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Tim Participacoes Sa (TSU) SEC Filing 6-K Foreign Issuer report for the period ending Wednesday, February 20, 2019

Tim Participacoes Sa

CIK: 1066116 Ticker: TSU

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
 
For the month of February, 2019
Commission File Number 001-14491
 

 
TIM PARTICIPAÇÕES S.A.
(Exact name of registrant as specified in its charter)
 
TIM PARTICIPAÇÕES S.A.
(Translation of Registrant's name into English)
 
Avenida João Cabral de Melo Neto, nº 850, Torre Norte, 12º andar – Sala 1212,
Barra da Tijuca - Rio de Janeiro, RJ, Brazil
(Address of principal executive office)
 
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. 
Form 20-F ___X___ Form 40-F _______

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

Yes _______ No ___X____

 









TIM Participações S.A.,

TIM Participações S.A. and

Subsidiary

FINANCIAL STATEMENTS

as at December 31, 2018

and Independent Auditor’s Report



























 




(A free translation of the original in Portuguese)


TIM PARTICIPAÇÕES S.A.


FINANCIAL STATEMENTS


December 31, 2018 and 2017



Contents


Independent auditor's report on the financial statements

 

Audited financial statements

 

Balance sheets

 

Statements of income

 

Statements of comprehensive income

 

Statements of changes in shareholders’ equity

 

Statements of cash flows

 

Statements of value added

 

Management report

 

Notes to the financial statements

 

Fiscal council opinion

 

Statutory Audit Committee Annual Report

 

Statutory officers statement on the financial statements

 

Statutory officers statement on independent auditor's report

 












 










(A free translation of the original in Portuguese)





Independent auditor's report



To the Board of Directors and Stockholders

TIM Participações S.A.




Opinion


We have audited the accompanying parent company financial statements of TIM Participações S.A. (the "Company"), which comprise the balance sheet as at December 31, 2018 and the statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, as well as the accompanying consolidated financial statements of TIM Participações S.A. and its subsidiary ("Consolidated"), which comprise the consolidated balance sheet as at December 31, 2018 and the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TIM Participações S.A. and of TIM Participações S.A. and its subsidiary as at December 31, 2018, and the financial performance and the cash flows for the year then ended, as well as the consolidated financial performance and the cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).


Basis for opinion


We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Parent Company and Consolidated Financial Statements section of our report. We are independent of the Company and its subsidiary in accordance with the ethical requirements established in the Code of Professional Ethics and Professional Standards issued by the Brazilian Federal Accounting Council, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.








PricewaterhouseCoopers, Rua do Russel, n° 804 – Térreo, 6° e 7° andares – Edifício Manchete, Rio de Janeiro – RJ,  
T: (21) 3232 – 6112, F: (21) 3232 – 6113, www.pwc.com/br












TIM Participações S.A.



Key audit matters


Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the parent company and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.


We planned and performed our audit for 2018, considering certain events,

transactions and circumstances, as presented in the financial statements and

Management Report, such as: (i) corporate reorganization of its subsidiaries;

(ii) Company’s continuous investment in its network infrastructure (optical fiber);

and (iii) evolution of the financial and operational results related to the growth of its postpaid client base, investment in the digitalization of the customer relationship and distinctive offerings.


Considering the aforementioned, our audit strategy in determining the nature, timing and extent of our work, as well as defining the Key Audit Matters, remained substantially unchanged for this year, with a continuous focus on the significant accounting estimates, revenue recognition (“unbilled”), cash flow projections that support the goodwill based on future profitability, as well as the appropriate measurement, register and disclosure of the impacts of the application of new effective accounting pronouncements for the current year and/or effective as from 2019, as appropriate, which, in our professional judgment, were the most significant matters in our audit of the current year.



Why it is a Key Audit Matter

How the matter was addressed in the audit

 

 

Revenue recognition ("unbilled" – Notes 3 (e) and 27)

 

The revenue recognition process carried out at the end of each period considers certain calculations for measuring the accounting estimate related to the determination of the revenue incurred but not yet billed (“unbilled”) at the end of the period.


The possibility of internal controls being inadequate, and considering that the calculation methodology for this estimate involves the use of many system generated reports as well as manual inputs, could result in incorrect processing of critical information used in the preparation of the financial statements. Accordingly, this was an area of focus in our audit.

Our audit procedures included, among others, the update of the understanding and testing of the significant internal controls related to the telecommunication services revenue process and the assessment of the relevant information technology systems that support this business process.  


We also assessed the main assumptions as well as the calculation template that the Company uses to measure the incurred and unbilled revenue at the end of the year.  We also made specific tests to guarantee the gathering of voice and data traffic by the Company's postpaid billing operating platform

("billing"), including a test on the tariffs of traffic applied over the prices agreed in the contract and

on the integrity and accuracy test of the reports used in the determination of the aforementioned estimate.


We consider as reasonable the methodology that management used to calculate the estimated incurred and unbilled revenue.  

Why it is a Key Audit Matter

How the matter was addressed in the audit

 

 

Goodwill based on future profitability (Notes 3(a) and 15(d))

 

At December 31, 2018, the consolidated accounting balance of goodwill supported by the expectation of future profitability, due to business combinations, amounts to R$ 1,527 million, and the test of its recoverable value (impairment test) involves critical judgments by the Company’s management.


As disclosed, that recoverable value is sensitive to the discount rate used in the discounted cash flow method, as well as other assumptions adopted according to management's judgment, and adverse economic conditions may result in significant changes in those assumptions.  


Due to the aspects aforementioned, this matter was considered as an area of focus in our audit.

Our audit procedures included, among others, assessing the relevant internal controls that support the process of determination of the recoverable value of goodwill based on future profitability.  


We also compared the information used in this impairment test with the Plan that the Company's Board of Directors approved; assessed the reasonableness of the calculation model and of the relevant financial/economic assumptions used, we tested the sensitivity over the key assumptions used by the Company, and evaluated the existence of any information that could contradict the assumptions of growth defined by management.


As a result of the procedures described above, we considered that the measurement model and the assumptions adopted by the Company’s management are reasonable.

Why it is a Key Audit Matter

How the matter was addressed in the audit

 

 

Provision for tax contingencies (Notes 3(c) and 24)


The Company is a party to tax proceedings at different levels, which amounts to R$ 16,801 million, for which a provision for contingencies amounting to R$ 271 million was recorded, based on the opinion of the Company's legal advisors.




The determination of the provision value and the amounts disclosed depends on Management’s critical judgments, based on the analysis of the proceedings and corresponding prognosis from its legal advisors.


In addition, considering the significance of the involved amounts, any changes in estimates or assumptions that affect the determination of the prognosis of an unfavorable outcome, may significantly affect the Company's financial statements.


Therefore, this matter was considered as an area of focus in our audit.

Our audit procedures included, among others, the update of the understanding and testing of the significant internal controls over the tax contingency process and the assessment of the relevant information technology systems that support this process.



We also required and obtained confirmation from all internal and external legal advisors that are in charge of the Company's tax proceedings, confirming the amounts and the prognosis of the proceedings, as determined by the Company’s management.


Furthermore, we obtained, for the most significant tax proceedings, opinions from other legal advisors in order to assess the reasonableness of the prognosis determined by the Company’s legal advisors in charge of the respective proceedings, as well as the arguments, case laws, and/or defense strategy adopted by the Company's legal advisors.


Based on the procedures performed, we considered that the management estimates related to the disclosure and provision for tax contingencies are consistent with the information and documents presented.    

Why it is a Key Audit Matter

How the matter was addressed in the audit

 

 

Adoption of the new accounting standards (Note 2(f))


 

 

The new accounting standard “IFRS 15/CPC 47 – Revenue from contracts with customers” and
“IFRS 9/CPC 48 – Financial instruments” became effective as from January 1st, 2018, and the Company’s management decided to adopt these new standards through the recognition of the transition impact on shareholders’ equity, in the opening balance at January 1st, 2018.


The application of those standards comprised significant involvement of the Company’s management in many activities, such as: (i) review of the commercial agreements portfolio; (ii) identification of the performance obligations; (iii) definition of certain assumptions and model for the price allocation amongst the performance obligations; (iv) development of manual and automated controls for the adequate data gathering, measurement, record and disclosure of the transactions and balances in the financial statements; (v) determination of the calculation model for the measurement of the expected loss on financial assets, among others. As a result, the Company recognized, in the opening balance at January 1st, 2018, a decrease in its shareholders’ equity of R$ 94 million, before income tax effects.


“IFRS 16/CPC 06 (R2) – Leases” will be applied as from January 1st, 2019 and the Company’s management decided to adopt it through the recognition of the transition impact against shareholders’ equity, at January 1st, 2019.


Considering the nature of the telecommunications segment, the Company has a significant volume of operational lease contracts due to various network infrastructure sharing leases amongst various telecom operators in the market, with payments recorded on a linear basis over the contract term.


Therefore, due to the implementation of this new accounting standard, the Company estimates an increase in lease liabilities resulting from the recognition of the right of use the assets, at January 1st, 2019, of R$ 5,100 million, impacting certain financial indicators of the Company.


Therefore, due to the aspects aforementioned, this matter was considered as an area of focus in our audit.

Our audit procedures included, among others, the understanding and testing of the significant internal controls established by the Company’s management, with the objective of evaluating the quantitative and qualitative impacts on the financial statements resulting from the adoption of these accounting standards.


We have also reviewed the technical accounting memorandums prepared by the Company’s management and obtained understanding and evaluated the design and effectiveness of the main specific internal controls, including significant information technology systems implemented in the business processes directly affected by these accounting standards, which objective is to support the data gathering, measurement, recognition and disclosure of the transactions and balances in the Company’s financial statements.


Additionally, we designed specific tests that included: (i) validation of reports and/or tools implemented by the Company’s management to ensure the completeness and integrity of the customer commercial and lease agreements, as well as the appropriate data gathering and measurement of the balances and transactions recorded and disclosed in the financial statements; and (ii) testing, on a non-statistical sampling basis, the contracts with customers and leases; (iii) understanding of the main assumptions used by the Company’s management to determine the impacts of the adoption of these accounting standards, as well as exceptions adopted as permitted by these standards; among other procedures.


Based on the procedures performed, we consider that the main assumptions and estimates of the Company’s management related to the data gathering, measurement, record and disclosure of these new accounting standards in the financial statements are consistent with the information and documents presented.   







Other matters


Statements of Value Added


The parent company and consolidated Statements of Value Added for the year ended December 31, 2018, prepared under the responsibility of the Company's management and presented as supplementary information for IFRS purposes, were submitted to audit procedures performed in conjunction with the audit of the Company’s financial statements. For the purposes of forming our opinion, we evaluated whether these statements are reconciled with the financial statements and accounting records, as applicable, and if their form and content are in accordance with the criteria defined in Technical Pronouncement CPC 09 - "Statement of Value Added". In our opinion, these Statements of Value Added have been properly prepared in all material respects, in accordance with the criteria established in the Technical Pronouncement, and are consistent with the parent company and consolidated financial statements taken as a whole.


Audit of prior-year information


The audit of the financial statements for the year ended December 31, 2017 was conducted by other independent auditors, whose unqualified audit report was dated February 5, 2018.



Other information accompanying the parent company

and consolidated financial statements and the auditor's report


The Company’s management is responsible for the other information that comprises the Management Report.


Our opinion on the parent company and consolidated financial statements does not cover the Management Report, and we do not express any form of audit conclusion thereon.


In connection with the audit of the parent company and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether this report is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Management Report, we are required to report that fact. We have nothing to report in this regard.



Responsibilities of management and those charged

with governance for the parent company and consolidated financial statements


Management is responsible for the preparation and fair presentation of the parent company and consolidated financial statements in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.


In preparing the parent company and consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.


Those charged with governance are responsible for overseeing the financial reporting process of the Company and its subsidiary.
















TIM Participações S.A.




Auditor’s responsibilities for the audit of the parent

company and consolidated financial statements


Our objectives are to obtain reasonable assurance about whether the parent company and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.


As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:


Identify and assess the risks of material misstatement of the parent company and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.


Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiary.


Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.


Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of the Company to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the parent company and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.


Evaluate the overall presentation, structure and content of the parent company and consolidated financial statements, including the disclosures, and whether these financial statements represent the underlying transactions and events in a manner that achieves fair presentation.


Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.


We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.


We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.


From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.


Rio de Janeiro, February 19, 2019




PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5




Alexandre Fermino Alvares

Contador CRC 1SP 211793/O-5












(A free translation of the original in Portuguese)


TIM PARTICIPAÇÕES S.A., TIM PARTICIPAÇÕES S.A. AND SUBSIDIARY

BALANCE SHEETS

December 31, 2018 and December 31, 2017

(In thousands of Reais)

 



 

 

Parent Company

 

Consolidated

 

Notes

2018

 

2017

 

2018

 

2017

Assets

 

20,275,453

 

18,346,594

 

31,957,889

 

32,600,365

 

 

 

 

 

 

 

 

 

Current assets

 

457,534

 

115,768

 

5,998,126

 

7,607,388

Cash and cash equivalents

4

167

 

28,369

 

1,075,530

 

2,960,718

Marketable securities

5

13,378

 

-

 

784,841

 

765,614

Trade accounts receivable

6

444

 

329

 

2,838,808

 

2,540,856

Inventory

7

-

 

-

 

183,059

 

123,785

Dividends and interest on shareholders equity receivable

13

362,436

 

53,497

 

 

-

Indirect taxes, charges and contributions recoverable

8

-

 

-

 

280,254

 

386,001

Direct taxes, charges and contributions recoverable

9

45,278

 

11,677

 

347,505

 

323,040

Prepaid expenses

11

2,460

 

2,189

 

272,060

 

168,366

Derivative financial instruments

37

-

 

-

 

50,769

 

53,875

Financial leases

16

-

 

-

 

22,491

 

19,773

Regulatory credits recoverable

17

-

 

-

 

41,612

 

68,571

Other current assets

 

33,371

 

19,707

 

101,197

 

196,789

 

 

 

 

 

 

 

 

 

Non-current assets

 

19,817,919

 

18,230,826

 

25,959,763

 

24,992,977

 Long-term receivables

 

133,848

 

116,688

 

4,074,137

 

2,841,962

 Marketable securities

 

-

 

-

 

5,229

 

2,997

 Trade accounts receivable

 

-

 

-

 

130,308

 

26,207

 Indirect taxes, charges and contributions recoverable

8

-

 

-

 

912,511

 

949,586

Direct taxes, charges and contributions recoverable

9

 

 

558,016

 

209,503

Deferred income and social contribution taxes

10

-

 

-

 

801,971

 

-

 Judicial deposits

12

131,270

 

112,307

 

1,345,113

 

1,366,576

 Prepaid expenses

11

2,578

 

4,381

 

74,381

 

39,466

 Derivative financial instruments

37

-

 

-

 

30,639

 

26,915

 Financial leases

16

-

 

-

 

185,558

 

185,558

 Other non-current assets

 

-

 

-

 

30,411

 

35,154

 

 

 

 

 

 

 

 

 

Investments

13

19,526,515

 

17,956,582

 

 

Property, plant and equipment

14

 

 

 

 

11,203,622

 

10,838,488

Intangible assets

15

157,556

 

157,556

 

10,682,004

 

11,312,527


The accompanying notes are an integral part of the financial statements.











   

TIM PARTICIPAÇÕES S.A. AND TIM PARTICIPAÇÕES AND SUBSIDIARY

BALANCE SHEETS

December 31, 2018 and December 31, 2017

(In thousands of Reais )

 

 

Parent Company

 

Consolidated

 

Note

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

20,275,453

 

18,346,594

 

31,957,889

 

32,600,365

 

 

 

 

 

 

 

 

 

Total liabilities

 

480,616

 

195,410

 

12,163,052

 

14,449,181

 

 

 

 

 

 

 

 

 

Current liabilities

 

441,024

 

162,983

 

7,075,379

 

7,224,437

Suppliers

18

11,770

 

3,352

 

4,323,374

 

3,986,557

Borrowing and financing

20

-

 

-

 

698,728

 

1,351,860

Financial leases

16

-

 

-

 

205,048

 

176,925

Derivative financial instruments

37

-

 

-

 

2,373

 

14,044

Payroll and related charges

 

2,344

 

6,449

 

211,685

 

262,450

Indirect taxes, charges and contributions payable

21

447

 

370

 

451,169

 

305,266

Direct taxes, charges and contributions payable

22

47,285

 

218

 

332,333

 

260,786

Dividends and interest on shareholders’ equity payable

25

370,105

 

143,591

 

370,105

 

143,591

Authorizations payable

19

-

 

-

 

65,464

 

233,173

Deferred revenues

23

-

 

-

 

406,867

 

480,431

Other current liabilities

 

9,073

 

9,003

 

8,233

 

9,354

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

39,592

 

32,427

 

5,087,673

 

7,224,744

Borrowing and financing

20

-

 

-

 

964,289

 

3,339,084

Derivative financial instruments

37

-

 

-

 

9,245

 

18,419

Financial leases

16

-

 

-

 

1,735,026

 

1,710,247

Indirect taxes, charges and contributions payable

21

 

 

2,772

 

2,527

Direct taxes, charges and contributions payable

22

 

 

209,880

 

206,788

Deferred income and social contribution taxes

10

-

 

-

 

 

98,919

Provision for legal and administrative proceedings

24

9,837

 

2,672

 

849,408

 

528,320

Pension plan and other post-employment benefits

 

 

-

 

2,850

 

2,635

Authorizations payable

19

-

 

-

 

348,336

 

273,527

Deferred revenues

23

-

 

-

 

906,600

 

990,932

Other non-current liabilities

 

29,755

 

29,755

 

59,267

 

53,346

 

 

 

 

 

 

 

 

 

Shareholders equity

25

19,794,837

 

18,151,184

 

19,794,837

 

18,151,184

Share capital

 

9,866,298

 

9,866,298

 

9,866,298

 

9,866,298

Capital reserves

 

412,091

 

416,161

 

412,091

 

416,161

Profit reserves

 

9,524,124

 

7,884,223

 

9,524,124

 

7,884,223

Accumulated other comprehensive income

 

847

 

989

 

847

 

989

Treasury shares

 

(8,523)

 

(16,487)

 

(8,523)

 

(16,487)


The accompanying notes are an integral part of these financial statements.


TIM PARTICIPAÇÕES S.A. AND TIM PARTICIPAÇÕES AND SUBSIDIARY

STATEMENTS OF INCOME

Years ended December 31, 2018 and 2017

(In thousands of Reais , except as otherwise stated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent Company

 

Consolidated

 

Notes

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

Net revenue

27

 

              -

 

              -

 

16,981,329

 

16,233,959

 

 

 

 

 

 

 

 

 

 

Costs of services provided and goods sold

28

 

              -

 

              -

 

 

 

 

 

 

(7,701,418)

(8,002,077)

Gross income

 

 

 

 

9,279,911

 

8,231,882

 

 

 

 

 

 

 

 

 

 

Operating income (expenses):

 

 

 

 

 

 

 

 

 

Selling expenses

28

 

-

 

-

 

(4,970,780)

 

(4,575,177)

General and administrative expenses

28

 

(29,745)

 

(27,915)

 

(1,608,319)

 

(1,424,643)

Income from equity accounting

13

 

2,672,647

 

1,279,941

 

-

 

-

Other income (expenses), net

29

 

(837)

 

(904)

 

(283,289)

 

(298,710)

 

 

 

2,642,065

 

1,251,122

 

(6,862,388)

 

(6,298,530)

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

2,642,065

 

1,251,122

 

2,417,523

 

1,933,352

 

 

 

 

 

 

 

 

 

 

Financial income (expenses):

 

 

 

 

 

 

 

 

 

   Financial income

30

 

1,978

 

6,927

 

412,733

 

512,565

   Financial expenses

31

 

(95,687)

 

(23,511)

 

(951,439)

 

(1,009,653)

   Foreign exchange variations, net

32

 

(9)

 

(31)

 

1,373

 

(748)

 

 

 

(93,718)

 

(16,615)

 

(537,333)

 

(497,836)

 

 

 

 

 

 

 

 

 

 

Income before income and social contribution taxes

 

 

2,548,347

 

1,234,507

 

1,880,190

 

1,435,516

 

 

 

 

 

 

 

 

 

 

Income and social contribution taxes

33

 

(3,246)

 

 

664,911

 

(201,009)

 

 

 

 

 

 

 

 

 

 

Net income for the year

 

 

2,545,101

 

1,234,507

 

2,545,101

 

1,234,507

 

 

 

 

 

 

 

 

 

 

Earnings per share attributed  to the Company’s shareholders (in R$ per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

34

 

1.05


0.51

 

1.05

 

0.51

 

 

 



 

 

 

 

 

Diluted earnings per share

34

 

1.05


0.51

 

1.05

 

0.51



The accompanying notes are an integral part of these financial statements.













TIM PARTICIPAÇÕES S.A. AND TIM PARTICIPAÇÕES AND SUBSIDIARY

STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2018 and 2017

(In thousands of Reais)

 

 

 

 

 

 

 

 

 

 

 

Parent Company

 

Consolidated

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Net income for the year

 

2,545,101

 

1,234,507

 

2,545,101

 

1,234,507

 

 

 

 

 

 

 

 

 

Other components of comprehensive income

 

 

 

 

 

 

 

 

Item not to be reclassified to income:

 

 

 

 

 

 

 

 

  Remeasurement of post-employment benefit obligations, net of taxes

 

(142)

 

(694)

 

(142)

 

(694)

Item to be subsequently reclassified to income:

 

 

 

 

 

 

 

 

  Cash flow hedge (Note 5)

 

 

2,190

 

 

2,190

Total comprehensive income for the year

 

2,544,959

 

1,236,003

 

2,544,959

 

1,236,003


Items in the comprehensive income statement are stated net of taxes.



The accompanying notes are an integral part of these financial statements.











TIM PARTICIPAÇÕES S.A. AND TIM PARTICIPAÇÕES AND SUBSIDIARY

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In thousands of Reais )

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Profit reserves

 

 

 

 

 

 

 

 

 

 

Share capital

 

Capital reserve

 

Legal reserve

 

Reserve for expansion

 

Tax benefit reserve

 

Treasury shares

 

Accumulated other comprehensive income

 

Retained earnings

 

Total

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

Balances as at December 31, 2016

9,866,298

 

405,239

 

657,034

 

5,103,908

 

1,158,910

 

(3,369)

 

(507)

 

 

17,187,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net income for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,234,507

 

1.234.507

    Remeasurement of post-employment benefit obligation

 

-

 

-

 

-

 

-

 

 

 

-

 

(694)

 

-

 

(694)

Cash flow hedge

 

-

 

-

 

-

 

-

 

 

 

-

 

2,190

 

-

 

2.190

Total comprehensive income for the year

 

 

 

 

 

 

 

 

1,496

 

1,234,507

 

1.236.003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contributions from shareholders and distributions to distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Stock options (Note 25.b)

 

-

 

10,923

 

-

 

-

 

 

 

 

-

 

-

 

10.923

   Purchases of treasury shares, net of disposals

 

 

 

 

 

 

 

(13,118)

 

 

 

(13.118)

   Allocation of net income for the year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Legal reserve (Note 25)

 

-

 

-

 

61,725

 

-

 

 

 

-

 

-

 

(61,725)

 

         Dividends proposed (Note 25)

 

-

 

-

 

-

 

-

 

 

 

-

 

 

 

(103,325)

 

(103.325)

         Interest on shareholders equity (Note 25)

 

-

 

-

 

-

 

-

 

 

 

-

 

 

 

(189,991)

 

(189.991)

         Recording of tax benefit reserve (Note 25)

 

-

 

 

 

 

 

 

 

112,493

 

-

 

-

 

(112,493)

 

         Recording of expansion reserve (Note 25)

 

-

 

-

 

-

 

766,973

 

 

 

-

 

-

 

(766,973)

 

   Dividends recorded directly in shareholders equity

 

-

 

-

 

-

 

23,179

 

 

 

-

 

-

 

 

23.179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contributions from shareholders and distributions to shareholders

 

 

10,923

 

61,725

 

790,152

 

112,493

 

(13,118)

 

 

(1,234,507)

 

(272.332)

Balances as at December 31, 2017

9,866,298

 

416,162

 

718,759

 

5,894,060

 

1,271,403

 

(16,487)

 

989

 

 

18,151,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 











TIM PARTICIPAÇÕES S.A. AND TIM PARTICIPAÇÕES AND SUBSIDIARY

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands of Reais )

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 




Balances as at January 1st, 2018

9,866,298

 

416,162

 

718,759

 

5,894,060

 

1,271,403

 

(16,487)

 

989

 

-

 

18,151,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of initial adoption of new accounting pronouncements (Note 2.f)

-

 

-

 

-

 

(62,119)

 

-

 

-

 

-

 

-

 

(62.119)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as at January 1st, 2018, adjusted

9,866,298

 

416,162

 

718,759

 

5,831,941

 

1,271,403

 

(16,487)

 

989

 

 

18,089,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net income for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,545,101

 

2.545.101

        Remeasurement of post-employment benefit obligation (Note 13)

 

-

 

-

 

-

 

-

 

 

-

 

(142)

 

-

 

(142)

Total comprehensive income for the year

 

 

 

 

 

 

 

(142)

 

2,545,101

 

2.544.959

Total contributions from shareholders and distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Stock options (Note 25.b)

 

-

 

(4,071)

 

-

 

-

 

 

 

 

-

 

-

 

(4.071)

   Purchases of treasury shares, net of disposals

 

-

 

-

 

-

 

-

 

 

 

7,964

 

-

 

-

 

7.964

   Allocation of net income for the year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Legal reserve (Note 25)

 

-

 

-

 

119,933

 

-

 

 

 

-

 

-

 

(119,933)

 

         Interest on shareholders equity (Note 25)

 

-

 

-

 

-

 

-

 

 

 

-

 

 

 

(849,994)

 

(849.994)

         Recording of tax benefit reserve (Note 25)

 

-

 

-

 

 

 

 

 

146,455

 

-

 

-

 

(146,455)

 

         Recording of expansion reserve (Note 25)

 

-

 

-

 

-

 

1,428,719

 

 

 

-

 

-

 

(1,428,719)

 

   Dividends recorded directly in shareholders equity

(Note 25)

 

-

 

-

 

-

 

6,914

 

 

 

-

 

-

 

 

6.914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contributions from shareholders and distributions to shareholders

 

 

(4,071)

 

119,933

 

1,435,633

 

146,455

 

7,964

 

 

(2,545,101)

 

(839.187)

Balances as at December 31, 2018

9,866,298

 

412,091

 

838,692

 

7,267,574

 

1,417,858

 

(8,523)

 

847

 

 

19,794,837



The accompanying notes are an integral part of these financial statements.






 MANAGEMENT REPORT AND ANALYSIS FOR 2018 RESULTS


COMMENTS ON THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2018





TIM PARTICIPAÇÕES S.A. AND TIM PARTICIPAÇÕES AND SUBSIDIARY

STATEMENT OF CASH FLOWS

 

 

 

 

 

 

 

 

 

Years ended December 31, 2018 and 2017

 

 

 

 

 

 

 

 

 

(In thousands of Reais )

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent Company

Consolidated

 

Note

 

2018

 

2017

 

2018

 

2017

Operations

 

 

 

 

 

 

 

 

 

Income before income and social contribution taxes

 

 

2,548,347

 

1,234,507

 

1,880,190

 

1,435,516

Adjustments to reconcile income with net cash from operations

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

-

 

-

 

3,954,321

 

4,013,671

Income from equity accounting

13

 

(2,672,647)

 

(1,279,941)

 

-

 

-

(Gain) loss on the sale of property, plant and equipment (leaseback)

29

 

-

 

-

 

 

1,801

Residual value of property, plant and equipment and intangible assets written off

 

 

-

 

-

 

9,700

 

54,104

Interest on provision for decommissioning costs

 

 

-

 

-

 

648

 

428

Provision for legal and administrative proceedings

24

 

4,180

 

1,189

 

551,191

 

372,469

Monetary adjustments to deposits, administrative and legal proceedings

 

 

4,507

 

(407)

 

297,529

 

97,805

Interest, monetary and exchange variations of borrowings and other financial adjustments

 

 

-

 

-

 

(35,450)

 

521,570

Lease interest payable

31

 

-

 

-

 

266,328

 

257,305

Lease interest receivable

30

 

-

 

-

 

(25,664)

 

(22,709)

Provision for doubtful debts

28

 

-

 

-

 

544,881

 

316,387

Stock options

26

 

(4,593)

 

3,743

 

(1,424)

 

10,923

 

 

 

(120,206)

 

(40,909)

 

7,442,250

 

7,059,270

Decrease (increase) in operating assets

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(115)

 

-

 

(1,028,791)

 

99,674

Taxes and contributions recoverable

 

 

(33,601)

 

10,675

 

175,116

 

162,705

Inventory

 

 

-

 

-

 

(59,274)

 

20,149

Prepaid expenses

 

 

1,532

 

1,987

 

56,792

 

(40,490)

Dividends and interest on shareholders’ equity received

 

 

734,685

 

404,331

 

 

-

Judicial deposits

 

 

(18,794)

 

(21,744)

 

30,478

 

(53,217)

Other assets

 

 

(13,665)

 

6,558

 

133,831

 

(26,129)

Increase (decrease) in operating liabilities

 

 

 

 

 

 

 

 

 

Payroll and related charges

 

 

(4,105)

 

2,606

 

(50,765)

 

50,171

Suppliers

 

 

8,418

 

1,266

 

331,736

 

523,419

Taxes, charges and contributions

 

 

15,955

 

234

 

(26,786)

 

(474,557)

Authorizations payable

 

 

-

 

-

 

(104,582)

 

(895,964)

Payments for legal and administrative proceedings

24

 

(1,690)

 

(798)

 

(536,646)

 

(439,670)

Deferred revenues

 

 

-

 

-

 

(193,599)

 

(415,651)

Other liabilities

 

 

(308)

 

1,346

 

(40,373)

 

(165,598)

Net cash from operations

 

 

568,106

 

365,552

 

6,129,387

 

5,404,112

 

 

 

 

 

 

 

 

 

 

Cash from investment activities

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

(13,378)

 

-

 

(21,460)

 

(288,658)

Cash received from property, plant and equipment sales

 

 

-

 

-

 

 

13,850

Additions to property, plant and equipment and intangible assets

 

 

-

 

-

 

(3,831,906)

 

(4,147,907)

Receipt of financial leases




 

-

 

-

 


22,946


 

22,140

TIM PARTICIPAÇÕES S.A. AND TIM PARTICIPAÇÕES AND SUBSIDIARY

STATEMENT OF CASH FLOWS

 

 

 

 

 

 

 

 

 

Years ended December 31, 2018 and 2017

 

 

 

 

 

 

 

 

 

(In thousands of Reais )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) from investment activities

 

 

(13,378)

 

 

(3,830,420)

 

(4,400,575)

 

 

 

 

 

 

 

 

 

 

Cash from financing activities

 

 

 

 

 

 

 

 

 

New borrowing

 

 

-

 

-

 

166,548

 

646,853

Repayment of borrowing

 

 

-

 

-

 

(3,552,407)

 

(3,270,570)

Payment of financial lease

 

 

-

 

-

 

(252,410)

 

(219,189)

Derivative financial instruments

 

 

-

 

-

 

37,044

 

17,677

Purchases of treasury shares, net of disposals

 

 

5,317

 

(13,118)

 

5,317

 

(13,118)

Dividends and interest on shareholders’ equity paid

 

 

(588,247)

 

(332,658)

 

(588,247)

 

(332,658)

Net cash used in financing activities

 

 

(582,930)

 

(345,776)

 

(4,184,155)

 

(3,171,005)

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

(28,202)

 

19,776

 

(1,885,188)

 

(2,167,468)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the year

 

 

28,369

 

8,593

 

2,960,718

 

5,128,186

Cash and cash equivalents at the end of the year

 

 

167

 

28,369

 

1,075,530

 

2,960,718


Supplementary information on consolidated cash flows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

 

 

 

 

 

435,845

 

584,853

Income tax and social contribution paid

 

 

 

 

 

 

213,956

 

297,079

 

 

 

 

 

 

 

 

 

 

Non-cash transactions

 

 

 

 

 

 

 

 

 


Additions to property, plant and equipment and intangible assets, without cash effects

 

 

 

 

 

 

(38,944)

 

(48,957)

Increase in lease liabilities, without cash effects  

 

 

 

 

 

 

38,944

 

48,957



The accompanying notes are an integral part of these financial statements.











 

TIM PARTICIPAÇÕES S.A., TIM PARTICIPAÇÕES S.A. AND SUBSIDIARY

STATEMENTS OF VALUE ADDED

Years ended December 31 , 2018 and 2017

(In thousands of Reais)


 

Parent Company

 

Consolidated

 

2018

 

2017

 

2018

 

2017

Revenue








  Gross operating revenue

 

-

 

24,232,405

 

22,611,074

  Losses from doubtful debts

 

-

 

(544,881)

 

(316,387)

  Discounts granted, refunds and other

 

-

 

(2,087,279)

 

(1,349,709)

 

 

 

21,600,245

 

20,944,978

Inputs purchased from third parties

 

 

 

 

 

 

 

  Costs of services provided and goods sold

 

-

 

(3,929,961)

 

(4,035,789)

  Materials, energy, third-party services and other

(4,675)

 

(5,968)

 

(3,237,371)

 

(3,099,939)

 

(4,675)

 

(5,968)

 

(7,167,332)

 

(7,135,728)

Withholding

 

 

 

 

 

 

 

  Depreciation and amortization

 

 

(3,954,321)

 

(4,013,671)

Net value added produced

(4,675)

 

(5,968)

 

10,478,592

 

9,795,579

Value added received by transfer

2,672,647

 

1,279,941

 

 

-

  Equity income

1,989

 

6,934

 

510,265

 

942,583

  Financial income

2,674,636

 

1,286,875

 

510,265

 

942,583

Total value added for distribution

2,669,961

 

1,280,907

 

10.988,857

 

10,738,162

 

 

 

 

 

 

 

 

Distribution of value added

 

 

 

 

 

 

 

Personnel and charges

 

 

 

 

 

 

 

 Direct compensation

22,591

 

19,979

 

503,198

 

515,382

 Benefits

1,479

 

1,050

 

181,502

 

141,279

 F.G.T.S. (unemployment fund)

268

 

231

 

55,765

 

52,705

 Other

87

 

388

 

102,254

 

71,722

 

24,425

 

21,648

 

842,719

 

781,088

Taxes, fees and contributions

 

 

 

 

 

 

 

 Federal

4,806

 

1,362

 

1,655,868

 

2,520,892

 State

 

-

 

4,000,551

 

3,990,856

 Municipal

 

-

 

104,710

 

18,834

 

4,806

 

1,362

 

5,761,129

 

6,530,582

Remuneration of third-party capital

 

 

 

 

 

 

 

 Interest

95,613

 

23,369

 

1.046.256

 

1,438,809

 Rents

16

 

21

 

789,015

 

748,162

 

95,629

 

23,390

 

1.835.271

 

2,186,971

Other

 

 

 

 

 

 

 

 Social investment

 

-

 

4,637

 

5,014

 

 

 

4,637

 

5,014

Remuneration of shareholders equity

 

 

 

 

 

 

 

  Dividends and Interest on shareholders equity

849,994

 

265,072

 

849,994

 

265,072

 Retained earnings

1,695,107

 

969,435

 

1,695,107

 

969,435

 

2,545,101

 

1,234,507

 

2,545,101

 

1,234,507

The accompanying notes are an integral part of these financial statements.






 MANAGEMENT REPORT AND ANALYSIS FOR 2018 RESULTS


COMMENTS ON THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2018



Dear shareholders,


The management of TIM Participações S.A. ("TIM Participações", "Company" or "TIM") presents the Management and Discussion and Analysis for 2018 Results, together with the Individual and Consolidated Financial Statements and the Independent Auditors’ Report for the fiscal year ended on December 31, 2018.


The Financial Statements have been prepared in accordance with Brazilian Standards and the IFRS (International financial reporting standards), as defined by the IASB.


The operational and financial information for 2018, unless stated otherwise, is presented in Reais (R$), based on the consolidated amounts, and pursuant to Brazilian corporate law.


Company Profile


TIM Participações is a publicly-held company with shares listed on the São Paulo Stock Exchange (B3) and ADRs (American Depositary Receipts) listed on the New York Stock Exchange (NYSE). In 2018, TIM confirmed its permanence for the eleventh consecutive year in the select group of companies that integrate the ISE (Corporate Sustainability Index) portfolio, reinforcing its commitment to economic, social and environmental sustainability. Moreover, TIM is the only telecommunication company to participate in Novo Mercado, a segment recognized by B3's highest level of corporate governance.


TIM Participações is controlled by TIM Brasil Serviços e Participações S.A., a subsidiary of the Telecom Italia group. Through the sharing of experiences and the adoption of a good practices policy, the Company shares experiences with its parent company and accumulates synergies that benefit all of its clients. Through its subsidiary, TIM S.A., TIM operates in the mobile and fixed telephony, long distance and data transmission markets throughout the Brazilian territory and in the ultra-broadband market encompassing certain states of the country.







 MANAGEMENT REPORT AND ANALYSIS FOR 2018 RESULTS


COMMENTS ON THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2018





1. Message from Management


The year 2018 demonstrated the Company's ability to be resilient and perform amid a challenging environment, showing the highest growth of Revenue and EBITDA among the large telcos. Our focus on executing the strategic plan made it possible for us to face the challenges created by a slower than expected economic recovery and a much tougher competitive environment. This ability allowed us  to exceed in some indicators historic levels, such as EBITDA and Margin.


The following elements were key to this performance: (i) the resilience of the mobile service through the evolution of the customer base transformation strategy; (ii) taking advantage of the opportunities created by the expansion of the residential broadband operation; (iii) the development of the infrastructure aiming to support the evolution of the customer experience; (iv) an approach focused on efficiency and value creation for shareholders.


Mobile Service Resilience


Throughout the year, the mobile segment faced an increase in the offers’ aggressiveness, while economic activity remained with low growth. Even so we adapted our approach  to manage the strong transformation of the base with the growth of Postpaid. In order to do so, we sought to work a second wave in the process of up-selling that goes beyond migrations from Prepaid to Postpaid, accelerating migrations within the segments. In addition, the use of loyalty offers was expanded.


The positive impacts of these adjustments were evident through results such as: (i) postpaid growth of approximately 14% YoY, reaching a mix of more than 36% of the total, (ii) a two-fold increase in the volume of migrations from Control Plans to Pure Postpaid, (iii) the increase in sales of loyalty offers by almost 30 p.p. and (iv) the evolution of ARPU (Average Revenue Per User) of more than 11% YoY.


Leveraging the Opportunities in Residential Broadband


Residential broadband was one of the greatest highlights of the year, going through a complete transformation. Extending a geographic expansion from an operation limited to the 2 largest metropolitan areas to serving customers in 14 cities of 5 states, it was a great challenge that required a strong capacity for adaptation and execution. Even more considering that this expansion was made using a new technology, the FTTH (Fiber to the Home).


The commercial launch of the fiber connection enabled the offerings portfolio evolution that, in addition to a faster and more stable connection, also brought content to customers through video streaming partners. This combination brought significant results, with the user base growing approximately 20%, while ARPU increased 13%.




Infrastructure Development


Our infrastructure development is an essential part of our customer experience improvement strategy. Therefore, during the year 2018, we emphasized investments that had a direct impact on the quality of mobile and fixed services.


The maintenance of the leading position in 4G coverage, with more than 3.200 thousand cities, gives us an important competitive differential that continues to be extended with the deployment of an efficient frequency refarming process to expand the capacity of our network. In addition, we are the operator that accelerated more in the implementation of the 4G through 700 MHz frequency, surpassing the 1,400 covered cities, which provides a significant improvement in indoor coverage.


We also expanded our optic fiber network, surpassing the 90,000 km milestone and reaching more than 600 cities, which helped in the performance of the mobile network with the connection of the sites to optic fiber and expanded the coverage of TIM Live’s ultra broadband services. This service is available today to more than 1 million households in the 14 cities we cover.


Efficiency and Cash Generation


The efficiency program continues to permeate the entire Company, totaling more than R$ 340 million in savings. In addition, the digital transformation process, which has an impact on both cost and customer satisfaction, continues at great speed with expressive results in the adoption of non-human channels (+ 37%), electronic payments (+ 33%), invoices (2x) among other indicators.


The objectives of the program are not limited to cost savings, but also fiscal efficiency and improvements in financial expenses. In this context, corporate reorganization projects with fiscal and operational impacts were submitted, in addition to optimize the Company's financing lines.


The combination of these factors produced the highest EBITDA in TIM's history, reaching R$ 6.6 billion with a margin close to 39% in the year, as well as an excellent level of net cash generation of R$ 1.2 billion. This made possible a growth of almost 3 times in the compensation announced to the shareholders.


Conclusion and Perspectives


Resiliency and focus on strategy execution were the 2018 brands, making it possible to deliver all defined goals and continue our history of sustainable and consistent growth.


The year 2019 will be of hard work and we continue to evolve in our approach to materialize the strategic objectives of being the operator most admired by customers, with the most engaged employees and the with highest profitability in the industry.




2. Economic and Industrial Overview


2.1. Macroeconomic Environment


The high macroeconomic volatility seen in 2018, triggered by uncertainties surrounding the elections scenario coupled with less favorable external conditions towards emerging markets, impacted directly the Brazilian Gross Domestic Product (GDP), which should end the year with a modest growth of 1.3% according to the latest FOCUS report1, much lower than the 2.7% rate expected by the majority of analysts at the beginning of 2018.


Inflation measured by the Ample Consumer Price Index (IPCA), began 2018 under control, but saw oscillations throughout the year, impacted by the truckers' strike and higher administered prices, such as those for fuels and electricity, peaking at 4.5% while closing the year at 3.75%, slightly higher than in the previous year, however still below the Central Bank target. With inflation below the target and with anchored expectations, monetary policy has been defined by the stability of interest rates at 6.5% per year (p.y.) and by the expectation of this level maintained for the coming year.


On the foreign exchange front, the Real devalued 18.50% versus the U.S. dollar in 2018. It showed strong oscillations throughout the year amid factors such as uncertainty surrounding Brazil's political and economic environment, in addition to international factors, especially the trade war involving the U.S. and China with mutual taxation on imports, which may impact global growth. The trade balance ended the year with a US$ 58 billion surplus, representing a 13% decline compared to 2017, impacted by the advance of imports by 19.7%, which outpaced exports growth at 9.6%.


Despite the generally positive result and the resumption, at the end of 2018, of the market's confidence as a whole with the definition of the election scenario, there is still strong uncertainty as to the approval of the reforms necessary for growth recovery, especially fiscal and social security reforms, throughout 2019, as well as regarding the depth of the proposals to be presented by the new presidential administration.


Concerning the international scenario, the trade war between the U.S. and China, started in March 2018 with the already mentioned mutual surcharges on products of the two countries, brought volatility to the markets, triggering sharp instability amid the possibility of a slowdown in the global economy. In Europe, the level of economic activity presented a slight deceleration in the Euro zone, still impacted by the uncertainties around Brexit and due to the deceleration of global trade.






2.2. Particularities of the Telecommunications Sector


The telecommunications sector in Brazil is marked by strong competition and by the effective regulation of the National Telecommunications Agency, ANATEL, whose mission is "to promote the development of the country's telecommunications, in order to provide it with a modern and efficient telecommunications infrastructure, capable of providing the society with adequate, diversified and fair prices throughout the entire national territory".


The economic recovery at a more moderate pace than that expected initially by the market in general influenced the Brazilian telecommunications sector in 2018, which continued the path identified in the previous years of reduction of the mobile base. The mobile market maintained the dynamics of migrating prepaid subscribers to hybrid plans (control plans) and postpaid plans which, in general, seek to make the clients loyal with offers that present consumption recurrence and, as a result, revenue recurrence, in line with the strategy of offering more for more.


However, such strategy was impacted by fiercer competition in the Brazilian market, seen through the presence of more aggressive offers considering the content provided to clients and of a reduction in the level of prices offered by the operators in general, which, to a certain extent, limited the Company's capacity to pass on the cost increases or to propose adhesion to higher-value offers.


The sector continued the trend of strong growth in data consumption, demanding from the operators the capacity to adapt their networks, facing the challenge of delivering an increasingly robust infrastructure in an environment of more rational investments in projects such as the densification of sites, frequency refarming and the carrier aggregation in two or three frequencies. Moreover, TIM has advanced its sharing initiatives focused on 4G and transport network. This evolution in the Company's network allows the significant expansion of traffic on the 4G network, providing clients with a better user experience, both in terms of performance, with higher download and upload speeds and lower latency, and in indoor coverage and greater penetration.


Last, the growing demand for Fixed Broadband consolidated the view of internet access as an essential resource for the population, which was confirmed by the evolution of the client base and TIM Live's net additions.


 




3. TIM Services


3.1. Business


TIM is recognized by its strong brand and the reputation of an innovative and disruptive company, capable of defining new consumption standards for the market. The proactive approach allows the Company a leading position in the transformation of the business model in telecommunications. The change in the clients' consumption profile and the emergence of new technologies foster a rupture in the telecommunications industry, based on the consumption of data, contents and digital services.


The offers' pioneering spirit and innovation are the Company's trademarks, which has a complete portfolio both for individual clients, and corporate solutions for small, medium and large companies. In addition to the traditional voice and data services, TIM offers fixed ultra broadband, TIM Live and fixed broadband service through the mobile network, utilizing WTTx technology.  


Also in the portfolio, the Company offers a series of digital contents and services in its packages, increasing the mobile devices' functionalities within its clients' routines. The capacity to manage a complete and diversified portfolio gives TIM the possibility to offer customized packages to its clients and propose convergent offers in certain regions.


In 2018 TIM innovated by bringing significant changes to the control and prepaid segments. In regards to control, the entry door to postpaid, the Company provided for its clients an offer with unlimited social networks for 3 months, in addition to the robust internet and digital services packages. The same applies to the prepaid segment, whose new portfolio features unlimited social networks, data package and offer expiration based on the recharge and unlimited calls to any operator.


TIM's new positioning seeks to follow the desires of its consumers, placing them at the center of our decision-making, based on: (i) INNOVATION, which is in the Company's DNA and will continue as a priority with new plans, offers, partnerships and technologies; (ii) QUALITY, which is the core of client loyalty and of the expansion of his life cycle; and (iii) CUSTOMER EXPERIENCE, which is the strategic pillar converging all the other ones, establishing a new relation with clients and acting in order for everyone to receive the best experience, excellent services and a transparent relation with the Company.




3.2. Strategy


The Company's strategy, for 2018, was based on 6 (six) pillars: culture, digitalization, offer, infrastructure, efficiency and customer experience. These pillars aim to redesign customer experience and make TIM the best choice of value in the market, leveraged by the leadership position in mobile ultra-broadband and by the proposal of intelligent offers.


In the culture pillar, the goal is to disseminate the feeling of ownership, responsibility, as this is the axis for a deep cultural transformation within the Company. Based on the concept of accountability, TIM believes that its employees will be able to concentrate their creativity and energy in the search for new solutions, delivering positive results.


The digitalization pillar aims to accelerate the development and implementation of digital systems, enhancing customer experience and delivering significant operational and financial efficiencies. The migration to digital and flexible platforms follows the market trend of using the most sophisticated technologies, allowing greater operational agility and efficiency.


The offer pillar proposes the selective development of innovative packages, according to the client's profile. Additionally, the Company intends to expand its fixed broadband offer through FTTH (Fiber To The Home) and WTTx (Wireless To The x) technologies, which will allow a selective approach with convergent offers in certain regions.


Regarding infrastructure, the Company aims to expand the 4G coverage with 700MHz, confirming its leadership in mobile ultra-broadband coverage and quality excellence. In parallel, the development of the fiber network aims to broaden the fixed broadband coverage and maintain the quality level required by the customers, which is one of the drivers for investments targeting.


The efficiency proposal remains in the Company's strategy, based on the broad and systemic view that is predominant in the operation, which aims to generate disruptive efficiencies both in the operational and financial scope.  


All 5 (five) pillars mentioned above are directly related to the commitment to customer experience. This is the main objective of the proposed structure, in which the customer is at the center of our decision making.




4. Human Resources

TIM understands that in order to conquer better results, it needs an engaged team. Therefore, it establishes a transparent relationship with all the levels of the Company. Clarity and targeting are fundamental so our team works towards our objectives, with autonomy and sense of ownership.


Among the highlighted practices, we offer a differentiated compensation and benefits package, being one of the items that showed better evolution in our annual Organizational Climate Survey, carried out by Hay/Korn Ferry in 2018. We also highlight the Training practices, another aspect with good performance in the survey.


Our culture is strengthened in the pillars Accountability (sense of ownership) and Customer Experience, which are essential to differentiate ourselves in our segment. In an environment of dynamic and challenging work, the Company offers space and opportunities so that its team broadens its horizons, develops and expands corporate and personal achievements.


4.1. People


TIM ended 2018 with 9,661 employees throughout Brazil. These employees, with their stories and knowledge, represent the intellectual capital of the Company and act as engines for the development of the business


Approximately 72.5% of employees have completed higher education or attend university and 10.3% have postgraduate degrees. The numbers and results show that TIM has a diverse and highly qualified framework to meet the Company's challenges. The workforce is complemented by 180 trainees and 235 young apprentices.


4.2. Development and Training


TIM employees have access to innovative tools and well-structured ways to evolve within the company and to build a successful career. In line with the organizational values, they trace their careers from their own professional experiences and knowledge acquired from the company's investment. In this regard, TIM invested more than R$ 9 million in training and development of its employees in 2018.


To guide the careers of its employees, TIM maps and monitors individual performance to guide the activities more assertively. In addition to encouraging and providing real growth opportunities, the Company recognizes the dedication and differentiated performance of its professionals by using Performance Management.


In order to attract the best students in the market and train our future professionals, the Trainee Without Borders program brings to TIM young people with energy, determination, initiative, team spirit and, especially, interest in challenges.




4.3 Long Term Incentive Plan


The Long-Term Incentive Plan is intended to grant shares or options for the purchase of shares of TIM Participações to employees of the Company and its subsidiaries, thereby seeking to promote the expansion, achievement and success of the corporate objectives, as well as the interests of TIM shareholders and management.


In August 5, 2011, April 10, 2014 and April 19, 2018, the Annual Shareholders Meeting of TIM Participações approved the long term incentive plans; “Plan 2011-2013”, “Plan 2014-2016” and “Plan 2018-2020”, respectively, grant to the high management and to those whom occupie key positions in the Company and its subsidiaries.


The Plans 2011-2013 and 2014-2016 provides the granting of stock options, while the 2018-2020 Plan provides for the granting of shares.


The exercise of the 2011-2013 Plan options is conditional on the achievement of specific performance targets, while the 2014-2016 Plan has no premise of achieving the target and its exercise is conditional on the favorable market price at the time of exercise, in comparison to the exercise price. In turn, the strike price of both Plans is calculated based on the Base Price of the Shares, adjusted, more or less, as a consequence of the stock performance, considering the criteria established in each Grant.


Regarding the 2018-2020 Plan exercise, the Company's share concession is subject to conditions of time and performance (achievement of specific goals). Such performance conditions may also vary the number of shares granted, more or less, depending on the criteria defined in each Grant.


The term of validity of the options of the Plans 2011-2013 and 2014-2016 is 6 years and TIM Participações has no legal or non-formal obligation to repurchase or liquidate the cash options. For the 2018-2020 Plan, the term of validity has 3 years period, which is the same related to its grace period (Vesting). In addition, besides considering the transfer of shares, the 2018-2020 Plan also provides for the possibility of making the payment to the participants of the equivalent value in cash.


As approved by the Company's General Meeting, the management of the Plan is the responsibility of the Board of directors, subject to the Company's bylaws.


Specifically for the year 2017, as the Company began the process of restructuring its long-term incentive plan, on an exceptional basis and duly approved by the Board of Directors, the long-term incentive plan took the form of a bonus, with the payment conditional upon the attainment of certain financial indicators of TIM and divided into three annual installments.






4.3.1. Stock Option 2011-2013 Cycle

Plan

Options Granted

Exercised Options

Expired Options

Non-Exercised Options

 

 

 

 

 

2011 - 2013 Plan

8,567,765

-3,399,832

-4,624,350

543,583

1st Concession

2,833,595

-1,532,132

-1,301,463

0

2nd Concession

2,661,752

-896,479

-1,765,273

0

3rd Concession

3,072,418

-971,221

-1,557,614

543,583


4.3.2. Stock Option 2014-2016 Cycle

Plan

Options Granted

Exercised Options

Expired Options

Non-Exercised Options

 

 

 

 

 

2014 - 2016 Plan

8,965,119

-2,473,308

-4,501,793

1,720,017

1st Concession

1,687,686

-27,424

-1,128,290

531,972

2nd Concession

3,355,229

-1,146,626

-1,646,080

292,523

3rd Concession

3,922,204

-1,299,258

-1,727,423

895,522


4.3.3. 2018-2020 Stock Cycle

Plan

Options Granted

Exercised Options

Expired Options

Non-Exercised Options

 

 

 

 

 

2018 - 2020 Plan

849,932

0

-383,418

466,514

1st Concession

849,932

0

-383,418

466,514

2nd Concession

0

0

0

0

3rd Concession

0

0

0

0




5. Network

 

Infrastructure is one of the strategic pillars of the Company and TIM reaffirms its investment commitment in 2019, seeking to offer more and better services. The recent changes in the consumption pattern as well as the increasing demand for quality requires a structured network expansion plan, supported by more robust technical analyses regarding the consumption pattern and the customers' needs, as well as a cultural transformation.


In the scope of spectrum usage, TIM continues its successful refarming project, expanding to the 2.1GHz frequency, aiming at more efficiency and better performance. Regarding fiber, the Company continues with its network expansion project, to support the ultra-broadband converging network, increasing the availability of FTTH and FTTS.


As for sites, TIM plans to increase site density by using Biosites, which are sustainable, cheaper structures that are easier to install and have no visual impact on cities. In the context of big data, the Company is constantly evolving its analytical tools from a more complete and proactive approach, aiming at a more efficient deployment of investments.


When it comes to corporate culture, the new technologies and customer expectations cause a rupture in the traditional model of telecommunications operators. In this scenario, TIM seeks to develop, motivate and engage its employees so that they can perform in a dynamic, innovative and collaborative environment, based on an agile and flexible operating model.


5.1. National Coverage


TIM's infrastructure has a national reach, covering approximately 95% of the Brazilian urban population, being present in more than 3,500 cities. The Company also has extensive data coverage, maintaining its leading position in 4G coverage in the country


Of the R$ 3.98 billion invested in 2018, 87% were dedicated to network and information technology in line with the previous years, aiming to meet the growing data consumption.  Infrastructure improvement and growth are supported by different projects, among them one can highlight the expansion of fiber optic network (backbone, backhaul and FTTH), densification of sites, frequency refarming and the aggregation of carriers in two or three frequencies, depending on geographic location. Moreover, TIM has advanced its sharing initiatives focused on 4G and transport network.


Regarding the actions and projects focused on modernization, efficiency and/or enhancement of our infrastructure, we highlight:

§

Refarming the 2.1 GHz frequency to 4G reaching almost 250 cities;

§

Infrastructure virtualization project, which reached about 41% of network functions in 2018;

§

Installation of multiple data centers to enhance experience (21 in 2018), of which 10 DCC (Data Center Core) and 11 DCE (Data Center Edge);

§

Extansion of the VoLTE technology support for more than 2,500 cities.


TIM maintained its leadership in 4G coverage, reaching 3,272 cities or 93% of the country's urban population at the end of 2018, registering a 38% YoY increase in network elements in this technology in the time period. As a result, 76% of TIM's customer data traffic was over 4G network in the last quarter of 2018, up 16 p.p. when compared to the same period of the previous year.


In addition, the usage of 700MHz frequency for the development of the LTE network continues to evolve, providing a significant improvement in customer experience both in terms of performance, with higher download and upload speeds and lower latency, and indoor coverage, higher penetration.

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At the end of the year, TIM had ~18,800 sites, 67% of which connected through high capacity backhaul.


In relation to transport infrastructure, the Company reached 90.1 thousand km of optic fiber for backbone and backhaul, an increase of 5.7% YoY.


Residential fixed broadband continues to evolve with 1.1 million households in FTTH, 3.5 million in FTTC, totaling 4.3 million households in 14 cities 2.


Infrastructure development is also in line with the Company's corporate social responsibility values. TIM continues to implement the Biosites installation project, a solution for densification of the mobile access network (antennas/towers) with a very low visual impact. Bio Sites also contribute to harmonization with the environment and urban infrastructure – multifunctionality capable of aggregating beyond the transmission of telecommunications, lighting and security cameras – these structures are cheaper and faster to install. At the end of 2018, TIM reached a total of 841 active Biosites.

Currently, the Company has authorization to use more than 130 MHz in spectrum, with 36 MHz in frequencies below 1 GHz, distributed as follows:



Average Spectrum Weighted by Population

700 MHz

850 MHz

900 MHz

1,800 MHz

2,100 MHz

2,500 MHz

20

11

5

35

22

20


5.2. Customer Service and Quality


The results of the digitalization initiatives keep expanding, and were consistent during the year. The broad digital transformation depends on acting according to the clients' real needs and on the redesign of processes, in order to impact all of the client's lifecycle. In order to reach this objective, we work with three strategic pillars: (i) development of offers based on our clients' individual needs; (ii) promoting the expansion and evolution of our network infrastructure; and (iii) efficient operation while approaching integrated channels for sales and customer care.


Sales through digital channels, a key factor in TIM's upselling strategy, advanced 28% YoY in the postpaid segment (pure + control) and 32% in prepaid in 2018. The mix of digital recharges continues to obtain greater relevance among the sales channels with 5 p.p growth in 2018.


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In relation to customer care, the Mobile App and IVR modernization are fundamental to the enhancement of the customer experience. We highlight the increase of 26% in machine interactions as a whole. The number of unique Meu TIM App users more than doubled, while IVR retention grew 3 p.p., leading to a 6% decline in live human interactions through our call center, at the end of 2018.

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The initiatives to incentivize the digitalization of billing and payment had strong growth in 2018. Bills delivered via digital channels doubled, leading the penetration of this means to more than 50% at the end of the year. The number of clients who make payments by digital means grew 32.6% YoY.

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Regarding network, attesting to the quality of TIM's mobile network, Open Signal3 in its January 2019 report again placed TIM's 4G network as the most available one. TIM users spent 78.6% of their time in LTE technology. TIM maintained the leadership in important regions of the country such as São Paulo (SP), Rio de Janeiro (RJ) and Belo Horizonte (MG).


In addition to this report, a study carried out by consulting firm P3 Network Analytics4 ranked TIM as having the best mobile network in Brazil among the biggest operators. The consulting firm assessed data and voice performance of the major Brazilian operators in the country's biggest cities (São Paulo, Rio de Janeiro and Brasilia), through a drive testing of about 9,000 km.


We also highlight the maintenance of TIM Live in the first position of Netflix's5 speed index ranking of Brazilian internet providers during the last 3 months of the year, completing 54 months within the past 57 at the top of the list. This ranking measures the performance of Netflix's service in primetime for internet providers in several parts of the world.


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6. Operational Performance


6.1. Overview of the Brazilian Market


Following last year's dynamics, the Brazilian market maintained the process of reducing the client base, however at a slower pace compared to previous years. This movement is still explained, mostly, by the result of the migration of prepaid clients to postpaid offers, by the base cleaning actions and by the process of consolidation of multiple sim cards.


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6.2. TIM's Performance


TIM ended 2018 with a base of 55.9 million active lines, a 4.6% reduction YoY. Despite the solid postpaid performance, disconnection in the prepaid segment negatively impacted the total base.


In 2018, TIM presented negative net additions of 2.7 million lines, a 43.3% reduction compared to 2017. Total gross additions fell to 24.1 million in the year, -12.7% YoY, while disconnections fell to 26.9 million lines, a reduction of -17.2% YoY. In this context, the monthly average disconnection rate felt 0.6 p.p. when compared to 2017, achieving 3.9%.


The postpaid customer base amounted to 20.2 million users by the end of 2018, an increase of 13.7% YoY, adding 2.4 million clients to the base. The segment increased its relevance for TIM, representing 36.2%of total base at the end of 2018 (versus 30.4% at 2017). It is worth noting that the total postpaid new clients with loyalty offers growth 4 times when compared to the previous year.


In the prepaid segment, the base totaled 35.7 million clients at the end of 2018. Net disconnections totaled 5.1 million lines in the year, resulting from the migration of clients from prepaid to postpaid, fiercer competition and the maintenance of a rigid base cleaning policy. The dynamics of the prepaid base makes it clear that there are still many clients with multiple sim cards. Therefore the company keeps seeking their consolidation in its base through the increase of commitment, drawing on offers with full-service packages.


Breakdown of customer base by technology:


·

The number of 4G users reached 34.5 million. Year-on-year, growth was +24.9%, explained by the migration of 3G users to 4G;

·

The 3G base had 11.3 million users, down 40.8% YoY, maintaining the downward trend;

·

M2M and Data Terminals base closed the quarter with 2.5 million lines, +24.8% YoY.

Smartphones reached a total penetration of 85.0% of the customer base in December 2018, 4.1 p.p above the same period in the previous year. This growth corroborates the Company’s strategy to equip its customers with 4G devices in order to stimulate the penetration of data services.


6.3. Fixed Segment


TIM Live base totaled 467k customers in 2018, growth of 19.1% YoY. Net adds totaled 75k in the year, of which 50k in FTTH technology (Fiber To The Home).


TIM Live continues its focus on investing in the expansion of connection technology with higher speed offers and optimal connection stability. Coverage represented by the number of homes with available FTTH already reached 26% of total coverage in 2018. As of December, the Company already had 11 cities with FTTH, of which five capitals (Rio de Janeiro, São Paulo, Salvador, Goiânia and Manaus).


TIM Casa Internet, which uses WTTX technology to offer residential broadband through the mobile network, ended 2018 with 123 available cities for sale.








 MANAGEMENT REPORT AND ANALYSIS FOR 2018 RESULTS


COMMENTS ON THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2018



7. Financial Performance


To better represent financial performance and business trends, TIM normalizes some lines of its Financial Statements, eliminating the impact of non-recurring items. These movements are pointed out when required.


7.1. Operating Revenues


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In 2018, Net Revenues reached R$ 17,050 million, growth of 5.0% YoY supported by Net Service Revenues, which advanced 4.7% YoY and by Net Product Revenues which increased 11.2% YoY, demonstrating a resilient dynamic, despites the macroeconomic scenario still in a slow recovery process.


In 2018, Total Gross Revenue increased 7.5% YoY, exceeding the expansion of Total Net Revenues. During the year, we had an increase in the number of clients who adhered to loyalty offers, increasing the discounts given to clients. This is one of the pillars in the clients' migration strategy to higher-value plans.


The breakdown of Net Revenues and other highlights are presented below:


The Mobile Service Revenues (MSR) increased R$ 659 million or 4.5%, reaching R$ 15,346 million in the fiscal year ended December 31, 2018. Growth in this line was mostly influenced by the advance of Client Generated Revenues (CGR) with the decline in Interconnection revenues being almost totally offset by growth of Other Revenues.


Client Generated Revenues (CGR), composed by Local Voice Revenues, Long Distance Voice and Data & Content grew 5.1% YoY in 2018, driven by the migrations process between segments and intra segments seeking to raise the penetration of higher-value offers. CGR expansion remains limited by a challenging environment, represented by a slow economic recovery and a fiercer competitive environment. These elements keep impacting the prepaid recharge levels and, to a lesser extent, the acquisition of postpaid plans. Still, revenues generated by recurring offer packages advanced 29.3% YoY and packages now represent 77.1% of CGR (vs. 62.7% in 2017).


Interconnection Revenues declined 14.7% to reach R$ 712 million in the fiscal year ended December 31, 2018. The result remains impacted by the reduction of VU-M tariffs and a smaller growth of incoming traffic.


Other Mobile Revenues ended 2018 up 22.2% YoY, at R$ 577 million in the year. This revenue line follows to a great extent the dynamics of network sharing and swap contracts, which represent more than 50% of this revenue line (and with corresponding costs in the Network and Interconnection line).


Mobile ARPU (average revenue per user) increased 11.3% YoY and reached R$ 22.4 influenced mostly by an improved mix following the migrations to higher-value plans. The segments ARPUs, which exclude “non-TIM” client revenues and other mobile revenues, showed slight expansions. Prepaid ARPU remained stable in R$ 11.5 and postpaid ARPU was R$ 39.9 (+0.5% YoY).


Fixed Service Revenues totaled R$ 860 million at the close of the fiscal year ended December 31, 2018 and increased 9.2% compared with the previous year. This performance results from the strong performance of TIM Live, more than offsetting the decline in revenues from other fixed segments (corporate and wholesale).


TIM Live maintained a strong growth pace, expanding 38.4% YoY. With an expanded coverage, Live became present in 14 cities (5 capitals) and already represents almost 50% of fixed service revenues.


Product Revenues totaled R$ 845 million, an increase of 11.2% compared with 2017, reflecting a better sales mix that contributed to a higher average price of handsets (+7.7% YoY). This increase was accompanied by a 3.1% reduction in the volume of handsets sold in 2018 compared with 2017.




7.2. Operating Costs and Expenses


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* Operating Costs normalized by adjustments to the sale-leaseback contract of towers (+R$ 431,000 in 4Q18, +R$ 1.1 million in 2Q18, +R$ 220,000 in 1Q18 and +R$ 1.8 million in 2Q17), temporary HR and G&A costs (+R$ 120,000 in 2Q17 and +R$ 132,000 in 1Q17), tax credit due to the exclusion of ICMS from the calculation basis of PIS/COFINS (-R$ 159.1 million in 4Q18) and loss forecast revision for labor contingencies (outsorced and internal) and tax contingencies (+R$ 156.5 million in 4Q18).


In 2018 Reported Operation Expenses totaled R$ 10,487, an increase of 1.9% compared to reported expenses in 2017. Disregarding non-recurring effects, Total Normalized Costs and Expenses increased 2.0% in the year, totaling R$ 10,487 million in 2018. The main effects that affected costs were (i) (-R$ 159.1 million) the gain from a positive judicial decision excluding the ICMS from the calculation basis of PIS/COFINS (Financial Statement note 9), (ii) (+R$ 157 million) loss forecast revision for for labor and tax provisions related to previous years (Financial Statements note 24) and, (iii) (+R$ 431 thousand) adjustment of sale-leaseback towers contract (Financial Statements note 16).


This performance is explained by (i) higher cost of goods sold (COGS), (ii) increase of bad debt from higher exposure to postpaid clients and (iii) expenses related to right to use the TIM trademark. Still, the performance lagged inflation in the time period (IPCA 12M; 3.75%) and influenced positively by the initiatives delivered in our Efficiency Plan.  


The Efficiency Plan reached 118% of the target for 2018, reinforcing the focus on strict costs control. In the time period, the plan's initiatives generated savings of more than R$ 340 million.


An analysis detailing the operational expenses for the year is presented below:


Normalized Personnel reached R$ 994 million in 2018, an increase of 4.0% compared to 2017 impacted by (i) inflation of the previous year, which updated the wage and benefits base; (ii) higher number of employees (+1.5% YoY); (iii) temporary effect generated by the end of contracts of executives who left the company; and (iv) re-composition of old pension plans.


Selling and Marketing Expenses increased 0.7% YoY, reaching R$ 3,518 million impacted by higher expenses (i) with postpaid and residential broadband sales, (ii) due to campaign-triggered offers during the year and (iii) related to the right to use the TIM trademark6. Such effects were partially offset by (i) efficiencies generated by process digitalization, (ii) reduction of FISTEL expenses and (iii) lower expenses with recharge commissioning.


Network and Interconnection in 2018 declined 4.3% YoY compared to 2017. This result was influenced by lower Interconnection costs, with the main improvement factors being (i) falling mobile termination rate (VU-M), (ii) lower pressure from outgoing traffic to other operators and (iii) cost reduction from content providers. These positive effects more than offset the higher costs related to network elements and infrastructure sharing and rent.


General and Administrative Expenses (G&A) ended 2018 with an increase of 5.5% compared to 2017, mainly due to higher expenses related to collection services with the start of a new contact center operation in September, one of the initiatives implemented in our action plan aiming to recover bad debt, and higher costs linked to maintenance.


Cost of Goods Sold (COGS) was R$ 884 million, an increase of 4.4% compared to 2017, accompanying the dynamics of handset revenues with an increase in the average selling price by 7.7% YoY, more than offsetting the reduction of sales volume in the period (-3.1% YoY).


Provision for Doubtful Accounts (Bad Debt) in 2018 reached R$ 530 million, an increase of 67.5% YoY, explained by the continued growth of revenues exposed to delinquency due to postpaid base growth. Even with this expansion, bad debt as a percentage of Gross Revenues remains under control at a level of 2% in the year.


Other Normalized Operating Revenues (Expenses) totaled R$ 322 million, an increase of 8.3% YoY. Despite the seasonal oscillations during the year, the participation of this line over total Normalized OPEX in 2018 was 3.1% (compared to 2.9% in 2017).


Subscriber Acquisition Costs (SAC = subsidy + commissioning + advertising expenses) totaled R$ 46.4 per gross addition in 4Q18, an increase of +17.1% YoY. The drivers remain greater commissioning expenses (higher postpaid mix in gross additions) and advertising.


Despite the increase in SAC, the SAC/ARPU ratio (indicating the payback per client) remained at a healthy level of 2.1 months in 2018.




7.3. From EBITDA to Net Income


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*EBITDA Normalized according to the items indicated in the Costs section -R$ 840,000 in 2018, of which -R$2.1 million in 4Q18, and +R$ 2.1 million in2017). Financial expenses are adjusted by monetary correction over tax credits and labor and taxes contingencies (-R$ 66 million in 4Q18).Net Income Normalized by the tax credit due to the merger of TIM Celular into TIM S.A. and other effects (-R$ 927 million in 2018, of which +R$23 million in 4Q18).


EBITDA


Normalized EBITDA totaled R$ 6.6 billion in 2018, a robust growth of 10.3% YoY. The main levers were: (i) growth of Mobile Service Revenues, (ii) growth of fixed service revenues boosted by TIM Live, and (iii) costs kept under control with the Efficiency Plan.


Normalized EBITDA Margin ended 2018 at 38.5%, 1.8 p.p. addition YoY, maintaining the growth trajectory of the past 4 years.


EBITDA exposure to VU-M fell 1 p.p, ending the year with a -0.2% exposure. This indicator's dynamics tend to be a little more volatile and more linked to off-net traffic dynamics (incoming vs. outgoing).


Depreciation and Amortization (D&A) / EBIT


D&A increased 2.8% YoY in 2018, explained mostly by growth in software investment dedicated to the digitalization process and by the 700MHz license (license starts to be amortized once the cities are activated). Normalized EBIT increased 26.0% YoY in the year, while reported EBIT grew 26.2% YoY in 2017.

Net Financial Result


Net Financial Result was negative by R$ 537 million, impacted by non-recurring effects totaling R$ 66 million.


Excluding these effects, Normalized Net Financial Result was negative by R$ 604 million, 21.2% more negative than in 2017. Such performance is explained by impacts from the implementation of the 700MHz license7 in more cities, the increase in PIS/COFINS related to the distribution of interest on capital.


Income Tax and Social Contribution


Reported Income Tax and Social Contribution were positive by R$ 658 million in 2018 affected by the non-recurring effects described previously and by the impact of the merger of TIM Celular into TIM S.A., which generated a tax credit of R$ 950 million.

 


Income Tax and Social Contribution Normalized were positive by R$ 269 million in 2018, an increase of R$ 68 million compared to 2017 with an effective rate of 14.7% compared to -14.0% in the previous year. Such result is mainly explained by the expansion of EBIT offset by the deductibility of about R$ 850 million payment of Interest on Capital approved in 2018.


Net Income


Net Income Normalized by the effects described previously totaled R$ 1.6 billion, an increase of 26.6% YoY, while Earnings per Share (EPS) was R$ 0.65 compared to R$ 0.51 in the previous year.


Net Income totaled R$ 2.6 billion, an increase of 107.0% YoY with EPS of R$ 1.06 compared to R$ 0.51 in 2017.






7.5. Cash Flow, Debt and CAPEX


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* EBITDA normalized according to the items indicated in the Costs section -R$ 840,000 in 2018, of which -R$2.1 million in 4Q18, and +R$ 2.1 million in 2017)


The Free Operating Cash Flow (FOCF), excluding the 700 MHz license, was R$ 2,943 million in the year, an increase of R$ 565 million compared to 2017, resulting from EBITDA growth and CAPEX reduction offset by lower working capital.


CAPEX


In 2018, investments retreated 4.1% YoY and totaled R$ 3,977 million, continuing to be allocated to infrastructure (more than 85%), mainly projects in transport network, IT and 4G technology through 700MHZ and the refarming of 1.8 GHz and 2.1 GHz.




DEBT AND CASH


The 2018 Gross Debt totaled R$ 3,325 million, a reduction of R$ 3,098 million YoY. The current balance includes (i) leasing recognition in the total amount of R$ 1,732 million (related to the sale of towers, the LT Amazonas project and other financial leasing operations) and (ii) the hedge position in the amount of R$ 70 million (reducing gross debt) which includes derivatives (Dollar “Call Option”). This year, the balance for the acquisition of the 700MHz license was re-classified. Its updated amount in 2018 is R$ 114 million, which the Company is challenging in court8.


TIM's debt is concentrated in long-term contracts (75% of the total), consisting mainly of BNDES financing. Approximately 16% of total debt is denominated in foreign currency (USD) and is fully hedged in local currency. The average cost of debt excluding leasing was 8.4% p.y., compared to 10.5% p.y. in 2017. During 2018, important debt pre-payments to the BNDES were made, which together with our normal amortization and debt interest payments totaled R$ 3,511 million.

 


 


In 2018, Cash and Securities totaled R$ 1,860 million, a reduction of R$ 1,866 million YoY. The main movements in 2018 that affected cash and securities are presented below:

 


 


In the year, the average financial yield was 6.5% p.y. compared to 10.2% p.y. in the same period of the previous year, following the reduction in the Selic rate.


The Net Debt/EBITDA ratio was 0.22x in 2018, down from 0.45x in 2017. In 2018, Net Debt totaled R$ 1,465 million, a R$ 1,232 million decrease compared to the same period of the previous year, when net debt was R$ 2,697 million.


8. Social Responsibility


The Company's Social and Environmental Responsibility Policies guide actions and initiatives, and are based on the UN Global Compact's principles. This is a voluntary agreement that TIM has belonged to since 2008. The 10 principles of the Global Compact organized by human rights, working conditions, the environment and the fight against corruption are utilized as guidelines for business at the Company.


In November 2018 TIM was confirmed for the 11th consecutive year in B3's Business Sustainability Index (ISE), a list with shares of companies that are highly committed to sustainability and corporate governance, continuing as the telecommunications company on the list for the most consecutive years.


The Company has a Climate Change Policy that establishes guidelines for the management of its emissions of greenhouse gases and also publishes an inventory of its greenhouse gases pursuant to GHG Protocol methodology. In 2018 for the sixth year the inventory was qualified with the gold seal.


TIM Institute


Founded in July 2013, the mission of TIM Institute (www.institutotim.org.br) is to develop resources and strategies for the democratization of science, technology and innovation. It does so through mathematics and science education projects for children and young people and the development of free technologies that contribute to the implementation of public policies.


The actions of the TIM Institute have already reached approximately 500 municipalities in all 26 states and the Federal District, benefiting more than 700,000 people including 500,000 students and 15,000 teachers.


In 2018, 200 students were selected to receive the TIM-OBMEP Institute Scholarships, offered to medalists of the Brazilian Public Mathematics Olympiad (OBMEP) who entered public universities and come from low-income families. The student aid comes from the partnership between TIM Institute and the National Pure Mathematics Institute (IMPA).


Academic Working Capital – AWC, an entrepreneurial education program that provides mentoring and financial support for college students who want to turn their Course Conclusion Work (TCC) into technology-based businesses, continued in 2018. At the end of the year, the students supported by the program presented their businesses at an Investment Fair, attended by investors and market experts.


Another action in the education field, the Busca Ativa Escolar (http://buscaativaescolar.org.br/) is a platform developed by TIM Institute in partnership with Unicef (United Nations Children's Fund), which has led over 2,000 Brazilian municipalities to solve school exclusion issued in their areas. It uses free technology to expedite the search and reintegration of children and teens currently not in school.


Scientific education also comprises one of TIM Institute's lines of action. In 2018, for the first time the TIM Institute established a partnership with Garatea-ISS, a scientific education and aerospace program for children. The aim of the project is to awaken student interest and their taste for science in a practical and amusing manner. At the end of the project, the best scientific experiments were selected and the winning entry is being readied for launch to the International Space Station (ISS).


Another unprecedented project supported by the TIM Institute in 2018 was Robolab, which offered robotics training and classes for teachers and students of public schools in the State of São Paulo. The TIM Institute offered connectivity to the schools so that the teacher training workshops and the robotics classes could take place.


Energy


In line with the principles of the Environmental Policy and Climate Change Management, TIM considers energy efficiency as one of its challenges. The expected increase in energy consumption due to the expansion of the network infrastructure is accompanied by energy efficiency actions. Projects include the modernization of lighting and air conditioning installations; temporary or permanent shutdown of idle equipment; Freecooling – a system for exchanging heat from equipment containers through the installation of cooler in shelter-type sites (cabinets) that allow the reduction of the use of energy and refrigerant gases in air-conditioning equipment; Decommissioning – turning off and removing equipment from the site in order to save energy and free up space for new projects.  


Energy consumption

2018

2017

Electricity (MWh)

1,028,3501¹

719,070

Fuels (L)

1,120,775¹

1,054,548


(¹) Data subject to change after external verification.


In addition to investing in energy efficiency, TIM has sought alternative sources of energy, aware of the potential that Brazil offers in renewable sources. In 2018, the Company continued the self-generation of renewable energy through five Hydroelectric Generating Centers (CGHs) leased at the end of 2017 that meet the energy demands of more than 1,000 sites. In addition to this initiative, we also continue to generate solar energy, with about 40 photovoltaic panels in operation in different regions of Brazil. In 2018, the renewable energy sources totaled about 26% of energy consumption at the Company. (302-4, GRI Standard).


At the end of 2018, TIM reached a total of 841 active Biosites. Biosites are structures with significant reduction in visual impact which, in addition to telecommunications transmission, add lighting and security via security cameras.


For more information, access TIM's Sustainability Report, which presents the main financial, social and environmental results along with important themes for the company's business and sustainability governance, and also our commitment to sustainable development.  


The social investment initiatives include donations, TIM Institute projects and sponsorships. In 2018 more than R$ 8 million were invested in social benefit, as detailed below:







Private Social Investment 2018 (R$'000)

Donations

73

TIM Institute Projects

3,703

Education

2,071

Investments

188

Work

600

Inclusion

190

Other

654

Community Initiatives¹

4,760

Sports sponsorpships

-

Cultural sponsorships

4,760

Other

-

Total

8,536


¹ Tax incentives are included in the total amount invested in this category and represent approximately 80% of the investment in Community Initiatives.







9. Corporate Governance


9.1. The Only Telecom Company in Novo Mercado


On August 3, 2011 TIM joined the "Novo Mercado", a segment that concentrates companies committed to the best corporate governance practices.


The migration to Novo Mercado resulted in benefits for all shareholders.  The required rules, aligned with the best corporate governance practices of markets such as the United States and Europe, promote greater liquidity and valuation of shares, allowing broader access to international markets, in addition to promoting the strengthening of the institutional image and increasing confidence in the Company.


Additionally, TIM belongs to the select group of companies that comprise the portfolios of the Corporate Governance Index (IGC), the Stock Index with Differentiated Tag Along of B3 (ITAG) and also of the Corporate Sustainability Index (ISE), made of companies committed to managing risks deriving from economic, environmental and social developments.


9.2. Corporate Governance at TIM


TIM Participações is a publicly-held Company, managed by the Board of Directors and an Executive Board and supervised by a Fiscal Council and a Statutory Audit Committee.


The duties and responsibilities of the Board of Directors, the Executive Board, the Fiscal Council and the Statutory Audit Committee are determined by Brazilian law, the Company's Bylaws, the Novo Mercado Listing Regulation, the Internal Rules of the Board of Directors, the Internal Rules of the Fiscal Council and the Internal Rules of the Statutory Audit Committee.    


As active members responsible for the community in which they operate, the Company and its managers must guide their actions by legality and ethics, based on three fundamental principles:  transparency, honesty and loyalty.

 

In conducting its business guided by good faith, in addition to ethics and loyalty, the Company seeks to: (i) act with transparency in business, (ii) promote fair competition; (iii) act with competitive excellence in the market; (iv) serve the welfare and growth of the community in which it operates; (v) enhance human resources; and (vi) promote sustainable development.


9.3. Disclosure Policy


In 2002, TIM Participações adopted a Disclosure/Negotiation Policy and Differentiation of Corporate Governance from NYSE, which the Company's management adhered to by signing the term of acceptance. As part of this policy, a code of conduct was established to be followed by all employees with access to privileged information and restrictions were imposed on negotiations with the Company's shares in certain periods.


The Company's Disclosure Policy provides the possibility of using the Portal Agência Estado, which can be accessed through the link:] http://economia.estadao.com.br/fatos-relevantes/, pursuant to CVM instruction no. 547/2014 which allowed the disclosure of material facts in free access news portals.


9.4. Board of Directors

The Board of Directors (CDA) comprises at least 5 (five) and at most 19 (nineteen) members, with a two-year tenure. Reelection is allowed. Currently, the Board of Directors comprises 9 (nine) members, of whom three (3) members are independent.  In 2018 the CDA met 14 (fourteen) times in the exercise of its functions.


All decisions taken by the Board of Directors are recorded in minutes, published and placed in the Board of Directors' minute books, archived in the Company's headquarters.


The Board meets ordinarily once a quarter and extraordinarily upon a call made by its Chairman, or by any two board Members, or by the Company's Chief Executive Officer. The Chairman of the Board may invite any member of the Executive Board, other executives of the Company and also third parties who may contribute opinions or recommendations related to the matters to be deliberated. Those invited to attend meetings of the Board shall not have right of vote.


The Board of Directors has two (2) advisory committees, the Compensation Committee and the Control and Risks Committee, and one or more members may participate in both Committees simultaneously. The Board of Directors also has an advisory and instruction agency directly linked to it, the Statutory Audit Committee.



9.5. Executive Board

The Executive Board is the representative and executive management body of the Company, comprising at least two (2) and at most twelve (12) executive officers, elected by the Board of Directors for a two-year tenure, reelection allowed. They may be dismissed by the same agency at any time. Currently, the Company's Executive Board has 6 (six) members.



9.6. Fiscal Council

The Fiscal Council (CF) is the supervisory body for the acts of the Company's management and for the information to shareholders, and it must function permanently. The Fiscal Council is composed of at least 3 (three) and at most 5 (five) effective members, all independent professionals recognized by the market, who have no other ties to the Company, each with a respective alternate, whether shareholders or not, elected by the General Meeting. Currently, the Company's Fiscal Council is composed of three (3) members. In 2018 the CF met 9 (nine) times in the exercise of its functions.


9.7. Statutory Audit Committee

The Statutory Audit Committee (CAE) is a collegiate agency of advice and instruction directly linked to the Board of Directors, comprising at least three (3) and at most five (5) members, all independent. Currently, the CAE has 3 (three) members.


The CAE aims to supervise the quality and integrity of the financial reports, adherence to legal, regulatory and statutory standards, the adequacy of processes related to risk management and the activities of both internal and independent auditors, as well as to supervise and evaluate the signing of contracts of any type between the Company or its subsidiaries, on one side, and the controlling shareholder or its associated, colligated companies, which are subject to common control or parent company control, or that otherwise constitute Company related parties, on the other side. Besides its ordinary attributions, the CAE also performs the function of the Company's Audit Committee, in accordance with the provisions of the Sarbanes Oxley Act, to which the Company is subject because it is registered in the US Securities and Exchange Commission – SEC. In 2018 the CAE met 22 (twenty two) times in the exercise of its functions.


The CAE members analyzed the Financial Statements together with the Independent Auditor's Report and the Annual Management Report for the fiscal year ended on December 31, 2018 ("Annual Financial Statements for 2018"). Considering the information provided by the Company's Executive Board and the external audit of PricewaterhouseCoopers Auditores Independentes, as well as the proposal for allocation of the results for the year 2018, the CAE assessed that this information and documents adequately reflect, in all relevant respects, the patrimonial and financial positions of the Company and its subsidiaries. For this reason, they unanimously recommend the approval of the aforementioned documents by the Company's Board of Directors for referral to the Annual General Meeting, pursuant to the Brazilian Corporate Law.


9.8. Control and Risks Committee

The Control and Risks Committee (CCR) is a collegiate advisory agency directly linked to the Board of Directors, and should consist of at least 3 (three) members and at most 5 (five) members of the Company's Board of Directors. Currently the CCR is composed by 3 (three) members, of whom 2 (two) are independent. In 2018 the CCR met 9 (nine) times in the exercise of its functions.




9.9. Compensation Committee

The Compensation Committee (CR) is a collegiate advisory agency directly linked to the Board of Directors, and must comprise 3 (three) members of the Company's Board of Directors.  Throughout 2018, the CR met 3 (three) times in the exercise of its functions.


9.10. Shareholder Structure


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The Company ended 2018 with share capital in the amount of R$ 9,913,414,421.74 represented by 2,421,032,479 common shares. TIM Brasil Serviços e Participações S.A. holds share control of TIM Participações with approximately 67% of the shares.


9.11. Corporate Reorganization


In October 2018, the Company concluded the corporate reorganization project of its subsidiaries TIM Celular and TIM S.A. (current name of Intelig Telecomunicações Ltda.) through the merger of TIM Celular by TIM S.A. The Company booked the entire deferred tax asset in the amount of R$ 952.4 million coming from the amounts it has utilization rights to as tax loss (R$ 702.6 million) and the negative base of Social Contribution over Income (R$ 249.7 million).


As previously indicated, the Reorganization aimed to seize operating and financial synergies through the implementation of a more efficient process structure, as well as accounting systems and internal controls. The ownership structure change is shown below.


 




9.12. Dividend Policy


According to the Bylaws, the Company must distribute as mandatory dividend, for each fiscal year ended on December 31, as long as there are amounts available for distribution, the amount equivalent to 25% of adjusted net income.  


It is mandatory to maintain a legal reserve, to which the Company must allocate 5% of the net income of each fiscal year until the value of this reserve is equivalent to 20% of the capital.


The distribution of annual dividends is resolved by the Annual General Meeting.


9.13. Events of the Fiscal Year and Subsequent


Dividends Payment and Interest on Capital (IOC)


In May 2018 the Company released a Material Fact informing its shareholders and the market in general about the payment of R$ 800 to R$ 900 million approximately as IOC, related to the fiscal year ending on December 31, 2018 being allocated to the minimum dividend mandatory for the fiscal year and ad referendum at the Ordinary General Meeting of 2019.


TIM made the following payments of IOC, totaling approximately R$ 850 million, within the guidance provided by the Company to the market, which account for 33.2% of the Net Income reported above.


Payment Date

Amount Paid

Per Share

01/24/2019

379,993

0.156997806

11/12/2018

240,007

0.099162742

 08/10/2018

230,000

0.095040657

  

1st Issuance of Debentures from TIM S.A.


In January 2019, through its subsidiary TIM S.A., the Company issued R$1.0 billion unsecured non-convertible Debentures, with additional personal guarantee from the Company, for public distribution with restricted efforts, as set forth in CVM Instruction No. 476. The proceeds will be used to strengthen working capital and will pay interest at 104.10% of the CDI for a period of 18 months.








MANAGEMENT REPORT AND ANALYSIS FOR 2018 RESULTS


COMMENTS ON THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2018




10. Capital Market


The common shares of TIM Participações are traded on the São Paulo Stock Exchange (B3) under the TIMP3 code and the ADRs, American Depositary Receipts, on the New York Stock Exchange (NYSE) under the TSU code.


The São Paulo Stock Exchange Index (Ibovespa) closed 2018 at 87,887 points, accumulating a 15.0% increase when compared to the previous year, and a market cap of R$ 2.8 trillion.


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The Company ended 2018 with its common shares quoted at R$ 11.70 on B3, accumulating a decrease of 10.7%, while the ADRs on NYSE reached a price of US$ 15.14, a decrease of 21.6% in the year. In terms of market cap, TIM closed the year valued at R$ 28.2 billion or US$ 7.6 billion.






 MANAGEMENT REPORT AND ANALYSIS FOR 2018 RESULTS


COMMENTS ON THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2018



Final Considerations


TIM Participações S.A., with the permanent objective of maintaining a continuous, balanced and sustainable growth, thanks its customers for their loyalty and reiterates the commitment to tirelessly seek mechanisms to return the preference through quality and a differentiated service.  Acknowledgements also extend to the commercial partners, suppliers and financial institutions, for their support and trust, and especially to the employees, without whom the objectives would not have been achieved and, finally, to the shareholders, for the support and trust in the management of the business.


The Management








TIM PARTICIPAÇÕES S.A. AND

TIM PARTICIPAÇÕES S.A. AND SUBSIDIARY


EXPLANATORY NOTES TO THE FINANCIAL STATEMENTS

As of December 31

(In thousands of Reais , except as indicated otherwise)


1. Operations


1.a Corporate Structure


TIM Participações S.A. (“TIM Participações” and/or the “Company”) is a publicly-held corporation based in the city of Rio de Janeiro, State of Rio de Janeiro, and a subsidiary of TIM Brasil Serviços e Participações S.A. (“TIM Brasil”). TIM Brasil is a subsidiary of the Telecom Italia Group and held 66.58% of the capital of TIM Participações as at December 31, 2018, (66.58% as at December 31, 2017). The main purpose of the Company and its subsidiary (the “Group”) is to control companies providing telecommunications services, including personal mobile telecom services and others, in their licensed areas. The services provided by TIM Participações’ subsidiary are regulated by the Agência Nacional de Telecomunicações (“ANATEL”).


The Company’s shares are traded on B3 (formerly BM&F/Bovespa). Additionally, TIM Participações trades its Level II American Depositary Receipts ("ADRs") on the New York Stock Exchange ("NYSE") – USA. Accordingly, the Company is subject to the rules of the Brazilian Securities Commission (Comissão de Valores Mobiliários or “CVM”) and the U.S. Securities and Exchange Commission (“SEC”). In accordance with market best practice, TIM Participações adopts the practice of simultaneously releasing its financial information in Reais in both markets, in Portuguese and English.


Corporate Reorganization


On July 25, 2017, the meeting of the Board of Directors of the Company approved the corporate restructuring of the subsidiaries TIM Celular S.A. and Intelig Telecomunicações Ltda. (“Intelig”) through the takeover of TIM Celular by Intelig. On September 6, 2017, the corporate act transforming Intelig into a closely-held joint stock company was annotated, and its corporate name was changed to TIM S.A.. On September 30, 2018, the Company’s Management had obtained from third parties all approvals and consents required to perform the said restructuring. As a result, the Company’s Management proceeded with the merger on October 31, 2018, based on the net book assets of TIM Celular, in the amount of R$17,035,254, in accordance with the valuation report issued by independent experts as at September 30, 2018. Also as a result of this corporate restructuring, the amount of R$952,368 relating to deferred income tax assets arising from tax losses and the negative base of TIM S.A. were recognized on September 30, 2018 (Note 10).



T he changes in TIM Celular’s equity between the date of the repor t and the merger were transferred, absorbed and incorporated into the operating income of TIM S.A., as set forth in the protocol of the merger. As a result of the merger, all TIM Celular operations were transfe rred to TIM S.A., which succeeded it in all its assets, rights and liabilities, universally and for all purposes of the law .


Direct subsidiary – TIM S.A.


TIM S.A. (current name of INTELIG TELECOMUNICAÇÕES LTDA. and successor by merger of TIM CELULAR S.A. )


The Company holds 100% of TIM S.A.’s capital. This subsidiary provides Landline Telephone Services (“STFC”) - Domestic Long-Distance and International Long-Distance Voice Services, Personal Mobile Service (“SMP”) and Multimedia Communication Services (“SCM”) in all Brazilian states and in the Federal District.



2.

Basis for preparation and disclosure of the financial statements


The individual and consolidated financial statements have been prepared in accordance with the accounting practices adopted in Brazil, including the pronouncements issued by the Accounting Pronouncements Committee (“CPC”) and the International Financial Reporting Standards (“IFRS”) issued by the International Ac counting Standards Board (“IASB”) , and provide all material information required for such financial statements, and only such statements, which is consistent with the information used by Management in the course of its duties.


The significant accounting p olicies applied to the preparation of these financial statements are described below and/or presented in the respective notes. These policies were consistently applied to the years presented, unless otherwise indicated.


a.

General preparation and disclosure criteria


The financial statements were prepared taking into account the historical cost as the base value as well as financial assets and liabilities (including derivative financial instruments) measured at fair value.


The individual and consolidated financial statements were prepared according to the accounting practices in place in Brazil issued by the CPC and according to the IFRS issued by the IASB. As the Brazilian accounting practices applicable to the individual financial statements, since 2014, do not differ from the IFRS applicable to separate financial statements, as now the IFRS permit the application of the equity method in subsidiaries, affiliates and joint ventures in separate information, they are also in accordance with the IFRS issued by the IASB. These individual financial statements are presented together with the consolidated financial statements.


Assets and liabilities are reported according to their degree of liquidity and collectability. They are reported as current when they are likely to be realized or settled over the next 12 months. Otherwise, they are recorded as non-current. The only exception to this procedure involves deferred income tax and social contribution balances, both assets and liabilities that are fully classified as long-term.


The presentation of the individual and consolidated Statement of Value Added (Demonstração do Valor Adicionado – “DVA”), is required by the Brazilian Corporate Legislation and accounting practices adopted in Brazil applicable to listed companies. The DVA was prepared according to the criteria set forth in CPC Technical Pronouncement No. 09 - “Statement of Value Added”. IFRS does not require the presentation of this statement. As a consequence, according to the IFRS, this statement is presented as supplementary information, without affecting the financial statements.


b.

Functional currency and presentation currency


The presentation currency for the financial statements is the Real (R$), which is also the functional currency for all the companies consolidated in these financial statements .


Transactions in foreign currency are recognized at the exchange rate on the date of the transaction. Monetary items in foreign currency are conv erted into Reais at the exchange rate on the date of the balance sheet published by the Central Bank of Brazil. Exchange gains and losses linked to these items are recorded in the statement of income.


c.

Segment information


Operating segments are the components of the entity that develop business activities from which revenue can be obtained and in relation to which expenses are incurred. Their operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions on the allocation of resources and to assess the performance of each segment. For a segment to exist, it must have separate financial information available.


The Company’s chief operating decision maker, responsible for allocating resources and for periodic performance evaluation, is the Executive Board. The Executive Board and the Board of Directors are jointly responsible for making strategic decisions and for managing the Group.


The Group’s strategy is to optimize the consolidated results of TIM Participações. This strategy includes optimizing the operations of each Group company, in addition to taking advantage of the synergies generated between them. Notwithstanding the various business activities, the decision makers see the Group as a single business segment and do not take into account specific strategies intended for a particular line of service. All decisions on strategic, financial, purchasing, investment and fund investment planning are made on a consolidated basis . The aim is to maximize the consolidated result obtained by exploring the SMP, STFC and SCM licenses.


d.

Consolidation procedures


Subsidiaries are all entities over which the Group holds control. The Group controls an entity when it is liable or has rights to variable returns on the basis of its involvement with the subsidiaries and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. The consolidation is discontinued from the date that the Group loses control over that entity.


The purchase accounting method is used to record the acquisition of subsidiaries by the Group. The acquisition cost is measured as the fair value of the assets offered, equity instruments (e.g. shares) issued and liabilities incurred or assumed by the acquirer at the date when control is exchanged. Identifiable assets acquired, contingencies and liabilities assumed in a business combination are initially measured at their fair value as at the acquisition date, irrespective of the proportion of any minority interest. The excess of the acquisition cost over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of net assets of the subsidiary acquired, the difference is recognized directly in the statement of income as revenue, after a review of the concepts and calculations applied.


Transactions between Group companies, as well as balances, unrealized gains and losses related to these transactions, are eliminated. The accounting policies of the subsidiary have been adjusted to ensure consistency with the accounting policies adopted by TIM Participações. The dates of the financial statements used in the consolidation are the same for all Group companies.


e. Approval of the financial statements


These financial statements were approved by the Company’s Board of Directors on February 19, 2019 .


f. New standards, amendments and interpretations of standards


I) Among the new standards and/or interpretations that became effective as of January 1, 2018 issued by the CPC and the IASB, the following standards and/or interpretations had a material impact on the Company’s financial stat ements :


IFRS 9/CPC 48 – “Financial instruments”


On December 22, 2016, the CVM approved accounting and technical pronouncement CPC 48, which is equivalent to IFRS 9. The Company opted for the retrospective adoption of this standard, with the cumulative effect of the initial application being recognized o n the date of this initial application, that is, January 1, 2018, with the cumulative effect on the date of the initial application of the standard being recognized as an adjustment to the initial balance of the revenue reserve in shareholders’ equity.


Th is standard is applicable to financial assets and liabilities, and covers issues relating to the classification, measurement, impairment and derecognition of financial assets and liabilities, as well as hedge qualification and accounting criteria.


This st andard requires that entities classify their financial assets as measured at amortized cost, at fair value through other comprehensive income, or at fair value through profit or loss, based on the assessment of the following assumptions:


(i)

The business mode l of the entity regarding the management of financial assets; and

(ii)

The characteristics of the contractual cash flow of the financial asset.


Regarding the classification of financial liabilities, this standard broadly maintains the requirements set forth in IAS 39/CPC 39, according to which entities must classify most financial liabilities as measured subsequently at amortized cost, except for derivative financial instruments, financial guarantee agreements and commitments to grant loans at interest rates that are lower than those used in the market, among others. There was no material impact on the classification of financial assets and liabili ties of the Company due to the adoption of the new standard. Complete information based on the nature of each financial asset and liability, as provided for in this new standard, is disclosed in Note 37 .


Regarding impairment, the new standard establishes the recognition of the provision for expected credit losses, according to which the entities must recognize a provision for expected losses in financial assets measured at amortized cost. The impact of the adoption of the new model for calculating the impa irment of financial assets resulted in an increase of approximately R$130 million in the provision for doubtful accounts as at January 1, 2018, recorded to the "profit reserve", as presented in the table below.


IFRS 15/CPC 47 – “Revenue from c ontracts with c ustomers”


The CVM resolved to approve technical accounting pronouncement CPC 47, which is equivalent to IFRS 15, as of December 22, 2016. The Company adopted IFRS15 (CPC47) retrospectively, with the cumulativ e effects of the initial application being recogni