Telecom Argentina SA (TEO) 2003 Q1 法說會逐字稿

We welcome you to this telecom conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Chief Executive Officer, Mr. Carlos Paleez (ph).

Good morning everybody. Thank you for participating in this conference call, I am Carlos Paleez. I have Valerio Cavallo, who is our Chief Financial Officer and Comptroller of the company and Pablo Careide (ph) the Finance Director, together with Pedro Susarle (ph) the Manager of Investor Relations Division.

Before we continue with the conference call, I would like to express the results we have reported today show a net profit of approximately 900M pesos. It is important to consider that this profit is mainly due to the effect of the appreciation of the Argentine Peso. So, that financial debt is denominated in hard currency.

In spite of the tariff specifications, the company managed to increase revenues in all nonregulated business, something that has an impact in our quarterly results. The company continues to make all the efforts to review its costs and capital expenditures and has been able to significantly expand its margins and operating cash flow.

On the debt restructuring process, which is a very important process we are taking care of now, we have launched a tender offer on April 16th, and will we close the tendered offer by the end of this week. We continue negotiations with our creditors in order to arrive to a financial restructuring of the remaining portion of the debt. After this brief introduction, I would like to pass the call to the Pablo Careide and Pedro Susarle who will go into the specifics of the results that we have announced yesterday.

Thank you. As usual, we would like to remind you that for all of those who have not received our press release nor our presentation you can call our office, or even download them from our website at telecom.com. We will remind you that this conference call will be replayed until May 12th. Additionally, this conference call will be accessible through the webcast available in the investor relations section of our website.

Moving on with the conference call, 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 peso strengthened. The U.S. dollar to the peso foreign exchange rate decreased at the level of 2.98 pesos and inflation slowed rapidly with the foreign exchange [inaudible]. The indicators of economic and industrial activity are still below pre crisis levels, but showing signs of recovery. Principally, in the industrial sector due to import substitution. The financial system continues at a standstill, pending of a significant restructuring with new uncertainties after the [reorganization] of the profits declared by the Argentina Supreme Court.

Furthermore, on the political front, presidential elections held April 27th, have lead to a second round for this Sunday between the former President Carlos and the governor [inaudible].

In slide 2 of the presentation we are making an overview of some of the issues related to corporate development. As Carlos mentioned before in regard to the debt restructuring process the main issue related to this point is that the company has launched on April 16th, a cash tender offer for a portion of Telecom Argentina and Telecom [Personal] financial debt and it has announced intentions to perform partial interest payment. With respect to the tender offers the company and its subsidiary to the [compersonal] are offering to use $260m and $45m respectively in cash to retire approximately 20% of their financial debt. This will be done through a modified [batch] option. It must be noted that all [inaudible] with successful tenders will be paid at the same price and will be paid in the original currency of their debt obligation.

Furthermore, the offers are available for operators and will expire May 16th. Additionally, interest will be paid at constructive rates for the period through and including June 24, 2002 and at 30% of the constructive rates for a period of June 25, 2002, through December 31, 2002. [inaudible] At this time, I will pass the call off to Pedro who will make a 15 minute speech where we will go through the rest of the presentation where we explain the most significant variations of the financial and operational data for the first quarter of this fiscal year ending March 31st.

Following this speech we will be glad to answer any questions you might have.

Thank you. Before you continue we would like to clarify that during the conference call and Q&A session we may produce certain forward looking statements about Telecom performance, planned 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 affects of public emergency law and the complimentary regulation, the effects of ongoing industry and economic deregulation; possible changes in demand for Telecom products and services and the effects of more general factors such as changes in general market or economic conditions, legislation or regulation. Our press release dated May 9th, a copy of which will be included in a 6K form report furnished to the SEC describes certain factors that may affect any forward-looking statements that we may produce during the session. Furthermore, we urge the audience of this conference call to read the disclaimer clause contained in Slide 15 of the presentation.

Going to Slide 3, the company has accounted for the affects in the inflationary adjustments adopted by resolution 4015-02 of the Argentina CMV. However, the government through decree 664-03 stated that the regularities entities are not allowed to receive financial statements adjusted by inflation. Accordingly, the CMV through resolution 44103 decided to discontinue, as of March 1st, 2003 the inflation adjustment method stated by the Argentine accounting standards. Therefore, the financial statements as of March 31, 2003 only contemplate the inflationary adjustments as of February 28th, 2003.

In slide 4, we are presenting a summary of operational restructuring efforts the company continues to make in order to adapt its business to a new economic environment. The human resources area, after having put in place a new organizational structure, head count reductions were implemented and reductions in labor costs achieved. Expenses in advertising sales, commissions and [hatchet] subsidies have been strongly turned down. Connections have improved due to very strick connections and disconnection policies. Other efforts are focused in in-house performance and activities and the rationalization of support areas and maintenance expenses.

Finally, there has been a significant reduction in capital expenditures, focusing on investments mainly in the mainframes of the networks with a specific priority list. The reductions did not affect the level of operations in the networks, nor the quality of service of our business.

Going to Slide 5 of the presentation, we can see the main variations of the financial statement for first quarter of 2003 as compared to the same period of fiscal year 2002. The net profit of 907m pesos reported was mainly due to the foreign exchange gains arising from the appreciation of the Argentine pesos. Wee can see that an increase in non-adjusted net revenues of 14% was registered. This was mainly driven by the following factors. The Increase in revenues in cellular activities $9M pesos was mainly driven from the substantial increase in the sales derived from prepaid services and [call all] party pays.

The rise in revenues in fix lined telephony of $32M pesos was mainly due to the increase in DOD service as pricing was adjusted as we will see in following slides. Additionally, higher sales in the public telephony service were achieved mainly due to increased traffic. The interest transition revenues grew by $22M pesos as the company has adjusted pricing in this service.

Internet revenues grew by $5M pesos mainly due to the expansion of ADSL services. On the other hand, operating costs were reduced by approximately 5%, mainly due to the decrease in allowances for [inaudible] accounts and management fees together with the limitation of the cost control plan mentioned before. The decreases were partially compensated by the increase in certain costs, such as taxes, service fees, maintenance expenses and settlement charges.

As revenues have grown and costs were maintained under control, we can see that telecom has been able to increase EBITDA by 37% to $455m pesos and expanded its margin from 45% to 54%. We describe the main variables of the different businesses of the Telecom group in slide six, and we observed that the lines of service continue to increase when compared to the previous quarter and to the previous year. This is mainly due to the lower demand for new lines and higher disconnections as the company has increased connections and reconnection fees and has been very strict in terms of disconnection procedures. Furthermore, as of March 2003, the penetration of six prepaid and [inaudible] lines has amounted to 536,400 lines, which represents 15% of total amounts of lines of service. In terms of rates, the company has reduced discounts of certain domestic and international distance rates and reformulated certain pricing plans. Consequently, the average IOD and DOD prices have increased since June 2002 by approximately 43% and 29% respectively. It must be noted that [freeze of tariffs] that include DOD and IOD services continue.

In slide 7, we can see that total traffic volume is approximately 3% lower as compared to March 2002 quarter. This reduction in traffic is mainly due to a lower number of lines of service when compared to December 2002 quarter a 9% reduction in traffic is mainly due to normaly seasonality. Furthermore, the average revenue per fixed line customer decreased in current business by approximately 3% when compared to the previous quarter mainly due to normal seasonality but increase by 10% when compared to March 2002. This latter is main due to the increase in long distance rates and to the effects of the clean-up of the customer base.

In the slide 8, we can see the evolution of cellular subscribers. Cellular customers of telecom personal in Argentina increased by 6% year over year and by 2% compares to December 2002. These increases were achieved despite the tough conditions prevailing in the cellular market. Additionally, the migration of customers from post-paid into prepaid modality has continued. Currently, prepaid customers represent 81% of the customer base of telecom personal.

In Slide 9, we can see that prepaid and post-paid [articles] have expressed in current pesos experienced a mixed trend. Prepaid articles remained at the same level than the previous quarter, but increased by 50% when compared to March 2002 quarter. Post-paid articles decreased by 3% when compared to the previous quarter and increased by 44% when compare to march 2002 quarter. Blended articles remained at the same level than December 2002, but increased by 27% when compared to March 2002 quarter. The increases in the year over year comparison were mainly due to the increase in nonregulation rates of telecom personnel and high usage of prepaid cards.

Moving to Slide 10, during the March 2003 quarter the internet business has registered table trend in terms of dial-up customers. Additionally, ADSL high speed access connections increased by approximately 2000 during the quarter and reached 32,000 connections by the end of march 2003.

In slide 11 we can see the reductions in labor cost and efficiently gains. The decrease in labor expenses is evidenced since last year continued during March 2003 quarter. Head count was reduced by 1010 employees since March 2002 and 138 employees since December 2002. Labor expenses increased by approximately 3% in current pesos as from March 2002 quarter. This increase can be largely attributed to the increase of social security contributions and the increase salaries of unionized employees mandated by the government.

Regarding other operating costs, as seen in Slide 12, allowances for [doubtfull] accounts have decreased consistently in nominal values and as a percentage of revenues since December 2001. The main reason of this are better collections but also due to proactive actions taken in order to reduce potential nonperforming customers. Additionally, we must point out that the reduction of that debt was despite the collection of bonds that currently represents 15% of collections. Additionally, the stock of [provincial] bonds generated a loss of $3M pesos during the first quarter of 2003.

Commercial costs that including advertising, sales commissions, and costs of handsets have increased by 2m pesos on an annual comparison or 3m pesos as compared to December 2002 quarter. As a consequence of the increase in commissions paid for car sales and distribution, partially compensated by lower advertising expenses and handsets costs.

Finally, taxes increased by approximately 10m pesos year over year or 1m pesos in the March 2002 quarter mainly due to the increase in turnover taxes in the cellular activity. We can see in Slide 13 that the Telecom group has trimmed down its capital expenditures to its minimum expression investing 13m pesos during the first quarter fiscal year 2003. This Capex is mostly related to the maintenance of network. Here again, we want to note that the level of service, nor the quality of networks are being affected.

Following our previous comments related to cost reduction in Slide 14, we can see that the effects of the efforts of telecom has undertaken to reduce control of the cost of capital expenditures. [inaudible] minus charges for accounts have decreased by $17M pesos or 4% when compares to the first quarter of fiscal year 2002. In line with these reductions, the operating cash flow defined as EBITDA minus Capex increased by 71% to 442m pesos.

Having said that I would like to open it up to questions.

Thank you the question and answer session will be conducted electronically. If you would like to ask a question, press the star key followed by the digit one on your telephone. If you are on a speaker phone turn off the mute function to allow your signal to reach our equipment. Again, that is star 1 to ask a question and we'll pause for just a moment. Rizwan Ali with Bear Stearns has our first question.

Good morning. My question with regard to the bonds you are taking as collection instrument.

Good morning. My question was regarding the bonds that you collect as payment. When you take these bonds do you take the face value as revenue and record it as revenue or the market value of the bond and take it as revenue?

In revenues we recognize the face value and holding results we take the charge for the loss to the market price. That loss in the first quarter of 2003 represented approximately 3m pesos.

If I may, one other question. The allowances for bad debt have been going down steadily. In terms of receivables, total receivables for revenue number, has that gone up compare to what you used to have prior to devaluation?

We'll follow up with the question, Rizwan, if we may, and we will get back to you immediately, okay?

Thank you.

There are no further questions at this time. Once again if you would like to ask a question please press the star key followed by the digit one.

Juan Cruz with Miller Taback has our next question.

Good morning. You mentioned that you will probably be closing your cash tender offer this week. I wonder if you can comment on the number of participants you have so far? And when would you be starting with the {AT] solicitation?

Excuse me, before we answer the question could you state your name and affiliation?

Yes, my name is Juan Cruz (ph) and I work for Miller Tabach (ph) in New York.

Okay. Regarding the offer that we have, we think it is too early to comment on that, we expect important movements this week. I missed the second part of your question?

Yes. The other question is, how about the… can you provide more details on the debt exchange offer?

Regarding the debt exchange offer, we offer to the market and we've been in touch with the [sitting] committee and Association of Italian Banks and we included our offer in the recent prospectus that we published as a consequence of the tendered offer.

But, it cannot be considered as an offer today, because what we included there is the last conversations that we have with the banks in order to permit investors to evaluate what we've been discussing against the tender offer.

Thank you.

Moving on we'll take a question from Jack Noble with EBDA Securities.

Hi, good morning. I just wanted ask about Capex and if you have fairly fixed targets for 2003 and then what the possible influence of the debt buy-back as well as any forthcoming decision from the government on tariffs on unregulated services and how that might change your Capex numbers if you see those as two very clear triggers or for the time being you are happy where your Capex numbers are?

Well, I think with this level of Capex, what we are trying to assure is two things. The first one is that we keep our cash flow under control. And the second one is that we maintain our operations running. We have a plan of capital expenditures for this year and we consider that this will be enough for maintaining our competitiveness in the Argentina market.

Basically, the needs required for maintaining the network you're satisfied with, more or less what you're spending right now. However, if cash flow increased for whatever reason you might contemplate an increase in CAPEX or you think in the current environment you are really going to hold extremely low Capex levels for most of the year regardless of what cash flow does?

We don't have plans to increase our Capex substantially. What we are looking and we have to consider is that we -- the market conditions in Argentina, due to the recession and the situation in Argentina, permit us to continue operating with this Capex level without again losing our competitiveness in the market. We don't expect to increase our CAPEX despite we could have a better cash flow.

Just for clarification, I might have missed it in the call, but do you have a target for 03 that you are sticking with right now?

The total Capex for the year around 200m pesos.

Okay great, thank you very much.

Returning to Rizwan Ali with Bear Stearns for a follow-up.

This question is for Pedro. You said 15% of the total revenues are collected via the bonds. So that means roughly 127m is collected through the bonds. 3m that you have mentioned is the difference between market value and the face value, the bonds appear to be really low.

You are forgetting is that a lot of these bonds, are very high percentage. We allocate them through tax payments and supplier payments. So what’s the remainder is basically what you take as a loss in the holding results.

And that is 3m?

Exactly.

Thank you very much.

And answering your question regarding the levels of receivables, pre-crisis levels. Pre-crises levels were around 700m pesos in terms of receivables, and currently we are around $550m pesos. The reductions mainly due at this time we are collecting much better than what we collected pre-crisis level.

I see, okay. Okay thank you very much.

Thank you.

There are no further questions in our queue at this time, I'll turn the conference back over for additional or closing remarks.

Okay, I would like to thank you for the participation in this conference call, and well, talk with new the next quarter, thank you very much.

That does conclude today's conference call, thank you everyone for your participation.