Telecom Argentina SA (TEO) 2004 Q1 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 Insussary, Manager, IR Division. At this time, I will turn the call over to Mr. Felices. Please go ahead sir.

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

As an introduction to this conference call, I am going over some highlights of the quarter. I would like to point out that the results that we reported yesterday show a net gain for the first quarter of the fiscal year 2004 of approximately ARS124m. The beginning of the quarter, with a combination between a substantial improvement of the operating results, as you will see later, and the effect of the gains in exchange difference related to the application of the Argentine peso versus the dollar and the euro - as our net financial debt is mainly remunerated in foreign currency.

The operating results reached ARS65m, which is a substantial improvement from the loss of ARS24m that we have in the first quarter of the year 2003. Total revenues increased by 20%, mainly due to a significant expansion of our mobile business. And, in addition, the stable macro-economic conditions contributed to the general improvement of our business.

As you will be able to see later during the presentation, all subscriber levels declined whereas subscribers and Internet connections showed positive evolutions but at different growth rate. Cellular subscribers continue to grow at an accelerated rate as compared to that experienced in the year 2003. Additionally, we have been able to expand our ADSL services, and the fixed line business continues to recover, adding 114,000 lines in service year-over year.

Despite this positive evolution, we are seeing that the market in general is showing signs of tighter competition. As a consequence, and in order to maintain our leadership position in the different markets, we have increased our marketing expenses and CAPEX. This is expected to rise as we are in the process of increasing the coverage and capacity of our GSM and ADSL networks.

In respect of the tariffs renegotiation, we continue conversations with the government and no significant development has been achieved. We must mention that the result of the company still being affected by the tariff freeze, and caused by the government in January 2003.

Finally, and I am going to -- finally I am going to a very important issue for the future of the company. Yesterday we announced a new restructuring proposal and the expected timetable for the launch of the transaction. The new proposal allows higher levels of recorded creditors and, at the same time, leaves the company with a cash flow that it needs to finance its operations.

We have been in discussion with an audit committee who have indicated its support to our debt restructuring proposal. It is important to recall that the company has a consolidated net debt of approximately $2.5b.

After this brief introduction, I would like to pass the call to Pablo and Pedro who will go into the specifics of the result which I have announced yesterday. Pablo.

Thank you. Moving on with this conference call, you now have a presentation we will go over the general context and the evolution of the Group. Then we will go through a brief description of the performance of our fixed and cellular business and finally, we will go over the debt [indiscernible] and restructuring issues.

Going to the description of the context in which we perform, we would like to briefly detail how each of them that have effected the environment in which Telecom operates, as seen in slide two of the presentation. During the quarter, the macro-economic situation continued to recover after experiencing an 8.7% GDP in 2003. The peso to dollar exchange rate has remained stable around ARS2.9/Dollar

Inflation continues at slow rate to again increase 1.1% first quarter and 2.3% for the last 12 months. The labor market is also showing positive signs. Unemployment has decreased by 600 basis points and the unemployment rate has declined to 14.5% in the fourth quarter of 2003. As a consequence of higher labor demand, it will increase the economic activity but also due to the implementation of social plans.

When analyzing the evolution of the Argentinean economy, one must remember that Argentina is recovering from a very long recession and that in 2002, GDP contracted by 10.9%, or by 18% in the period 1998-2002. Additionally, in recent weeks the country is beginning to experience an energy crisis that could affect the economic recovery.

Concerning recovering debt, the government has announced that it is preparing a restructuring proposal for the approximately ARS100b in defaults for the first quarter of 2004. The acceptance of this proposal that contemplates an important nominal tariff cut, as well as lower interest rates and longer repayment terms is still uncertain.

The government has complied with all the goals set in the agreement with the IMS but the continuity of the agreement depends on the results of their debt restructuring. Regarding the political situation, the level of popularity of our government has decline in recent months but the [indiscernible] administrations continue to enjoy high popular support.

Finally, there are no significant developments in the tariff renegotiations for the telecommunication services. However, due to the energy crisis, the government is implementing some tariff increases for gas and electricity.

On slide three of the presentation, we are making overview of some of the issues related to corporate development. Similar to previous years, the company continues to operate in a stable environment but it is facing new challenges. Significant market consolidation is occurring after the announcement of mergers and acquisitions in both fixed line and cellular business. The cellular market is experiencing a significant increase in the level of activity that could lead to higher commercial expenses and accelerated CAPEX plans, due to the deployment of the GSM network.

After three years of significant low levels of capital expenditures, the company will have to engage in higher levels of investment for its fixed line business in order to maintain the quality of services and strengthen its market position.

Additionally, the company continues to invest in the expansion of the coverage and capacity of the ADSL service, due to the increase in demand of Broadband services. Finally, the earnings results are showing the effect of the wage increases granted in 2003.

Going to slide four, we can see the quality of evolution of the income statement. During the month 2004 fourth quarter, revenues moved by ARS166m or 20% compared to the first quarter of 2003. This was mainly driven by the expansion of the mobile business in Argentina and the increase in traffic volumes in the fixed telephony.

Regarding costs, opex increased by ARS175m or 31% when compared with previous quarters. Meanwhile, operating profit before depreciation and amortization amounted to ARS494m, growth of 9% when compared to the March 2003 quarter. The margin reached 49%, decline from 53% in March 2003. Finally, below the operating profit, net income for the March 2003 quarter was mainly influenced by a monetary gain due to the positive effect of the foreign exchange rate.

Going to slide five, we are showing a breakdown of revenues and operating profit before depreciation and amortization by business line. We can see that fixed line business has expanded its revenue by 7%. In this business, operating profit before depreciation and amortization grew by 5%. On the other hand, this business expanded its revenue by 52% and its operating profit grew by 21%. It must be noted that all these figures are percentages and percentages are after inter-company account elimination.

Going to slide six, we are showing the revenues evolution for first quarter of 2004 compared to the previous year. Revenues in the fixed telephony, including fixed line telephony, international telephony, and data transmission increased by ARS39m or 7%. The increase can be mainly explained by the higher number of lines in services, the increase of 7% in local and DLD traffic, and an increase of 3% in fixed line telephony.

Revenues in the cellular activity in Argentina increased by ARS117m or 58%, mainly driven by the growth in the number of subscribers, and the increase in ARPUs. Revenues coming from Nucleo also show an increase of ARS6m or 17% due to the same reasons. The net revenues grew by ARS4m or 29%, mainly due to a large number of connections to ADSL services.

Going over the main operating costs in slide seven, we can see that labor costs and headcount have increased. Labor expenses increased by approximately 19% as of the March 2003 quarter. This increase can be largely attributed to the incorporation of contracted employees, and the increase in salaries of the unionized and non-unionized employees.

Commercial costs - that includes advertising, sales commission and cost of handling - have increased by ARS69m as compared to the March 2003 quarter. As a consequence of the increase in commissions paid to vendors, higher advertising expenses and incremental costs of handsets. The expansion of the cellular business was a main contributor to the growth in commercial expenses.

In slide eight, we can see that despite the actions adopted by the company to pull back controllable costs and capital expenditures, also defined as operating expenses plus capital expenditures minus charge for doubtful accounts, have increased by ARS182m or 45%, when compared to the first quarter fiscal year 2003. With these increases in costs, the operating cash flow, the finance operating profit before depreciation and amortization minus CAPEX, increased by 2% or ARS9m to ARS433m on a quarterly, year-over-year comparison.

At this time, I will pass it across to Pedro who will continue the presentation of the evolution of the fixed line and cellular business. Following the speech we will be glad to answer any questions 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, 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 the 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 May 10, 2004 - a copy of which will be included in our 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 clause contained in slide 21 of the presentation.

As usual, we would like to remind you that all those who have not received our press release, nor our presentation, you can call Golin/Harris or our office, or even download it from our website located at www.telecom.com.ar. We remind you that this conference call is being recorded and will be replayed until May 18. Additionally, this conference call can be replayed through the webcast feature available in the investor relations section of our website.

Going back to the presentation and the evolution of the fixed line business in slide ten, we can see the evolution of the unconsolidated income statement of Telecom Argentina. During the March 2004 quarter, revenues grew by ARS51m or 8%, compared to the first quarter 2003. This was mainly driven by the increase in the number of lines in service, and the increase in traffic.

Regarding costs, opex increased by ARS28m or 10% when compared with the March 2003 quarter, mainly due to the increase in labor costs. Meanwhile operating profit before depreciation and amortization amounted to ARS318m, a growth of 6% when compared to March 2003 quarter. The margins declined to 55% from 56% in March 2003.

In slide 11 we can observe that the lines in service continued to increase, growing year-on-year by 114,000 lines. Demand for new lines continues to be steady and the number of disconnections continues at low levels. It must be noted that the number of fixed pre-paid and restricted use of lines remain at 14% of total lines in service. In terms of rates, domestic line prices have remained stable since March 2003, despite this service is under significant competition.

Regarding average international business rate, the company has been able to reduce some discounts and, as a consequence, the average rate has increased since March 2003 by approximately 11%.

In slide 12, we can see that total traffic volume is approximately 9% higher compared to the March 2003 quarter. This is mainly due to the growth of local, DLD and Internet traffic. For the March 2004 quarter, the average revenue per fixed line customer totaled ARS39.00, increasing by 5% when compared to March 2003, mainly pushed by higher levels of consumption and traffic.

Moving to slide 13, during the first quarter the Internet business has registered a 5% increase in terms of dial-up customers, when compared to that registered a year ago. Additionally, ADSL high speed access connections increased by approximately 6,000 during the quarter and 19,000 when compared to first quarter 2003, to reach approximately 51,000 connections by the end of March 2004. Additionally, ADSL connections to other ISPs continues to grow at a steady pace.

Going to the description of the evolution of the cellular business in slide 15, we can see that the evolution of unconsolidated income statement for Telecom Personal during the March 2004 quarter. Revenues grew by ARS116m or 57% compared to the first quarter of 2003. This was mainly driven by the increases in the number of subscribers and the higher levels of traffic. Regarding cost, opex increased by ARS101m or 82% when compared to March 2003 quarter.

This significant increase was mainly driven by charges related to terminational calls and other cellular networks; higher traffics due to the impact of turnover taxes that evolve in accordance to the increase in revenues; higher commissions paid to vendors related to the increase in handsets and pre-paid cards sold; and higher commercial expenses as Telecom Personal has engaged in advertising expenses in order to face the new market scenario.

Meanwhile operating profit before depreciation and amortization amounted to ARS97m, a growth of 18% when compared to the March 2003 quarter. The margin declined to 30% from 40% registered in March 2003.

We can see in slide 16 the evolution of the cellular subscribers. Cellular subscribers of Telecom Personal in Argentina increased by 28% year-over-year or by 10% compared to December 2003 quarter. Both post-paid subscribers and pre-paid customers continue to increase. Pre-paid services represent approximately 81% of our customer base. Moreover gross adds continue to grow at a safe pace. And disconnections have dropped by 72% compared to the first quarter 2003, when we changed the policy of dormant subscribers for the pre-paid service.

In slide 17 we can see that cellular blended ARPU increased by 41%, when compared to the March 2003 quarter but declined 6% when compared with the previous quarter. Since the month of September 2003, revenues related to the charges for the termination of calls of other operators in Telecom Personal's network are contributing to the increase in ARPU. Pre-paid ARPU increased by 35% when compared to March 2003 quarter, and has remained stable when compared to the previous quarter. Post-paid ARPUs increased by 16% when compared to March 2003 quarter, and 4% when compared to the previous quarter.

Finally, going to issues related to our debt in slide 19, we can see the evolution of our consolidated net debt. Since the end of 2002, we can see that as a consequence of the cash regeneration of the company and the debt buyback performed last June, net debt converted to US dollar has consistently declined at regional level, of the equivalent of approximately $2.5b.

Finally, in slide 20, we briefly describe the proposal made public yesterday night. It is important to mention that regulatory approvals are pending, and that if we receive such clearance in due time we expect to launch the proposal in early June. In addition to what is included in the slide, we can mention that - as Carlos Felices mentioned before - after extensive discussion with representatives of debt holders, such groups of creditors have indicated their support to the proposal announced yesterday. Having said that, we would like to open it to questions..

Thank you. [Operator's Instructions] We will go first to [Patrick Grenham] of Citigroup Smith Barney.

Good morning. Just under debt restructuring proposal. Are you confident that you have enough in order to -- enough bondholders in order to make this proposal live? And how confident are you that this proposal will actually resolve your debt issues, and allow you to move on from the debt restructuring? And finally, if it is successful, it looks as if the interest costs we are looking to pay every year is around $140m going - stepping up to $175m from 2009. Would that be correct?

Okay, this is Carlos Felices. You ask if we are confident that we will achieve the percentages that we need to close it the transaction. We have been in touch with, as I mentioned before, with creditors that represent a substantial portion of our debt. And we are confident that we get that agreement that we achieve with them, we will be able to rate the necessary percentages to apply to an agreement.

Our proposal collects the request that these creditors have been asked that, and I think this time we have already a substantial agreement with our creditors.

Right, you need two-thirds approval? Correct?

Exactly, yes, exactly. The second point - we always have been very careful in managing, or instrumenting, our proposal in a way that permit us to avoid problems in the future. And this is exactly what we are doing in this case. We have been very careful in determining the levels of amortization and the levels of interest that we are going to pay every year. We are sure that we will be able to honor the debt that we are restructuring.

Regarding the last point of interest, Pablo.

Yes, the amount of interest that we are offering to pay is less than $160m for the first year and then start decreasing from that moment that we start amortizing the debt. So it is $160m, or $140m something. It depends on the final options that the creditors have but the maximum that we can pay for next year is less than $150m.

Right, and as the step-up comes through, you are hoping to have matured the bonds or what? Because the two bonds [series] you have -- Because 2008 seems to be the key here where the interest coupon steps up.

Yes, but at that moment we will have amortized an important part of the debt. So the effect - the impact on the interest is going to be not significant.

Right, and I am right that your cash position would drop to of cash and that would drop by ARS1.6b or so, pesos of cash if you were to--

I am sorry I can -- You are asking me for a level - up to a level of cash would decrease?

Yes, but because of the cash portion of what you will do under option C.

Yes, we will use ARS660m to buyback some bonds or loan.

Right, and that's about ARS1.7b correct?

Yes.

Okay, so you would have about ARS1b left of cash on the balance sheet having done that option?

Yes, now we have to pay interest.

There is a principle to amortization that is planned for the end of this year too, so we think we are going to end with an amount of cash, it is going to be in the range of $80m. So make it to $100m.

US dollars?

Yes.

Okay, and then the guidance for the CAPEX in 04 and 05? Do you have -- I mean what is your investment capability in your assets?

Patrick, this is Pedro. Basically the guidance of CAPEX is similar to what we have mentioned in previous calls [inaudible] 2004. We are -- We have a CAPEX budget of approximately $160m on a consolidated basis. The breakdown of that is approximately $85m for the cellular business and $75m for the fixed line business. And going forward, we are assuming normalized level of CAPEX of approximately 15% of revenues.

When we talk about the amount of interest, we were talking only about Telecom, no? Not including Personal.

Patrick Grenham. Okay, great. Thank you.

Okay, you are welcome.

We will go next to Riswan Ali of Bear Stearns.

Good morning. My question is regarding the margins. We have seen, I guess for the first time for the last year, year and a half, the modest decrease. And that was kind of expected but my point that, as things get back to normal, is it fair to assume that your margins - EBITDA margin - will still remain well above what you had prior to the devaluation of the currency in Argentina?

I will answer that. This is Pedro, good morning to you. As we have consistently said in the past, and finally it has occurred, the levels of margins that we have reported, especially in 2003, were not sustainable. And, basically because we understood that for several reasons that were not going to occur in -- or several factors that were not going to be repeated in the future - such as the level of commercial expenses, levels of advertisement, and also our cost structure was under significant strap in a way as the company had implemented a very stringent cost control action.

What we can say regarding margins is that, again, the levels that you have seen in 2003 were not sustainable, and the best proof of that is what we have reported in the first quarter of 2004. And, regarding, as I say, projections going forward, we prefer not to give any guidance of that sense, particularly of the country and certainly of the Argentine economy.

Is it fair to say that they can only be lower than where you are in the first quarter?

Again, we -- Our assumption is that we -- the margins that you have seen in 2003 are not sustainable. Okay? It was expected that margins will decline and we have consistently said that, and that is what you see in the first quarter.

Okay, thanks.

Okay. It is important to point out that we are reducing our rentability but we are increasing the absolute value of the margin. It is what we are looking for. We do not want to reduce our absolute level in margins. Okay rentability.

Okay, thank you.

[Operator's Instructions] We will go to William [Perry] of JP Morgan.

Hi, good morning. Just a question on the deal - relating to the first question that was asked. Can you give us the percent approval rating of the ad hoc bondholder committee or the dollar vote that you have supporting this latest restructuring, please?

We do not have these numbers but we are not authorized to disclose these numbers but the percentage are important.

Okay, thank you.

We will go next to [Ann Milne] of Deutsche Bank.

Yes, good morning and it is nice to see your updated proposal, gentlemen. I have a couple of questions. The first was just to ask if you could confirm, is there - is this new proposal also going to include a cash flow [sleep], as you had in your original proposal and with the last proposal? And is it essentially the same? And the second, just on the debt proposal, is could you just give us a quick rundown of the amortization schedule?

Okay, we have included in the proposal a cash flow sleep of activity. And regarding the amortization schedule, if you give us a second to give you the information.

And this is a basic [indiscernible] for everybody. The document that basically contemplates the new proposal - the amendments to the [mission] statement is already available in the [STC] website. We have filed the amendment this morning.

Okay, we had not seen that one yet.

No it was, let us say, an hour, an hour and a half ago, so. Okay?

Okay.

Speaking of what we can see, that the option A that has the long bond growth from 2004 to 20014. And the option B there is a shorter bond, goes from 2004 to 2011.

Okay, is it equal amortizations or is it --

No, it is a variable amortizations.

Okay. So I should - what you are saying is I should go look at the registration amendments?

Yes, please.

Okay, two other quick questions. Just again, staying on the debt restructuring, is the Telecom Personal proposal essentially the same?

It is [different] than the one in Telecom but we did not reach an agreement with all the creditors of Personal yet.

Okay, so that will still be pending for the time being?

Pending, yes.

Okay, and then just going back to the cellular business. Obviously over the last year there has been a dramatic change in the landscape in Argentina. Could you just tell us what you are expecting to see, based on increased competition from [America Mobile] and now Telefonica with the [Modocom] acquisition or [Belle South] acquisition?

Well, what we are expecting to see is a substantial more complicated market because of the factors that you mention, because of the changes in technology. And because of the attitudes that the companies we take to capture the best customers in the market. It means it is going to be a very dynamic market where we will see a lot of activity in investment, a lot of activity in advertising. And I hope not too much activity in discounts of their handsets. But I can predict what we are going to do but I cannot talk about our competitors because it is going to be difficult to predict what they are going to do.

Okay. Do you have just in general an idea of how - what penetration levels you can achieve overall in the Argentine market on the cellular side?

We are thinking that in the year 2011 -- sorry, the level should be around 35%.

Okay, great. Thanks very much and we will look forward to your registration amendments. We will talk to [inaudible] about it. Thank you.

We will go now to [Hamoda Sheik] of Aberdeen Asset Management.

Hi there, sorry, just a couple of questions. I did not quite hear the answers properly. Regarding the percentage of votes, could you just remind us what percentage of votes you require from bondholders and other creditors to pass the resolution?

We need two-thirds of the amounts in order to have the necessary - the requisite majorities - in order to submit the [obit] to the commercial judge.

Okay, and with regard to the committee that you are mentioning you have got support from. Is that a committee of bondholders or of the bank debt participants?

It is a committee where there are banks and there are bondholders.

Okay, and so when you say significant percentage are in support, is that a significant percentage of the bonds?

It is a significant percentage in support.

Of the bondholders not the banks but of everybody? Because I am trying to get an idea - I know that you have been in talks for quite a long time with the bank debt guys. But from what I had understood, the bondholders have not been involved to any great extent for a good portion of that time. So it is quite -- you know, it would be helpful if you could give us some specific information about, you know, what sort of percentage of bondholders you have got support from to give us an idea.

What I can tell you is that the bondholders actually participate in time. Regarding percentages, I cannot assure you who [that] is going to be and not also right to talk about this information. But this time the bondholders have had an active participation in the discussions - both retail and distribution.

[inaudible] contact person who is happy to talk to other bondholders who are not on the committee? I mean I am just wondering if there is a representative on the committee for bondholders who is willing to talk to bondholders who are not on the committee? Usually there is some contact point.

I would suggest that you contact Morgan Stanley which is our adviser, and they will orientate you towards who you should be talking with.

Okay, that is fine, and just one final question. You mentioned that the Telecom Personal part of the restructuring is not so far advanced. Will you - Do you anticipate doing the restructuring of all the Personal debt at the same time as the rest of the other debt? And would it be at the same terms?

Well, our way of working with that was first to finish with Telecom Argentina, and then to work with Telecom Personal. We are going to start working in Telecom Personal. Despite that, we have an important degree of advance this week, as soon as we finish all the necessary documentation - in that Telecom Personal will come immediately, I hope.

I have clarification on Telecom Personal. The [universe] of credit in Telecom Personal is much more concentrated than it is at Telecom Argentina. Telecom Personal does not have bonds. Basically is has bank loans and the number of creditors is much - obviously it is smaller the case of Telecom Argentina.

Okay, and that debt is [peri pasu] with the Telecom Argentina debt, is it not?

The Telecom Argentina debt is peri pasu and Telecom Personal debt is peri pasu.

Okay, thank you.

And we will go next to [Andre Barchelle] of JP Morgan.

Good morning. I have a question regarding the mobile in sense of ARPU. Can you give a sense of what is the ARPU of the marginal customers, like the new customers that have been like added in in the last six months or two quarters? Is there ARPU like comparable to the ARPU of existing clients? Or we have seen like an upward trend just mainly driven by the existing clients who are increasing their usage?

Andre, basically that one of the main products that we are selling in the market is a product called Clear Accounts [indiscernible]. That is basically a mix of post-paid and pre-paid services. Basically it has a limit of credit of approximately ARS35.00 per month, and over that amount of consumption the customer has to recharge its account through a pre-paid card. That is, I would say, one of the most active products that we are selling obviously.

Also, we have a lot of pre-paid adds that we are acquiring in the market. Obviously, I mean taking into account your comments, that the new subscribers obviously are similar to what we have as an average ARPU, okay? Does that answer your question? Hello?

Okay, thanks a lot. Sorry, I was on mute.

At this time there are no other questions in the queue. Mr. Felices I will turn the call back to you for any additional remarks.

Well, I would like to thank you again for your participation, and invite you to continue supporting our company as you do it today. Thank you very much.

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.