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Edited Transcript of TIMP3.SA earnings conference call or presentation 6-Nov-19 1:00pm GMT

Q3 2019 TIM Participacoes SA Earnings Call

Rio de Janeiro/RJ Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Tim Participacoes SA earnings conference call or presentation Wednesday, November 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leonardo De Carvalho Capdeville

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

* Pietro Labriola

TIM Brasil Serviços e Participações S.A. - COO

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Conference Call Participants

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* Andre Baggio

JP Morgan Chase & Co, Research Division - Senior Analyst, Latin America Telecom, Media and Technology

* Daniel Federle

Crédit Suisse AG, Research Division - Research Analyst

* Frederico P. Mendes

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

* Luis Fernando Azevedo

J. Safra Corretora de Valores e Cambio Ltda, Research Division - Research Analyst

* Susana Salaru

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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to TIM Participações' 2019 Third 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 warranties. They involve risks, uncertainties and assumptions, as they refer to events that may or may not occur. Investors should understand that internal and external factors to TIM Participações may affect their performance and lead to different results than those planned. (Operator Instructions)

Now I'll turn the conference over to the CEO, Mr. Pietro Labriola, so he can present the main messages for the third quarter of 2019. Please, Mr. Pietro, you may proceed.

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [2]

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Good morning, everyone, and thanks for attending our (inaudible) conference call. (inaudible) in order to adapt to new realities while maintaining our (inaudible) during this process. I will walk you through the main highlights of third quarter and then the team will love to answer your questions.

In the third quarter we were able to post solid results, maintaining our consistence across the board. Service revenue continued to show an acceleration in growth, reaching 3% year-on-year, versus 2.4% of the last quarter. We still have a lot of work to do in these months, but this encouraging trend together with the postpaid seasonality of the fourth quarter keep us confident on reaching our annual guidance for service revenue.

We continue to perform very well on the cost side, down 0.6% versus third quarter of the last year, which combined with better revenues led to an acceleration in EBITDA. Our growth reached 6.8% compared to last year, allowing EBITDA margin to expand to 39.6%, another record for our company.

EBITDA minus CapEx reached close to BRL 800 million during the quarter, which means a growth of 7% year-on-year. The reduction of a similar amount on the net financial position in the last 12 months is once again showing our strong cash generation, even after the interest on capital payments.

So as you see, we are preparing the company to be ready for a more dynamic industry that we'll have in the near future. As we stated before, TIM wants to be a protagonist in the evolution of the Brazilian telecom market.

The acceleration in mobile revenues we are showing today, from 1.9% in second quarter to 2.8% in the third quarter, is being supported by our new approach to the market. Revenues for prepaid segment continue to improve, while postpaid is performing well but it still needs some fine-tuning to reaccelerate. [And we will do that, we will complete.]

Our mobile ARPU increased by roughly 6% year-over-year, reaching close to BRL 24, not only by the better mix on customer base but also by improvement in both segments. Compared to the third quarter of last year, postpaid ARPU grew 1% and prepaid ARPU was up 4%. Prepaid improvements (inaudible) the team implemented in the beginning of the year. Today, TIM's (inaudible) 60% of our (inaudible) and is positively contributing to revenue, customer experience and [branding].

On the revenue side, this offering, along with less competitive pressure (inaudible), are pushing recharges levels back to positive, after years of sequential declines. (inaudible), confirming data penetration as a significant opportunity since more than 40% of our clients still do not use data.

TIM Pre Top, as I said, is also positively contributing to a better customer experience and brand recognition. The simplification of adding service packages direct into the recharges (inaudible) reduced demand in our call center, which contributes to our customer satisfaction and delivered additional efficiencies. All this led us back to be the first in top of mind of prepaid clients.

In the postpaid segment it's important to realize that despite the negative net debts of recent months we are still capable of having a compelling offer to capture customers, as our gross additions showed. The trend in the last 12 months is positive, growing more than 9% year-on-year.

We are also solving the issue related to the involuntary churn of delinquent customers. We are running above the average of a year ago, which (inaudible) related to system issue and the former commercial approach, but finally we are seeing the indicators improving.

TIM Black Familia, which was launched last quarter, is getting more traction and today represents half of our pure postpaid acquisitions. The entertainment hub concept, in addition to contributing to acquisitions, is promoting brand recognition and innovation. This, together with a more consistent communication and advertising, brought us back to the second place in top of mind of postpaids. This will be our future platform to deliver content, software and other services.

The device business is another area where (inaudible) in order to offer upgrades in customer plans and segment customer engagement. This practical move is still in the early stages, but we expect that the device business will contribute to drive data adoption and service revenue growth without having to change our low subsidy policy.

In sum, we are seeing some improvements in the mobile segment. Competition is not so harsh as it was in the first half, macro environment is showing small evolution and our operation is on track and focused on what matters. With this, we expect another period of solid progress in our results for the fourth quarter.

As I said before, consistency is our priority. We are doing things step by step to ensure that we deliver on our promises with quality.

In the features segment, TIM Live has been a highlight of our results for quite a while, once again posting a very solid pace while catching up with our FTTH rollout. Revenue growth of more than 30% year-on-year was once again driven by a combination of high-single-digit ARPU expansion and a solid double-digit customer base increase. TIM Live's customer base reached close to 540,000 clients, almost 30% in FTTH. In TIM Live's region, we were the only large player to post positive adds in the third quarter.

During the third quarter, we entered 3 new cities, being one of them Recife, one of the largest capitals of the northeast. TIM reached 1.9 million households covered with fiber technology, and until the end of the year our FTTH network recovery plan will be completed, which will put us in a condition to add 16 more cities until 2020. [Investment in] TIM Live represented almost 10% of the overall CapEx in the 9 months of 2019.

FTTH network is just a part of our infrastructure strategy. Our smart CapEx approach is being applied to all fronts to ensure a level customer experience that will open up monetization opportunities on (inaudible). It's an important initiative I'd like to share with you.

Still on the fiber side, FTTH coverage, as I mentioned before, is accelerating. We are covering 2.5x more households than a year ago. We are also expanding our transport network. In the past 12 months we have increased backbone and backhaul kilometers of fiber by more than 10%.

For the mobile network, our 4G coverage continued to expand, driven by 700-megahertz rollout, with more than 40% growth in cities covered with these frequencies. Further 4G coverage is also accelerating: 70% growth in the cities with carrier aggregation and the leadership in the states of the northeast and south of the country where we are the leader. We continue with our spectrum refarming project, at the same time as we reach 3,300 cities with VoLTE.

We are also implementing new initiatives, our narrowband IoT network reached 3,000 cities and is the largest in the country. We expect this to be a key differentiator in the business (inaudible). We are pushing forward with the implementation of [maximum in] 4G. As we commented in recent months, this technique can boost capacity by 2x to 3x. The MOU with [Vivo for metro sharing] was renewed. Discussions are going well, and we expect to have news on the outcome of these negotiations in the coming months.

As we develop our infrastructure to improve customer experience and satisfaction, we continue to prepare for the future. Our journey to 5G started more than a year ago, and we keep moving forward to be a key player for the evolution in Brazil. Our network preparations are moving fast, with more data centers for content and network virtualization being deployed, 5G-ready equipment being sold to ease migration.

At the same time, we continue with our real network tests on 3 different locations with 3 different vendors. (inaudible) to engage customers and present to them the benefit of the technology. More than 10 stores will be supplied with 5G equipment and devices so clients can experience different application of this new technology.

Among these different applications, such as IoT, smart cities and others, it is worth mentioning that we believe that one of the main use cases to benefit the Brazilian population will be the ultrafast (inaudible) solution. This should represent a very interesting opportunity for the market and especially for TIM in the coming years.

As you well know, we are as focused in accelerating revenue growth as we are in improving quality and being an efficient company. That is why we see developments in our IT platform in the same importance as our network. The digital transformation we are implementing will only be achieved by changing our processes and introducing new ways to better serve our customers.

For example, we implemented the Naked SIM platform that allows TIM to sell any type of plan on any (inaudible) channel, doing all the network provisioning in real time. In addition, we are working on a next best action approach to better customize offers to cluster of our customer base.

The next 2 key deliverables will be (inaudible) and artificial intelligence customer care. Both projects are expected to significantly improve the quality of our caring service and to be an important driver of further efficiencies.

As you have been following in recent quarters, we are measuring the evolution of our digital transformation program of 4 fronts: caring, billing and payment, acquisition of clients and prepaid recharges. In all of them we are delivering changes that empower customers [to have closer to our 3 ask goals]: First, caring; [fulfilling and self-provisioning].

With the contribution of this and other traditional initiatives, we are capturing efficiencies at a strong pace. From our efficiency plan of BRL 1.2 billion between 2019 and 2021, which BRL 461 million by (inaudible) '19. This contributed to normalized OpEx decrease of 0.6% in the quarter and 0.2% in the 9 months of the year, well below the inflation.

These solid results on costs could be even better if it wasn't for the bad debt. Normalized OpEx with the exception of bad debt would have decreased 2.5% year-on-year. We like to look at the bright side of things. Once we have completed our action, these initiatives (inaudible) opportunity to further improve our EBITDA and margin.

A quick update on the initiatives we are implementing. On the credit front, we have partially implemented the new credit model. In order for this new model to work we are using new internal and external databases which provides a better ability to understand customer behavior.

Regarding our billing systems, we are implementing new models and added new features to improve systems ability and performance. As we commented earlier in the year, we had some issue during this upgrade that negatively impacted involuntary churn and bad debt. These problems are behind us, but the evolution of our billing system is an ongoing effort.

This section, we are already seeing some results. The new approach and (inaudible) we are using are increasing our recovery rates, but we need to improve further to meet our expectation.

All in all, we are confident of showing a better trend for delinquency in the fourth quarter '19 and in 2020.

The acceleration of revenue with strong cost control drove EBITDA growth to almost 7%, confirming the improvement trend presented in the second quarter '19, and with margin expansion of 170 basis points to another record, of 39.6%. The long-term trend of our margin clearly show TIM's commitment to be a very efficient operator.

Also bottom line the result was strong, since in the third quarter we posted normalized net income of BRL 619 million, an increase of more than 60% year-on-year. In the 9 months 2019, the growth was 34%.

EBITDA minus CapEx increased 7% year-on-year, to reach 18% of total revenues, leading normalized free operating cash flow to BRL 1.1 billion in the quarter.

Our share of the remuneration following the 2 interest on equity announcements during the quarter provides BRL 750 million, which puts us on track to meet our guidance of approximately BRL 1 billion for the year.

In conclusion, we delivered a solid quarter, confirming we are regaining momentum and are sitting in a position to deliver on our 2019 promises. We were able to reload our operation with a focus on the basics: value rather than volume, quality, innovation, branding and, last but not least, customer satisfaction.

For us, 2020 already began. Our updated plan that should come out in the (inaudible) will provide more details on the initiatives we have already started to develop, such as mobile advertising business, which has already (inaudible); financial services, taking advantage of TIM's assets; 5G preparation; and development of more IoT verticals.

Thank you. 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) Our first question comes from Fred Mendes, Bradesco.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [2]

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I have 2 questions here. The first one is related to the mobile service revenue. Just trying to get a better understanding of this line, "Other". I know it has been increasing and showing clarity, very solid on this quarter, 55% year-over-year. We're just trying to get, understand the potential for this line to continue to grow and also a little bit of the rationale for this strong growth in the last quarter. So this will be my first one.

And then my second one related to the PDD. It continues to grow. I think Pietro already mentioned that in his previous speech. But then our understanding here is that on the second half you should start to see some improvement. Of course the third Q number will continue to grow. So just trying to understand what these new initiatives you mentioned you are implementing now are different from the previous ones and also what would be an improvement here. An improvement would be slower growth or a relative (inaudible)? I know you don't give a guidance for this line, but if you could just guide us here this would be great.

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [3]

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Thank you, Fred. Related to the mobile revenues, as we stated, as we stated also in the last call for the second quarter, we are accelerating both on mobile service revenue and both on other revenues. We explained that our other revenues [impact] our business. And in a market where the backbone construction is part of our strategy and one of the key elements, the possibility to get in a faster way and in a more efficient way through this [work] is part of our (inaudible).

So we think that this line will continue to have this kind of pace because it's part of our business. You know better than me that in the market there is a new demand for backbone transport construction. And so we think that will continue with that approach. I repeat: it's faster and it's more efficient that build our own network.

Related with the PDD (inaudible), for sure it's clear that we are (inaudible) late with work that we [told] in the beginning of the year. But we think that if you look at the absolute value from the second quarter to the third quarter we have a deceleration in terms of growth rate, and the difference is very small. But as we stated, we foresee a fourth quarter that will see a stabilization quarter-on-quarter or perhaps a slight reduction compared to the (inaudible) quarter.

The initiatives that we put in place that we described are already showing in the number of October good results. But I need to speak to (inaudible) to give some more colors on these activities.

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Unidentified Company Representative, [4]

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Fred, also regarding the first question about this "Others" line in terms of revenues and the growth in terms of [swaps], it's also related to the evolution of our OpEx. Because you see also this quarter we posted a negative number in terms of the evolution of costs from (inaudible). So from our view it's much more efficient to make (inaudible). At the end, if you're doing the swap your EBITDA will be more (inaudible), having the least that will be negative.

So this is something that we've been working a lot. You see and you've seen in the presentation the evolution of the high-speed connection over time that we are having. So it's always related to the business. So you should expect similar trends, probably not in terms of growth but yet in nominal terms.

But going to the second question, related to delinquencies. Clearly, something that for us still a challenge. We stated this already at the beginning of this year. It's both coming from some external issues, but also some internal issues.

We've been working a lot these quarters. The thing is the PDD reflects what happened probably in mainly 6 or 7 months ago because with the new standards of IFRS 9 the higher impact on the PDD comes from the issues of 6 months ago.

So I won't say that we solved all the issues. We have built a lot. We are already seeing some signs of improvement. Clearly, we're going to have some year-on-year growth in the fourth quarter, but what we are expecting is that the third quarter, this quarter that we already closed, should be the peak in absolute terms. You will see this in the next (inaudible). This is also an opportunity going forward in 2020 for additional efficiency, as Pietro mentioned.

But again, it has a lot of focus on our side. We have a big portion of our company helping on this side. And we will continue to work. As I mentioned, we think that this third quarter should be the peak in absolute terms.

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Operator [5]

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Our next question comes from Daniel Federle, Credit Suisse.

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Daniel Federle, Crédit Suisse AG, Research Division - Research Analyst [6]

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My first question is regarding prices in the mobile segment. We have been seeing certain competitors increasing prices significantly over the past few quarters. My question is if that's an opportunity for TIM, as well, to implement a more significant price increase in the coming quarters?

My second question, we see that the macro conditions have been challenging in the past 2 years, and my question is this. The macro conditions, if this improves in the coming quarters, if that changes in some way the strategy of the company, maybe investing more to capture growth or focus more on the prepaid instead of the postpaid? So if something changed in the strategy overall.

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [7]

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Thank you, Daniel. Related to the price offer, you have to remember that we were the sixth player starting from 2016 that every year [prices up] our own customer base. We think and we believe also in a (inaudible) kind of more-for-more approach, also to reduce the reaction of the customer and the churn when this kind of events can happen.

And it will be part of our strategy and we will continue on that, then with some different details related to our (inaudible). But I can confirm you that this is an opportunity. Remember that we priced up our customer base last year in -- this year, sorry, in February and we try to respect our (inaudible) to institute that once per year.

Related to the macro condition, I think it's important if I can do some advertising for our company. In our plan we were forecasting a growth of 2.5% of GDP. And we are in line with the guidance with the macro that reached only a growth of 0.8%. For sure, a sign of improvement could help us and for sure could help mainly part of our customer base because we are used to talking about prepaid as a part of the segment that is impacted by the macro. But we have to remember that today a good part of prepaid was migrated to Controle. So an improvement of the macro can help not only TIM, but all the market, on prepaid and on Controle.

Then it's important to further detail that, going ahead, prepaid is an important segment on which we have to further improve our capacity of (inaudible), of go-to-market because we see opportunity to be back to growth also in prepaid. It is not the case that the focus that we put in the last months allow us for the first time after 36 months to have recharges that are best to grow compared to the past.

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Operator [8]

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Our next question comes from Susana Salaru, Itau.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [9]

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If you could elaborate a bit more about your 2 new initiatives on the financial services and mobile advertising, that would be our first question.

And our second question is related to the (inaudible) sharing with Oi. When you guys expect to make an impact in the P&L in terms of reducing the OpEx of TIM.

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [10]

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Susana, thank you for the question. Related to these new initiatives, for sure in the presentation of the new planning we go much more in detail. But just to give you a flavor about what we are talking about, let me discuss about this, let me say, advertising, digital advertising, that we cannot bear to wait. One is as the publisher. We have a lot of assets that we can exploit to sell advertising. Just to give you an idea, every time (inaudible) our prepaid customer and they recharge, they are directed to a portal to convince them to do a recharge. We can put on this portal some video that can be a full-size one or it can be an advertisement. So we are starting to sell this kind of advertising.

The second element we are working on and putting a lot of attention on the new rules on privacy that will arrive in August. We have a capacity to do segmentation of our customer base that is very important, and we can start to act in the next year also as a [VMP]. So we can sell the profiling of our customer base to improve mobile advertising from people that want to buy advertisement.

And then I don't have to say that (inaudible) will take a lot of time. When there is someone that is doing something better than us, we can copy. I don't have to mention here the initiative, called [Vivira], that we had in the past that showed good results in terms of revenue. And so we think that we can apply in the same way.

Related to financial services, this is something we are working on and it's another way to monetize our customer base. On this area we are still working. So I cannot go too much in details. But for sure in the presentation of the new plan we will give much more detail, (inaudible). I can assure you that will be very interesting initiatives.

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Unidentified Company Representative, [11]

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Your second question was related to the MOU with Vivo, Susana?

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [12]

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When do you guys expect it actually to be reflected in the P&L of TIM, the rev sharing, in terms of OpEx savings?

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Unidentified Company Representative, [13]

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Regarding the OpEx, it's something that we are still working and we're working a lot on both sides. You know that the MOU was related to different initiatives. But it's the same date of the 2G and then the (inaudible) cities below 30,000 inhabitants.

The thing is we still don't have the numbers. Clearly, there is significant impact that we are analyzing that you probably will see these cost reductions starting in 2021, 2022. Why? Because even if we manage to close, as you mentioned, in the next couple of months this contract, probably 2020 will be the year that we will be working in order to set (inaudible) the agreement. So you should expect this impact 2021 and onwards.

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Operator [14]

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Our next question comes from [Venicio Cebeto], UBS.

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Unidentified Analyst, [15]

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The first one, Pietro, you said during your presentation that the annual guidance for your service revenues was (inaudible). I would just like to understand where should this acceleration in mobile service should come from and what you guys expect for the next year, starting the first Q.

And our second question is just I'd like to, just a color from you guys on the [AMX Nextel] which you guys have requested, alongside with [Claro], to be an integral part. Just to understand what you guys expect from that and if you give -- the antitrust gives what you guys are asking, what's the potential impact for you.

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [16]

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Thank you again. First of all, related to what is the acceleration that could be in the fourth quarter to allow us to reach the guidance. As we told every time, the fourth quarter is always for a (inaudible) operator, like TIM, has always an important seasonality, mainly from prepaid. And this is one of the reasons for which usually in the fourth quarter, as you can see every year, we posted also a better result in terms of EBITDA. Why? Because there are more revenues compared to the previous quarter due to this seasonality and we have also a better EBITDA.

So we see in this seasonality opportunity of the acceleration. And this is at the number, the [month of] October, we are quite confident that we are able to reach the target. But again it's mainly related to the seasonality because always the second -- as we stated also when we announced the restart of the second quarter, in Brazil, looking at our number, the second half has a seasonality that is much more important than the first half.

Then related to the Claro-Nextel, actually I repeat the answer that I gave also to some journalists. I'm a CEO of a company quoted to the stock exchange. If there is any movement that can change the way of the competition, we (inaudible) to look and evaluate if it can be something that changed the competition, or not. So there is nothing specific we entered in the CADE a better evaluation about how this deal can change the competition battlefield.

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Operator [17]

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Our next question comes from Andre Baggio, JPMorgan.

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Andre Baggio, JP Morgan Chase & Co, Research Division - Senior Analyst, Latin America Telecom, Media and Technology [18]

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So we are seeing once again Oi collapsing and having problems with debt and possibly assets for sales. And TIM was mentioned as one that would be interested in these assets. So just to clarify, I understand the obvious synergies of mobile of Oi for TIM. But can you talk a little bit about other assets that could be interesting for TIM in your view?

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [19]

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Andre, about -- I think it's something to say without going too much in details. And again I will state what I told also this week during an event in Sao Paulo. For a mobile operator, assets as spectrum, (inaudible) and backbone are always assets important to improve the quality of our network. We have a level of CapEx in our plan that in an increasing way means that we have to continue to build transport backbone, backhauling and new antennas.

So if a certain point some of these assets could be available on sale on the market, it is our duty to evaluate if it is something relating to our plan that can aggregate value. And this is not only related to Oi because there are a lot of discussion related to that. These evaluations that we are doing also related to the 5G auction because there are other frequencies. The evaluation of the possibility to use other players that are building their other, let me say, extension companies, (inaudible) that are building networks that can allow us to put further fiber.

So this is something that we are doing on a daily basis. This is a huge job that Leo is working on, and this is the thing that we did in the right way and in a clever way in the past.

Last but not least, sometimes we have to look to technology because (inaudible) technology is a black box. If you choose at the right time the right technology, you can gain some competitive advantage for a certain amount of time. This is the case of (inaudible), is a technology that is coming from 5G that can be applied on the 4G and that can allow us to improve the spectrum efficiency.

I don't know if Leo wants to add more color on that.

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Leonardo De Carvalho Capdeville, TIM Participações S.A. - CTO & Member of Board of Statutory Officers [20]

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Completely right. It's important to understand that all the time we are analyzing what is the better situation for existing assets, if it is buy or make it or lease it or swap it. So it is a continual, let's say, work that we have doing with the CFO. Specifically, also for assets from Oi, you are right. The mobile is a clear, let's say, asset, but they have a lot of fiber. The way that they broadly will take it available for the market, it can be different, not specifically by sale but can be in a different way, for a sale, swap, et cetera. So we are always analyzing all the opportunities.

As Pietro mentioned, at the same time we are seeing all the opportunities in terms of technology to improve our capacity using the existing assets. So remember that we did the refarming, retaking [hundreds] on the new cycle of the 4G. And now we are bringing to Brazil this new technology that is called the (inaudible), what in the previews testing show us that we can improve our capacity into 3x, 4x using the existing spectrum. So it's very good because, let's say, it showed to us a near feature in terms of show achieve the current capacity growth without for high densification of sites. So this is our day-by-day.

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Operator [21]

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(Operator Instructions) Our next question comes from Luis Azevedo, Banco Safra.

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Luis Fernando Azevedo, J. Safra Corretora de Valores e Cambio Ltda, Research Division - Research Analyst [22]

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I have 2 questions. First, it's regarding if you analyze any type of franchise. Just, for example, Telefonica and Oi is doing to accelerate the deployment of fiber connections.

And the second question is regarding the 5G. What do you expect to be the auction in terms of timing and in terms of disbursements and CapEx. How do you see it right now?

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

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Thank you, Luis. With regard to the first question, we are analyzing different model. We can approach that internally called a Smart CapEx approach to continue to grow with TIM Live. But among this approach there isn't something similar to the (inaudible).

Related to the second question, on 5G, we are very interested in understanding better the rules of this new technology wave. Because if we don't have a clear understanding about the rules, any kind of discussion makes no sense because it's quite difficult to say the level of capital requested, the kind of revenue that can we have. So as you mentioned, as we stated again, we prefer to have something later with clear rules than something tomorrow with unclear rules.

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Operator [24]

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Now we will move on to the questions received via webcast.

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Unidentified Company Representative, [25]

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Everyone, this is (inaudible) speaking. Our first question comes from (inaudible), from (inaudible) Bank. And he would like some clarification on what is the involuntary churn that we mentioned during the call and in our documents, if we can give further details on the initiatives that are being taken to reduce it related to new models of credit and improvements in our collection systems.

The second question, also from Fernando (inaudible), is related to additional details of what is the next TIM project related to artificial intelligence in customer caring.

Please, Pietro?

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [26]

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Okay. Related to the second question that is related to artificial intelligence on the customer care, what we are doing is that -- let's try to simplify the concept. Today when you interact with [an SGR] that is the answering machine, you have only options. The (inaudible) is going to push you if you are calling for Issue 1, Issue 2, Issue 3, Issue 4. With the artificial intelligence, jointly with the speech recognition system, we are able to allow the customer to speak in a natural way with our technology, and we are able to understand which is the issue, and we are able to answer in automatic way also to the issue.

Keep in mind that today already improving our capacity to understand all these elements, we are able to increase by 5 percentage points the number of calls that you are answering on the call center through an automatic system, so a savings in terms of attendant cost.

This is just one of the part of the way in which we are going to use artificial intelligence. But perhaps the level of details needs to have a specific question to discuss that. And so we are ready to discuss the issue to you all the details.

Related about involuntary churn, again we mentioned in the presentation the 3 areas on which we are working (inaudible). The first one is more to prevent the acquisition of customers that have a higher level of risk in terms of bad payment. Our data, improving our level of database to recognize the customer that has a higher level of risk. At the same time, in the third point of the presentation that we show is to act in a better way to recover money when a customer doesn't pay. So these are 2 of the 3 areas on which we are working.

The last one that was the billing. For sure it's much important also to have a system that is able to bill the customer in the right date and to deliver to the customer the bill starting when is the right moment. As we mentioned before, in this area we had issue at the beginning of the year. These are areas on which we have already worked on and we are improving. And this is the reasons for which we expect revenue improvement in the last quarter of the year.

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Unidentified Company Representative, [27]

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The next question coming from our platform is from (inaudible), from (inaudible). And she asks about how TIM can accelerate the migration of the 60 million devices that are still 2G and 3G technology. What is TIM's strategy?

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [28]

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Okay. I think that is we don't have a silver bullet to do everything at once. The activities that our team have put in place are several of them. First of all, as we mentioned, next best action as a platform. Every time that a customer that has a 2G or 3G asset call our call center, why would we not propose to our customer to migrate to 4G, explaining the advantage? Every time that the customer with a 2G or 3G handset come in our shop, why we do not propose to do that?

So compared to the past, our system in the past had some difficulty to allow to all our attendants to have visibility of which was the handset that the customer had in his hands. Today with these next best action platforms, jointly with an increased level of segmentation, we are able to have a more [sniper] approach of all these customers.

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Unidentified Company Representative, [29]

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Just to complement, Pietro, we have to remember that since 2 years ago that we are not selling more 3G, 2G devices in our stores. What it means that our focus is to provide the customer with the better technology, 4G, on our own store and our partners. So I guess that is one of the parts that help us to speed up so much our user base in terms of 4G.

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [30]

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And for sure, then there are some details that we cannot disclose because it's not that we are going to be finding this to the competition, our marketing plan.

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Operator [31]

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Ladies and gentlemen, without any more questions I am returning to Mr. Pietro Labriola for his final remarks. Please, Mr. Pietro, you may proceed.

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Pietro Labriola, TIM Brasil Serviços e Participações S.A. - COO [32]

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I want to reiterate what has been seen in the past months. TIM Brasil has a strong fundamental, and we are preparing ourselves to take full advantage of the economic recovery and be a protagonist in the future development in the Brazilian market. This market is not so easy but keeps [setting] potential, requiring focus and concentration.

To close the year strong and achieve all of our goals, we will need excellence in execution and economic progress to continue, and we are optimistic that both will be present in the fourth quarter. I want to remark the professionalism and dedication of our team who continue to make the difference to deliver the solid results.

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

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Operator [33]

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Thus, we conclude the third quarter of 2019 conference call of TIM Participações. Your lines can be disconnected from now on. For further information in sales at the company please access our website, ri.tim.com.br. Thank you.