Telecom Argentina SA (TEO) 2005 Q2 法說會逐字稿

Good day, everyone. Thank you for your patience. We would like to welcome you to this Telecom Argentina conference call. As a reminder 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.

I would like to thank everybody for participating on this conference call. I am Carlos Felices, the Chief Executive Officer of Telecom Argentina. And today with me are Valerio Cavallo, which is our Chief Financial Officer; Pablo Caride, our Finance Director; and Pedro Insussary, our Manager of Investor Relations division. As an introduction to this conference call I would like to go over some highlights of the quarter.

It is important to point out that following our comments raised in our previous earnings conference call our results continued to be positive on the operational side. Our revenues continue to grow at a strong pace, and our EBIT continues to increase in absolute terms and in terms of margins.

While we have achieved a significant expansion of our mobile and Internet business, our operating profit before depreciation and amortization practically maintained the same levels of the year 2004. Yesterday we reported a second quarter of 2005 earnings where consolidated revenues grew by 25%, reaching 2.6 billion pesos. Our mobile revenues grew by 58%, and we have increased our customer base by 50%.

In the fixed line business revenues increased by 6%. Lines in service grew by 4%, and total ADSL connections increased by 69%. Fixed line (ph) did not deteriorate our cash flow generation, and the Company continues to deliver healthy levels of operating cash flow that allows us to finance our CapEx programs, we are not putting at risk the commitments that we have agreed with our financial creditors in our debt restructuring.

We are also seeing that the competitive level of the Argentine telecom market continues to be very high. Especially in the cellular and Internet services. In order to support our market position we have increased our commercial expenses, and we continue with investment in our TSM network.

In addition, maintenance expenses have increased in our fixed line network in order to sustain the quality of our services. With respect to (indiscernible) we continue our conversation with the Argentine government, but unfortunately no significant developments have been achieved in these negotiations.

Finally, I am going to a restructuring process. We understand that we are at the final stage. With respect to Telecom Argentina we have obtained the court obligation of our (indiscernible) and we are in the implementation phase of the agreement. Although we cannot predict the exact timing of the closing of the final (indiscernible) we expect that the closing of the debt restructuring process will come shortly.

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

Before we continue with the 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's actual results and operations to differ materially. Such uncertainties include but are not limited to the effect of 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 effects of more general factors such as changes in general market or economic conditions, inflation or regulation.

Our press release dated August 10, 2005, a copy of which will be included in our Form 6-K report furnished to the SEC describes certain factors that may affect any forward-looking statements that we may produce during the session. Furthermore, we urge the audience of this conference call to read the disclaimer clause contained in slide 19 of the presentation.

As usual we would like to remind all those that have not received our press release or presentation you can call our office or download it from our website. Additionally, this conference call can be replayed through the webcast feature available in our Investor Relations section, and having done this clarifications I would like to pass the call to Valerio Cavallo.

Moving on with the conference call, the agenda 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 slight 2, we would like to briefly detail the issues that have affected the macro environment in which Telecom operates. Second quarter the macro environment continues its positive evolution as GDP continues to grow in the first half of fiscal year 2005 at similar rates than in 2004 already reaching a level similar to that of 1998.

CPI inflation amounted to 7.2% in first seven months of 2005, arising some concerns for the medium-term scenario. The Argentine peso continues to show an application trend due to the net to capital flows generated by trade surplus and the foreign portfolio investment. However, the recent explicit economic policy with the objective of maintaining a nominal depreciated currency in order to fuel economic activity and maintain a high level of collections of each quarter related taxes. Federal public sector posted a 11.6 billion pesos of primary surplus in the first half of fiscal year 2005.

Cumulative 12 months of primary surplus reached 17.1 billion pesos, equivalent to 3.6% of the GDP. In turn, the government announced the closing of its debt restructuring process with the issuance of the new debt instruments. The government is currently engaged in negotiations with the IMS where certain intellectual issues are being discussed. And our aim is to agree on a medium-term program and refinance important maturities in the next quarter. Finally, regarding the political outlook, the (indiscernible) elections are scheduled for October 23, 2005.

In slide 3 of the presentation we are making an overview of some of the issues that are related to the market environment and our recent corporate developments. Regarding the fixed line business, competition is mainly oriented forward to the corporate segment, long distance and Internet services. The market continues to show a high level of demand for broadband services but in a highly competitive market environment. The Company has started to offer a mixed, fixed cellular and Internet product, taking advantages of our commercial synergies.

In addition, the Company has launched new low-end ADS offer. The company is allocated capital expenditures to the expansion of the coverage and capacity of its ADSL service and the maintenance of the fixed line network. Regarding the cellular market it continues to grow at impressive rates, reaching a penetration of approximately 46% of total population. (indiscernible) resulted incremental revenue but with a higher commercial expenses in advertising, (indiscernible) and commission paid to vendors. In addition, development in a GSM network deployment continues.

Regarding the regulatory environment, the authorities have reiterated that universal services fees billed to similar customers not (indiscernible). The Company has filed an (indiscernible) request and is analyzing the next step to be taken in this manner. Nevertheless if the position of the regulatory authorities becomes final our estimation is that the deal will not have a significant impact in the financial situation of the Company.

Going to slide 4, we can see the evolution of the consolidated income statement. During the first half of fiscal year 2005 revenues grew by 515 million pesos or 25% compared to the same period of 2004. It was mainly driven by the expansion of the mobile business in Argentina and in a lesser extent to the growth of the fixed line and Internet business. Operating costs increased by 526 million pesos or 48% when compared to first half 2004. It was mainly due to higher commercial expenses where mobile subscriber acquisition costs have significantly increased and network access costs have also risen due to incremental traffic delivered through our fixed and cellular networks.

Meanwhile, operating profit before depreciation and amortization amounted to 972 million pesos with a slight decrease of 1% when compared to June 2004. The reported margin was 38% declining from 47% when compared to first half 2004. Below the Operating profit new income for the period, net income for the period was mainly influenced by the effect of the financial results.

Finally, net financial debt declined by 1.214 million pesos or 17% due to the depreciation of the peso against the euro and the dollar to the effect of the debt restructuring of Telecom Personal and Nucleo and the strong cash flow generation of the group partially offset by the interest accrued during the period.

Going to slide 5, we can see the quarterly evolution of the consolidated income statement. Revenue grew by 111 million pesos or 9% when compared to first quarter 2005 and 295 million pesos or 28% when compared to second quarter 2004. This was mainly driven by the (indiscernible) of the mobile business in Argentina. Operating costs increased by 155 million pesos or 21% when compared to first quarter 2005 and by 320 million pesos or 57% compared to second quarter 2004.

Operating profit before depreciation and amortization amounted to 464 million pesos, a decrease of 44 million pesos or 9% when compared to first quarter 2005 and by 25 million pesos or 5% when compared with second quarter 2004.

Going to slide 6, we are showing the changes in the composition of our consolidated revenue and the operating profit before depreciation and amortization for the first half of fiscal year 2005 and compared to that registered one year ago. As we can see, in the first half of fiscal year 2004 revenues from the Cellular Telephony represented approximately 36%. Due to the increasing demand for the cellular services and the expansion of the customer base, this participation has increased during this year to 46%.

Meanwhile, cellular operating profit before depreciation and amortization last year represented 31% of our consolidated business and in the first half of fiscal year 2005 this participation increased to 32%. It is important to mention that these percentages are after the elimination of intercompany accounts.

Going to slide 7, we can see the evolution of CapEx broken down by Company. We can see in the slide CapEx for the first half of the current year for Telecom Argentina, Telecom Personal and Nucleo amounted to 89 million pesos, 76 million pesos and 4 million pesos, respectively with a total of 169 million pesos. These figures will not include approximately 73 million pesos of cellular network achievement stored in our warehouses that has been classified as material due to the fact that as of June, 2005 it was not yet installed in the corresponding sites. Additionally, our current CapEx estimation for 2005 amounted to approximately $200 million that will be distributed evenly between the fixed line and the cellular businesses.

It might be noted that the CapEx levels adding lines to the commitments undertaken with our financial credit (Indiscernible)having gone through the evolution of our consolidated figures I will pass the call to Pedro who will continue with a description of the evolution of the fixed line and cellular businesses.

Going to slide 9, you can see the evolution of the unconsolidated income statement of Telecom Argentina. In the first half of fiscal year 2005 revenues grew by 131 million pesos or 9% to approximately 1.5 billion pesos. This was mainly driven by the increase of the Internet business and the rise of interconnection revenues generated by incremental traffic coming from the cellular industry and higher levels of fixed line voice traffic.

Regarding costs, OpEx increased by 99 million pesos or 16%, mainly due to higher labor costs and maintenance expenses. Meanwhile, operating profit before D&A amounted to 771 million pesos with a growth of 3%. Furthermore our EBIT margin increased from 5% to 15% due to the reduction in amortization charges.

In slide 10 we can note that the lines in service continued to increase, growing year-over-year by approximately 153,000 lines that represent a 4% annual growth rate. In terms of rates, the average domestic long-distance rate has remained stable at the same level of last year. The evolution is (indiscernible) and semi flat products as the Company aims to defend its participation in this highly competitive service. Regarding the average international business rate, it declined by 9% when compared to that registered in June 2004 and 1% when compared to March 2005 quarter. Here again the evolution is due to application-specific discounts and also the effect of new plans recently launched.

As we see in the next slide, traffic is evolving positively to these discounts. In slide 11, we can see that total voice traffic volume, excluding the Internet traffic, is approximately 3% higher when compared to the second quarter of 2004 and 9% higher when compared to the first quarter of this fiscal year. The increase when compared to that registered one year ago is mainly due to higher DLD and ILD traffic, as the market responded positively to the new package (ph) plans launched by the Company and through incremental local traffic as a result of the higher number of lines in service.

Meanwhile, Internet traffic declined by approximately 18% when compared to the second quarter 2004 due to the natural migration of dial-up clients to ADSL connections. For June 2005 quarter the average revenue for fixed line customer totaled 39 pesos per line per month, remaining flat to that registered in June 2004.

Moving to slide 12, during the second quarter the Internet business has registered a 17% increase in terms of customers when compared to that registered one year ago. Our net ADSL connections increased by 80% (indiscernible) to 47,000 lines when compared to the second quarter 2004. Total ADSL connections including those to other ISPs grew by 69% or 65,000 lines when compared to June 2004, reaching a penetration of approximately 4.1% of total lines in service, up from 2.5% in June 2004. This is in response to the strategy of expanding our broadband services through market segmentation with specific products for each type of customer.

Going to the description on the evolution of the cellular business in slide 14, we can see the evolution of unconsolidated income statement for Telecom Personal Line in Argentina for the first half of fiscal year 2005. Total revenues grew by 422 million pesos or 63% when compared to the first half of 2004. Meanwhile, service revenues, excluding asset sales totaled 970 million pesos with an increase of 54%. This was mainly driven by the expansion of a number of subscribers and by a higher level of traffic.

Regarding operating costs, these increased by 457 million pesos or 96% when compared to the first half of 2004. This increase was mainly driven by higher commercial costs as the Company has invested in customer acquisition costs. This rising cost is related to the increase in the customer base as Telecom Personal has engaged in campaigns in order to capture the market opportunities of the impressive growth of the cellular market and to face higher levels of competition.

Furthermore, the incremental traffic resulted in higher interconnection and (indiscernible) access costs. Meanwhile, operating profit before depreciation amortization amounted to 165 million pesos, equivalent to a decrease of 18% when compared to that registered one year ago. Regarding margin it has declined from 30% in June 2004 to 15% in June 2005 mainly due to the impact of subscriber acquisition costs. If we deduct this effect the Telecom Personal would have reported a pretax margin of approximately 40%.

We can see in slide 15 the evolution of the cellular subscribers. Cellular customers of Telecom Personal in Argentina increased by 55% year-over-year and by 14% compared to March 2005 quarter. It is important to mention that the mix of postpaid and prepaid customers has been changing significantly in the last quarters. As of June 2005 postpaid subscribers amounted to 31% of the customer base, up from 21% of the base one year ago. This is a result of the strategy of Telecom Personal that according to current market demand has focused on high-value customers such as prepaid and mixed plans.

Going to slide 16 we can see the (indiscernible) in the cellular business increased at a rate of approximately 172% while churn has risen to approximately 2% per month, mainly due to disconnections in the prepaid services. Meanwhile in order to sustain this growth in the subscriber base acquisition costs have increased by 157% in the six-month period of 2005.

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

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 to summarize in slide 18. The Company was notified on February 25, 2005 that the update had been admitted by the court. On May 26, the court amolodated (ph) the agreement which has positioned to become final on June 16th. In the customer solution the Company will (indiscernible) to allow an additional 10 day period for (indiscernible) connection the absence of (indiscernible). This period expires on July 4, 2005. The court ruled that the nonconsenting (indiscernible) submit an election would be allocated through option 8 (ph).

According to (indiscernible) the Company has 90 days from expiration of the 10 day period to issue the new notes and pay the cash consideration. Such period expires on October 2, 2005. The Company is currently taking the necessary steps to implement this process. And to process (indiscernible) as soon as possible. Once the debt exchange is performed and cash consideration is safe, Telecom Argentina will report positive debt restructuring results that will mainly arise from (indiscernible) in principal amounts of forgiveness of interest. Now we would like to open it up to questions. Thank you.

(OPERATOR INSTRUCTIONS) Miguel Garcia, Bear Stearns.

We've read in the papers that the quality problems in the wireless market in Argentina is causing some problems. And even the government wants to intervene and demand better quality. Do you think this is going to mean that the Company is going to have to increase CapEx, and do you have these problems? And the other question is related to the wireless EBITDA margin. We saw a big decrease this quarter and I wanted to know your opinion about the trend going forward this year. Do you think this 10% we saw in the second quarter could go even lower, or is it hit a bottom? Thank you.

Regarding to the first part of your question, (indiscernible) we are following the situation of the DSM or the mobile business with maximum focus. What has happened is that in Falza (ph) one of the provinces stopped the sales of the mobile handsets, stopped the sales of connections. Measured at yesterday have been appealed and with a favorable resolution. Today we had started the sales again. And when I say we, I refer to the industry because this was not any specific measure for Personal, was for Personal more we start on CTI. We have a plan to improve the quality of our GSM network. And we are working hard on this plan, and we are confident that our services will improve as soon as we finish with our plans.

Questions here have been that the demand went well ahead of our predictions. And not only the demand in handsets but the demand in services because the service in the GSM are -- or the use of the GSM is higher than the traditional DDMI. This is a question of investment and needs our technicals to work and then will follow the situation. I will tell you that everybody talks about number of claims, and the number of claims when we compare that with the number of subscribers is insignificant because the number of claims at around 7000, when the subscribers is around 70 million, is still is not significant. But we are working very hard in trying to improve our service, and I understand that the other companies are doing the same.

Regarding the question of margins, what we are projecting is that our margin in the second half of the year will accelerate slightly. Basically because of the evolution of the mobile business. And we are migrating part of our DD&A cost (indiscernible) to GSM. That is why our projections are showing a decrease in the margin. I don't know if I satisfied your question.

In the first answer, you mentioned that the engineers are currently assessing the quality problem. Do you think that you can maintain the current level of CapEx for the wireless network of $100 million into '06? Or you think that it would have to be if the engineers are looking at it, some of the following might have to increase significantly.

First we have to finish with the 2005 and (indiscernible) we are analyzing the situation of '06. We have to remember that we have some limitations imposed by our restructuring. And we have to put this in context that our financial limitation or market needs and what we can do to improve the service.

Okay. Excellent. Thank you.

From Bear Stearns, we have Rizwan Ali.

My question is regarding the Inversora stacks. (ph) Could you tell us how much is the Inversora stacks as a percentage of revenues? And how much will the back payments amount to roughly? I know you said it's not going to be anything significant, but in most of the countries it's 1% or maybe 1.5% of revenues. And that is a pretty decent amount of money that you can lose.

The universal services tax is equivalent to approximately 1% of service revenues. And in the case of the amount we are currently calculating that figure, and unfortunately we can't disclose that figure right now.

Okay, so I guess it is fair to assume that impact going forward on your EBITDA margin would be around 1%?

No, no, no. Because first of all the 1% is on service revenues, not on the total amount of revenues. And on top of that we are incorporating that cost in part of our cost structure. So no, it is less than that, much less than that.

Okay, and finally do you -- what is the latest on your labor negotiations? And should we continue to expect that employees will demand higher wages as the economy recovers?

We have an agreement that over the year 2005 and this was an agreement that we signed in the last quarter of 2004. It's very difficult to predict what is going to happen. Starting the beginning of next year what we are assuming is that we will have to follow the trend of inflation around that. But is going to the subject of the negotiations because today we are ahead of the levels of -- the community level of inflation in that we will negotiate something between the total inflation and the situation we are at today, or the cumulative inflation that we have today.

Thank you very much.

(OPERATOR INSTRUCTIONS) With Credit Renaissance (ph) we have Vincent Merlack (ph).

Yes, thank you. I know that you can't tell us exactly when the closing for the restructuring will take place, but could you summarize just exactly what needs to happen between now and the final distribution?

As we said before, we have 90 days since the (indiscernible) location of the (indiscernible) so that means we have time up to October the 2nd. What we are doing now is we are working with all of the -- we are doing all the necessary steps to finalize the exchange of the new bonds. We are working with the clearing houses and with the (indiscernible). And apart from that, we are working to have the necessary approvals from the local authorities, the commission (indiscernible). We will try to do it, to close the (indiscernible) and to pay each of the new bonds as soon as possible.

Are you pretty comfortable that this will be completed by October 2nd?

For sure.

Okay. Thank you.

Gentlemen, we have a follow-up question from Miguel Garcia with Bear Stearns.

Thanks a lot for taking the question. I was wondering about your strategy in wireless, now that you face so much competition. Are you going to -- well, we saw a decrease in margins, right, and a higher growth in subscribers. Going forward do you -- how important is it for you to maintain a marketshare you have now, or are you going to stress the increase in margins? And another question is that you mentioned there was a higher competition in the corporate segment and long distance, and I was wondering if this is due to the operations of Telmex in Argentina or is something beyond that? Thank you.

Regarding the first part of your question, we are working for maintaining our marketshare, yes. The response is yes, and it is -- our interest is not losing our position in the market. Obviously, this is a market that is going very fast. And what I think we have to look is a trend and not to stop in a (indiscernible) moment in time. But our objective is maintain the marketshare around 29% as we have today. And the question of the margins is that -- sorry, I have two comments here. What we are trying to maintain is the (indiscernible) margin in the range of 40%. And probably what goes below that which is the acquisition cost is what is making the deterioration of the margin that we referred before. I don't know if I answered your question.

The last question of long distance, I don't think Telmex has a specific effect (indiscernible) Telmex is a player in this market, but they are phone cards, and there is pressure for the market in general to reduce this cost. And what the company is doing is working, following the market plans, but taking advantage of our knowledge of the market and taking advantage of our position in the market and the relationship with our customers and the quality of our services. It is a combination of various factors. But it is true that the trend of the market is to go down, in terms of prices.

Thank you very much.

Gentlemen, there are for further questions in our queue at this time. I'll turn the conference back over to you for any additional or closing remarks.

Okay. Thank you very much for your attention and looking forward to see you to talk with you in the next quarter. Thank you very much, and good day.

That does conclude today's conference call. Thank you for your participation, and have a good day.