Telecom Argentina SA (TEO) 2003 Q3 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 Mr. Valerio Cavallo, Chief Financial Officer. Please go ahead, sir.

Good morning. I would like to thank everybody for participating in this conference call. I am Valerio Cavallo and together with me are Pablo Caride, Finance Director, and Pedro Insussarry, Manager of the 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 we reported last Friday show a net loss for the sales quarter of fiscal year 2003 of approximately 509 million pesos that reduced the net profit for the nine-month period to 779 million pesos.

The loss of the quarter is mainly due to the effect of the devaluation of the Argentine peso, versus the dollar and the Euro, as our net financial that is mainly denominated in foreign currency. At the same time, operating results before the depreciation and amortization for the nine-month period reached 1.4 billion pesos, with an increase of 35% as compared to the similar period of fiscal year 2002 and the equivalent to 53% of revenues. As seen in the previous quarter, the expansion of revenues continues to indicate the recovery and the demand for telecommunication services, mainly in the mobile segment. The company continues to maintain a strict cost policy. However, some costs like salaries, Social Security contributions, and advertising started to rise.

Finally, net debt of the company amounted to 7.6 billion pesos, equivalent to approximately $2.6 billion. Experiencing a reduction of $300 million since the end of December 2002. The reduction of the debt was as a consequence of the cash flow generated by the company during the nine-month period, as the company was able to control costs and capital expenditures; and due to the debt retired during the tender offer closed last June. It was partially compensated by the devaluation of the dollar versus the Euro and the Yen. 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. In the future 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 download them from our website at telecom.com.ar. We will remind you that this conference call is being recorded and will be replayed until November 30th. Additionally this conference call can be replayed through a 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 environment in which Telecom operates; as seen in Slide 1 of the presentation.

During the quarter, the foreign exchange rate experienced a slight deceleration going from 2.80 pesos per dollar, or 3.21 pesos per Euro at the end of June, to 2.91 pesos, or 3.39 pesos respectively as of the end of September. The consumer and wholesale price inflation seems to have stabilized at very low levels. Moreover, indicators of economic and investment activities are showing growth rates mainly in the agriculture, industry, and construction sectors. The normalization of the financial system continues and the relation of the deposit was completed. The local interest rates have declined due to the significant liquidity level in the financial system. However, the amount of liquid is still low. With regards to determining debt restructuring, the Government has announced that it will seek a reduction of 75% of the principal amount.

Additionally, an agreement for three years have been reached with the IMS whereby the Argentine government will seek to roll over the principal amounts due to the International Equator Institution. On the political front (inaudible) is still high and has gained additional political support. Many candidates supported by the President won their elections as governor and congressmen. And the parent party have gained control of both chambers of congress. With respect to tariffs, the Government has not wanted any increase in tariffs. For one, this (inaudible) is still unclear.

In Slide 2 of the presentation, we are making an overview of some of the issues related to corporate development. In the recent quarter, the company has been operating in a stable environment, but there are some factors that could affect the positive trends in terms of operating profit before the depreciation and amortization. It's margin and the cash general capacity. Some examples of this are, the market is starting to show some activity that calls for actions to strengthen the market position of the company. In this sense, the company has launched several other enticing campaigns for the cellular and internet business. In view of this activity in the market, the company is re-evaluating cap ex targets that were suspended in 2001. Again, these projects are mainly allocated to the cellular and internet business.

After being very restrictive in the fixed telephone business, the company will have to engage in higher cap ex and output levels to improve the quality of services. Finally, the company has negotiated with the union wage increases and salary bonuses and has agreed to incorporate approximately 1,400 contracted employees who were previously hired. At this time I will pass the call to Pedro who will now make a ten-minute speech where we will go through the rest of the presentation, where we explain the most significant valuation of the financial and operational data for the nine-month period and the third quarter of fiscal year 2003 ended last September. Following this speech, we will be glad to answer any question you may have. 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 the public emergency law and complementary regulations, the effects of ongoing industry and economic regulation, possible changes in demand for telecom products and services, and the effects of marginal factors such as changes in the general market or economic conditions in legislation or in regulation.

Our press release dated November 7, 2003, a copy of which will be included in the 6-K form 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 17 of the presentation. Going to Slide 3 of the presentation, we would like to see the main variations of the financial figures for the first nine months of fiscal year 2003 as compared to the similar period of fiscal year 2002. Net gains of 779 million pesos reported was mainly due to the foreign currency exchange gains arising from the depreciation of the -- the appreciation of the Argentine peso and the unusual results related to the tender offer, both occurred mainly during the first half of the present fiscal year.

We can see that non-adjusted net revenues totaled 2.7 billion pesos with an increase of 14%. This is mainly driven by the increase of 173 million pesos in revenue generated by the cellular activity, 154 million pesos increase in the fixed telephony business, and 54 million pesos increase in the data tradition businesses and 12 million pesos increase in the internet business. On the other hand, operating costs amounted to 1.3 billion pesos and were reduced by 3%, mainly due to the decrease in allowances for doubtful accounts and management fees. These decreases were partially compensated by the increase in certain costs such as taxes, agent commissions, interconnection costs, salaries and Social Security contributions. By these means, we have been able to increase operating profit before depreciation and amortization by 35% to 1.4 billion pesos and the expanding it's margins from 45% to 53%.

Going to Slide 4, we can see the quarterly evolution of the income statement. We can see that during the September 2003 quarter, revenues grew on a year-over-year basis by 13% as compared to the June 2003 quarter by 7%. This was mainly driven by the expansion of the mobile business in Argentina and the expansion of the DLD service where traffic volumes grew substantially, as we will see in a further slide. Regarding costs, op ex remained stable on a year-by-year basis but suffered an increase of 12% when compared to the June 2003 quarter. Meanwhile, operating profit before D&A amounted to 504 million pesos with a growth of 39% when compared to the September 2002 quarter, or 3% when compared to the June 2003 quarter.

The margin reached 52%, increasing from 46% in September 2002 but declining from 55% in June 2003. Finally, below the operating profit, net income for the September 2003 quarter was mainly influenced by the monetary losses due to deterioration of the foreign exchange rate as we have mentioned before. Turning to Slide 5, we're showing a breakdown of revenues in operating profit for depreciation and amortization by business line. We can see that Fixed Line business has expanded it's revenues by 10%. This business operating profit before D&A grew by 29%. On the other hand, Cellular businesses expanded it's revenues by 27% and its operating profit before D&A grew by 47%. The growth in operating profit before D&A of these businesses can be largely attributed to the cost reduction actions in the Fixed Line business and the expansion of revenues in the Cellular business.

It must be noted that all of these figures and percentages are after intercompany account terminations. Going to Slide 6, we're showing the revenue evolution for the nine-month period compared to the similar period of fiscal year 2002. Revenues in the fixed line telephony business increased by 123 million pesos, or 9%. The increase can be mainly explained by the high end number of lines of service, the increase in local and domestic long distance traffic and higher sales in the public telephony service. Revenues in the cellular activity increased by 173 million pesos, or 27%, mainly driven by a substantial increase in the number of subscribers and the sale of prepaid cards in Argentina; partially compensated by lower revenues coming from the Paraguayan operation.

Data transmission grew by 34 million pesos, or 16% as the company has adjusted pricing for this service. Internet revenues grew by 12 million pesos, or 38%, mainly due to the increase in the dial-up service and higher prices and connections in the ADSL service. When we describe the main variables of the different businesses of the Telecom Group in slide 7, we can observe that the lines of service have continued to increase by approximately 44,000 lines. Demand for new lines is increasing, and the number of disconnections is lower than in previous quarters. It must be noted that the number of fixed, prepaid, and restricted use of lines amounted to 523,000 lines, which represents approximately 14% of total lines of service and represents a reduction of 2,100 lines during the quarter compared to 2Q '03.

This is the second consecutive quarter in which the restricted lines have experienced a reduction while the lines in service have grown. In terms of rates, the company has reduced discounts of certain domestic and international long distance rates. As a consequence, the average ILD and DLD prices have increased since September 2002 by approximately 28% and 13% respectively. Nevertheless, as long distance services are under significant competition, pricing has been subject to significant pressure and this has limited the ability to further increase prices. For example, the average DLD rate has remained stable at 18 cents of the peso for the last three quarters.

In Slide 8, we can see that the total traffic volume is approximately 8% higher as compared to September 2002 quarter. This increase is mainly due to the growth of local DLD traffic and internet. For the September 2003 quarter, the average revenue per fixed line customer totaled 40 pesos, increasing by approximately 3% when compared to the previous quarter. Furthermore, it increased by 11% when compared to September 2002 quarter. This is mainly due to the increase in the long distance rates in traffic and to the effects of the clean-up of the customer base performed in 2002. We can see in Slide 9 the evolution of the cellular subscribers. Cellular customers in Argentina increased by 13% year-over-year and by 8% compared to June 2003. Post paid subscribers have slightly increased and prepaid customers still represent 82% of the customer base of Telecom Personal.

Disconnections have dramatically decreased after the clean-up of dormant prepaid subscribers that took place in the last two quarters. In Slide 10 we can see that cellular ARPUs continue to increase at a steady pace. Blended ARPUs increased by 3% when compared to the previous quarter and by 23% when compared to the September 2002 quarter. Prepaid ARPUs increased by 11% compared to the previous quarter and by 50% when compared to the September 2002 quarter. Post paid ARPUs increased by 9% when compared to the previous quarter and by 31% when compared to September 2002 quarter. The increases were mainly due to the increase in non-regulated rates of Telecom Personal and to higher usage of prepaid cards. It must be noted that since April 2002, Telecom Personal continues to gradually increase its airtime rates.

Moving to Slide 11, during the third quarter the internet business has registered a 1% increase in terms of dial-up customers. Additionally, ADSL high-speed access connections increased by approximately 5,000 in the quarter and reached approximately 40,000 connections by the end of September, 2003. Additionally, ADSL connections to other ISPs are also growing at a steady pace of 3,000 connections, or 38% since June 2003 quarter, or 11,000 connections, or 100% since September 2002 quarter. Going over the main operating costs in Slide 12, we can see that the despite increases in labor costs, efficiency gains continue. Head count was reduced by 1,239 employees since September 2002, or 218 employees since June 2003. Labor expenses increased by approximately 10% in current pesos as from the September 2002 quarter.

This increase can be largely attributed to the increase in salaries of unionized and non-unionized employees, extraordinary bonuses and the increase in Social Security contributions. Regarding other operating costs as seen in Slide 13, allowances for doubtful accounts continued since December 2001 at record low levels, both in nominal values and as a percentage of revenues. The main reason for this are better collection conditions, but also due to the proactive actions taken to disconnect customers that did not pay their bills. Commercial costs that include advertising, sales and commissions, cost of handsets have also increased by 16 million pesos in total, or 76% as compared to the September 2002 quarter. As a consequence of the increase in commissions paid for card sales and distribution and higher advertising expenses.

We can see in Slide 14 that capital expenditures amounted to 65 million pesos during the nine month period of fiscal year 2003. This cap ex is mostly related to the maintenance of the network. We would like to point out that neither the level of service, nor the quality of the networks, is being affected. In Slide 15, we can see that despite the actions undertaken by the company to hold back controllable costs and capital expenditures, outflows defined as operating expenses plus capital expenditures minus charges for doubtful accounts have increased by 15 million pesos or 2% when compared to the third quarter of fiscal year 2002 or by 51 million pesos or 12% when compared to June 2003 quarter. Nevertheless, in spite of these increases in costs, operating cash flow defined as operating profit before depreciation and amortization minus cap ex increased by 32% to 114 million pesos; on the quarterly year-over-year comparison, but grew by slightly 1%, or 4 million pesos when compared to the June 2003 quarter.

Finally, in Slide 16, we can see the evolution of the consolidated net financial debt. Since the end of December 2002, we can see as a consequence of increasing cash flow generation and the debt buyback performed last June, partially compensated by the evolution of the U.S. dollar exchange rate, net debt converted to dollars has consistently declined. Regarding the debt restructuring, the company continues in conversations with its main creditors and is working in the final stage in order to conclude this process as soon as possible. And having said that, I would like to open it up to questions.

Thank you. Today's question-and-answer session will be conducted electronically. To ask a question, press the star key followed by the digit 1 on your touchtone phone. Please make sure your mute function is turned off so your question will register in the queue. Again that's star 1if you would like to ask a question. Our first question, Miguel Garcia, Bear Stearns.

Yeah, my question is related to the treatment of the debt. I understand you are capitalizing interest. Where do we find that in the balance sheet?

It's not that we are capitalizing. Basically we are accruing interest, unpaid interest, and once they are available in the financial statements, there is a breakdown. There is a note that breaks down the principal amount and interest amount.

So is that in the -- when we look at the result, is everything in loans, in that line?

Exactly, yes.

Oh, okay. Thank you.

Hello?

Please stand by. Miguel, would you please repeat your question?

My question was answered.

Thank you.

Okay. Are there any additional questions in queue?

Yes, we do. We have the next question, Rizwan Ali, Bear Stearns.

My question was regarding the debt negotiation. Can you give us an update where that debt negotiation is right now? And also in your press release you mentioned that cap ex is going to be high next year. We expected that. Can you give us some, you know, guidance of magnitude of increase in cap ex for next year?

Okay. It's -- as a result of the renegotiation of the debt, we have received a lot of feedback from our creditors. We are working with that. We are preparing documentation associated with the debt restructuring proposal and we expect to announce this proposal in the next couple of weeks.

Okay.

Regarding cap ex, our budget is approximately $120 million and cap ex will be mainly allocated to the cellular and internet business and basically in the internet, of the expansion of the ADSL service.

Well, I mean, the cap ex for this year should be around 62, right? Hello?

Yes, hold on, please. It should be around $50 million for this year.

Okay. So I mean, should we expect a similar ramp-up in cap ex in years going forward because, you know, using revenue as a gauge, as a percentage of revenues as a gauge, I mean, you -- even next year you'll be below 10% of revenues. So should we expect it to increase 15%, 16% in years thereafter?

Rizwan, I would assume a run rate going forward after 2004 of approximately 15% of revenue.

Okay. Thank you very much.

As a reminder, star 1 for questions. Our next question, Humara Sheath with Aberdeen Asset Management.

Hi, guys. If you can talk a little bit about the employee costs that went up. You said that you had gone to some extraordinary bonuses and in addition, some salary increases. If you can just sort of quantify those and then just sort of comment on your relations with the unions. I mean, what -- do you have any further salary increases or talks coming up, or is that all settled? And then secondly, on the sales and marketing, if you can just talk about what sort of increases you are looking for next year. And then in more generally if you can tell us what in broad terms your guidance is for next year for, you know, revenues and EBITDA. Thanks.

Please stand by.

Yes, hold on, Humara. We're gathering all the answers. Hold on, please. Okay, Humara. Basically the increase in salaries and the extraordinary bonuses was basically an agreement that we've closed with the unions, for a year, where we are recognizing part of the loss of purchasing power that our employees have suffered since the devaluation, and the impact on the average salary is approximately 20%, and this will be, in a way, compensated by increases in productivity, okay?

Regarding advertising expenses, we wouldn't like to quantify at this time what we're expecting to spend, but you should see higher expenses, higher commercial expenses going forward. And it's -- I mean, policy of the company not to get projections due to the exposure that it has regarding this, okay?

Okay. Can I get just a couple of follow-up questions. Can you say that the higher salaries will be paid for with productivity increases, can you just give us some sort of idea of what targets they have to fulfill? And then, will this just be -- this will be a one-year rolling agreement that you have to then renegotiate every, you know, November or whatever?

On the bonuses, what was the size of the bonuses that were paid? And then just on the ad expenses, I mean, is it going to take the form of marketing campaigns or is it subsidies for, you know, wireless handsets or is it, you know, one month free access for ADSL? You know, can you just characterize what those expenses will be? Thanks.

Okay. Long question. Let's go by part. Regarding the gains in productivity, basically what we're talking about is obviously a lower head count going forward. We will basically focus those head count reductions in -- or I would say we're not going to focus those head count reductions where we're seeing that the business is growing, mainly those businesses that are non-regulated. Regarding the increases in commercial expenses, the increases are mainly related to -- we're seeing that both cellular and internet businesses are growing, and there is a lot of activity going on in the market, and the company's needing to strengthen its market position.

So we have launched several advertising campaigns in order to reinforce the, both the cellular and internet brand. It's foreseeable in the future that we're going to see a higher level of competition in the cellular market so that will have to push us to increase commissions to vendors in order to, on one side, defend the market share and also our distribution channels. And those are the main, I would say the main factors in the commercial. And if I left out another question of yours.

It was just simply on the benefits, amount of benefits, if you could just please quantify those, please.

Hold on. Approximately, approximately 8 million pesos, or the equivalent of $3 million, slightly less than $3 million.

Okay, perfect. I'm sorry, just one last thing I was going to say about the union negotiations. Are you going to have an annual round of talks now going forward?

This agreement is for a year, and we will have to sit down in a year from now.

Okay. Thank you.

If we agree and everything will depend on the productivity gains that we have talked about and the evolution of the business.

We have a follow-up question, Rizwan Ali, Bear Stearns.

Yeah, can you just quickly explain why your financial expenses in the third quarter were so high because -- especially in the last two quarters, they were averaging around 170 million pesos and then we see, you know, a major jump in the third quarter. And that jump really is not explained by the precision of the currency.

Within the financial and whole year results, you have the foreign exchange, the monetary loss that we have due to the depreciation of the peso. It's approximately net, close to 400 million pesos, okay? And remember that it's not only the company is affected by not only the peso-to-dollar foreign exchange rate but also the peso to the Euro. In the quarter the Euro has also depreciated even higher than the dollar.

Okay. Okay. Sounds good. Thanks.

And the rest is basically the normal accrual of interest.

As a reminder, star 1 for questions. We have a follow-up, Miguel Garcia, Bear Stearns.

My question was answered. Thank you.

Thank you. Having no further questions, I would like to turn the conference back over to management for any additional or closing comments.

Okay. Thank you, everybody, for participating in the conference call. If you have any further questions, give us a call to our office, okay? Thank you very much. Bye-bye.

This does conclude today's conference. Thank you for your participation. You may now disconnect.