Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Andrea Mangoni – CEO

Lorenzo Lindner – Chief Commercial Officer

Roger Sole – Chief Marketing Officer

Rogério Lima – IR Officer

Claudio Zezza – CFO

Mario Girasole – Regulatory Affairs Officer

Analysts

Michel Morin – Morgan Stanley

Dan Kwiatkowski – UBS

Andrew Campbell – Credit Suisse

Walter Piecyk – BTIG

Susana Salaru – Itaú

Paul Marsch – Berenberg

TIM Participacoes SA (TSU) Q4 2012 Earnings Call February 6, 2013 10:00 PM ET

Operator

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everybody to TIM Participações’ 2012 Fourth Quarter and Year-End Results Conference Call. Today, we have with us Mr. Andrea Mangoni, CEO, and the management team.

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 facility for this call on the website. After TIM Participações’ remarks are completed, there will be question-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 general economic conditions, industry conditions and other operating factors could also affect the future results of TIM Participações and could cause the 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 day to everyone. On behalf of the team, I thank for your participation and attention in another conference call. In my first slide, I would like to highlight a great strength of this company, and in a perfect storm experienced in the second half of 2012 was able to demonstrate a great reaction power the inclination and above all a great commercial force.

We left this period strengthened, and we commend your commitment with core improvement to our more than 70 million carriers. Highlighted in the slide what I just said, in spite of the perfect storm we managed to have solid operational improvement followed by a good economic performance.

On the operational side, we had a base growth above the average of the market, a record for minutes per user and also significant evolution in data user. We kept the leadership in base growth for the 10th consecutive quarter, increased the leadership in the prepaid segment and conquered the second position in the postpaid voice segment.

Now on the financial side, we were able to maintain the revenue growth speeds and accelerate even more EBITDA growth in phase of the last two quarter and again improvement on EBITDA margin. Lastly, net income also followed an improvement factor in each quarter, and then we finished 2012 with a net income of BRL1.5 billion, a 17% growth for 2011. We will propose revenue of BRL743 million, a 40% growth compared to 2011 to the Board of Director and shareholders’ meeting.

Next slide, please. I make sure again the mention of the difficulties in the second quarter of 2012 in order to highlight the achievement of our guidance. Total revenues reached BRL18.8 billion in 2012, a 10% growth year-over-year. In relation to EBITDA, we reached the BRL5.1 billion mark and BRL3.4 billion CapEx in 2012, a little bit higher than our guidance due to a greater effort in infrastructure and quality.

As positive facts, I would like to mention the resilience in our operation, the quarterly improvement of our ARPU and good cost control when talking about a strong tariff increase and higher investment in infrastructure. In recognition to that, we are addressing the network and quality issues in right way, investing more and promoting a higher operational efficiency.

We’re supposed to give factor from neutralized and more modest macroeconomic scenario and increasing competition and low performance on the fixed business besides the regulatory situation we did in the year. In the graphic below and to the right we present a little more detail over difference, and we’re expecting impact from the service revenue growth year-over-year.

Moving to the next slide, I try to demonstrate here real agents that even in difficult times that we took importantly somehow which will generate benefit with lower – benefit in leading the long run. First, we promoted restructuring network management, bettering the planning and control processes, besides promoting an integration between the network of Intelig, TIM Fiber and TIM Cellular in one unique entity, which will allow us greater strength, resilience and more-cum-well defined priorities.

We also did a restructuring in the quality management. Just now into this quarter directed to the Chief Executive Officer. They need more that regular responsibility to assure the achievement of quality and satisfaction of the client rolls. Lorenzo will speak more about the compliance team but I anticipate the satisfaction in seeing TIM’s name as the Brazilian telephone company with fewest complaints in the consumer protection agency in 2012.

Beyond the operational excellence to better the quality, we increased our investment in 13% over the spending in 2011 reaching BRL3.4 billion. It’s important to remember that more than 90% of this value went to infrastructure.

Now, I’ll pass the floor to Lorenzo who will talk about the operational performance of the company.

Lorenzo Lindner

Thank you, Andrea. Good afternoon, everyone. Let’s move to slide six. As Mangoni said, through all the difficulties that we faced last year, we made a very strong result in 2012. This slide shows some of the key results that we achieved.

First, TIM is the only mobile operator that grew in market share last year, continuing to reduce against later. Second, TIM became the leader in prepaid market. Third, TIM became the second operator on postpaid voice market, in fact, even in this difficult environment, we continue to increase our commercial footprint both in postpaid and prepaid, reducing our subscriber acquisition cost and improving our other performance. In few words, we continue our performance in growth, efficiency and profitability.

Let’s move to slide seven. This is a very important slide. It shows the real situation of the quality of services offered by all players. It’s very clear from this stage that TIM is the number one or the second best operator in quality. This shows our commitment and our concern in offering good service to all our customers.

Let’s move to slide eight. So finally, let’s make a point on our network deployment and also on our network quality indicators. We’re showing this slide that we are on track with the quality plan that we presented last August to Anatel reaching all quality targets. This was the result of the BRS3.4 billion invested last year, and so the very important work achieved by our network department. Finally, we also continued to increase our 3G network, which is 72% of the overall population coverage at the end of last year. Now, we are on track of our network grow-out reaching all quality targets of Anatel’s plan.

Now, I’ll pass it to Roger Sole. Thank you.

Roger Sole

Thanks, Lorenzo. Moving to slide – to page 10. Here we have some detail on our customer base evolution, which as you know we’ve been always very consistent in our strategy and our first phase of development of the run of this company some years ago was to build a strong customer base evolution based on future distribution. This structural trend is taking place at the clinical level.

Specifically, on postpaid, we can increase it more than 15% of our customer base and more than 10 million lines at the end of last year. And on prepaid, we saw a growth of 9%, reaching almost 60 million prepaid customers. This change of year toward postpaid in growth acceleration made possible through increase a little bit of postpaid mix to more than 15.3% of postpaid of our total customer base so that increase in 25 basis points.

Specifically on postpaid, the news are actually better than shown. Our increase in voice postpaid customer base has been more than 25%, which is 8.7 million. This represents or which shows the most profitable customers which are backbone telecommunication customers are growing more than average, more than our overall customer base evolution. Specifically, to show this in more detail in the fourth quarter, our net share of voice postpaid was 34%, so making even stronger or number two position in the market in voice postpaid.

And now I’ll give a little bit more on the minutes of use evolution on voice we introduced. We also see a strong and very healthy increase of more than 14% year-on-year in the fourth quarter, accelerating from a 6.7% in the third quarter.

We see a very healthy sign of our customer base. In the end, I think while we don’t have loyalty contracts, so we need our customer base to be happy and satisfied with our services. Our distribution increased more as a sign of future and maximum profitability and loyalty into this fraction of our customer base. Another metrics to look at this is the top-up volumes, the number of total top-ups that actually increased also almost 15% in the fourth quarter to more than BRL210 million top-ups.

So this will be our comments on the first wave of growth. And now on page 11, we have some evidence on the Internet rate that we started to accelerate in 2010 and that is gaining momentum. First on the top of the slide, we will show you a little bit of our evolution in the sales of Internet-enabled device that are the latest in the growth of the Internet usage. And as you can see, the sales increased to almost 60% in the fourth quarter, all prices compared to the same quarter of last year basically because of the increase in sales of smartphones/web phones that now account for two-thirds of total sales.

Obviously, there’s leverage to keep it increasing because it’s amortization or basically changing and enabling their phones to Internet-enabled phones. And as you can see, we are being operated is more effective on the strategy as we have a market share of 38% of the total handset sales according to external figures, among the sales done by operators in Brazil.

So we are the market on this trend on taking the Internet to the smartphone, and that’s why we see this increase in our smart and web phone penetration in our techno range that went to 43% at the end of 2012.

So all this is allowing us to grow the VAS revenues as you can see at the bottom of the slide that went to more than BRL1.2 billion gross revenues seen in the fourth quarter. That’s an increase of almost 30% year-on-year, and achieving for the first time more than 20% of total revenues of the VAS revenues all over the Brazil. And well, as you can see this is driven by both increase of SMS unique users that grew almost 25% year-on-year, and obviously on the increase on data users which have increased to 21% reaching more than 21 million customers using every MOU the Internet network.

And finally moving to page 12, here we need to show you detail on our ARPU evolution. Here, the news are very good. Our ARPU has been increasing for the second consecutive quarter. In this case, it grew more than 5% in the fourth quarter versus third quarter in which we have already grown more than 3% in the fourth quarter.

So these are the news when we look at both postpaid and prepaid, we see that the strength of both is same, principle especially on prepaid, the growth was almost 6% towards the third quarter but also prepaid grew more than 3%. So in the end, we can show that in spite having an MTR cut of almost 14%, we can see an ARPU growth through several policies of managing our customer base, of migrating customers, of selling to customers from prepaid to accounts or plans, prepaid plans from counter to postpaid, selling new lines of operator to stimulate the usage of data to our customers and also basic mobile services. So managing our base effectively over more than 70 million customers, we have been able to grow centralize and go EBITDA and ARPU.

So with this, I’ll pass the word to Rogério to have an update about Live TIM.

Rogério Lima

Thank you very much, Roger. Good morning everybody. If we turn to slide number 14, a quick update on TIM fiber developments, and at this stage, we’ll cover the network deployment progress. Finally, after adjusting some operational processes, I believe we got the running speed on the network side.

In the last quarter last year, we deployed more than 70% of the whole coverage that we’ve got at the end of the third quarter, reaching 700 cabinets which connects roughly more than 4,000 buildings in São Paulo and that represents our coverage of more than 500,000 home passes. The other good news is that we are respecting the investment per unit that we forecasted in the business plan. We’re currently spending roughly BRL700 per connected home which is almost 70% less than the international benchmarks for ultra broadband services, and we are pretty confident that we’ll bring this number to below BRL500.

Thanks to – also to the innovative architecture that we’re deploying apart from being perhaps to deploy and the low investment required. It also allow us to offer much higher performance in Brazil, the average speed is below 2 megabits per second. Normally, operators actually deliver only 10% to what they sell.

With TIM Fiber, it’s the opposite. We’re managing to deliver more than what we’re selling. We’re selling 35 megabits per second in download and 20 megabits per second in upload, and we are actually delivering 37 megabits per second in download and 21 megabits per second in upload, so the service is working very well.

If we turn now to page 15 – slide 15, thanks to the last promotion that we had and to the point of service we are delivering, we now have more than 160,000 people in line that are filling the form and making a website and are waiting to do coverage to get it to our service.

On January 1 this year, we raised the price ending the last promotion that was 35 megabit per second for BRL 35 and now it’s costing BRL 59. The good news is that even with this price up, sales continued at the same pace that we had before during the business period. By the end of the year, we reached our first milestone, the first 10,000 subscribers. It’s still a small number to TIM numbers but it shows a growing trend there, which makes us very optimistic around the service.

If you look at the graphic on the bottom right, this is the proxy of the market share every time that we cover a new area. When took a cabinet in the area approximately between 8 and 10 months we’re reaching 10% of the market share, so there’s an important correlation between coverage growth and subscriber growth.

Now, I’ll pass the floor to Mr. Claudio Zezza, CFO on the financial part.

Claudio Zezza

Thank you, Rogério. And good afternoon, to everyone. On page 17, we show you the EBITDA evolution from the BRL4.7 million EBITDA 2011 to BRL5.1. The major contribution came from service revenue, obviously growing 7% year-on-year and handset margin as well contributed on the positive to – 70 million positive result in EBITDA. And marketing is staying as well. So even in the growing in the marketing in general and sale activity, we manage this area of cost efficiently.

The area that grew, interconnection, that grew 13% is mainly due to the interconnection itself with 13% year-on-year and the leased lines 12% year-on-year. The fourth quarter of leased lines grew only 1%, so we can see it consistently slowing down as part of the network expenses. Finally, personnel, G&A and others, growing 11% is mainly driven by personnel that came at 15% of growth year-on-year and this is mainly due to the 10% of growth of our full time equivalent, many concentrated in the sales area and network.

So in the bottom left of the slide, the handset contribution and the commercial efficiency, we’re already talking about this area, understanding the commercial grew down 3.4%. We manage finishing expenses with a reduction of 9%, so efficiency in the trade in the same channels.

The bottom right of this slide, traffic gains commission, we show here a compounded growth rate on a quarterly basis. So traffic growing on an average, it’s 7% per quarter, means a 35% in the whole year and leased-line cost ending their connections flat, so this is a sign of the inefficiency in this area.

Next slide, showing the passage from the income – sorry from EBITDA to net income. Well, the depreciation amortization is likely about last year, about 3.6% due to the higher CapEx. And net financial results came better than last year, more or less BRL70 million, met net financial expenses BRL14 million and mainly to the FX liberation market-to-market has contributed positively in this year for more or less BRL60 million. Taxes and other came in at BRL700 million, so we have dilution, just to briefly explain to you. We had a dilution coming from the Intelig that has a negative bottom line this year. So probably more or less BRL50 million came from the dilution in the tax rate coming from the Intelig negative bottom line higher than last year.

The organic net income growing 40% in the last three to two years and the proposed dividend as Mr. Mangoni said this is BRL 743 million. This means payout ratio of 51% given yield of 3.5 considering yesterday closing price.

Finally, cash generation, next slide 19, we taken out BRL3.8 billion of CapEx. We increased the working capital with generation this year of around BRL600 million. So, we spend operating free cash flow of BRL1.8 billion and that is at 12% of growth. So mainly thanks to the delta working capital.

Being at debt, we’ve reached a net cash position under BRL151 million thanks to the operating free cash flow performance. So, adding this year – generating this year more or less BRL600 million. So I would say efficiency result up to the net income cash generation very briefly augmented financial result of this year.

And I’ll leave the floor to Mr. Mangoni for the final remarks. Thank you.

Andrea Mangoni

Thank you, Claudio. In this last section, I conclude saying that the acceleration of the fixed to mobile substitution is a large impact, 55% of Brazilian household take only one mobile as a communication point adding to the figure interest the price to the consumer of mobile telephony is almost 60% cheaper than fixed telephony. So minutes per user in mobile telephony continues to grow, and TIM is the operator which is best positioned to be in this market dynamic once for sales are fixed directly.

In other word, the data access through mobile telephones has been multiplying in the last two years especially among the lower classes. Important to highlight that TIM has been one of the main drivers for such process, focusing on the universalization of the Internet service for all social classes in Brazil. Let’s say that we also see a solid growth in terms of data monthly user as you can see on the mid right graph.

In the regulatory issue, we have now more defined scenario of relevant issues such as MTR and EILD. However, each work on one side and the MTR decrease was implemented but impacted revenues of mobile operators. It’s necessary that the recognition of their EILD is also followed by these fixed operators.

So, now, the last slide of our presentation. After tomorrow, Telecom Italia will release with more details the three-year plan for the group. Business fundamentals have remained solid. With a more moderate base growth, it should reach 90 million lines by the end of 2015. Both the use of voice services and data services should continue to grow double digit in the next year backed the innovative and transparent approach of Infinity and Liberty of trust.

As you already know, I had communicated yesterday through a Board of Director meeting, my resignation from the Chief Executive Officer position of TIM Participações. I think this chance to thank the commitment of the whole top management and the first-class teams because they have done an outstanding job, a young and motivated team which will continue to be crucial for the first development.

Now, we will move to the Q&A session. Due to my resignation, I will ask not participate in the next section and I will leave the floor to the top management of the company. Rogério please.

Rogério Lima

Thank you, Andrea. Now, we are ready for the Q&A session. Operator, please.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Michel Morin with Morgan Stanley.

Michel Morin – Morgan Stanley

Good morning, everyone. Just two questions, the first is I was wondering if you could comment on the Anatel quarterly update that they published this morning, if you have any initial reactions to that report, kind of updating on the progress made on the mobile quality in Brazil. And then secondly, maybe for Roger, you shared with us some data on the top-ups. I think you said it was up 15% in the fourth quarter. I was wondering if you have the similar data points for the first three quarters of the year. How have the top-ups been evolving as the year has progressed? Thank you.

Rogério Lima

Thank you, Michel. The first question I will ask Mario Girasole, our Regulatory Affairs Director to answer and then Roger Sole. Here is Mario.

Mario Girasole

Thank you, Rogério. Thank you, Michel. And the presentation Anatel published today confirm basically what the – what we said. We see that in the first quarter of Anatel client, now we had a very good performance in terms of network indicators. And we also had a very good absolute and comparative performance in 81 cities now that were specifically forecasted by the agencies. So we think that our infrastructure and quality roadmap is correct. Anatel is stating that, so we are confident that we’re in the right footprint.

Roger Sole

Yeah. Michel, about the top up evolution, the trend is very similar. Actually, the news is that we have not lost any heat or any acceleration in our total top-up volumes year-on-year, but I cannot give you the exact numbers for the first quarter. But the good news is acceleration pace is similar and it’s expanding despite all the turmoil that happened in the second half.

Michel Morin – Morgan Stanley

And despite disconnecting inactive prepaid subscribers essentially.

Roger Sole

Well, actually, Michel, disconnecting or non-disconnecting inactive subscribers does not change a bit this number because by definition top-up is done by an active subscriber. So if we disconnect inactive subscribers, we do not lose any top-up because this is the volume of number of top-ups, right? So, by definition, they are done not by inactive subscriber.

Michel Morin – Morgan Stanley

Yeah. Great. Okay. Thank you very much.

Rogério Lima

Thank you.

Operator

And now our next question comes from Mr. Dan Kwiatkowski with UBS.

Dan Kwiatkowski – UBS

Hi. I’ve got a couple of questions. The first question is on your working capital, can you explain why it was quasi-positive in the fourth quarter? And whether there is a temporary reversal in following quarters? And how the payment of the spectrum impacts that? That’s the first question. And the second question is on your organic CapEx, perhaps you could explain why that was above your initial expectations? And what that might look like going forward? Thank you very much.

Rogério Lima

Dan, can you repeat please the first question, please? We didn’t get it right.

Dan Kwiatkowski – UBS

Yeah. The first question is on your working capital. Can you explain why you said positive in the fourth quarter? And if there are reasons for that to change going forward if this is related to the payment for the spectrum?

Rogério Lima

Yeah. I can say that in the comparison you’re near. We can have mainly two reasons. I’ll explain to you. The major one is the entrance of the major part of the CapEx that is more concentrated in the I would say second part of the year – second half of the year and mainly in the last quarter. So it pushed normally the accounting payable of the company.

The other one is coming from the more efficient management of our stock. And so I would say that mainly we have two main reasons. The first one coming from the payables, this is more relevant than the other.

Dan Kwiatkowski – UBS

And that would reverse obviously in 2013?

Rogério Lima

In 2013, I would say we will keep managing the payments of this path but even improving. I would say that this level could be even improved.

Dan Kwiatkowski – UBS

Okay, great.

Operator

And our next question comes from Mr. Andrew Campbell with Credit Suisse.

Andrew Campbell – Credit Suisse

Yes sir, good afternoon. So my first question is on the CEO succession plans. Because there’s some articles saying that the new CEO has already been chosen, and I was wondering if you could confirm that and any timing and when we should expect an announcement or basically any color on that process? And then my second question is on the reduction to termination rates that goes into effect in the first quarter this year, could you give us an update on what the net exposure is now to MTR revenue, even on a revenue or EBITDA basis so that we have an idea what to expect in terms of the impact there? Thank you.

Lorenzo Lindner

Thank you Andrew. This is Lorenzo speaking. For the first question on the CEO announcement, we are in the process to be defined by our Board of Directors, so they’re analyzing. They will come with the decision in the coming days. We cannot precisely say the date and of course the confirmation, we don’t have that information yet which is subject to our Board of Directors meeting. So we don’t have much to predict on that front.

And from the MTR exposure revenues on EBITDA, we are running let’s say close to 20% on EBITDA exposed MTR. So this is the magnitude of hold on MTR which has decreased from two years for now for example, we used to be above 40%, now it’s running at 20%.

Andrew Campbell – Credit Suisse

Okay, great. Thank you.

Lorenzo Lindner

Okay, thank you.

Operator

And our next question comes from Mr. Walter Piecyk with BTIG.

Walter Piecyk – BTIG

Thank you. My first question is just on minutes of use. I think in a previous question, you mentioned that the growth in the second half of the year was not just a result of – solely at least of disconnecting some of those non-paying customers. And then in the chart in your presentation on page 21, you showed very – it looks like an acceleration of growth that you expect between 2012 and 2015 as far as minutes of use. Can you explain the reasons for that? Is it more than – is it just simply the mobile price premium and where it is and that’s what’s driving the usage?

And then on a related basis, shouldn’t that mean that your ARPU declines should moderate pretty significantly in the next couple of years relative to the – I think you had 10% or 11% decline at least the past three years off the decline. And I also noticed that obviously data revenue was also looking like it’s accelerating here. So if you could just talk about minutes of use and kind of how that – how you see that impacting ARPU in the next couple of years. Thanks.

Roger Sole

Yes. Thanks, Walter. This is Roger. Yes, actually the minutes of use is increasing basically because of two elements. First, we are actively managing our customer base. So as you know, in Brazil, there’s a very tiered structure so the A class usually gets a postpaid with unlimited plan and the prepaid user has a plan with more limitations.

So as the economy is improving, people have more spending power and we have a very – we have got used millions of people to using a lot of the mobile phone especially on prepaid. Now they are ready for the next phase, so buying control leverage plans that are anywhere between prepaid and postpaid. And in that upgrade – in that up-sell we generate and unleash a new MOU for the TIM subscribers. So maybe we’re up-selling and managing the customer base so that they can use more on the mobile phones. In the end 150, 350 is still very low compared to worldwide average of emerging countries where you can find most of 400 or 500.

So we still think we have a good way to go, and this would be the first reason. But secondly we are simulating the customers even though they do not upgrade to constantly use more their mobile phone instead of using the fixed phone or sometimes creating minutes out of thin air because our people were not using that much.

So as long as they get more used to use the mobile everyday and they have more spending power, they start to use more. Also remember that still a lot chunk of the voice market in Brazil is still coming from fixed where it has a very strong IFBM difference. So actually it’s not that difficult to do voice calls from a fixed line and we’re also transferring...

Walter Piecyk – BTIG

Does that mean that your ARPU – shouldn’t that mean that your ARPU declines should start to moderate though with all these things that are happening?

Roger Sole

Well, the ARPU has been declining in the last two years as you have said, but now we are seeing a trend in the last two quarters of stabilization with a slight increase. And looking at your second question, yes, we think we are very optimistic on the way that ARPU might evolve because we are still gaining from the people watch us distribution in voice and from the up-sell to our target customer base on voice. And at the same time, now, we are seeing the Internet rates coming in a very smart market way. So 40% of enabled phones, increase of 30% of VAS revenues. So we are very optimistic because we see that both voice, unlike most of the more western countries, we still have a good way to go in emerging countries especially in Brazil.

And then data is happening big time in mobile. Even more accelerated than what’s happening in the western countries where the fixed infrastructure is usually very good for the Internet. It’s not the case in Brazil. So mobile Internet can be some times or in most of the cases the best comparative to connect to the Internet. So we’re very optimistic on the way we can evolve ARPU in the next year.

Walter Piecyk – BTIG

Okay. And on my second topic or the question I just want to ask about the dividend because obviously, you mentioned CapEx similarly less than EBITDA growth. So you’ve got some growth there, but the payout ratios at the same time have been increasing for the past three years. Shall we continue to expect the payout ratios for the dividend evolution to increase in addition to obviously the regular free cash flow growth here together?

Rogério Lima

Yes, I would say we would forecast a consistent dividend policy this year. We’re going to propose a significant increase expected in last year so 40%, 39% of growth. And would you believe that this is the path that we need to follow. So according to your comment, I would say it’s right. The moment that has increased our cash generation now, we do believe that it is sustainable to have a consistent dividend policy.

Walter Piecyk – BTIG

Great. Thank you.

Rogério Lima

Thank you, Walter.

Operator

And our next question comes from Susana Salaru with Itaù.

Susana Salaru – Itaú

Hi, guys. Just to follow-up question on the MTR rates, we should learn by the end of this year what would be the rate in 2016 and the result of the conclusion of the cost model. And do you guys have a synergy for what would be the rate that will be established by Anatel or do you raise an expectation of the company as to what the rate would be in 2016? That’s it. Thank you.

Rogério Lima

Thank you, Susana. I’ll pass the floor to Mario Girasole. Mario, please.

Mario Girasole

Thank you, Rogério. Thank you, Susana. We are in a technical conversation with the authorities that are a working group, establishing rules about our regulatory cost accounting and so now, we have no elements to give a number. But for sure, the indication means that this will be a reference interconnection and not a cost orientation, so we think that anyway after 2015, we will continue to have sort of a glide path and not very, very rarely we want to decrease. But again, the studies, the technical studies and the regulatory cost accounting is ongoing and now it is not ready to give numbers.

Susana Salaru – Itaú

Okay. Thank you.

Rogério Lima

Thank you, Susana.

Operator

And now our next question comes from Paul Marsch with Berenberg.

Paul Marsch – Berenberg

Yes. Thank you very much. On page 12, you talked about the sequential trend from Q2 to Q3 to Q4 showing that it’s growing. But you could have showed that chart any year for the last four years and you’d have seen similar sequential trends at various times through the year. But then come the first quarter of the next year, there’s always been 11% or 12% drop in all from Q4 into Q1. So I’m just interested in what’s going to prevent that drop into Q1 2013 this year? Are you expecting less of a drop or even maybe an increase into Q1 2013 compared to Q4 2012? That’s my first question.

And then secondly, I think, on the CapEx in an earlier version of the presentation slides, there was a chart that indicates that CapEx to sales are only falling very modestly from 18% in 2012. And I think it indicates that CapEx was going to be running along at about BRL3.7 billion to BRL3.8 billion and I wonder if you could confirm that that was what was suggested by the guidance. Thank you?

Rogério Lima

Thank you, Paul. First question, Roger Sole will answer then on the CapEx a part that the CFO will take the question. Roger, please?

Roger Sole

Yeah Paul. Actually regarding the seasonality definitely decreased in the fourth quarter on postpaid seasonality, but it’s not the same as it happened last year. So actually in 2011, we had an increase of 3% on the ARPU in the first quarter and in this fourth quarter, this last year, it was 5%. It was 2% that’s one more than seasonality let’s say, if we assume that last year’s seasonality or two years ago seasonality was actually under.

But in the third quarter, it happened exactly the same. So in 2011, we saw a decrease of ARPU of 2% in the third quarter versus the second one, which is usually normal because peak seasonality are usually in the second and the fourth quarter. And this year, we have an increase of 3%, so five percentage points more than seasonality would indicate. So I would say that, yes, definitely in the fourth quarter, we have had some seasonality but still it’s an increased figure than some seasonality and than 2011 for sure. Second...

Paul Marsch – Berenberg

So you think that two percentage points of delta can be carried forward into Q1 so instead of an 11% full, you’ll see maybe a 9% full or is that how I should read that?

Roger Sole

Yeah. And we are optimistic on this time, yes. Yes. That’s what we are seeing already entirely as a positive trend, yeah. And I also have to remind you that in 2012, we had the MTR cut of 14% in that second quarter, that’s why you can see a decrease on ARPU of 15% in the second quarter. That’s one of the reasons. And from that, we evolved to minus 11% year-on-year in the third quarter and only maintained that 9% in the fourth quarter.

So we are evolving positively despite an MTR cut so it is safe to say since April, actually in the end of the first quarter of last year. So despite having this structural MTR cut, we are seeing an improvement year-on-year over our ARPU evolution and the total average of the year was 11% less ARPU and the fourth quarter was minus 9%, so again despite our strong MTR cut, we see signs of good evolution of ARPU, and also we signed.

Paul Marsch – Berenberg

Thank you.

Claudio Zezza

Paul, Claudio speaking. As far as the CapEx is concerned, we are close this year at 3.4 industrial level of CapEx which is mainly concentrated in infrastructure. So, strengthening the coverage, the quality that’s why we could close the year slightly off the BRL3 billion that was the guidance. But then again we put more effort in coverage, in quality, in filling the gap in 3G coverage and then so on.

I would say that this level would be relatively stable during the next forthcoming two to three years. So I do not see any major change respect to this level. In terms of ratio, it’s 18% that’s 40% if we consider the 2012, probably will decrease up to something around 16% of the revenues. And also taking into account that the revenues at the ending point of the plan will be negatively affected by the MTR cut, I will say that this around 16% brackets could be even lower.

In another comment, this in previous plan, we didn’t appreciate and we didn’t count the 4G CapEx for the three-year plan. That is obviously is reflected in our current plan. And just to remind you that we will disclose the whole picture next Friday.

Paul Marsch – Berenberg

That’s great. Thank you very much.

Claudio Zezza

You’re welcome.

Operator

And our next question comes from Michel Morin with Morgan Stanley.

Michel Morin – Morgan Stanley

Thanks. I just wanted to follow up on a comment you made in your prepared remarks about the EILD. Specifically, are you saying that the fixed line incumbents have not yet complied with the regulation or if you can update us on what the status of that is? Have you been able to see some savings? I don’t quite get what you said in the prepared remarks? And then secondly on your costs for this quarter, was there anything in any of the cost items that you feel may not be fully sustainable? I’m asking the question because you clearly did a really good job on costs and I just want to get a sense as we model 2013 and beyond if there’s anything here that we should assume may not be repeatable next year. Thank you.

Rogério Lima

Thank you, Michel. For the first question I will ask Mangoni to ascertain what it is on the cost side. Mangoni please?

Andrea Mangoni

So can you repeat please because here, I am in Rome so the line is not so good.

Michel Morin – Morgan Stanley

Yes. The first question was related to the EILD, and specifically, what is the status of the fixed line operators complying with that regulation? Are you starting to see some of the benefits from that? I didn’t quite get what you said in your prepared remarks?

Andrea Mangoni

Of course. As EILD leased line is concerned, we have a regulation published in May and then we have some sort of negotiation with the concessionaire in particular towards the regulatory authority. There are some evolutions, some evolution on one side with a concessionaire like Telefonica. We have more faculties with the other concessionaires all but we are confident that in next planned conflict resolution meeting in Anatel is our plan by the end of February we will reach an agreement with substantial application of the regulation.

Michel Morin – Morgan Stanley

Great. And the second question?

Claudio Zezza

Michel, Claudio speaking. This quarter, this last quarter, fourth quarter, this does not include any organic, and say, items since obviously I would have informed you. I would say that our business is a chained one. So the way that we manage the fixed costs in an efficient way obviously sustained the business within a variable area. I will say that this is a sustainable trend.

So we do not expect any change in this pattern. So we want to just keep on managing the fixed costs in an efficient way, looking always more sufficient ways of doing business and solutions and so on and so forth. Obviously, not tapping the resource to the development of the business, so it’s something that’s come from doing better something and gaining efficiency in the fixed area of our cost, so I would say this pattern is sustainable in the next future.

Michel Morin – Morgan Stanley

Great. Thank you, Claudio.

Operator

Ladies and gentlemen, without any more questions, I’m returning to Lorenzo Lindner for the final remarks. Mr. Lindner, you may proceed.

Lorenzo Lindner

Thank you. So, 2012 was a very difficult year but one more time, TIM showed its ability to overcome the adversities. I would like to thank all of you that have been following us and finally in the name of the management of the company, I would like to thank Andrea Mangoni for his leadership who was very important for us to reach 2012 target. Thank you very much.

Rogério Lima

Thank you.

Andrea Mangoni

Sure.

Operator

This concludes the conference call results of TIM Participações. Thank you for your participation and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TIM Participacoes' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts