Telecom Argentina SA (TEO) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina conference call. Today's call is being recorded. Participating on today's call, we have Carlos Felices, Chief Executive Officer, Valerio Cavallo, Chief Financial Officer, Pablo Caride, Finance Director, and Pedro Insussarry, Manager, IR Division. At this time, I'll turn the call over to Carlos Felices.

Good morning. I would like to thank everybody for participating in this conference call. My name is Carlos Felices, I am with Valerio Cavallo, who is our Chief Financial Officer, Pablo Caride, who is our Finance Director, and Pedro Insussarry, who is Manager of the Investor Relations Division.

As an introduction to this conference call, I'm going over some highlights of the quarter. I would like to point out that the results that we reported yesterday show a net loss for the fourth quarter of fiscal year 2003 of approximately 428m pesos. That reduced the net profit for the fiscal year 2003 to 351m pesos. The loss in the quarter is mainly due to the effect of the valuation of the Argentine peso against the dollar and the euro, as our net financial debt is mainly denominated in foreign currency.

At the same time, the operating results of the fiscal year 2003 reached 107m pesos. This is an improvement over the loss of 204m pesos of the year 2002. It represents a very low margin when we compare these margins with historical levels of the company.

I think, in the previous quarter, the expansion of revenues continues at the pace of 16% due to a higher demand of telecommunication services, mainly in the mobile segment. Moreover, the company continues to maintain a strict cost policy, as we did in the last two years. However, some costs like labor, commission to vendors and advertising have started to rise. On the operational side, we experienced important growth in our mobile business. Moreover, we have seen that the market continues to experience growth in demand. Additionally, we have been able to expand our ADSL services. We understand that broadband is a very important growth factor for the future. Moreover, the fixed line business continues with moderate growth of lines in service and traffic, following a similar trend as seen in the previous quarters.

Despite this positive evolution we have seen in our business, we are seeing that the market in general has started to show clear signs of tighter competition. Due to this we are re-evaluating our marketing strategy in order to maintain our leadership position in the market. In a sense, going forward, commercial expenses are forecasted to increase, and capex is expected to rise, as we are in the process of increasing the coverage and capacity of our GSM and ADSL networks.

With respect to the tariff negotiation, we are continuing our conversations with the government, and no significant developments have been achieved. We must mention that the results of the company have been affected by the tariff freeze enforced by the government in January 2002.

Finally, I'm going on to a very important issue for the future of this company. In January we made public our proposal to restructure our financial debt. It is important to recall that the company has a consolidated net debt of approximately 6.7b pesos, equivalent to 2.6b dollars. Despite a reduction of 2.2b pesos, or 300m dollars, in December 2002, the leverage of the company continues to be very important. The proposal that we made public leaves the company with a level of debt that does not jeopardize its operations in a potential scenario of macroeconomics instability, and provides a pre-payment mechanism that allows higher levels of recovery to creditors.

After this 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 announced to the market yesterday.

As usual, we would like to remind you that, for all of those who have not received our press release, or our presentation, you can call [indiscernible] or our office, or even download them from our website at telecom.com.ar. We remind you that this conference call is being recorded and will be replayed until March 17. Additionally, this conference call can be replayed 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 environment in which Telecom operates seen in slide one of the presentation. During the quarter, the macroeconomic situation continued to be stable. The peso to dollar exchange rate has remained stable at around 2.9 pesos per dollar. But the euro has experienced a revaluation. The evolution of the euro effects is particularly important as the company has an important part of its debts denominated in this currency.

Both consumer price and [indiscernible] inflation continue at low levels, and gross domestic growth has grown around 8% for the year 2003. All economic sections show signs of improvement, especially the industry and construction sectors. Unemployment has increased by 400 basis points in 2003, mainly due to social [indiscernible] granted by a government that has an important influence in this indicator. When analyzing the evolution of the Argentine economy, one must remember that Argentina is recovering from a very important and long recession, that lasted several years and that implied a significant deterioration in all economic indicators. We must recall that for the period 1998 to 2002, GDP contracted by 18.4%. Additionally, the government is still dealing with the restructuring of approximately 95b dollars of soaring debt in default. The Argentine government is not experiencing important developments in this process. Tension in the relation with the IMS and international-equity institutions has appeared. It is possible that during 2004 the country may experience some type of instability due to this situation. Regarding the political situation, the government is still enjoying a high level of support from the population.

Finally, regarding the regulatory environment, some increases in gas and electricity tariffs have been announced recently. They will be applied only to large consumers and industry.

As Carlos Felices said before, there is no news regarding tariff increases and the negotiations of the regulatory frameworkfor the telecommunications services does not show significant development.

In slide two of our presentation, we are making an overview of some of the issues relating to corporate development. In the recent quarter, the company has been operating in a stable environment, but there are some factors that will affect the positive trends in terms of operating profit before depreciation and amortization, its margin, and the capacity to generate new cash flow.

The cellular market is growing thanks to the increase in demand. All operators have large technological upgrades and marketing [indiscernible]. At Telecom Personal, this will represent higher commercial expenses and capital expenditure as it increases its capacity of GSM networks.

In the fixed-line business, Telecom will have to engage in higher levels of capex and maintenance expenses in order to improve its quality of service. Additionally, the market is showing a higher level of activity that calls for actions to strengthen the market position of the company. In this sense, the company is currently revising its global marketing strategy.

Finally, the company has negotiated with the unions, which increases extraordinary bonuses, and has agreed to incorporate approximately 1,400 contracted employees that were previously hired through third parties.

Going to slide three of the presentation, and following the comments of Carlos Felices, we would like to mention that the proposal of the company was made public on last January 9.At this time the company is updating the government with the fiscal year 2003 figures. Once we have received the corresponding authorization, we will proceed to launch the voting solicitation process.

At this time, I will pass the call to Pedro who will now 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 12-month period and fourth quarter of fiscal year 2003, as of last December. Following the speech, we will be glad to answer any questions that you may have.

Thank you. Before we continue, we would like to clarify that during the conference call and Q&A sessions we may produce certain forward-looking statements about Telecom's future 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 effects of public emergency law and complementary 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 or economic conditions, in legislation or in regulation.

Our press release, dated March 9, 2004 - a copy of which will be included in the Form 6-K 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 cause contained in slide 18 of the presentation.

Going to slide four of the presentation, we can see the main variations of the financial figures for fiscal year 2003 as compared to fiscal year 2002. The net gain of 351m pesos reported was mainly due to the foreign currency exchange gains arising from the appreciation of the Argentine peso, and the restructuring results relating to the cash tender offer, both occurring during the first half of fiscal year 2003.

We can see that non-adjusted net revenues totaled 3.7b pesos, with an increase of 16%. This was mainly driven by the increase of 300m pesos in revenue generated by the cellular activity, a 164m pesos increase in the fixed telephony, a 32m pesos increase in the data transmission business, and a 15m pesos increase in the Internet business.

On the other hand, operating costs amounted to 1.8b pesos, and were reduced by 5%, 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 agent commissions, labor, taxes, interconnection and advertising.

By these means, we have been able to increase operating profit before depreciation and amortization by 28% to approximately 2b pesos, and we are expanding the margin from 48% to 53%.

Going to slide five, we can see the quarterly evolution of the income statement. We can see that during December 2003 quarter revenues grew on a-year-over-year basis by 21%, and compared to the September 2003 quarter, by 8%. This was mainly driven by the expansion of the mobile business in Argentina, and the expansion of domestic [inaudible] service where traffic volumes grew, as we will see in a further slide.

Regarding costs, opex increased by 125m pesos on a year-on-year basis, and by 48m pesos when compared with the September 2003 quarter. Meanwhile, operating profit before depreciation and amortization amounted to 537m pesos, with a growth of 12% when compared to the December 2002 quarter, or 7% when compared to the September 2003 quarter. The margins reached 52%, remaining stable since September 2003, but declining from 56% in December 2002.

Finally, below the operating profit, net income for the December 2003 quarter was mainly influenced by the monetary losses due to the deterioration of the foreign exchange rate. We can see in the slide that net income for the company has a direct correlation to the fluctuations of the peso-to-dollar, and the peso-to-euro foreign exchange rates.

Going to slide six, we are showing a breakdown of revenues in operating profits before depreciation and amortization by business lines. We can see that fixed-line business has expanded its revenues by 9%. In this business, operating profit before depreciation and amortization grew by 21%. On the other hand, the cellular business expanded its revenues by 35% and its operating profit before depreciation and amortization grew by 40%. The growth in the operating profit before depreciation and amortization 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 these figures and percentages are after inter-company account eliminations.

Going to slide seven, we are showing the revenues' evolution for fiscal year 2003 as compared to those of fiscal year 2002. Revenues in the fixed-line telephony increased by 175m pesos, or 10%. This increase can be mainly explained by a higher number of lines and service, the increase of 5% in local and domestic long-distance traffic, and an increase of 8.4% in the fixed-line ARPU.

Revenues in the cellular activity in Argentina increased by 316m pesos, or 46%, mainly driven by the growth in the number of subscribers, and the increase in ARPUs. Meanwhile, lower revenues coming from Nucleo, the Paraguayan operation, was mainly due to the effect of the appreciation of the peso to the guarani foreign exchange rate. Data transmission revenues grew by 32m pesos, or 11%, as a consequence of higher prices for this service and incremental Internet traffic. Internet revenues grew by 15m pesos, or 33%, mainly due to a large number of connections through the ADSL service, and higher prices for the service.

When we describe the main variables of different businesses of the Telecom Group, in slide eight we can observe that lines in service have increased year over year by 66,000 lines. Demand for new lines continues to be steady, and the number of connections continues at low levels. It must be noted that the number of fixed pre-paid and restricted uses remains at 14% of total amount of lines in service.

In terms of rate, the company has reduced discounts of certain domestic, international and business rates. As a consequence, the average international long-distance and domestic long-distance prices have increased since December 2002 by approximately 6%. 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 price for the domestic long-distance service has remained stable at 18 cents of the peso for the last three quarters.

In slide nine we can see that total traffic is approximately 9% higher as compared to the December 2002 quarter. This is mainly due to the growth of local, domestic long-distance, and Internet traffic. For the December 2003 quarter, the average revenue per fixed-line customer totaled approximately 41 pesos per month, increasing by 6% when compared to the December 2002 quarter. This is mainly due to the higher long-distance rates and incremental traffic.

We can see, in slide 10, the evolution of the cellular subscribers in Argentina. Cellular subscribers of Telecom Personal increased by 19% year over year, and by 7% compared to the September 2003 quarter. Both post-paid subscribers and pre-paid customers continue to increase. Pre-paid services represent 81% of the customer base of Telecom Personal Argentina. Moreover, disconnections have dropped after the change in policy for dormant subscribers in the pre-paid services that took place in March 2003 and that resulted in an increase in the level of disconnections.

In slide 11 we can see that the [cellular-blended] ARPU remains stable at 32 pesos per month, when compared to the September 2003 quarter, but increased by 14% when compared to the December 2002 quarter. Pre-paid ARPUs increased by 10% compared to the previous quarter, and by 53% compared to the December 2002 quarter. Post-paid ARPUs increased by 5% when compared with the previous quarter, and increased by 9% when compared to the December 2002 quarter.

Moving to slide 12, during the fourth quarter the Arnet Internet business has registered, in terms of dial-up customers, a 5% increase when compared to thatregistered one year ago. Additionally, ADSL high-speed connections increased by approximately 5,000 during the quarter, and reached approximately 45,000 connections by the end of December 2003. Additionally, the ADSL connections to other ISPs continues to grow at the pace of 4,000 connections, or 18%, since the September 2003 quarter.

Going over the main operating costs, in slide 13 we can see that labor costs and head count have increased. Labor expenses increased by approximately 30% in current pesos as from the December 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 labor taxes. Additionally, the incorporation of a contract [indiscernible] has also impacted this cost item.

Regarding other operating costs, as seen in slide 14, allowances for doubtful accounts continues at low levels, in both nominal values and as a percentage of revenues. The main reasons for this are: better collection conditions, as a result of pro-active actions taken to disconnect customers that did not pay their bills, and the recovery in the most recent quarters of past due accounts. Commercial costs that include advertising, sales commissions and costs of handsets, have increased by 36m pesos, or 97%, as compared to the September 2003 quarter as a consequence of the increase in commissions paid to vendors, higher advertising expenses and incremental cost of handsets, mainly in the cellular service.

We can see in slide 15 that the capital expenditures amounted to 182m pesos during fiscal year 2003. In the December 2003 quarter, capex levels have experienced a significant increase as Telecom Personal accelerated its investments in its GSM network.

In slide 16 we can see that, despite the actions adopted by the company to hold back controllable costs and its capital expenditures, outflow defined as operating expenses plus capital expenditures, minus charges for doubtful accounts, have increased by 225m pesos, or 55%, when compared to the fourth quarter of fiscal year 2002, or by 160m pesos, or 34%, when compared to the September 2003 quarter. Due to these increases in costs, the operating cash flow defined as operating profit before depreciation and amortization, minus capex, decreased by 8%, or 37m pesos, to 415m pesos on the quarterly year-over-year comparison, and by 12%, or 58m pesos, when compared to the September 2003 quarter.

Finally, in slide 17 we can see the evolution of consolidated net financial debt. Since the end of 2002 we can see that, as a consequence of the cash-flow generation and the debt buy-back performed in last June, the net debt converted to US dollars has consistently declined. Nevertheless, the impact of the evolutions of the US dollar exchange rate against the peso and the euro resulted in an incremental indebtedness of approximately 254m dollars.

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

Thank you. (Operator instructions.) We will go first to Miguel Garcia at Bear Stearns.

Good morning. My first question is about the corporate bond that increased significantly in the last quarter. I wanted to know the reason. Secondly, I wanted to know your opinion about the possible merger of Unifon and BellSouth in Argentina, and if you think there is going to be any problem with the regulator and monopoly commission? And the last question: is there capex guidance for this year and 2005? Are you planning to change it?

Regarding the first question, as to why there was an increase in the amount of the bond, it was mainly due to the appreciation of the euro. We have to remember that a good portion of our debt is euro-denominated. This increase reflected mainly the impact of the appreciation of the euro. Regarding the second, question, which is the announcement of Telefonica buying BellSouth's operation in Latin America and the Movicom operation in Argentina, I think that they will need approval from the regulators and from the antitrust group. This is quite difficult to say, if they have a problem. It is a process that will take some time. Honestly, I don't have an opinion about the final resolution that this issue could have. And the third question on capex, the capex as was mentioned during the presentation, we have two factors that mainly impacted our capex. The first one is the expansion of our mobile investment, mostly in GTM. And the second one is the expansion that we need to do in order to increase our ADSL services. The expected capex for the year 2004 is 160m dollars. This is our projection today. I don't know if I've answered all your points.

Mr Garcia, did you have a follow up?

Yes, thanks for that. I have a follow up regarding the possible merger of Telefonica and BellSouth. Would you be part of the process, at some point, in terms of contesting the possible merger? Or would Telecom Argentina be absolutely on the side, without intervening?

No. We will not be part of the process. No, that's the answer.

Okay, thank you.

We go next to [Humera Shake] of Aberdeen Asset Management.

Just a follow up question, on your mobile business, with the transaction in Argentina with BellSouth and Telefonica, can you just talk about the impact on competition as and when that deal does go through? Also, on the mobile side, you said that there were some technological upgrades that you and the rest of the industry were doing. What does that mean? Is that just GSM-related, or is it 2.5G or 3G related? And if you could just explain a little bit more about what sort of GSM expansion you're talking about. Are you talking about widening the network, or just making the network deeper? On the capex side, did you say 160m US dollars? And then, lastly, in terms of guidance, if you can give us sort of revenue and EBITDA guidance as well for 2004 that would be helpful. Thanks.

Regarding the first part of the question, how we see the market with this acquisition that Telefonica has done, hopefully we will have an important competitor that will have more than 50% of the market, I think, if we add in the percentage of the market share that they have today. This will make things tough for us. But saying that, I think that this opens some opportunities because obviously this acquisition will create a period of turbulence in the Telefonica Group. I'm sure that if we are able to respond to our customers and to the market with efficiency and good services, we will be able to capture part of the customers that are affected by this turbulence that I mentioned before.

The upgrade that you refer to is mostly GSM. We are not doing any other upgrade. I think this will be the trend in the market too, as the other competitors are doing practically the same. In terms of revenues and EBITDA guidance, well, I think we have the possibility, or we have the expectations that the economy has a positive development this year. I'm sure we will be able to follow this growth of the economy in general terms. The mobile could be an exception, because the question of the acquisition and the question of the upgrade that we are doing in our network, will make the business more difficult to predict. But again, I am confident that our professionals and the knowledge that we have of the market will be positive factors to achieve an important improvement in our mobile business in comparison with 2003.

In terms of margins, what we are imagining is that we will have a decrease in the margins if we project the margins of 2004 in comparison to 2003 margins, mostly due to the impact of the salaries that we have already mentioned. We know that to maintain or to increase the presence in this market we will have to increase our expenses in advertising. Mostly what I expect is a decrease in the margins, but not a huge decrease.

Just a quick follow up on that. You're saying EBITDA for 04 is probably going to be at least as good as it was in 2003, so roughly 2b. You're expecting revenues to rise in line with the rest of the Argentine economy, but maybe a little bit of margin weakness. Would you say it's fair to say an EBITDA at least flat, year on year?

Flat, I would say no. I would say that we will have a lower EBITDA in 2004 than the one we had in 2003.

Is it possible for you to quantify that at all, or give the range?

I am talking in terms of percentage, not in absolute value. In absolute value, due to the increases in sales and revenues, our EBITDA in absolute value is going to be higher than 2003 EBITDA. Excuse me, I lost the last part of your question.

I think the very last part of my question was, on the capex, you said 160m US dollars. Is that right, US dollars? Or pesos?

That's correct.

Because it seems, obviously... I mean, that's a substantial increase year on year. Just one very last question, on the cash side, can you just remind us - is your cash held in pesos, or is it held in dollars?

We have cash in different currencies. We have cash in pesos, we have something in dollars, and we have something in euros.

But given that you're trying to do a debt restructuring, and all of your debt is in foreign currencies, would it be fair to say that the vast majority of your cash is currently held in dollars or euros?

Yes. That's right.

Yes, our objective is to try to maximize our cash position in currencies comparable with the levels of debt that we have. I'm trying to say that we balance our debt position between euros and dollars in relation to the composition of our debt.

And as you know, there are some restrictions in buying dollars. We cannot freely buy all the dollars we want.

Okay. Would you be able to just tell us sort of how much you've got in dollars and euros?

In the balance you can see how much is in foreign currency. I don't remember the exact amounts.

Okay, that's fine.

I'm sorry, Ms Shake, did you have a follow up?

No, we were just trying to find that number. That's all.

Approximately, in dollars, at the end of December 2003, was approximately 300m in dollars, and approximately 230m in euros.

Okay, great. Thank you.

You're welcome.

And we go next to [John Charles Lemard] of JP Morgan.

Yes, good morning. Just a few questions. Firstly, on the issue of the merger again, can you remind us if there's a problem with the spectrum cap in Argentina? Wouldn't BellSouth and Telefonica go over significantly the spectrum cap? Secondly, can you give us an update on your tax assets? At the end of 2003, how much you have in tax loss to carry forward? And then a general question would be, how would you expect traffic to evolve going forward? If you look at your traffic levels, you're back to pretty much the levels of the third quarter 2001. Do you think there's more potential for a recovery in wireline traffic - and I'm talking about the wireline traffic, not wireless?

John Charles, can we go question by question? Your first question was related to spectrum. Obviously that's an issue that the regulator will have to resolve. Apparently there is a limitation on a per-region, or the spectrum that each operator can own. Obviously that will be an issue the regulator will have to resolve.

Is it 45mhz?

The maximum is 50.

50 - they would be at 87, right?

I would not like to comment on that because on top of that, both Movicom and Unifon combined have cellular in 800mhz, they have PCS in 1800, 1900. And in the case of Movicom, they have a trunking frequency. But basically we would not like to comment on that. And your next question?

The next question was on your tax loss carried forward. Do you have an updated figure as of the end of 2003, on your tax assets?

Yeah, consolidated was approximately 1.8b pesos. And approximately that's 1.5b for Telecom Argentine and approximately 300m for Telecom Personal. Due to a conservative policy, we've taken 100% provision on that carried forward.

Another question is again on going to wireline traffic, if you look at your wireline traffic in the fourth quarter and you combine Internet plus local plus long distance, you are approximately at the same level as the third quarter of 2001, or the fourth quarter of 2001. Do you see more potential for continued recovery in traffic levels going into 2004? Particularly, what are you seeing on the corporate side? What trend are you seeing on that side of the business, on the corporate?

Well the evolution we imagine will depend on the evolution in the economy of the country. As we are projecting a positive evolution in the country, we are projecting an evolution in the [indiscernible]. Does this respond to your concern or question?

Okay then. Just a last question, what should we be using as a long-term capex-to-sales ratio for you? On what do you think you will stabilize, both on the mobile and on the wireline side, in terms of capex to sales?

On a long term, we are forecasting something close to 15%, but in some years we may exceed that percentage, especially in the mobile business and especially in the next two to three years, we will be expanding the GSM coverage to the rest of the country. That will imply significant investments for the mobile business. But in general we are using a 15% ratio.

We'll go next to [Marianna Vassili] from [Group SBS].

[Al Campona[ from SBS. I am with [Marianna]. I have two questions. The first one is regarding your competition in the cellular business. Would you consider or is there a possibility of further association between your own company in the cellular business with any other company, let's say, maybe CTI? The second question is regarding your indebtedness. I need to know how much of your total debt is euro-nominated debt?

Okay, regarding the first part of your question on whether we are considering an association with other companies, here in Argentina, the response is no. We are not considering any association. Regarding the second part, the euro debt is 1.2b euros.

Okay, thank you very much.

Gentlemen, at this time there are no other questions in the queue.

Again, thank you, everybody, for participating in this conference call. Bye bye now.