Telecom Argentina SA (TEO) 2004 Q3 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 Mr. Felices. Please go ahead, sir.

Good morning, I would like to thank everybody for participating in this conference call. I am Carlos Felices and together with me are Valerio Cavallo our Chief Financial Officer, Pablo Caride our Finance Director and Pedro Insussarry our Manager of Investor Relation.

As an introduction to this conference call, I'm going over some highlights of the quarter.

I would like to point out that our results continue to be positive on the operational side. It is important to note that during this period, we have been able to increase our operating profit for D&A and EBIT in absolute terms, whilst financing the expansion of our mobile and internet business.

In the mobile business, revenues went up by 47% and 39% in terms of customers. On the other hand, in internet business revenue increased by 30% and ADSL customers increased by 79%.

Moreover, despite this significant expansion, we continue to deliver a strong cash flow generation that will allow us to finance the deployment of our GSM and ADSL networks, while not putting at risk the financial commitments that we have agreed in our financial restructuring.

The earning results that we reported yesterday do not include the effects of the restructuring that we expect to close shortly. That's why our financial results continue to be impacted at the bottom line.

Yesterday we reported a loss of approximately 491m pesos for the 9 month period and the main reason for this was the loss in the financial results of 622m pesos. Operating profit increased to 208m pesos compared with a small profit of 24m registered in the same period of the year 2003.

We can mention that the current macro-economic conditions are contributing to the general improvement of almost all of our business. We are seeing that the market, in general, is showing signs of tighter competition. In order to maintain our leadership position, we have increased our marketing expenses and CapEx levels. In addition, maintenance expenses increased in our fixed line network in order to sustain the quality of our services.

With respect to the tariff negotiation, after signing of the Letter of Understanding with the Argentine Government, where we committed to reach an agreement by year end. We continue with conversation with the renegotiation unit. We must mention that the results of the Company are still being affected by the tariff freeze enforced by the Argentine Government in January 2002.

Finally, I'm going back to the restructuring process, we understand that we are in the final stage. In Telecom Argentina, after obtaining 94.4% participation in the solicitation process, we appeal the Acuerdo Preventivo Extrajudicial ("APE") with the Argentine courts and we are expecting the final judicial homologation issuance of the new note and payment of the cash consideration to occur during the first part of the year 2005. This timeframe is subject to the timing of the final court approval.

In Telecom Personal we have obtained full support from our creditors and we are proceeding with an out-of-court restructuring. We are executing the final agreement and we expect of finalize Telecom Personal's restructuring before the end of the year.

As we mentioned in previous conference calls, we would like to reiterate that all our objectives in the restructuring process were to grant a fair treatment to all constituents and follow a secure process in order to reach a successful closing. We understand that the path that we are following in this restructuring met such objectives.

After this brief introduction, I would like to pass the call to Valerio Cavallo, Pablo Caride and Pedro Insussarry who will go into the specifics of the results that we announced today -- yesterday, sorry.

Thank you. Moving on with the conference call, the agenda of this call as seen in slide 1 is to 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-line Business, the evolution of our Cellular Business and finally we will go over a summary of the Debt Restructuring Process.

Going to slide 2, we would like to briefly detail the issues that have affected the macro environment in which Telecoms operates.

During the quarter, the macro environment has improved in general terms and the economy has resumed growth. Industrial production continues to grow. The demand for public services continues to show positive signs. Inflation continues at the low level while the falling exchange rate remains at around 3 pesos per dollar.

On the external front, prices have [indiscernible] continues to be strong despite the recovery in imports, fuelled by the increase in activity. On the fiscal front, the Government has posted an important primary surplus and that complied with all the quantitative goals set in the agreement with the IMF. However, despite this fact, the assenting government has decided to renegotiate the agreement with the IMF once the sovereign debt restructuring has been concluded. Despite the current environment, uncertainties such as the lack of definition in the tax sharing system, depending solely on debt restructuring and the waiting of a solution of the renegotiation of public services contract and concessions could impact this favorable macro-environment.

Regarding the sovereign debt restructuring, the Government has filed the last version of the terms and conditions of the new bonds and is prepared to launch the debt exchange process in the following weeks. The authorities have reached agreement with a local institutional investor that may deliver a minimum degree of acceptance for the proposal. However, the success of the Exchange will depend on the participation of local and foreign retail investors. The debt restructuring proposal will contemplate an important nominal [indiscernible] significantly lower interest rates and a materially longer repayment term.

Regarding the political situation, the Government still enjoys a high level of popular support. In addition, the Government is scheduling to call for a congressional election for October 2005.

Finally, regarding the regulatory environment, the Company continues in conversations with the Government, to resolve the renegotiation of the Contract.

In slide 3 of the presentation, we are making an overview of some of the issues related to corporate developments.

As we have mentioned in previous conference calls, the Company is facing an increasingly competitive environment that presents new challenges. The cellular market continues to experience an increased level of activity and this has resulted in incremental revenues, higher commercial expenses and accelerated deployment of GSM networks.

Additionally, after two years of significantly low levels of capital expenditures, the Company has started some projects in the fixed-line business, mainly allocated to external plant and maintenance of the network.

In the internet business, due to the increase in demand of broadband services, the Company continues to invest in the expansion of the coverage and the capacity of its ADSL service. In addition, in response to market demand and to the increase in competition, the Company has decided to double the speed of ADSL connections while maintaining the price of the service.

Going to slide 4, we can see the evolution of the Consolidated Income Statement. During the first 9 months of the year, revenues grew by 500m pesos, or 18%, compared to the same period of 2003. This was mainly driven by the expansion of the mobile business in Argentina.

Operating costs have increased by 465m pesos, or 37%, when compared with the 9 month period of 2003. It was mainly due to higher handset costs and the sales commission, deriving out of advertising expenses, increases in labor costs and augmented maintenance costs.

Meanwhile, operating profit before depreciation and amortization amounted to 1.485b pesos, an increase of 2% when compared to September 2003. The margin reached 46% declining from 53% when compared to the 9 month period of 2003.

Below the operating profit, net loss for the period was mainly influenced by the effect of the financial results. Finally, net financial debt declined by 427m pesos, or 6% due to the strong cash flow generation of the Group partially offset by the evolution of foreign exchange rates.

Going to slide 5, we can see the quarterly evolution of the Consolidated Income Statement. Revenues grew by 88m pesos, or 8%, when compared to second quarter 2004, and 180m pesos, or 19%, when compared to third quarter 2003. This was mainly driven by the expansion of the mobile business in Argentina.

Operating costs increased by 77m pesos or 14% when compared to second quarter 2004, and by 185m pesos, or 40%, compared to third quarter 2003. This was due to higher commercial costs arising from higher sales commissions, handset costs and advertising expenses.

Operating profit before depreciation and amortization amounted to 499m pesos, an increase of 2% when compared to the second quarter 2004. However, when compared with the third quarter 2003, operating profit before depreciation and amortization decreased by 5m pesos, or 1%.

Regarding margins, third quarter 2004 margin declined to 44% from 46% for second quarter 2004 and 52% for third quarter 2003.

Going to slide 6, we are showing the revenues evolution for the 9 months of 2004 compared to those of the same period of 2003. Revenues in the fixed telephony included international telephony and data transmission increased by 99m pesos, or 5%. The increase can be mainly explained by the higher interconnection revenues, higher number of lines in service and a 4% increase in local and domestic long distance traffic.

Revenues in the cellular activity in Argentina increased by 378m pesos or 54%, mainly driven by the growth in the number of subscribers and increased usage. Revenues coming from new clients also show an increase of 10m pesos, or 9%, due to an increase in ARPU and the effect to the depreciation of the peso versus the Paraguayan guarani.

Internet revenues coming from our net unit grew by 13m pesos, or 30%, mainly due to a larger number of connections to ADSL services.

Going over the main operating costs, in slide 7 we can see that the labor costs and headcount have increased. Labor expenses increased by approximately 11% from third quarter 2003. This increase can be largely attributed to the incorporation of contracted employees and increase in salaries of unionized and non-unionized employees.

Commercial costs that include advertising, sales, commissions and handset subsidies have increased by 68m pesos as compared to third quarter 2003, or 26m pesos when compared to second quarter 2004. This was a consequence of the growth in demand of cellular services and commercial actions taken to maintain market leadership and to face the increasing level of competition. As we can see, commercial costs represent approximately 9% of revenues, still well below market standards.

Going to slide 8, we can see the breakdown of the revenues and operating profits before depreciation and amortization by business line. We can see that the growth of operating profit before depreciation and amortization in the fixed-line business was due to the 6% expansion of revenues, but partially compensated by the 12% increase in OpEx.

In the cellular business, this effect is more evident as the 47% growth in revenues that was mainly due to the expansion of the customer base was substantially compensated by increased OpEx. This latter was mainly driven by the increase in commercial expenses mentioned before.

Having gone through the evolution of our consolidated figures, I will pass the call to Pedro who will continue with the description of the evolution of the fixed-line and the cellular businesses. Following this speech, we would be glad to answer any questions you may have. Let me pass the call to Pedro.

Thank you. Before we continue, we would like to [indiscernible] 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 [indiscernible] results in our operations to differ materially. Such uncertainties include, but are not limited to, the effect of public emergency law and complimentary regulations, the effects of ongoing industry and economic deregulation, possible changes in the demand for Telecom's products and services, the effects for more general factors such as changes in general market economic conditions and [indiscernible] and regulation. Our press release dated November 10, 2004, a copy of which will be included in the 6-K Report 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 22 of the presentation.

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

Going back to the presentation and the evolution of the fixed-line business, in slide 10 we can see the evolution of the unconsolidated income statement of Telecom Argentina, and in the 9 month of 2004 revenues grew by 113m pesos, or 7%, compared to the same period of 2003. This was mainly driven by the increase in inter-connection charges and higher traffic levels.

Regarding costs, OpEx increased by 104m pesos, or 12%, due to higher maintenance expenses and the increase in labor cost. Meanwhile, operating profit before D&A amounted to 1.1b pesos, with a growth of 2%. The margins declined to 53% from 56% in September 2003.

In slide 11, we can note that the lines in service continue to increase growing year-over-year by 127,000 lines. That represents a 4% annual growth rate. Demand for new lines continues to be steady and the number of disconnections continues to be low.

In terms of rates, the average domestic long distance rate has declined year-over-year by 6% and remains at the same level when compared to the June 2004 quarter. The evolution is mainly due to the application of higher price discounts as this service is under significant competition.

Regarding the international business rates, it remains at the same level when compared to that registered in September 2003, but declined by 4% when compared to the June 2004 quarter. Here, again, the evolution is due to the application of specific discounts and also to the launch of new pre-paid cards.

As we see in the next slide, traffic -- as we will see in the next slide, traffic is evolving positively following these discounts. Finally, we must recall that the local traffic rates remain flat due to the tariff freeze enforced by the Argentine Government.

In slide 12, we can see that total traffic volume is approximately 2% higher to that compared to third quarter 2003 and 5% higher compared to the previous quarter. This increase is mainly due to the growth of local domestic long distance and internet traffic.

For September 2004 quarter, the average revenue per fixed line customer totaled 39 pesos per customer, declining 3% when compared to September 2003 and remaining at the same level compared to June 2004 quarter.

Moving to slide 13, during the third quarter the internet business has registered a 16% increase in terms of customers when compared to that registered one year ago. ADSL connections increased by approximately 11,000 during the quarter and 30,000 when compared to third quarter 2003. Additionally, ADSL connections to other ISPs grew by 86%, or 19,000 lines, when compared to September 2003 and 17%, or 6,000 lines, when compared to the June 2004 quarter.

Going to the description of the evolution of the cellular business in slide 15, we can see the evolution of unconsolidated income statement for Telecom Personal during the 9 month period of 2004. Revenues grew by 380m pesos, or 53%, compared to the same period of 2003. This was mainly driven by the increase of the number of subscribers and the higher levels of incoming and outgoing traffic.

Regarding costs, OpEx increased by 375m pesos, or 91%, when compared to the 9 month period of 2003. This significant increase was mainly driven by higher handset costs as Telecom Personal significantly increased its sales of cellular terminals, higher charges related to the termination of calls in other cellular networks, higher taxes due to the impact of turnover taxes that evolve in accordance to the increase in revenues, high commissions paid to vendors related to the increase in the customer base and higher commercial expenses as Telecom Personal has engaged in advertising campaigns in order to face higher levels of competition.

Meanwhile, Operating profit before depreciation and amortization amounted to 306m pesos, equivalent to a growth of 2% when compared to the 9 month period of 2003.

The margins declined from 42% in September 2003 to 28% in September 2004.

As we have mentioned before, the increase in commercial expenses has affected Telecom Personal's margins. As an example, handset subsidies have increased by 59m pesos. This has a direct impact in the levels of operating profit before D&A and margins. We can see in slide 16 the evolution of the cellular subscribers. Cellular customers of Telecom Personal Argentina increased by 39% year-over-year, and by 9% compared to the June 2004 quarter.

It is important to mention that the mix of post-paid and pre-paid customers has been changing in the last year. As of September 2004, post-paid subscribers accounted for 24% of the customer base, up from 18% of the base as of 1 year ago. This change is due to the result of the policy adopted by Telecom Personal since October 2003 when commercial actions were focused to increase the penetration of specially designed post-paid plans with credit limits.

In slide 17, we can see that cellular blended ARPU increased by 13% when compared to the September 2003 quarter, and 6% when compared to the June 2004 quarter. We must note that since last year, revenues related to charges for the termination of calls of other operators in Telecom Personal's networks are contributing to the increase in ARPUs. Pre-paid ARPUs increased by 5% when compared to September 2003 and June 2004 quarter. Post-paid ARPUs decreased by 1% when compared to September 2003 quarter and has remained stable when compared with the previous quarter.

I will now pass the call to Pablo Caride who will go over the summary of the debt restructuring process.

As Carlos Felices mentioned before, we are approaching the end of our restructuring process. During the last quarter, we have gone through some very important steps that are summarized in slide 19.

Since having launched on June 22 the solicitation process of Telecom Argentina, on August 23 we were able to announce that we had achieved a 94.4% participation and on October 21 we filed the APE with a court in order to obtain judicial homologation of the APE agreement.

For Telecom Personal will launch the solicitation process on July 22 -- on July 2, and by October 3 we had reached 100% participation and therefore we were able to announce that we are pursuing an out-of-court restructuring.

In slide 20, we can see a profile of debt and principal amortization that we will have once the restructuring of the Telecom Group has closed in full. That profile assumes the following - non-participant status of Telecom Argentina with the Option A debt deferred option, the closing of Telecom Personal and Nucleo agreement take place during the fourth quarter of this year, and the closing of Telecom Argentina takes place during the first half of next year.

The exchange rates used in this profile are those as of September 30, 2004.

Following such assumptions, post restructuring debt will amount to US$2.2b, with an average life of 5.1 years and an average coupon of 8.25%. With respect to the currency composition of the restructured debt, 66% will be denominated in dollars, 28% in euros, 5% in yens and 1% in pesos.

As we can see in this slide, in a post restructuring scenario the Company will have a maturity profile where the principal amortizations are extended until 2004, and will not start to rise significantly until 2008. We must mention that the Company has agreed to a prepayment mechanism where the excess cash generated by the Company will be applied in direct order to the next amortization producing the short term refinancing risk.

Finally, in slide 21 we describe what we understand that the next steps until we can definitely close the restructuring process.

At the present time, the judge is verifying that all the requirements for the APE filing have been met. Once this review process is finalized, the judge will order the publication of judicial notice for five days in newspapers of general circulation in Argentina, where it will be informed that the objection period will begin.

The objection period will be open for 10 business days and during this period non-participant traders may object to the APE on certain specific grounds.

After the objection period has closed and the Company has answered any objections that my have been presented, the judge will rule approving or rejecting the APE. Telecom Argentina cannot predict the timing of a court approval but expect to complete its [indiscernible] process and issue the APE consideration in the first half of 2005.

Regarding Telecom Personal, we are in the process of finalizing the documentation in order to execute the APE. Once this is done, the debt instrument will be exchanged and cash consideration will be paid. Telecom Personal expects to finish its debt restructuring process before the year end.

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

Thank you. [OPERATOR INSTRUCTIONS] We'll go to Miguel Garcia of Bear Stearns.

Yes, good morning. My question is related to the wireless business. Your net adds were much lower than your competitors, [indiscernible] CTI reported net adds were double yours. Now, given the still low penetration in the Argentine market, don't you see the same opportunities they are seeing? Are they really capturing very bad quality subscribers in your opinion?

The second question is there a big difference in quality right now considering that CTI is still building its network in Buenos Aires?

This is Carlos Felices, Miguel. It's true what you said regarding the coverage of CTI. I think that there are important differences between what they are doing and what we are doing. What we are doing is focusing our expansion on our work coverage in the north of the country. We are trying to replicate the same network that we have before. It means that, at the end of the year, we will be in conditions to offer in GSM the same coverage that we have in TDMA.

Regarding customers, it's true that they are working on a more accelerated phase, if you can call it this way. But, again, our strategy is different. We are focusing in customers of higher ARPU. We are focusing in offering our customers value added services and our objective is to maintain the position in the market in terms of revenues and not as much in terms of customers, because what we notice is that there are many customers that has been incorporated for other operators that will never pay back the investment that they are doing with these customers. It means that, considering our objective of quality, better service, and considering our objective of having a positive cashflow, this is how we are working in the mobile business.

Thank you.

You're welcome.

We'll go next to Whitney Johnson of Merrill Lynch.

Hi, thank you. This is actually Mike Opelmann. I just have a follow-up on the wireless business. You stress a little bit more -- a little more [indiscernible] there in what you're seeing in a competitive environment. Are you not getting the share of net adds because your handset subsidies aren't as significant as your competitors? You talked a little bit about [indiscernible] success [indiscernible] may or may not be having in the corporate market, or if you can be able to defend yourself there.

Just on the DSL net adds, what market share do you have of DSL right now?

Gentlemen, we're unable to hear you at this time.

Can you now hear me?

Yes, yes. Sorry, sorry. We were looking for information.

Okay, sure. I wasn't sure who she's referring to.

Sorry about that.

No problem.

Your first part of the question was related to what we are doing different regarding our competitors. I think that it's true that they have a level of subsidies that we are not following, but what we have seen, two things that are going to be very important for the future, that we are increased or -- a good portion of our new additions are post-pay and we are gaining a lot of corporations. It means that I come back to the concept that I referred before in the sense that we are focusing in quality of our services and in quality of our customers and I think the result that today, we can say, are preliminary are satisfactory. Obviously, we need these concepts to mature and we will see if our vision of our objectives is the correct one, but again our objective here is follow the growth of the market, probably we will not be able to follow at the pace as the rest, but be focused in the quality of customer that we incorporate to our base.

Regarding the ADSL, the percentages are -- the total country is 16%, including cable TV, and in the north of the country is 28%.

Okay, thanks. Just to be sure on that second part, because I don’t -- I guess the one thing that is a little bit confusing is if you look across the competition, you're not seeing ARPU weakness. I think you're seeing similar ARPU trends across operators and if other people were going after lower end customers or possible customers, you would expect to see some ARPU evolution, which we're not really seeing. And if there's a chance that you're going to pick up the pace in a quarter or two we could get -- when you said when you have coverage at some of TDMA network that you'll get more aggressive to try to grow those a bit faster.

Well, regarding the ARPU, I think what we are seeing is consistent with our objectives. Despite the growth that we have had or we are having, we have been able to maintain the ARPU in our mobile business, and I think this is important for the future of our business. I don't know if I'm missing part of your questions but --

No, that's fine, that's fine. That's all. Thank you very much.

[OPERATOR INSTRUCTIONS] We'll go to --

Alicia, before we go to the next question, let me just clarify something regarding Michael's question.

Thank you.

When we compare ARPUs, in the case -- the figure that we report is basically the pure ARPUs does not include any revenues regarding the sale of handsets. So, we may have some factor of comparison of apples to pears situation. So, I would say a general advice to the whole market would be careful when you ARPUs of different companies, because maybe their criteria -- their reporting criteria may not match from one company to the other, okay.

Go ahead now, Alicia.

[OPERATOR INSTRUCTIONS] We'll go to Rizwan Ali of Bear Stearns.

I have a quick question about the Telecom worker's strike. I'm just wondering if you can update on what's happening on that front?

Okay. We have a situation where the unions are claiming for important salary increases, and what we told them is that we are not in agreement and we are not conditions to respond to their request. I think it's a moment that we have to be very careful because if we arrive to an agreement and after that the Government comes with certain fixed amounts, suppose 50 pesos or 100 pesos as was the case at the beginning of this year, the amounts finish absolutely distorted regarding what we have planned. In that we are in a period of conciliation. For the time being, the positions are very different. I think what we had offered is in line with inflation and the second point to consider is that our employee's level of salary are substantially above comparable salaries in the country. It means that I know we will have some tensions, but I think at the end the common sense will prevail.

Okay, thank you very much.

You're welcome.

And gentlemen, at this time there are no other questions in the queue. Mr Felices, I'll turn the conference back to you for any additional remarks.

Okay, I will like to thank you, all of you, for participating in this conference call and looking forward to share with you information in the next quarter. Thank you very much and good day.

And that concludes today's conference call. We thank you for your participation. You may disconnect at this time.