America Movil SAB de CV (AMX) 2003 Q3 法說會逐字稿

Good morning. My name is Cheryl and I will be your conference facilitator today. At this time, I would like to welcome everyone to the América Móvil's third quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press '' then the number '1' on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you Mr. Campbell. You may begin your conference.

Thank you, Cheryl. Good morning and good afternoon. My name is Andy Campbell. I am the Latin America Telecom Analyst for Credit Suisse First Boston. It is our pleasure today to be hosting América Móvil's third quarter conference call, and I'd like to hand it over to Carlos Garcia Moreno, the Company's Chief Financial Officer, to discuss the results. Carlos.

Hello everyone. Good morning. First, I'd like to thank you Andy and Credit Suisse for agreeing to host this call today.

Well, as some of you may already have seen, América Móvil had a good third quarter this year. We saw good revenue growth across the board. Each one of the subsidiaries saw their total revenues and their service revenues increase in both their local currency and in dollar terms.

We saw everyone prepared for the [indiscernible] operations, which I will get to in a moment. Improving the EBITDA also on a quarterly basis, both in local currency and in dollar terms.

We saw a very significant increase in some margins. I would begin by mentioning TracFone (ph.), which managed to increase by 4 percentage points its EBITDA margin to 10.6% which has been the highest to date, in spite of it having grown by nearly 150,000 subscribers, which was 6% of the subscriber base in the quarter.

Mexico has already reached 44.2% EBITDA margin. Again, it has brought an increase of nearly 1% basis point in the quarter, and in the state of very good growth of subscribers. We managed to grow by 818,000 subscribers, the operations in Mexico, which compared to 564,000 in the second quarter, and 650,000 in the first quarter.

This increase, indeed, in the EBITDA margin in Mexico, was very much supported by the increase in revenue that I have mentioned before, in local currencies concerning [indiscernible] ahead of these revenues by 4.6% quarter on quarter. And it's [grown] already by 6.2%. And this increase in revenues potentially is supported by regional increases in traffic as can be seen by the increases in the MOU.

These are some of the [indiscernible] have already pointed, that more people are using their phones more actively. People believe that they are getting a better deal with the combination of tariffs that become available today, and they've been using it more actively. And, at the same time, this also reflects the fact that the subscribers growth continues. And as you take on regional subscribers they tend to increase their traffic per subscriber all the time. That's something that we have been seeing for [indiscernible].

The Cable Brazil is the exception in terms of EBITDA margins. You will see a reduction of nearly 5 points, and this is essential because of several explanations.

The first one has to go simply with subscriber growth also in this quarter which was higher than we were expecting. Brazil's subscriber base increased by 300 (ph.) and nearly 6,000 subscribers, which was nearly 6% increased quarter on quarter. So obviously this has an impact in EBITDA margins. But there's just a couple of things that are also very, very significant.

One is that we had a launching of the nationwide brand, the new nationwide brand that we [indiscernible], which is Claro. The brand Claro was announced at the beginning of August and we have had some important advertisement since then. And this increase in advertisement has taken place not only in the regions we have had the operations before [indiscernible] also has been the case in those areas that we are developing with a view to launching a new operation -- a new green field operation. And I'm specifically talking about the metropolitan area of Sao Paulo, about Bahia/Sergipe and about Paraná/Santa Catarina. So, we have been advertising in areas that were not within the sight of existing operations.

The third thing is launching, precisely, of these new green field operations. They have involved, particularly in this third quarter, new administrative expenses. We have been putting up new stores and distribution centers. We have been having to cover rental payments for the offices and for the sites where will be having some of these stores. We have had to hire some personnel and, again, we have been doing this advertisement.

Now, these expenses which are of an extraordinary nature, have been important. I think that it’s something that we need to understand for we are in Brazil. We will be launching before the end of this month -- and the end of the month is really next week -- we will be launching GSM operations. And it will be sort of like the hard launch of GSM operations in the four regions where we have been operating which is Rio,[indiscernible] in Brasilia and in the state of Sao Paolo. Close also to [indiscernible] Sao Paolo.

We will be launching these services, GSM services, in this fourth quarter of the year in all of these regions, which means that the only exceptions that we will have opportunity will be coming in Spring, in the first quarter, will be the [indiscernible] of BSE, Bahia/Sergipe and Paraná/Santa Catarina.

Okay. So, we will have substantially all of the operations covered in the last quarter of this year and the remainder will be covered in the first quarter of next year. This will make us a company with really two networks, quite [indiscernible], TENL networks and a new GSM network also in place, that is covering an area where we already represent the population of Brazil.

To the extent that we did not have the GSM available yet to [indiscernible], but we did not have all these new operations ready to be providing services. We ultimately could not be more aggressive before even in the face of stronter competition from the other operators in Brazil. We were not going to be doing advertisements in the second quarter or the first quarter, and new in the third quarter could not be integrated, to the extent that we did not have the network ready and available. But I think that that is really over, behind us. We are very much where we wanted to be.

I think that I would like to highlight that we have been able to put together the infrastructure- -create an infrastructure in Brazil in really record time. Again, to the extent that we are covering not only the regions that we were operating but also the new regions that we acquired and the regions and civilians for the company that we also acquired this year for BSE and now for [BCP] too.

On other topics of our report, I'd just like to mention that for the end of the third quarter, we have already saved a bit more than 50% of expected cap ex that we have for the year. Roughly, 55% of the cap ex for the year has already been paid in full, and finally I'd like to highlight certain extraordinary items that we have in this quarter's report.

The first one has to do with a transaction that involves more certain fiscal benefits. This transaction that will present a sale leaseback of telecommunications equipment which generated what compensated within the program that we have for this year. So this transaction, on one hand, provides us funding, which is something that we needed to raise as far part of this program of funding required to cover for the payment of BCP in Sao Paolo and CP. So, we have this transaction that services as our financing.

But, on the other hand, it has some from fiscal implications, and these fiscal implications essentially take the form in the income statement of this charge by way of deferred taxes of 861 million pesos.

But it also affects the balance sheet. It affects the balance sheet in regards to assets where there's an increase of the value remaining in the plant and in the value of the assets that were sold. It affected the debt to the extent that there's financing involved, and that's basically where we have obligated with this transaction. So, it has an impact on the income statement, it's 861m pesos of taxes, and it also has some implications in the balance sheet.

Another thing we will see, particularly in the balance sheet, has to do with accounts payable, which have increased, mostly reflecting a statement that taxes are now due in Brazil and Colombia on account of both equipment purchases and handset purchases.

Finally, we are already reflecting in the balance sheet on the returned assets the acquisition of certain notes that were owed by CTI and which we put in the context of the restructuring of CTI's debt and are now appearing here under the accounts receivable.

So, just basically in a nutshell the more important elements of this quarter's report. Again, broader revenue growth across the board, the EBITDA everywhere for Brazil, essentially the launching of the new brand and the new GSM services and what that entails in terms of extraordinary expenses. And, finally, of the extraordinary items that I mentioned, the more important of which is the cellular transactions that have [indiscernible] with some funding but has also had certain fiscal benefits.

So, I would like to leave it here and pass it back to AndyCampbell.

Good. Okay. Thanks so much, Carlos. Yes, go ahead and lead off with the first question. I'd like to just go back to the Mexican operations again, and I was wondering if you could provide some color on the ARPU improvement that we saw in the quarter? I know that there is some elasticity effect earlier in the year from lower pricing. Were there any additional changes in pricing? What were the factors that had driven the continued improvement? Do you think there's a macro component to this? Do you think there could be any additional upsides from here to the ARPUs?

Yes, Andy. Well, we have not had any changes in tariffs, in pricing this year, in this last quarter. I think what you will see is a somewhat more lively market, which means it might be a show of the economy improving somewhat. But we certainly saw a better market generally in the third quarter. And this, and the more in [indiscernible] respect but also in greater non-growth of [indiscernible] that we were able to [indiscernible] in the third quarter.

I'd say that the growth of subscribers in recent quarters, as I was explaining, to the extent that subscribers have been generating somewhat more traffic. Not immediately, but in a few months after we had been putting lines in, but it's what is really now driving the revenue growth. I think that revenue growth is now led linked to the effect of the negotiation of these prices that took place at the beginning of the year and at the end of last year. And more related to the improvement of the economy and the dynamics of the subscriber growth.

Okay, perfect. Thank you very much, Carlos. Cheryl, can you open it up for Q&A please?

At this time, I must remind everyone that if you would like ask a question, please press '' then the number '1' on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Patrick Brennan of the City Group Smith Barney.

Morning. I have a couple of questions. The first thing is, could you go through the balance sheet items again. You say you had- -you took some notes from CTI onto the balance sheet. Because it looks as if you had a very pretty impressive amount of free cash loans and still we see the net debt number hasn't dropped at all. How much of the increase -- could you explain first what the increase in other current liabilities was on the balance sheet, and does that include the notes, and how much were the notes for on the balance sheet?

The other item is subscriber numbers in Mexico. How many do you think you'd have by year end now? It looks as if you're going to beat the 2.5m estimate? And then, that'll do for now.

Only two, Patrick?

Only two.

To the first one. Yes. There's an increase in [indiscernible] CAPEX, increase that is reflected to the second quarter would have been in the neighborhood of - it would have gone up in September prices from 2.6b pesos to 3.9b pesos. And this increase mostly reflects the application of certain CTI obligations in the amount of $500m, or $505m, something like that. So, that's the main charge.

There is another one in the deferred assets. In deferred assets, you would have had an increase of roughly 2.8b, 2.7b pesos. And this essentially reflects the the remaining value of the assets that were sold. In the case of the accounts payable, there's an increase on from 12.3b pesos to about 15.2b pesos.. And substantially all of these accounts payable on account of net group and [indiscernible] acquisitions in [indiscernible].

And finally, this [indiscernible]. And then the second question was?

I'll get this?

We were in the midst of the auditing process, Patrick. So, we don't know for next year. I do not know that we are in a position of providing guidance for next year. But certainly for the year in our target was 2.5m, and I think that, as things stand today, we likely will be able to more than meet the target by the end of the year.

Are we talking 3 million additions for this year in Mexico, or could it even be higher than that?

Well, I say that we have 3 million as our target. I think it would be feasible.

Okay. Okay, great. Thanks.

Thank you.

Your next question comes from Juan Ali with Bear Sterns.

First, I have a question about the changes in accounting in Brazil. And it's my understanding, I just want confirmation, that it impacts more the revenues and not really impact EBITDA as such?

That's correct, Juan, and that's why I did not mention that when mentioning the changes in this [indiscernible].

Okay. And the second thing is, could you tell us about competitive dynamics in Mexico? Have you seen Telefonica pick up market share? Are you feeling any impact there?

I really wouldn't know. I do not know that we would have a certain equation for the third quarter, in particular, I don't think that there's been any substantial change. I think that we have been noticing throughout the year the competition essentially going for more publicity, buying some more billboards, and [various media guides]. At the same time, you now have the smaller competitors are coming together, which is starting diversification.

So, all in all, I think that we are living in an environment in which competition has been increasing throughout the year. So I won't go over it. I think it is something that we were expecting, so not something unexpected, but I do think that we are seeing more competition.

Do you think that in Q3 you benefited from Telefonica's marketing GSM marketing also?

From Telefonica's what?

Telefonica's launch of GSM in the sense that they must be marketing and advertising quite a bit for wireless phones, and you also benefited in the process?

I don't know. I think that would be speculating on my part. I do not know that you can attribute any of the growth to the advertisement of the competition.

Okay. Thank you very much.

Thank you.

Your next question comes from Israel Hernandez with Merrill Lynch.

Good morning, Carlos. Just a question on Brazil. It seems that even backing up the change to SNP, it appears that the ARPU was down in Brazil. If you could discuss that a little bit as to what is driving it? That'll be great.

Also, in terms of your margins. If you would you give us a number of EBITDA margin for Telecom Americas in the third quarter, extracting your start-up costs and launch of the Claro brand? What would your EBITDA margin then? Thank you.

Israel. To answer the first question. I think in the absence of the [indiscernible] service where we would have grown 6.5%, and the subscriber base grew something like 5%. So, from that you would expect that we would have had [indiscernible] on everything [indiscernible] in [indiscernible].

As regards the second question, I don't have the numbers right here. It's not easy here to come by them. You have to control the details in all of the companies. But you should still work on contacting [indiscernible] and he will give you those numbers.

Okay, just one more question, Carlos. In terms of the competitor environment, who are you seeing is most aggressive in the market in Brazil? And, also, what is your expectation in general terms for subscriber growth or margins for the last quarter of the year and, also, for next year, please? Thank you.

Regarding the competition in Brazil. I would think that from what I see and from what I read in documents from [indiscernible] the course, it would seem that [indiscernible] is the group e] more aggressive both in terms of publicity and in terms of the kind of packages that are being offered to the market. I understand that some of these packages have also already been withdrawn. And I'd say that basically the kind of [payable] that I have on the Brazilian market.

I think as regards to our operation, we have our hands full. At the present, accomplishing everything that I mentioned in getting the brand out there, launching the GSM services and preparing for what we expect would be a good Christmas season. We know there's a tremendous seasonality in Brazil. We think that a very significant part of the [indiscernible] of the year are really generated in the last quarter, and, in particular, in December.

So, we are optimistic that we will have a good showing now that we will have the two networks that we will be able to offer people. We will not be able to advertise aggressively because we have the footprints. We didn't have the infrastructure; the same thing that we have mentioned, by the way, in Mexico. We do not want to go out and be very aggressive offering services when you cannot really fully deliver with them in an adequate fashion.

I think that now we really are where we wanted to be in Brazil. I think that we have the services, we have product that we needed to have had a good marketing. I can tell you that all our people in Brazil are very, very excited, 1000% in this project, and I'm sure that they will be [prolific].

I would not like to go into details of expectations of subscribers, but I do think that we should make our splash in this quarter.

Okay, thank you Carlos.

Thank you.

Your next question comes from John Charles Lamardley with JP Morgan.

Good morning, Carlos. First, could you expand a little bit on this sale and leaseback cooperation? Exactly what assets did you sell? And then is this going to have an impact on your operating costs going forward? And is there any accounting adjustment we will need to make going forward? Will part of the costs be included in depreciation or financial expenses? The second question would be on your traffic, but just on this first question first.

No, one by one, John.

Yes.

Okay. [indiscernible] but completely lacking the same assets. The assets were network and buried equipment and the – we will not be mentioning about all the transactions that we do on official [basis], no? But quite a bit, let's say, from the point of view of accounting, it should be neutral as regards the [custom] line going forward. It very much involves, on the one hand, [chasing to depreciate] the assets, on the other side, we will now have to amortize. For now, the new deferred assets which involves [indiscernible] value of the equipment at [workflow], no. So, next year, you're likely will not see anything because what [indiscernible] goes off in amortization, and in terms of the bottom line, the transaction should be neutral.

And no impact will be at the EBITDA line either?

No impact in EBITDA, certainly.

Okay. Well, the second question is related to traffic trends in Mexico. Could you describe, a little bit, what's happening? Is there any change in the mix? In outgoing versus incoming, and on the outgoing side, are you seeing growing on net traffic versus the traffic going to the other cellular operators and to the fixed line system?

I think that is a very good question, John, and I will not know that many people have agreed on the targets on it yet. I think that, yes, more people are using mobile phones. There already significant [indiscernible].

Part of the expansion, in particular, we have seen is simply response, if you will, a reaction, because we're [indiscernible] of traffic to begin with. As more people make more calls, there are more people that they have to return before they are noticed. Okay? So I think that, over time, you should expect to see that the ratio of incoming to outgoing calls will be coming down. In time, it should eventually converge to what you have [Tolsted]. As you know, in the case of [Tolsted] the ratio is very much one. You have the same number as incoming as outgoing. In the case of pre-paid, it is more incoming than outgoing.

But, again, as there's more people that return the calls, the ratio will be falling and that's something we should give our attention to over time.

Okay. What about net traffic. Is that growing at the expense of your toll traffic?

What?

On networking, your subscribers calling each other, basically.

In the network traffic? I would suspect that that is the case. It is what I said before.

Okay, thank you very much.

Thank you.

Your next question comes from Charles Chichester with Cavanagh.

Hi there, it's Charles Chichester. I was just looking specifically at Brazil and wondering whether you're able to give any information on the current subscriber acquisition costs? And also how you expect them to evolve over the next few quarters?

Well, now, we look at the number of subscribers [indiscernible] there. We are in the midst of a situation that is exceptional and I don't know if you really should be ascribing [qualities] to acquisition costs.

The one-off expenses that with the launching of our new nationwide brand or with the launch of new services, I can't say that we are not today the one that is providing the greatest subsidies. I do think that the approach of the company is that we should be an option of quality to the subscribers, to the general public. And that we do not expect to be the cheapest. And that is something that, again, we do see today in the differences in the pricing of different handsets.

I think that we are in business to make money, not necessarily to make clients, no? Where it makes sense to pay a bit more for clients who we will make money we will be doing that. But I think that we do not have the objective of going out [indiscernible]. We want to do it in a profitable fashion.

Okay, thank you very much.

Thank you.

Your next question comes from Vera Rossi with Morgan Stanley.

Hi, Carlos. I have one question in Mexico and then in Brazil. In Mexico, I would like know how many subscribers are already in your GSM network, and the breakdown between contract and prepaid; the subscriber mix on the GSM network? And then I move to Brazil after this question.

It's more than you think, Vera.

It's more like, do you have more post-paid or pre-paid users on the GSM to date.

No, we're not disclosing at this stage any of the information regarding the breakdown of GSM [indiscernible] in terms of prepaid to post paid as part of the subscriber base. I just think that -- when I mentioned it too, I think that that we have more GSM subscribers than [indiscernible].

I see and do you need to acquire more spectrum on GSM at this stage as you have only 10 megahertz at 1900 band?

We think today we are in good situation. I think, in time, we will take all the action that we think appropriate to be able to provide the service. But, at first, we are comfortable with the situation.

Okay. And moving to Brazil, I have a question about BCP. What do you gain, as a partner of Telemar, on BCP?

We are not [under] [indiscernible] BCP.

No, I know, but Telemar has an option to acquire a stake on BCP. Why did you give this option to them?

Well, I think we had some conversation regarding things that we have yet to do eventually involving, among other things, commercial application, roaming agreement, and the like. And I think it was in that spirit of establishing some kind of a link, establishing some kind of a relationship, that this option came about, okay?

So, I can tell you that the agreement has anything yet in terms of more concrete, in terms of specific roaming agreement or anything like that. But I think that we have got to talk to each other and we have looked at a possibility of having a mutually advantage- -a mutually good relationship basically.

Okay. Thank you.

Thank you.

Your next question comes from Daniel Enriquez with Goldman Sachs.

Hi, Carlos. I have two questions. The first question is a clarification. When you said in your press release that the net debt should be 43b, around 43b pesos by the end of the year once the deals are completed, are you assuming that you own 100% of BCP, or only 72% of BCP?

That was assuming 100%. We not know whether Telemar would exercise the option.

Okay, okay. The other thing, just to follow up --

And we do have to pay the full amount back.

Okay. On the GSM, when you migrate clients to GSM network you avoid paying the tax you have to pay in your 800 megahertz spectrum. Could you give us an idea of how? I know you're not disclosing subscribers. Could you just give us an idea of what percentage of your revenues are coming from the GSM infrastructure at this point, and how much more space for expansion in terms of margins because of that transition you have for 2004?

It's just that we're not providing a breakdown for subscribers, we're not providing it for revenue.

Okay. Okay, thank you.

Thank you.

Your next question comes from Stefan Peters of [Athabal].

Good morning, Carlos. A question on Brazil. Do you think that the major part of special expenses for the launch of the Claro brand and SMP transition has already been done in the third quarter? Or do you think that this extra costs will continue in the next quarters, or even increase?

Hi, Stefan. No, I think that they will probably peak in the fourth quarter. And then, I think, that we should expect to see them coming down.

Thank you.

Your next question comes from Whitney Johnson of Merrill Lynch.

Hi, callers. First question is on taxes. Year-to-date, your P&L shows about 3.5b in taxes for 2003. Can you just give us an update on what kind of expectation we should have for the P&L for taxes for the full year? And is there any difference between what you're going to have on the P&L versus the actual cash taxes paid out?

Hi, Whitney. I think, in terms of the expected tax break that we would be willing to -- that we may end up paying for the year. If you look only at the cash component, it will be below 20% only.

Okay.

If you look at the [indiscernible] tax rate through September including the first tax on cash, it's closer to 5%. It's about 24% and maybe somewhat lower by the end of the year. But, on a cash rate, we expect [20].

Okay, and in terms of the P&L then, taxes should be fairly low in the fourth quarter?

I think so, yes.

Okay. Can you just give us a quick update. We didn't see it in the press release this quarter of the breakdown of cost paid versus pre-paid R2 and MRU?

We are mentioning it in the document, and I think that, to the extent that there is more information that you may need for you. And for anybody that is in this call we can deliver to you. If there are any problems, you can call me or Daniel, no?

Okay.

The information will continue to be available, I think, [if you want it].

Okay, and then just one last question. If you can just give us an update your GSM network, how many cities and the highways you expect to have covered by the end of the year?

Hold on. By the end of the year, quarter-to-quarter.

By the end of the year, it's between 400 and 450 cities. And, in addition, we have a number of highway routes that are already covered today. Some of the more important highways are [covered].

That basically, if you want some more color, I'll give it to you later.

Okay.

We are, in respect of Telecom Brazil.

Okay. Thanks, Carlos.

You are welcome.

Your next question comes from Rodriguez [Optigal] with Banco [Brazil].

Hi, Carlos. I have a couple of questions regarding Brazil. First, there has been talk in the Brazilian press about a deadline for [T&E] to decide whether it will exercise the option on BCP. I'd like to ask you, is there a deadline and, if yes, could you tell us when that is?

Yes, the option will expire this month.

At the end of this month. Okay, great. Also, could you, maybe, share with us what was your cost of equipment in Brazil this quarter?

No, I don't know, I don't have it here with me. But if you want it you can call later.

Okay, great. Just one last question; let me just clarify one thing about the re-branding in Brazil. You said that the expense of the re-branding will peak in the fourth quarter? Was that correct?

Yes, what I think is that the actual amount paid on account of publicity will peak in the further quarter, okay? For that publicity it's solely the re-branding where it's now more actively engaged in a commercial campaign in order to get it in South America, no? I think profitability will peak in the fourth quarter.

And, lastly, could you, maybe, tell us specifically how much were the expenses of re-branding, itself, in Brazil this quarter?

No, we're not going to reveal that. I can tell you that from numbers we have seen in the past, the actual amount of expenses we have had in publicity have been fairly minor compared to the absolute amount that has been spent in publicity in Brazil so far.

[indiscernible] that correct -- and if not I will give it to you later -- I believe that we have spent something like 5% of the total spending to make it in the [indiscernible] for a year. So would actually cost very little campaigning. I can also say we first practically did nothing on the publicity side and we just certainly alive in the third quarter. So, that can give you a ballpark figure, no?

Okay, thank you very much.

Thank you.

There are no further questions at this time. Mr Moreno, are there any closing remarks?

No, I would just like to thank everybody for attending the call. And, again, we will be available, both [indiscernible] and I, for more consultation if needed for anything. Thank you.

Thank you, Andy.

Yes, Carlos. On behalf of CSFB, thanks to you and to América Móvil for letting us host the call today, and thanks everybody for participating.

This concludes today's América Móvil third quarter results conference call. You may now disconnect.