Telecom Argentina SA (TEO) 2004 Q4 法說會逐字稿

Good day everyone and welcome to the Telecom Argentina fourth quarter 2004 earnings conference call. Today’s conference call is being recorded. Participating on today’s call we have Carlos Felices, Chief Financial Officer. Chief Executive Officer, excuse me. Mr. Valerio Cavallo, Chief Financial Officer; Pablo Caride, Financial Director and Pedro Insussarry, Manager of the 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. My name has been mentioned. It is Carlos Felices and I am the Chief Executive Officer of Telecom Argentina.

Together with me are Valerio Cavallo, our Chief Financial Officer; Pablo Caride, our Financial Director and Pedro Insussarry our Manager of the Investor Relation division.

As an introduction to this conference call I'm going over some highlights of the quarter. I would like to state 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 before D&A and EBIT in absolute terms while we have experienced significant expansion in our Mobile and Internet business.

In our Mobile business, revenues grew by 49% and we have increased our customer base by 39%. Moreover, Telecom Personal expanded its revenues by 56% and its customer base by 47%.

In the Internet business, revenues increased by 28% and ADSL connections increased by 76%.

Despite the significant expansion, we continued to deliver a strong cash flow generation that allowed us to finance the deployment of our GSM and ADSL networks, while not putting at risk the commitment that we have agreed with our financial creditors in debt restructuring process.

Yesterday we reported a net loss of approximately ARS666m for the fiscal year 2004. And the main reason for this was the loss in financial results of ARS1.172m which includes losses related to net foreign exchange difference of ARS460m.

In terms of operating profit, operating profit increased to ARS400m compared with a profit of ARS107m as registered in the fiscal year 2003.

We can mention that the current favorable macroeconomic conditions are concluding to the general improvement of almost all our business.

We are also seeing that the market in general is showing signs of tighter competition. In order to maintain our market position, we have increased our marketing expenses and CapEx level. In addition, maintenance expenses have increased in our Fixed Line network in order to sustain the quality of our services.

With respect to the tariff renegotiation, we continue our conversations with the Argentine government and no significant developments have been achieved.

We must mention that the results of the Company are still being affected by the tariff rates imposed by the Argentine government in January 2002.

Finally and going to the restructuring process, we understand that we are in the final stage. In November we had closed the restructuring of Personal and Nucleo. And both subsidiaries are current on their debt.

With respect to Telecom Argentina, we have been notified by the Court that the APE process was admitted and we are in the process of publishing the required judicial notices in order to commence the opposition period.

Although we cannot predict the exact timing of the final approval of the APE, we continue to expect that the closing of the debt restructuring process may of course -- about mid year. This timeframe is subject to the timing of the final Court approval.

As we have mentioned in previous conference calls, we would like to reiterate that 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 meets 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 yesterday. Pedro.

Thank you. Before we continue with this conference call 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 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 effect of ongoing industry and economic deregulation, possible changes in the demand for Telecom products and services and the effect of more general factors such as changes in general market, or commitment, or economic conditions, [implementation] or regulation.

Our press release dated March 8, 2005, a copy of which has been included in our Form 6K 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 23 of this presentation.

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 our office or download it from our website at www.telecom.com.ar or from PR Newswire’s website located at www.prnewswire.com.

We remind you that this conference call is being recorded and it will be replayed until March 15.

Additionally, this conference call can be replayed through our webcast feature available in the Investor Relations section of our website.

After having done these clarifications, let me pass the call to Valerio Cavallo.

Thank you. Moving on the agenda and turning to slide 1, 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 Line business, the evolution of our Cellular business and finally we will go over a summary of the main topics of the debt restructuring process.

Going to slide 2, we would like to briefly state the issues that have affected the microenvironment in which Telecom operates.

During the quarter, the microenvironment and the Argentine economy continued with the positive trends evidence in prior quarters. GDP grew by approximately 8.5% and the demand for public services rose 21%. This latter, mainly due to the expansion of cellular services.

The foreign exchange rate remains at around ARS3 per dollar, but experienced a depreciation versus the euro.

KPI inflation continued at the low level, but concerns on the evolution of prices are starting to rise.

On the external front, despite the stronger recovery inputs, trade balance continued to be strong, posting a surplus of over $2b for the last 12 months.

On the fiscal front, the government has posted a ARS17b primary surplus, equivalent to approximately 4% of the GDP.

Uncertainties with respect to structural reforms such as the tax sharing system and the outcome of the renegotiation of public services contracts and concessions could impact the current scenario.

Regarding the following debt restructuring, the period to participate of the government’s offer concluded on February 25. The government announced an acceptance level of 76% and declared the end of [the following] default.

The debt restructuring proposal contemplated an important nominal tariff cut, significantly lower interest rates and materially longer repayment terms, improving the sustainability of restoring debt. Despite the situation, in the mid term, the Argentine government will need important levels of fiscal surplus to comply with debt repayment.

Finally, regarding the regulatory environment, the Company continues in conversation 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 relating to corporate development. As we have mentioned in previous conference calls, the Company is facing an increasingly competitive environment.

The cellular market continues to experience an increased level of activity. As of December 31, 2004, the total cellular market has reached a total subscriber of close to 14m subscribers. Growing at a rate of 70% year-over-year. This has resulted in incremental revenue, higher commercial expenses and accelerated deployment of the GSM network for all operators.

In the Fixed Line business, competition is mainly focused in the long distance and Internet services. And it continues to be really high in the corporate segment.

The Company has increased its capital expenditure program, mainly allocated to the GSM deployment, external plant, maintenance of the Fixed Line network and expansion of the coverage and capacity of its ADSL service.

Going to slide 4 you can see the evolution of the consolidated income statement. During the year 2004, revenues grew by ARS741m, or 20% compared to 2003. This was mainly driven by the expansion of the Mobile business in Argentina.

Operating costs have increased by ARS679m, or 38% when compared to 2003. It was mainly due to labor costs, increased taxes, higher handset costs, higher sales commissions, higher maintenance expenses and to the rise in advertising expenses and roaming charges.

Meanwhile, operating profit before depreciation and amortization amounted to ARS2,046m. An increase of 3% when compared to the same period 2003.

The margin reached 46%, declining from 53% when compared to 2003.

Below the operating profit, net loss for the period was mainly fuelled by the effect of the financial results.

Finally, net financial debt declined by ARS548m, or 7%, due to the successful restructuring of Telecom Personal and Nucleo, the strong cash flow generation of the Group partially offset by the evolution of foreign exchange rate of the peso versus the dollar and the euro.

Going to slide 5 we can see the quarterly evolution of the consolidated income statement. We can note that operating profit before depreciation and amortization amounted to ARS564m. Increasing 13% when compared to third quarter 2004 and 5% when compared with the fourth quarter 2004.

Meanwhile, EBIT increased significantly in the fourth quarter 2004 to ARS192m, an increase of ARS116m versus third quarter 2004 and ARS109m, or 131% versus the fourth quarter 2003.

Going to slide 6, we are showing the revenues evolution for fiscal year 2004 compared to 2003. Revenues in the Fixed Telephony increased by ARS147m, or 7%. The increase can be mainly explained by the higher levels of monthly fees resulting from the higher number of lines in service and the 4% increase in local and domestic long distance traffic.

Revenues in the Cellular activity in Argentina increased by ARS564m, or 56%. Mainly driven by the growth in the number of subscribers and increase in usage.

The revenues coming from Nucleo also show an increase of ARS6m, or 4% mainly due to increase in ARPU.

Data Transmission and Internet revenues grew by ARS24m, or 6% 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 the headcount have increased. Labor expenses increased by approximately 11% when compared to fourth quarter 2003. This increase can be largely attributed to the incorporation of employees previously hired through third parties and increasing salaries granted by the Company to unionized and non-unionized employees.

The commercial costs that include advertising, sales commission and handset subsidiaries have increased by ARS61m as compared to fourth quarter 2003. Or ARS20m when compared to third quarter 2004. This was a consequence of the growth in demand of cellular services and commercial actions taken to maintain market position and to face the increasing level of competition.

Going to slide 8, we can see the breakdown of the revenues and operating profit before depreciation and amortization by business line. We can see that the growth of operating profit before D&A in the Fixed Line business was due to the 7% expansion of revenues. But partially compensated by the 12% increase in OpEx.

In the Cellular business, this effect is more evident as the 49% growth in revenues. This was mainly due to the expansion of the customer base. Was partially compensated by 97% increase in OpEx. The latter was mainly driven by the increasing commercial expenses mentioned before.

Going to slide 9, we can see the evolution of CapEx broken down by company. As we can see, in 2004 CapEx for Telecom Argentina, Telecom Personal and Nucleo amounted to ARS160m, ARS234m and ARS34m respectively. This amount of CapEx are below the levels that we have committed under the terms and conditions of the debt restructuring.

Moreover, according to such conditions, each Company has the possibility to carry over the amount of permitted CapEx and used to the following fiscal year.

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 Cellular businesses. Following the speech, we will be glad to answer any questions you may have. Let me pass the call to Pedro.

Thank you. Going to slide 11 we can see the evolution of the unconsolidated income statement of Telecom Argentina. During 2004, revenues grew by ARS204m, or 8% compared to 2003. This is mainly driven by the increasing interconnection charges and higher levels of traffic.

Regarding costs, OpEx increased by ARS144m, or 12%, due to the higher maintenance expenses and the increase in labor costs.

Meanwhile, operating profit before D&A amounted to ARS1,543m with a growth of 4%. The margin declined to 54% from 56% in December 2003. The main reason for this evolution was the increase in revenues coming from traffic, lines in service and interconnection services. That was partially offset by the increase in labor costs and maintenance costs.

In slide 12 we can note that lines in service continued to increased, growing year-over-year by 154,000 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 DLD rate has declined year-over-year by 6% and remained at the same level when compared to September 2004 quarter. The evolution is mainly due to the application of higher price discounts as this service is under significant competition.

Regarding average ILD rate, it remained at the same level when compared to that registered in December 2003. But declined by 1% when compared to September 2004 quarter.

Here again, the evolution is due to the application of specific discounts and also to the launch of new prepaid cards. As you will see in the next slide, traffic is evolving positively following these discounts.

Finally, we must recall that local traffic rates remain flat due to the tariff reinforced by the Argentine government.

In slide 13 we can see that total traffic volume is approximately 1% lower compared to fourth quarter of 2003 and 2% lower compared to the previous quarter. This decrease is mainly due to the Dcon and Internet traffic as more clients are migrating to the ADSL services.

Moreover, local DLD and ILD services posted significant increases in the levels of traffic as the market -- the market is responding positively to the price adjustments mentioned before.

For December 2004 quarter, the average revenue per Fixed Line customer totaled ARS41, increasing by 5% when compared to September 2004 and December 2003. This is mainly driven by the increase in usage mentioned before.

Moving to slide 14, during the fourth quarter the Internet business has registered a 17% increase in terms of customers when compared to that registered 1 year ago.

Our net ADSL connections increased by approximately 11,000 lines during the quarter and 36,000 lines when compared to the fourth quarter 2003. Total ADSL connections, including those to other ISPs, grew by 79%, or 55,000 lines, when compared to December 2003. And 13%, or 14,000 lines when compared to September 2004 quarter.

Going to the description of the evolution of the Cellular business in slide 16, we can see the evolution of the consolidated income statement for Telecom Personal for fiscal year 2004. Revenues increased by ARS565m, or 56% compared to 2003. This is mainly driven by the increase in the number of subscribers and the higher levels of traffic.

Regarding costs, OpEx increased by ARS569m, or 96% when compared to the fiscal year 2003. This increase was mainly driven by higher commercial costs. Mainly commission paid to vendors and cost of cellular handsets related to the increase in the customer base, higher advertising expenses at Telecom Personal in engaging campaigns in order to face higher levels of competition.

Moreover, the increase in headcount resulted in higher labor costs. And incremental traffic resulting in higher interconnection and access costs.

Meanwhile, operating profit before depreciation and amortization amounted to ARS420m. Equivalent to a decrease of 1% when compared to 2003. The margin declined from 42% in December 2003 to 27% in December 2004.

We must note that the increase in handset subsidies of ARS91m has impacted the operating profit before D&A at its margin. Pre-handset subsidiary operating profit for D&A would have been ARS518m with a margin of 36%.

We can see that -- we can see in slide 17 the evolution of the Cellular subscribers. Cellular subscribers of Telecom Argentina increased by 47% year-over-year and 14% compared to September 2004.

It is important to mention that the mix of postpaid and prepaid customers has been changing positively during the last year. As of December 2004, postpaid subscribers accounted for 26% of the customer, up from 19% of the base a year ago. This change is due to the result of the policy adopted by Telecom Personal since October 2003 when commercial actions were a focus to increase the penetration especially designed postpaid plans with certain credit limits.

Additionally, gross additions have increased dramatically in this last quarter while churn rates continue at very low levels.

In slide 18 we can see that the Cellular blended ARPU increased by 3% when compared to December 2003 and to September 2004 quarters.

Prepaid ARPU has increased by 9% when compared to December 2003 quarter and 5% when compared to September 2004 quarter.

Postpaid ARPU has increased by 4% when compared to December 2003 quarter and remains stable when compared to September 2004.

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

Thank you. Carlos mentioned before we are approaching the end of our restructuring process. During the last quarter we have gone through some very important steps formalizing the [indiscernible].

Telecom Argentina filed the APE with the Court on October 21, 2004 in order to obtain judicial evaluation of the APE agreement after having achieved a 94.4% participation from its creditors.

Telecom Personal and Nucleo concluded their restructuring process in November with a payment of the cash consideration and the execution of the new debt instrument.

On February 4, 2005 the bondholders meeting was held in compliance with the resolution of the Judge in charge of the [evaluation] of the APE. All creditors present at the meeting unanimously approved the process.

The Company was notified on February 25 that the APE had been admitted by the Court and was instructed to publish the judicial notice to commence the opposition period that will be open for 10 business days.

Once the judicial [evaluation] of this APE is sustained and the debt exchanges performed, Telecom Argentine will record positive debt restructuring of itself. That will arise mainly from cuts in principal amount and forgiveness of the interest.

In slide 21 we can see the profile of the debt and principal amortization will have once the restructuring of the Telecom Group has been closed in full. [Indiscernible] the following.

That non-participants greater to Telecom Argentine, we will say option A. That’s the final option. And that the exchange rate in this profile is also of December 30, 2004.

Following such assumptions, post restructuring and gross debt will amount to ARS2.2b with an average life of 4.4 years and an average coupon of 8.65%.

With respect to the currency composition of the restructured debt, 66% will be denominated in dollars, 28% in euros, 5% will be yen 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 until 2008.

We must mention that the Company has agreed the prepayment mechanism where the excess cash generated by the Company will be applied in a debt rollover to the next amortization, reducing the short-term refinancing risks.

In slide 22 we show the effect of the debt restructuring of Telecom Personal and Nucleo. Post restructuring debt will amount to ARS452m with an average life of 4.7 years and an average coupon of 9.3%.

With respect to the currency composition, 100% of the restructuring debt is in dollars.

Regarding the maturity profile, similar to Telecom Argentina on a consolidated basis. The principal amortizations are extended until 2014 and do not start to rise until 2008.

Finally in slide 22 we describe what we understand as the next steps until we can definitely close the restructuring process. At the present time the Judge has ordered a publication of the judicial notice for 5 days in newspaper of general circulation in Argentina. Where it is being informed of the objection period will begin.

The objection period will be open for 10 full days and during this period non-participants created may have taken the APE on certain specific [lines]. After the objection period has closed and the Company has answered any objections that may have been presented, the Judge will rule approving or rejecting the APE.

Within 90 days of final Court approval, new notes will be issued and cash considerations will be paid.

As we have stated before, Telecom Argentina cannot predict the timing of the Court approval, but expects to complete this APE process in the first half of 2005.

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

Thank you sir. [OPERATOR INSTRUCTIONS]. We’ll go first to Miguel Garcia with Bear Stearns.

Good morning. After the restructuring -- well the restructuring itself is going to generate extraordinary gains this year. Based on these gains, when do you think Telecom Argentina could start paying income taxes again assuming that are not generating more gains could accelerate the payment -- the initiation of payment of taxes, income taxes?

Okay. What we are assuming is that we will start to pay income taxes in the year 2008.

Do you have an estimate of how much the cash taxes will be in terms of percentage?

35%. Yes, the statutory rate is going to be 35%.

Okay and regarding dividends. According to the debt restructuring agreement, when can you start paying dividends?

When?

Dividend payment.

Okay. When we can start? First we would have to take care of all tax loss carried forward and then we would analyze the situation of the dividends. It is not our assumption that we will pay dividends before 2008.

Okay.

Miguel?

Yes.

Just 1 clarification related to your question. There is no restrictions under the debt restructuring conditions regarding dividends. The Company can pay dividends once it has positive return earnings and obviously with regarding the tax consideration that Carlos Felices has mentioned before.

The only consideration is that we pay dividends. We have to pay 2.5 times the same amount as prepaid.

For every peso of dividend that we pay we have to prepay ARS2.5 as mandatory prepayments.

Okay. My last question is CapEx for this year and next year?

We are assuming approximately $2m in CapEx levels for 2005.

Okay. Thanks a lot.

You're welcome.

We’ll take our next question from Carlos Constantini at Deutsche Bank.

Yes hello everyone. My question is about the situation of the GSM network right now if you could provide us an update. What is the current status and how does it compare with your competitors?

If possible, how long do you think will it take to catch up with the period where you under-invested on the Wireless to say you are fully competitive again?

And also, is there any kind of target for market share, or margin of net additions that you would expect to take from now on, or at least after the debt restructuring is finished and you can increase investment again?

Okay. Regarding to the first part of your question, the GSM network. We have finished the first stage of our plan which is to expand our network in the area of our incumbents, which is in the North of the country. And then we have some plans to make additional capacities in order to attend the demand -- the additional demand that we are having.

It is our view that in the area that we are operating in, we are competitive with our main competitors. We have roaming agreements with Uniphone that give us a chance to our customers to use our [satellites] all around the country. I would say our service is comparable, or sometimes better than our competitors.

Regarding the market share, we are thinking that we will focus our efforts and try to maintain our actual market share. Or slightly increased it from the actual levels of 28% to around 30%.

And the last part of the question was on our estimation of the penetration. What we are assuming, that could be around 46% in the year 2005. At the end of the year 2005.

Okay. Thank you.

We’ll take our next question from Rizwan Ali at Bear Stearns.

Good morning. I have 2 questions. 1 is that if you look at your Cellular margin, in the breakdown that you have provided in your press release it appears that your Cellular margin for the year 2004 was 38%. Whereas in the presentation you made, it appears that it was 27%. Can you just tell us what the difference is? Maybe if I'm losing something in the consolidation process?

Rizwan, can you repeat your question? Where did you see the discrepancy?

In your press release. The earnings. It’s the -- you had kind of the breakdown of your operating expenses in [table 6]. It breaks down EBITDA margin into Fixed Telephony, Cellular, Publishing and Consolidated. And there it says for 2004 it’s 38%. In the presentation you made it was 27%.

Okay. In that table where you see the breakdown of different activities, it is basically after inter-company elimination. So in other words, the margin that you see there is higher than when you look at Telecom Personal on a standalone basis. In my presentation, or in our presentation, we basically showed the P&L on a standalone basis for Telecom Personal. That includes mainly the inter-company eliminations of the cost that Telecom Argentina charges to Telecom Personal for the usage of the network. The interconnection.

Okay.

Okay?

Yes, that makes sense.

So in other words in the present -- in this breakdown and by the way if you go to page 18 of the press release you'll see again the P&L on a standalone basis. Or you see basically the margin that we've shown in the presentation.

Okay.

Following question. Go ahead.

Yes. The second question is do you, given that it appears that you lost market share in the Wireless Cellular business in the fourth quarter, especially to CTI which has been very aggressive. Having met them just recently it appears that they are continuing to be very aggressive in the market. Wouldn’t you rather lose market share to CTI and try to maintain your margins and profitability as opposed to trying to gain market share against CTI?

Yes, sorry for the delay. But we are trying to conceptualize a response. Our main focus is in the quality of our services and you will see us working extensively in our network, in our customer relationship and trying to grow in customers with important ARPU.

It is a difficult equilibrium and 1 that we are trying to do because in 1 hand we are trying to focus in our margins and in the other hand we are trying not to lose market share. But we are bidding that the criteria of the quality will prevail. We know that CTI will continue being as aggressive as they were in this year. But we are convinced that the battle will be won with the quality and with the service in an environment where we have some financial restrictions imposed on our debt. But we are confident again that we will be able to manage, or to administrate this situation.

Thank you very much.

[OPERATOR INSTRUCTIONS]. We’ll go next to [Dimray Marchio] at JP Morgan.

Hi. I have 2 questions. The first relates to the tariff increase. Do you have any progress on this front? I notice you’ve been asking for some initial increase and then an increase above inflation. So do you see any -- from the regulators for any kind of proposal to increase the tariffs?

No. We don’t have any proposal or any amount proposed by the authorities. We continue working with them making presentations about our situation and our request, or our needs. The idea in the long-term would be to try to come back to the original contract. But we don’t have any positive response for this idea.

Okay. Thank you and the second question I have is that have you noticed any change in the aggressiveness of your competitors in the Mobile business recently? Or they have been as aggressive in the first quarter as they were in the fourth quarter?

We don’t see significant changes in the level of aggressiveness. What we are seeing is that the impact in their results as a consequence of the way that they manage their acquisition of new customers is very important. And our view is that at 1 point in time the combination of the negative results and the needs of permanent need to inject capital will make the market to reflect, or to rethink about the correct strategy for the future of this business.

Okay. Thanks a lot.

And there are no further questions at this time. I will turn things back over to your Mr. Felices for any additional or closing comments.

Okay. We would like to thank you very much for your time and your attention. Thank you very much. Thank you.

Thank you. Once again everyone, that does conclude today’s teleconference. We do appreciate your participation and you may disconnect at this time.