Telefonica Brasil S.A. Q4 FY2023 Earnings Call

Good morning, ladies and gentlemen. Welcome to Vivo's Fourth Quarter 2023 Earnings Call. This conference is being recorded and the replay will be available at the company's website. The presentation will also be available for download. This call is also available in Portuguese. Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding the company's business prospect, operational and financial projections and goals are the beliefs and assumptions of Vivo's Executive Board and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events, and therefore depend on circumstances that may or may not occur. Investors should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in respect to forward-looking statements. Present at this conference, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. João Pedro Soares Carneiro, IR Director. Now, I'll turn the conference over to Mr. João Pedro Soares Carneiro, Investor Relations Director of Vivo. Please, Mr. Carneiro, you may begin your conference.

Good morning, everyone, and welcome to Vivo's fourth quarter and full year 2023 earnings call. Christian Gebara, our CEO, will walk us through Vivo's operational and financial performance, followed by an update on our digital ecosystem and ESG evolution. Then David Melcon, our CFO, will go through our cost and CapEx management, free cash flow generation, and outlook for shareholder remuneration. With that, I turn the call over to Christian.

Thank you, João. Good morning everyone. I hope you all had a great start to 2024. Firstly, I would like to invite you all to join us for our Vivo Day that will be held during the morning of March 5th at Teatro Vivo in Sao Paulo. The event will be an excellent opportunity to hear from Vivo's top executives about our strategy for the next few years. We look forward to seeing you there. Now moving to the results. We closed out the year with another record-breaking quarterly performance. Our customer base totaled 113 million access, one of the largest among all Brazilian companies, with postpaid and fiber continuing to expand, allowing for sustained real top line growth. Total revenue increased by 6.9% year-over-year in the fourth quarter and 8.4% in the full year. Looking at mobile service revenue, the performance was even better, up 8.7% in the last quarter and 10.8% in the year. We are able once again to combine growth with improved profitability. EBITDA grew 9.9% year-over-year in the quarter, thus closing the year up 10.6% versus 2022. As a result of EBITDA expansion and CapEx intensity reduction, operating cash flow accelerated to R$12.4 billion in 2023, while free cash flow generation expanded double-digit on an annual comparison to R$8.1 billion. Bottom line performance was also a highlight, as net income hit R$5 billion in 2023, up 23%. This strong result gives us further confidence to maintain a robust level of shareholder remuneration as David will detail later. On Slide 4, we show our consistent revenue expansion in the mobile segment that represented over 70% of total revenue in the quarter. We saw an increase of 8.4% year-over-year as Vivo is in the best position to meet customers' ever-growing needs for connectivity and tech products. Fixed revenues fueled by fiber continue to show a positive evolution, as we outpace the market in connecting homes and businesses with FTTH and offer the broadest portfolio of digital services. We see a clear path to maintain this trend going forward. Moving to Slide 5, you can see the enhancement of two key mobile KPIs, churn and ARPU. Postpaid churn reached its lowest historical level, 0.97% per month, demonstrating the result of offering the best-in-class value proposition. At the same time, postpaid continues to gain relevance within the overall mix, and we have increased the penetration of digital services across our customer base, resulting in ARPU growth of 8% year-over-year, reaching its highest level in the last four years. The accelerated adoption of 5G will be another driver supporting further demand for mobile connectivity. During the fourth quarter of 2023, 5G ready devices represented 89% of all smartphones sold by Vivo and more than 30% of pure postpaid customers already had a 5G ready smartphone. We expect this ramp up to continue in 2024, with more customers having access to the benefits of this technology. Turning to Slide 6, we comment on Vivo's fiber operation. We have the largest and fastest growing FTTH footprint, which is available to 26.2 million homes and businesses throughout Brazil. By the end of 2024, our target is to reach 29 million homes passed. During 2023, we led the market in net additions by connecting almost 700,000 fiber customers while improving FTTH ARPU evolution as well. Moreover, Vivo Total, our convergent offer that combines fiber and mobile postpaid services, totaled 1.3 million customers, more than double from the previous year. This unique value proposition puts Vivo in a privileged position to address the opportunities around convergence, and the recent demand for this product is a positive indicator of its potential going forward. Moving to Slide 7, we show that Digital B2B services summed up to R$3.4 billion in 2023, up 25% year-over-year. During the last three years, these services increased in relevance over Vivo's total revenues from 3.3% in 2020 to 6.5% in 2023. We see room for this to continue as Vivo has the best B2B sales team and portfolio of solutions to help Brazilian companies of different sizes and sectors in their digitalization process. Recently, the Brazilian mobile industry launched three anti-fraud network services and became a pioneer of Open Gateway with a global initiative aimed at transforming telco networks into programmable platforms through standardized APIs. The APIs launched by Vivo and our peers are focused on combating digital fraud in financial institutions such as banks and fintechs through number verification, SIM swap, and device location. In the GSMA Open Gateway ecosystem in Brazil, we experienced significant improvements throughout 2024, with new partners joining the initiative. Moving to Slide 8, I'm proud to share more important recognitions of our commitment to ESG in the year that marked our 25th listing anniversary in B3 and New York Stock Exchange. Vivo was considered the most sustainable company in Brazil by the B3 Corporate Sustainability Index. We were also ranked as one of the most sustainable companies in the world by the S&P sectorial ranking and by Corporate Knights. On the environmental front, Vivo reduced emissions from its operations, Scope 1 and 2, by 90% since 2015, reaching the first target of our Net Zero plan. As a result, during COP 28, we've received the Climate Guardian Award. Moreover, we were successful in making our team a better reflection of Brazil's diversity, with 37% of executive leadership positions occupied by women and 42% of employees self-declared as black. Now David will comment on our financial performance.

Thank you, Christian, and good morning everyone. On Slide 10, we break down our cost structure into two parts. First, the cost of services and goods sold increased 2.6% year-over-year, reflecting higher revenues from the sale of customer electronics, and the acceleration of B2B revenues. Then cost of operations grew 6% year-over-year as costs related to the higher commercial activity and customer base expansion were partially compensated by our continued focus on digitalization and streamlining. I would also like to highlight that during the quarter, we registered a positive net effect of R$292 million related to the renegotiation of tower leasing contracts from the Oi Mobile acquisition that was partially offset by lower levels of tax recoveries and sale of legacy network equipment on a year-over-year basis. As a consequence of this leasing renegotiation, we have canceled all the unused towers acquired from Oi, corresponding to 70% of the sites coming from this transaction, reducing our IFRS 16 debt and enabling savings that boost our free cash flow from 2024 onwards. Overall, total costs were up 4.8% year-over-year, well below the evolution of total revenues, translating into a strong EBITDA margin of 42.5%, up 1.1 percentage points. This improvement in Vivo's profitability reflects our commitment to cost efficiency. Turning to Slide 11, we closed out the year with CapEx below R$9 billion as guided, which translates into an important reduction of our CapEx to sales ratio, dropping from 20% in 2022 to 17% in 2023. This unique combination of reduced capital intensity, with improved profitability translated into a strong 26.7% year-over-year operating cash flow growth that led us to the highest operating cash flow margin ever at 23.7%. We are positive about the CapEx outlook as we shut down legacy technologies such as copper 2G and 3G and focus on investment in future-proof networks like fiber and 5G. Additionally, revenues from new businesses are CapEx light and contribute to a lower CapEx intensity. Moving to Slide 12, we show the progress of Vivo profitability metrics. Net income was 23% higher than the previous year, reaching R$5 billion in 2023, and free cash flow generation grew double-digit, reaching R$8.1 billion. This improvement in our cash position combined with the payment of senior debt and 5G licenses obligations allows financial net debt to reduce substantially compared to the previous year. Even if we include IFRS 16 leases, leverage remains well controlled at 0.7 times EBITDA. All these metrics demonstrate how robust Vivo's financial position is, placing us in an unmatched position that combines growth with profitability. Now let's move to Slide 13. Here we detail the components of 2023 shareholder remuneration and our guidance for the period 2024-2026. Throughout 2023, we paid R$2.5 billion of interest on capital, R$1.8 billion in dividends and we executed almost R$500 million of our share buyback program, totaling R$4.8 billion in shareholder remuneration. In December 2023, we canceled 11 million shares, corresponding to 0.7% of the company's total shares, in addition to the 13 million shares already canceled in February 2023. In November 2023, we released to the market a formal guidance of our commitment to pay shareholders a value equal to or greater than 100% of net income in 2024, 2025, and 2026. The distribution of resources to shareholders will be through dividends, interest on capital, capital stock reduction, and share buybacks. The first tranche of the capital reduction in the value of R$1.5 billion was approved at the Extraordinary Shareholder Meeting held in January this year and will be paid before the end of July 2024. As you can see, Vivo finished the year in a stronger financial position and with several instruments to consolidate its position as a leading company in terms of growth, profitability, and shareholder remuneration. Thank you and now we can move to the Q&A.

Thank you. Our first question comes from Frederico Mendes from Bank of America. Please, Mr. Mendes, your microphone is open.

Thank you. Hello. Good morning, everyone, and thanks for the call. I have two questions here. The first one related to the working capital. There was a major decline quarter-over-quarter, about R$900 million in the suppliers line. I think that was the main driver for the negative working capital. My understanding is that you opted to prepay some contracts due to better financial conditions. So just trying to understand this move. I think it happened also in the 4Q '22, but not at the same magnitude. So just trying to understand what happened and what we can expect next on this front. This will be my first one. Then my second one related to the line orders. Just to understand this renegotiation of towers related to the Oi deal, if this is a benefit that we can continue to see forward, or if that is basically something that only happened this quarter? Any explanation on this line would be very helpful as well? Thank you very much.

Well, thank you. Thank you, Fred. So regarding the first question on the working capital, during the last few years, we have consistently shown a very strong free cash flow. In fact, this year, we grew almost 12%. However, if we look across the quarters, there is always some seasonality impacting mainly the last quarter of every year. Specifically this year, in the last quarter, as you say, there are more payments to suppliers at the end of the year, but this is normal business that we do consistently, and this is also impacted by lower tax recoveries in this period. It's important to look at working capital on a 12-month basis and not just for single quarters. For the future, I would say the sustainability of cash flow is mainly based on a very strong EBITDA that we had also this year, which is consistent with what we have seen over the last few years. Also, we have reduced CapEx intensity, which is what we expect for the future, and we are controlling IFRS 16 payments, along with tax payments, thanks to acceleration in interest on capital that we declared this quarter and will continue to do. Regarding the second one, Fred, the other revenues and costs include several items and again show some volatility throughout the quarters. This quarter, the main item, as you say, has to do with the towers. However, if we look at the total amount, this quarter, we had R$349 million. But if we look at the fourth quarter last year, the number was also above R$300 million, specifically R$303 million. So, this quarter is primarily the negotiation of towers, which also needs to be considered alongside other less positive factors coming from taxes and lower network equipment sales. So overall, growth is maintaining sustainability and performance on the commercial side.

Perfect. Super clear, David. Thank you, Christian, as well.

Thank you.

Thank you, Fred.

Our next question comes from Marcelo Santos from JPMorgan. Please, Mr. Santos, your microphone is open.

Hi, good morning, Christian, David, João. Thanks for the opportunity to ask questions. I think, David, you mentioned in your explanation regarding future free cash flow to Fred's question that you expect lower CapEx intensity. Could you please share a bit more light on how you expect CapEx to behave - your plan to deploy homes passed? I think it ends next year, right? You're close to getting to your goal. How would CapEx behave after that? Any color there would be interesting. And also on the margin outlook, you had a strong margin this year. There were some effects in the others line, but as you mentioned, excluding the other line, EBITDA increased well. How do you see margin going forward? Is there room for some expansion of margin in the coming years? These are the two questions. Thank you.

So, I will take this one, Marcelo. Thank you for the question. Regarding CapEx, we are not giving a specific number for the year, but I want to highlight that the CapEx intensity reduction that we mentioned is indicative of what we aim for going forward. In 2022, we had an extraordinary year due to the integration of the Oi customer base and auction obligations that increased CapEx. In 2023, our CapEx reached a maximum of R$9 billion, and if you look at the intensity over sales, we went from 19.8% in 2022 to 17.2% in 2023. We see this downward trend continuing as sales grow. We are on track to reach our target of 29 million homes passed by the end of this year. We are also continuing to expand 5G and connect customers. We added approximately 700,000 fiber customers last year and we are maintaining a strong commercial response to market demand. So, that’s the highlight for our CapEx. Regarding margin, we are focusing on operating cash flow margin as our key metric. We moved from an operating cash flow margin of 20.3% in 2022 to 23.7% at the end of 2023. Our objective is to continue growing revenue and EBITDA in absolute numbers while also aiming to improve our operating cash flow margin.

Okay. Thank you. Very clear.

Thank you, Marcelo.

Our next question comes from Eduardo Rubi from UBS. Please, Mr. Rubi, your microphone is open.

Hi. Good morning, everyone. Thank you, Christian, David, João. One question from my side. We saw cash leasing expenses have risen quarter-over-quarter, but there was a reduction looking year-over-year. Could you give some more color on this number going forward, considering negotiation with contracts with towers, please?

Hi, Eduardo. Thank you for the question. Look, we expect IFRS 16 debt related to the CapEx to remain under control. This year, we have renegotiated the sites acquired from Oi, canceling 70% of those 2.8 thousand sites. We are analyzing opportunities to reduce this IFRS 16. For example, the network sharing is proving efficient in reducing infrastructure costs. Additionally, we are exploring alternatives to optimize both the monetary cost through negotiation with tower companies and efficiency on the deployment of new sites, especially related to 5G. This is a critical area for us, and while we cannot provide exact numbers, we maintain a controlled approach and continue optimizing quarterly.

No, that's very good. Thank you very much.

Thank you.

Our next question comes from Vitor Tomita from Goldman Sachs. Please, Mr. Tomita, your microphone is open.

Hello. Good morning, all. And thanks for taking our questions. Two questions from our side. The first one is on broadband. If you could give us an update on how you are seeing competition in the broadband market? And if you are already seeing some reduced aggressiveness from broadband competitors? My second question is related to M&A. If you have any updates on M&A strategy for the fiber segment considering Oi and other potential targets that might be on the table right now? Thank you.

So Vitor, yes, the fiber market continues to be very competitive. We have many players in different cities, and the competition varies depending on geography. Despite this, we have maintained a strong strategy in deploying home passes, and we were able to increase our customer base by more than 700,000 during this period. At the same time, we also increased ARPU, which demonstrates that our strategy is proving rational. We are blending our higher speeds and digital services with connectivity. Our convergent offer, which combines mobile and fiber, has also been well received, as we have seen significant growth in that area. Competition remains, but we are standing out for our quality, support, and combined services. Regarding M&A, we are always assessing the market for potential targets and ensuring that we engage comprehensively with due diligence. We keep in mind the need to understand network quality and the overall market perspective before any engagements.

Thank you very much. Very clear.

Thank you, Vitor.

Thank you.

Our next question comes from Marco Nardini from XP. Please, Mr. Nardini, your microphone is open.

Hello, good morning, Cristian and David. Thank you for taking my question. So a quick follow-up here regarding fixed and broadband in the last question. It's impressive to see that you grew 3% year-over-year FTTH ARPU. Can you comment on churn here, please, after price increases? And what do you expect on fixed broadband growth in 2024, both in terms of customer base growth and price adjustments, if there's still room? Thank you.

So Marco, we don't disclose churn numbers, but it is at historically low levels. We are very strong in controlling churn, and it has not posed an issue for us in fiber. ARPU has increased due to the greater penetration of higher speeds. As the service has become essential, customers are willing to pay more for better speeds and services. We are also enhancing our offerings by providing capabilities for connected homes. In terms of price adjustments related to fiber, we typically implement annual increases based on the prevailing rate of inflation. We maintain a rational approach given high investment needs and the necessity of returning to our investments.

Perfect. Thank you.

Thank you.

Our next question comes from Gabriel Vaz from Morgan Stanley. Please, Mr. Vaz, your microphone is open.

Hi, guys. Thank you very much for taking my question. I just wanted to get a bit more color on what you're seeing in the first quarter trends for 2024. Any color you can share in terms of what you're expecting on growth? And if you're still seeing a path for above inflation growth?

Yes. We just had one month of the new year, but we continue to see a good commercial momentum. We're not sharing specific numbers now, but there's nothing different compared to the strong performance we ended the year with, so we remain optimistic. If interest rates continue to decline, this could stimulate consumption in both B2C and B2B segments. We will provide more details during the Vivo Day.

Perfect. Thank you.

Thank you.

Our next question comes from Carlos Legarreta from Itau BBA. Please, Mr. Legarreta, your microphone is open.

Just two quick ones from my side. The first one on B2B revenue. Obviously, you had a very good year in terms of growth. I'm wondering what's driving that? Are you gaining new customers? Are you winning contracts? And what is your expectation for 2024? The second point, we haven't had a chance to discuss the joint venture with Auren Energia. Could you talk about that, what's the opportunity size, what you want to achieve, particularly in the context of that partnership? Thank you.

Perfect, Carlos. So with B2B, I think we have a unique value proposition. First, there is no other company with the strength of our commercial channel, which comprises more than 5,000 sales representatives distributed across segments by different company sizes, from small to large competitors. We also segment by sectors, which is something new in our corporate customer strategy. We target specific sectors, giving us a deep understanding of needs by size and vertical. This creates a challenging client relationship to replicate, and it positions us favorably for upselling digital services, which represent a significant growth opportunity, as only an average of 10% of these clients currently purchase digital services from Vivo. We are optimistic about continuing to show strong double-digit growth quarter-over-quarter. Regarding the joint venture with Auren Energy, established in December 2023, this focuses on commercializing customized solutions in renewable energy across Brazil. Auren is a key player in this sector, and we see growth opportunities in the expanding free energy market. This includes leveraging our scale and digital penetration to address renewable energy needs in both B2B and, eventually B2C as the market opens.

Thank you for your comments.

Thank you.

Our next question comes from Felipe Cheng from Santander. Please, Mr. Cheng, your microphone is open.

Good morning, Christian, David, and João. Thank you so much for taking my questions, and congrats on the good fourth quarter results. Two on my side, if you could first comment on the churn levels for the postpaid segment. We have been seeing a consistent improvement. So just wondering, what are the main drivers here for this improvement in churn, which is at a historically low level? And what should we expect for 2024? Is there more room for improvement in this sense? My second question is related to price increases in mobile. If you could also make a comment on expectations for 2024 and whether you continue to see room for price increases above inflation, and what should the schedule look like?

So Felipe, yes, you're correct that churn has been decreasing. From 1.65% at the end of 2019 to 1.3% at the end of 2021, and now we are at 0.97% at the end of 2023. This reflects our strategy's success in emphasizing customer experience alongside offering the best network in the market. We aim to combine more services for customers and enhance their overall experience with Vivo. Moving forward, our objective is to maintain control over churn, increase lifetime value, and provide more service offerings to our customers beyond just telco. Regarding price increases, we will proceed with hikes aligned with inflation, typically implemented in the first semester for part of the customer base and subsequently in August for other segments. However, we aim to add new services that provide greater value, which enables us to justify those price increases better to our customers.

Perfect. Very clear. Thank you so much, Christian.

Thank you.

Thank you, Felipe.

Thank you. The Q&A session is over. I would like to hand the floor back to Mr. Christian Gebara for the company final remarks. Please, Mr. Gebara, your microphone is open.

Okay. Thank you so much for all of you that followed our call. We are very happy with the results that we presented for last year in the quarter and in the full year, and we are confident about the perspective for this year. We will give more details about our strategy and the trends that we see in our Vivo Day. We hope to see all of you there, and we will have a great group of executives presenting our vision. Thank you again, and for any doubts you may have, our team is always available to answer you.

Vivo's conference is now closed. We thank you all for your participation and wish you a wonderful day. You may now disconnect your line.