TIM S.A.

Good morning, ladies and gentlemen, and welcome to TeamSA 2023 Second Quarter Results Conference Call. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company's presentation. There will be a replay for this call on the company's website. After TeamSA remarks are completed, there will be a question and answer session for participants. At that time, further instructions will be given. We highlight that statements that may be made regarding the prospects, projections, and goals of Team SA constitutes 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 Team SA may affect their performance, and lead to different results than those planned. Should any participant need assistance during this call, please press star zero to reach the operator. Now, I'll turn the conference over to the CEO, Mr. Alberto Griselli, CEO of Team SA, and to Ms. Andrea Viegas, Chief Financial Officer, to present the main messages for the second quarter of 2023. Please, Mr. Alberto Griselli. You may proceed.

Good morning, everyone, and thanks for attending our conference call. Outstanding achievements and rock-solid results mark the second quarter driven by the sharp execution of our plan. Our top line rose more than 9% year over year. with EBITDA growing above 17%. This combination led to a margin expansion of more than 300 basis points. Our operating free cash flow grew more than 65% versus the second quarter of 2022, and the net income more than doubled. Strong operational trends were achieved jointly with the aforementioned financial highlights. ARPU, churn, and network quality presented their best performances in years. On the ESG front, it is worth highlighting that TIM was certified, once again, as a great place to work, achieving a favorability of more than 90% with solid improvements versus last year. In this context, we were also recognized as one of the best companies for inclusive work experience. Under the scope of the environmental pillar, we are executing two initiatives that impact energy consumption. The first is related to transforming our sources to renewable energy proprietary plants. Under this project, we closed the quarter with 87 plants. The second initiative addresses energy consumption by developing smart public lighting solutions that drastically reduce the usage of electricity by municipalities. The integration of ESG aspects into our business dynamics and how we can promote social impact while developing and selling solutions to our clients is a relevant part of our strategy. In Team Agro, for example, we are taking connectivity to the countryside of Brazil. covering 90,000 rural properties, more than 220 public schools, and 65 basic health units. While in the education vertical of our customer platform strategy, we provided courses to 450,000 people to improve their education or develop their careers. Going over the details of our business performance, I want to highlight our revenue dynamics. Total service revenues grew 9.5% year-on-year in the second quarter, with a relevant contribution from mobile services that expanded by 9.7%. This performance was driven by inflation recovery and improved customer base dynamics and a scenario of rational competition. ARPU was also positively impacted, reaching an all-time high level of 29.2 reais per month, growing 13% versus last year. When looking at the mobile segments individually, we saw post-paid revenues growing significantly, up by more than 10% year over year, with an ARPU excluding machine-to-machine lines of almost 52 reais. As anticipated, we return to positive net addition in this quarter after the cleanup and adjustment of former oil customer base. Post-pay churn scored the lowest mark in 12 quarters. In prepaid, revenue expanded at a sound pace of close to 12% versus second quarter 22, leading to an ARPU above 14 reais. Following this remarkable mobile performance, we now have the highest mobile ARPU in Brazil, in prepaid, postpaid and also blended. Migration and app sales movements grew 28% versus Q2 2022 and are playing an essential role in consolidating our ARPU leadership. To better understand what is behind these results, we need to recover concepts from our 2022 investor day. We are developing our value proposition according to three pillars, best offer, best service, and best network. And in all three of them, we are delivering what we promised yesterday. As probably most of you saw last week, we extended our exclusive partnership with Apple and launched Apple One bundle in our high-end team-like plans. We are the third operator in the world to launch such an initiative and the first and only operator in Latin America. This is a clear evidence of how we play the game of innovation as a core differentiator to deliver the best offer to Brazilian customers. Our journey towards customer experience excellence is long, but we are doing it step by step to achieve the best service. Results from the Reclamia Key Portal, Procom Agency, and Anatel point to a significant improvement in all experience metrics. In June, we won the Resolution Award from the Sao Paulo Consumer Protection Agency. We are the only Brazilian company to ever achieve such a recognition. What seemed impossible a couple of years ago is now a reality. TIM is providing the best quality on Brazil's largest mobile network. And we have the evidence to show. OpenSignal awarded us as the number one operator in consistent quality index, a metric that combines a set of critical indicators to measure network quality across a variety of commonly used and demanding applications. On top of that, we are also leading in 5G with 40% more sites than the second place. Our value proposition evolution is clear, but the average client must also perceive that. And perception change is a marathon where consistency is more important than sprints. The good news is that the first signs of change are emerging. As I mentioned earlier, in the second quarter, we have the best churn level in years and need a quarter of inflation recovery in certain offers. Also, debt is historically low, representing 1.8% of our net revenues, and our overall NPS improved by 4 points versus the first quarter. With this, I wrap up the explanation on mobile performance, and we can now move next to fixed services. In fixed, the growth driver remained in ultra-fibra with a solid performance. Fixed broadband revenues went back to double-digit expansion. Broadband ARPU grew year over year for the 18th consecutive quarter, reaching almost 95 reais. Our broadband continues to be driven by the successful migration from FTTC to FTTH and accelerated net addition following the geographical expansion to Paraná and Santa Catarina states. We closed the quarter with a client base beyond 760,000 connections, adding 38,000 clients in those new regions. We are still fine-tuning the model, but the results are encouraging. Additionally, we are following a similar approach to the one that we use in mobile, staying away from price competition and focusing our differentiators on offer innovation and quality of service. With this in mind, we expanded our portfolio with a new 2GB speed plan. Until now, we have been successful, but the overall broadband market is still very price-oriented. I will now pass the floor to Andrea to review the financial results.

Thank you, Alberto. Good morning, everyone. As Alberto just explained, this second quarter was very strong across all lines of our results. Our performance continued to be driven by the positive effects of the M&A integration as well as the organic growth. Our OPEX continued to decelerate and is now growing below inflation. In addition, during the quarter, our TSA agreement with OEI ended, which is helping us reduce costs and eliminate some pressure. The combination of strong revenues and solid OPEX dynamic resulted in a double-digit growth of our EBITDA in the quarter. We grew more than 17% in a year-over-year basis and suppressed 2.9 billion reais. Our EBITDA margin expanded by 340 basis points in the quarter, and we recorded the highest margin on the record at 50%. It is important to mention that the second quarter was the first one without the negative effects that were impacting the trends of our costs. The TSA cost was eliminated in April, and now we have an apple-to-apple comparison related to the Fiberless Mile Rental. In terms of our decommissioning program, we are now seeing the benefits following our M&A. We were able to optimize our process during the quarter and have already adjusted the dynamics with our suppliers. As a result, we are now ready to accelerate the site dismantling. By the end of the quarter, we had eliminated over two-thirds of the planted sites for the year. Of course, there is a delay between the fiscal decommissioning and seeing its financial impact. However, we had already seen some initial positive effects in the second quarter. We paid 57 million reais in decommissioning fines. But the pace of increase in our lease costs has slowed down on a year-on-year comparison and started to decline on a sequential basis. As a result, our EBITDA after lease increased 21% year over year. During the disclose of our guidance at the beginning of the year, we explained that we expect the effects from the decommission to pick up in the second half of the year as more sites are eliminated. We are happy with the progress we already made in this project so far. The strong operation and financial performance added to our bottom line totally 640 million reais, which is almost double the amount of what we registered in the second quarter of last year. It's important to remind you that the transitory impacts we addressed in recent quarters are starting to decrease, including this impact on both DNA and financial expenses. We are also seeing less on the impact of the monetary adjustment related to the 5G license, and a reduction in the tax burden as we resumed the distribution of interest on capital. Free cash flow for the second quarter was also strong. Our EBITDA after lease minus capex was up 67%, totally 1.2 billion reais. Our cash position also rose by 46% year over year, ending the quarter at 3.3 billion reais. The second quarter allowed us to strengthen our financial position and improve our leverage level. The net debt to EBITDA ratio decreased to 1.4 times, and total net debt, including leases, amounted to R$15.3 billion. These sustainable trends leave us comfortable in a scenario of high interest rates. Now, I hand the call back to Alberto.

Thank you, Andrea. I'm very pleased with the first half of the year as we were able to achieve so many things. We completed our integration, achieved network leadership, improved customer experience, and delivered important milestones in ESG. While posting solid results that put us more than on track to reach our guidance, actually it is fair to see some upside risk to our full year numbers, But this will depend on several factors, some of them we control, but some we don't. That is why our focus on mobile for the coming quarters won't change. Execution to capture oil synergies, recovery inflation in a more rational and value-based competitive environment, while using the other marketing mix tools to differentiate from our competitors. Finally, leading 5G deployment to both support positioning and capex efficiency. For fixed broadband, we'll continue using the asset-light model to expand by tuning this approach in new markets while we migrate from FTTC to FTTH. The second half for the customer platform initiatives will be more exciting. We are accelerating the implementation of the Cartao di Todos health partnership. A new partnership will be launched. Lastly, we will continue to evolve our B2B verticals. We are increasing the penetration of our solution to consolidate our leadership in key verticals while we mature the different business models. And in my comments, I want to thank the whole team for the great job done so far. For the second half, we know what the challenges are, we have a clear plan, and we will maintain focus on its execution. Let's now open the floor for questions. Please, operator.

Thank you, Mr. Roberto. Now we will begin the Q&A section. First, we will take questions from analysts, followed by general public, both in English. If you're listening through the webcast, your questions can be sent by chat. Please hold while we collect the questions. We ask each participant to restrict themselves to two questions at a time. To ask a question, please press star 1, and to remove the question from the list, please press star 2. The first question comes with Marcelo Santos with JP Morgan. Please go ahead.

Hi, good morning, Alberto, Andrea. Thanks for taking the questions. My first question is regarding the sustainability of margins. You had a very strong margin increase this quarter. Could you please comment how this translates to the next couple of quarters, if there are some effects that should not be sustained or if they are? This is the first question. And the second question is regarding the very low churn impulse rate. Could you please explain what is causing this churn to be so low? What are the main sources of this improvement we are seeing? Thank you.

We have been discussing for a while our guidance whereby we were planning margin expansion because we were assuming in our guidance EBITDA growing double digits versus revenues growing high single digits. And so everything that is going on with the exception of the fistel, we can discuss this a bit, it's organic. So it means that there are a number of things that we're doing on the bidda margin to increase the productivity of our resources. And if you look at this from, let's say, a logical point of view, we have a few things. a few levers in place, the first of which is the fact that costs related to oil start to disappear, start in the second quarter. Then we have a number of productivity increase related to the to the increased productivity of the oil customer base that we are capturing over time, so the cost to serve them. And third, we have a significant number of initiatives within the company from innovation to business process remodeling and discipline to better locate our cost base and so increase productivity on the EBITDA level. So we've got margin of improvements going forward. When you look at the after lease also, because the decommissioning process is proceeding a bit ahead of schedule, and this will support a further margin expansion on that line also. So, all in all, we are quite confident that the profitability can be sustained and expanded. On the low churn on postpaid... I think that there are, Marcelo, a number of factors to be taken into account. So generally, this is quite a remarkable achievement because we are getting the lowest churn on postpaid in the quarter of the implementation of our more-for-more strategy. And generally, this tends to put a bit more, let's say – a bit more pressure on the churn level in the quarter that we executed. If you look, for example, last year, churn level in the second quarter. So I think that there are a number of factors in place here. So the first one is related to the more rational competitive environment and the fact that we adjusted our post-paid offer portfolio in the first quarter before the implementation of the more-for-more strategy. And the second one is related to the numerous initiatives that we are implementing to increase the quality of service perceived by our customers. So this is a continuous effort and is going to improve going forward. And it's basically related to the quality of the value proposition that we offer to our customer base that generally tends to increase their lifetime with us. For example, in this quarter, we just launched the Apple One initiatives. The second set of initiatives is related to the quality of service that can fall into the category of customer relations. And there you've got a number of improvements on Alatel, Reclamia Key, Consumer Protection Agency, and so customers start to perceive that. And the third one is the fact that we are also working quite hard to improve customer The quality of our network, let's put it this way, our technical service, so the fact that we've been awarded in July the best networks in terms of quality, of perceived quality, is another important initiative. So all this combined tends to increase our ability to retain customers and, therefore, to reduce churn. I don't know if I've been exhausted in the answer.

No, very clear. Thank you very much.

Thank you.

The next question comes with Bernardo Gutmann with XP. Please go ahead.

Hi, good morning, everyone. Thanks for taking my question. Actually, I have two on my side. The first question is related to dividends. If you could provide us an update for dividend distribution for this year, it seems like you are on track to generate a lot of cash, probably at a faster pace than the guidance provided of 2.3 billion. So I just want to understand if there is room for potential upside here in terms of dividend distribution. And the second one is related to the tax reform. I would appreciate it if you could make a general comment about the proposal under discussion for the sector. Thank you.

Okay, Bernardo, when it comes to dividends, so we just remembering when we met for our guidance earlier this year, we gave a 2.3 billion reais as the new floor of our shareholder remuneration for 2023 and then a continuous improvement going forward. When you look at the way we are executing the plan, basically we are trying to improve it. We are improving it as a matter of Fact, are they listening to me? Yeah, okay, okay. Sorry, because here the system sort of appeared to be went out. And so, Bernardo, so when I look at the performance of our plan to date, we see a number of upside risks. Of course, there are still uncertainties related to, for example, the microenvironment, but there are a number of things that are going according or better versus our plan. Our main focus is to increase free cash flow and operating free cash flow margin. And we see upside risk here versus our guidance. So basically we are now in the process of analyzing the numbers and discussing this among ourselves about the risk of upside review of shareholder remuneration. When it comes to the tax reform, I think here we see this in the phases that have been discussed in terms of the VAT reform that has been just passed and is going to be discussed in the Senate. whereby we see that we need to actually, Bernardo, the big point is here we need to wait for the actual numbers to take a stance on what the impact is going to be for us. So far the discussion is going according to what has been anticipated, so there is no surprise. whereby the other component of the tax reform that is related to corporate taxation and dividends, it's a bit further on. So our understanding is that to make a precise call of what the implications are going to be that we closely monitor as a sector, We need to wait for the actual tax rate to be defined. This is going to happen probably in the next year. There is a transition period that should be soft for the next couple of years. But I would say that we need to wait a bit more to give a final stance on this.

Okay, very clear. Thank you, Alberto.

Thank you. The next question comes with Vitor Tomita with Goldman Sachs. Please go ahead.

Hello, good morning, all, and thanks for taking our questions. My first question would be a quick follow-up on Marcelo's earlier question. Looking on costs, looking aside from the end of the TSA to the sales and marketing line, which improved quite a bit this quarter, should we assume this quarter – as a recurring baseline for future quarters. In particular, should we expect marketing activity to pick up in the third quarter relative to the second or a similar level? And a second question from us would be on if you could provide an update on how you view the possibility of price readjustments in prepaid or additional price readjustments in postpaid this year following the recent readjustments you made. Thank you.

Okay, Victor, so on the first ones, in terms of sales activity, this is pretty much dependent on the number of launches and commercial initiatives that we are running on each quarter. So if you look at, for example, the current quarter, so we just happened to launch a significant campaign with Apple I. which is the exclusive partnership. So you see a number of advertisements around. You will see some subsidies in our point of sales. So we have, at the moment, a very appealing proposition for our black postpaid plans. And so this is much dependent, therefore, this line of cost on the activities that we are running. So, for example, I would expect that this quarter, because of the launch of the Apple I campaign, is going to be heavier versus the previous quarters where we didn't launch anything, let's put it this way, special. And we've got more special things coming up for the last quarter also. And so I would say that the second half in terms of commercial activities and initiatives is likely to be more, let's say, intensive versus the first half. This is for the first question in terms of marketing and sales expenses. When it comes to the price adjustment topic, I would say the following. So The overall competitive environment is moving versus a value-based, at least what we are doing, competitive dynamics. So our approach is always to provide more for more offers and value proposition to our customers. And in the first alpha, we pretty much concentrated on post-paid offers. and uh uh we are culminating with the apple one launch so we make it uh let's say we deliver more value to our customers and prices are adjusted accordingly i would say that the bulk of uh adjustment and fine tuning of our postpaid offer is completed now so we did something on the entry prices in the first quarter We are doing, we did, we carried out the more formal strategy in the second quarter. So the residual opportunities are, let's say, they got much less impact versus what we did in the first half. And so we are turning our attention into prepaid. And we are going to follow the same approach, whereby we're going to upgrade the value proposition to our customers, and we're going to command some price revision accordingly. So we did this last year, for example, including Amazon Prime and all our recharges, and we are planning something starting this second half as well. So the focus of the second half of the year is going to be more concentrated on prepaid.

Very clear. Thank you very much.

The next question comes with Fred G. Manges with Bank of America. Please go ahead.

hello uh good morning everyone and thanks thanks for the call here uh i have two questions here as well i mean the first one on the working capital line uh we see a major impact in the line suppliers uh 1.3 billion uh on this quarter looks like you paid uh this amount uh so just right and when i look at the second q22 i didn't see this this impact so just wondering if you took advantage of some type of opportunity in terms of the fx or something this line just trying to understand the working capital here this will be the first one And then on the second one, I think it's more like a question of the strategy. When I look at the ARPU, you already have the highest ARPU in the street. It looks like one of the highest. And when I look at the net ads, I mean, it has been bad in the last three months. It's true. But over the last years, it hasn't been as strong. I mean, when I look forward, where should I see most of the growth for Tim for the next, let's say, the next years? Thank you very much.

Good morning, Fred. Thank you for the question. There are some dynamics that pressure our captain this first semester, like you mentioned. And the major impact is related to the vendors. And this is related to our seasonality in our business. If you see past years, happened the same. And we expect the second part of the year, less pressure on this item.

Go on the second one on the ARPU. So, yes, we achieved the ARPU leadership on both prepaid and postpaid. That's true. That's a nice achievement on our side. And when I go forward and I look forward at the revenue dynamic of the sector and of Team Brazil, So here, what we always said is that we want to grow on a balanced way in terms of customer-based growth and ARPU growth. So when it comes to ARPU growth, of course, the main strategy is related to the value-based competition, so providing something more for the customers to be able to command a higher price. And when it goes to the customer base, I think that the answer is a big difference between postpaid and prepaid. So if you look in general at our customer base dynamics on postpaid, you're right. We've been running a number of quarters with negative postpaid additions. And the numbers have been a bit mixed up by the oil post-merger integration. And we signaled over the last quarters that in the second quarter, we would have come to positive net addition. So this is the results of this quarter confirm that we are now in the positive net addition territory. And we expect to move forward on a positive space for the next quarters. And when you look at the absolute number of net additions, I think that the number that needs to be taken into account is the relative ratio between net additions and customer base. Because on Postpaid, we got the three of us, a different customer base. And so when you look at growth, I think that it's better to look at relative numbers versus our customer bases versus absolute numbers. Because this puts everything into perspective. And this translates into the year-on-year growth and quarter-on-quarter growth, both positive for us in this quarter. So on the customer base, we want to grow the customer base for postpaid. And since we have the lowest market share, we think that there is a space to grow there, whereby on a value-based proposition, we intend to increase ARPU, providing better services to our customers. For post-paid, I was mentioning before for Marcel and Victor, the exercise has been closed, whereby for prepaid, there might be some additional update for the second half. So at the end of the day, we've been always running on a mixed growth approach, customer base and ARPU. the oil integration sort of made it difficult to read through these dynamics. And I think then from this quarter onwards, you will be able to see again that our top line is going to be driven by both ARPU growth and customer-based growth.

Perfect. Very clear, Alberto. Thank you. Thank you, Andrea.

The next question comes with Leonardo Olmos with UBS. Please go ahead.

Hi, good morning, everyone. So a couple of questions from my side. First, lease expenses and the decommissioning process, you touched that a little bit before. Can you provide some idea on what should we expect in the second half of 2023 and provide some update on the number of towers? How is that going? And the second question is regarding the basically asking for an update on the agreement with neutron networks, particularly VTOL. Thank you.

Okay. On the list expenses, I think, Leonardo, that we have some upside risk. We are moving ahead of our plan. So as of today, as Andrea was mentioning in her speech, we are at around 70% of the plan already executed. This is going to be a bit less relevant for this year because the number needs to pile up, but it's going to provide us some upside on the entry speed for the following years. And we are likely to provide a better focus on the progress in the next quarter. We are now left with the hardest hour to the commission, so they say the easy part or the easier part because it was not easy. We have the commission in thousands of hours this year, but basically we are happy with the results and we are ahead of schedule. So it's a positive upside risk on this line, more profound in the following years, unless on this year because of the piling up of the exercise. But already in this quarter, you can appreciate a positive dynamics, as Andrea was saying. When it comes to the neutral network, we have been, we carried out a quite successful launch in Parana and Santa Catarina. We are very pleased with the commercial results of our operations. We are now fine-tuning the model at a larger scale. The benefit of it is related to the fact that since we don't need to build the network, we can operate in a mobile-like fashion. So our go-to-market is simpler, and this should translate into a better quality of our commercial operations. So at this point in time, we are happy with our speed. We increase our net addition to something like 30K per quarter. We are likely to run at this speed in the following quarters, and we are fine-tuning the machine to be able to scale up when the competitive environment is going to be a bit more attractive versus today.

Sounds great. Thank you very much. Have a great day.

Thank you. Once again, if you wish to ask a question, please press star then 1. Ladies and gentlemen, without any more questions, I am returning to Mr. Alberto Griselli for his final remarks. Please, Mr. Alberto, you may proceed.

Thank you, everybody. So my closing remark, considering this exciting World Cup atmosphere, I'm going to play a little football coach here today. Half time is over. Guys, we need to go back on the field to secure our victory in the second half of the game. See you soon. Bye.

Thus, we conclude the second quarter of 2023 conference call of Team SA. For further information and details of the company, please access our website, team.com.br.ir. You can disconnect from now on. Thank you once again. Have a good day.