Telecom Argentina SA (TEO) 2005 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 would like to turn the conference over to Mr. Felices. Please go ahead, sir.

Good morning. This is Carlos Felices speaking. I would like to thank everybody for participating on this conference call.

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. Our revenues continue to grow at a strong pace, and we have been able to sustain our operating profit before D&A, an increase of EBIT in absolute terms, while we have achieved a significant expansion in our mobile and Internet business.

Yesterday, we reported our first quarter earnings result, where consolidated revenues grew by 22%, reaching ARS1.2b. Our revenues grew by 53%, and we have increased our customer base by 40%.

In the fixed line business, revenues increased by 5%, lines in service grew by 4% and total ADSL connections increased by 70%. Moreover, the Company continues to deliver healthy levels of operating cash flow that amounts ARS417m, that will allow us to finance our CapEx programs while not putting at risk the commitments that we have agreed with our financial creditors in our debt restructuring.

We are also seeing that Argentina telecom market is more competitive, especially in the cellular service. In order to support our market position, we have increased our commercial expenses and we continue the deployment of our GSM network.

In addition, maintenance expenses have been increased in our fixed line network, in order to sustain the quality of service that today we provide.

Regarding labor costs, our expenses have grown as a consequence of the salary increases and bonuses granted to unionized and non-unionized employees.

With respect to the tariff renegotiation, we continue our conversations with the Argentine government. But unfortunately, no significant development has been achieved in this regard. We must mention that the fixed line operations are still being affected by the tariff freeze enforced by the Argentine government in January 2002.

Finally, I'm going to the restructuring process. We understand that we are in the final stage. With respect to Telecom Argentina, we are awaiting the court homologation of the agreement after the opposition period has concluded and the Company has contested all objections. Although we cannot predict the exact timing of the final approval of our APE, we continue to expect that the closing of the debt restructuring process will come shortly, possibly slightly after mid-year. This timeframe is subject to the timing of the final Board approval.

After this brief introduction, I would like to pass the call to my colleague. And at the end of this description and before the Q&A session, I will close this part of the call with some final remarks. Thank you. Pedro.

Before we continue with the conference call, we would like to clarify that during the conference call and Q&A sessions we may produce certain forward-looking statements about Telecom's future performance, plans, strategies and targets. Such statements are subject to uncertainties that could cause Telecom's actual results and operations to differ materially. Such uncertainties include but are not limited to the effects of the Public Emergency Law and complementary regulation, the effects of ongoing industry and economic deregulation, possible changes in 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, 2005, a copy of which will be included in a Form 6-K 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 19 of the presentation.

As usual, we would like to remind you that for all those who have not received our press release nor our presentation, you can call our office or download them from our website located at www.telecom.com.ar. Additionally, this conference call can be replayed through the webcast feature available in the Investor Relations section of our website.

And having done these clarifications, I would like to pass the call to Valerio Cavallo.

Thank you. Moving on with the conference, the agenda of this call, as seen in slide one, 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 main topics of the debt restructuring process.

Going to slide two, we would like to briefly detail the issues that have affected the macro environment in which Telecom operates. During the quarter, the macroeconomic scenario was positive, although preliminary indicators are showing a decline in the growth rate.

CPI inflation, fixed to 4% during the first quarter of 2005, raising concerns over this issue, while the peso appreciated in real terms, both against the dollar and the euro.

Despite the strong recovery in imports, trade surplus remained very strong, over $12b for the last 12 months.

Federal public sector reported a ARS4.2b primary surplus in first quarter, and the 12 month primary surplus has reached ARS17.6b, equivalent to 3.8% of the GDP.

Uncertainty with respect CPI inflation, the evolution of the energy supply, and the outcome of public service tariff renegotiations, are the main economic concerns today.

Finally, regarding the sovereign debt restructuring, the Government reached an acceptance level of 76% on its restructuring proposal, but the exchange for the new instrument has been delayed until a final ruling is reached on a legal claim presented at a U.S. court. The Government is currently in consultation with the International Monetary Fund in order to grant a medium-term agreement.

In slide three of the presentation, we are making an overview of some of the issues related to the market environment and the recent corporate developments. As we have mentioned in previous conference calls, the Company is facing a challenging competitive environment. The cellular market continues to experience an increased level of activity, reaching at the end of March a total subscriber base close to 15m subscribers, growing at a rate of 75% year over year. It has resulted in incremental revenue, higher commercial expenses and accelerated deployment of GSM networks for all operators.

In the fixed line business, competition is mainly focused in the long distance and the Internet services, and it continues to be very high in the corporate segment.

On the regulatory front, as Carlos Felices mentioned before, conversations with the Government continue, but the final outcome and the timing of any potential tariff increase is still uncertain.

Going to slide four, we can see the evolution of the consolidated income statement. During the first quarter, revenues grew by ARS220m, or 22% compared to first quarter 2004. It was mainly driven by the expansion of the mobile business in Argentina.

Operating costs have increased by ARS206m or 39%. This was mainly due to higher commercial expenses, interconnection, network access costs and labor costs.

Meanwhile, operating profit before depreciation and amortization amounted to ARS508m, an increase of 3% when compared to March 2004.

The margin reached 41%, declining from 49% when compared to first quarter 2004.

Below the operating profit, net income for the period was influenced by the effect of the financial results.

Finally, net financial debt declined by ARS757m or 11%, due to the restructuring of Telecom Personal and Nucleo, the strong cash flow generation of the Group, partially offset by the interest accrued during the period.

Going to slide five, we are showing the changes in the competition of our consolidated revenues and operating profit before depreciation and amortization for the quarter, compared to that registered in the first quarter of 2004.

As we can see, in the first quarter of 2004 revenues from the cellular telephony represented approximately 36%. Due to the increase in demand for these services and expansion of the customer base, this participation is increased to 44%.

Meanwhile, cellular operating profit before depreciation and amortization in the first quarter of 2004 represented 30% of our consolidated business, and in the first quarter of 2005, this participation increased to 35%. It's important to mention that these percentages are after the elimination of inter-company accounts.

Going to slide six, we can see the evolution of CapEx, broken down by Company. CapEx during the first quarter of 2005 for Telecom Argentina, Telecom Personal and Nucleo amounted to ARS38m, ARS21m and ARS3m respectively.

Additionally, our current CapEx estimated for 2005 amounts to approximately $200m, that will be split evenly between the fixed line and cellular businesses. It must be noted that the CapEx levels are in line to the commitments undertaken with our financial creditors.

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 business.

Thank you. Going to slide eight, we can see the evolution of the consolidated income statement of Telecom Argentina. During the first quarter 2005, revenues grew by ARS53m or 8%, compared to the first quarter of 2004, amounting to ARS742m.

This is mainly driven by the rise in interconnection revenues, generated by incremental traffic coming from the cellular industry and higher levels of fixed line voice traffic.

Regarding costs, OpEx increased by ARS45m or 15%, mainly due to higher maintenance expenses, taxes and labor costs.

Meanwhile, operating profit before depreciation and amortization amounted to ARS388m, with a growth of 2%. The margin declined to 52% from 55% in the first quarter of 2004.

In slide nine, we can note that the lines in service continue to increase, growing year over year by 144,000 lines. That represents a 4% annual growth rate.

In terms of pricing, the average domestic long distance rate has declined year over year by 6% and remains stable at the same level when compared to December 2004 quarter. The evolution is mainly due to the application of plans with flat domestic long distance prices, as the Company aims to increase market share in this service that is under significant competition.

Regarding average international long distance rates, it declined by 10% when compared to that registered in March 2004, and declined by 3% when compared to December 2004 quarter. Here again, the evolution is due to the application of specific discounts and also the effect of new prepaid cards launched during last year. As we will see in the next slide, traffic is evolving positively to these discounts.

In slide ten, we can see that total voice traffic volume, excluding the Internet traffic, is approximately 1% higher when compared to the first quarter of 2004. This increase is mainly due to the higher traffic in domestic long distance and international long distance, as these services respond to the pricing plans implemented by the Company, as we mentioned before. Meanwhile, Internet traffic declined by approximately [16%], mainly due to the migration of clients to ADSL services.

For the March 2004 quarter, the average revenue per fixed line customer totaled ARS38 per month, decreasing by 3% when compared to March 2004 and 7% when compared to December 2004. This latter is mainly due to the seasonality that the Company experiences in this period.

Moving to slide 11, during the first quarter, the Internet business has registered a 15% increase in terms of customers when compared to that registered one year ago. Our net ADSL connections increased by 76.5%, equivalent to 39,000 lines when compared to the first quarter of 2004. Total ADSL connections, including those to other ISPs, grew by 70% or 56,000 lines when compared to March 2004.

Going to the description of the evolution of the cellular business, in slide 13 we can see the evolution of the unconsolidated income statement of Telecom Personal for the first quarter of 2005. Revenues grew by ARS188m or 59%, compared to the first quarter of last year. This was mainly driven by the increase in the number of subscribers and by higher traffic levels.

Regarding costs, OpEx increased by ARS178m or 79%, when compared to the first quarter of last year. This increase was driven by higher commercial cost, mainly vendor commissions and advertising expenses related to the increase in the customer base, as Telecom Personal has engaged in campaigns in order to face higher levels of competition. Moreover, the increase in headcount resulted in higher labor costs, and incremental traffic resulted in higher interconnection costs and network access costs.

Meanwhile, operating profit before depreciation and amortization amounted to ARS107m, equivalent to an increase of 10% when compared to last year.

Regarding the margin, even though it has declined from 30% in March 2004 to 21% in March 2005, it still remains the highest in the cellular market in Argentina.

You can see on slide 14 the evolution of the cellular subscribers. Cellular subscribers of Telecom Personal Argentina increased by 48% year over year, or by 10% when compared to December 2004 quarter. It is important to mention that the mix of post-paid and prepaid customers has been changing positively during the last year. As of March 2005, post-paid subscribers accounted for 28% of the base, up from 19% one year ago.

Going to slide 15, we can see that gross additions to the cellular business has continued to increase at a rate of 94%, while churn rates continue at a very low rate of approximately 1.6% per month. Meanwhile, in order to sustain this growth in the subscriber base, acquisition costs have increased year over year by 102%, mainly due to the higher handset subsidies and vendor commissions, in line with the growth of the subscriber base mentioned before.

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

Thank you. As Carlos Felices mentioned before, we are in the last phase of the debt restructuring process. During the last quarter, we have gone through some very important steps. They are summarized in slide 17.

As to the APE, Telecom Argentina was admitted by the Court and the Company published the required judicial notices. The opposition period concluded on last April 7. The Company has responded to all objections received at the court, and has requested the judicial homologation of the APE. Although we cannot predict the timing of the court homologations and the subsequent exchange, we expect that the closing of the restructuring will occur after mid-year.

Once the judicial homologation of this APE is obtained and the debt is exchanged for [funds], Telecom Argentina will report positive debt restructuring results that will arise mainly from haircuts in principal amounts and forgiveness of interest.

In slide 18, we can see the profile that the debt and the principal amortization will have once the restructuring of the Telecom group has been closed [in full]. That profile assumes the following.

As Telecom Argentina closed its restructuring to March 31, 2005, as we know now, it was not the case. Loan participant creditors of Telecom Argentina received Option A debt, the [par] options, and the exchange rate using this profile are those as of March 31, 2005. Following this assumption, [also restructuring] gross debt would have amounted to $2.2b, with an average life of 4.9 years and an average coupon of 8%.

With respect to the currency composition of the restructured debt, 62% will be in dollars, 32% in euros, 5% in yen and the remainder in pesos.

As we can see in the slide, in a post-restructuring scenario the Company will have an extended maturity profile where the final amortization of its debt will occur in 2014. Moreover, we must mention that the Company has agreed to a payment mechanism with excess cash, and such prepayment will be made in direct order to the next amortization.

Due to this, it is expected that the Company will have a low short-term refinancing risk. Nevertheless, as almost all its debt is denominated in foreign currency, the Company will continue to be exposed to the effects [indiscernible].

And having said that, let me pass the call back to Carlos Felices.

Thank you Pablo. What I would like is to make final remarks before going to the Q&A questions. We would like to share with you certain plans and expectations that we see for the year, as we concentrate our efforts to meet our objectives.

In the fixed line business, we expect that the [OIBDA] will experience a slight growth, and therefore our margins will -- our margins for the full year might suffer some deterioration. This evolution will be a result of incremental revenues coming from traffic and line growth, together with expansion of our Internet business, while our cost structure will be impacted by the inflationary effects and by higher labor expenses.

Regarding rates, as I mentioned before, we continue the conversations with the Federal Government. But the process is a complex matter and it is possible that the resolution of this issue will arise by year-end. Therefore, any potential impact in revenues or any possible tariff increase may not be seen during this year.

In the cellular business, we expect that the rise of customer growth will continue at a similar pace as that seen in the first quarter. This must be supported with incremental subscriber acquisition costs, such as handset subsidies, commission paid to vendors and advertising expenses, and additional investment in our network.

Therefore, we expect that our [OIBDA] and its margins will be lower than we have been seeing in the first quarter and that cash flow generation will be affected.

Now, I would like to open it up to questions. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] We'll first hear from Miguel Garcia of Bear Stearns.

Good morning. The first question is related to the local traffic. The year-over-year growth of local traffic has been decreasing every quarter, and this quarter, for the first time in a while, was negative growth. Would you say that this is due to cannibalization from wireless or that it's also an economy that is growing less strongly than a year ago?

And the second question is about the guidance for increase of subscribers, net adds for the year. Last time, we were talking about, I think, 800,000 and with the net adds this quarter, it seems that this is a little conservative. Thank you.

Well, regarding your first part of the question, effectively the -- our view is that there are a cannibalization of flat rates coming from the mobile or from the mobile business, that your conclusion is correct from our point of view.

Regarding the second part of the question, what we are estimating is growth of our customer base of approximately 46%. What we are estimating is arriving at the year-end, with approximately 5.5m customers. And our market share participation will be around 30%. Those are our best estimations for the time being.

Thank you.

[OPERATOR INSTRUCTIONS] Next, we'll hear from Rizwan Ali of Bear Stearns.

My question regards to have you figured out what share of the net adds, cellular net adds, did you gain in the first quarter?

And the second question regards to cable competition and cable services. Have any other major cable operators in Argentina started providing voice-over-IP services and offering a triple play service?

Rizwan, this is Pedro. Regarding the share of net adds, we were slightly higher than -- our growth was slightly higher than the market, so we basically had a higher percentage of gross adds during the quarter. Currently, our share is slightly over 28%, up from 28% that we had at the end of the year of 2004. So basically, effectively we have gained share and this obviously is a -- you can see this in a higher participation in the share of the net adds.

Regarding the operations of cable companies and basically the offer of the famous triple play, no, we haven't seen any offer of voice services coming from cable companies, I think, for the time being.

What we are seeing is competition in broadband. But again, as mentioned, as Pedro mentioned, despite that there have been many comments in the market regarding the possibility of offered voice services by part of the cable operators, we are not seeing any practical or any concrete result on that line.

Is there a regulatory or any other impediment to offering voice-over-IP services by cable operators?

Not in my knowledge, no.

Thank you very much.

Anne Milne of Deutsche Bank.

Good morning. I have two questions this morning. The first regards the evolution of your cellular subscribers and the nice growth you've seen over the last year in your post-paid. I guess the first part of the question would be have you -- what do you attribute that to? Is it due to just a better economic environment, and would you say that this is the main contributor to why your margin, even though it's declined, is higher than the average for the system?

The second question is on the APE process and I was just wondering how many objections you received and how what were generally the nature of those objections? That's it.

Okay. The first part of your question, the response is that our focus has been trying to bring into our customer base customers with important amounts of consumption. And that's why we focus in post-paid and clear accounts. This has been a strategy that we started to implement last year and we will continue to do that.

Regarding the second part of the question, as I understand that refers to the objections to the APE, there are two main lines of objections. One comes from net revenue, from taxes, that we think is more formal than effective, but our lawyers have been responding to that and we don't expect any surprise. The second one has come from two small investors and we don't see any problem to respond that, and we don't see that the judge will have any difficulty in giving a solution for this objection.

Okay, great. So, there were three objections, is that it? One --

No, four. Two and two.

Two and two. Okay, great. Thank you very much.

[OPERATOR INSTRUCTIONS]. We'll now hear from Andre Baggio of JP Morgan.

Hi, good morning. I have two questions. In the mobile business, have you been changing your strategy towards being more aggressive with the competition, because I see that your share of that business is increasing and you also expect to have a higher share of additions going forward? Are you being more aggressive, or are the competitors being less aggressive, especially in the case of CTI, I guess, and maybe Telefonica?

And the other is towards the mobile usage figure. ARPU is stable on a year-over-year basis. That's contrary to previous trends. Do you expect the ARPU to accelerate going forward, or to pretty much maintain the same levels that we are seeing right now, with flat year-over-year comparisons?

To respond to the first question, I think that there are various factors impacting the result. I think -- not I think, we have been more aggressive and I think our strategy of offering or concentrating our services on customers [attendance] is giving us positive results.

I think that the ARPU, or we project that the ARPU will maintain in the actual levels, and [indiscernible] will respond.

So, regarding the ARPU -- so even regarding the ARPU, that the current level was reported 34, and that's actually slightly lower than what we see the average for 2004, when it reached 36 and 37 towards the second half. We expect that there was some seasonal effect in the first quarter, and we should see some recovery in the second and third quarter, relative at least to the first quarter.

We believe that the ARPU for 2005 will be at the same level as the average ARPU of 2004. We don't expect that in the year a change in the level of the ARPU.

Okay, thanks a lot.

Andre, let me add something to what Caride was just answering. If you compare Telecom Personal's ARPU to the market, you will see that in the market -- I mean the average ARPU in the market is going down, and this is not the case in Telecom Personal.

Okay, sure.

Okay.

And gentlemen, it appears there are no further questions at this time. I'll turn the call back over to you for any additional or closing comments.

Okay. I would like to thank you very much for being with us today and looking forward to see you the next quarter. Thank you.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.