just curious to understand if there is any regulatory risk to that and also how the antitrust agency could view eventually a consolidation in the fiber business in particular?

Diego, it's Adrian. I will leave then the floor to Mario in terms of the regulatory side of this possible deal, but there's no concession on a fiber business. So I think that there are no issues on that side. On the first part of your question, yes, we need to remember that we started talking about this, our project in the first quarter results conference call. We presented our plan on the -- with the presentation of our 3 years plan. So we are well -- our project is going -- it's going fine. We already signed more than 30 NDAs. So we think that we are in very good shape on this side. So we don't see any issue on the regulatory side. We are pretty happy with the project, how it is going also in terms of timing, considering the context. So that's why we think that we will be having or signing of a project before the end of this year. This is extremely important because we think that we are -- could be somehow ahead of other projects. It's interesting. Then we will see how things go in the second part of the year. But today, we are targeting the signing by the end of this year. I don't know, Mario, if you want to consider.