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Edited Transcript of TIMP3.SA earnings conference call or presentation 20-Feb-19 4:30pm GMT

Q4 2018 Tim Participacoes SA Earnings Call

Rio de Janeiro/RJ Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Tim Participacoes SA earnings conference call or presentation Wednesday, February 20, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Calaza

TIM Participações S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers

* Leonardo De Carvalho Capdeville

TIM Participações S.A. - CTO & Member of Board of Executive Officers

* Mario Girasole

TIM Participações S.A. - Regulatory & Institutional Affairs Officer and Member of Board of Executive Officers

* Renato Ciuchini

TIM Participações S.A. - Head of Marketing

* Sami Foguel

TIM Participações S.A. - CEO

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Conference Call Participants

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* Diego M. Aragão

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Frederico P. Mendes

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Joseph Anthony Galone

BTIG, LLC, Research Division - Research Analyst

* Maria Tereza Azevedo

UBS Investment Bank, Research Division - Director and Research Analyst

* Susana Salaru

Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology

* Valder Nogueira

Santander Investment Securities Inc., Research Division - Head of Telecom, Media and Technology

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to TIM Participações S.A. 2018 Fourth Quarter Results Conference Call. We would like to inform you that this event is being recorded. (Operator Instructions) There will be a replay for this call on the company's website. (Operator Instructions)

We highlight that statements that may be made regarding the prospects, projections and goals of TIM Participações constitute the beliefs and assumptions of the company's board of executive officers. Future considerations are not performance warranty. 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. Sami Foguel, so he can present the main messages for the fourth quarter of 2018. Please, Mr. Sami, you may proceed.

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Sami Foguel, TIM Participações S.A. - CEO [2]

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Good afternoon, everyone, and thanks for attending our conference call. Sorry for having our call right after our competitor. This was the only possible regimen this time around. I hope you had the chance to grab a bite before connecting.

I have the opportunity to discuss my vision of evolution, building our strong base to become the best operator in Brazil, the one customers love the most, the one with the highest engagement level of employees and the one with the highest returns to its shareholders.

As we transform our base with more exposure to postpaid, an entire new set of capabilities are under refinement, from credit and collections to billing to digital and physical distribution, acquiring, logistics, under the surface of revised set of capabilities are being put in place, and that only signals the long-term potential we have ahead of us.

I'm pleased to be here today celebrating strong results. We closed 2018 in a very solid way. Our focus on execution enable us to deliver record high numbers for EBITDA and margin and today generate solid cash while continuing to invest in our infrastructure. All this are made in acceleration of mobile revenues in 4Q, with great growth trends in TIM Live.

We delivered our 2018 target. We are able to overcome obstacles imposed by much slower economic growth than originally expected and a much tougher competitive environment. Our 2018 annual plan was based on assumptions that began to turn in May. We hope that for 2019, those 2 components will pose less of a challenge. But even if there are no improvement, we are confident we can sustain positive results.

Going specifically to the fourth quarter, our EBITDA grew close to 6%, with margin soaring to 42%, the highest margin in the history of our company. Our MSR growth accelerated to 3.6% year-on-year. And TIM Live maintained its strong revenue growth trend, expanding more than 35%.

A solid 4Q led to strong numbers for the year. EBITDA grew above 10%, and the margin expanding to about 39%. This drove EBITDA minus CapEx to BRL 2.6 billion in 2018, reaching more than [60%] of our sales, while net cash flow reached BRL 1.2 billion. Cash revenue growth reached almost [5%] with the contribution of mobile and TIM Live. The dynamics in both business reflect a double-digit upward expansion and resilient growth in high-value offers.

Mobile, the largest portion of our revenues and where the challenge become more pronounced since May. In prepaid, for instance, we had to deal with aggressive offers from competitors, hindering a rational approach to the market. So far, we have been able to avoid a price war, and we have been focused on managing the natural slowdown in prepaid while we continue with the upselling process.

Prepaid ARPU stood flat in 2018, supported by an average recharge that grew quarter-over-quarter. Top-ups are becoming more digital, which is an important element for cost reduction, with e-recharge penetration increased by 5%, reaching more than 30% of the total.

At the end of the last year, we introduced a new concept in prepaid to simplify the existing offer, facilitating customer understanding of their consumption while increasing their commitment. The new product is called TIM Pré Top. This innovative product links the recharge directly to the service package. The client always knows what BRL 1 of recharge will provide in benefit. We expect this approach to address customer concerns on transparency and interface, therefore improving customer experience.

During the fourth quarter, we kept executing our multi-segmentation migration strategy, and that's control, control to control and control to pure, adjusting the way we target our base for this upselling movement to maintain growth with quality and profitability.

We also took steps to increase loyalty, using lock-in offers both in pure postpaid and in control. Lock-in offers in these sub-segments as the percentage of the gross additional represented 56% and 18%, respectively. We expect this will help in the long-term churn levels and reduce the impact of competitive threats.

We also have to dodge price competition movement in postpaid. To counter this, we combined innovative offers and channel restructuring to register a resilient postpaid ARPU. We expect that the recently announced price increase in postpaid can set the tone for 2019, depicting an environment with less price competition threat pressure.

The industry should compete on service, product, innovation, quality, channels. That's what will deliver long-term return on investment for our shareholders. These will also drive positive impact with more and better service, client successions, investments, coverage, employment and growth.

The net effect of navigating well through turbulent skies of the mobile mark led us to a total ARPU of BRL 22.4, with strong growth of 11.3% year-on-year. Our postpaid base represent 36% of total, reaching November more than 20 million clients and using a growth of almost 14% versus December 2017. 4G adoption was also very strong, growing by 25% year-on-year and reaching more than 60% of the base.

If the mobile operation was marked by its resilient performance, on the 6 business fronts, we keep having outstanding results in TIM Live. During the fourth quarter, we reached 14 cities with ultra broadband service, of which in 9, we have rolled out FTTH. The geographical expansion boosted coverage through a total of 4.3 million households and helped us post sold net adds of 75,000 clients, 2/3 of which are connected by fiber. Going to the expansion, our base reached almost 470,000 customers, a 20% increase year-on-year.

The combination of high speed and streaming content is pushing the mix of sales towards high-value offers. 40% of our clients has signed up for higher than 100 MB connections. This is rising stronger ARPU performance, which grew 14% year-on-year in the 4Q. Double-digit growth rates for the base in ARPU led TIM Live revenues to grow more than 35% year-on-year. This performance leads TIM Live to become the largest portion of fixed revenues in 4Q. TIM Live is proven to be a great opportunity, an important stream of revenue. Looking forward, we will maintain our controlled growth approach, perfecting execution and making sure our path is sustainable.

Building our boost network and IT infrastructure is the foundation for transforming customer experience. On the network side, we are executing very well our strategy to improve coverage and capacity both in mobile and fixed. Allow me to highlight some of the key initiatives.

First, we are maintaining our leadership in 4G coverage with close to 3,300 cities.

Second, our spectrum efficiency program continues to excel, helping us to scope data traffic role in a CapEx-efficient manner. We are accelerating the 2.1 GB refarming, reaching almost 260 cities, while finalizing the reutilization of the 1.8 GB now in more than 2.2 thousand municipalities.

Third, the focus on deploying 4G on the 700 megahertz keep us in a unique position. Close to 65% of the urban population already has this additional layer of frequency that improves indoor coverage in a significant manner.

Fourth, we continue pushing the deployment of Voice over LTE technology, now with more than 2.5 thousand cities and 12 million customers.

Lastly, on the fiber front, we reached more than 600 cities in our FTTCity program. The FTTH rollout is showing excellent speed, and we closed the year with more than 1 million households covered with fiber to the home.

As a consequence, in the fourth quarter, we celebrated, once again, our leadership in most important ranks of network performance analysis. We took first place in the P3 mobile benchmark. We maintained our leadership in OpenSignal's 4G availability test. And we continue our supremacy in Netflix ISP ranking, taking first place 53 times in the last 56 months.

It's worth mentioning that our network investment of today are already 5G compatible. Brazil will not decrease its productivity gap without 5G. The more we wait, the less compact the counter will turn. We embrace the idea of 5G spectrum auction sooner rather than later, an auction that to -- privileged direct rollout of the network and hence country developers and GDP growth. TIM will be working with all stakeholders to support the best decision-making process for the society. [This is] what we put Brazil compared with global development and enforcing investment, innovation and growth.

On the digital transformation front, 4G demonstrated very consistent results. E-billing doubled when compared to a year ago, reaching more than 50% penetration. The number of clients using electronic methods of payments grew by 33%. MyTIM app utilization also expanded heavily, above 70% versus last year. And nonhuman interaction grew by almost 40%. Digital channel usage is accelerating the revolution of demand on our clients.

Step-by-step, we're improving our capabilities to better serve all segments, an early sign confirming we are moving to the right direction. Satisfaction NPS in preference are all reflecting positive reaction. That is clear. We have a long road ahead of us. Having changed the mix from prepaid to postpaid requires our continuous focus on cost returns and processes.

Recent improvements reinvigorate our motivation and present an enormous opportunity to be captured. I will continue to lead the evolution of the company culture towards the customer-centric approach, and it will flourish in the upcoming quarters and years.

Going to the sales of the financial results. As I mentioned earlier, the external environment poses additional challenges to our business. Nevertheless, our consistent execution drove resilient dynamics for revenue and ARPU. In the quarter, top line was up 5.2%, with service revenues accelerating 3.7% after 3.3% in the third Q, driven by a small recovery in mobile. 4Q mobile ARPU showed a solid expansion of more than 8% to reach almost BRL 24.

Looking at the full year picture, top line grew 5%, with services coming pretty close to that level as well. It's worth highlighting how our revenue profile has changed over the past 12 months. Postpaid generated revenues sustained a year-on-year growth of more than 20%, while prepaid was down close to 15%, directing to reach a speed of 63% to 37% (inaudible) an incremental of more than 8 percentage points versus 2017.

Moving on to cost dynamics. Normalized OpEx for the year grew only 2%, below inflation and better than expected in our original plan. We are overdelivering on our efficiency program, having achieved almost 120% of the target for 2018. The digitalization process is certainly a big contributor to this. Despite being at a reasonable level of 2% of gross revenues, bad debt provisioning is the main challenge we are facing, and it is directly affected by the change in revenue mix. To put this into perspective, excluding bad debt, our normalized OpEx would have remained flat in 2018.

During the first few call, I listed some of the initiatives we would be implementing to improve risk management, and some of them became active in the fourth quarter. This include the collection portal and the call center to treat early delinquents as well as reinforce collections team. We expect to start seeing the benefits of this action plan in the second half of the year.

It's worth to telling the 2 nonrecurring items that impacted our results in the fourth quarter. First, we booked the first of our 3 court case related to the payment of PIS and COFINS federal tax over ICMS state tax. The tax credit was monetary adjustment total more than BRL 360 million, roughly BRL 160 million positively impacts OpEx, while more than BRL 190 million was a positive impact on net financial expenses. As stated in third Q, we focused a total of BRL 3.2 billion from this tax case. Second, in our reassessment of our contingencies, we revised the loss probability forecast for a number of old case, mainly related to the third-party label, which we don't expect to happen again. Total impact was in excess of BRL 280 million, BRL 160 million negative impact on OpEx and BRL 130 million on net financial expense.

The summary of what I have described up to now is a robust operation with a resilient revenue growth and continued cost control that, combined, produce an outstanding

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with a growth rate nearing 6%. Full year EBITDA grew more than 10% to BRL 6.6 billion, with margin reaching 42% in 4Q and 39% in 2018. Our EBITDA figures are really impressive as they represent the highest levels in the company history.

The bottom line was also very strong. For the full year, we posted normalized net income of almost BRL 1.6 billion, 27% higher compared to 2017. CapEx was deployed according to plan, totaling BRL 4 billion 2018, representing 23% of sales, down from 26% in 2017. EBITDA minus CapEx total BRL 2.6 billion, growing more than 40% year-on-year and leading free cash flow to almost BRL 3 billion, 24% higher than 2017. Following this improvement

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BRL 950 million announced between IOC and dividends. We expect to continue using IOC as an efficient distribution tool.

Before I conclude my speech, I'd like to remind you that Telecom Italia Group [judicial] plan will be released tomorrow, which will give us the opportunity to provide TIM Brasil's updated guidance. Although I, of course, cannot provide any numbers in advance, I can assure you that will be the solid, realist and coherent plan that we'll focus in here as well for the business.

Managing the challenges in prepaid, evolving our B2C postpaid strategy to maintain a strong performance, reinforcing TIM Live's expansion without losing quality control, these will be where we receive additional attention to become a new source of growth. Efficiency efforts will remain in place to maintain margin expansion, either by executing further on digital transformation or by more traditional means of controlling cost, and we will focus on developing our infrastructure. We will continue to be the base for improving the customer experience. In mobile, with much more focus on growing capacity; [while]the 6 segment, coverage will remain the core of our attention.

We will now open the floor for questions. Please, operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) First, we will take questions from analysts followed by the journalists, both in English. (Operator Instructions) The first question comes from Susana Salaru with Itaú.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [2]

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Actually, I had 2 questions. The first is about the competitive landscape. We have been hearing that the market is being more rational. Actually, we have been seeing

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perception of the market and if you have intention of price increase going forward? That will be our first question. The second question is related to the 5G auction. What are your expectation towards the timing of the auction and the format of the auction? That's it, guys.

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Sami Foguel, TIM Participações S.A. - CEO [3]

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So for the first question, just to recap the question, was about the market competitiveness. Can you repeat, please? Because it's cut during your question.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [4]

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Sure. It's about the competitive landscape for the market. We saw the competitors increasing price.

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Sami Foguel, TIM Participações S.A. - CEO [5]

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Yes. I think there are 2 different aspects on that. On the prepaid, we unfortunately haven't seen any easiness in the competition. Actually, the competition very strong, and we are positioning ourselves to a different product. We just launched the TIM Pré Top, which has a different value proposition, innovative product for our clients, transparent, customer-friendly, and it's not focused on price war. But unfortunately, we don't see this behavior in the competition. On the postpaid, we see a much better environment as the price hasn't been the focus of competition over the last few months. Question about 5G. We are capable of 5G auction in Brazil. This is important for the country. One of the talks of the country is the competitiveness gap. And without 5G, this will only increase. So it's not a matter of having or not 5G, it's how fast we can have a 5G. So we hope the auction to be 1 year from now. And then after the auction, there will probably be a 1 year spectrum cleaning. But really, the more it goes, the worse for the country, for gap generation, for competitiveness. So this is the focus. Thanks to Mario, who will complement any of the comments. Mario Girasole.

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Mario Girasole, TIM Participações S.A. - Regulatory & Institutional Affairs Officer and Member of Board of Executive Officers [6]

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Mario Girasole, Regulatory in Institutional Affair. Just to complement, of course, we are -- we have discussions in place in terms of having a rational approach for 5G. So fast and rational. 5G is strategic. So we cannot lose the momentum, and also we cannot lose the rationality to have an auction that give us, of course, a privilege to the investment to be done in order to foster the sector and the productivity of the country.

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Operator [7]

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Our next question comes from Fred Mendes with Bradesco.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [8]

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I have 2 questions as well. I mean, the first one is -- I assume you had mentioned -- I do understand the competitive landscape remains quite challenging. But we did see -- at least, here in my numbers, there was an improvement on mobile service revenue. So I'm just wondering if something had changed. And I think on this line as well, how is the -- if any, that had an impact, how is the performance of the WTTx? Is this something already relevant in terms of net revenue? And if you think you're already being competitive against other players on the broadband, the other players that offer copper through the broadband. It will be my first question. And then my second question, in terms of the cost, looking at the bad debt, of course, you're increasing your postpaid base significantly. But when I look at the bad debt increase of 80%, it does caught the attention. You also mentioned that you started a new contact center back in September to reduce this line. So I mean, just wondering, what are your expectations for 2019 related to bad debt?

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Adrian Calaza, TIM Participações S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [9]

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Fred, I'm Adrian Calaza. Fred, to answer your first question, it's a little bit of last (inaudible) -- more -- talking about the mix of the revenues and the impact on the growth this quarter and I think the point that Sami mentioned in the first [answer], it's a different competitive environment on prepaid and on the postpaid. On the prepaid, we had a lot more aggressiveness [in the market], where we managed to cope the reduction on those revenues. If you see the [evolution] of our prepaid revenues, our reduction was less than on the third quarter. So that was a positive impact on the growth. If you see, our total growth of client generated revenues was up 4.5%. So for us, it was positive in terms of prepaid. We mentioned in the third quarter that we saw a more stable curve in terms of recharges [prepaid]. So that was a positive. And then you have on the postpaid side, we did some price increases already in November. We were, as a matter of act, the first movers on the postpaid. It was a big effort on our side. As you know, we are trying to focus more on our growth than [quantity] these days. So that was one of the few reasons that revenues this quarter were a little bit above the growth of the third quarter. On the second question...

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [10]

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Bad debt.

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Adrian Calaza, TIM Participações S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [11]

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Regarding bad debt, clearly, this is a factor that we've been working a lot in the last quarters. We always talk about this as something -- maybe one of our main concerns in terms of OpEx. Clearly, there is an effect on all the migration process that we did in the past. We started this migration process from prepaid to postpaid at the beginning -- at the end of 2016 year, beginning of 2017. So clearly, the effect of the mix of our customer base creates the effect on the year-on-year growth of the bad debt. Nevertheless, it's something extremely important for us. Even if the rate is aligned with the rest of the operators in this market, it's even below rates, as a matter of fact, of some banks. But it's still something what -- where we will be working a lot. If you see, there were some questions about the growth of our G&A OpEx. That's related also to increase our effort in terms of contact center to cut this bad debt effect. So again, it's more related to the new mix of our customer base. It's an area where we want to work a lot on for next quarters. The big issue is the year-on-year comparison.

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Sami Foguel, TIM Participações S.A. - CEO [12]

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Sami. To complement Adrian here, Fred, we have implemented recently the list of initiatives to start to -- not to start but to continue to work on the bad debt portal, our negotiation portal where as Fred -- as Adrian mentioned, we reinforce our operations. We have a full team now onboard. But also, we're expanding our capabilities on the credit side. And as we know, there's a vintage game, right? So the new vintage are going better or worse according to our appetite for risk and our capability on the collections side. So it's a natural evolution, as I mentioned the call. As we change our mix from more postpaid, there's a new set of capabilities that we will and we are developing. That actually -- the only final, the positive upside ahead for us. So we expect on the second part of the year to start seeing the benefits of those initiatives.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [13]

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Perfect, Adrian, Sami. So if I can just -- I think the beginning of the answer was a little bit harder [to understand you]. So if I just may follow up here, looking at the WTTx, is this something already there? Something that's becoming relevant in your net revenue? There's this one -- they had an impact in the mobile service revenue growth or not yet?

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Adrian Calaza, TIM Participações S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [14]

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Still, again, Fred, no, WTTx isn't yet relevant in terms of total revenues. The impact, it's still very low. It's not an easy business. We are reviewing all the process of this business. We think that this can bring us -- it's an additional revenue stream for the future. We're working a lot, and we think that you will see an effect in terms of rates and revenues more in by the end of 2019, maybe beginning of 2020. So now it's not a factor in this fourth quarter of 2018.

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Operator [15]

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Our next question comes from Maria Azevedo with UBS.

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Maria Tereza Azevedo, UBS Investment Bank, Research Division - Director and Research Analyst [16]

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So I'm not seeing the growing focus on convergence and converging offers. Do you expect to increase your CapEx allocation in the coming years to accelerate your fixed line strategy? I know you're going to cover strategic plans more. But do you see room for higher fixed CapEx? And still on the convergence, do you -- what is your strategy on content? I mean, we're seeing some competitors bundling Netflix, Globo, Amazon kind of content. How do you think the industry will approach that? That will be my first question.

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Sami Foguel, TIM Participações S.A. - CEO [17]

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CapEx allocation.

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Adrian Calaza, TIM Participações S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [18]

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This is Adrian. In terms of CapEx allocation for the Live business or for fiber, we are following what we mentioned in our -- the communication of the plan in last March. So the Live business is still on track. We believe there is -- as Sami mentioned in the speech, there is a lot of -- there are a lot of opportunities on this business but it's always a business that we need to grow very carefully. You know perfectly well, the story of this business in this company in the past years, it needs to be very well managed in very controlled growth. Yet again, a lot of efforts on our CapEx plan are oriented to growth in fiber, not only in FTTH but also in FTTC -- in FTTCity and fiber to the site. But clearly, it's going to be a key factor for the revenue growth in the following years. But yes, we are not changing any point on our CapEx allocation that we already communicated at the beginning of 2018. You will see that in the next communication or year, by the line with what we said 12 months ago. The second part of the question was...

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Sami Foguel, TIM Participações S.A. - CEO [19]

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I can take. So Maria, talking about content, especially on the broadband, on the FTTH. There are 2 components of this. First is our strategy. We have a selective approach, okay? So we select place that have the proper population mix in terms of GDP and low competition or no competition. So our strategy is not to enter the most competitive place with a double play or triple play. On the contrary, we are being very successful in entering place that is underserved and start to offer outstanding products in terms of broadband, broadband. So -- and we see over the next 3 years a lot of opportunities to continue growing in that manner. Second, we already have -- despite of this, we already have content available in our offerings, so Fox, Cartoon, Nat Geo. We do have embedded on our offers already content.

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Maria Tereza Azevedo, UBS Investment Bank, Research Division - Director and Research Analyst [20]

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Perfect. As a follow-up question, if you could please comment on the cost side. I mean, you've been executing extremely well on cost efficiencies. Do you have any expectations on improving your bad debt on the total provision? Or do you think that this is more a structural macro issue on what strategy can do it and if you have been more selective on your upgrade from mobile to postpaid on the back of higher bad debt levels or if you're comfortable with it? That would be -- that is very helpful.

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Adrian Calaza, TIM Participações S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [21]

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I'm Adrian. We said already a couple of times that we are already focusing more in terms of quality. So this is maybe a starting point, working a lot in terms of credit analysis, focusing more on the better customers to migrate from prepaid to postpaid. I think that delinquency, it's a structural factor. It's not really high in Brazil compared with other countries. But clearly, there is a factor. What we are seeing for the future is that you won't have this year-on-year growth. Maybe you will still be in the phenomenal levels that you're in these last quarters, that this will not take you to additional growth in terms of bad debt. Clearly, the new customers need to have more marginality due to a better quality.

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Operator [22]

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Our next question comes from Diego Aragão with Goldman Sachs.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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My first question is related to the acceleration on the mobile service revenue growth in the fourth quarter. How do you see this line trending in 2019? I mean, will this mark a turning point on your top line growth? Or we should see it more as a stabilization of the growth rate? And if you can just provide the outlook, how should we be considering this -- your top line growth in the coming year, that will be great.

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Sami Foguel, TIM Participações S.A. - CEO [24]

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So thank you, Diego. This goes back to the market economic and competition environment, right? So there's a lot of expectation that the country will grow and would likely develop. Some of the early signs for January are not so optimistic in terms of what's actually going on. So we don't see, so far, a real change in terms of GDP growth that could allow a different scenario in terms of macroeconomic, okay, either in terms of more demand or less debt or improve in the prepaid that would come with growth. They of course, if the growth come, it's only upside to everyone, and also in terms of competition, right? As we discussed here, I think the competition heeled in the postpaid. We have repriced, and we have [tactical] facts in the postpaid over the last quarter. And we just announced the repricing as well now in Feb. So we see the competition much more mild, if you wish, if it's going to be possible in the postpaid. While in the prepaid, we haven't seen these -- we haven't seen any real fundamental change on what's going on over the last quarters.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Okay. And maybe the second question related to the postpaid. I mean, we saw some deceleration actually on your net adds in the fourth quarter, especially in November and December, which was right after this increase on price. So what is causing this pressure on recent months? I mean, could this be a reflection of your -- this increase on price?

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Renato Ciuchini, TIM Participações S.A. - Head of Marketing [26]

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Diego, this is Renato, Head of Marketing. We have elaborated a little more on how we strategy on migrating prepaid to postpaid and had start focusing on more quality. So what you have seen on our net adds is also quality of the net adds are better than what we had in the past. So there is a more focus on a selective approach, migrating prepaid to postpaid. And also, we started the Phase 2 of our migration inside of the segment of Controle and also postpaid. So we are doing more Controle to Controle migration, Controle to postpaid and also postpaid to postpaid. As you have seen, our main postpaid offer a year ago was in the BRL 99 target price. Our main offer now is in the BRL 119. So piece by piece, we are migrating the base not only from prepaid to Controle, but also intra the postpaid [base] overall.

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Operator [27]

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Our next question comes from Valder Nogueira with Santander.

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Valder Nogueira, Santander Investment Securities Inc., Research Division - Head of Telecom, Media and Technology [28]

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Sami, you mentioned, there is still long road ahead regarding the mobile business, and there is milk yet to be taken from this business. But given the [sheets sold] that you have had on TIM fiber and I believe low-hanging fruits in the B2B arena, would it make sense for you to speed up a little bit more your fiber deployment or fiber partnership or be more engaging to this business? This is the first question.

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Sami Foguel, TIM Participações S.A. - CEO [29]

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Okay. Thank you. I'll take your -- Valder, this is Sami. Thanks for your question. In December 2017, we have 2 pilots on FTTH with a few clients. One year later, we have 11 cities with over 50,000 clients and a big plan ahead of us. So what we've been saying about in terms of efforts in FTTH is that, number one, we are really accelerating the growth of 35% year-on-year. But also, there's a total new business for us, and we wanted to perfect execution so that we grow in a controlled manner so that we actually generate positive value to our clients and to our shareholders. So that's number one. In terms of your second related question in terms of fiber, we have been and we are always open to analyze potential inorganic moves. So far, what we have faced is that the organic path are the perfect. We don't have exempted something that would add more value to our shareholders, into our strategy in a inorganic way. But I also want to take the opportunity to present [Matthew Stefano]. He just joined a few months ago in the company. He's leading the B2B area and Live. He's come from a long background into those segments, and he will complement any comment about the growth in B2B and what we see ahead.

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Unidentified Company Representative, [30]

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Valder, as Sami said, we are starting a new way to approach the B2B market. We do have here in TIM a very good infrastructure, a very [experienced] network with high quality and also focus, as Sami mentioned, in a customer-centric way. So there is a very good opportunity for us to increase our share in the B2B marketing with this approach. And also in TIM Live, as Sami said, we are being very focused. We are studying the best regions to deploy our network and be more efficient in the deployment. So we do believe that this is a good path for growth, and we are going to see that in the years to come.

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Valder Nogueira, Santander Investment Securities Inc., Research Division - Head of Telecom, Media and Technology [31]

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Well, first of all, nice to hear from you in the new house. And does it make sense making partnership with those players that have fiber that goes closer to these players, to this potential B2B arena?

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Unidentified Company Representative, [32]

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No, not necessarily going organic but making joint ventures or helping to finance these guys so we can have a fresher access to this fiber. And we are starting here, of course, as partners. We do -- today, we have partnership also and that we buy [leased]line from many company, and we are also starting here ways to increase that. That's a way to go to new areas. Also studying new products that we can put over the [business] lines from third parties to increase our capacity, our offering capacity. So we are increasing this -- we are looking to the market to see partners that can help us. So we do this today, and we intend to grow in this also, but ever looking. There are qualities of service that we are delivering, and that this is the great differential that we -- a company can give to the B2B market. It's been very close to the customer, have a high speed delivery and having high quality of service. So we are looking at all possibility here, yes.

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Operator [33]

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Our next question comes from Walter Piecyk with BTIG.

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Joseph Anthony Galone, BTIG, LLC, Research Division - Research Analyst [34]

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This is Joe Galone for Walt. You mentioned the ongoing refarming of spectrum in 1.8, 2.1, the LTE. And then there was also a comment about -- I think it was over 79% of data traffic is on the 4G network at this point. So my question is, how far we can make bands and push refarming or the additional bands that you have? And how little spectrum do you need to continue to serve the 2G and 3G subscribers at TIM? And you also -- maybe you've mentioned this before. But when do you think you'll get to the point where you maybe shut down 2G or 3G?

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Leonardo De Carvalho Capdeville, TIM Participações S.A. - CTO & Member of Board of Executive Officers [35]

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Walter (sic) [Joe], it's Leonardo speaking. First, we started to have the refarming in 2.1 this year so we are still -- sorry, last year. We are still, let's say, beginning this opportunity. We are seeing that we have some interesting point in our north to east and other states like in Minas Gerais, Paraná and Santa Catarina. But we are trying to do the same in São Paulo area. So what we are discovering is every time that we move your head with the refarming for one band, we are seeing the applicant capture more and more traffic in the 4G. Knowing that we are above 90% of the traffic already generated in 4G device. And we are carrying on the network 4G around the 76% of the amount of data traffic. So what we are seeing is that we have this opportunity in 2.1. But in the near future, we can see that the [850] could be the next wave. So we are forcing to have the customer all the time in the 4G. We are delivering in terms of the coverage. We started to use the VoLTE in Brazil. We have more than 12 million subscriber already using VoLTE. In some cities, as in Recife and São Paulo, we are above 25 percentage of the total calls already in VoLTE. What it means is that this customer, we will be there in their 4G for all the time despite to use data or voice. When you look ahead, what we have is some opportunity in the T-band. That is a new band in 2.6 gigahertz, where we have in some region. So we still have some kind of, let's say, refarming and new presence opportunity. And what we are seeing is that the technology is developing. And with that all the time, we are discover new way to use the [tenacity] in more efficient way. So talking about this future of 2G and 3G, it's not the clear to us right now what will be in Brazil and when it will happen. Of course, if this go to work with the 2G, 3G, 4G and then starting thinking about 5G. So what we are seeing is that the 2G, 3G will be, let's say, more peripheral technologies, but it's not so clear when we have the opportunity to make this [trough] one of this technology. What we are trying to push in Brazil is some kind of a sharing agreement with the other companies to reduce the inefficient rate of these legacy networks. So we are going to move some kind of a new discussion among the other companies to have some kind of a single grid or a run sharing in the old technology to avoid specifically the maintenance cost.

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Operator [36]

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Our next question comes from Diego Aragão with Goldman Sachs.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [37]

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Yes, a little bit -- the industry is clearly benefiting from this ongoing digitalization process in the region, which is producing major margin gains. So the question is, when do you expect margins to stabilize in the scenario where players will start using those efficient to reinvest in growth?

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Adrian Calaza, TIM Participações S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [38]

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Diego, it's Adrian again. Digitalization is a key factor. It has been already this year to increase margins for the industry. And you can see, it did also on our numbers. I think as we discussed a couple of times today, this industry is every day more capital intense, so again, in terms of new customers, in terms of new networks. And clearly, digitalization is part of this process. We've been improving margins already almost 3 years in a row or even more. We reached already the upper part of the curve? I don't think so. Maybe the pace could be a little bit lower in the future, but we'll still see some [dominos] or 2 to improve furthermore. And again, we need this improve in terms of margins because we need more investments in infrastructure, in information technology because the industry has become much more digital. And you know that we are still maybe a bit back in terms of digitalization with some other industries. So it's still an ongoing process, but we clearly see that there is still a bit room to improve in terms of margins.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [39]

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That make a lot of sense, Adrian. And if I may, just very quickly, any thoughts on consolidation? I mean, after you got the, let's say, the green light from Telecom Italia to eventually pursue some acquisitions in Brazil, I think market was expecting to hear something about it. So is there anything in progress that you can share with us?

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Adrian Calaza, TIM Participações S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [40]

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Thank you for the question, Diego. It's -- as we mentioned also couple of times, this company was supposed 3 or 4 years ago to be the target, and we are now in a completely different situation. If you see, our financial situation is extremely healthy. Our leverage is extremely low. We've been working a lot in order to put us in this situation because we think that there will be a consolidation in this market. If you see, all the material market -- in -- confident -- In this countries, there are 3 operators. There are some countries that they even have 2 operators. So we think that this consolidation will eventually come, and we want to be prepared. This said, we are not working on any process these days. We are analyzing everything. We have a deep knowledge of the numbers of each of the competitors on every possible target. But today, we are focused on what we need to deliver in organic terms. But again, we'll see what happens in the near future.

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Operator [41]

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Ladies and gentlemen, without any more questions, I am returning to Mr. Sami Foguel for his final remarks.

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Sami Foguel, TIM Participações S.A. - CEO [42]

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Thank you. I want to congratulate our team for this strong 4Q performance. They worked very, very hard to deliver these results. I also want to thank our clients who choose TIM every day of their lives and investors who share our vision of long-term value generation.

We are planning events over the next weeks, so I'm sure we will have the chance to discuss our results and new plans in further detail.

Thank you all once again for participating in our conference call. Have a great afternoon, and I hope we can meet soon.

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Operator [43]

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We conclude now the Fourth Quarter of 2018 Conference Call of TIM Participações. Your line can be disconnected from now on. For further information and details of the company, please access our website, www.tim.com.br/ir. Thank you.