Telecom Argentina SA (TEO) 2005 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; Pablo Caride, Finance Director; and Pedro Insussary, Manager IR division.

At this time I’ll turn the conference over to Mr. Felices. Please go ahead, sir.

Okay, good morning everybody. I would like to thank you for participating on this conference call. This is Carlos Felices speaking and with me are Pablo Caride our Finance Director; and Pedro Insussary, our Manager of the Investor Relation division. As an introduction to this conference call I would like to go over some highlights of the quarter.

As you were able to see in the press release that we released yesterday, our results continue to be positive on the operational side. Our revenues continue to grow at a strong pace following the significant expansion of our cellular business. Moreover, our EBIT and its respective margins continue to increase.

Meanwhile the significant expansion of our mobile and internet business imply an important growth of commercial expenses but supported such growth and made operating profit before depreciation and amortization to remain stable in nominal terms.

Yesterday as I mentioned, we reported our third quarter ’05 earnings results where consolidated revenues grew by 26%, reaching approximately 4.1 billion pesos. We are in a very competitive Argentine mobile market. Our revenues grew by 63% and we have increased our customer base by 57%.

In the fixed-line business revenues increased by 6%, lines in service grew by 4%, and total ADSL connections increased by 66%. Moreover the Company continues to deliver healthy levels of operating cash flow that allowed us to finance the CapEx programs that will support the growth our business while not putting at risk the commitments that we have agreed with our financial creditors in our debt restructuring.

With respect to the tariff negotiation, we continue in conversations with the Argentine government, but unfortunately no significant developments have been achieved in these negotiations. We have mentioned 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 financial debt. On August 31st we have closed the debt restructuring process. At closing date the Company issued new notes, performed the cash payments and delivered all the APE considerations.

Thanks to this closing, we were able to register an unusual gain of 1.4 billion pesos that account for in the third quarter results, are debt restructuring results.

We believe that having closed the debt restructuring process is a very important step for our Company and leaves us in a solid position, allowing us to continue growing in the telecommunication market.

After this brief introduction, I would like to pass the call to Pablo Caride and Pedro Insussary who will go over the specifics of the results that we have announced yesterday. 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 the demand for telecom products and services and the effects of more general factors such as changes in general market or economic conditions, in legislation or in regulation.

Our press release dated November 9, 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 this 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 that have not received our press release or presentation, you can call our office or download it from our website 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 let me pass the call back to Pablo Caride.

Thank you. Moving on with the conference call to this agenda seen as 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 performance 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 detail the issues that have affected the macro environment in which Telecom operates. The Argentine economy maintains expansion during 2005 at similar rates as those of 2003 and 2004 in the range of 8 to 9% [per year] in terms of real GDP.

Inflation is clearly the main concern in terms of economic policy. CPA inflation amounted to 8.9% in the first nine months of 2005, and 10.3% in the 12-month period ending in September 2005. This inflationary upsurge is related to the expansive monetary policy followed by the Argentine authorities seeking to avoid a nominal appreciation of the peso. And it is also related to the expansion of domestic demands in the context of an important economic growth.

The Argentine peso remains stable during the third quarter of ’05. [Indiscernible] this capital influence and trade surplus determines an exceeding supply of dollars in the local markets that was absorbed by the monetary authorities in order to avoid a nominal appreciation of the peso.

As of September 13th, the peso-to-dollar exchange change rate was 2.91, down from 2.98 as of December 31st 2004. A maintenance of a depreciated currency is core to the macro economic program of the [indiscernible] administration. But inflationary pressures impose a medium term limit to this policy approach.

Federal public sector primary surplus remains stable in the range of 17.4 billion pesos for the 12-month period ending in September ’05, equivalent to 3.4% of GDP. Overall, federal public sector surplus amounted to 8 billion in the same period.

The government is currently engaged in a decision with the IMF towards a medium term program that refinances the important maturities from 2006 onward. The main open issues are the monetary policy, free spend of whole notes and the renegotiation of tariffs and regulatory framework of public service companies.

In slide 3 of the presentation we’re making an overview of some of the issues related to the market environment and recent corporate developments. Regarding market environment, the cellular market continues to grow at impressive rates, reaching a penetration of approximately [60] % of total population. This has resulted in the incremental revenue but with higher commercial expenses; advertising, handsets, subsidies and commissions paid to vendors. In addition, investment in GSM network deployment continues.

In the fixed-line business the market continues to grow in a more modest way where the main driver to growth is the broadband service. The market continues to show a high level of demand for broadband services but in a highly competitive market. In this market environment the Company has launched new ADSL offers tailored to the different segments of the market.

Competition in the fixed telephony market is mainly directed toward the long-distance and internet services and focused in the corporate and government segments of the market. Taking into account this market [indiscernible] the Company has allocated its capital expenditure to the expansion of the coverage and capacity of its ADSL service and maintenance of the fixed-line network.

Regarding the regulatory environment, the Company continues in conversation with the government renegotiation unit in order to define the new contract and tariff scheme. But at this time the outcome and timing of this process is still uncertain. Moreover the authorities have ruled the universal service fees billed to cellular customers must be reimbursed. The Company is analyzing the next steps to be taking in this market.

Going to slide 4, we can see the evolution of the consolidated income statement. During the first nine months of fiscal year 2005 revenues grew by 846 million pesos or 26% 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 internet and fixed-line operations.

Operating costs have increased by 847 million pesos or 49% when compared to nine months of the previous year. It was mainly due to higher commercial expenses for mobile [indiscernible] acquisition costs have significantly increased. Our network access costs have also risen due to incremental traffic delivered through our fixed and cellular network.

Meanwhile operating profits before depreciation and amortization amount to approximately 1.5 billion pesos, remaining at the same level when compared to September 2004. The reported margin was 37% declining from 46% when compared to nine months of ’04.

Below the operating profit, net income for the period was mainly influenced by the positive effect of the debt restructuring of Telecom Argentina.

Finally the financial debt declined by approximately 2.6 billion pesos, or 36% due to the effect of the debt restructuring of Telecom Argentina, Personal and Nucleo and the appreciation of the peso against euro and the dollar.

Going to slide 5, we are showing the changes in the composition of our [indiscernible] revenue and operating profit before depreciation and amortization for the nine-month period of fiscal year 2005 compared to that which is from one year ago. And we can see in the first nine months of the fiscal year 2004 revenues from the cellular telephony represented approximately 37%. Due to the increase in demand for these services and the expansion of the customer base, this participation has increased during this year to 47%.

Meanwhile cellular operating profit before depreciation and amortization last year represented 32% of our consolidated business. And in the first nine months of fiscal year 2005 has remained at the same level. It’s important to mention that these percentages are after the elimination of inter-company accounts.

Going to slide 6, we can see our CapEx broken down by company. As we can see in this slide, CapEx for the first nine months of the current fiscal year for Telecom Argentina, Telecom Personal and Nucleo amounted to 149 million pesos, 175 million pesos, and 16 million pesos respectively; with a total of 340 million pesos.

Having gone through the evolution of our consolidated [indiscernible] I will pass the call to Pedro who will continue with a description of the fixed-line and cellular business.

Thank you. Going to slide 8, we can see the [inaudible] terms of the consolidated income statement of Telecom Argentina. In the first nine months of fiscal year 2005 revenues grew by 187 million pesos, so 9% to approximately 2.3 billion pesos. This was mainly driven by the increase in lines in service with a subsequent increase in traffic, by the growth of the internet business, and the rise in interconnection revenues generated by incremental traffic coming from the cellular industry.

Regarding costs, OpEx increased by [130] million pesos or 13% mainly due to higher labor costs and maintenance expenses. Meanwhile operating profit before depreciation and amortization amounted to 1.1 billion pesos, with a growth of 5%. Furthermore EBIT margin increased from 6% to 15% due to deduction in amortization charges.

Below the operating profits, the results of Telecom Argentina were influenced by the debt restructuring results and FX gains related to the appreciation of the peso vis-à-vis foreign currencies.

In slide 9 we note that the lines in service continued to increase, growing year-over-year by 156,000 lines. That represents a 4% annual growth rate.

In terms of rates the average DLD rate has remained at the same level for the last year. By the way, is the operator there? Are you listening correctly because we hear an echo?

Sir, I believe that’s coming from your line.

Okay, is the echo very pronounced?

Not at this end.

But can you hear me clearly?

Yes I can, sir.

Okay, we’ll continue.

In terms of rates the average DLD rate remained at the same level for last year. This evolution is mainly due to the application of new plans and semi-flat product as the Company aims to defend its participation in this highly competitive service.

Regarding the average ILD rate, it declined 8% when compared to that registered in September 2004 and by 3% when compared to June 2005 quarter. Here again the evolution is due to the application of specific discounts and also to the effect of new plans recently launched. As you will see in the next slide, traffic is evolving positively to these discounts.

In slide 10 we can see that total voice traffic volume excluding the internet traffic is approximately 3% higher when compared to the third quarter of ’04 and to the second quarter of ’05. This increase is mainly due to the higher DLD and ILD traffic as the market responded positively to the new pricing plans and to the incremental local traffic as a result of a high-end number of lines in service.

Meanwhile internet traffic declined by approximately 25% when compared to the third quarter of 2004 due to the natural migration of dial-up clients to ADSL services.

For the September 2005 quarter the average revenue per fixed-line customer totaled 41 pesos, approximately 3% higher when compared to the third quarter of 2004.

Moving to slide 11, during the second quarter the internet business has registered an 18% increase in terms of customers when compared to that registered one-year ago. Our net ADSL connections increased by 84% accruing to 59,000 lines when compared to the third quarter of 2004; total ADSL connections including those to other ISPs grew by 66% or 75,000 lines when compared to September 2004, reaching a penetration of 4.8% of total lines in service, up from 3.0% in September 2004.

This is a consequence—going to the description of the cellular business in slide 13 we can see how on consolidated income statement for Telecom Personnel evolved during the nine-month period of fiscal year 2005. Total revenues grew by 681 million pesos, or 62% when compared to nine months of 2004.

Meanwhile, service revenues excluding asset sales totaled 1.6 billion pesos, with an increase of 55%. This was mainly driven by the expansion of the number of subscribers, by higher levels of traffic, and incremental use of value-added services.

Regarding operating costs, these increased by 745 million pesos, or 95% when compared to the nine months of 2004. This increase was driven by higher commercial cost 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 retain and capture the opportunities of the present growth of the cellular market and sustain higher levels of competition. Moreover, the incremental traffic resulted in higher interconnection and network access costs such as roaming and termination charges.

Meanwhile operating profit before depreciation and amortization amounted to 242 million pesos, equivalent to a decrease of 21% when compared to that registered one year ago. Regarding the margin, it has declined by 28% in 2004 to 14% in 2005, mainly due to the impact of the subscriber acquisition costs. If we deduct this effect, Telecom Personal would have reported a [preset] margin of 41%.

We can see on slide 14 the behavior of the cellular subscriber base. Cellular customers of Telecom Personal in Argentina increased by 57% year-over-year and by 10% compared to the June 2005 quarter. It is important to mention that the mix of post-paid and prepaid customers has been changing significantly during the last quarters. As of September 2005 post-paid subscribers accounted for 33% of the customer base, up from 24% a year ago. Moreover this significant expansion of the customer base was achieved through the growth in ARPU of 3%. This is a result of the strategy of Telecom Personal of focusing on high-value customers such as post-paid and mixed plans following the current demand of the market.

Going to slide 15 we can see that gross additions in the cellular business increased at a rate of 134% while churn has risen to approximately 3.3% per month, mainly due to disconnections in the prepaid services. Meanwhile, in order to sustain the growth in the subscriber base, acquisition costs have increased by 167% reaching 28% of revenues in the third quarter of 2005.

Going to the debt restructuring section of this presentation and to slide 17, as Carlos Felices mentioned before, on August 31st we were able to close our debt restructuring process. At closing date, Telecom Argentina complied with all the terms of its out-of-court restructuring agreement whereby it issued the new notes, paid cash consideration and delivered all the APE consideration and performed mandatory and voluntary prepayment on the new notes.

The debt restructuring generated an unusual gain of 1.4 billion pesos that was registered as debt restructuring results. This gain was mainly as a result of [haircuts] in principle amounts, forgiveness of interest, and to the effect of accounting for the restructured debt on an NPV basis.

Finally, going to slide 18 we can see that the debt profile of the Company after having closed its debt restructuring process. As of September 30, 2005, the Telecom group has a gross debt of the equivalent of $1.8 [billion] of which 97% is denominated in foreign currency, with an average life of approximately 6 years and average cost of approximately 8%. Moreover, net debt amounted to $1.6 billion.

As a consequence of the prepayments made at closing and on last October 17, the Company has a very comfortable profile of principle maturities. Furthermore, its leverage and coverage ratios have increased significantly. And having said that, I would like to open it up to questions; thank you very much.

Thank you gentlemen. [Operator Instructions]

We’ll take our first question from Rizwan Ali with Bear Stearns.

Good morning. My question is in regards to the cellular business. Have you lost market share in the third quarter? That’s the first thing. And the second is—you may have mentioned it in your presentation but I’m still not clear where the universal service fund which is supposed to be reimbursed for the claims; have you begun those reimbursements? And is it reflected in the cost or [indiscernible] of the third quarter results?

Regarding the market share, did we lose or did we maintain? The information, according to the CNC which is the place where all the companies inform their number of customers, is we maintained our market share in the third quarter in a range of 27%.

And with respect to universal service what was exactly the question?

In your text you mentioned that you have to reimburse your cellular customers for the universal service tax that was charged to them.

Yes.

And is that reimbursement already done or will you be reimbursing your customers—

No. We are the process to do that and probably we will finish the process sometime in December.

And so is that impacting—I mean how are you listing it; are you taking it as sort of revenues or are you taking it as a charge?

We are taking part—a portion in revenues and a portion as a charge.

Thank you.

[Operator Instructions]

We’ll now move on to Ruth Mazzoni with Deutsche Bank.

Yes, hello; good morning. I have a pretty simple question. Are handsets included in the CapEx expense for Telecom Argentina?

No, they are not.

Okay, so CapEx limitations don’t restrict your growth in terms of the number of handsets? They may restrict your growth in terms network expansion?

No, there is not a limitation in terms of CapEx affecting the handsets you referred to, no?

Right but at Telecom Personal CapEx limitation and the current debt only limit expansion of the network, not –

Exactly.

That’s the case. The limitation on CapEx according to the debt restructuring conditions only is on what we capitalize as fixed assets.

And why is that the case? Because—why wouldn’t you be capitalizing some of the cost of the handsets?

We are not capitalizing the costs of the handsets.

Basically the costs of the handsets are in our P&L.

Okay. Thank you.

Basically the Company has taken the conservative posture of expensing all the acquisition of this customer.

Okay. Thank you.

[Operator Instructions]

And we’ll now hear from Jose Ramirez with Deutsche [IX].

Good morning. Are you planning to be more aggressive on the prepaid segment in the wireless business going forward? Or do you plan to maintain the same strategy of going after the post-paid more aggressively? Thank you.

No, we will maintain our policy of going for post-paid customers, not losing attention on the prepaid but all of the strategy is focused on post-paid.

And you do you think you’ll be more aggressive in the fourth quarter? I mean because looking at AMX gaining market share on the prepaid, I’m just wondering if you’re to be a little bit more aggressive on that segment.

Well normally the last quarter of the year is a more active quarter in terms of sales because a couple of events- Christmas and Mother’s Day and events like that that imply an additional sales of handsets and additional expenses in terms of advertising. But we will not do [anything] different than what the market is doing.

Okay. Thanks.

At this time I would like to turn the call over to you Mr. Felices for any additional or closing remarks. It appears we have no more questions.

Okay. What I would like is to thank you for your participation and emphasize that as we mentioned, in this quarter we finished the process of the restructuring of the debt of the Company that I see as a very positive step and that puts us in a competitive position to continue operating without problems in the Argentine market. Thank you very much for your interest and participation. Good-bye now.

That concludes today’s conference. Thank you for your participation.