Telecom Argentina SA (TEO) 2021 Q2 法說會逐字稿

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating on this conference call. The participants of today's conference call are: Roberto Nóbile, Chief Executive Officer; Gabriel Blasi, Chief Financial Officer; Fernando Balmaceda, Director of Investor Relations; and myself, Lucas Berges, also part of the Investor Relations team.

The purpose of this call is to share with you the results of the 6-month period and second quarter of fiscal year 2021 ended on June 30, 2021. If you have not received our press release or presentation, you can call our Investor Relations office to request the documents or download them from the Investor Relations section of our website, located at www.telecom.com.ar. This conference call and presentation is being broadcasted and can also be replayed through our investor website at institucional.telecom.com.ar/inversores.

I would like to go over some safe harbor information and other details of the call. We would like to clarify that during the conference call and Q&A session, we could mention certain forward-looking statements about Telecom's future performance, plans, strategies and objectives. Such statements are subject to uncertainties that could cause Telecom's actual results and operations to differ materially. Such uncertainties include, but are not limited to, the effects of ongoing industry and economic regulations, possible changes in the demand for Telecom's products and services, the effects of potential changes in general market and lower economic conditions, in legislation and the impact of the outbreak of COVID-19 on the global economy and specifically on the economies of the countries in which we operate as well as on our operations and financial performance.

Our press release dated August 6, 2021, a copy of which was included in our Form 6-K and sent to the SEC, describes certain factors that may affect any forward-looking statements that can be mentioned during this call. The company has reflected the effects of the inflation adjustment adopted by Resolution 777/18 of the Comisión Nacional de Valores, which establishes that the re-expression will be applied to annual financial statements for intermediate and special periods ended as of and including December 31, 2019, accordingly, the reported figures corresponding to the first half of 2020, including the effects of the adoption of inflationary accounting in accordance with IAS 29.

In this presentation, we will also include figures in historical values, which are easier to understand. Our press release is complemented by our earnings presentation. The audience should read the disclaimer contained in Slide 1 and 2 of the presentation. The agenda for today's conference call includes our business and financial highlights, and we will end the call with a Q&A session. Now let me pass the call to Gabriel, our CFO, who will start with the presentation.

Thank you, Lucas. Good morning, and welcome to everyone. Moving to Slide 3. We summarize our main highlights as of the first half of 2021: The full repayment of our 2021 144A bond in June; our firm intention to increase our CapEx program for this year; our commitment to ESG, demonstrated by our first integrated report; our consistent reaction on operating expenses; our ability to increase prices since January 2021 up to date. Our increase in prices has been up 30% when the local inflation is running at a rate of 3.5% per month; our strong reduction in bad debt and normalization of our collection periods or steady performance both in Paraguay and Uruguay; our strategy to develop new businesses at our new fintech; the confirmation that we have been working on the right path regarding the refinancing of our financial debt.

It is important to mention that the company was served with notice of the resolution dated in June 18, 2021, rendered by the Chamber II of the Federal Court of Appeals of Administrative Litigation Matters in the proceedings, Telecom Argentina Sociedad Anónima A-EN ENACOM and others reference preliminary injunction (Autonomous) (Docket No. 12,881/2020) whereby the court decided by majority to reject the extraordinary appeals filed by the national state and the ENACOM against the decision of the court that accepted the company's appeal without the first instance court's decision and granting the preliminary injunction requested by Telecom Argentina ordering the suspension of the effects of section 1, 2, 3, 4, 5 and 6 of Decree 690/20 and of ENACOM resolutions No. 1466/2020, 1467/2020 and 204/21 and their nonapplicability to the company.

Moving to Slide 4 shows the company figures for the first half of 2021. During the first 6 months of the year, Telecom's revenue totaled $1,881 million. Revenues measured in constant pesos decreased 8% year-to-year. EBITDA totaled $640 million. Our EBITDA margin was 34%.

Telecom's mobile subscribers in Argentina amounting to 19.3 million, increasing more than 450,000 total clients when compared to the first half of 2020. Broadband and pay TV clients have also experienced an increase totaling 4.2 million and 3.5 million when comparing the first half of 2021 with first half of 2020. Fixed voice subscribers without considering IP telephony lines amounting 2.6 million during the first half of 2021. Our commercial strategy has allowed us to have 2 million convergent unique customers with 47% of our broadband customers having a mobile bundle.

Moving to Slide 5 shows our price adjustment during June 2021. After having our prices constant for most part of 2020 for March to December, we decided to increase prices in the 20% during the first quarter of 2021. In June, we increased our prices again in a 10%. We might continue with said price increases if the local inflation continues at current levels, I will need to take pace of that inflation.

In mobile, prices have increased 10% on average. In broadband, the prices of the services with speeds up to/equal to 25 megabytes per second, mainly Fibertel Lite, have increased in a 15%. Price of services with speeds higher than 25 megabytes per second grew by 10%. All prices of pay TV services, including the premium services just -- such as HBO and Fox as well as the football pack have increased by 10%. Prices of fixed voice basic services were increased by 10% on average.

Moving to Slide 6 shows the evolution of our products. On the mobile segment, postpaid subscribers have increased 5.6%, while prepaid subs have increased 0.2%. Our postpaid and prepaid shares are 42% and 58%. Fibertel, our customer base, increased 3.1% year-over-year, mainly growing in the AHC and FTTH segments. In pay TV, accesses have grown 1.3% year-over-year, mostly leveraged on our Flow platform.

In fixed voice, the reduction of accesses has continued, mainly in traditional fixed copper lines. On the other hand, our Fibertel IP accesses have increased by more than 350,000 lines.

In Slide 7, we show the evolution of our service revenues. Service revenues totaled ARS 167 billion, decreasing 10.8% in real terms versus first half of 2020 in a period where the annual inflation was 50.2%. Our revenue breakdown as of June 2021 is similar to our previous quarters with a slight increase in equipment sales. The breakdown is as follows: mobile revenues, 38%; broadband revenues, 21%; pay TV revenues, 20%; fixed telephony and data revenues, 14%; equipment sales revenues, 7%.

Our main trends in mobile and broadband are explained on Slide 8. We have been able to keep constant of our customer base and clients have been growing the usage of our products. Postpaid mobile and broadband are the 2 main drivers of our performance.

As of June 2021, postpaid subscribers amounted to 42% of our total customer base. The chart in the upper left shows the competitive landscape, wireless per month. Personal is in blue color, positive numbers show incoming clients and negative numbers show clients lost against the competition. Mobile Internet usage has continued increasing, reaching an average of more than 4.2 gigabytes per user per month in 2021.

In addition, there has been an important increase in broadband speeds. 63% of our total subs have speeds between 50 and 1,000 megabytes per second compared to 55% during the first half of 2020.

Slide 9 is a summary of our operations in Paraguay. Núcleo generated $103 million and $48 million in revenues in U.S. dollar terms and EBITDA, respectively, during the first half of 2021. Revenue breakdown was as follows: browsing services, 43%; voice, 16%; data, 6%; broadband, 14%; TV services, 8%; And other services approximately 13%.

As of June 30, 2021, mobile customers totaled 2.2 million. Clients of Billetera Personal, a mobile financial service that our subsidiary provides, reached more than 250,000, fixed Internet services subscribers amounted to 188,000 (sic) [168,000], in the pay TV segment, Flow customers totaled 28,000, and in Personal HD, 60,000. I will now pass the call to Fernando Balmaceda, who will go our financial performance.

Thank you so much, Gabriel. Slide 10 shows that during the first half of 2021, consolidated revenues on nominal terms grew by 32%, reaching ARS 164.8 billion. Again, when our licensing figures adjust by inflation, revenues amounted to ARS 180 billion, showing a decrease of 9% in real terms. Service revenues showed a 29% nominal increase in a context where prices were frozen from March to December of 2020.

EBITDA increased by 26% year-over-year in nominal terms, thus generating an EBITDA margin of 35.3%. EBITDA margin in real terms was 34%. The company performed well in terms of cost controls. Operating costs before G&A decreased by 5% in real terms versus the first half of 2020. As mentioned, the company has achieved an aggressive cost reduction strategy.

Slide 11 shows the company's EBITDA and the impact of the different components of revenues and costs. Operating costs were 5% lower in real terms. The company performed an efficient cost management process as almost all our cost lines experienced a decrease in real terms with the exception of handset costs, mainly due to increasing prices and higher sales.

It is important to mention that our bad debt expenses decreased by 61.3% versus the first half 2020 as a direct consequence of the several actions that management has been taking place during 2020 and 2021. Our percentage of bad debt related to total sales is very low, 1.7%, and our collections are performing normally.

Let's move to Slide 12, where we can see that the company's operating income totaled almost ARS 5.3 billion, while EBIT has decreased 76% in real terms. The EBIT decrease in constant measuring unit is explained by the increase in D&A and disposal and impairment of fixed assets, which increased almost 12% in real terms year-over-year, mainly due to D&A increase, operating margins reached 3% of consolidated revenues, while historical figures, the same margin was 21%. In the first semester of 2021, the company had a net loss of ARS 1.672 billion, mainly to tax expenses of ARS 25 billion, which was partially offset by the company's operating profit and positive net cash results.

Slide 13 shows a summary of the company's CapEx during the first half of the year, which amounted to almost ARS 33 billion or an equivalent of $344 million at the official tax rate. This amount is 50% (sic) [15%] higher when compared with the same last year's period. Our consolidated amount of CapEx amounted 13% of our total venues, which is a very important ratio as per the global industry standards. Technical CapEx was mainly composed of installation and customer premise equipment, or CPE. The balance was allocated to network and technology and to our international operations, both in Paraguay and Uruguay. During the first half of 2021, 81 new mobile sites were deployed and more than 1,000 existing sites were upgraded. The capacity of our HFC access network continues increasing, mainly through segmentation and division of variance. More than 4,000 blocks were provided with FTTH fixed access technology.

Slide 14 describes our cash flow generation during the first half of 2021 when compared with the same period of 2020. During the first half of 2021, the operating free cash flow amounted to approximately $256 million, equivalent, $133 million less than in the first half of 2020. This variation is mainly explained by the decrease in EBITDA and increase in CapEx in constant currency.

Slide 15 shows our key figures for the last 12 months as of the second quarter of 2021 in constant measuring unit. The company revenues amounted to almost ARS 361 billion, while the EBITDA amounted more than ARS 118 billion. Last 12 months EBITDA margin was 32.8%. Our gross debt amounted to ARS 240 billion as of June 30, 2021, decreasing 4.2% from December 2020. The company has been able to generate an important amount of cash and equivalents, having a net debt of ARS 189 billion. Our net debt-to-EBITDA ratio is at 1.6x.

Slide 16 shows the breakdown of our financial debt. As mentioned during the last quarters, a debt refinancing process is extremely -- has been extremely successful. During the year 2020, we refinanced $777 million of our financial debt and canceled $200 million of the same debt. Total outstanding debt as of June 2021 amount to almost $2.5 billion.

On June -- on the 15th of June 2021, we repaid the outstanding amount of our 2021 class A loans. Total consideration was $106.6 million, $103.2 million in principle and $3.4 million in interest payments. For the rest of 2021, our debt maturities are completely manageable and very low. For 2022 and 2023, our debt maturities remain within the range of $500 million and then reduced considerably until the maturity of our 2026 notes. We are already talking with banks and mutuals in the refinancing of our 2022 and '23 debt maturities.

Now I will pass the presentation to Lucas Berges who will give the final remarks.

And with this, now we are more than pleased to answer any questions you may have. However, before we start, we would like to remind you how you can address your questions during the Q&A session, which we will open immediately. (Operator Instructions)

Okay. We have the first question from Marcelo Santos from JPMorgan.

The first question is on the CapEx outlook. If it remains at $600 million for this year, or if anything has changed on that front? And the second question is if you think that in the next couple of quarters, you have the capacity to offset inflation. We see that you are increasing prices, but inflation is also coming very high. What are the -- what's the outlook like for the third, fourth quarter, or maybe next year? Should we expect Telecom to be able to offset in ARPU the inflation? That's the 2 questions.

Okay, Marcelo, thank you for your questions. Well, regarding the CapEx, as a result of the good cash generation that the company had in pesos during the first half of the year, we took the decision to increase the CapEx that primarily we established for the year, meaning that on a consolidated basis, our total CapEx, including our CapEx of our subsidiaries would be over $700 million, more in the $770 million as total.

Of course, this figure is directly related to how the devaluation pace evolves in Argentina and how we translate the pesos to final dollars. But as a final question, there is no reduction of CapEx for this year. On the contrary, we are going to invest near 20% more than what we stated at the beginning of the year.

Regarding the second part of the question about the inflation pace. It is important to address that although we can think that during this year, our inflation adjustment of prices has been able to cope with the inflation in terms of the speed of the trend, meaning of the loop, of the curves, there is a piece of inflation that was all the effect of last year freeze that we are not able to recover. When you look at all -- yet, and when you look at our total results, the company in terms of inflation is behind if you take the consideration of our total prices for -- since they emerge up to now, our total price structure regarding the inflation pace has a gap of almost 30% on an accumulated basis. Of course, in the long run, all these tend to normalize, but that the situation has pressed.

Just to add to Gabriel's This is Roberto. Hello to everyone. In addition to what Gabriel said, first of all, regarding the CapEx, we started the year with a forecast of $500 million for the total year. But remember, we tried to forecast the CapEx like in different stages. As long as the numbers were good, we granted another $100 million. And then since the numbers were still good and the cash generation was good enough and the capacity that we have to do was there, we decided to move forward and move to almost $770 million by the end of the year, including our subsidiaries.

So this is the way we have been managing our CapEx investments. And we are obviously trying to accelerate as much as we can as long as we -- as the cash flows are good enough.

On the price increases, we have already communicated to our customers and to ENACOM a 10% price increase starting from September 1. That is in addition to the 30% that we have already adjusted up to June. And we will see if that's enough for the year or not, but that will depend on the pace of the inflation rate coming from -- for the next months.

What we are seeing is a decrease in the inflation rate -- in the monthly inflation rate. So with this 10% in September, we should probably reach the end of the year as it is and keeping track of inflation -- of 2021 inflation. We're still behind with this 7 or 8 months period of 2020 that we were not able to increase prices by inflation.

Okay. We have a new question from [Nicolas Iannone] from [Balance Capital.]

Actually, it's more of an update on the legal front. I think the last time I read about the case, the government was about to true up on a per saltum. And in the press release, you said that it has not been treated yet. I just wanted to know if that refers to this per saltum? And if effectively, this would be the last stage of the case, right, if once the court rules over this per saltum, this would be over.

Thank you, Nicolas. As long as we know, the per saltum is not the right procedure for the government to appeal. They have appealed to the court, and the court has said no. So it has been rejected. So as long as we move forward, there is no new procedure from the government on our case. There could be -- remember that Telecom has been granted legal coverage. The whole industry has been granted also legal coverage against the Decree 690. And we have also other cable operators in Misiones, 2 cable operators in Córdoba, another cable operator in San Luis that were granted the same coverage and also TeleCentro and DirecTV has been granted in court, the legal coverage. So this is more like an industry thing. And we feel strong that this situation will remain.

Great. That was really clear. And just one more question on the -- on the financing side. I think Fernando commented that you were already in talks with multilateral organizations for the maturities of next year. Just wondering if -- I don't know exactly the terms or the check list of these organizations to grant new credit lines, but considering that you are upping your CapEx for this year and perhaps the next year as well, do you think you could be able to be granted new credit lines and you adjust the refinancing considering the current macro situation and the macro and FX situation, right?

Yes. Thank you for the question. Well, regarding the ability of the company to get additional financing lines, at present, we are negotiating with Sinosure, the credit agent of the Chinese government. The second tranche, remember that last year, we granted a loan of $100 million. Now we are granting a second stage of that loan just in case we need that. And it's important because as the grades of the multilateral agencies, that type of financing has somehow a short effect channel under Banco Central regulations. Also, we have granted additional financing related to Finnvera, another creditors from EXIM Bank from Canada and even from the United States. All those are financing that the company is at present discussing with different type of creditors.

On the pure financial side, we are at present -- we have for next year and the following one, we just only have $140 million of maturity, which is not related to the multilateral agents, meaning that $140 million maturing next year on the term loan is the remainder of the original $1 billion bridge that we received during the beginning of the consolidation of the 2 companies.

That transaction is the only transaction that we might think has not, under the present regulatory environment, the obligation of Banco Central to provide the dollar directly as -- is at work from a Banco Central regulation, they have when it is a multilateral agency finance. Meaning that IDB, IFC, Sinosure and that type of credits, all that have like a privilege under Banco Central international rules to be providing the dollars for payment.

So although we are almost covered in that event because $140 million is something that we can easily get in the local financing market and to get the dollars from Banco Central, we are already having conversations in different type of instruments, and we must say that the outlook is very positive. There are certain developments in the market in Latin America, like the green bonds, the other type of bonds related to multilateral agencies that post opportunities where Telecom might find additional space.

And also, it is important to address that the company has been able in the middle of last year and the quarantine to refinance $800 million. And we have just fully repaid our $100 million remaining of the $500 million of the 2021 notes. So all that consideration regarding the credit of the company, is well received among our investors.

We have just started conversations with our group of creditors with very positive outlook, where I must say that all of them are willing to support the company in a way of easing our financial maturities. I will say, which is, by the way, is not absolutely necessary. This is just a precaution that we want to take in terms of not waiting to the end because, as I mentioned, we have the ability to go directly to the original maturities. And as the biggest part of all this obligation, our preferred foreign exchange channel, we can replace the financing locally, which is, by the way, what we have been doing with the last maturity.

So I think that, that gives us a very good support and gives you a good color in terms of the future developments of our financing needs.

Please let us know if you have any further questions. Okay, we have now a new question from [Ophil Bahalden].

Just one quick question and that is related to the margin dynamics of the second quarter, the decrease in the [loss] against the first quarter mainly impacted by labor cost. So I was wondering -- what are you expecting in terms of EBITDA margins for the rest of the year? And which was the agreement with the unions in terms of salaries increases?

Okay. Yes, as you have observed -- you have observed that the -- yes, if you can mute, we are receiving some noise on the line.

As you have observed, of course, on the second quarter, the biggest impact that we have was the adjustment of salaries according to the bargaining process with the unions. That's the main reason of the inquiries.

Having said that, in general terms, our EBITDA margin is quite strong considering the general circumstance and you can probably see, with the exception of the cost that I already mentioned, the rest of the cost of the company are willing to be managed well behind inflation pace.

And the reason to that has 2 different reasons, one is that -- or 3. The first one is the level of activity that we have been, of course, when you compare to last year and the year-to-year comparison, the second quarter, we were in the worst moment of the pandemia and really that was the lowest level of activity in the country as a whole. And that is reflected in the evolution year-to-year on the second quarter.

The second aspect, which is relevant for this comparison is related to the fact that we tend to increase our activity as the general situation of the quarantine and pandemic consequences tend to get milder. As that gets better, it's easier to increase our activity. Also, as we have mentioned, we are increasing our level of activity in general. All that has implications.

But having said that, I must also say that we are receiving the benefits of the big investment that the company has been doing in the last 2 years, especially on the IT front and on the different digital platforms that we are implementing. With all that, we have certain synergies that are being included in the figures that we have been discussing as, for instance, when you look at the evolution compared to the inflation of our administration costs, they have been constantly lower than inflation and getting a very strong reduction in real terms. And that is also related because of the application of all these new platforms that simplify our processes.

So putting all this together, I will say probably the margin that we are having today, which by the way has the impact of the inflation adjustment included in it. And this is something that you must take in consideration because certain figures are adjusted automatically. And that is the part of the accounting, I will say, particularities that we have to deal with.

I will say that the general margin of the company will keep this pace, not thinking of we are having an increase by the end of the year, we have an election year. General expenditure is going to increase. We have accelerated our CapEx and increase it and all that, as I mentioned, put pressure on those margins. But we think that we are going to cope to be successful in terms of keeping the margin at a good pace from now to the end of the year.

So just to add that salaries are going to be -- to receive an impact or increase of 20% by the rest of the year just to complete the picture. And that probably is the most relevant effect that you will see on present 1/3 of the total cost.

Thank you very much for participating in our quarterly conference call. Please do not hesitate in contacting our Investor Relations department for any further inquiries you may have. Good morning to all, and have a nice day.