America Movil SAB de CV (AMX) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the America Movil first quarter conference call and webcast. My name is Stefanie, and I will be your operator for today. (Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Daniela Lecuona, Investor Relations Officer. Please proceed.

Thank you. Good morning, everyone. Thank you for joining us this morning to discuss our first quarter results. We have on the line Mr. Daniel Hajj, Chief Executive Officer; Mr. Carlos Garcia Moreno, Chief Financial Officer; Mr. Oscar Von Hauske, Chief Operating Officer; and also, Mr. Carlos Robles, Chief Financial Officer of Telmex.

Daniel?

Good morning. Welcome to America Movil first quarter of 2016 financial and operating report. Carlos is going to make a summary of the results. Carlos?

Thank you, Daniel. Good morning, everyone.

The first quarter marked the worst beginning of the year for capital markets, in general, and for emerging markets, in particular, with renewed concerns about the sustainability of growth in China impacting commodity prices across the board. Oil prices were under severe pressure, reaching in mid-February their lowest level in at least 12 years.

The Mexican peso depreciated sharply in the first two months of the quarter, dragged down by oil prices. Currency volatility in Mexico and other countries was very high throughout the quarter, making it difficult to manage the sale of dollar-based products such as handsets.

In spite of this, economic activity was rather stable throughout the region, with the major exception being Brazil.

In March, fixed line RGUs reached 81 million, up 3.8% from a year before, while wireless subscribers were down 2%, to 284 million.

During the quarter, we added 729,000 (sic - see press release, "723 thousand") postpaid subs, with Brazil and Mexico accounting for just over 200,000 postpaid net adds, each one, and Colombia 69,000. Our contract base was up 6.2% (sic - see press release, "6.1%") year on year.

Our prepaid subscriber base declined 4.1% year on year, following disconnection of 2.4 million clients in the first quarter, including 908,000 in Brazil and 700,000 in Colombia.

On the fixed line platform, fixed broadband access lines led the way, increasing 9.3% from the prior year, with both PayTV and voice accesses expanding between 1% and 2% year on year.

Our revenues totaled MXN223 billion in the first quarter, 1.4% more than the year before, with service revenues increasing 0.3% in Mexican peso terms and declining 1.1% at constant exchange rates. Fixed broadband and PayTV revenues were the main drivers of revenue growth, increasing 7.9% and 5.9% year-on-year, as mobile data revenues decelerated, particularly in Mexico and Brazil.

Mobile voice revenues were impacted by sharp reductions in interconnection rates in Peru, Colombia, Brazil, and Chile -- they averaged about 30%, [overall] -- and also by stronger competition in some markets, especially Mexico. Central America continued to outperform other regions, posting 5.9% service revenue growth at constant exchange rates, followed by the South American block.

EBITDA came in at MXN62 billion, down 9.6% from the year-earlier quarter in peso terms and 8.8% at constant exchange rates. It was equivalent to 27.7% of total revenues.

Operating profits fell 25% in peso terms, reflecting both the EBITDA reduction and a 10% increase in depreciation and amortization charges, an increase that for the most part reflected the amortization of goodwill -- basically intangible assets -- related to the acquisition of our stake in Telekom Austria.

Our comprehensive financing cost amounted to MXN21 billion, 14.5% less than the year before, with net interest payments of MXN6.9 billion. Whereas our foreign exchange losses totaled MXN1.8 billion, other financial expenses reached MXN12 billion.

We obtained a net profit of MXN4.8 billion in the quarter, equivalent to MXN0.07 per share and $0.08 per ADR.

Our net debt totaled MXN578 billion in March, down from MXN582 billion in December. It was equivalent to 2-times last-12-months EBITDA. In flow terms, our net debt was reduced by MXN14 billion, with gross debt falling by MXN23 billion.

Our capital expenditures, which included MXN3.6 billion in spectrum purchases -- most of them in Mexico -- amounted to MXN26 billion, and shareholder distributions, mostly share buybacks, to MXN2.8 billion in the quarter.

With that, I would like to give the call back to Daniel, so that we can begin the Q&A session. Thank you.

Thank you, Carlos. We can start with the Q&A.

(Operator Instructions) Daniel Federle, Credit Suisse.

My first question is related to the deceleration in the top line and EBITDA in Mexico. I'd like to understand. If you could help us to quantify how much was the impact of the calendar effect and how much is increasing competition and the more competitive or attractive plans you implemented in the quarter which was the reason for the deceleration?

And the second question is related to CapEx. I see that the CapEx in the first quarter declined 26% year over year is US dollar terms. And this is an indication of lower CapEx in this year also?

The first question, in Mexico on the EBITDA, as everybody knows we have been having new competitors since maybe one and a half, two years ago. They have been making their things, and I think fourth quarter of last year starts with big promotions. And still we have these first quarter big promotions there.

And what we deciding is to follow the competition. The competition has been strong. And I think the good news there is that when we get closer to the prices and the competition and the promotions things, our distribution network, our plans Telcel, our dealers, our customer care centers, and our capacity and quality are so good that people is reacting very good.

So, what we decide is to defend our customers, to do what we need to do in terms of pricing, and that's hitting us in the EBITDA.

Other good thing is that minutes of use are growing a lot. Data volumes are also growing a lot. And that means that people that are staying with us are using more and more the phone.

So, those are the things that are happening. I think eventually things are going to be a little bit more rational in the future. But today, the promotions that are in the market are very aggressive.

Other thing that hit us in Mexico is the Telesites. We used to have Telesites inside America Movil. Today, with the spinoff, we're paying rent there. It's more or less 1.5% to 2% of the EBITDA what we're paying in Mexico -- in Mexico, what we're paying to Telesites, percentage points. So, that's more or less what is hitting us.

We're growing good in postpaid, and the market is reacting good on the Telcel brand.

The CapEx, the second question is on the CapEx. The CapEx is -- we said that we're going to invest a little bit less than last year, and it's what you are seeing this first quarter.

Number portability, also in Mexico. Number portability decreases at the end of last quarter. It's starting to increase February and March. So, the competition is talking promotions, but the market is reacting good.

Okay. Just a quick follow-up on the first question. So, the calendar effects with the Easter holidays in March represented a very minor effect. That's correct?

No, it's not correct. Particularly in Mexico it's very strong. As you know, it's practically two, three business days that are taken off, and all the weekend there's much less usage. So, no, the calendar effects in terms of Easter holidays are very strong in several markets, but more importantly in Mexico.

And if you look at Easter holidays, they were in April last year. This year, they were in March. So, they were captured 100% in here.

I don't want to give you an estimate of exactly what's the impact, but it is a very important impact and you can see it. Historically, in our reports, when there's been a difference in terms of when the Easter holidays takes place, there's a very significant change.

But other than that, it's what Daniel said. I think that we need to look at the distribution of revenues. There's on the fixed line platform, where you don't really see the seasonal effect, you see an improvement of revenues. They have been recovering, I would say, since the middle of last year. They've been trending up, and if the trend continues they should be on a positive path year on year, probably as soon as next quarter. So, on the fixed line side, we did not see this kind of seasonal effect.

On the mobile side, you do have the seasonal effects, and as I said, I think there's a big history of evidence of when this happens how it's affecting the revenues.

But then, the other thing is what Daniel said. It is the case that we have had a lot of competition, promotions in place that began toward the end of last year that have been in place also all of the first full quarter, and they have had an impact, yes, in terms of driving MOUs up.

For instance, MOUs, Daniel was mentioning, were up. They reached, as you have seen in the report, 319 minutes. That's, I believe, the record. I don't think that we have ever had -- I think the record before was something around 250. So, we are seeing very significant increases in usage that have been driven by the promotions that we have put in place.

Richard Dineen, UBS.

Just two questions, if I may? Firstly, if you could perhaps compare and contrast your competitive strategy in Mexico and Peru mobile, given that you're facing a similar situation with new competitors in both markets? In Peru, you've been pretty aggressive with discounts and subsidies to try and defend share, which has obviously impacted the margins quite significantly over the last several quarters.

But in Mexico, I'm just wondering, does it make sense for you to defend share less aggressively, given that you have potentially a lot more value at stake there? And plus, losing share in Mexico arguably helps you in the eyes of the regulator. So, just wondering how you think about that, kind of philosophically, market share versus margin in these two markets?

And then, secondly, just if you could give us a quick update on fixed line local loop unbundling in Mexico, which seems to be the only major regulatory measure missing from that market. Just wondering what stage is that discussion at? Is it just a discussion about pricing at the moment? Or, are there other things that might need to be resolved which might take some time? I guess, anything on the kind of road map over the next few quarters would be fantastic.

There's a lot of questions. Let me start with the first. I think it's totally different what is happening on Peru than what is happening on Mexico. It's not the same market. It's different competitors.

It's different what is happening in Peru. What is hitting us a lot is the interconnection rates. The interconnection rates, they reduce a lot, and it's around 60% of the reduction is in interconnection rates. It's been high. So, that.

In Peru, still subsidies are high. I think they should be more reasonable in the future. But today, subsidies are high.

In Mexico, we have not been so aggressive in subsidies. In Mexico, we are more aggressive on rates, in promotions. And these promotions have some time. I don't know exactly what is the -- when they are going to be more reasonable, the promotions. But in terms of subsidies, we have been more careful.

We are losing a little bit of market share in Mexico on the prepaid. We are in a very good position in postpaid. In postpaid, we're maintaining or gaining a little bit market share.

So, it's totally different. So, it's different competition. Here, we have AT&T and Telefonica. In Peru, we have Entel, that is a new entrant in the market, and we have also Telefonica. So, we cannot compare different strategies, different markets. So, it's different.

The other question about the unbundling on Telmex --.

Basically, on December of last year, IFETEL issued the final conditions for their unbundling, including the tariffs. And at this moment, we are speaking with the different interested operators to be able to implement the unbundling in Mexico.

It is difficult to envision or to see what the effect of the unbundling would be. But just as we have been doing, what we are doing is we are further increasing the speeds and the quality of our products. And therefore, we think that we are in a good position to face this new competition environment.

And just to finalize on Mexico, it makes sense to --. We are losing some customers in prepaid, but the promotion was too aggressive. So, we had to do something in the market, and it's what we decide. I think long term it's good.

And as I said, eventually things are going to be more rational in terms of promotions. So, we are going to be aggressive in postpaid. And we have a very good network. We have a good quality on the network, good coverage, good distribution, customer care centers. So, it's a lot of good branding.

So, as we get closer in the promotions, people is reacting on favor on Telcel. So, that's a very good news for us.

In the other side, people is using a lot more data, a lot more minutes. And I think it's also very good for the Mexican market.

Michel Morin, Morgan Stanley.

I just wanted to see if you can elaborate a little bit more on the statement you made in your prepared remarks and also in the earnings release around the impact of the FX volatility, in terms of your ability to manage the business. Was that reflected in some of the cost pressures that we saw? Was there a material or visible impact on margins in some markets?

And then, the second thing is around your leverage. It's ticked back up to about 2-times net debt to EBITDA. And I'm wondering if you can update us a little bit on how you're thinking about your leverage levels and also whether or not you're seeing any pressure from rating agencies to bring that down a little bit faster?

As Carlos said at the beginning of the call, there was a lot of volatility during the first quarter of this year, also the fourth quarter of last year, first quarter of this year. And in terms of the operation, yes, it hit us a lot because you have to pay handsets; handsets are in dollars. You have to pay software. You have to pay -- some operating expenses are in dollar terms.

So, it's very difficult when you have a due date to pay some things and at what the rate is in, let's say, the Brazil or the peso -- the real, the peso, or the Colombian peso. So, will change you a lot.

It's difficult to budget all those things. And that's why it hits you a little bit, because let's say the dollar against the peso gets in the quarter from MXN17.20 to MXN18.90, and then goes down to MXN18 and then to MXN17.60. But in those days, you have to do some things. So, it's difficult.

And then, you have to manage that, and it's going to hit you always in your results. So, that's what is happening, and it's depending on the country hit you depending on the exchange rate and the volatility. So, there's a lot of things that are denominated in dollars, and you have to pay in dollars.

And Carlos can talk a little bit about the (multiple speakers).

The increase in the ratio, Michel, is basically the result of the decline in ARPU for the last 12 months because of the reduction that we had in this quarter.

In my prepared remarks at the beginning, I mentioned that in terms of flow we had actually reduced gross debt by MXN23.7 billion and net debt by approximately MXN1.4 billion. So, there's a lot of noise with the FX volatility, as we have pointed out. So, that probably does not allow you to see all of this -- the reduction in net debt in terms of pesos was approximately MXN4 billion, but in flow terms was approximately MXN14 billion.

So, I expect that throughout the year as we continue to reduce our debt, which is what we have said that we will be doing this year, that we will maintain the leverage ratio within the ratio that we want to keep it.

Thank you. That's very helpful. And has there been any conversations with the rating agencies? Is there any pressure as from their perspective?

We have stable ratings today by S&P and by Fitch. We have a negative outlook by Moody's that came roughly at the same time that Mexico was put on credit watch, as well. So, there could be something there.

But again, I don't think there's anything immediate. We have today the best credit ratings in the telecom sector. I can't say that in the world. I do not know about Japan. But outside of Japan, I think that we have the best credit ratings of any telecom company in the sector, and we intend to hold on to them.

Amir Rozwadowski, Barclays.

I was wondering if we could talk about the reverse side of some of the increased competition in Mexico? If we think about some of the pricing declines that have occurred from a regional perspective and some of the increased competition, do you believe this puts you in a better position to benefit from easing asymmetric regulations, going forward?

And then, a second question, with your CapEx down, which is a theme that you had mentioned in your analysts update late last year, I suspect that the expectations is improving cash flow conversion. And with that, how should we think about the priorities for cash at this level? Is it to focus on some of the debt? Is it potential increased return to shareholders? How should we think about your strategy, going forward?

On the second one, which is a little bit related to what Michel already had asked, our intention is to reduce net debt by MXN3 billion to MXN4 billion this year. That's the intention, and that means that some of the savings that we will have on the CapEx side will be utilized mostly for debt reduction.

So, that would be the priority for this year, as opposed to, say, paying an extraordinary dividend, as we did last year.

And the first question, we're in the process where IFETEL is reviewing all the asymmetric what happened the last two years. We don't know what they are going to decide.

I think, in my personal, that there's effective competition in the market. Competition means that we don't -- they should see that we are not putting prices in the market. So, when you have competition, you don't decide the prices in the market.

So, it's what is happening. It's what you could see the last eight months. There is much more aggressiveness in the market. We don't decide that. We don't decide what the market is going to do. And that means that there is effective competition in the market.

So, still we don't know what the IFETEL is going to decide, but I hope there are going to be more relaxed regulations in the future for America Movil. That does not mean that we're going to be out of being a preponderant player, but it means that there should be more relaxed regulation for Telcel and Telmex.

Thank you very much. And one follow-up, if I may? Switching gears a bit, how do you think about your opportunities for a TV license at this juncture?

In Telmex, we asked for the -- to renew the concession. And we don't know what they are going to decide. Still they are reviewing that, and let's see what does the IFETEL is going to decide that.

Andre Baggio, JPMorgan.

Two years ago, AMX tried to get out of the preponderance by trying to divest some assets. And we now see an opportunity that we have a very aggressive competitor; that is probably AT&T. But we are seeing that America Movil is trying to fight back, trying to follow the price discounts or more aggressive campaigns that we have seen from competition. So, why not simply giving up market share that would expedite America Movil getting out of the preponderance status?

It's a very complicated question because you need to defend your customers. You need to be also competitive in the market. And we don't know even if there is --. America Movil doesn't have any offer of selling customers at this time. So, there is -- at this stage, what we want to do is we want to defend our market.

And I think, as we're saying, it's very good for all the customers. So, they are consuming more data. They are consuming more minutes. And I think that's a very good [fidelization] for the customers for the future.

So, as I'm saying, we are losing market share in the prepaid business, and I think we're going to lose market share in the next years. Of course, AT&T and Telefonica are aggressive and they are going to get more customers.

But in the other side, the market in Mexico is also going to grow. Still the penetration in Mexico is low, and I think we're going to have more growth in the market in Mexico.

So, that's what we are -- the strategy for Mexican market.

And do you see any signs of change in this competitive position? Or, should we just expect the market to get more and more competitive over time?

I think we are at a very competitive pricing right now; I think much lower than in a lot of countries, than in US. We are at a much lower price than what my competitor is having in their market, in their --.

So, I don't know, and I'm not the one who is deciding at which [state] we are going to go. We're deciding to compete and that's what we are doing.

But if you are asking me is the market today? The market today is really competitive. There is a very low pricing today, much lower than what you see in the United States.

One thing, Andre, that is interesting to look at is how the structure of subscribers of America Movil in Mexico is changing. We have been losing share in prepaid. We are continuing to gain, I think, in postpaid. The quality of the subscribers is improving, overall.

I think that the quality of the network is a key element. We have seen that as we move our prices closer to the competition, without even having to match them, this immediately attracts more people back to our network. An indicator of this is that in February and March we had the highest numbers ever of porting, on the number portability.

And that is basically what we have seen already in other markets, including in Europe, that the main driver of your competitiveness vis-a-vis other operators is the quality of service. We have the best quality of service. We have the best data speeds of any network. We have the best coverage. And that's not going to change any time in the future.

So, we expect that we will be able to hold onto this competitive advantage and that that should continue to allow us to gain in the segments of the market that we are more interested in.

And in this regard, if you look at our plans for CapEx this year, it's basically, in the case of Mexico, basically meant to allow us much greater capacity, to allow us again to process much greater volumes of data, so that we can continue to service the high-volume clients the way that we want.

So, I think that's how you should look at that. We have an installed infrastructure in Mexico that is a key element of competitiveness, going forward, and we intend to maintain it and strengthen it.

Carlos Legarreta, GBM.

I notice in Brazil there's a substantial contraction in operating profitability. I was wondering if you could comment on that? Because that seems to be mostly explained by depreciation charges. That's the first question.

Let's talk a little bit about Brazil. I think in Brazil we know what's happening in the economy. It's been bad debt has increasing a little bit. We have been a little bit more careful on what we are doing there.

But all over all, we are gaining market share in most of our markets. In the PayTV, we're doing well. In the broadband, we're doing well. Also in the fixed. I think in the corporate customers we're doing well. So, we are investing, and we're preparing. When Brazil recovers, we are well prepared to take more market there.

So, that's what is happening in Brazil. It's a special condition. The economies are not doing so well. And what we want to do is to be a little cautious on what is happening. We are seeing that bad debt is increasing. A little bit of our DTH customers segments C and D are disconnecting.

So, what we want is to be more cautious on all our offers that we are giving. So, that is what is happening right now in Brazil.

But all over all, our Company has a very good strategy. We have fixed. We have mobile. We are doing also Cloud. We are doing applications. We are doing more on the Cloud business in the corporate side. So, we are well prepared in Brazil.

Thank you, Daniel. I am very aware of the integrated offering that you guys have in Brazil, but I don't think that explains the actual decrease in the operating profit. EBITDA is increasing by 1.2%, whereas operating profit is declining by more than 60% year over year. So, I don't know if there is a specific reason for that that you can (multiple speakers).

I don't know. Daniela can tell you. I don't have it why the depreciation specifically is growing in Brazil. I don't know, Oscar, if you have the number exactly. But if not, Daniela can give you exactly what's the reason, why is the reason why the depreciation is growing in Brazil a little faster.

Walter Piecyk --.

Excuse me. One question. Just to go back to the prior question, because we have now the answer. We changed the policy for depreciating the set-top boxes in Brazil. It used to be for five years. So, we moved it forward to three years, because that's more consistent with the life of that type of hardware and obviously it's more reflective of the real value of the hardware that we are buying. So, it depreciated more rapidly. That's the reason.

Thank you, Carlos.

Walter Piecyk, BTIG.

This is a question for Carlos. Carlos, the leverage, obviously because of the movement in EBITDA, is up. I see that your share repurchase is obviously a lot lower than it was back in early 2015. Just curious, just given the trajectory of EBITDA, does it make sense to perhaps suspend the share repurchase program at this time?

No, I think that we can continue with --. It obviously will depend on the price. As you know, we have not always had a linear share buyback. So, very often the share buyback plan is sensitive to the kind of prices that we see in the market.

So, I would say that, yes, we do have some amount earmarked for share buybacks this year. And in principle, we will continue with that. At what pace will depend on what prices we see in the market.

Understood. Also, Verizon was talking very positively about TracFone as a good prepaid channel for them. I know you use a number of different operators and you have the ability to shift your traffic between operators. Have you been shifting a significant amount of traffic to Verizon and away from the other US operators?

I think Verizon at this stage has a good share of our traffic and, yes, if Verizon is giving us a more competitive offer, of course we can move more traffic to Verizon. But it's going to depend on the offers that we receive, and that's what we have been doing for the last two or three years.

Verizon has been very aggressive, and that's why they have been growing with us in the last five years. So, they have a big share of our market, and I hope we have in the future very good offers from them and we can increase the market. But that's the business and that's what we're seeing there.

Depending on the offer is going to depend on with whom we can go. It's not only Verizon. It's also T-Mobile. It's also AT&T. We have business with them. And that's more or less what you have been seeing in the last three or four years.

(Operator Instructions) Gregorio Tomassi, Itau BBA.

I have actually two questions. The first one is on the local loop unbundling in Mexico. I want to go back a little bit there. I understand there are any rules that allow you not to unbundle for a certain period of time the fiber that you have deployed in some accesses, the fiber accesses that you have deployed. Is that in place? What's the time window? And basically, I think it was two years, but is that in place and have you --? And what percentage of your access network actually would fall into a category that would not be forced to be unbundled? That's the first question.

And the second question is about again the depreciation charges. Can you give us a -- refresh us a guidance in terms of percentage of revenues where should depreciation and amortization on a consolidated basis converge?

Gregorio, speaking about the local loop unbundling, yes, the measures that IFETEL established two years ago regarding the unbundling, they specified that there was a period of two years for new development of fiber. And basically, this is one of the conditions that is defined in the measures that were established on December of last year.

Regarding the number, I don't have the numbers right now. But basically, there's a portion of those that would be exempt from the unbundling at this moment for two years.

On the depreciation and amortization charges, I would expect them to be similar to what we have in this quarter. They had been always around 13% of total revenues.

I'd say that basically what is being reflected in this quarter that's a bit higher than it was before was on account of what was just discussed in Brazil, that we are accelerating the depreciation of the set-top boxes.

But on the other hand, what we are now doing which we did not have in the first quarter of last year was the amortization of goodwill intangible assets associated with our consolidation of Telekom Austria. So, that leads to this amortization that has increased the line item of depreciation and amortization charges.

So, the comparison year on year was high, because in the first quarter of last year amortization of goodwill was not taking place. But this should normalize -- for purposes of year-on-year comparisons, that should normalize next quarter.

But in terms of percentage of revenues, I think that we will expect to continue to be close to around 14% of revenues.

Thank you very much, Carlos.

Ric Prentiss, Raymond James.

A couple, if I could? One, on Telesites. You mentioned it was about 1.5% to 2% of your EBITDA in first quarter. I think it was also about 1.5% in fourth quarter. So, this really is a year-over-year difference, I guess, not a quarter-over-quarter difference for Telesites impact? Is that correct?

That's correct. And the 1.5% and 2%, it's on the Telcel results I was saying, not on the Mexican results. So, I have to check exactly what is the percentage of all the Mexican results, because I was giving you only on the wireless side. So, Daniela can give you exactly the number on the Mexico --.

And it's also year over year, not quarter over quarter, as you are saying.

Exactly. Good. Thank you. To piggyback -- and on Walt's question earlier, obviously Verizon made a nice mention of you, but the results in the US were very tough in the first quarter. Can you talk a little bit about the competitive environment in the US? Usually, first quarter is a good quarter, with the income tax season. But how do you view the competitive dynamics in the US, please?

What we're seeing in TracFone is a lot of competition in the prepaid side, and I think also the US market is really competitive.

And what's happening? We're an MVNO. So, we have to be -- as the market is changing faster their rates, then we have to negotiate new offers with our carriers. So, that's why it has been more costly for us, because there's a time where you need to give a new promotion and then you have to negotiate with all the carriers a new rate.

An that's more or less what it has been happened for the last six months, eight months. And that's really -- we are really happy. As you said, Verizon is mentioning us as our prepaid business. We have a big market, a big size of our market, with them. And we are really happy with that mention.

At this time, there are no further questions in queue. I would now like to turn the call back to Daniel Hajj for final remarks. Please proceed.

Just to thank you everybody for being in the call. Thank you. Good morning.

Goodbye. Thank you, all.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.