Q3 2022 Tim SA Earnings Call
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Getting into additional details in our revenue dynamics that we saw mobile service revenues grow close to 26% year over year, while fixed service was up by more than 8% consolidating our service revenues and an expansion of 25% year over year.
Yes.
Once again it is a trend set to highlight that this revenue performance was driven by more than just the <unk> acquisition.
Our organic performance continues to be helped by the positive effect of price ups benign macro environment and rational competition.
Postpaid revenues continued with its solid expansion up almost 20% year over year with an article of circus.
<unk> per client per month.
Prepaid revenues rose more than 30% versus last year, pointing twin output of close 13, we eyes.
As expected the average revenue per sub is being diluted by the acquired customer base with a lower ticket in both segments with these mobile blended <unk> stood at $24 nine reais.
These metrics will show some quarters of volatility as we haven't started to clean up of the acquired base. We expect to begin in November and the process should take months to complete.
Although much of our attention is focused on that the integration process, we continue to innovate.
As this is a fundamental part of our positioning our company DNA, we continue to bring novel piece to our existing and new clients.
During the quarter <unk> launched a partnership with Latam Angola Airlines to offer in flight connectivity embedded in our postpaid Timberlake plants. We also expand our partnership with Amazon to provide content for prepaid and postpaid customers.
Peeling mobile and as I mentioned earlier, the fact sheet launch is a success Bismarck coverage approach and in our circuit device strategy are delivering competitive differentiation and customer experience improvements our factory coverage arrive in all state capitals with a particular.
So on crucial market liquidity by Sunpower and <unk> today, we have more than our peers combined number of antennas given team an edge over competitions.
When we sum this up with the acceleration of <unk> device penetration driven by team and retailers that we already see 10% of profit offload a major state capitals.
The importance of these accelerated adoption comes from the potential savings in <unk> capex and in better customer experience. It is early but in the first measurement five users at twice the NPS of customer using the older technology.
Let's now move and go deeper into the integration of <unk> assets.
As I mentioned earlier integration is on track with network implementation proceeding at a solid pace what client migration is starting to accelerate.
The net or the first two phases roaming like in frequency availability were completed one full integration should be achieved in early 2023.
The migration of the acquired base into our system is occurring in waves to ensure we do it properly and with minimum impact on clients until September we migrated $2 5 billion customers and due to the complexity of the process that we should take the entire 12 months, we plan to complete the entire process.
On a separate initiative. Besides the commissioning process is starting this month following an accessory system implementation that allowed us to consolidate ERP functions for the acquired assets. We plan to the commission for Enbridge sides in two months.
In 2023, an additional 3000 sites that will be shut down, leaving approximately $1 3000 until December 2020 core.
Lastly on the M&A topic as you probably saw in our communications during the quarter, we together with the other two buyers enter into a litigation process with OE related to adjustments to the closing price and indemnities. The total amount under discussion now is $3 2 billion Reais This heat wave.
<unk> is developing on two fronts, one in legal courts, where the judicial recovery judge determining the buyers to deposit the withheld amount of 1.5 billion reais in the escrow account.
<unk> has been done a couple of weeks ago.
The other in the arbitration court Dmitry the buyers initiated this path.
The following is an update on b to B.
As we discussed during our Investor day in May we are focusing on selected verticals to offer a complete set of connectivity Iot and tech solution to Brazil's industry leaders.
Three of these verticals are already showing promising opportunities.
In agribusiness the vertical we have been working for longer we offer solutions to increase productivity covering millions of acres of crops and fees.
<unk> our coverage in the last 12 months, we started with solution based on <unk> technology, but we already closed a few deals to develop <unk> with groups like some athene.
In logistics, we can positively impact lead times and fleet management that taken transportation efficiency to the next level again, we almost doubled the number of kilometers connected with Iot project and we are starting a <unk> initiative, we PTP in Santos port they're larger.
<unk> in Brazil.
With the utility sector, we can collaborate for smart lighting solutions, improving distribution and increasing automation over the last quarters and increase the number of public smart lighting points at 90 fold with engie being one of the major power plants in such initiatives.
Changing gears to fixed surface Tim live.
Solid quarter.
Amit is transitioned to a new operational model using ice's them as his network platform.
We grew revenues at around 12%.
Taking third quarter revenues to more than 200 million reais.
Fiber users represent more than 70% of the entire base.
And the FTC to S. PTH emigration is helping turn to reduce materially volte.
Voluntary churn declined by one five bps since the first quarter.
As a result of our efforts to grow sustainably with a high value service and portfolio, we maintain a strong FTE THR poor level of close to 98, despite competitive pressure, we resumed our footprint expansion or expansion in the first half and in October we added a new regional classes Center.
In Campinas and important theory in the countryside of some other state now our path forward to come in Lee our CFO to review the financial results.
Thank you Robert and good morning, everyone. As <unk> explained earlier the third quarter was marked by improvements in all lines of our results our opex, although still pressured by the same elements. We saw in the previous quarter presented a deceleration when compared to second quarter, 24% versus 25% year over year.
This trend reflects a larger company following the M&A transaction, but all cost lines remain under control.
With revenues growing faster than in the second quarter, and Opex expanding slower EBITDA dynamics accelerated.
EBITDA for the quarter increased by 24, 5% versus third quarter to start 2021 with a stable margin of 48% net of the ice systems costs. We would have had more than 28% of EBITDA growth with a margin of 49, 5%.
Of course this record high EBITDA was driven by service revenue growth from organic performance and M&A amid an environment of course under pressure and carrying a lot of transitory effects.
Looking ahead, it's always important to remember that we are carrying the burden of the temporary service agreement with a way that will end in April of next year, we expect a much cleaner opex dynamic in 2023 as both impacts from the GSA Andi systems will start to disappear.
Last quarter. Some of you became a bit worried about our bottomline dynamic.
And as we explained there will remain a transitory and temporary effects in the third quarter. Some of this impact is already starting to ease, but some will remain until we finished the asset integration inside the commissioning.
Signed leases continue to impact DNA to financial results significantly and spite starting the decommissioning in the fourth quarter, but will only benefit.
It permits later in 2023 and 2024.
As a result net income came in line with the third quarter of 2021, <unk> hundred 73 million highs.
And we feel very comfortable to fulfill our 2 billion the highest guidance of shareholder remuneration.
Till December we'll announce a portion of the remaining 1 billion Reais and interest on capital and the rest will be proposed as a dividend.
<unk> system deal negatively impact our costs it benefits us even more on the capex side positively affecting free cash flow.
This saved Capex is compensating for a good portion of our <unk> rollout year to date EBITDA minus Capex is growing close to 25% and the free cash flow margin is exceeding 25%.
Our cash position remains solid even after the payment for oil assets, we closed the quarter with approximately $3 7 billion in cash so even after the court decision to transfer 700 million ties to the escrow account, we will retain more than 3 billion hedged.
This deposit will not impact our leverage guidance since we took into consideration the total payments to <unk> additions.
Additionally, our indebtedness level is comfortable in the third quarter, the net debt to EBITDA ratio remained below one five times.
Now I'll hand, the call back to our back to complete the discussion related to the third quarter.
Thank you Camilla It is fair to say, we're executing firmly the plan, we set our self to deliver in 2022.
A very tough and uncertain year, we expect to meet our financial and ESG targets.
Our accomplishments in this first nine months confirmed our progress to build the next generation team evolving step by step to become the best mobile operator in Brazil.
Building, the new chapter in TMC three tanks immense support so I'd like to thank the entire team for their outstanding work and commitment.
Additionally, we have a new executive team member <unk>.
<unk> joined <unk> in Brazil, as the new legal officer. She has a vast experience in both in telco and other industries.
I'd like to give her a warm welcome and we showed the lag can success. It is great to have her on board.
Now, let's open the floor for questions. Please operator.
Thank you Mr. Gilberto will now begin the Q&A session.
First we will take questions from analysts followed by the general public.
Both in English if.
If you are listening through webcast questions can be sent by check.
We ask each participant to restrict himself to two questions at a time.
To ask a question. Please press star one and to remove the question from the list.
Please press star two.
Our first question comes from Marcelo Santos with Jpmorgan.
Hi, Good morning, Albert Camilo. Thanks for taking my questions. The first question is the eye CMS impact I wanted to understand better, especially on prepaid we're doing pilots to increase their allowances and not change prices.
Did this impact already happen and how much of the quarter was impacted by by Ics.
The second question would be about the litigation with voice how did this impact the P&L and the balance sheet is in any way could you just described.
How each parts moved because of this for example deposited into escrow accounts. This impact I don't know earnings or taxes or anything. Thank you.
Hi, Marcelo.
We start with the first question and then I will handover to come in at for the second one when it comes to prepaid.
<unk> already implemented the.
The measures for gross additions in the customer base.
Roughly it was August and basically we followed as already commented in many occasions.
With a.
Larger gigabyte benefits for our customer base and so when you look at the combined effect.
What you see already in the quarter is.
Let's see a positive impact of the CMS a reduction on the net revenues, but at the same time at the race.
A reduction of total cannibalization in Recharges, then thereafter translate in revenues because we have a.
A big chunk of our customers that are recharging more than once and so basically the additional gigabyte. So megabytes that we're giving to the clients that cannibalize.
They're recharging and so what you see in the quarter is the net effect of.
The better net income due to the SMS and the cannibalization of recharges due to the extra gigabyte that we are offering to the entire customer base.
Starting in August .
Okay. Thank you.
Hello.
Okay.
Hi, Hi, Marcellus so regarding your question.
Right now we had no impact yet from the from the 700 million highs.
Or is it that we did that tower part that we didn't not on the escrow account on the P&L on the ballot because we took a conservative approach and we may end and let the transaction as initially recorded in our numbers with respect to the balance sheet. You will not that you will not see that in September of course, because the deposit was that was made in October .
But as I've hoped over we will have roughly 700 million highs of cash moving from our cash position to a judicial deposit.
But as I mentioned in my speech that will not impact our our leverage guidance by the end of the year because.
When we develop the guidance we were already counting on the fact that we would have to pay the full price for oil that was before the.
The price adjustment request.
Perfect. Thank you very much trickier.
Hello.
The next question comes from.
But our goal with Goldman Sachs.
Yes, good morning, everybody.
Thanks for taking my question a quick one from my side I just wanted to get an updated view of both your capex outlook and whether we should start thinking about potential change going forward. I mean, if we would think about you know the first or mobile integration process. Secondly, initial results in <unk> and then.
On the asset light model. If this partnership with ice systems are you seeing any major attrition at this point that could eventually lead to a downward revision of your annual guidance. So this is the first question and my second question is related to the B to B business. If possible can you just help us to understand the economics.
These projects are you are presenting if you can enlist trades for example, who is responsible for the related Capex for network maintenance costs. How team has got paid in these type of projects and lastly, what kind of margin you should achieve them. The average level for return you are looking.
For that would be great. Thank you.
Okay. Diego. These are two very long question to answer during the call, but let's go with the first one which is easier when it comes to the Capex on the third quarter.
You see that we are a notch below 1 billion.
But we expect to catch up in the last quarter and.
Closed this year in line that we the guidance that we gave to the market. So there would be an acceleration in the last quarter. When you look at next year.
Basically what is going on is that what has been presented in the vessel day.
Is happening so.
Basically what we see at that time, there was may this year that we were assuming that <unk>.
<unk> would be in line with four G. The capa as we saw at the time that you in the last years, what is happening is that <unk>.
<unk> is growing faster.
Then the vessels the four G pickup in these areas.
Positive upside on.
On Capex here for the next year basically you've got two big capitalization of Capex efficiency. One is the higher frequencies and towers are the second and fourth.
Secondly is for the off road.
<unk>, so <unk> offload of Fuji is proceeding ahead of what we planned we're going to be able to.
To materialize the upside.
In 2023, and 'twenty four given to the fact that.
What we expect it to be a necessity for.
<unk> investment are no longer required. So we mentioned on upside of 600 million Reais in the Investor Day. This is actually we see this materializing in the following years. So we are still discussing now on finalizing the industrial plan for 'twenty three 'twenty four 'twenty five but the upside.
That is coming along as we move with implementation of <unk>.
Same staff for Ice's them. So basically as you know with with Ice's them. Why we include a new Opex line and the benefit is the Capex savings. This everything is moving according to plan. So what we say it is happening.
So this is for the FERC question for a second question on that and then we can maybe discuss it also in a one to one meetings afterwards.
Basically there are two main business model for these b to B business. The first one which is the one in place for a 99% of our projects. So far it's basically model whereby.
With.
Technical services connectivity and.
In network services and network maintenance services to our customers said they paid for it and we put a margin on top of on top of it. This is a sort of set up payments plus margin for US and then there are the services that are running on top of these network of technology that we are.
Deployment and here the margin is.
Let's see pretty high because it's at.
Telco services on top of the Capex the capex that by the way is paid by the client. So this is the main model that we've been deploying so far in the 99% of our projects. These changes a bit when we look at.
For example, utility vertical that we just launched in this case.
These are what we are discussing with our customers is not always that service.
But this is let's put this way emerging so.
So far the well.
The entirety of our projects are based on our capex be that by declining margin for US and then services on top of these Capex hi.
High margin for us so accretive on our EBITDA margin.
Super clear. Thank you very much for your answers.
The next question comes from Leonardo Olmos with Banco UBS.
Hi, good morning.
Yes.
Two questions. The first one just a quick recap of the commission of the sites you mentioned that you expect 400 sites in the remainder of 2022 3000 sites in 'twenty three.
One 3024, not sure I heard that part right.
So just so we get that and if you could.
Sure Al.
What is the impact of fines that you expect from this the commission process.
The first question if I may ask the second after this thank you.
Turning to find site and.
Yes.
Let's go to the commission is in the pre fab that you just mentioned so you understood correctly, what we see throughout the presentation. So.
The 400 is not that we are expecting to do it we are already doing it so of these 400.
Last week, we were sort.
150 already implemented so we are putting together the machine to make this happen this year and next year. So we are now ramping up the speed and then we are going out to execute this speed next year. So there is SPC feature organizational group within the organization that is in charge of this huh.
And the plan is let's see Randy and is being executed. So your understanding is correct. So it's a small piece this year in.
As we speak already and in November a big chunk of next year and the remaining part in 2024.
When it comes to the impact of the fees are deep. Although this is already included in our numbers and so basically the the.
The amount of I will hand, it over to Luca to give you. The details about the number that are part of our Ah that is already in our ownership I think I'll batzel alone idle two three effects here. So the total amount of the expected fines.
Was already included in our I F 16 debt as of second quarter. So its roughly between 600 and 700 million hasn't it's there already.
The in terms of cash of course, it will be paid when with the commission that the sites, but in terms of our P&L because it's part of our the commissioning plan, it's being amortized over time. So in the P&L you already see the defect of the AR.
Defines lynn.
Linear amortization over the period of the decommissioning.
Very good. Thank you very much and my second question regarding <unk> clients can you. Please discuss the bad debt dynamics and if you plan to disconnect scratch essentially as a competitor.
Yes.
Okay.
The better dynamics.
Basically the normal better dynamics of mobile operators. So we got bad debt on their side then the delinquency rates on our clients our it will be higher than ours, and it's business as usual, let's put this way.
When it comes to the disconnection.
We are planning we got.
Immaterial number of customers that are inactive so they do not generate that traffic. So they did that they are not using the service and so what is going to happen is that starting from November and this quarter. The current quarter and the next quarter first quarter of next year.
We are going to initiate the process of cleaning up this customer base.
Basically this is a cost avoidance opportunities on our side as he said the so basically that people have come from and not using the service, but we got some cost attached to it like taxes and license costs et cetera. So we are going on.
Any shade of the cleanup.
This month.
And carry out.
These are according to all time scheduled this quarter and next one.
Alright, Thank you very much have a great day.
Oh.
The next question comes from Mark <unk> with XP investments.
Hello, all bad things.
Thank you for taking my questions I actually have two on my side. If I may the first one is regarding S. G.
<unk> SWA, if I would like to know when the company intends to lounge at WH plans and when will we start to see its impact on <unk> revenue and the second one is regarding company's strategy on F. D. G H.
The Korean company focus is capturing synergies with <unk>.
And also five G rollout, however, I would like to know if you could give us a little bit view on and when could we expect major at Dth expansion. Please thank you.
Okay. So Michael let's go to the first question in terms of <unk> in terms of that <unk> you probably know we have been experience experiment is the technology in <unk>, we launched the.
Three pilots last.
Last year in <unk> and <unk>.
We set out our view on these in our Investor days. This view remain unchanged. So basically it's an opportunity to.
Leverage at the available capacity of <unk>. We believe this is an opportunity and there are a few barriers that need to overcome to make it available in the consumer segment.
Which is basically a decent cover of five <unk> and we are addressing these in main capital. So for example, the generic San Paulo, Curitiba and then there is the.
Let's say, let's put this way the affordability issue because today the CPE is still quite expensive for the consumer market. Nonetheless.
The the the size of CPA is going to expand rapidly over the next year or so so we managing that the affordability point could be addressed at the end of 2023 in the second half of 2023 and 2024. This is an opportunity that we are going to attack for the consumer segment.
At that point of time, if the CPA size, and therefore economies of scale make it viable for the consumer segment.
With different <unk> for the corporate segment, whereby we already uses <unk> for top clients.
For example are required.
Backup solution side is one use case for that so it's a complementary backup solutions for our top clients imaging differential services bank branches. So it's an emerging opportunities that we already have some in roads. So we expect these to scale up.
Not going to be meaningful on our revenue in the short term.
This is for let's say <unk> and <unk>.
When it comes to F Dth.
The expansion of F. Dth basically it's it's again in line with what we see in our Investor day. So we have a plan that we di system at.
Whereby they deployed in that worker F. D ph network, and then that we grow our customer base and revenues. So this year. We opened two cluster wanting joined <unk> in the first half and now incomplete answer and so we are proceeding. According to this piece so the pace of growth of our EF.
Dth business is continuing.
Let's say X is now.
I believe this is in the short term the right approach because it combines it allows us to combine both volume and value in a market, which is quite competitive we've got 2% market share. We are growing we got their houses at a pool in the sector and so we are we're basically balancing and trading off this.
Speed of growth versus the value that this girl generate for us.
Perfect. Thank you.
Yeah.
The next question.
It comes from.
Luca branding with bank of America.
Hi, Good morning, everyone. Thank you for taking my question so two.
Two questions from my side first of all.
If you could comment on what we should expect from depreciation in the coming quarters.
Depreciation and amortization.
It increased this quarter with the full three months of acquisition. So if you could comment what we can expect and then second.
In terms of the IPO for the oil clients I know, it's probably difficult to say what this exactly from oil or not right now but are.
Are you already working on Upselling those clients are you, having any success on that and what's the outlook for this thank you.
Okay. Let me let me let me look at let me take the second one and then we'll pass it per community for the first one when it comes to the ARPA of oil customers.
The average ARPA is lower is lower on both segments and then the mix is more skewed versus prepaid and therefore, you see the effect of these are in our article dynamics and the decreased year on year.
When you look at quarter over quarter. The decrease is due mainly by the fact that we got three four months this year and two months that next year.
Now we are totally focused on migrate these mostly the customized from <unk>.
To our system. So 12, two two team. This is our priority. It is a complex and quite large exercise over to talking about the.
$70 million a customer of mine those disconnection, so you're still a big number. So this is our focus.
There is of course.
Opportunity to monetize these clients in the future because they are based on a tariff plans, which are among the lowest in the marketplace and nonetheless this is not our priority as we speak.
At this point in time, our priority is to migrate customers from the existing plants that are two equivalent or better plans and in Brazil. When he is done we got to take care of our monetization opportunities.
With respect to depreciation and amortization going forward, we're not giving exact guidance on that number but just to give you a view of what's going to happen. We are still carrying the burden of 7200 towers that we that we got from the contracts up seven hundreds of thousands of hours as I mention.
We're going to decommission roughly 400 towers this year only.
As you remember we are required by guide you to try to sell 50% of our antennas and we can't really decommissioned the towers, while the sale process is ongoing it started in July as we publicly announced so we can only start massively decommissioning powers in 2023, So we will still.
I feel the burden of those additional towers.
For the remaining remainder of 2022 and for a part of 2023 and as we start to decommission. The towers, then that that burden is going to ease overtime and the process is expected to end by 2024, So we won't really see a normalized.
Right.
In our DNA until 2025, but of course easing over time as we decommission the towers.
Perfect. Thank you.
The next question comes from the nail Fidel with credit Suisse.
Hello, Good morning, everyone and thank you very much for taking my questions. The first one on the goods EBITA margin increase.
Quarter over quarter I would like to understand is part of that is coming from synergies from all your assets and use those synergies are coming higher or faster than initially expected by by the management and the second question is more like a quick follow up on the ice CMS.
Topic.
The financials that the company's provision.
A portion of the IC, a mess that I ended.
Our sense would be like related to the music the Titans mismatch between the reduction in the ICM aesthetics and the reduction in the billing, but it's it was not totally clear. If these provisions are being deducted from revenues.
Those provisions provisions are like an increase in costs. Thank you very much.
So then let me take the first one on the EBITDA margin basically.
So we are working.
Our cross sell all of the cost base items.
And these justify the margin expansion.
When it comes to the <unk> contribution I would say that the bottom line is as simple as that in the second quarter, We got what we got and we and that once we got it that we started working on this that we gave you an example.
And our E. If you take the energy costs the energy cost we got all the base stations with all the energy Casa and then once we got there we started to switch off the energy cost for the <unk> that we're going to the commission and so it's a.
I would say that you can take this as the fact that the second quarter was the initial few months of this process now. So we're moving ahead. So it's we are in line with what we had expected we are not lower we're not faster.
But we are working quite hard.
To make sure that the synergy.
So the contribution margin from oil is that while we expected there are a number of opportunities that we're going to capture like for example, the taxes on the silent base in the future and to this you need to add the continuous job that we're doing consistently over our own cost base.
To drive the margin expansion that are a critical part of our guidance and commitment.
We'll pass it could come in to discuss the 100 millions there.
I'm Danielle so regarding ICM as so first your statement is correct that.
That provision is a result of the time mismatch between the moment in which we started to collect ICM, yes, I say a method of lower rates and a moment in which we reflected that reduction in the client's bills.
And it is a deduction of our revenues both gross and net revenues of course, so it's a it's an impact on revenues our revenues do not reflect that the additional ice M. S.
Okay. Thank you very much.
Ladies and gentlemen, as a reminder, if you'd like to make a question. Please press star one.
Thank you.
Without any more questions from analysts.
I would like to return to word to Alberto Chris early for his final remarks. Please Mr. Roberto you May proceed.
And thank you everybody for attending our conference call.
We have been very pleased to discuss with you the advance on our plants and our commitment to execute.
The value generation opportunity said ive been discussing.
This year I want to thank once again the entire team for the huge effort is being put in place over a huge number of initiatives that are running in parallel to transform <unk> in the next generation teams thanks to everybody.
Yeah.
Thus, we conclude the third quarter of 2022 conference call of team SC for further information and details of the company. Please access our website <unk> dot com BR slash I are.
You may disconnect from now on.
Thank you once again and have a nice day.