Telecom Argentina SA (TEO) 2003 Q2 法說會逐字稿

Good day and welcome everyone to the Telecom Argentina conference call. Today's call is being recorded. At this time I would like to turn the call over to the Chief Financial Officer, Mr. Valerio Cavallo. Please go ahead, sir.

Good morning. I would like to thank everybody for participating in this conference call. I'm Valerio Cavallo, CFO of Telecom Argentina. And together with me are Pablo Caride, Finance Director, and Pedro Insussarry, Manager of Investor Relations Division.

As an introduction to this conference call, and going over some highlights of the quarter, I would like to point out that the results that were reported last Friday show a net profit of approximately 1288 million pesos. This profit is mainly due to the effect of the appreciation of the Argentine peso, as our net financial debt is mainly denominated in other currency.

As seen in the previous quarter, the expansion of nonadjusted revenues continues, both in wireline and the wireless businesses. This fact can be mainly attributed to the fact that we have managed to increase the revenues in almost all non-regulated segments. Moreover, the Company continues to maintain costs under control. Following very strict cost cutting actions, operating costs continue to decline. As a result of these factors, operating results before depreciation and amortization and (inaudible) margin continue to increase, reaching 945 million pesos, equivalent to 54 percent of revenues.

Finalizing with some comments on the debt restructuring process, we have closed the cash tender offers on June 2, and made partial interest payments on the same date. We continue negotiations with our creditors in order to arrive to a final restructuring of the remaining portion of the debt. As of the end of June, consolidated net debt of the Company amounted to 7.5 billion pesos, equivalent to approximately the US$2.7 billion. Additionally, the shareholders' equity of the Company reached 2.1 million pesos.

After this brief introduction, I would like to pass the call to Pablo Caride and Pedro Insussarry, who will go into the specifics of the results that we have announced last Friday.

Thank you. As usually we would like to remind you that all of those who have not received our press release nor our presentation, you can call (inaudible) our office, or even download them from our website at www.telecom.com.ar. We remind you that this conference call will be replayed until August 18. Additionally, this conference call will be accessible through the webcast feature 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 government in which telecom operates, as seen in slide 1 of the presentation. During the quarter, the Argentine peso continued appreciate versus the U.S. dollar. The foreign exchange rate decreased at the level of 2.8 pesos, and the Central Bank intervention prevented a further appreciation. The consumer price index decreased by .4 percent for the quarter, and has reached 2.1 percent for the first semester 2003. The wholesale prices have (inaudible) a decrease of 2.6 percent for the quarter, and 2.5 percent for the first semester. The indicators of economic and industrial activity that showed significant growth rates in previous quarters are starting to show signs of slowing down.

Regarding the restructuring of the financial system, this is still pending a good solution. There has been progress in the liberation of deposits and in the recovery of the liquidity levels of the system. However, the low level of new (inaudible) granted shows that the system is not functioning normally. Additionally, provincial bonds have been recovered up to 42 percent of the stock. This should tend towards a normalization of the monetary system as the provisional government are restricted to issuing new (inaudible) currency bonds.

The country's total debt is around 130 billion, and a formal proposal to (inaudible) is still pending. Argentina has signed a provisionary agreement with the IMS until August 2003. On the political front, President Kirchner's popularity is high, as the market stability has been maintained, and his new administration seems to respond to political and social demand.

On the regulatory issues, the new administration has expressed that privatized companies should not expect an increasing tariff in the short term. Furthermore, the government has indicated that before tariff increases are granted, the full remission of contracts should be performed.

In slide 2 of the presentation, we're making an overview of some of the issues related to corporate development. As Valerio Cavallo mentioned before, in regard to the debt restructuring process, the main issue related to this point is that the Company has closed on June 2nd a cash tender offer for a portion of Telecom Argentina and Telecom Personal financial debt. And it has performed partial interest payments on that same day.

With respect to the tender offer, the Company and its subsidiary, Telecom Personal, have purchased $209 million and $80 million in debt, respectively, applying 115 million and 44 million in cash. The purchase price for the company's debt instruments was equal to 55 percent. Additionally, the Company has performed partial interest payment with accrued interest at constructive rates for the period through, and including, June 24th, 2002, and at 30 percent of constructive rates for the period of June 25, 2002 through December 31, 2002.

Furthermore, (inaudible) at the record date of April 13th (inaudible) has received such payment. With these payments, Telecom Argentina and Telecom Personal paid a total of 96 and 11 million of accrued interest.

At this time, I will pass the call to Pedro, who will now make (inaudible) 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 semester and second quarter of fiscal year 2003. Following his speech, we will be glad to answer any questions you may have. Let me pass the call to Pedro.

Thank you. Before we continue I 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, planned strategies and targets. Such statements are subject to uncertainties that can cause Telecom's actual results and operations to differ materially. Such uncertainties include, but are not limited to, the effect of public emergency (inaudible) complementary regulations, the effects of ongoing industry and economic deregulation, possible changes in demand for Telecom's products and services, and the effect of marginal factors such as changes in the general market or economic conditions in legislation and regulation. Our press release stated dated August 8, 2003, a copy of which will be included in the 6-K Form report furnished to the SEC, describe 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 14 of the presentation.

Going to slide 3 of the presentation, we can see that the main variations of the financial figures for the first semester of 2003 as compared to the same period of fiscal year 2002. The net profit of 1.3 billion pesos reported was mainly due to the foreign currency exchange gains arising from the appreciation of the Argentine peso, as we have mentioned before.

We can see that an increase in nonadjusted net revenues of approximately 15 percent was registered. This was mainly driven by the following factors. The increase in revenues in the cellular activity of 103 million pesos was mainly driven by a substantial increase in the sales of prepaid cards and calling party paid revenues. The rise in revenues in the fixed line telephony of 78 million pesos was mainly due to the increase in traffic and the increase in domestic long distance rates where the pricing was adjusted, as we will see in a following slide. Additionally, higher sales in the public telephony service was achieved mainly due to increased traffic in telecommunication centers. Data transmission revenues grew by 42 million pesos as the Company has adjusted pricing for this service. And Internet revenues grew by 8 million pesos, mainly due to the increase in dial-up fees and the expansion of the ADSL service.

On the other hand, operating costs were reduced by 4 percent, mainly due to the decrease in allowances for doubtful accounts and management fees. These decreases were partially compensated by the increase of certain costs such as taxes, service fees, maintenance expenses and settlement charges. Telecom has been able to increase operating profit before depreciation and amortization, what was formally called EBITDA, by approximately 38 percent to 945 million current pesos and expanded its margins from 45 percent to 54 percent.

Going to slide 4. We're showing the contribution of the revenues and operating profit before depreciation and amortization by activity. We can see that fixed-line businesses have expanded its revenues by 12 percent and this business' operating profit before D&A grew by 37 percent. On the other hand, cellular businesses expanded its revenues by 25 percent, and its operating profit before D&A grew by 37 percent. The growth in operating profit and D&A of these businesses can be largely attributed to the cost reduction actions of the baseline businesses and the expansion of non-regulated services in the cellular business. This must be noted, all these figures and percentages are after intercompany account elimination.

We can see that the main variables of the different businesses of the Telecom Group in slide 5. We can observe that the lines and services has decreased for the first time in the last six quarters. Nevertheless, the amount for new lines is still weak, and disconnections are still high compared to historical levels, since the Company increased in 2002 connections and reconnection fees to the maximum authorized price.

Furthermore as of June 2003, the penetration of fixed prepaid and restricted use of lines amounted to 525,100 lines, which represents 15 percent of the total amount of lines and service. This type of lines experienced a reduction of 11,700 lines during the quarter.

In terms of rates, the Company has reduced discounts on certain domestic and international and business rates, and has reformulated certain pricing plans. Consequently, the long distance rate -- the domestic and international and business rate have been reformulated as certain pricing plans have been modified. Consequently the average IOD and VOD pricing have increased since June 2002 by approximately 45 percent and 29 percent, respectively. Nevertheless, as long distance services are under significant competition, pricing has been adjusted -- has been subject to significant pressure, and this has limited the ability to further increase prices.

In slide 6, we can see that total traffic volume is approximately 5 percent higher as compared to June 2002 quarter. This increase in traffic is mainly due to the impact on all segments of the macroeconomic condition improvement. For the June 2003 quarter, the average revenue per fixed-line customer totaled 39 pesos, increasing in current pesos by approximately 5 percent when compared to the previous quarter. This is mainly due to normal seasonality. Furthermore, it increased by 13 percent when compared to the June 2002 quarter. This latter is mainly due to the increase in long distance rates and traffic, and due to the effects of a healthier customer base after the cleanup performed in 2002.

We can see in slide 7, the evolution of the cellular subscribers. Cellular customers of Teleconference Center in in Argentina increased by 7 percent year-over-year and by 1 percent compared to March 2003. Additionally, the migration of customers from postpaid into prepaid modality has continued, but at a slower pace. Currently prepaid customers represent 82 percent of the customer base of Telecom Personal.

In slide 8, we can see that the cellular ARPUs continued to increase at a steady pace. Blended ARPUs increased by 11 percent when compared to the previous quarter, and by 29 percent when compared to June 2002 quarter. Prepaid ARPU increased by 12 percent when compared to the previous quarter, and by 73 percent when compared to June 2002 quarter. Postpaid ARPUs increase by 8 percent when compared to the previous quarter, and by 35 percent when compared to the June 2002 quarter. The increases were mainly due to the increase in the non-regulated rates of Telecom Personal and to higher usage of prepaid cards.

Moving to slide 9. During the June 2003 quarter, the Arnet (ph) Internet business has registered a 3 percent increase in terms of dial-up customers. Additionally, ADSL high-speed access connections has increased by approximately 3000 during the quarter, and reached approximately 35,000 connections by the end of June 2003.

Going over the main operating costs in slide 10, we can see that despite increasing the labor cost, efficiency gains continue. Headcount was reduced by 1138 employees since June 2002, and 286 employees since March 2003. Labor expenses decreased by approximately 5 percent in current pesos as from June 2002 quarter. This can be largely attributed to the headcount reductions mentioned before, partially compensated by the increase in social security contributions and the increase in salaries of unionized employees mandated by the government.

Regarding other operating costs as seen in slide 12, allowances for doubtful accounts have decreased precipitously in nominal value and as a percentage of revenues since December 2001. The main reason for this are the better collections, but also due to proactive actions taken to disconnect customers that do not pay their bills. Commercial costs that include advertising, sales commissions and costs enhancements, have increased by 13 million pesos as compared to the June 2002 quarter. As a consequence of the increase in commissions -- for commissions paid for card sales and distribution, partially compensated by lower advertising expenses, enhances costs.

You can see in slide 12 that Telecom Group has trimmed down its capital expenditures to its minimum expression, and that being 44 million pesos during the first semester of fiscal year 2003. This CapEx is mostly related to the maintenance of the network. Here again, we want to point out that neither the level of service nor the quality of the network is being affected.

Following our previous comments related to cost reductions in slide 13, we can see that the effects of the efforts Telecom has undertaken to reduce all controllable costs and capital expenditures. This is how outsourced (inaudible) its operating expenses. Thus capital expenditures minus charges for doubtful accounts have decreased by 10 million pesos, or 2 percent when compared to the second quarter of 2003 -- sorry, 2002, or by 35 million pesos or 4 percent when compared to the first semester of 2002. In line with these reductions operating cash was defined as operating profit before D&A minus CapEx, increased by 51 percent to 469 million pesos on the quarterly year-over-year comparison.

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

(CALLER INSTRUCTIONS) Homira Shake (ph) with Aberdeen Asset Management.

Can you just talk a little bit more about your future plans with respect to restructuring the balance sheet? You mentioned about the debt, the tender that you had done earlier this year. Can you shed a little light as to the timing and sort of what options you are seeing? Can you give (inaudible) peso, which obviously is making your net leverage look a lot better than it did a couple of quarters ago. Thank you.

Yes, as you know, we are discussing all the restructuring plans with our main creditors. We are (inaudible) with a representative of the banks' steering committee and with representative of the bondholders. We are moving on on these discussions. We're planning to finish this by the end of this year. You know that we have to go through some judicial steps. We think that the softness will be finished by the end of this year.

If you can just update us again, you mentioned just at the end of the presentation about presenting your EBITDA minus CapEx? Can you just remind us again what your plans are with respect to the cash that will inevitably be bolting every quarter as a results of this sort of (inaudible) tight cash management that you are undertaking at the moment? Speaking in terms of what sort of amounts could be -- or whether you are thinking of distributing some of the cash that is building up to creditors? Thank you.

As you know, the main usage of that cash is going to be to repay our debt. And so our future plans are regarding that to what we expect for the next years is that I would say that the main part of our cash is going to be -- are going to go to pay our debts and maintaining -- or doing the necessary CapEx.

(CALLER INSTRUCTIONS) Maria TiNoto (ph) with Citigroup Asset Management.

I just have a quick question about rates. What are your expectations about regulated rates for this year? Do you think -- if you give us an update about what you're trying to negotiate with the regulator?

As you may have read in Argentine newspapers the situation of the negotiation regarding tariff increases is, I would say, pretty much delayed. And as I mentioned in the -- as Pablo has mentioned in his speech, the government has indicated that any -- the public service companies should not expect tariff increases in the short term. And also, the government is revising certain contracts in order to see the completion, or see the compliment of service companies regarding this these contracts. Taking into account this context, we're not expecting tariff increases for this year, or at least should have any impact during this year.

The recent question on the long distance rates, it is competition from new operators or from the current operators?

The competition is mainly from, I would say, the three largest competitors that are Telefonica, Mobilcom (ph), BellSouth, PicTel. And those are the main operators that are competing in the long distance business.

Pictel is relatively new, so...

Yes, but it has entered in the market and obviously is giving some pressure on pricing.

(CALLER INSTRUCTIONS). We return now to Homira Shake with Aberdeen Asset Management.

Sorry, just a quick follow-up question. What was your CapEx for the first quarter of this year?

13 million pesos.

Okay, thanks.

There are no further questions at this time. I would like to turn the call back over to Mr. Cavallo for any additional or closing comments.

Once again, thank you for participating in our conference call, and please feel free to call Pedro and his team for any additional questions.

That concludes today's conference call. Thank you for your participation. You may now disconnect.

(CONFERENCE CALL CONCLUDED)