Telecom Argentina SA (TEO) 2005 Q4 法說會逐字稿

Welcome, everybody, to Telecom Argentina's fourth-quarter fiscal-year 2005 earnings conference call. The participants of this call are Carlos Felices, Chief Executive Officer; Valerio Cavallo, who's Chief Financial Officer; and myself, Pedro Insussarry, Manager of the Investor Relations Department. The call is being recorded, and after the speech that we have that follows the presentation that we sent you this morning, we will have a Q&A session where, different to other conference calls, this time we do not have a moderator and we will be willing to take questions one at a time. We will kindly request all participants to wait for the close of the next question. Basically, I will say as a moderator, we're willing to take another question. We would kindly request to all participants to put their telephones in mute in order to avoid interference with the conference call.

And having said that, I would like to pass the call to Carlos Felices.

Good morning, and I would like to thank everybody for participating on this conference call. As Pedro mentioned, we have participating in the call Valerio Cavallo, which is our Chief Financial Officer, and Pedro Insussarry, our manager of Investor Relations Divisions.

An introduction to this conference call -- I would like to go over some highlights of the quarter. As [we are able] (multiple speakers) in the press release that we distributed yesterday, our results continue to be positive. Our revenues continue to grow at a strong pace, fueled by the expansion of our cellular business, and our [EBIT and its respective matters] continue to increase. Meanwhile, the significant expansion of our mobile and Internet business imply an important growth of commercial expenses supporting such growth that made our operating profit before depreciation and amortization to remain stable in nominal terms.

Yesterday, we reported our earnings results for fiscal year 2005, where consolidated revenues grew by 27%, reaching approximately 5.7 billion pesos. In a very competitive Argentine mobile market, our revenues grew by 64%, and we have increased our customer base. In the fixed line business, revenue increased by 8%, lines in service grew by 4% and total ADSL connections increased by 77%.

Concerning our earnings results, yesterday we reported our net income for the fiscal year 2005 of 1.3 billion pesos. Our bottom line was mainly influenced by the debt restructuring result (indiscernible) the third quarter, slightly slightly offset by foreign exchange losses reported during the last quarter of the fiscal year. Moreover, on a consolidated basis, the Company continues to deliver healthy levels of operating cash flow that allow us to finance the CapEx programs that will support the growth of our business and reduce our net debt.

With respect to the negotiations with the government, on Monday we signed with the Argentine government a letter of understanding that sets the fundamental of the next steps that we will follow in this respect. This event represents the last phase of this process that we expect will end during this fiscal year.

Finally and going to the main financial issues, on December 22, 2005, we were able to refinance all the debt of Telecom Personal that was issued under the debt restructuring process. This event represents a transaction of equivalent of US $381 million, and it was extremely important for our cellular operations. Telecom Personal was able to access the local and international markets, contracting debt with the market-standard covenant package, and reduced its exposure to foreign exchange fluctuations, as we were able to [rise debt] in local currencies. Moreover, at [similar standards], the cost of the financing in dollars obtained in this transaction was lower than the contracted in the debt restructuring.

Finally, Telecom Argentina is undergoing a solicitation process to collect consent to vote in favor of some amendments that relate to the CapEx limitation of Telecom Personal, and (technical difficulty) investment of dividends received from from this subsidiary. The solicitation process expires on March 17, and the bondholders' meeting that will deal with the amendments will be held on March 27th. From the feedback received, and taking into account the conditions offered for this minor amendment to creditors and participant banks, we understand that the transaction is a reasonable one, and we expect to conclude this process as soon as possible.

After this introduction, I would like to pass the call to Valerio Cavallo and Pedro Insussarry, who will go into the specifics of the results I would 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 cost Telecom's actual results of operations to differ materially. Such uncertainties include but are not limited to the effects of public emergency law and complementary regulation, the effects of ongoing industry and economic regulation, possible changes in demand for telecom products and services and the effects of more general factors such as changes in general market economic conditions, and legislation and regulation. Our press release dated March 9, 2006, a copy of which will be included in our Form 6-K report furnished to the SEC, describes the main 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 21 of the presentation.

As usual, we would like to remind you that for all those that have not received our press release and our presentation, you can call our office or download it from the 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.

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

Thank you. Moving on with the conference call, today's agenda, 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 performance of our cellular business. And finally, we will go over a summary of the financial highlights.

Going to slide two, we would like to briefly detail the issues that have affected the macroenvironment in which Telecom operates. Including 2005, the Argentine economy continued to grow 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. (Indiscernible) inflation amounted to 12.3% for the full year, up from [5.1]% experienced in 2004. The inflation upsurge is related to the expensive 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 demand in the context of an important economic [drought].

The Argentine peso depreciated by 2%, mainly in the last quarter of the year, especially after the cancellation of the debt that the Argentine government had with the International Monetary Fund and with the Central Bank Reserve. Moreover, throughout the year, net capital inflows and trade surplus [returned an exceeding] supply of dollars in the local market that was absorbed by the monetary authorities in order to avoid a nominal appreciation of the peso. At the end of 2005, the peso-to-dollar exchange rate was 3.03, up from pesos 2.98 as of December 31, 2004.

The maintenance of a depreciated currency discouraged the macroeconomic program of the senior administration, but inflationary pressure imposes a medium-term limit to this policy approach. [Federal subsector] primary surplus for the year increased to 19.6 billion pesos, equivalent to 3.7% of GDP, mainly fueled by an increase in tax revenue of 21% and to a controlled evolution of fiscal spending.

In slide three of the presentation, we are making an overview of some of the issues related to the marketing environment and the recent corporate developments. Regarding market environment, the cellular market continues to be very competitive and to grow at impressive rates, reaching a penetration of approximately 55% of total population. The market growth has resulted in incremental revenue, but with higher commercial expenses such as advertising, handset subsidies and commissions paid to vendors, affecting the profit margins of our operators. In addition, investments in the GSM network deployment, information technology and new services continued, and the market has evidenced a very tight level of innovation in handset and services.

In the fixed line business, the market continued to grow in a more moderate pace, where the main driver of evolution is the broadband service. The market continues to show a high level of demand for broadband services but in a highly competitive and price-oriented environment. (Indiscernible), the Company continues to enrich its ADSL portfolio products, tailored to the different segments of the market. Competition in the fixed telephony is mainly oriented toward the long distance and Internet services, as well as in corporate and government segments.

Going to slide four and to the regulatory environment, as Carlos Felices has mentioned, the Company has signed a letter of understanding with the Argentine government. The main concepts contained in the letter are the adjustment of the termination charge that the Company collects from international carriers for international long distance calls delivered in the local area. The adjustment of the hour bands for off-peak local rates and commitments from the government [that the] stable regulatory environment that will be enacted through a new telecommunication law. We understand that this letter sets the main fundamentals for the renegotiation agreement that we expect will be enforced by the end of the year.

Going to slide five, we can see the evolution of the consolidated income statement. During fiscal year 2005, revenue grew by 1.2 billion pesos or 27%, reaching 5.7 billion pesos. This was mainly driven by the expansion of the mobile business in Argentina and Paraguay and, in a lesser extent, through the growth of the Internet and the fixed line operations.

Operating costs increased by 1.3 million pesos or 52% when compared to fiscal year 2004. This was mainly due to the higher commercial expenses, where mobile subscriber acquisition costs have significantly increased and [net or] access costs have also risen through the incremental traffic delivered through our fixed and cellular networks.

Meanwhile, operating profit before depreciation and amortization amounted to approximately 2 billion pesos (technical difficulty) stable, similar level as reported in fiscal year 2004. (Technical difficulty) the evolution of revenue (technical difficulty) operating costs (technical difficulty) [resulted in a] reduction in the reported margins that was 35% declining from 46% when compared to fiscal year 2004.

Below the operating profit, net income for the period was mainly influenced by the positive effect of the debt restructuring of Telecom Argentina, slight offset by exchange rate losses related to the depreciation of the Argentine peso.

Finally, net financial debt declined by approximately 2.5 billion pesos or 36%, mainly due to the effect of the debt restructuring of Telecom Argentina, Personal and Nucleo, and to the cash generation of the group.

Going to slide six, we are showing the changes in composition of our consolidated revenues and operating profit before depreciation and amortization for fiscal year 2005 and compared to that registered one year ago. As we can see, the fiscal year 2004 revenues from the cellular telephony represented approximately 39%. Due to the growth in the subscriber base and the increasing usage, [this participation] has increased during the year to 49%. Meanwhile, as the cellular activity is causing higher expenses related to the growth of this business, the participation of cellular operating profit before depreciation and amortization remained stable from 2004 to [2005], representing 31% of our consolidated business. It's important to mention that these percentages are after the elimination of intercompany accounts.

Going to slide seven, we can see our CapEx broken down by company. As we can see in the slide, CapEx for fiscal year 2005 for Telecom Argentina, Telecom Personal and Nucleo amounted to 260 million pesos, 262 million pesos, and 31 million pesos, respectively, with a total of 553 million pesos, equivalent to approximately $183 million. The Company, as it invested in the cellular business, was increasing coverage in capacity of the GSM network, the introduction of new services and the development [of transmission] technology to support the business were the main areas of focus. In the fixed line business, CapEx was mainly oriented toward the expansion of ADSL network, the upgrade of information systems and the maintenance of the network.

Having gone through the evolution of our [consolidated figure], I will pass the call to Pedro, who will continue with the depiction of the fixed line and the mobile businesses.

Thank you. Before I continue, again, we would kindly request to all participants to put their telephones in mute, as this conference call does not have a moderator, and I will be the moderator of the conference call.

Continuing with the conference call and going to slide nine, we can see the main items of the unconsolidated income statement of Telecom Argentina. During fiscal year 2005, revenues grew by 237 million pesos or 8% to approximately 3.1 billion pesos. This is mainly driven by the increase in license service, the subsequent increase in traffic, the growth of the Internet business and the rise in interconnection revenues generated by incremental traffic coming from the cellular industry.

Regarding costs, OpEx rose by 168 million pesos or 13%, mainly due to the increase in labor costs, maintenance expenses, factors related to the growth of revenues and advertising expenses.

Meanwhile, operating profit before D&A amounted to 1.6 billion pesos with a growth of 4%. Furthermore, EBIT margin increased from 9% to 17%, mainly due to the growth in operating profit before depreciation and amortization and the reduction in amortization charges. Below the operating profit, the results of Telecom Argentina were influenced by the debt restructuring results, with a slight offset coming from FX losses related to the appreciation of the peso foreign exchange rate experienced in the last quarter of the year.

In slide ten, we can note that the lines in service continued to increase, growing year over year by 160,000 lines that represents a 4% annual growth rate. In terms of rates, the average DLD rate has remained at the same level than that registered last year. This evolution is mainly due to the application of new plans and [semi-flat] products as the Company aims to defend its participation in this highly competitive service. Regarding the average ILD rate, it remained in the level of $0.67 to $0.68 of the peso, declining by 6% when compared to that registered in December of 2004. Here again, the evolution is due to the application of specific discounts and also the effect of new plans launched during the year.

In slide 11, we can see that total voice traffic volume is approximately 1% higher when compared to fourth quarter of 2004 and to third quarter of 2005. The increase is mainly due to the higher DLD and ILD traffic, as the market responded positively to new pricing plans launched by the Company, and to the higher number of lines in service. For December 2005 quarter, the average revenue per fixed line customer remained stable at 41 pesos when compared to the third quarter of this fiscal year.

Moving to slide 12, in fiscal year 2005, the ISP business has registered an increase of 23% in terms of customers when compared to that registered one year ago. ISP ADSL connections doubled during fiscal year 2005, reaching 162,000 lines. Total ADSL connections, including those connected to other ISPs, grew by 77% or 98,000 lines when compared to December 2004, reaching a penetration of approximately 6% of total lines in service, up from 3% last year or 5% in September 2005. This is a consequence of the strategy of Telecom Argentina, where the expansion of its broadband service is one of its main objectives. This is being achieved through market segmentation with specific products for each type of customer, whereby we aim to [create] the price orientation that other operators are following.

Going to description of the cellular business in slide 14, we can see how the unconsolidated income statement of Telecom Personal evolved during fiscal year 2005. Total revenues grew by 1 billion or 64% to 2.6 billion pesos. Meanwhile, service revenues excluding handset sales totaled 2.3 billion pesos with an increase of 57%. This was mainly driven by the expansion of the number of subscribers by higher levels of traffic and incremental use of value-added services.

With regard to the operating costs, these increased by 1.1 [million] pesos or 98%. This increase was driven by the higher commercial costs as the Company has invested in customer acquisition costs. This rise in costs is related to the increase in the customer base, as Telecom Personal has engaged in commercial actions to capture opportunities of the impressive growth of the cellular market and to face 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 293 million pesos, equivalent to a decrease of 30% when compared to that registered one year ago.

Regarding the margin, it has declined from 27% in December 2004 to 11% in December 2005, mainly due to the impact of the subscriber acquisition costs. If we deduct the effect of tax, Telecom Personal would have reported a pretax margin of 41%.

We can see in slide 15 the evolution of cellular subscriber base. Cellular customers of Telecom Personal in Argentina increased by 60% year over year and by 16% compared to September 2005 quarter. It is important to mention that the mix of postpaid and prepaid continues to improve. As of December 2005, postpaid subscribers accounted for 34% of the customer base, up from 26% one year ago. In addition, as the Company is exclusively growing in GSM, customers that use this technology represent, as of December 2005, 64% of the total subscriber base.

Moreover, this significant growth was achieved with the growth in ARPU of 3%. This is a result of the strategies of Telecom Personal of focusing in high-value customers such as postpaid and [mixed stance] following the current demand of the market.

Going to slide 16, we can see that gross additions in the cellular business has increased by 118% while churn has declined from the peak of 3.3% per month registered in September 2005 to 2.4% per month as of December 2005. This was mainly due to the reduction of the effect of the change in the disconnection policy for prepaid services introduced in the third quarter of 2005. Meanwhile, in order to sustain the growth in the subscriber base, acquisition costs have increased by 166%, reaching 30% of revenues in fourth quarter of 2005.

Going to section of the financial highlights of this presentation, and to slide 18, after having closed our debt restructuring results on October 15, 2005, Telecom Argentina performed a voluntary prepayment equivalent to $78 million, together with a cash generation -- with a cash [consideration] delivered to creditors at closing, all monetary prepayments corresponding to Telecom Argentina were prepaid until April 2008. Taking into account these prepayments, the consolidated amount of debt totals the equivalent of $1.7 billion. After restructuring, the Company is enjoying a healthy situation where indebtedness and coverage ratios are within industry standards.

Moreover, in slide 19, we describe the main issues related to the consent solicitation that Telecom Argentina is currently undergoing. The Company is requesting its creditors to consent to vote in favor of the proposed amendments to modify certain conditions embedded in the indenture of the Series A and B notes that will be dealt with in a bondholders' meeting to be held on March 27th. The proposed amendment is to eliminate two conditions -- the limitation of CapEx related to Telecom Personal and the obligation to invest dividends received from Telecom Personal. These amendments do not affect nor the cash flow nor the basic conditions of the debt of Telecom Argentina. And in the case of the elimination of the dividend reinvestment, it could eventually have a positive effect in the credit quality of Telecom Argentina by allowing the Company to access cash generated by its fastest-growing business. Moreover, the Company is offering to pay a consent fee of 0.5% of the outstanding principal amount to creditors that grant the consent, and in the case the amendments are approved by creditors, at the bondholders' meeting. The consent solicitation period expires on March 17th.

Finally, in going over Telecom Personal's debt refinancing transactions, detailed in slide 20, on December 22, 2005 Telecom Personal closed a multi-currency, multi-instrument transaction for an equivalent of $381 million, where all the debt issued in the debt restructuring process was refinanced. The transaction comprised of a peso and dollar-syndicated loan of the equivalent of $[98] million and an issuance of pesos and dollars denominated bonds of the equivalent of $283 million.

And having concluded with the presentation, I would like to return the call to Carlos Felices, who will go over our expectations for fiscal year 2006. Thank you very much.

(Indiscernible) the fiscal year 2006, we would like to share with you our expectations in terms of the business trends. In the fixed line business, we expect that the evolution of our operations evident in 2005 will continue with a similar trend during 2006. We expect that lines in service will continue to grow in a moderate pace, with a slight increase in traffic, and ADSL will continue to be the driver of growth. We expect that this will result in a moderate increase of our revenues, where we do not expect a modification of [hour-related tarriff], taking into account the timing of the approval process of the final negotiation agreement.

With respect to operating results of this business, we expect that operating profit before depreciation and amortization will grow in nominal terms with a slightly reduction in margins. Of course, we will continue to be affected by the inflationary effect and by increasing labor costs.

In the mobile business, we expect to continue growing in terms of customers, in line with increasing total penetration. We are assuming that total cellular penetration in the market will reach a level between 65 to 70% of total population. This, coupled with the subscriber growth that we have achieved during 2005, will result in a significant expansion of our revenues and an improvement in our operating profit before depreciation and amortization. We expect that operating margin will start to recover moderately, as subscriber acquisition costs start to decline as a percentage of total operating costs.

In terms of CapEx during 2006, we are planning to invest approximately the equivalent of $300 million that will be eventually shared, heavily shared, among the fixed and the cellular business. It is important to mention that this CapEx level assumes that we obtain the necessary approvals from creditors to eliminate the Telecom Personal CapEx restriction in Telecom Argentina [bonds].

In terms of consolidated operating cash flow, our expectation is that the Company will be able to finance (indiscernible) program. In addition, free cash flow should allow us to reduce the level of indebtedness in the fixed line business.

Finally, and taking into account the trends I have mentioned previously, we expect that the consolidated operating profit before depreciation and amortization to grow in nominal terms, with a stable trend in terms of margins.

Having shared these trends with you, I would like to open the questions -- for (technical difficulty) for questions.

(OPERATOR INSTRUCTIONS).

This is Miguel Garcia from Bear Stearns. Could you explain the 400 million pesos in financing costs, if this is mostly foreign exchange losses? Maybe, making it more clear, you could provide a breakdown between interest cost, interest income and foreign exchange losses?

Out of the approximately 400 -- specifically, 397 million pesos of financial and [holding] results, approximately 235 million pesos are related to FX losses and 89 million pesos are related to interest. The rest are other financial results.

This is [Juan Alira] from HBK. Could you provide a little bit more detail on the 300 million CapEx plan and how it's broken down between the different businesses?

The split of the CapEx that we are forecasting for 2006, in general terms, 50% in mobile telephony, which -- the most important part in Argentina, and 15% in Paraguay. In fixed telephony, the most important investments are related to our network in terms of improvement in ADSL, where we are forecasting investments by about 60 million pesos, and in information technology, where we are forecasting investments by about 100 million pesos.

This is (indiscernible). According to your presentation, subscriber acquisition costs in the cellular business increased to 30% of revenues from 25% in September '05. Is this a consequence of seasonal promotions that usually appear in 4Q '05? And can we expect the ratio to go back to close to 25% in 1Q '06?

Yes. Effectively, the last quarter of the year is the strongest quarter in terms of subscriber growth. And it obviously is related to the 16% growth in the subscriber base that we experienced in the last quarter. Going forward, yes, you should start to see subscriber acquisition costs going down as a percentage of revenues, basically because, one, the customers that we have acquired, especially in the second half of 2005, will start to generate revenues. And then we are expecting a slight reduction in the percentage of subscriber growth, as we have experienced a tremendous growth during 2005.

This is Nick Sebrell at Morgan Stanley. Could you comment a little bit more on the wireless market? You gave a guidance goal for the year. Maybe talk to little bit about how the competition between CTI and Telefonica is rolling out? The major concerns of investors seems to be that it will turn irrational. So I would like to hear from you the pricing scenarios you are looking for, and essentially, in that guidance that you gave, what kind of competition, what kind of market share for you is assumed? I think that's good for starters.

Well, as you said, the market had some degree of irrationality. But we are working very hard in order to increase our quality and our customer care, not losing the trend of the market. Our assumption is that our market share will be around 30%. I don't know if I responded to your --

Yes. Maybe a little more qualitatively, do you see CTI and Telefonica becoming more intense in their marketing campaigns, or maybe more intense on the price side? In other markets where we've seen similar penetration levels, the ARPU tends to trail off. So I'm trying to figure out why your ARPU has a different path than what we've seen in other markets.

Well, we are not projecting campaigns more aggressive than the ones we had in the last quarter of last year. I think that the trend of the market will go to an accommodation of positions where the market will start to distinguish certain factors, the ones that we are trying to focus -- in service, the quality and customer care. But we don't see -- or we don't project, at least -- a drastic change in market aggressiveness. I don't expect changes or significant changes in the subsidies and things like that.

What is your handset subsidy running right now?

40%.

About the wireless business, I wanted to know if the migration to GSM is having a positive impact on margins. I assume it is. And how important it is? And also, when you say you're going to improve margins in wireless in the next year, are you talking about going back to levels seen in '04, about almost 30%? Is that a reasonable assumption?

To quantify the improvement in margins of migrating customers from TDMA to GSM is a little bit difficult, and we don't disclose that type of information. Basically, the difficulty is basically how you appropriate the basically fixed costs to one or the other.

But what I can say is that in terms of customers that was in TDMA that migrates to GSM, what we're seeing is that the increase in ARPU is approximately 34 -- the customers that we have in GSM is approximately -- the ARPU of the customers in GSM are approximately -- have an ARPU of 34% higher than those in TDMA. And going forward, a migrated customer that was in TDMA that is now in GSM is generating approximately incremental traffic of approximately 15%.

Okay, and your second question was?

What do you expect in terms of improvement of margins, quantifying that, because I think it was around 27% in '04. And now, this last quarter, it was down to 6%. So can we go back to those levels of ARPU, between 25 and 30% for the Personal business?

In terms of the --?

I'm sorry, the EBITDA.

We believe that in 2006, as we have commented before, the EBITDA, in absolute terms, will increase significantly compared to the EBITDA that we accounted in 2005. In terms of profitability, we believe that we will be able to improve the [rentability] a little, but just to see the complete effect of the increase in our customer bases, we have to wait the middle term -- 2007, 2008.

We'll take our next question.

It's [Bill Perry], JPMorgan. Can you comment on, now that we have your ending cash position, the level of a potential cash sweep we might expect, given we're coming up on the mandatory date in April?

What I can say is that the cash position as of December is approximately slightly over $200 million. And in terms of the excess cash that we've measured as of December 31, 2005, it is equivalent to approximately $120 million.

Regarding the prepayment that we will be doing at this time, we are not in the position to disclose that information right now.

No further questions? I'll pass the call to Carlos Felices for closing remarks.

(Technical difficulty) say that once again, thank you for being with us (technical difficulty). Please feel free to call our Investor Relations Department for any (technical difficulty). Thank you and good day.