TIM S.A.

Hello everyone and welcome to TNSA's earnings conference for the second quarter of 2024. Thank you for joining us. I am Vicente Ferreira, Head of Investor Relations. Today we share our highlights on video and afterwards we'll have our live Q&A session with our CEO, Alberto Griseli, and our CFO, Andrea Viegas. Before we discuss our results, I remind you that management may make forward-looking statements and this presentation may contain them. Please refer to the disclaimer on the screen, which is also available in our earnings materials and on our investor relations website. With that, let's move to our results.

Hello, everyone. I'm Alberto Griselli, CEO of Team Brazil, talking from our headquarters in Rio de Janeiro. I'm pleased to share the highlights of our solid second quarter 24 results. Despite some macro challenges, we are taking advantage of favorable market dynamics to develop further our three-breeze approach and deliver robust results across the board. In the second quarter, we maintained the pace, growing our service revenue high single-digit year-over-year, our EBITDA grew above our revenues, sustaining margin expansion despite tougher comparative phases. Our proxy for operating free cash flow reached a record high for the second quarter, growing approximately more than 20% year over year. These solid financial results are accompanied by improvements in our services, innovation in our offerings, and consistent infrastructure development. Our results are driven mainly by mobile services, with revenues growing by 7.3% compared to Q2 2023. Consequently, ARPU is expanding by 6.8% through more-for-more initiatives and migration strategies. Our customer base profile continues to improve with post-pay net addition accelerating to solid levels. In second quarter 24, we added 458,000 clients. We combine initiative to reduce churn and expand migration from prepaid to postpaid to support this performance. Behind these numbers is a sharp execution of our 3B strategy. Building the best offer in the market requires an innovative mindset, bringing novelties valued by the customers at the right price. In the coming weeks, we will showcase our new postpaid portfolio with the best control plans in the market. The best network combines excellent coverage with the best availability and quality. As you know, the team ranks number one in those metrics in 5G and overall. Building this while reducing capex pressure requires an innovative and efficient approach. An example is the new 4G and 5G integrated antenna we developed with one of our vendors, which increases capacity and coverage at reasonable prices. To deliver the best service, we are changing our portfolio of offers and improving how we serve our clients more effectively. We are increasing first call resolution rates and facilitating digital interactions, therefore call center MPS is improving and we continue to outperform the sector in resolution rankings. Moving to the other areas of our operation, our fixed broadband unit is performing well despite fierce competition. The focus remains to grow with profitability, so we kept revenue expansions at high single digit, while our FTTH base increased double digit. Our team IoT solution continues to evolve fast, winning new connectivity contracts while developing end-to-end solutions. In the last 12 months, we added close to 280 million reais in contracted revenues, growing in the three verticals we selected. Before Andrea joins us for this update, I'd like to remark on how effectively our 360-degree approach to productivity and efficiency It's helping teams reduce cash cost pressures while improving customer satisfaction with technology and discipline. We have done a great job with digitalization in the past years. However, there is room for additional improvement. Two examples. PIX is the new frontier for ePayments and MyTeamApp will contribute more to our digital interaction after its new version is released. In terms of our infrastructure, the network sharing with Vivo was resumed. We should accelerate more, but we are back working on the 2G shutdown and the single grid. On another front, we recently closed new agreements with vendors for our access network. We are bringing new 5G technology at an effective cost to improve the quality of our customers. Our AI initiatives are moving from pilot to full rollout. Two of the 10 use cases mapped to be tested in 2024 have completed their testing period and we are rolling them out until the end of this year. During the test, the Team AI X customer care co-pilot showed a decrease in average service time and increased satisfaction. For network predictive maintenance, the test showed that our system was able to predict failures and we were able to resolve them. Our hypothesis that generative AI could benefit Team by reducing cost and increasing customer experience is holding so far. We will keep you updated on this topic in the coming months. Now I will pass over to Andrea to talk more about our financial highlights.

Hello everyone, I'm Andrea Vieira, CFO of TIM. As Alberto mentioned, we delivered robust results across the board. The top line grew 7.5% year-on-year this quarter. with positive contributions from all revenue lines. Our EBITDA showed solid performance despite a tougher comparative basis. It grew more than 8%, with the margin reaching an all-time high of 50% for a second quarter. Considering the lease's effects, EBITDA after lease grew by almost 14%. This performance continues to benefit from the decommissioning project. which has reduced recurring lease payments by R$ 56 million versus second quarter 2023. The bid-after-lease margin grew notably by more than 2% points year-over-year. In this quarter, our net income grew by more than 20% year-over-year, benefiting from the overall operational performance and positive effects at the DNA line. In addition, we recorded a substantial increase in operation cash flow of almost 24%, with the margin expanding to 24.4%. As we explained last quarter, the seasonal negative impacts on working capital and CAPEX are reverting. CAPEX will close the year inside our guidance bands, with no material impact from FX. and working capital should be positive in the second half. I am pleased with the figures we are delivering, which makes me confident that we will achieve our guidance by the end of the year, even with a more challenging comparison base in the second half. Now, back to Alberto.

We just closed better than expected first half. Financial and operational performance are responding well to our initiatives. In the second half, we expect healthy competition to be maintained, So we will focus on evolving our portfolio and looking more carefully into our prepaid dynamics as the macro environment may be a concern for low-income clients. Our digitalization program will continue to run both in the more traditional way and through AI projects. We expect more pilots to move from the testing environment to full implementation. In B2B, we expect the coming months to be exciting with more solutions being added to our portfolio. We are optimistic about the future and look forward to the opportunities that lie ahead. We are on a long journey to become Brazil's most preferred mobile operator. And our commitment to this goal remains unwavering. This delivery can only be achieved through hard work, creativity and discipline. And we are confident in our ability to succeed. Now, let's move to the live Q&A session.

We'll now start the Q&A session for investors and analysts. If you wish to ask a question, please press the button Raise Your Hand. If your question is answered, you can exit the queue by clicking on the same button. You can also send written questions through the Q&A button. Our first question comes from Bernardo Gutmann with XP. You can open your microphone.

Hi, good morning, everyone. Thanks for taking my question. Actually, I have two on my side. The first question is relating to margin. You have consistently achieved this expansion. On the revenue side, it's evident that the more for more strategy is proving effective. But on the cost side, I would like to understand the main factors that are contributing to this expansion, the key initiatives that can drive this growth moving forward. And my second question is related to competition in the mobile segment. It would be great to hear views on possible competition coming from a new player, a nail bank as MVNO. Historically, this market never took off in Brazil, but now there is a new player with great execution capacity. What has changed in this market from a commercial point of view? Thank you.

Hi, Bernardo. So I will start with the second one, and then we will pass it to Andrea for the margin one. So on the first one, I will say, Bernardo, that the competitive environment so far remains pretty rational in terms of competition. what is happening in both postpaid and prepaid. So the more-for-more approach and the shift from volume to value is actually happening. Everybody's more competing on quality of services and innovation rather than a straight-on price or price per giga. When it comes to the possible new entrants, we need to see what kind of strategies that we've deployed. So far, MVNO has been operating as niche segments, competing on a different value proposition, and again, not competing on price. So, so far, the MVNO has not been a disruptor on one lever, that is the price. As they have been focusing the strategy in specific segments, And so they didn't change the competitive dynamic materially. So on this front, I would say that for the specific case that you mentioned, we need to wait to see what their commercial approach will be. So far, everything is fairly constant and focused on the more for more approach, competition on quality of services, meaning new offerings. We are launching some new ones in the coming months. months, natural services, and the likes, less on price.

Hi, Bernardo. Related to the margin, we achieved a very good percentage this quarter. In the beginning and also in the beginning of the release, we will continue to focus in our productivity to increase our digitalization, but we have to remember that we also have to invest in some objects also for generating more revenue. So we always have room to improve, but our guidance shows that we will increase margin this year related to the previous years, but we also have to invest. So we have good margin results, and we will continue in this path.

And if I can add something, if you look at the categories of things that we're doing, so we've got this whole front of digitalizations that we mentioned in the presentation before, a few examples that are proceeding quite nicely. We have clearly the dynamics on the revenues that favors also the margins when it comes to more formal strategy, so it's a creative margin expansion. And I would say it's also that we are studying a few remote, let's say, fine-tuning of the make versus buy approach that we are thinking to deploy in the coming quarters that should be assertive in terms of increased efficiency and increased quality of the services that we are relating to that specific activity.

Very clear. Thank you, Alberto and Andrea.

Next question from Marcelo Santos with JP Morgan. You can open your microphone.

Hi, good morning to all. Thanks for taking my questions. I also have two. The first, I wanted to question you a bit about the guidance, especially the service revenue growth guidance. So for the second quarter in a row, you are coming above the guidance. above the high end of the guidance. Is there room to increase that guidance? I mean, or is there some expectation that the second half is going to be particularly weak? I mean, could you please just comment, I mean, on your yearly guidance in face of the results that you have achieved so far? That's the first question. And the second question is the lease line and the tower renegotiation. Where are we on that process? What's the outlook for the line of lease payments? Thank you very much.

Okay, Marcello, I will take the first one and then we'll pass to Andrea for the second one. When it comes to the second half, I wouldn't say weak guidance. So I would say the following. Weak guidance, and you're right, we've been performing above the bracket in the first quarter and second quarter. Now, what we are foreseeing for the following quarter is something that has already happened in the previous year, so a sort of slowdown in the pace of revenue growth. And there are a number of reasons that we need to be considering that. First of all, we got a less favorable comp versus last year, so we got quite a strong second semester last year. The second one is the fact that when you look at the price of post-pays, this year was less intense versus last year. And so you tend to see the results in the second quarter and going forward. So if you look at our post-pay revenue growth on a historical trend, you generally see a strong second quarter, and then the effect of the price up tend to stabilize in the following quarters, and so the revenues are slowing down a bit. And so this is, we expect the same effect this year. We need to see at the prepaid. So you see that on prepaid, we got a slightly negative revenue growth in this quarter, also because we are migrating prepaid to control plans. This is going to happen in the next quarters. And so we are fine tuning our value proposition and go-to-market approach. And so we need to see how this will play out in the following quarters. And last but not least, we got the ultra, team ultra, so the broadband that we imagine that is going to stay fairly stable. So all in all, what we are likely to see in the second semester is a slowdown of the revenue growth, and this will put ourselves in the position to achieve fully our guidance, which is the bracket from 5% to 7%.

Hi, Marcelo. Related to the leases, this quarter we have still the impact of the decommission, but as we mentioned before, we ended the major part of the physical decommission. So we still have some positive impact in the decommission sites, but we also have the inflation. We have a lot of contests that have the inflation adjustment in this quarter. So we have the leads in the same level of the first quarter. But from now on, the trend is to increase a little bit. We still have some renegotiations with the Towers Company that is continuous for us. And related to the panels, we also have some panels in the second quarter because we still have around 200 sites that we are in the final stretch of the contract. So the trend is to increase a little bit in the second half of the year.

Thank you very much. Thank you.

Our next question comes from Vitor Tomita with Goldman Sachs. You can open your microphone.

Hello, good morning all, and thanks for taking our questions. We have two questions from our side. The first one is, since you cited some AI initiatives on the cost side and some other sides, Do you believe those could be major enough to support some upside to long-term EBITDA guidance assumptions, depending on how they play out? And our second question would be, you mentioned just now also a changing make versus buy approach. Could you give some more color on that? Thank you very much. Okay.

So, Vico, let me take the first one, and then we'll interact with Andrea on the second one. So, when it comes to the artificial intelligence system, we are following a quite pragmatic approach. So we are deploying it, we are measuring the results. If the results are there, we are going to scale this up in the coming years. So we organize ourselves since 2023 with an organizational structure that is quite transversal among the company that select the case studies and the one with the most potential economic potential and the ones that are closer to our strategy. So this process led us to select something like 100 use cases where artificial intelligence can be applied. Now, of these 100 potential use cases, we went down to a number which is around 10 that are the most promising in terms of alignment with the strategic fit and potential benefits. And there are two clusters of these use cases that we are actually in the phase of implementing. One is related to the customer care, and the other one is related to the network maintenance. Why these two? Because these are in line with our strategic objectives, that is to increase the quality of services that we are providing to our customers and, at the same time, increase productivity. So where do we stand now with these use cases? We are rolling them out. As a matter of fact, we are rolling the artificial intelligence use case to all our internal service attendants for the call center. So we are moving from the piloting to the rollout, and we are doing this this month. And the same we are doing with the predictive maintenance of networks. So we got three main vendors, and with one of these vendors, we are already engaged in rolling out predictive maintenance based on artificial intelligence for field services. So what does it mean? That starting from now, we will be in the position to see the impact of those use cases on a large scale. And we will be able to see if our initial hypothesis of increase of productivity and quality of services If this is the case, if this is proved on this rollout, then we are talking about double digit reduction roughly in terms of cost to do these activities. And at the same time, a potential benefits in increased NPS or network availability for the network side. So we are pragmatic. So we need to see if it works. And we are in the process to prove this. in two specific large use cases for call centers and network maintenance. In the meantime, we are scaling up also the others that we selected. But the two main ones are these two that I've been mentioning. I don't know if it's clear for you, Victor, this. If yes, we move to Andrea for the second question.

Very clear. Related to the make or buy, Victor, we are always looking for – Another way to increase our productivity. So we always make this kind of study about make or buy. For example, now we are studying about one part of the maintenance of our network, the operation of the network. Maybe we can have a BPO in this area. We are studying another area, some administrative areas that maybe we can also do outside of the company with better productivity. So this is kind of make or buy area study now.

Very clear, very pragmatic as well. Thank you.

Next question from Gustavo Farias with UBS. You can open your microphone.

Hi, everyone. Thank you for taking my questions. I have two as well. The first one is regarding the prepaid operation. If you could put more color on what you guys expect on revenues going forward. And the second one regarding the fiber operation, as we have seen limited growth in other players in the market, considering selling their operations? What's your strategy on the fiber operation as a whole? Thank you.

Okay, Gustavo, so let's start with the prepaid. When it comes to prepaid, I think that there are two main dynamics that determine how revenues is performing and is going to perform in the future. One is in our hand and is the prepaid to control migration. And this is something that we are fine-tuning quarter on quarter. We discussed this in the last quarter. As a matter of fact, we are accelerating a bit, keeping control of the overall effect that is positive for the company, which is accretion on revenue growth. So this trend is there and is there to stay. And so this will impact the revenues as we're going forward as it is impacting it today. The other element is more related to the, let's put it this way, the elasticity of the demand versus the price adjustment they've been doing over the last quarters. So when you look at prepaid, prepaid is a mixture of a number of segments or subsegments. In this structure, you find people that have a limitation on available income, and so their ability to commit a specific amount of money to that specific amount, so let's say lower-income segments, whereby at the same time you have... people that have the availability to put recharge, and they could be also postpaid customers, but they prefer to be prepaid because they prefer to have the flexibility of spending the money as they please. And what we saw when we applied the adjustment over the last quarters is that the elasticity response is different in different segments. And It's sort of obvious if you are lower income, your response is not that great. If you are higher income, the response is better. So what we are doing is to fine-tune our value proposition and the go-to-market strategy to be able to segment our operation to address in a more efficient way these different sub-segments of prepaid customers. And so the extent that we'll be successful in implementing our strategy and the time required for this strategy to pay off will determine, together with the prepaid to control migration, our prepaid performance in the next quarters. And when it comes to the broadband, so you're right. As we've been mentioning over the last quarters, we have a selective approach in terms of broadband growth, and this doesn't change, meaning that we consider the market to be extremely competitive and keeping competitive, and therefore we are controlling the pace of growth to ensure profitability. As part of this process, we decided to restructure a bit our sales and commercial machine in order to depend less on what we call push channels that generally tends to have a lower quality of acquisitions. And this, of course, requires a resetting of the commercial machine because we close down these channels and the first effect is that you lose a bit of gross additions whereby the channel level tends to stay constant for years. six months because of what entered in the previous growth campaigns. This is impacting the pace of growth on FTTH, but we are getting to the normalization for the next quarters. Plus, we have expanded the footprint, so we are likely to accelerate a bit versus where we stand today. At the same time, we decided to close the sale of FTTC, so copper, so we don't sell any more copper. And so we lost the gross additions of this operation, whereby the share level continued to be there. If you combine these two things, you see a bit of a slowdown. We are working to invert this trend and going back to growth that is not going to be very different from before. a high single-digit growth because this is the pace that we consider to be good for this moment of the market. In the meantime, you're right, there are a number of players in the market that they are willing to consolidate. So we are looking at it to find the right move for us. We are not in a hurry because our exposure to broadband is limited. And so we are waiting for the right conditions and the right player to appear in our screen. Thank you.

Our next question comes from Daniel Federli with Bradesco BBI. You can open your microphone.

Good morning, everyone. My first question is more like a follow-up on Marcelo's question. Your three-year guidance also implies deceleration in the upcoming years versus 2024. So my question is, why the mobile industry should grow less in 2025 than this year? Which are the drivers for deceleration? And the second question related to selling expenses, they are growing in line with revenue. And we were not expected to see some, like, efficiency gains with lower churn, right? Churn close to all-time lows, selling expenses could be benefiting from that. Thank you very much.

Okay, Daniel, let me take the first one, and then we'll pass to Andrea for the second one. In terms of the first one, I would say that the rationale is sort of pretty simple. Okay. When you look at the revenue growth and you look at the performance of the sector over the last 10 years, you will see there have been, if you take away 2022 and 2023, where the sector grew above inflation because the market rationality and market repair was already in place. In the last previous years, we have been growing below inflation. So the thesis of the more-for-more approach is the one that we discussed in our investor day. So you have a situation where the market is shifting from volume to value, and so more importance of quality of service versus price. This is confirmed by all research that we are running. At the same time, on the demand side, you see that we got in our hands a pretty essential services with, let's put it this way, low usage and low prices because of the competitive dynamics of the previous years. And so the opportunity to catch up this gap that has been growing over the last years and at the same time you've got a macroeconomic environment where inflation was, now it's a bit less, going down over time, but it's still going down over time. So when you put what is the ideal growth rate, it's 1.5 to 2 pp above inflation, and this is basically what we put in our guidance at that time. A stronger growth at the beginning because we have some ground to catch, and then a growth that slows down to something above inflation, And this is, by the way, subject to the fact that a rational environment will keep staying in place for the next years and the ability to have a positive demand elasticity response when implementing the more-for-more strategy. And that is basically behind our assumption for the guidance. So 5% to 7%. for the bracket for 2024, and five to six on a longer time horizon as inflation goes down, and therefore the inflation plus goes down as well. Was it clear, Daniel?

Very clear, Alberto. Thank you.

Okay. Hi, Daniel. In relation to the selling expenses, if we are increasing them below the revenue, because Remember, last year we have the Fistel credit. When we incorporated Oi, we recognized a credit of Fistel. When we took this value from last year, you see that our increase in selling expenses is below revenue. We have also productivity in these expenses. the same expenses are increased related to the expenses with the revenue, with the project revenue, where we have a subsidy, and also the bed debt, but the bed debt have the same ratio on revenue. So we consider that we have very good results in the offset expenses, and we will continue to grow this one, For example, second quarter, we have more , we have and other, we will launch other projects. So, we have increase in this part. But related to the go on, on regular, we have a very good duration in the expenses. I don't know if I answered your question.

That was perfect. Thank you, Andrea. Congratulations.

Thank you. Our next question comes from with . When do we must expect dividend guidance revision since the company is generating much more cash than predicted?

Well, we have some formal moments in our governance where we update our guidance. And that would be the guidance for next year that are going to be released in February next year. So far, we gave a guidance for three years already. That was a big, to put it away, positive novelty and respond to a demand of you guys to have a more long-term view. So we moved to the 12 billion overall three years guidance for 20456. And so the number is in place. It covers already three years. As we said, many times we want to have some flexibility on our side for potential inorganic activities. And the update, I would say at this point in time, it's going to be next year when we update the three-annual industrial plan.

Thank you. Once again, if you wish to ask a question, please press the button, raise hand. If your question is answered, you can exit the queue by clicking on the same button. Please hold while we poll for questions. Our next question comes from Gustavo Farias with UBS. You can open your microphone.

Hi, everyone. One additional question. regarding the bad debt. Do you believe in an increase in bad debt given a higher mix in postpaid going forward? Thank you.

Gustavo, what we are seeing now is that our bad debt, Even with our increase in the net ads and increasing the revenue, it's still under control. We are not seeing any kind of increase in bad debt. Our collection is still the same. Our collection curves for the future are still the same. So we are seeing very good results in this way, even with the increase of our base, of phosphate base. So, so far, so good.

Okay, thank you.

Next question from Felipe Cheng with Santander. You can open your microphone.

Hi, thank you so much for taking my questions. Two on my side. If you guys could provide a little bit more detail as to what stage we are in the infrastructure sharing agreement with Vivo, if this has already been an important driver here for OpEx and CapEx, what to expect in the upcoming years, right? For this infrastructure sharing agreement, that would be great. And my second question is related to the B2B business, right? The IoT solutions, how this has been evolving, if you could provide also a little bit more detail, if it has been running ahead of expectations or not. So these are my two questions. Thank you very much.

So, Felipe, let me start with the second one, and then we'll pass on for the first one. On the second one, on the B2B, we are on track according to our plan. So, we have quite an ambitious plan, by the way. And this is something that is going to, in our view, contribute to revenue growth in the medium term. It's already contributing, but so far it's an ascent business. Nonetheless – Over the last two years, basically, we increased by 10 the revenues, contracted revenues of this sector. So we keep closing contracts in the three main verticals where we are operating. That would be the agribusiness, that would be the logistic business, and the utilities business. So on both these verticals, we are making steady progress and consistent progress. And the pipeline of the contracts that – You know, the cycle to close this contract is pretty long. It's something that it takes from six months to 18 months to close. So the pipeline is pretty strong. And our positioning is pretty strong. And so the answer is we are in line with our plan and we are moving forward. And you will see a number of things appearing in the next quarters in terms of commercial swings, and potentially new verticals that we are going to open. We got the priority to expand our customer base from one side and also to increase our portfolio on the second one. So finding partners to enrich the portfolio and provide additional services on our customers. So I'm satisfied with the progress to date. And last but not least, we are also looking at non-organic activities. And when we have some news, of course, we're going to share it with you.

Hi, Filipe. In relation to the infrastructure, I agree with you. We're still on in this project. We mentioned in our presentation we have an update to some cities. We have the two fronts, one single grid, and one is to shut down the 2G network. We are moving forward in this, and we are looking for another city inside what we have approved with the CAGE and Anatel. But it's a complex project, not very fast like we want, but we are continuing in this project, and we think that until the end of the year or first quarter of next year, we are complete this project.

Maybe it's worth remembering that, Felipe, when you look at this, the one that is the 2G shutdown is basically energy saving.

Yes.

But that's the main driver, whereby when you look at the single grid, we share the entire infrastructure, and so there is some cost avoidance in terms of energy, maintenance, and network cost, and it's clearly much more complex to implement. And when you move forward to what it could be, that would be CAPEX avoidance if we decide to extend this to 5G at some point in time. But for this weapon, of course, the 2G and the single grid needs to work and the process needs to work. And this is something that we are proceeding with Vivo at this stage.

And just remember that it's only for cities with 30,000 people, less than 30,000 people.

Perfect. Very clear. Thank you so much and congratulations on the great results. Thank you.

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, everyone, for staying with us. We are delivering a very strong first semester for this year, so first half of the job is done and we're fully focused on the second half. I would like to thank the entire team for the hard work that allowed us to deliver another great quarter. And I look forward to meet you guys on the one-to-one conference call in the coming days, weeks. Thank you, everybody.

Thus, we conclude the second quarter of 2024 conference call of TeamSH. For further information and details of the company, please access our website, team.com.br. You can disconnect from now on. Thank you once again.