Earnings Call Transcript - TIMB Q3 2024

Operator, Operator

Good morning ladies and gentlemen and welcome to TIM S.A. 2024 Third Quarter Results Video Conference Call. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company’s presentation. There will be a replay for this call on the company's website. After TIM S.A. remarks are completed, there will be a question-and-answer section for participants.

Vicente Ferreira, Head of Investor Relations

Hello, everyone and welcome to TIM S.A.'s earnings conference for the third quarter of 2024. Thank you for joining us. I'm Vicente Ferreira, Head of Investor Relations. This video shares the key highlights of our recent performance and the strategic initiatives we are implementing to continue our sustainable cash flow growth. Afterward, we will host a live Q&A session with our CEO, Alberto Griselli; and our CFO, Andrea Viegas. Before we discuss our results, I remind you that management may make forward-looking statements and this presentation may contain them. Please refer to the disclaimer on the screen, also available on our earnings materials and Investor Relations website. With that, let's move to our results.

Alberto Griselli, CEO

Hello, everyone. I'm Alberto Griselli, CEO of TIM Brazil. Once again, we delivered solid financial and operational results in the quarter marked by cash flow generation. But before we discuss our results in detail, let me introduce a relevant part of our effort to improve our brand perception. In September this year, the Rock in Rio festival took place. This is the biggest music festival in Latin America, lasting 7 days and attended by more than 700,000 people. TIM is a master sponsor which reinforces a connection between the company and music that dates back to 2003. Since then, we have kept this connection, but now we are expanding it as a platform to reshape clients' perceptions of our brand. Mobile networks operate in extreme conditions during this type of event, so we used the music festival to showcase our 5G network strength and reliability while innovating in how we interact with our clients and prospects. This year's results were remarkable. TIM was the number 1 brand mentioned with enormous favorability and cell brand exposure. We expect that investments like this will help us close the gap in brand perception and clear the way for future growth. Back to our financial results. In the third quarter, we achieved a 6.1% growth in service revenues, outpacing inflation and maintaining the sustainability of our revenue dynamics in the face of an already expected tougher second half of the year. Our revenues were driven mainly by mobile services, which expanded by 6.3% compared to the third quarter of 2023. Mobile ARPU is an important lever, rising close to 5%, while our post-paid customer base improved with migration and a new record low churn at 0.7%. Our EBITDA grew by 7.5% during the same period with another quarter of margin expansion. After the third quarter of 2024, we have 13 quarters of expanding margins, confirming our ability to push the boundaries of efficiency. Our proxy for operating cash flow reached a record high for the third quarter, growing above 20% year-over-year. As a percentage of revenues, we reached 25% in quarter 3 and more than 21% in the first 9 months of 2024. We have the highest cash conversion in the industry. These solid financial results are accompanied by innovation in our offers, consistent infrastructure development, and improvements in our services. We continue to develop the best content. To build the best offers, we focus on the best value proposition. As we promised last quarter, we launched the best control plans in the market. This comes as a part of a full revision of our post-paid portfolio, establishing new price points to facilitate upselling while reviewing benefits and smoothing the customer journey. This proactive approach to managing our customer base is helping to increase loyalty and improve churn. Our post-paid customer base is sustaining a solid pace, growing close to 8% year-on-year and 2% quarterly. In prepaid, we launched a new proposition with adjustments to our go-to-market aiming to improve our performance in this segment and to open opportunities for future growth. The second part of our strategy combines the largest coverage with the best quality and reliability. As you know, TIM is the only operator to cover all cities in Brazil with 4G and it's also number 1 in cities with 5G, very close to 500 municipalities. We are widening our leadership in consistent quality and we ranked first in reliability, a key metric for customer experience and more important than download speeds. To deliver the best service, we work on addressing today's challenges while building an evolutionary path with artificial intelligence. TIM is increasing first call resolution rates and facilitating digital interaction to maintain service quality at the highest standards efficiently. Therefore, call center NPS is improving, and we continue to outperform the sector in resolution rankings. Our AI initiatives continue to evolve; TIM AIX is fully rolled out to more than 5,000 attendants. Speech and text analytics are producing insights into consumer complaints to improve and accelerate carrying activities. Before Andrea joins us, I'd like to touch on an important topic for advancing our business. As we presented during our Investor Day a year ago, we have been working on expanding and developing new growth avenues such as our digital ecosystem and our B2B. The expansion of this digital ecosystem is focused on verticals such as health, mobile apps, data monetization, and education using partnerships with consolidated companies. Through venture capital investments, we are using our 5G funds with upload Ventures to explore other segments with start-ups and scale-ups. Mobile ads and data monetization more than doubled the revenues in the past 12 months as we consolidate our position as a relevant player in these markets. In health, after the soft launch, we learned and adjusted the go-to-market and now we are bringing roughly 20,000 new customers to our partner. In education, since the beginning of the partnership, more than 700,000 people subscribed to courses. Our fund now has 2 investees with promising addressable markets to be explored. In the coming weeks, we will announce initiatives in a new vertical to open further opportunities for TIM. Regarding B2B, we are accelerating our execution to develop new IT markets in Brazil. We closed this quarter with more than BRL600 million in contracted revenues with 2 very relevant and new contracts signed. Additionally, we have a solid pipeline of potential clients for the coming months. Here, we also expect to go beyond the already known agri, straight lighting, and highways vertical. Stay tuned for novelties before the year-end. Now we move along to more financial details with our CFO, Andrea.

Andrea Viegas, CFO

Hello, everyone. I'm Andrea Viegas, CFO of TIM. It's a pleasure to share that our performance continues to be strong with a clear highlight on our cash generation capacity as we had anticipated and communicated over recent quarters, supported by solid revenue growth above inflation. Our EBITDA demonstrates robust results with a 7.5% increase and another quarter of margin expansion. After accounting for lease impacts, EBITDA after leases grew nearly 9%. Our tower decommissioning project no longer has a material impact. A few tariffs were made to be financially decommissioned, we still have some to be paid. However, these numbers have significantly decreased. As a result, the EBITDA after leases margin expanded by an additional percentage point year-over-year. Driven by TIM's overall strong performance, our net income saw double-digit growth when compared to the third quarter of 2023, despite a lower interest on equity. Additionally, operational cash flow grew over 20%, with margin expanding to 25%. Despite the country challenges with Forex exchange pressure, we're managing to maintain our CapEx levels within guidance bands. Our 9-month results are also quite positive with operating cash flow nearly 30% growth and exceeding 21% as a percentage of revenue. This third quarter confirms what I highlighted in our previous call. Seasonal negative impact on working capital and CapEx have indeed reverted. Even with nearly BRL2 billion in debt and interest payment, we generate almost BRL2.3 billion in cash before dividends. These results underscore the strength of our strategy and I'm confident we are on track to meet our year-end guidance, even with a more challenging comparison base in the second half. Now, back to Alberto.

Alberto Griselli, CEO

To conclude our quarter discussions, it is worth recapping some developments in the past 3 months. We saw some new pricing movements from our peers, but competition remains healthy, and we believe it will remain so. We reformulated our post-paid portfolio without using the pricing lever to improve the value proposition. We are carefully looking into our prepaid dynamics and adjusting our offer and go-to-market to regain momentum. We will implement our GenAI use cases that prove to be promising for our customer experience and efficiency. We will keep developing our business while caring for our people, society, and the environment. The third quarter was marked by outstanding cash flow performance. We were also pleased with the post-paid contribution and the efficiency of our operations. We are positive we will deliver on our promises on all guidance lines. Therefore, out of our 3-year guidance we gave, we confirm our intention to distribute an additional BRL2.7 billion in shareholder remuneration between dividends and interest on equity totaling BRL3.5 billion for 2024. The journey towards our aspiration of becoming Brazil's most preferred mobile operator requires firm commitment and consistency. I'm sure we have the right people to deliver this through hard work, creativity, and discipline. Now, let's move to the live Q&A session.

Operator, Operator

Thank you, Mr. Alberto. Our first question comes from Marcelo Santos from JPMorgan.

Marcelo Santos, Analyst

Alberto, Andrea, I have actually two questions. The first question is on prepaid. I wanted to get a better assessment on how do you think you're doing in this market? Are you losing space? You mentioned in the release some lower recharges in some groups. So I just wanted to better understand the performance. The second question is more in general about mobile service revenues. Not all the peers have reported yet but you have been growing a bit below peers. So I just wanted to understand the elements here. Do you think this is more of value-added services are growing a bit less? Or is this more on the prepaid that’s dragging you? So, just wanted to get your assessment.

Alberto Griselli, CEO

Thank you, Marcelo. Hi, everybody. So let's go with the first question that it’s somewhat related to the second one. When it comes to prepaid, we are observing this quarter and in the last 3 quarters that we are sort of going sideways. If you look at our prepaid revenues, you will see quite similar numbers in quarter 1, quarter 2, and quarter 3. Our competitors' numbers are showing quite a similar pattern as well. When you look at year-over-year performance, we had quite a good 2023 for prepaid. Therefore, the comparison shows a revenue decrease on a quarter-for-quarter basis starting the second quarter of this year. This is due to a few factors. Last year, we adjusted pricing across the board, which created a better incentive to migrate from prepaid to control. In 2024, we have experienced a faster migration from prepaid to control. This has impacted our prepaid revenues. Simultaneously, we found some lower recharge frequency in specific groups of prepaid customers after the price adjustment, creating a sort of negative elasticity that impacted our revenue growth potential. This explains our prepaid performance in the first, second, and third quarters. A couple of months ago, we launched an upgraded value proposition to improve our prepaid performance going forward. That is centered around three concepts: first, to be more appealing in the prepaid market; second, to increase the frequency of recharges for some specific groups, primarily related to a new WhatsApp benefit; and third, to stimulate the download and usage of our Meu TIM app which enhances our communication mechanisms and lowers our costs to serve. So in summary, this performance is driven by the migration from prepaid to control on one side, and on the other, the frequency decline in specific lower-income segments of prepaid. For the second question, regarding overall revenue performance, we are on the right track with post-paid in line with our peers. The drag on our growth relative to peers is mainly due to prepaid performance affecting our overall profile. We are optimistic as we launch a new value proposition to capitalize on opportunities within prepaid, while also exploring other revenue opportunities related to our customer platform strategy and business segment.

Operator, Operator

Our next question comes from Vitor Tomita from Goldman Sachs.

Vitor Tomita, Analyst

So I have two questions from our side. The first would be on the post-paid side now, if you could give us an updated view on how you are seeing competition in post-paid, especially at the lower end of post-paid, the control plans where you have been carrying out prepaid to post-paid migrations and also recently launched a new plan portfolio? And my second question would be on the mobile advertising initiative. If you could give us a bit more color on how that has been evolving and how it is being operationalized in particular, what are the most common ways you usually display the ads to clients? Is it mostly commonly done via push notifications, via videos that they can watch, or other methods? And whether there is strong growth there in mobile ads has been more concentrated in your own hedging inventory or on the sale of third-party inventories. Those would be my questions.

Alberto Griselli, CEO

Let's go on post-paid, the first question regarding the competitive dynamics. For pure post-paid, roughly the higher post-paid plans with an initial price point of around BRL110, BRL120, we see quite a rational environment. There are no big movements or updates there. When looking at what we define as mid post-paid or entry post-paid control plans, we executed price adjustments from quarter 1 to quarter 2. Another competitor did something quite similar during the same period, and Claro did the same at the beginning of July only to roll it back by the end of July. I would say that this indicates an adjustment that did not work out for them. The price difference among the major players is quite thin. Recently, there's been news about an MVNO launched by Nubank with an offer priced lower than ours, placing the offer in this group of control. While they are a bit more aggressive than us, we see this as a BTL offer targeting their existing customer base. Our strategy, which we define as a more-for-more approach remains strong, and we just launched our Black Friday value proposition for control without touching prices, offering an extra benefit, such as a one-year Netflix subscription. We believe that our continued focus on providing more value will help us compete effectively. Regarding your second question on mobile advertising, today it predominantly utilizes our own inventory. We are leveraging our channels, mainly through our app, a section of apps, our one-to-one communication mechanisms, and the captive portal that customers visit after recharging. The formats of advertisements vary based on the channel, including images and text messages, and we have been diligently working over the years to enhance our inventory and expand our advertiser pipeline. This approach has been effective, and our focus is currently on leveraging our own channels.

Operator, Operator

Our next question comes from Gustavo Farias from UBS.

Gustavo Farias, Analyst

Two from my end. The first on prepaid and in light of a less frequent recharging in the prepaid market. Do you guys see any relevant impacts of bets in prepaid? And my second question, if you guys could give us more color on the increase in leasing expenses quarter-over-quarter.

Alberto Griselli, CEO

Gustavo, let me take the first one, and then I will pass the second one to Andrea. On the reduced recharge frequency for prepaid, it's related to different customer segments. We have lower-income customers on one end, and on the other end, customers without economic restrictions who prefer prepaid. The less frequency often impacts lower-income segments, which we attribute to last year's price adjustment. Regarding the betting impact, we don't have data indicating that it's negatively influencing our recharge profile.

Andrea Viegas, CFO

Gustavo, regarding the leasing; we anticipated an increase in the second half of this year. We expected this increase of about 3 points attributable to inflation adjustments related to our regular contracts. We also have new sites that came up from our 5G expansion and new contracts like the solar energy contracts affecting these expenses. Our focus remains on generating efficiency, and we anticipate this line to grow at a rate lower than revenue growth.

Operator, Operator

Our next question comes from Phani Kanumuri from HSBC.

Phani Kanumuri, Analyst

The first question is regarding how you're placed for price readjustments next year, considering that Claro has taken back and rolled back its price readjustments this year? The second question is regarding CapEx guidance, specifically for 2025 and '26. With the recent depreciation of BRL versus USD, do you see a risk to the guidance?

Alberto Griselli, CEO

On the first question, regarding price adjustment for next year, our plan is to follow a similar approach as in the first and second quarters of this year, executing both front book and back book price adjustments. We have been doing this simultaneously. For back book prices, we will proceed as planned; however, front book price adjustments may be influenced by the overall competitive landscape. On post-paid, we feel confident with our current pricing. In the control segment, there is slight magnitude difference among competitors, making it essential to evaluate future adjustments carefully.

Andrea Viegas, CFO

Regarding CapEx, we are tracking in line with expectations. Although the division of a quarter may not reflect the full-year vision, we anticipate maintaining our CapEx guidance for the full year. We are also managing effectively against the recent depreciation of the real against the dollar and expect to maintain our range without significant impacts in 2025.

Alberto Griselli, CEO

It's worth mentioning that we recently closed a new round with our 5G providers, which represents a significant portion of CapEx. We are aligned with our vendors to ensure that our capex remains consistent despite exchange rate fluctuations.

Operator, Operator

Our next question comes from Gabriel Vaz de Lima from Morgan Stanley.

Gabriel Vaz de Lima, Analyst

My question is on 2025 growth. Considering the macro and the new plans launched by Nubank, do you see risks of growing above inflation next year? What are your thoughts on growing above inflation for 2025?

Alberto Griselli, CEO

Our plan is to grow above inflation, and thus far, we see the necessary elements in place to achieve that. Our growth will mainly be driven by post-paid, with increases in customer base and ARPU related to planned price adjustments. The performance in the post-paid segment shows growth in both customer acquisition and ARPU. We expect to improve our performance in prepaid as our recent value proposition begins to take effect. Moreover, we observe additional revenue opportunities such as customer platform revenues and B2B revenues, which increase steadily—both in contracted revenues and pipeline growth. We aim to grow above inflation as indicated in our guidance of 5% to 6%.

Operator, Operator

Our next question comes from an unidentified analyst.

Unidentified Analyst, Analyst

I have two questions. The first one is I would love to hear your thoughts on the evolution of the customer from prepaid to control to post-paid. Could you talk about the percentage of people who move to control and how many of those eventually transition to pure post-paid? What are the differences in churn rates between control and pure post-paid? And how price sensitive are the two different consumer types? That would be my first question. My second question, maybe for Andrea, I wanted to know if there is room for savings in OpEx so you can deliver further margin expansion, apart from the above-inflation ARPU increase for next year.

Alberto Griselli, CEO

For the migration from prepaid to control, this represents about 50% of our net additions today, showcasing double-digit year-over-year growth. Our targeted approach allows us to select customers for migration based on specific subgroups. We closely monitor ARPU increases while carefully managing churn and bad debt, ensuring a favorable balance. The stabilization helps grow revenues without increasing bad debt or churn, leading to effective revenue growth. As we refine this approach, the design includes a unique pricing and benefits structure for different customer subgroups to maintain and extend this trend.

Andrea Viegas, CFO

We continue to work on efficiencies in our OpEx management. Our focus remains on cost control, and we frequently look for new opportunities to optimize overheads. Trials related to customer activation and core network maintenance currently provide avenues for cost-cutting. There is room for improvement, and maintaining OpEx growth below revenue growth is our target.

Alberto Griselli, CEO

Additionally, our approach emphasizes having discipline in expenditures across all levels. Utilizing technology such as artificial intelligence enhances our efficiency. We've implemented business process outsourcing initiatives to aid in tower management, fraud prevention, and billing.

Operator, Operator

Our next question comes from Daniel Federle from Bradesco BBI.

Daniel Federle, Analyst

Alberto, do you see room for making plans simpler, like easier to understand or removing SVAs? Do you see any reason for making them simpler this way? Additionally, do you see room for any significant improvement in the customer experience in-store and in the app, and what is the timeline for making those experiences much better if it takes time or if you could change understandably from one year to the next? The second question is regarding new players coming into the market. How do you see the importance of a convergence offer, like bundle of fixed and wireless?

Alberto Griselli, CEO

Regarding service quality, simplifying our service offerings is essential to enhancing perceived value in the eyes of our customers. Our more-for-more strategy necessitates delivering perceived quality alongside delivering real value in our offers. Over the last months, we have significantly improved the new post-paid and control portfolio to reduce barriers in the customer journey. We're focused on enhancing customer experience across channels, including app improvement, with a planned roll-out at the beginning of next year to facilitate smoother interactions. Improving our captive portal is also a priority and is already being implemented this year. NPS, a critical Kpi for us, is factored into the performance metrics for all leadership levels.

Phani Kanumuri, Analyst

How do you see the importance of a convergence offer, like bundle of fixed and wireless?

Alberto Griselli, CEO

The role of convergence in Brazil remains limit on multiple levels and intensities. I believe there is potential for growth, but it isn't a focus for us at this moment given our strong post-paid growth and low churn, which indicates no immediate pressure in that regard. Our competitive outlook remains solid without need for convergence at this juncture.

Operator, Operator

Our next question comes from Lucca Brendim from Bank of America.

Lucca Brendim, Analyst

I have two questions from my side. The first, working capital usually has a positive dynamic for TIM in the fourth quarter. I want to confirm if that will be the case this year as well? The second question, you had a very strong performance in other mobile revenues, this quarter up more than 20% year-over-year. You mentioned it was related mostly to IoT projects. Can you share whether this is something recurring or more of a one-off? Are there other initiatives in this line that could influence results going forward?

Alberto Griselli, CEO

Lucca, let me start with the second one. The increase we’ve seen is intentional and part of our strategy, which includes the customer platform strategy, IoT, and improved roaming revenues due to a stronger post-paid position. We're focused on these areas for continuous growth. Regarding the working capital dynamic, we expect to see similar positive trends into the fourth quarter as previously observed, but the dynamics are contingent on various KPIs.

Andrea Viegas, CFO

Regarding working capital, we traditionally see a positive trend in the second half of the year, and I confirm that the fourth quarter will exhibit a positive dynamic again, relating especially to dynamics with our major suppliers.

Operator, Operator

Our next question comes from Carlos Sequeira from BTG Pactual.

Carlos Sequeira, Analyst

Alberto, I have a few questions. One on pricing. You mentioned the price points of the controlled package; they are very similar between competitors. However, Nubank made an offer that is about BRL10 lower than the cheapest one out there. Do you think this price point could change the dynamics of the entry-level clients, especially since control plans for those clients are highly price-sensitive? How do you see this evolving? I know it may be too early but just wanted your perspective on this. Another question is on your growth rates—you are growing your top line well above inflation for several quarters. Yet there seem to be bigger growth opportunities in broadband and B2B. How do you view these opportunities going forward? How meaningful can they be?

Alberto Griselli, CEO

In comparing BRL60 versus BRL45, while there is a difference, customer segments value our more-for-more approach. Thus, even if there are some price-sensitive customers attracted to Nubank's offering, we have our own BTL offers that are closely priced. This mitigates immediate pricing dynamics changes. Additionally, growing our B2B operations could greatly enhance our overall strategy, as we have identified verticals yielding promising prospects. We are committed to pursuing these opportunities assertively. When it comes to broadband, the marketplace is highly competitive. It has varied price dynamics both at national and regional levels. We're keen on maintaining selective sales to ensure we capitalize on opportunities without compromising our broader utilities in the competitive space. We are currently focused on B2B as a strategic priority due to its importance and robust pipeline, in light of the existing competitive dynamics in broadband.

Carlos Sequeira, Analyst

Perfect. And lastly, regarding CapEx, we notice that CapEx has been falling for multiple quarters and years. Would you be able to share how low you see it going? Are we looking at a potential around 15% for CapEx to sales in the longer term?

Alberto Griselli, CEO

Historically, we discussed a limit where it would be difficult to go below 20%, yet we've achieved 18.9% recently. If revenue continues to grow and maintain its current structure, we could see ratios fall even more. However, our focus will always be ensuring our investments bolster superior network quality and reliability. Therefore, our guidance is on sustaining consistent CapEx levels going forward.

Operator, Operator

Our next question comes from Gabriel Gusan from Citi.

Gabriel Gusan, Analyst

Would it make sense to divest the broadband operation to maximize shareholder value or focus on leveraging the parent company's specialties instead?

Alberto Griselli, CEO

Currently, we see broadband as an adjacency that we could efficiently leverage thanks to our existing capabilities. If market dynamics don’t improve, divesting is an option we may consider down the line, but for now, our approach aligns well with our broader strategic goals.

Operator, Operator

Ladies and gentlemen, since there are no further questions, I will turn the floor to Mr. Alberto Griselli for his final remarks.

Alberto Griselli, CEO

Thank you for staying with us today. We are now 9 months into the year, and we have been delivering across the board in terms of revenue growth above inflation, margin expansion, and an increase at EBITDA level, EBIT after lease level, and free cash flow level. Our strategy moving forward is sound, and we have two months left to finalize the year according to our projections. I want to thank the entire team for their efforts thus far and in the upcoming months as we conclude the results of 2024 according to our plans. Thank you, everybody.

Operator, Operator

This does conclude the third quarter of 2024 conference call of TIM S.A. For further information and details of the company, please access our website at tim.com.br/ir. You can now disconnect. Thank you once again.