Good morning, ladies and gentlemen, and welcome to TIM S.A. 2023 Second Quarter Results Conference Call. We would like to inform you that this event is being recorded, and all participants will be in a listen-only mode during the company's presentation. There will be a replay for this call on the company's website. After TIM S.A.'s remarks are completed, there will be a question-and-answer session for participants. At that time, further restrictions will be given. We highlight that statements that may be made regarding the prospects, projections and goals of TIM S.A. constitutes the beliefs and assumptions of the company's Board of executive officers. Future considerations are not performance guarantees. They involve risks, uncertainties and assumptions as they refer to events that may or may not occur. Investors should understand that internal and external factors to TIM S.A. may affect their performance and lead to different results than those planned. [Operator Instructions] Now I'll turn the conference over to the CEO, Mr. Alberto Griselli, CEO of TIM S.A., and to Ms. Andrea Viegas Chief Financial Officer, to present the main masters for the second quarter of 2023. Please, Mr. Alberto, you may proceed.

Good morning, everyone, and thanks for attending our conference call. Outstanding achievements and rock solid results marked the second quarter, driven by the sharp execution of our plan. Our top line rose more than 9% year-over-year with EBITDA growing above 17%. This combination led to a margin expansion of more than 300 basis points. Our operating free cash flow grew more than 65% versus the second quarter of 2022 and the net income more than doubled. Strong operational trends were achieved jointly with the aforementioned financial highlights. ARPU, churn and network quality presented their best performances in years. On the ESG front, it is worth highlighting that TIM was certified once again, as a great place to work, achieving a favorability of more than 90% with solid improvements versus last year. In this context, we were also recognized as one of the best companies for inclusive work experience. Under the scope of the environmental pillar, we are executing two initiatives that impact energy consumption. The first is related to transforming our sources to renewable energy proprietary plans. Under this project, we closed the quarter with 87 plants. The second initiative addresses energy consumption by developing smart public lighting solutions that drastically reduce the usage of electricity by municipalities. The integration of ESG aspects into our business dynamics and how we can promote social impact while developing and selling solutions for our client is a relevant part of our strategy. In TimAgro, for example, we are taking connectivity to the countryside of Brazil, covering 90,000 rural properties, more than 220 public schools and 65 basic health units. While, in the education vertical of our customer platform strategy, we provided courses to 450,000 people to improve their education or develop their careers. Going forward the details of our business performance, I want…

Thank you, Alberto. Good morning, everyone. As Alberto just explained, the second quarter was very strong across all lines of our results. Our performance continued to be driven by the positive effects of the M&A integration as well as the [Indiscernible] group. Our OpEx continue to deaccelerate and is now growing below inflation. In addition, during the quarter, our TSA agreement with Oi, which is helping us reduce costs and eliminate some pressure. The combination of strong revenues and solid OpEx dynamics resulted in a double-digit growth of our EBITDA in the quarter. We grew more than 17% in a year-over-year basis and suppress BRL 2.9 billion. Our EBITDA margin expanded by 340 basis points in the quarter, and we recorded the highest margin on the record at 50%. It is important to mention that the second quarter was the first one without the negative effects that were impacting the trends of our costs. The TSA costs was eliminated in April, and now we have an apple to apples comparison related to the fiber last mile rental. In terms of our decommissioning program, we are now seeing the benefits following our M&A. We were able to optimize our process during the quarter and have already adjusted the dynamics with our suppliers. As a result, we are now ready to accelerate the site dismantling. By the end of the quarter, we have eliminated over 2/3 of the planet sites for the year. Of course, there is a delay between the fiscal decommissioning and seeing its financial impact. However, we have already seen some initial positive effects in the second quarter. We paid BRL 57 million in decommissioning fines, but the pace of increase in our lease cost has been slowing down on a year-on-year comparison and started to decline on a…

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

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

My first question is regarding the sustainability of margins. You had a very strong margin increase this quarter. If you could please comment how this translates to the next couple of quarters, if there are some effects that should not be sustained or if they are, this is the first question. And the second question is regarding the very low churn in postpaid. Could you please explain what is causing this churn to be so low? What are the main sources of this improvement we are seeing?

We have been discussing for a while, our guidance, whereby we were planning margin expansion because we were assuming in our guidance, EBITDA growing double digits versus revenues growing high single digit. And so everything that is going on with the exception of the Fiscal, we can discuss this a bit, it's organic. So it means that there are a number of things that we're doing on the EBITDA margin to increase the productivity of our resources. And if you look at this from, let's say, a logical point of view, we have a few levers in place, the first of which is the fact that costs related to oil start to disappear starting the second quarter. Then we have a number of productivity increase related to the increased productivity of the oil customer base that we are capturing over time, so the cost to serve them. And third, we have a significant number of initiatives within the company from innovation to business process remodeling and discipline to better allocate our cost base and so increase productivity on the EBITDA level. So we got margin of improvements going forward. When you look at the after lease also because the decommissioning process is proceeding a bit ahead of schedule, and this will support further margin expansion on that line also. So all in all, we are quite confident that the profitability can be sustained and expanded. On the low churn on postpaid I think that there are, Marcelo, a number of factors to be taken into account. So generally, this is quite a remarkable achievement because we are getting the lowest churn on postpaid in the quarter of the implementation of our more for more strategy. And generally, this tends to put a bit more, let's say, a bit more pressure…

No, it's very, very clear. Thank you very much.

The next question comes with Bernardo Guttmann with XP Inc. Please go ahead.

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

Okay. Bernardo. When it comes to dividends, so we -- just remembering when we met for our guidance earlier this year, we gave a BRL 2.3 billion as the new floor of our shareholder remuneration for 2023 and then a continuous improvement going forward. When you look at the way we are executing the plan, the -- basically, we are trying to improve it. We are improving as matter of fact... are they listening me or the line is?

Yes.

Okay. sorry, because here, this sort of appeared to be went out. And so Bernardo, so when I look at the performance of our plan to date, we see a number of upside risks. Of course, there are still uncertainties related to, for example, the macro environment. But there are a number of things that are going according or better versus our plan. Our focus, our main focus is to increase free cash flow and operating free cash flow margin. And we see upside risk here versus our guidance. So basically, we are now in the process of analyzing the numbers and discussing this among ourselves, but there is a risk of upside review of shareholder remuneration. When it comes to the tax reform, I think here, we see this in the phases that have been discussed in terms of the VAT reform that has been that just passed and it's going to be discussed in the Senate, whereby we see that we need to actually -- Bernardo the big point is here, we need to wait for the actual numbers to take a stance on what the impact is going to be for us. So far, the discussion is going according to what has been anticipated. So there is no surprise, whereby the other component of the tax reform that is related to corporate taxation and dividends, it's a bit further on. So our understanding is that to make a precise goal of what implications are going to be that we are closely monitor as a sector -- we need to wait for the actual tax rate to be defined. This is going to happen probably in the next year. There is a transition period that should be soft for the next couple of years. And -- but I would say that we need to be a bit more to give a final chance on this.

The next question comes with Vitor Tomita with Goldman Sachs.

My first question would be a quick follow-up on Marcelo's earlier question. Looking on costs, looking aside from the end of the TSA should the sales and marketing line, which improved quite a bit this quarter. Should we assume this quarter -- and I know there are tough easier comps versus last year, but should we assume this quarter's level of sales and marketing expenses as a recurring baseline for future quarters? In particular, should we expect marketing activity to pick up in the third quarter relative to the second or a similar level? And a second question from us would be on -- if you could provide an update on how you view the possibility of price readjustments in prepaid or additional price readjustments in postpaid this year following the recent readjustments that you made.

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

The next question comes with Fred Mendes with Bank of America.

I have two questions here as well. I mean, the first one on the working capital line, we see a major impact in the line of suppliers, BRL 1.3 billion on this quarter. It looks like you paid this amount. So just try -- and when I look at the second Q '22, I do not see these impacts. So just wonder if you took advantage of some type of opportunity in terms of the FX or something in this line, just trying to understand the working capital here. This will be the first one. And then on the second one, I think it's more like a question on the strategy. When I look at the ARPU, you already have the highest ARPU in the Street, it looks like one of the highest. And when I look at the net adds, I mean, it has been very in the last three months. It's true. But over the last years, it hasn't been as strong. I mean, when I look forward, where should I see most of the growth for TIM for the next, let's say, the next year.

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

Going onto the Fred, on the second one on the ARPU. So yes, we achieved the ARPU leadership on both prepaid and postpaid. That's true. That's a nice achievement on our side. And when I go forward and I look forward at the revenue dynamic of the sector and of Tim Brazil. Here, what we always said is that we want to grow in a balanced way in terms of customer base growth and ARPU growth. So when it comes to ARPU growth, of course, the main strategy is related to the value-based competition, so providing something more for the customers to be able to command a higher price. And when it goes to the customer base, I think that the answer is a bit difference between postpaid and prepaid. So if you look in general at our customer base dynamics on postpaid, you're right, we've been running a number of quarters with negative postpaid additions. And the number has been a bit mixed up by the post-merger integration. And we signaled over the last quarters that in the second quarter, we would come to positive net addition. So this is -- the results of this quarter confirm that we are now in the positive net addition territory. And we expect to move forward on a positive space for the next quarters. And when you look at the absolute number of net additions, I think that the number that needs to be taken into account is the relative ratio between net additions and customer base because on postpaid, we got the 3 of us, a different customer base. And so when you look at growth, I think that it's better to lose at relative numbers versus our customer bases versus absolute numbers because this put everything into perspective. And this translates into the year-on-year growth and quarter-on-quarter growth. They are both positive for us in this quarter. So on the customer base, we want to grow the customer base for postpaid. And since we have the lowest market share, we think that there is a space to grow there, whereby on a value-based proposition, we intend to increase ARPU, providing better services to our customers. For postpaid, I was mentioning before for Marcelo and Vitor, the exercise has been closed, whereby for prepaid, there might be some additional update for the second half. So at the end of the day, we've been always running on a mixed growth approach, customer base and ARPU, the all integration sort of made it difficult to read through these dynamics. And I think time from this quarter onwards, you will be able to see again that our top line is going to be driven by both ARPU growth and customer base growth.

The next question comes with Leonardo Olmos with UBS.

So a couple of questions from my side. First, lease expenses and the decommissioning process. You touched that a little bit before. Can you provide some idea on what should we expect in the second half of '23 and provide some update on the number of towers, -- how is that going? And the second question is regarding the -- basically asking for an update on the agreement with neutral networks, particularly Vital.

Okay. On the lease expenses, I think, Leonardo that we have some upside risk. We are moving ahead of our plan. So as of today, as Andrea was mentioning in her speech, we are at around 70% of the plan already executed. This is going to be a bit less relevant for this year because the number needs to pile up, but it's going to provide us some upside on the entry speed for the following years. And we are likely to provide a better focus on the progress in the next quarter. We are now left with the hardest hour to decommission. So the, let's say, the easy part or the easier part because it was not easy. We have decommissioning 1000 towers this year. But basically, we are happy with the results, and we are ahead of schedule. So it's a positive upside risk on this line, more profound in the following years, less on this year because of the piling up of the exercise. But already in this quarter, you can appreciate a positive dynamics, as Andrea was saying. When it comes to the neutral network, we have been -- we carried out a quite successful launch in Parana and Santa Catarina. We are very pleased with the commercial results of our operations. We are now fine-tuning the model at the larger scale. The benefit of it is related to the fact that since we don't need to build the network, we can operate in a mobile-like fashion. So our go-to-market is simpler, and this should translate into a better quality of our commercial operations. So at this point in time, we are happy with our speed. We increased our net addition to something like 30,000 per quarter. We are likely to run at the speed in the following quarters, and we are fine-tuning the machine to be able to scale up when the competitive environment is going to be a bit more attractive versus today.

[Operator Instructions] Ladies and gentlemen, without any more questions, I am returning to Mr. Alberto Griselli for his final remarks. Please, Mr. Alberto, you may proceed.

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

Thus, we conclude the second quarter of 2023 Conference Call of TIM S.A. For further information and details of the company, please access our website, tim.com.br/ir. You can disconnect from now on. Thank you once again. Have a good day.