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TIM Participacoes S.A. (NYSE:TSU)

Q3 2012 Earnings Call

October 31, 2012 10:00 am ET

Executives

Andrea Mangoni - Chief Executive Officer, Member of Board of Executive Officers, Director and Member of Internal Control & Corporate Governance Committee

Mario Girasole - Regulatory & Institutional Affairs Officer and Member of Board of Executive Officers

Lorenzo Federico Zanotti Lindner - Chief Operations Officer and Member of Board of Executive Officers

Roger Solé

Claudio Zezza - Chief Financial Officer and Member of Board of Executive Officers

Rogerio Takayanagi - Former Chief Marketing Officer and Member of Board of Executive Officers

Antonino Ruggiero - Wholesale Officer and Member of Board of Executive Officers

Analysts

Vera Rossi - Barclays Capital, Research Division

Stanley Martinez

Soomit Datta - New Street Research LLP

Susana Salaru - Itaú Corretora de Valores S.A., Research Division

Operator

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everybody to TIM Participações Third Quarter Results Conference Call. Today, we have with us Mr. Andrea Mangoni, CEO and the Manager of TIM. We would like to inform you that this event is being recorded. [Operator Instructions] There will be a replay facility for this call on the website. After TIM Participações remarks are completed, there will be questions and answer session for participants. At that time, further instructions will be given.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of TIM Participações' management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that the general economic conditions, industry conditions and other operating factors could also affect the future results of TIM Participações and could cause results to differ materially from those expressed in such forward-looking statements.

[Operator Instructions]

Now, I will turn the conference over to the CEO, Mr. Andrea Mangoni. Please, Mr. Mangoni, you may proceed.

Andrea Mangoni

Good morning, everyone. This is Andrea Mangoni speaking. And I would like to welcome you all to our conference call for the third quarter results.

First of all, I would like to make a quick introduction of myself. I joined Telecom Italia in 2009, and from '09 on I had the position of Group Chief Financial Officer. Previous to Telecom Italia, I was the Chief Executive Officer for Acea, an Italian electricity company, where I worked for 30 years. It's a great honor being nominated CEO of TIM Brazil. Since 2009, when I started working with people at TIM Brazil, a followed closely and support all the business transformations, such as AES Atimus and Intelig. I'm not surprised to lead such young motivated and highly [ph] skilled management team.

Now, let's move to the first slide. This quarter was a very challenging one. As you know, we had several impact on our [indiscernible], with the sales ban and [indiscernible] allegation and other items that overshadow our fundamentals. In spite of the difficult political environment, we are managing to maintain our operation on track and assure that fundamentals remain intact, thanks to an outstanding and skilled team. In this quarter, we saw small but encouraging signs of macroeconomic improvement. Competition remained tough, but I would say, it is rational.

Looking at the highlights in the quarter, total revenue growth came at 8%, that is the same figure of last year, and improving from the yearly comparison in the second quarter of 7%. As for the year-to-date performance, top line reached 11% yearly growth. The main reasons for all this improvement were the continued strong performance of data services, and of course, smartphone sales. And we saw minutes of use reaching the all-time high of 139 minutes per user and our sale resilience. In spite of the back, we maintained our leadership position on the prepaid market and we are foreseeing a good performance of postpaid voice. On the negative side, we had a weak performance of Intelig, our fixed line operation, the negative impact from the MTR cuts and the sales ban [indiscernible]. We're looking to EBITDA on adjusted basis from the one-off item. We saw, again, the rebound performance to 7.5% year-over-year growth in the last quarter and 8.6% on the year-to-date basis. Another highlight in this quarter was Live TIM commercial launch, which is now up and running. I'm sure that we have a fantastic [indiscernible] opportunity in the fixed broadband in São Paulo and Rio, with strong proposition of Live TIM.

Moving to the next slide please. In the upper part of this slide, I mentioned that task ahead will [indiscernible] in quarter. Starting with the sales ban for 11 days, [indiscernible] allegation of forcing drop call of our Infinity clients, generating sales slowdown at Great Image -- damage and a small financial impact.

I will stop, for a while, on the drop call issue. The allegation really devastated us all. Not only for the great image damage in media to reference [ph], but mainly by jeopardizing our strong value with our 70 million customers, based on honesty, transparency and innovation. We have hired 2 independent firms, PricewaterhouseCoopers and Ericsson, with great reputation and technical expertise to conduct analysis on dropped-call allegation. Both [indiscernible] have just been completed and finding corroborates to our prompt deny when the matter come up. We never forced the calls of our Infinity clients to drop. We also saw an exaggeration over the tax goodwill benefit and contingent [indiscernible]. The fiscal issue arriving in 2011 is under analysis on an administrative level, and there are several precedents. As for [indiscernible] contingent provision level we seek to our proposition, left column strictly accounting rules supported by external and internal [indiscernible] procedure of SOX. Worth noting that never in TIM history, our level of provision was underestimated in face of contingencies. Just to say it in a different way, our financial accounts are rock solid.

All of these events overshadowed our fundamental, but I would like to reiterate to you that business foundation remains solid, and our strategy will remain intact. Customer base growing above market, traffic [indiscernible] in this quarter, data continues to show strong double-digit growth and TIM Fiber is now up and running.

Now, I'll turn the floor to Mario, regulatory director to discuss our regulatory update. Please,Mario.

Mario Girasole

Thank you, thank you. Good morning to everybody. Just to make a quick update, while the 4 main chapters that the regulatory environment is facing now and in the next months. Anatel is [indiscernible] is in the final steps for discussion in October, in [indiscernible]. The general competition frame. The fusion that will introduce some cost [indiscernible] significantly matter [ph] operator with specific regulation. There will be a chapter, [indiscernible] regulation applied to our fiscal significant [ph] market operators and this could be an opportunity for TIM because we are [indiscernible] in the fixed and broadband market.

There will be some incentive on infrastructure sharing, in terms of passive infrastructure and is still is a help to reduce the costs of actual [indiscernible] overall. And there will be, also -- I discussed this question about the mobile-to-mobile interconnection. Also, introduction of the partial [indiscernible] TIM, between nonsignificant market power operators and significant market power operators. Considering that, probably, significant power market operators or will be defined, the 4 big operators [indiscernible], Claro and Vito.

Same on the MTR side. We expected that glide path defined for 2013 will be confirmed, yes, with public event with the President of Anatel. That, underlying, it's -- your talking about 9.5% cut from second week of February. And then, from 2014 on, there will be consideration about the cost model, that it's discussing between operators and Anatel.

On the 4G side, we are full in check because the contract were signed 16 days ago and that the suppliers who are defined and communicated Huawei, Nokia-Siemens, and Ericsson. And as far as the future is concerned, 700 MHz there are still ongoing discussions between Anatel broadcasters and operators about the definition of [indiscernible] and probability of discussion will take some sort of development next year.

Finally, last but not least, quality of course. We are still on track with our improvement plan with Anatel. We are taking a monthly meeting with satisfactory in our view outcomes. We will have next meeting in 7th -- next week, 7th of November, and so we think that we are in the good way to ensure the improvement of our infrastructure, of course, quality for regulators. But above, also, customer support.

Thank you. I give the floor to our COO, Lorenzo Lindner.

Lorenzo Federico Zanotti Lindner

Thank you, Mario. Good morning, everyone. Let's turn to Slide 6. I think the key message of this slide is the resilience and strength of TIM [indiscernible] position. We'll show that after the sales bans cleared our sales quickly recovered the same level we used to have before the ban. It is a strong indicator that, from a customer point of view, TIM continues to have the best offer of the market. Beside this, we continue to increase our distribution channel with focus on efficiency, we already have the lowest subscriber acquisition cost of the market, and we continue to find ways to improve it. All in all, we continue our best, combining power and control, which means stronger effects with cost efficiency.

Let's move to Slide 7. Despite the sales ban, we continue to increase our customer base, reached almost 70 million customers in the third quarter. We have been leader in customer base for the last 9 quarters. Another key message of this slide is that, even being the [indiscernible] with the most [indiscernible] the approach, we are the leader in handset sales, which is an important driver to increase penetration of [indiscernible] smartphones in our customer base and boost data revenues. Finally, we also are our accelerating our postpaid customer base growth. In the third quarter 2012, we added 541,000 new postpaid human lines in our customer base, the record high of TIM's postpaid lines net ad.

Let's move to Slide 8. In this slide, we want to show the evolution of 2 key metrics of quality of operators. The first one is IDA, measured by Anatel, where TIM continues to be the second best operator. The second one is the volume of claims at consumer protection agency, Procon. In this metric, TIM has the lowest levels claim of the market being responsible for just 15% of all mobile claims, even having 27% of total lines.

I'll pass the call to our Chief Marketing Officer, Roger Solé.

Roger Solé

Thanks Lorenzo. Good morning. Moving to Slide 10 [indiscernible] mobile marketing [indiscernible]. Building on the words of our COO, we had a really tough quarter, in terms of image for TIM Brazil, amid accusations of our dropping calls and allegations on quality [indiscernible] have an impact in the image of the company, even before. And the way we can actually show it very transparently on the graphic on the left of the slide. It's on our net preference. So we follow the [indiscernible] evolution of the fractions of [indiscernible] led the rejection of TIM Brazil for customers in the market. And we were at historical highs of more than 20 points of net preference and we have a slash of nearly 1/3 in our [indiscernible] exactly after all the issues related to TIM image, from the 14 points. So this shows that we really had a hit on image. But at the same time, looking or having the long view, we can see that we are still second on preference on that very, very tough year [indiscernible] in the [indiscernible] position than the third and fourth player in [indiscernible] practically 0 or in the negative net preference among customers. So I think here that the message is that the heat was taken in the quarter but that also momentums are very strong image in have building our image in the last 3, 4 years through our customers, of relevant innovation that has helped millions of Brazilians to use a mobile phone in different way. And this has not come overnight. So I think we have a very solid terms to recover and keep on going on that preference and in that image. At the same time, we are very quick in our response to the fact. We are very quick enough, offering explanations to the customers, through print media and also in TV, using the Chairman of the Board as a person -- spokesperson to explain very clearly about the problem and what we are doing to solve it. And now, we'll have to move from phase [indiscernible] rate in terms of [indiscernible] management, into a phase of reputation building and strengthening of our core values. So, the fact is that our relevant innovation which keep on being one of our main overall value propositions into the market. We are known for that. But we have to be, also, into the values of quality and transparency on how we communicate quality. This is going to be much more relevant, from now on, because of all the awareness generated regarding the situations after all the results of the third quarter. And we will also see this threat as an opportunity to improve our position into the market. We will show not only that our Anatel plan is on track, but also show a clear commitment to the market on quality, and done in a very transparent way in order to communicate improvements on quality of the network and quality for our customer. For that, we will start a communication campaign to support on this positioning, and also website image. People will be able to follow which is all our -- real coverage and our [indiscernible] will be able to monitor all the KPIs and all the improvements we're doing on the [indiscernible].

So, moving forward to Page 11. As, also again, building on COO's words, we think that our fundamentals or foundings are very strong, and our value proposition strategy in the market is a winner in the mid- and long-term. We see mobile as the main guider or engine of growth and integration of the communications market. We see that reflected in the 3 different ways that we have been standing in the last 16 years. The first is the growth in the customer base of mobile versus fixed. And we have seen doubling in the last 5 years, the customer base of mobile to more than 250 million lines, whereas the fixed customer base is at around 40 million. So this shows strength of the mobile [indiscernible] translation of conveniency and also the [indiscernible] of price reflected in the [indiscernible] of [indiscernible]. The second line relating to usage of mobile. That is always accelerating. If you the structural evolutions. In the case of TIM, you can see our growth of [indiscernible] 28% year-on-year, reaching more than 28 billion units in our network, when we make a year on year comparison. Going into the detail of the mobile we see that we have seen a very healthy mobile growth of 7% year-on-year as well. And finally, the third [indiscernible] of Internet user [indiscernible] access in mobile. This is even more exaggerated. Using Anatel numbers they show that there more than 50 million lines or internet-enabled lines in the market on mobile, which is a growth of 75x what we had 2000 -- 4 years ago. And the fixed lines that can have access to Internet have nearly doubled in the same period. So, again, we see how we [indiscernible] it's very adequate to offer the Internet in a mobile environment.

Moving forward, and getting into a little more details on the first and second ways, and specifically for our results of [indiscernible] in the third quarter. In the top of the slide, you can see that our Prepaid business have been growing steadily. As we've said, we have 17% improvement in our customer base, Prepaid year-on-year. And despite all the problems of the first quarter, we have been managing a growth of 3% on more minutes of use and a very healthy increase of 12% on the total number of top-ups in our prepaid base. So, again, the fundamentals are solid.

In the postpaid, the trend is even better. Our minutes of use have grown 15% year-on-year. In fact, thanks to our management of the customer base from prepaid to our counter plan, and these results [ph] show relates to our relevant innovation strategy. As you know, a couple of quarters ago, we announced the amount [ph] of [indiscernible] control [indiscernible] it is a postpaid, [indiscernible] and customers can top-up for additional use. And this is having a great success in the market especially as an [indiscernible] for our Infinity and our [indiscernible] on huge customer base [indiscernible]. And that's why we see this fantastic improvement of 24%, overall, postpaid customer base. [indiscernible] And also a decrease in churn of our postpaid lines. Although, despite the terrible news that some customers have, and you read in the press during the third quarter, they stay with us, they are giving us a second opportunity to show our improvements, and it also shows our [indiscernible] on caring of these customers and giving them additional benefits, that's what we're doing. And despite that they don't have any loyalty contract, and contract that binds them to us, they are choosing to stay. While we see all the defects related from or reflected on our [indiscernible], we see in the bottom of the slide that the ARPU has actually grown into the third quarter, more than 3%, where it is through our slight improvement on human postpaid. Also, the vast growth, especially in prepaid and the slight recovery that we're starting to see in the economy, in the economy, in the third quarter. So, a very healthy outcome in the end.

Finally, moving forward to the third way of Internet data. This is a way that we started a few years ago [indiscernible] and we've been very consistent in growing everything we do. And as you can see on the first slide, on the left, our product net revenues have been improving consistently, again, more than 28%. Being more than 70% of those handsets, Internet and mobile handsets, which help forge our [indiscernible] strategy of improving this [indiscernible] in the mobile customer base. On the graphic on the right, you can see how all this slightly have paid up handsomely, increasing our effective smartphone penetration to almost 40%, to double of the penetration 1 year ago. And again, bringing the Internet to millions of people. Now, we have more than 20 million monthly users of Internet in our customer base, which also reflects our improving the 3G coverage, almost reached 70% of [indiscernible] area. But, also, that reflects of our strategy of offering and enhance the blending of our handset of our customers, therefore including 34%, the number of Internet users.

It's not just as a data story, there was also another story. Around the world, [indiscernible] suffering, but here in Brazil, peoples of -- many years of the same nation, we had a huge opportunity that we are capturing through [indiscernible] offering. We have never to more than triple the SMS users for the third quarter, in nothing more than 1.5 years. So this [indiscernible] additional revenues on that. And in the end, it comes related into a revenue of more than BRL 1.1 billion, fast revenues in the quarter, which represented growth of 25%, year-on-year, and on the bottom line, it's more than 90% of data revenue our overall total revenue of 70%.

Now, I'll pass towards to our CFO, Claudio Zezza.

Claudio Zezza

Thank you so much Rogério, and good afternoon to everyone. Now, we will show you briefly the comparison between the EBITDA in third quarter 2011 and 2012. Just as [indiscernible] the Service Revenues grew over 5.5% this quarter, mainly driven by vast growth in local traffic.

The handset margin still positive, even considering the [indiscernible] the contribution. Marketing and Sales benefiting from our multi-channel approach and then [indiscernible] SAC still going down, contributed BRL 70 million in the comparison. The network interconnection is mainly affected by the increase in the SMS interconnection cost. I would say a 80%, 85% in terms of SMS interconnection, while the interconnection for traffic and lead line grew very, very -- at very low rate.

Personnel, G&A and others growing more than 20%, and we include in this class [indiscernible] and other contingency. The bad debt, I will show you in the next page. Regarding this non-recurring items that we put on the top line, the chart, we refer to 60 million of provisions [indiscernible] from [indiscernible] developed with contract will expire this November. So according to the accounting principle, we booked a provision considering [indiscernible] will not be giving anymore. And it was related to advertisement on [indiscernible] continue that our close [ph]. The other one, on the fix [ph] related an open administrative process that was established with [indiscernible] related to 2007, 2009. So this contribution [indiscernible] recurring our EBITDA came at a growth of say 7.5% as discussed before.

From the net income, the position relatively stable, and the financial result contributed with BRL 29 million net financial expenses, that is mainly driven by monitoring adjustment and a positive effect on exchange variations defect. Then, we exclude impacts in other, mainly higher because of the taxable profit of [indiscernible] is still higher, so the tax rate remain stable. With income came to BRL 318 million, if we exclude the BRL 51 million non-recurring items, the adjusting income will grow up to 17.5% year-on-year.

Next slide, as you commented before, handset capitalized subsidy still zero. Bad debt trend a little bit higher than the third quarter of last year, mainly driven by a higher [ph] ability in postpaid and higher cluster of [indiscernible] in the cluster of about 210 days. So we are talking about a very, very old [indiscernible].

In the chart top rank -- in this line, traffic interconnection, we measure a comparison between traffic volume that moves 28% or in terms of compounded, roughly 6.4%, while the interconnection cost grow 10x less or 5x less with leased line cost that, in terms of year-over-year, grew 5%. So, notwithstanding the enormous growth of traffic we still have a compounded growth rate in the excess of 1% or below 1% for the interconnection cost.

CapEx, still 92% for infrastructure. So, we changed [indiscernible] versus years ago. And we invested 772 this quarter. The operating free cash flow growing 21% this quarter, with an instance of around 18% on revenues. And net debt in -- to BRL 1.6 billion and including, obviously, the [indiscernible] of fiber BRL 85 million.

So I'll leave the floor to Rogerio Takayanagi for the presentation of Fiber.

Rogerio Takayanagi

Thank you very much, Claudio. This is a very special day for TIM Fiber. It is the first anniversary since the acquisition of AES Atimus. And during this year, we managed to develop a full operating fixed operation, not only deploying the network, but as well all the IT system, people, sales channel and so on. We managed to develop a network not only in São Paulo, but as well in Rio de Janeiro, where we're having the commercial launch this month of November.

In terms of development of the network in this year, we managed to connect more than 3,000 buildings. But most important than that, the total coverage in terms of home passed, we're managing to get almost 0.5 million homes passed coverage in this short period of time, which is very close to our benchmark of the fixed income [ph] in São Paulo that has more than the same [ph] coverage in terms of ultra broadband developed in the last 4 or 5 years.

Apart from the coverage, the topology that we choose help us to provide an outstanding service. So we're managing to offer to the clients performance that is above worker's selling, and so we're selling 20x faster than the average of the market in terms of download speed and much more in terms of upload speed. We're selling 35 megabits per second in terms of download speed, and we are actually delivering 37, so more than the worker's selling. And of course, because of that, we're attracting a huge interest in terms of demand. Today, we already have more than 100,000 clients in line that -- who would be forming our website to web [ph] self-service.

If you turn the page, on the top left, we can see our launch offering, which is 35 megabits per second for BRL 35, which is, of course, very aggressive. And if you consider that we're not asking for a contract, people -- absolutely in line with our mobile philosophy of transparency. We have no contracts, and we're offering naked [ph] growth, and so no combo with the TV or with the [indiscernible], so it helps us to have -- to reduce the entry barrier.

Thanks to this offering, our sales jumped. And we believe that by November, we'll be selling something between 5,000 and 6,000 lines. So very close also to the ultra broadband sales in the area where we are present.

And this type of aggressive offering is viable only because of the low industrial costs that we're incurring to deploy our network.

In the bottom left, you can see the breakdown of our CapEx splitted between how much we spend to develop the coverage, so the home passed, and how much we spend to connect the new client.

In terms of our coverage, we're spending as low as BRL 80 per home passed, which is much below any international benchmark for ultra broadband deployment. And in terms of connection of the clients, as we're using the corporate lines that exist in the buildings, we've managed to invest very low to connect a new client.

Of course, the -- apart from the offering, the gross speed depends on the coverage that we deploy. So we believe that until the end of this year, we'll manage to increase another 30% in terms of coverage, reaching something close to 600,000 households by the end of this year.

Now, I'll pass back the floor to our CEO for the final remarks.

Andrea Mangoni

Thank you, Rogerio. In this very last slide, I would like to incorporate our strategy based on innovation efficiency, not market and pushing of fixed to mobile substitution have paid off and it will be confirmed. The sales ban has brought [ph] an 2% already expanded and detailed the investment plan to Anatel ends to market.

We are already with around 90% of 2012 plan on track and for data capacity, we have reached 115% of our commitment for 2012. So a sharp upward move in the performance of our network is our priority, reducing the regulatory risk and supporting the announcement of our business we learned a lesson.

On the other hand, we maintained our constructive view for Brazilian market to [indiscernible], and our team is positioned in this market. In other words, a pure mobile player constructing a very solid infrastructure. Sure, we will continue to leverage on [indiscernible] this through innovative and best value proposition offer. [indiscernible] attribute will support our consumer base growth, data services performance and traffic acceleration.

Lastly, I'm very satisfied with the TIM Fiber launch in Sao Paulo [indiscernible]. Clients [indiscernible] region [indiscernible] from now on a very strong fixed broadband alternative offer.

As for the outlook, we maintain our commitment with the guidance and we will work hard for it. It's challenging, but we will do it. Despite the headwind, we believe that in July and August, we are reacting, and we will be at least on track on our guidance.

With that, I conclude our presentation. Let's move to the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Vera Rossi with Barclays Capital.

Vera Rossi - Barclays Capital, Research Division

Could you talk about the administrative procedures with Anatel that created this onetime charge of BRL 26 million?

Andrea Mangoni

It's related to...

Antonino Ruggiero

Bueno, thank you. There is a contingency that relates to 2 puzzles [ph] that's the administrative costs this was established and so related between 2007, 2009. And so there's a bit -- they are still open towards Anatel. So since the assessment of risk of loss was assessed and probable, we decided to provision this BRL 26 million.

Vera Rossi - Barclays Capital, Research Division

Okay. But why were the circumstances that created this provision? What happened between the company and Anatel?

Mario Girasole

Vera, I'm Mario Girasole, the Regulatory Affairs Director. The business acknowledged the regulation call the general plan for quality since 2006. And every year, there are some assessments on this method. In this year, we assessed one, so we're talking about 2007 and 2009, we had some administrative proceedings with some fines that were applied now at Anatel Board's level. So in our view, until the issue is exactly [ph] the level, we have, of course, other arguments and some technical issues to consider did not probable, but after having the issue reached the Board of Anatel level, we think that it [indiscernible] the provision. This is something very old, 2007 and 2009 and maybe something absolutely similar toward other operator or distributions.

Vera Rossi - Barclays Capital, Research Division

Okay. And I have a second question, and it's about your provisions for bad debt. What type of client is creating this increase in the provision this quarter versus the previous quarters, especially last year?

Antonino Ruggiero

So Vera, Antonio speaking. So they are related to postpaid. Of this [indiscernible] there's something a little bit regarding the handset [indiscernible] the dealer, and so we have 90% of this provision comes from the postpaid. We have -- the 1%, I think it's a benchmark of the market, but with provision just clustering our credits, our receivables. In terms of aging, so we proved for every age of the receivable, the percentage of the provisions, so is the methodology that we use, that we apply for the debt provision. So this is still higher, it will be higher, more than 1%, but again this is the benchmark of the market that came from the postpaid. Taking also into consideration that the economic environment is still showing us a deterioration in terms of paying of the customers in January [ph] in Brazil. So the solidity of the -- this original, I think that it is still a good figure benchmark for the market.

Claudio Zezza

If I can add...

Vera Rossi - Barclays Capital, Research Division

Okay, is it... okay, go ahead, sorry.

Claudio Zezza

Just to add, I think, if you look at this number combined with our acceleration in postpaid, I think it's a very strong number because we have already a benchmark in terms of bad debt for the market and we are accelerating our acquisition of postpaid.

Vera Rossi - Barclays Capital, Research Division

Okay. And is that right to say that the increase -- the majority of the increase in provisions is related to handsets? Or part of that is also related to services?

Antonino Ruggiero

No, postpaid services, Vera.

Vera Rossi - Barclays Capital, Research Division

Postpaid services, not handsets?

Antonino Ruggiero

No.

Operator

And our next question comes from Mr. Stanley Martinez with Legal & General Investment.

Stanley Martinez

First, going back to regulatory. Mario, you mentioned in the script some of the potential discussions with Anatel around a partial bill and keep routine. Could you just dimension what the effect of that would be if TIM were to adopt partial bill and keep in 2013 off of the 2012 revenue base? And then with respect to CapEx, Claudio, you mentioned the spending on infrastructure. I just wanted to get a sense for whether your future plans in CapEx were more related to adding fiber backhaul to the mobile network? Or is it really related to increasing the addressable households for the through the TIM Life proposition?

Mario Girasole

Thank you. Thank you for the question. What is the has been started by Anatel, is the introduction of Partial Bill & Keep between, let's say, smaller and bigger operators. This is very different from the Bill & Keep that was in place until 2005. Because it was before the Bill & Keep between -- among all the operators, and this creates some distortion because, in particular, for the fixed mobile network, the Bill & Keep scheme in integrated operators fixed mobile professional who we originate this traffic. This is not the case. The idea of this Partial Bill & Keep is to create some sorts of cumulative for very, very little regional operator like [indiscernible] and [indiscernible]. There is a question about another operator that is not properly active on the mobile market, and that is Nextel because the [indiscernible] market does not consider it properly a mobile market from Anatel. And this goes [indiscernible] reaching consider Nextel bigger enough to have this signatory. And so all 4 variables rules to Anatel saying simply that with a project on 4G, and so our symmetry could be good with very little variation not with immediate mobility. This is a discussion going and that we think that apart from regulatory principles, economic impact, this does not create any concern.

Stanley Martinez

Just if I can follow up on that, is -- could we estimate that it's maybe potentially 5% of traffic to the smaller regional operators and potentially Nextel if you were to apply what the impact of Partial Bill & Keep might be on 2013?

Mario Girasole

I -- the point is the traffic from [indiscernible] shows more [ph] that are very, very relevant. The mobile traffic from Nextel does not exist because Nextel has no mobile operator. So it is still in operation in paper now, so I don't know now how -- what kind of impact that this could have. We are talking about very small regional operator and the not still existent mobile operator that has only 3G spectrum and so forth as a big rollout is trying to be fulfilled before being competitive with the established operator.

Stanley Martinez

Sure, I understand.

Mario Girasole

I hope I answered all the question, and I leave the floor to [indiscernible].

Stanley Martinez

Yes. And then on the CapEx side, I just want to get a sense for what are the priorities for Q4, again, in the context of the guidance that you've given, both for the year and for the next 3 years. But just looking into the fourth quarter and the first half of 2013, is it going to be more in terms of adding density to the mobile network? Or do you think it's going to be skewed more towards increasing your addressable footprint further beyond the 560,000 households for TIM Life?

Claudio Zezza

Thank you. Claudio, speaking. We maintained this BRL 3 billion level of investment for this year. Obviously, adding the investment -- industrial investment for the license, 4G license. So BRL 3 billion for industrial. We maintain focused obviously on the roll out of the network coverage capacity and obviously, focusing on the level of quality that was defined and with the Anatel, with the recovered plan that we discussed and was approved with Anatel. So I was saying that it's mainly focused on infrastructure, 92% is still good ratio for the fourth quarter, and the main cuts will be dedicated on the mobile side.

Andrea Mangoni

Stanley, it's Andrea. Just a few words on our CapEx program. Talking about the quality improvement we need on our network, the problem is not increase the amount of our CapEx. The main problem is a problem of CapEx allocation. So we confirm our current cash guidance in terms of CapEx.

Operator

And our next question will come from Mr. Soomit Datta with New Street Research.

Soomit Datta - New Street Research LLP

I have few questions, please. First of all, again, on CapEx. Well, you [indiscernible].

Unknown Executive

Can you speak louder, please, Soomit? Can you speak louder, please?

Soomit Datta - New Street Research LLP

Yes. Sorry. Is that better? Yes, I'm sorry, just like to follow up on the CapEx. I wanted to check on the -- in terms of the currency [indiscernible] your CapEx guidance. It has [indiscernible] in fact, my understanding is historically that's been variedly split equally into 2 years but is there any chance that will [indiscernible] and if so to what extent? And then the second question is related to all the residential fiber offering [indiscernible] indications to the subscriber database. And I was intrigued about the very aggressive price cuts which you've recently put out on those 2 main products, what has driven that sudden change in pricing and does that make any difference or does that change your relative guidance you previously given for [indiscernible]?

Andrea Mangoni

Soomit, I think we didn't quite understand well the question. I think the sound is quite low. Sorry, but we didn't follow your question.

Unknown Executive

I think your question maybe CapEx evolution and then I think Fiber [indiscernible] if I'm not mistaken. Is that correct?

Soomit Datta - New Street Research LLP

Yes. It's actually the movement of the CapEx guidance, and then just asking about the price reductions on the TIM Fiber.

Andrea Mangoni

Okay. So the point is, regarding capital, we maintained our actual guidance at BRL 3 billion for this year and BRL 9 billion on the total 3 years in related plan. The focus there is on, as I've commented before, quality that we assess with the Anatel. Obviously, coverage and I will say some confidently commented that in the past, as for instance, the Fiber to the site, we allow our towers to have a very broadband throughput in order to sustain our data traffic. So the CapEx remain the same and I'd like to say, focusing on infrastructure, you're beginning to see the level of commercial lower or [indiscernible] that we had in the past. So network infrastructure is our big goal.

Andrea Mangoni

Well, your question, you were asking the clusters of our sales growth adds, most of our sales more than 90% are concentrated in the 35 megabits per second tariff plan.

Soomit Datta - New Street Research LLP

Okay. I don't know if you can hear me. But I just wondered why you put through such aggressive price promotions recently. Is that related to the total of the level of sales that you've had so far?

Andrea Mangoni

Soomit, it's really [indiscernible] get you on our end. We're not getting your question.

Operator

And our next question comes from Susana Salaru with Itau.

Susana Salaru - Itaú Corretora de Valores S.A., Research Division

Just a question regarding the 700 megahertz per auction, that's probably going to be anticipated for next year. What are your views on that because we remember that on the past, TIM was very vocal on favor the [indiscernible] over the 2.5 gigahertz that was auctioned this year?

Andrea Mangoni

Thank you, Susan, for the question. We continue to be convinced that, that full 4G environment will be reflected with high band like 2.5 gigahertz and lower band like 700 megahertz, like the international experience is showing. We can consider also that our strategy to participate -- of participation to 4G auction reflected this question. Now, when this 700 megahertz will enter in Brazil, of course, the discussion -- discussion between Anatel is under discussion between our operators and the broadcasters to support digital dividend. So we have no perspective now and -- from now until the end of the year about clients [indiscernible] we think that by the first quarter to the half of next year, we will have some perspective on this.

Unknown Executive

Just to add, we are in favor as, of course, it's already anticipated of auctions that stimulate investment more than pay off about the spectrum. And so, again, we are -- our perspective is that also this auction will be infrastructure-driven and not necessarily [indiscernible].

Operator

And our next question comes from Mr. José Vallejo with JBM.

Unknown Analyst

I have a quick question regarding the EBITDA margin for the next couple of years. We saw some reduction this quarter for some exceptional wins, but I was wondering where it would end for the next 3 years.

Claudio Zezza

Thank you for that question. Claudio speaking. With EBITDA we have to separate the margin in the service and the margin in the handset that polluted a little bit the margin as a whole. However we do believe that obviously, considering the same fiscal environment that obviously, hard to get a [indiscernible] the operational margin, the operators, I do believe that this is something that will increase in the next few -- for the next 2 years. But, we will of course, maintain the figures that we look after the market in the last 3 years plan. But we do believe that this is something that is going back consumer to debt that probably the level of the handset will not increase in the future while the level of the service contribution margin will be higher. Even considering obviously, the reduction in the MTR that will be able to be higher in the next years. So finally, I do believe that considering the same condition in terms of fiscal environment, fiscal bargain and level of handset, it's sustainable to see something around 28%, 30% in the next 3 years.

Unknown Analyst

And I have a second question regarding the -- your views in the wireless market and the competitive landscape. I don't know if you can comment a little bit on where you see penetration rates in a year from now? And where you do see the postpaid and prepaid mix?

Roger Solé

This is Roger Sole. Thanks for your question, Jose. Actually, we are working -- we see the market evolving and keep on going in the next years. We believe we have penetration when we really take out the effect of the dealer or [indiscernible] ownership is much lower than what it appears. So best decision for moderate growth in the next 2 to 3 years until we reach, let's say, we have penetration of more than 90%, 85%, which now we are [indiscernible] this year. On that sense, prepaid, where we've seen the engine of growth for all these new customers and also the second line of many customers, but at the same time, we also see a structural change in the Brazilian market. Which is the emergence of B class, which want a better experience [indiscernible] problems with consumes. On mobile this means to go from a prepaid to a hybrid product that have the convenience of a postpaid or not having to have a top-up to use your phones on most of the days of your month, but at the same time, it has a cost control issue that they like on prepaid. So you will see an evolution -- you have the new customers coming into prepaid, but also many of the existing customers migrating to postpaid through the console plan. So we will probably see an accumulated [ph] of the prepaid and postpaid. In the long run, you'll see probably postpaid starting to grow more than prepaid. I hope that answers your question. I don't know if you have any more point?

Operator

And our next question comes from Andrea Corillo [ph] with Scotiabank.

Unknown Analyst

I have a question on the competitive landscape. It seems that American Mobile recently eliminated the [indiscernible] recharge for prepaid subscribers. So they are now offering at BRL 0.21 per call rate in Brazil, which is 15% cheaper than your BRL 0.25 per call rate. So I want to know if you guys will be making changes or will be dropping the prepaid rate to your subscribers? In the one hand and then more than that, I would like to ask you what was the reason behind the 100,000 postpaid disconnections that occurred during September?

Antonino Ruggiero

On the first issue about American Mobile offering. What was the actual question again? Sorry, I didn't hear it well.

Unknown Analyst

Yes. My question is if now that AMX has a cheaper rate than yours and that they are not requiring for a monthly recharge just as you -- same as you, excuse me. If you will now be cutting or be reducing the price of your per call rating on-net instead of charging BRL 0.25 per call, you will be reducing this to say BRL 0.19 per call?

Antonino Ruggiero

Okay. No, that is not our offering evolution. If you have followed us in the last 3 and 4 years, we have never entered into a price war of any kind. I think that for rate has been to offer structurally different, innovative and very relevant ways for our customers to use their mobile phone. So that's why we invented the Infiniti calls, Internet survey, the SMS survey and our customers recognize us for that. In the end, I don't think that a price down of one offering in one of our competitors is enough to lure our customers to this competitor. In the end, our customers, first, they have built their community around TIM, so they aren't going to change because of a few cents more or less. Second, they know that staying with us will always have better and newer, let's say, offering evolution the market because this other player mentioned, they maybe copy paste usually in a different or [indiscernible] of our offering and then over time, they tend to actually talking totally. But I think that customers are very clever to understand who's creating value for the, into the market.

Unknown Analyst

Okay. And on the...

Andrea Mangoni

Just to add, if you look at our growth rate in the third quarter, our sales is 40% higher than collateral, even if they have lower price. So it's not just a matter of price they offer.

Unknown Analyst

No, excuse me, but during September, America Mobile did this during September and during September, they gained twice as many prepaid generations as you did, they gained 207,000 activations against 112,000 by you. So it seems that at least just taking a look at the data for September, they gained twice as many [indiscernible]. So that's why I was asking you what you're [indiscernible] your pricing in terms you want -- it's probably the right decision, I don't know. But on the other hand, I wanted to ask you why there were 100,000 postpaid disconnections during September that [indiscernible] the base or what happened?

Andrea Mangoni

I won't [indiscernible] your answer about the prepaid. The net debt of prepaid depends on growth and churn, but if you look at the gross, when we look at the point of sales, we still see that we are selling a lot more than [indiscernible], okay? Now, better to [indiscernible] question.

Antonino Ruggiero

Yes, actually about the postpaid issue, we have a cleanup of postpaid lines on M2M, it's our machine-to-machine lines that I mentioned, which have a very, very low ARPU. So basically, irrelevant effects on our revenues disconnections. And this -- even if it happens because these are very big customers that from time-to-time they disconnect their huge chunk of lines and we decided to -- these lines [indiscernible] we activate it again, and we cut them down. But in reality, a very, let's say, low revenue generating postpaid lines that was cut. All of them were M2M. It was in the full quarter. It was around 280,000 of M2M lines that were cut.

Operator

Excuse me, ladies and gentlemen, since there are no more questions, I want to pass the floor for Mr. Andrea Mangoni for his final remarks. Mr. Mangoni, please proceed.

Andrea Mangoni

Thanks. Just to thank you all very much for attending our earnings release and I also see you soon. Wish you all a very nice day. Bye-bye.

Operator

This will conclude the conference call results of TIM Participacoes. Your line can be disconnected. Thanks for your participation, and have a good day.

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