Telecom Argentina SA (TEO) 2002 Q3 法說會逐字稿

Good day and welcome to the Telecom Argentina conference call. Today's call is being recorded. With us today is the CEO, Mr. Carlos Felices; the Finance Director, Ms. Elvira Lazzati; and the Manager IR Division, Mr. Pedro Insussarry. At this time I will turn the call over to Mr. Carlos Felices. Please go ahead, sir.

Good morning, ladies and gentlemen, this is Carlos Felices speaking. I would like to thank you for participating in this conference call. As it was mentioned I have today with me Elvira Lazzati, Finance Director and Pedro Insussarry, Manager of the Investor Relations division.

Before passing the call to Elvira and Pedro, what I would like to express that the results that we reported last Friday show in one side the effects of the difficult context in which the company is operating today. But I hope you will be able to see that on the other hand we are making significant efforts in order to tackle this difficult situation. When I talk about efforts I refer to actions, aggressive actions, that we are taking in order to reduce our operating expenses, reduce our capital expenditures and increase the efficiency of our operations.

With this, I understand that we are managing with the maximum conviction and focus things that are at our discretion in order to offset part of the problems generated by the [inaudible] and the devaluation and inflation in Argentina. I think that there are other aspects that are very important for shareholders or analysts to know, and that in this quarter we initiated conversations with the main financial creditors regarding the establishment of framework for the re-negotiation of the financial debt of the company. This is a process that will take a period of time, and the intention is to continue with the conversations and try to hold other informative meetings with bondholders in order to update them about the development of the process.

Another aspect that we are working on is the question of the tariff. We continue our efforts to be in contact with the Argentine Government in order to obtain some relief to our work tariffs. We think we will get something. It's very difficult to be precise about what we will get, but as you already know there are conversations with the government and with the IMF that indicates that tariffs should be increased.

We are aware that these are very challenging times for Argentina and for the companies and that we have had difficult times too. But the group of professionals that are conducting this company are trying to make efforts in our focus in making the company to a safe [corridor].

I would like to pass the call to Elvira and Pedro, and then if you have any questions I will be delighted to answer at the moment of question and answer. Thank you for your attention. Elvira.

As usual we would like to remind you that for all those who have not received our press release and nor our presentation, you can call [inaudible], or our office or even download them from our web site at www.telecom.com.ar. We remind you that this conference call will be replayed until November 18, 2002.

Moving on with the conference call. Pedro will now make a 15 minute speech, where he will go through the presentation that we have sent to you this Friday, where we explain the most significant variations of the financial and operational data for the third quarter of fiscal year 2002, ended September 30. Let me turn the call to Pedro.

Thank you. Before we continue we would like to clarify that during the conference call and Q&A session we may produce certain forward-looking statements about Telecom's future performance, plans, strategies and targets. 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 Public Emergency Law and complimentary regulation, the effects of ongoing industry and economic deregulation, possible changes in the demand for Telecom products and services, and the effects of more general factors such as changes in general market economic conditions and legislation or regulation. Our press release dated November 8, 2002, a copy of which was included in our Form 6-K report furnished to the SEC, describes certain factors that may affect any forward-looking statements that we may produce during this session. Furthermore, we urge the audience of this conference call to read the disclaimer clause contained in slide 16 of the presentation.

Following, we would like to briefly detail the issues that have affected the environment in which Telecom operates, as seen in slide one of the presentation. During the quarter the Argentine economy has shown a stable trend in its main indicators. Despite this trend, after significant modifications to monetary, foreign exchange and regulatory matters implemented by the President of [inaudible] Administration, no significant positive signs in economy were evident. The US dollar to Peso foreign exchange rate remained close to the level of 3.5 Pesos. The indicators of economic and industrial activity seem to have stabilized, and the financial system continues at the strength still pending the significant restructuring. Furthermore, on the political front, uncertainties regarding the elections in March 2003 have emerged.

In slides two and three of the presentation we are making an overview of some of the issues related to the corporate and then review situation. As Carlos Felices has just mentioned, in regard to the debt restructuring process, the main issue related to this point is that the company has initiated conversations with its main financial creditors. Talks with the Federal Government continued in order to resolve the issue of the tariff structure, but the definition of the situation is not close. At this time, after calling for public hearings with the proposal that the emergency rate increases submitted by the company was going to be discussed, court actions have been filed, and the process was interrupted. We continue working with the government in order to find a final solution to the situation.

Going onto slide three of the presentation, as from the last quarter, the company's resulting financial statement in constant Pesos, nevertheless, in the press release and in the presentation delivered to you, we have included information expressed in current Pesos or non-adjusted figures.

In slide four we have summarized the main actions that the company has taken to reduce operating expenses in view of the difficult context in which it operates. Reductions in labor costs were achieved through more flexible conditions of the unionized employees, and reductions in salaries and non-salaries concepts for non-unionized employees. Decreases in commercial costs were achieved through a comprehensive commercial channel, which in definition, by eliminating subsidies on customer equipment, by reducing commission paid to vendors, and by lowering advertising and promotional expenses. Moreover, reduced allowances for doubtful accounts were obtained not only on account of a better collection, but also because of proactive actions taken by the company. Finally, other operating expenses were lowered mainly through associated functions, fraternization of buildings, and reduced maintenance expenses.

Passing onto slide five, we can see the main variations of financial figures for the nine-month period of fiscal year 2002, ended September 30, as compared to the same period of fiscal year 2001. The net loss of 4.1b Pesos reported was mainly due to the foreign exchange losses arising from the devaluation of the Argentine Peso. We can see that a reduction in non-adjusted net revenues of 4% was registered mainly driven by the reduction in fixed line and telephone directories revenues, and this was partially compensated by the increase in data submission, cellular and Internet businesses.

The reduction in almost all revenue lines related to the fixed line business was a result of lower traffic, lower license service, lower penetration of services produced by the duration of macroeconomic conditions of the country. This reduction is even more evident when the inflation adjustment is applied. In this sense, prices of fixed line service have grown at a much lower rate than inflation, mainly due to the 'pesification' and freeze of tariffs enforced by the government in January. The telephone directory publishing revenues decreased due to the postponement in publishing of Publicom's most important directories. With respect to cellular, data submission and Internet activities, slight increases were evidenced mainly due to higher rates resulting from price increases implemented in non-regulated services.

Operating costs were reduced mainly due to the cost control plan implemented by the company. Here again we can see that this reduction is even more evident than with the application of inflationary adjustments. We can point out that despite the difficult situation Telecom was able to increase its EBITDA by 10%, to 1.1b current Pesos, and expand its margins from 42% to 49%. Furthermore, the increase in depreciation was a consequence of the effect of incorporation of the foreign exchange differences related to the purchase of fixed assets.

In slide six we can see that revenues in current Pesos for the third quarter of the present fiscal year have remained stable. Meanwhile, on the cost side, the actions taken by the company resulted in a reduction of 11% in operating expenses denominated in current Pesos. Additionally, we can observe that the expansion in EBITDA and EBITDA margins is even more evident, reaching 50% for the third quarter of the present fiscal year.

In slide seven we're showing the evolution of the EBITDA in current and adjusted Pesos for the nine-month period. The company was able to offset the reduction in non-adjusted revenues by a significant reduction in operating expenses that altogether resulted in the expansion of EBITDA of 10% or 100m Pesos against which 1.1b current Pesos. We can see that the EBITDA in constant Pesos has fallen by 34%, mainly due to the effect of the inflation adjustment on figures corresponding to fiscal year 2001.

When we describe the main variables of the different businesses of the Telecom Group, in slide eight, we can observe that the lines and service continue to decrease when compared to the previous quarter and to the previous year. This is mainly due to significant lower levels of growth additions, and a higher level of disconnections. As we have mentioned before, the company has increased its connection and reconnection fees and is being very strict in the terms of disconnection process. Despite this evolution, we can note a certain stabilization trend is being evidenced and could result in a balanced evolution for the rest of the year.

Furthermore, as of September 2002, the penetration of fixed, prepaid and restricted usage lines amounted to 535,700 lines, which represents 15% of total amount of lines in service. In terms of rates, the company has reduced discounts in certain long distance pricing plans and reformulated offers, and consequently the average ILD and DLD in current Pesos has increased.

In slide nine, we can see that total traffic is approximately 9% lower as compared to September 2001 quarter, and approximately 3% higher as compared to the June 2002 quarter. This reduction in traffic is mainly the result of the effects of the macroeconomic context upon consumption patterns and the lower number of lines in service.

Furthermore, the average revenue per fixed line customer increased in current Pesos by approximately 4% when compared to the previous quarter. This is mainly due to the increase in long distance rates, partially offset by the reduction in traffic mentioned before.

We can see on slide 10 the evolution of cellular subscribers. Cellular customers of Telecom Personal in Argentina decreased by 2% year-on-year but increased by 2% compared to June 2002. This increase was achieved despite the difficult conditions prevailing in the cellular market. The number of additions increased by 29% compared with June 2002 quarter. This is mainly due to the growth of prepaid services. Additionally, the migration of customers from postpaid into prepaid modality continues at a steady pace.

In slide 11 we can see that prepaid and postpaid RPOs expressed in current Pesos, continued with the upward trend experienced since March 2002 quarter. This was mainly due to the gradual increase in the rates of Telecom Personal. These increases were applied to airtime rates, and in the case of contract customers, monthly fees, a lower discount and value added services.

Moving to slide 12. During the September 2002 quarter the Internet business registered a slight decrease in dialup customers, although such increase is much lower than that evident in the previous quarter after the clean up process in the customer base ended. Additionally, ADSL high-speed access connections increased by approximately 3,000 during the quarter and reached approximately 28,000 connections by the end of September 2002. In terms of revenues generated by the Internet business, the increase in ADSL fees and traffic resulted in an increase of 33% in current Pesos, when comparing September 2002 quarter with the similar period of fiscal year 2001.

In slide 13, following our previous comments, we can see that Telecom has continued to focus strongly on cost reduction and efficiency gains. This decrease in lever expense is evident, since the last year continued during September 2002 quarter. Headcount was reduced by 503 employees since September 2001, mainly in the cellular and Internet businesses. This occurred despite having in-sourced certain functions within the company. Additionally, labor expenses decreased by approximately 8% in current Pesos as from September 2001 quarter. This decrease can be largely attributed to the reduction of salaries of unionized and non-unionized employees, and were partially compensated by the compulsory increase in wages of unionized employees enforced by the government.

Regarding other costs, as seen in slide 14, allowances for doubtful accounts has decreased significantly in nominal values and as a percentage of revenues since December 2001. The main reasons for this are the better collections, but also due to the proactive actions taken in order to reduce potential non-performing customers. Moreover, advertising costs were also part of the cost reduction actions implemented by the company and have decreased in current Pesos by approximately 76% as compared to September 2001 quarter.

Finally, moving to slide 13, we can see that the Telecom Group has trimmed down its capital expenditures to minimum expression, investing 150m Pesos during the nine-month period of fiscal year 2002. This CAPEX is mainly related to the maintenance of the network and to commitments undertaken during the previous year.

And having said that, I would like to open it up to questions.

Thank you, sir. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the '' key followed by the digit '1' on your touch-tone telephone. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we will take as many questions as time permits. Once again, please press ' 1' on your touch-tone telephone to ask a question. We will pause for just a moment to give everyone an opportunity to signal for questions.

Everyone, it seems our speaker line has disconnected. Everyone please remain on line and we will have them connected shortly.

Alright everyone we do have the speakers reconnected now. We will take our first question from Evan [Kristanspevic](pf) with Elliott Associates.

Good morning or good afternoon, I have a couple of questions related to your debt balance. If you could explain to us why the total figure for the debt balance at the end of September is actually lower than the figure as of June 30? And then also, where are you showing the accrued interest expense that you have deferred on payment on your debt balances?

The main reason why the debt balance is lower than what you've seen in the June quarter is mainly because as it's denominated in Pesos - our financial statements are denominated in Pesos - and there has been an appreciation of the Peso from September to December, that's the main reason why there is a reduction in the balance in Pesos.

On your second question, the accrued unpaid interest is included as loans in the current liabilities.

So the total debt balance actually includes your accrued interest that was not paid, as of September 30?

Exactly.

And can you tell us what is the line item called 'financial and holding results' that showed a positive 1.1b dollar Pesos for the third quarter?

That's mainly due to the inflation adjustments, and also to the appreciation of the Peso, the affect of the appreciation of the Peso.

Finally, the $20m in Pesos that you spent in third quarter on CAPEX, is that a sustainable type of level going forward, or are we likely to see a higher capital expenditure number in the future?

The level is in line with our forecast. We estimated something like 180m Pesos for the whole year, and the year-to-date expense is around 150m Pesos. It means that we are in line with what we projected.

I understand that. I guess my question is really more the long term. Is this the sustainable type capital expenditure level for the type of business and the size of business that you have or are we likely to see at some point a deterioration in infrastructure because of such a low maintenance CAPEX number that you guys are putting into the business at this point?

No the idea is that probably we have the concern of not deteriorating the service, but the levels we are projecting, we think that service is not going to be deteriorated.

Thank you.

You are welcome.

And we will take our next question from Robert [Madicar](pf), Credit Suisse First Boston.

Good morning, good afternoon Peter. I got a couple of questions for you again on your debt. Can you tell me the amount in that line item that is actually surpassed through interest?

Hold on a second. In Pesos approximately -- only for bond it's approximately 300m Pesos, and with the rest of the figures well I'll have to get back to you.

That's alright. Has there been any change in your debt in terms of if it's at the Telecom Personal or Nucleo level versus the last quarter?

No, what are you referring to specifically?

I think last quarter you had the debt at the holding company level and the debt at the Telecom Personal level, it was around $675m, is that still about the same?

Yes, there hasn't been any change in the debt, except for what I've mentioned regarding the foreign exchange rates.

And then the second point, of your cash balance, how much is that at the Personal level?

Approximately 150m Pesos in cash and equivalents.

Okay, great. And two more questions if you don't mind. What percentage of your collections -- have you seen a difference in the trend of collections in currencies or [script] other than Pesos?

It's pretty much similar to what we've seen in the June quarter. In the nine-month period approximately 19% is in provincial bonds for the currency bonds.

And monetizing them, what's the general haircut you have to take to monetize those?

It depends on the bond that we're talking about. That could go from 15% to zero.

And then it appears as if you paid a lot in taxes in the third quarter, 400m Pesos, is that right?

No, it's basically we're applying the deferred tax methods. So that's why you see we've had a total result in the quarter, that's why under deferred tax method you take a liability.

Okay, so basically no material cash taxes paid in the quarter?

No. In terms -- No. In terms of income tax, that's zero.

And then my last question is you talked a bit about having informative sessions for bondholders for some of the smaller creditors, will you send out general invitations or how do smaller creditors find out about these sessions?

Yes, we will send invitations through the trustee and we will also try to contact the beneficiaries. But the important issue there is that only the bondholders will be admitted to the sessions, the bondholders of the creditors.

Yup, okay great. Thank you very much for hosting the call.

Thank you.

Once again, that is ' 1' for questions. We will move along to Patrick Grenham with Salomon Smith Barney

Good morning. I have a couple of questions. You mentioned the possibility of a tariff review, and you also mentioned the interest cost and the changes you've had in the debt. Do you have any idea of how long the restructuring is going to take and how long is this tariff review process going to take? And when could we see some idea of some clarity on either of those issues?

Okay, regarding the debt restructuring it's difficult to predict at this time. How long the process is going to take? Our expectation is try to do as soon as we can, but as you will imagine it is a difficult process. But our objective is to do it as soon as we can again.

Regarding the tariff question, it's quite difficult to answer. What we expect is that the government -- well we have a question to the government to say is that they give us a sort of way or line where we will be able to project what kind of adjustments we are going to have. We will not like to see only one adjustment and finish the question. What we would like is an adjustment but the first in a line of adjustments that will put tariffs in certain levels of other countries in the region, more compatible with other countries in the region.

Do you think that by the end of the year we will see at least a first restructuring proposal that will be made public?

A further restructuring proposal before the end of the year? No I don't think so.

Okay. Alright, thank you.

And we do have a follow up question from Evan Kristanspevic of Elliott Associates.

I was wondering if the accrued interest, that you include in your total debt balances includes a penalty interest on bonds and bank debts if you're in default, or just regular interest expense?

We are accruing at contractual rates.

And what are the penalty interests under your indentures and bank agreements that you should be accruing at since you're in default?

We're not incorporating that as a disclosure at this time.

No I understand that, I guess I'm asking, what is the delta, the difference between what you're accruing at and what is the contractual commitment under default rates to be paying to your creditors?

It's different from contract to contract. It depends on what instruments you're talking about.

And I think you mentioned somewhere in the press release that you were looking to increase the number of ADR's on your stock exchange, is that correct? Can you walk us through exactly what you mean by that? Are we looking to have an increased float in ADR's versus the local shares, or actually an absolute number of shares increase?

Well what we have included in the press release was basically that the New York Stock Exchange notified us that at a certain time we didn't comply with the criteria for the minimum price, and the Board of Directors decided to take the resolution of this issue to solve the minimum price criteria to the shareholders meeting that will take place in April. And one of the actions that we may take is to increase the number of shares that each ADR represents. Currently it's five, and we may increase it depending on what the situation of the minimum price that we have at the time.

So essentially sort of like a reverse stocks but between ADR's and the locals?

It's basically you're going to have an exchange of those ADR's if the shareholders approve any ADR ratio change. You'll have an exchange of the current ADR's representing five, but the new ones depending on what amount of shares they represent.

Thank you very much.

You are welcome.

And there are no further questions at this time, I'd like to turn the conference back over to you Mr. Felices for any additional closing remarks.

Okay. What I would like is to thank you for your participation and repeat again our commitment to continue making efforts in variables that we can control in order to improve the results of the company. Thank you very much and good afternoon, or good morning to everybody.

We thank you. Once again that does conclude today's teleconference. We appreciate your participation. You may now disconnect at this time.