Telefônica Brasil S.A. (NYSE:VIV) Q4 2022 Earnings Call Transcript

Telefônica Brasil S.A. (NYSE:VIV) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good morning, ladies and gentlemen. Welcome to Vivo’s Fourth Quarter 2022 Earnings Call. This conference is being recorded and the replay will be available at the company’s website at ri.telefonica.com.br. The presentation will also be available for download. This call is also available in Portuguese. To access. you can press the Globe icon on the lower right side of your zoom screen and then choose to enter the Portuguese room. After that, select mutual regional audio for a better experience. We would like to inform you that all attendees will only be listening to the conference during the presentation and then we will start the question-and-answer section where further instructions will be provided. Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding the company’s business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo’s Equity Board and the current information available to the company.

These statements may involve risks and uncertainties as they relate to future events and therefore, depends on circumstances that may or may not occur. Investors should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in the respective forward-looking statements. Present at this conference, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. Joao Pedro Carneiro, IR Director. Now, I will turn the conference over to Mr. Joao Pedro Carneiro, Investor Relations Director of Vivo. Mr. Carneiro, you may begin your conference.

Joao Pedro Carneiro: Good morning everyone and welcome to Telefonica Brasil’s conference call to present the fourth quarter and full year 2022 results. The call will start with our CEO, Christian Gebara, commenting Vivo’s operating and financial highlights, followed by an update on the progress of our digital ecosystems and ESG initiatives. Then our CFO, David Melcon, will go through our cost and CapEx evolution, net income, free cash flow, and shareholder remuneration. I’ll now hand it over to Christian.

Christian Gebara: Thank you, Joao. Good morning and thank you for joining our earning calls. I start by presenting the highlights of the fourth quarter and full year. 2022 was a transformational year for Vivo and the telecommunications industry in Brazil. With the initial deployment of 5G standalone and then mobile market consolidation, both of which are bringing significant improvements to the quality of service and customer experience. We closed the year, with 112 million access, up 13.7% year-over-year, reinforcing our position as one of the Brazilian companies among all sectors, with the largest number of clients. Our 58.7 million access in postpaids and 5.5 million in FTTH gave us a very solid recurring revenue base, protecting our results from inflation impacts.

In the sense of our total revenue grew 10.1% year-over-year in the fourth quarter, driven by the expansion of 13.6% of our mobile service revenues and by the best fixed revenue results since the fourth quarter of 2015 with a growth of 2.9%. As a result, our EBITDA expanded 6.1% year-over-year, reaching for 1.3% margin. The strong operating performance delivered during 2022 was culminated by a relevant amount of free cash flow closing the year with BRL7.3 billion. The reversed cash generation, which is one of the key elements of our equity story, allowed us to declare over BRL5 billion in dividends and interest on capital during 2022. On top of the BRL600 million investment in buyback our shares, we firmly believe our shares to be undervalued.

Hence, we’re starting a new share buyback program aiming to invest an additional BRL500 million during the next 12 months. To continue enhancing differentiating our shareholder remuneration capability, yesterday we filed with Anatel a request that if approved, we will allow us to potentially reduce our capital stock by up to BRL5 billion. This will give us further flexibility to decide on future cash distribution and how to improve our capital allocation. Now, we go to slide four, where we can see that for the second straight quarter, our topline grew well above inflation. The 10.1% year-over-year expansion results from the 13% growth for core revenues that already represent 93% of our total revenues. This is particularly important as our non-core business, which for years served as a drag to our revenue performance, now weights less than lines with potential to keep double-digit growth rates for years to come, such as FTTH and B2B data, ICT, and digital services.

Moving to slide five, on the left hand side of the slide, you can see that our mobile revenues increased 13.4% year-over-year, as postpaid, prepaid, and handset revenues all grew double-digit. The mobile market consolidation and our leading commercial performance have been the main drivers here. On the right side, we detail our fixed core performance and in which we had revenues climbing 11.9% year-over-year. The core products already represents 76% of our wired line business, up six percentage points on an annual basis. As a result, our total fixed revenues grew 2.9% year-over-year in the fourth quarter, this being the best early growth rate we reached since the fourth quarter of 2015. As usual, the main drivers were FTTH and data and ICT, and digital services.

Services that are hard to replicate and provide us with a robust platform for continued improvement of our fixed business going forward. On slide six, we detail their operating performance on mobile and fiber close in a year that probably was the best in our recent history regarding our customer base evolution. On mobile, we added 14 million new customers during 2022 reaching 98 million access, up 16.8% year-over-year, even after carrying out this connection of 3.4 million inactive lines coming from Oi Mobile’s acquisition, of which 339,000 were eliminated during the fourth quarter. Our postpaid base grew at an even higher pace, up 18.2% year-over-year, as the migration of prepaid users towards hybrid plans continues to be very successful, while churn remains at record low levels close to 1%.

Also, we continue to be net gainers in portability of postpaid lines, clearly leading the best value proposition. As a result, we closed the year with homebuyer market share of 38.9% of almost one percentage points since April, which was the first month in which Anatel reported the consolidation of Oi’ access with the buyers basis. In fiber, we ended 2022 with 23.3 million homes passed with FTTH after rolling out the network to 3.7 million new premises. Moreover, we added 874,000 FTTH access during the year, expanding our customer base by 19% to 5.5 million home connected. Our convergent offer, Vivo Total has been very successful, representing around 70% of the FTTH net adds we registered during the fourth quarter. Being the only player capable of providing 5G plus fiber flat unique offering on a national-wide basis is a key differentiator, enabling us to keep on improving our operating performance and reducing postpaid and fiber churn.

Moving to slide seven. During 2022, our digital B2B revenues grew 29% year-over-year, reaching BRL2.7 billion. These revenues that aggregated products such as cloud, cybersecurity, IoT, digital, B2B solutions, among other already represent 5.6% of our total topline and we assume out-weight noncore revenues. These services and solutions are in great demand as companies of all sizes are becoming more and more aware of how beneficial is to invest in digitization of their business. We’ll continue to lever on our leading brands, complete portfolio, channel and rich capabilities to be the preferred partner of Brazilian companies in their digital transformation capturing this unique opportunity. Moving to the right hand side of the slide, you can see that we continue to develop our presence as a digital finance hub, taking advantage of the dozens millions commercial relationships we have with individuals through our connectivity services to increase our share of wallet and customer monetization.

Apart from Vivo Money, which closed the year with a loan portfolio of over BRL180 million, growing by almost seven times year-over-year, we are also offering co-branded credit cards in partnership with and handsets and home insurance products. In addition to that, Vivo Ventures, our corporate venture capital fund, made its second investment in a FinTech by investing BRL10 million in Klubi that act as a consortium administrator with financing model that’s becoming increasing relevant in Brazil. On slide eight, we update you on our ESG initiatives. During 2022, we were able to deliver solid results on all fronts. In environment, we reduced by 50% year-over-year our direct greenhouse gases emission and increased by 20%, the collection of electronic waste through our Recycle with Vivo program.

On diversity, we reached a 22.4% occupation of leadership roles by black people growing three percentage points year-over-year. Also during 2022, Telefonica Vivo Foundation invested BRL58 million to support students and teachers of the public education system and develop their digital capabilities, benefiting 2.2 million people. We were also recognized as a leading telecom company in terms of corporate sustainability by S&P in their 2023 sustainability yearbook. Finally, we are pleased to announce we had the second highest score among 83 participants in Easy 2022 process being the only telco we’ve been the top 10 best qualified companies. This is an improvement vis-à-vis fourth place achieved in 2021, reflecting the efforts we make to create a more inclusive, green and sustainable company.

Now, David will take us through the financial highlights of the quarter.

David Melcon: Thank you, Christian and good morning everyone. Moving to slide nine, the continued formation of our cost base structure remains underway as we accelerate revenue to relate it to the digital B2B and B2C services and solutions that led to increase lifetime value of customers. Looking at the cost of services and good short that represent 35% of our OpEx in the quarter, it grew 11% year-over-year, driven by the ongoing transformation of our business mix as revenues coming from the sale of digital solutions and services, handset, and accessories outlays total topline expansion leading to an improve growth profile. Cost of operations, which comprise the remaining 65% of our OpEx increased 14% year-over-year in the quarter.

Here even though we continue to reduce costs such as commissioning, billing, call centers, and back offices, assisted by the increased usage of digital channels and payment platforms, this was compensated by the effects related to higher personnel cost and lower recovery of taxes and sale of unused network equipment in the quarter. Another positive note, we expect to incorporate Garliava, the SPE that held the assets we bought from Oi Mobile during the first quarter of 2023, unlocking additional savings, while also allowing for the tax amortization of the goodwill arising from this acquisition. Moving to slide 10, in 2022, we invested BRL9.5 billion, which is the highest-ever annual capital expenditure, excluding licenses made by us. This year was particularly pressured by investment made to incorporate Oi Mobile assets of around BRL500 million and by the initial deployment of 5G to key cities to start building a network that was recently considered as the one delivering the fastest 5G in Brazil.

We also accelerated our FTTH compass footprint, taking the opportunity to further consolidate our leadership in fiber. Even so, our operating cash flow expanded 4.4% year-over-year reaching BRL9.8 billion. For 2023, we just provided a market guidance on CapEx that will bring a strong revenues in the coming years, committing to invest less than BRL9 billion in the period, thus allowing for an important improvement of our CapEx per sales ratio. This year’s investment will be focused on the continued expansion of our 5G coverage on the refurbishment of our overall mobile capacity and on the increase of our FTTH penetration. Moving to slide 11, in 2022, our net income reached BRL4.1 billion. The year-over-year comparison was impacted by some positive non-recurring events that benefit the previous year results as well as the higher average interest rate seen into 2022 versus 2021, which coupled with our increased level of net debt directly penalized our financial results.

On the other hand, we deliver once again an excellent result in terms of free cash flow, with a generating of BRL7.3 billion in 2022, representing 15.2% of our revenues. This 11.3% free cash flow yield is among the very best in the sector, and then out how resilient our business is under any circumstance. Finally, now going to slide 12. Here we detail the components of our 2022 shareholder remuneration, as well as discuss the additional levers that will allow for a continuation of a strong cash churn going forward. Considering the dividend and interest on capital events declared with record date in 2022, our total distribution reached BRL5.1 billion, of which BRL2 billion were already paid out to our shareholders in October 18, 2022, while the remaining BRL3.1 billion will be paid out on April 18, and July 18, 2023.

In addition, we invested over BRL600 million raised to buy back our own shares, resulting in a total of BRL5.7 billion of shareholder remuneration equivalent to 8.9% of the company market cap as of December 2022. We keep working on ways to maintain the cash returns to our shareholders. As such, yesterday, our Board of Directors, green lighted the following. First, the proportion to our 2023, general shareholders meeting to be held next April of dividend based on 2022 results of BRL827 million to be paid out on July 18, 2023. Second, the deliberation of BRL106 million in interest on capital base on January 2023 results. Third, the cancellation of 13.4 million shares held internationally on December 31, 2022 equivalent to 0.8% of our capital.

Fourth, the creation of a new share buyback program to be executed from February 2023 to February 2024, with a potential to invest up to BRL500 million to buyback our stock. Fifth, the request to Anatel of a Prior Consent to potentially reduce our capital stock by up to BRL5 billion, which, if approved, will bring important flexibility to decide on the future remuneration of our shareholders and capital structure. As you can see, we remain highly committed to maintain our differentiation as one of the few companies that combined important growth avenues, such as the one presented by the mobile consolidation, fiber capillarity and soaring demand for digital B2B and B2C solutions with a rock solid balance sheet and cash flow generation capacity while providing leading shareholders deals.

Thank you. And now we can move to the Q&A.

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Q&A Session

Operator: Thank you. We are going to start the question-and-answer session for investors and analysts. Our first question comes from Fred Mendes, The Bank of America. Please, Mr. Fred, your microphone is open.

Fred Mendes: Hello. Good morning, everyone. Thanks. Thanks for the questions. I have two here on my side. The first one is related to capital reduction. Meaning I think was a good move during the capital reduction was likely to increase the dividends. But the question is why BRL5 billion? I mean, why not more, considering the equity of 65 billion you guys have? There’ll be my first one. And then as the second one, at least of the scenario we have today, it looks like 2023 is going to be a year of lower inflation, right, which I think is particularly good for the telcos. How do you see the opportunity to reduce costs here, eventually increasing margins further in 2023? Thank you.

Christian Gebara: Hi, Fred. Thank you for the question. Look, free cash flow generation, I mean, exceed the annual net income. It has been like this for many years now. And we have limited distributor reserves left. Therefore, we believe a capital reduction address the situation, allowing us to create a platform to distribute more cash than annual net income. No, we use — I mean, we’ve had our 100% payout over the last few years. So with this capital reduction, if it’s approved, we should be able to have a higher payout than 100. No, and we believe BRL5 billion is the right amount to have a story for the next few years now. Also, regarding timing, no, I’m sure you — your question is also about this. I mean, we — now we need to wait around six months for an Anatel Prior Consent approval, and then we will need to go through also all the internal governance approval, such as Board and general assembly.

David Melcon : And I can take the beginning of the second question and then Christian can also elaborate. Look, we are showing the OpEx breakdown, showing the cost of service goods sold and cost operation. On the first one, I mean, we have been growing 11% in the last quarter, but if you look to the revenues that are linked to those costs, which are mainly have to do with digital service and handsets, we are growing more than 50%. Now, just a B2B digital services, they grow 29% now. And in the other part of the costs that have to do more with operation, there are a few things that happen in the second half of this year. Now, the first one is that decision on Vita IT, which is a company, B2B company that’s allowing us to accelerate the growth in B2B.

This is bringing in additional costs, particularly on personnel costs. That’s why we are seeing an increase on personnel costs at year-over-year, next year, we shouldn’t see such a growth. Also, we have the cost from integration of Oi, just to remind you that we are paying 146 million for the transmission service agreement to Oi, which is more than 12 million per month, this will finish at the end of the first quarter 2023. So, it’s something that we will not have in the nine months of 2023. Also inflation for next year, we are expecting to be lower than 2022. So, this is also a lever. Also, we are saying that the new revenue streams are coming with higher OpEx, but without CapEx. So, this is such an upside because we look to operating cash flow margin that we will see that will be an expand for next year.