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Edited Transcript of TIMP3.SA earnings conference call or presentation 28-Apr-17 2:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Tim Participacoes SA Earnings Call

Rio de Janeiro/RJ Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Tim Participacoes SA earnings conference call or presentation Friday, April 28, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Pietro Labriola

Tim Brasil Serviços e Participações S.A. - COO

* Rogério Tostes Lima

TIM Participações S.A. - IR Officer & Member of Board of Exec. Officers

* Stéfano De Angelis

TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director

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Conference Call Participants

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* Carlos Antonio de Legarreta Diaz

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Frederico Mendes

Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst

* Mauricio Fernandes

BofA Merrill Lynch, Research Division - MD and Head of Latin America Equity Research

* Richard Martin Dineen

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst

* Walter Paul Piecyk

BTIG, LLC, Research Division - Co-Head of Research and MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. We would like to welcome everybody to TIM Participações 2017 First 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 website. (Operator Instructions)

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996 (sic) [Private Securities Litigation Reform Act of 1995]. Forward-looking statements are based on the beliefs and assumptions of TIM Participações' management. They involve risks, uncertainties and assumptions, because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that internal and external factors could also affect the future results of TIM Participações. (Operator Instructions)

Now I'll turn the conference over to the IRO, Mr. Rogério Tostes. Please, Mr. Tostes, you may proceed.

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Rogério Tostes Lima, TIM Participações S.A. - IR Officer & Member of Board of Exec. Officers [2]

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Hello, everyone. Good morning, and thanks for participating in our earnings release conference call. I'd also like to thank the top management team that is here to join this call, and they will be available during the Q&A session.

Without further ado, I'll pass the call to Mr. Stéfano De Angelis to run with the presentation. Stéfano, please?

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Stéfano De Angelis, TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director [3]

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Thank you, Rogério. Good morning to all, and thank you for attending our conference call.

With a single sentence, I would say that the first quarter of 2017 was matched by confirmation of a new trend of our operation. If -- in our last conference of the results of 2016, we could already see a new trajectory in the performance of our business, with recovery of revenue and EBITDA and also of operational metrics, such as accelerated postpaid, in 2017, these metrics are even better and confirm that we are on the right track.

I will try to move fast along the presentation to also allow more time for our interaction. In the first slide, I present, graphically, this new course that I mentioned just now. In other words, we are facing a new business scenario, with both financial and operating metrics improving. I highlight in the first slide the recovery of mobile service revenues, which after 11 consecutive quarters with negative performance registered a rise of 3.7% in the annual comparison. I also draw attention to the great results we are having in the postpaid segment. For the first time in a long period, we can see TIM again leads the additions in this segment, ending the quarter with 40% of net adds in the market. I would say that this is the result of the new positioning of the brand with appropriate offers and, above all, a differentiated network quality. This add of postpaid reconstruction is shown in Slide #3.

The key performance metrics continue to respond very well to the new offerings and adjustments we have made, always in the more-for-more concept. Both the gross additions that evolve 16% in their annual comparison, or the net addition as I already mentioned, are in a good rhythm. It's important to highlight the decrease in churn and also the excellent trajectory of the number portability flow, which accelerated in relation to the last quarter as doubled compared to the first quarter of 2016. As a result, we can see the generation of value with this new proposal, represented here by the relevant increase in ARPU, both in the new acquisition of clients and in the users of our customer base.

(inaudible) segments, evidenced on Slide 4, we are also maintained a more-for-more approach, defending our leadership and focusing on value. If on the one hand, we maintain the restriction on the disconnection policies of ensuring better efficiency for the segment; on the other hand, we are promoting a revolution in the services rendered to the prepaid, and a transformation on the usage profile for this segment. We have strengthened the offer by including more data services, digital entertainment, such as the platform (inaudible), also digital magazines, music as well as social network communication service. Our focus is to promote the migration from daily usage to weekly packages and more importantly, encourage greater customer loyalty. At bottom of the slide, we demonstrate the benefit of promoting greater recurrence in the prepaid, with higher ARPU and higher data consumption.

Moving on to Slide 5, we -- I highlight the evolution in data services. At the end of last year, we introduced data services in digital entertainment for all of our plans. The objective was to create the differentiation of offers, promoting greater value at the -- in the creation of value. As a result, 4G device already represent 32% of the total base, almost 20 percentage points above the same period a year ago. On the other hand, data users already account near to 60% of total base. In financial terms, today, more than 1/2 of mobile service revenues are already represented by data, and the famous curve of traditional and data revenues have already crossed this quarter. Another important point is the revenue per user of data, which in the quarter reached around BRL 10, growing 34% compared to the same period of 2016 and accelerating from the average of 28% in the recent quarters.

On Slide #6, I comment on the performance of our residential growth and operation in São Paulo and Rio de Janeiro. Also in this part of the business, we had great results with Live TIM, a consistent result over many quarters. Operational metrics continue to grow at a good pace. I would like to highlight the 7% increase in the availability of the Live TIM network for approximately 3.1 million households. The first driver number for the ultra broadband service reached 322,000 this quarter, represent a strong growth of 26% over the same period last year.

Looking at the financial part. The operating -- the operations are -- also continues contributes to the group's revenue generation. In this quarter, Live TIM revenues grew by almost 40% and already represents almost 1/3 of the total fixed revenues. Finally, I would like to mention that we are in the test phase for the WTTx solution in the project called TIM Casa Internet, which can assist in the use of the 4G frequencies that is 701.8 and 2.6 as an option in the regions that Live TIM does not serve today for the residential segment and small businesses. For now, we tested in Rio Verde and Fernando de Noronha with differentiated packages in speed and volume of data with very interesting results.

Moving onto the next slide. I'm on Page 7. All these fruits would not have been possible without the exceptional support of our network, allowing greater agility on the commercial front and supporting our more-for-more concept. Our structural advantage in 4G has grown even more. Today, there are more than 1,300 covered cities, number well above the 439 cities in the first quarter of 2016. If we add to this the fact that we have expanded the frequency from 1.8 to 4G, adding more 10 MHz in major cities, the quality of data services delivered improved significantly. One challenge we are facing is to make visible all the improvement in network quality and translate into better customer perception. We have a lot to do yet, but as shown at the bottom of this slide, we are on the right track with improvement in all network requirements. If we look specifically at postpaid, the overall satisfaction index went from the fourth to second position. And in the Controle segment, it is already #1.

I now turn to the financial section. I am on Slide #8. During the second half of 2016, we highlighted the change in the revenue path, and we stated very clearly in our 3-year plan committed that we would have coordinates with revenues increasing year-over-year in all the quarters of 2017. In fact, the first quarter of this year confirms this evolution.

Mobile service revenues reached a growth of 3.7% year-on-year with a strong contribution from data revenues, which rose 25% year-on-year in the quarter. As I said earlier, to date, TIM has data services as its main revenue element. If we isolate for a moment the aspect of the regulated interconnection revenues, which we call business generated, it grew 6.3% year-on-year in this first quarter.

Following the financials data, Slide #9 presents the details of OpEx and EBITDA. As one of the main elements of our execution, our discipline in cost control remains firm. In this quarter, the annual variation was slightly negative despite this

(technical difficulty)

with accelerating revenues and commercial metrics. This control provided annual EBITDA growth of 8.7%, a strong recovery since the beginning of last year, as we can see in the central part of the slide. EBITDA margin also increased by 200 basis points, reaching that 32% mark. It is interesting to note that exposure to MTR presented the lowest historical level and reached 1.9% of EBITDA in this quarter. If we add to the performance of revenues and cost, the strict control in CapEx, we then have a cash generation in double-digit growth, represented here by EBITDA less CapEx, with a 31% increase in the annual comparison.

I arrive to the final slide of the presentation, also with a [dull] sentence, as I did in the opening. Our turnaround is progressing. So recapping. We have an improvement in the mix of subscriber base, with postpaid increase to 25% of our base compared to 20% a year ago, an improvement in the capacity and quality of our network making also 2/3 of data traffic occur via 4G terminals. And finally, the financial performance, significantly better than in the recent past.

As a perspective, I would like to leave the message that we will continue to focus on the network. And we expect users' perception to evolve positively. We will test LTE voice service in the second quarter to support voice quality as well as greater cost efficiency in the network. We will follow the more-for-more concept in our offers, aiming to improve the mix of users in our base and also the usage profile. And obviously, we will continue to improve our financial performance for revenues and EBITDA for the next quarter.

I now return the word to Rogério for the Q&A session.

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Rogério Tostes Lima, TIM Participações S.A. - IR Officer & Member of Board of Exec. Officers [4]

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Thank you, Stéfano. Now we're ready for the Q&A session. Please, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Richard Dineen, UBS.

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Richard Martin Dineen, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [2]

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We've seen in some survey data that quite a high percentage of postpaid customers seem interested in migrating to Controle trading down arguably. How much cannibalization of postpaid by Controle are you actually seeing? I'm assuming that the overall net benefit of migrating prepaid up to Controle outweighs those cannibalization concerns? But just if you can give us a sense of the proportionality or impact of that process as you see it right now, that would be really interesting.

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Rogério Tostes Lima, TIM Participações S.A. - IR Officer & Member of Board of Exec. Officers [3]

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Thank you, Richard.

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Stéfano De Angelis, TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director [4]

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I will pass to Pietro, but I would like to underline that as we show in the presentation, all our moves are showing very positive results in terms of upgrade of value. And this is shown by the growth in the ARPU of the appreciation and in the ARPU of the customer base. So all the moves that we are doing in the market, and this is happening also in the prepaid for the recurring offer, so we are not facing cannibalization. The unique part, as we discussed said several times, of the postpaid market is -- today is subject to some ARPU erosion, it's represented. But this is an industry trend by the off-bundled consumption. But this is just related to the postpaid [view], as we call, segment. And this is something that TIM, as you know, was pioneering in this story. And this is part of the trajectory of the first 6 months, I would say, of last year, where we faced revenue, I will call it cannibalization, represented by the new monthly packages that were including a good amount of data, on-net and off-net traffic and clearly SMS services. So again, all our move is to strongly improve the profile of our customer base, both in prepaid, in postpaid, that both Controle and view . Then I leave to Pietro for further detail.

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Pietro Labriola, Tim Brasil Serviços e Participações S.A. - COO [5]

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Just to share some numbers, keep in mind that you are looking at the net adds result. In terms of gross addition, we have more or less 2 tiers that come from migration of prepaid to Controle. And one tier that our traditional growth that we take from the market, that's mainly in mobile number portability. This is the main number. On the postpaid, the migration come from some Controle customers to postpaid, mainly driven by the increase of the data consumption, towards our strategy moves customers based on the data consumption and less from the prepaid migration to the postpaid. These are the main numbers.

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Operator [6]

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The next question comes from Mauricio Fernandes Merrill Lynch.

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Mauricio Fernandes, BofA Merrill Lynch, Research Division - MD and Head of Latin America Equity Research [7]

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Stéfano or Pietro, what -- for the new customers, as you were talking about the upgrades, how much do you think -- given this is actually recent, how much do you think this has already contributed to the revenue reported in the first quarter, if anything?

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Pietro Labriola, Tim Brasil Serviços e Participações S.A. - COO [8]

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So your question is related how much the contribution of the gross competitive migration? Keep in mind that we did the calculation where the growth that come with an ARPU that is 2.5x the ARPU that come from the migration.

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Stéfano De Angelis, TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director [9]

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That's right, Mauricio, I find this -- you're asking the contribution to that top line, so just to keep in mind. Just to give you some -- I think, even -- really one KPI. You know that we don't disclose postpaid, prepaid and so on. But if you look at the main drivers of the growth of the top line, what are the key metrics that I can disclose? Now the postpaid revenues have -- represent more than 50%, I would say that prepaid and postpaid are well balanced, with some percentage points more than the 50 for the postpaid. So today, the main contributors to the growth in terms of top line, we can say that it's the postpaid segment, clearly driven by the strong Controle additions that we were able to post in the last 12 months, because clearly the performance of the top line is not reflected in just the last quarter result but the consistent story in terms of net adds that we were building in the last 3 to 4 quarters. And this growth is, let's say, a double-digit growth that is being helped in terms of revenue given by the increase in ARPU. We have disclosed how much it's growing the ARPU of the base in both Controle and postpaid. So I would say that today, the positive performance of the top line is 100% related to the postpaid. And this is quite positive for 2 different reasons. First of all, we have a less volatile revenues environment, I would say. So we are very confident that we can maintain this trend, because we continue to see a solid postpaid commercial KPIs, that we will make TIM maintaining that kind of growth. And we still have the opportunity, as we discussed several times, to explore still the prepaid segment that is still suffering the macroeconomic environment with both the change in the profile of usage and the change -- the consequent change in the ARPU of this segment. And last but not least, it moved from the optimistic view of the macro to the realistic change in the macro condition.

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Operator [10]

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Next question comes from Walter Piecyk, BTIG.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [11]

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Congratulations for returning to service revenue growth after, I guess, it's been 3 year now. What -- where do we go from here? I mean, 3.5% growth, can that accelerate through the course of the year? I know you said earlier that it'll be positive for each of the quarters, but as we kind of look to 2017 and 2018, is it possible that you can lift your revenue growth to the high single digits at some point over the next 6 to 8 quarters?

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Stéfano De Angelis, TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director [12]

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Sorry for the -- we have some metallic influence in the voice. So your question is, we expect the trend of revenues to continue in the next quarter, in the planned period, was the question?

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [13]

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The question is, given your return to growth, can you accelerate further total service revenue growth, which was growing 3.5% this quarter, first time in 3 years. Can you take that up to high single-digit growth at some point over the next 2 years?

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Stéfano De Angelis, TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director [14]

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As we state in the guidance, we now are in a positive [net]. If you look at what is ahead, just partially coming back to the answer to Mauricio, what is happening today, that -- we, as you know, have made some change into the offer in the first quarter. That was not happening at the beginning of the year. It was not started in 1st of January. So what do you expect for the second quarter is to continue to improve this trend, also considering in positive terms that we will compete, let me say, with the recovery trend of 2016. But net-net, what we expect is to have the full benefit of the change that we made in the first quarter starting from the second quarter. I would say that if you ask me what is your aim, our aim in the top line is to have a real growth. We don't want to stay below inflection, absolutely.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [15]

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Okay. And then just one follow-up. Are you aware of any process to sell AT&T's pay-TV business has started in Brazil? And if there would be any interest from Telecom Italia to bring that into your company?

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Rogério Tostes Lima, TIM Participações S.A. - IR Officer & Member of Board of Exec. Officers [16]

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Walter, can you repeat your question, please? We -- there's some cut here in the lines. Can you repeat, please?

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [17]

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Yes, Rogério, I'm having the same problems myself hearing, but the question was on AT&T. Are you aware of any sale process that may have started for that asset and whether there'd be any interest from Telecom Italia in buying AT&T's pay-TV business in Brazil?

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Stéfano De Angelis, TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director [18]

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Yes. Thank you, Walter. Let me say, clearly, if we think about the evolution of the industry, it's clear that we are carefully looking at any opportunity in terms of evolution of our portfolio not just for the mobile but also thinking about our residential ultra broadband operation. What we have to keep in mind that the regulation today in Brazil is different when we compare to other countries. So today, we can be just a distributor of content. And you know that the model today is not to have any kind of, let me say, differentiation in the offer of content in Brazil. So we -- what we are looking at is trying to explore, say -- let me say, the future television consumption more than, let me say, legacy one. Considering that, we can use our ultra broadband network, both in fixed and mobile. What we are starting, let me say, today is how to make a synergic approach in terms of [4-play] offer, but looking more at, let me say, streaming, IPTV and SVoD services than, let me say, legacies one.

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Operator [19]

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The next question comes from Fred Mendes, Bradesco.

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Frederico Mendes, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [20]

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I have just 2 more question, basically follow-ups. You mentioned in the first call that the number of gross adds that you are pushing from your prepaid base, something like 50,000 to 100,000 per month, and if I'm not correct, please correct me. So basically considering you have a net add of 410,000 subs in the first Q, we are assuming, at least in rough numbers, your net portability is off at least 200,000 to 250,000 clients in the first Q. So I mean, is there a specific region where you're gaining these clients? Or this is more basically balanced? This will be my first question. And then jumping to the second one, bad debt and commercial expense remain well under control. And we saw, obviously, a quite a strong increase in the volume of the net adds in the last months. Should we expect this trend to continue? Or it may -- we see an increase in this number considering the high volume of postpaid net add?

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Pietro Labriola, Tim Brasil Serviços e Participações S.A. - COO [21]

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Thank you, Fred. Fred, I was reading also real time the report that you sent few minutes ago in the market here. First of all, one, also in the quarterly version we were telling that we had 66% of migration on the overall gross. We weren't meaning just on that. That is the number is not below 100,000, then we cannot disclose the number. But again, 66% of the overall gross [margin plus] migration come from the migration of the prepaid to Controle. The 34% comes from what we get from market, and as I told before, are coming mainly from portability. The liquid net debt result come also from how we are managing, today, the level of churn or downgrades from Controle to prepaid. Because as we mentioned, customers that leave the Controle customer base not necessarily leave the company but they come to the get prepaid. This is an important element also to explain why the bad debt is under control, because if the customer's problem in the payment of the first bill of the (inaudible) they are unable to continue to stay with that level of expenditure, they come back to the prepaid. So we do not expect worsening of the bad debt going ahead.

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Frederico Mendes, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [22]

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Thank you, Pietro, for the correction. So basically -- just to one last point. 66% of the gross adds or 66% of the net adds comes from your prepaid base...

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Pietro Labriola, Tim Brasil Serviços e Participações S.A. - COO [23]

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66% of the gross. And again, the last point is that, as was mentioned also in the presentation, we are improving the level of churn and downgrade.

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Operator [24]

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The next question comes from Carlos Legarreta, GBM.

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Carlos Antonio de Legarreta Diaz, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [25]

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I guess, maybe a question this quarter regards Claro's recent offering regarding data unlimited in [4G postpaid], and that's the first question. And the second question, I know this comes very often, but what are your thoughts on consolidation in Brazil at this moment?

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Stéfano De Angelis, TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director [26]

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Regarding the -- I'll start from the second question regarding the consolidation, it's clear that when you look at the Brazilian market today, there is a lot of discussions going on the possible consolidation. If you look at the fifth -- 5 players in the market and consider that 2 of them are, let me say, in some financial constraints. As I stated before in the Portuguese conference call, we are clearly interested in looking at what is happening. Because when you have a market with 4, 5 companies, it's normal to look at what is happening and look if there are opportunities. What is today our priority is to continue in our turnaround, working on our perimeter of operation and make our balance sheet stronger and stronger in order exactly to take any kinds of possible benefit of this consolidation. That probably will lessen, but I don't expect something happening in the very short term.

Regarding the Claro offer, then I move to Pietro for the details. I will say that it's not something particularly new. If you consider that the postpaid plans of TIM and also Oi have 1,000 minutes of net and unlimited on-net, honestly, we never adopt the unlimited concept for, let me say, consumer regulation. You know that here in Brazil, it's very difficult to make some fair usage in the [Controle] -- it was -- in the past we faced some problem in the [senses]. So honestly, we consider our postpaid offer unlimited voice, and I think this is how the consumer are looking at this offer of Claro. Pietro, please?

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Pietro Labriola, Tim Brasil Serviços e Participações S.A. - COO [27]

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Yes. Stéfano stated what I was going to tell you, because 1,000 off-net minutes, unlimited on-net, and [what's after], I think that more than covers the unlimited. What is important to share is that one of the questions that was more asked during the last quarter presentation that everybody was asking guys, why we were looking at improvements of our incoming volume traffic. And this was because we're the first one to launch off-net calls. And also, if the competitors didn't have already off-net calls, it's clear that for each call that you do in the future, expect that there will be an incoming call. Now that Claro has added in other plan off-net calls, what we could expect and we are very curious to look at that, is that we will increase, furthermore, incoming traffic. And as we experienced, when we launched the offer, we launched this offer, we start to have, in the short run, a worsening of the profit and loss, with increase of interconnection cost. So from the marketing point of view, this is not going to affect our positioning. From the economic point of view, perhaps we can expect a further improvement in the volume of the incoming traffic.

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Operator [28]

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(Operator Instructions) Ladies and gentlemen, without any more questions, I'm returning to Mr. Stéfano De Angelis for his final remarks. Mr. De Angelis, please proceed.

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Stéfano De Angelis, TIM Participações S.A. - CEO, Member of Board of Exec. Officers & Director [29]

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So thanks, everybody, for attending the conference call. I hope that the interaction was good, and we expect you on July for the second quarter results with another set of positive results, that we give another consistent step in our turnaround project. Thank you very much, and have a good day.

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Operator [30]

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That will conclude the conference call results of TIM Participações. Your lines can now be disconnected. For further information and details of the company, please access our website, www.tim.com.br/ir and take the opportunity to download TIM IR app available for Android and iOS platforms. You can also follow tim_ri on Twitter. Thank you.