Telecom Argentina SA (TEO) 2006 Q3 法說會逐字稿

Good day everyone and welcome to the Telecom Argentina Third Quarter 2006 Earnings 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 Insussarry, Investor Relations Manager. At this time, I would like to turn the call over to Mr. Felices. Please go ahead, sir.

Good morning. I would like to thank everybody for participating on this conference call. My name is Carlos Felices and I am Chief Executive Officer of Telecom Argentina and together as it was mentioned are with me Valerio Cavallo, our Chief Financial Officer; Pablo Caride, our Finance Director and Pedro Insussarry, our Manager of Investor Relation Division.

As an introduction to this conference call, I would like to go through over some highlights of the quarter. As you were able to see in the press release yesterday, we continue with the positive trend in our financial and operational results. Our revenues continue to grow at a pace of 30%, reaching approximately 5.3 billion pesos in the first nine months of the year, mainly fueled by the expansion of our cellular and Internet business. Our operating profit before depreciation and amortization show an increase of 17% to 1.7 billion pesos, and our operating profit increased by 95%, reaching 676 million pesos.

Net income totaled 164 million pesos during the nine-month period ending September 2006 and 65 million pesos considering only the third quarter of this year. Inter-annual comparison is affected by the non-recurring gain of 1.4 billion pesos recorded in the year 2005 as a result of the debt restructuring process. Moreover, the Company continues to deliver healthy levels of operating cash flow that allows us to finance our CapEx programs that support the growth of our business and continue deleveraging our balance sheet.

On the operational side during the last 12 months, our customer base in cellular business grew by 46%, our fixed lines in service by 4% and our ADSL customers by 99%, thus showing our competitive strength in the different markets. Summarizing, we would like to point out that these results are in line with the main development that we have expected for this fiscal year in terms of a rapid expansion of our cellular and Internet business and are also consistent with the effort that the Company is undertaking in order to offer each customer attractive solutions for their increasing and progressively sophisticated demand for telecommunications services.

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 that we have announced yesterday. Pedro?

Before I 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 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 [inaudible - background noise] industry and economic regulatios; 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, 2006, 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 16 of the presentation that we distributed this morning.

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 them from our website, located at www.telecom.com.ar. Additionally, this conference call is being broadcasted through the webcast feature available in the Investor Relations section of our website. It can be replayed through this feature.

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

Thank you. Moving on with the conference call, the agenda for today's call as seen in Slide 1, is supposed to go over through the evolution of the telecom group and general overview of the context in which we operate. Then we will go through a brief description of the performance of our fixed-line business, including Internet and data transmission. And finally we will describe the evolution of our cellular business.

Going to slide 2 of the presentation, we are making an overview of the market and the regulatory environment. Regarding the macroeconomic context, the Argentine economy maintained the expansionary trend, seen in recent years, while 12 month CPI inflation remained stable at approximately 10%. The cellular market continues to grow, reaching a nominal penetration of over 70% of population. This growth resulted in incremental revenues but with a higher commercial expense associated to it. In the highly competitive and dynamic market environment, Personal implemented actions to strengthen its brand positioning, focused on quality of its service and increased its market [capilarity] through its distribution channels throughout the country.

Despite the strong growth of the cellular market, the fixed line business continued to grow in a more moderate pace where the most dynamic segment was the ADSL service. Competition is mainly focused on long distance, corporate and government accounts as well as broadband services.

Moving to Slide 3, we can see the evolution of the consolidated income statement. During the first nine months of 2006, revenues grew by 30%, going from period to the same period of last year. This was mainly driven by the expansion of the mobile business and to a lesser extent, the growth of the Internet and fixed line operations.

Operating costs have increased by 955 million pesos or 37% when compared to first nine months 2005. This was mainly due to the higher commercial expenses including costs associated to cellular subscriber acquisition, network assets, taxes and commission from prepaid card sales. Moreover, the Company's (technical difficulty) higher labor costs due to wage increases granted during the year, but also as a consequence of a higher count as the [shares] are reinforced to commercial and customer support areas.

Meanwhile, operating profit before depreciation and amortization amounted 1.7 billion pesos, 17% higher than the same period of 2005, equivalent to 33% of the net revenues. Below the operating profit, net income for the nine-month period, 165 million pesos, was mainly influenced by interest and the foreign exchange fluctuations. Finally, our net financial debt declined by approximately 795 million pesos or 17% since September 2005, mainly due to the strong cash generation of the group. It is important to note that on October 17, Telecom Argentina has performed a new prepayment by $104 million, equivalent to 75% of the mandatory principal installment due in October 2009. We can see that our financial ratios continue improving and are comfortably within industry standards.

As a consequence of this improvement in our business, together with the perception of better performance of the Argentine economy, Standard & Poor's upgraded the long-term debt rating of Telecom Argentina and Telecom Personal to B-plus from B in the international scale.

Moving to Slide 4, we are showing the evolution of the consolidated revenues broken down by business segment. As a consequence of the rapid growth experienced in the cellular business, the participation of mobile revenues has consistently increased in recent years, reaching a participation of 57% during the first nine months of 2006.

Moving to slide 5, we can see our CapEx broken down by company. CapEx for the first nine months of 2006 amounted to 365 million pesos, 352 million pesos and 38 million pesos for Telecom Argentina, Telecom Personal and Nucleo respectively. Total CapEx amounted to 755 million pesos, equivalent to approximately $245 million. On a consolidated basis, our plan is to invest during the fiscal year an amount in the vicinity of $314 million. The Company continues to invest in the cellular business, with increasing coverage in the capacity of the GSM network, the introduction of new services and the announcement of information technology to support the business are the main areas of focus.

We continue expanding our coverage in the South consistently with our commercial objective of gaining market share in this region. In the fixed line business, CapEx is mainly oriented towards the expansion of ADSL accesses, the upgrade of information systems and the maintenance of the network. In addition, resources are being dedicated to the upgrade of our fixed line network to the latest technology available, such as the development of our next generation network using Internet protocol technology that will permit us to enhance our portfolio services and gain OpEx and CapEx efficiency.

Heading on through the evolution of our consolidated figures, I will pass the call to Pedro, who will continue with the description of the fixed line and cellular businesses.

Thank you. Going to Slide 7, we can see the main items of the income statement of Telecom Argentina on an unconsolidated basis. In the first nine months of 2006, revenues grew by 203 million pesos or 9% as compared to the same period in 2005, totaling approximately 2.5 billion pesos. The most dynamic segments were the Internet business and the interconnection revenues generated by incremental traffic coming from the cellular industry.

Regarding costs, OpEx rose by 183 million pesos or 16%, mainly due to the higher labor costs and general price increases affecting the overall cost structure. Meanwhile, operating profit before depreciation and amortization amounted to 1.2 billion pesos, stable when compared to the previous year. Furthermore, the nominal amount of operating profit and its respective margin increased due to the growth in operating profit before depreciation and the reduction of amortization charges.

Finally, net income amounted to 164 million pesos, influenced by a loss in financial results of 318 million pesos as compared to a gain of 177 million pesos in the nine-month figure of 2005. Here again, the interannual comparison is affected by the nonrecurring gain of 1.4 billion pesos reported in 2005 as a result of the closing of the debt restructuring of Telecom Argentina.

In Slide 8, we can note that the fixed lines of service continued to increase at the rate of approximately 4% year-over-year. This growth is a consequence of the intense commercial activity performed by Telecom Argentina in the retail market. The average DLD and ILD rate has slightly decreased during the last year. The Company defends its market position by applying new pricing plans and [semified] products. Local rates continue to be affected by the tariff freeze imposed by the government.

Total voice volume remains stable, basically stable when compared to last year. Despite a higher number of license service, we are beginning to see that the voice traffic is being marginally affected by new technologies, particularly the cellular service. The substitution effect is impacting more in services such as public telephony. For September 2006 quarter, the average revenue per fixed line customer, including only voice-related services, decreased by 4% to 39 pesos per month when compared to the third quarter 2005.

In Slide 9, we can see the evolution of our Internet business. Total ADSL customers reached 375,000, almost double to those registered in September 2005. License with ADSL connections reached a penetration of over 9% of total Telecom lines of service. This expansion is a consequence of Telecom's strategy of launching quality products at accessible prices. Another innovation is a new portfolio of data streams and services that permits small and medium-sized businesses to access services that up to now were only available for large corporations. The ISP business has registered an increase of 54% in terms of customers, basically due to the broadband expansion partially offset by the reduction of dial-up connections.

Going to the description of the cellular businesses in Argentina, in Slide 11 we can see how the unconsolidated income statement of Telecom Personal excluding the operations of Nucleo Paraguay, evolved during the period. Total revenues grew by 988 million pesos or 56% when compared to the nine months of 2005. Service revenues totaled approximately 2.4 billion pesos, with an increase of 53%. This was mainly driven by approximately 2.4 million net additions by higher levels of traffic and incremental use of value-added services. In regards to operating costs, we have increased -- they have increased by 807 million pesos or 53%. Higher expenses are related to the expansion of the business, direct taxes on sales, interconnection, commissions on prepaid cards as well as through the efforts undertaken to capture the opportunities of the impressive subscriber growth evidence in the market.

Meanwhile, operating profit before depreciation and amortization amounts to 423 million pesos, 75% higher when compared to that registered one year ago. This important operating profit before depreciation and amortization growth is a result of the commercial efforts that Telecom Personal undertook in recent quarters in order to significantly increase its subscriber base.

We can see in Slide 12 the evolution of the cellular subscriber base in Argentina. During 2006, the cellular market maintained a spectacular growth rate while existing subscribers have massively migrated to GSM technology. As of September 2006, customers of Telecom Personal increased by 45% year-over-year and by 12% compared to June 2006. It is important to mention that the mix of postpaid and prepaid customers continues to improve. As of September 2006, postpaid subscribers including mixed plans and [inaudible] class accounted to 35% of the customer base, up from 33% one year ago. Personal is in an advanced stage of the migration of its CDMA subscribers into GSM, which represented 85% of the subscriber base by the end of 2006.

Going to Slide 13, we can see that this significant subscriber growth was achieved with an 11% increase in ARPU when comparing to the third quarter -- when comparing third quarter 2006 with third quarter 2005. This result was the strategy of Telecom Personal focusing on high-value customers such as postpaid and hybrid plans and in the promotion of the use of value-added services. For instance, outgoing SMS traffic increased by 119% when compared to the third quarter of 2005.

Telecom Personal continues to work towards the consolidation of its market position in Northern and Buenos Aries region and to gain market share in the South region. Moreover, continuing the high penetration of cellular services, we expect that during the next fiscal year, a change in the profile of the market will start to occur where new subscribers will come predominately from the prepaid segment.

Going to Slide 14, we can see that churn has reached 2.9% per month. Meanwhile, we see that subscriber acquisition costs and related costs as a percentage of revenues decreased to 21% when compared to the previous year.

Finally, we see in Slide 15 that our subsidiary Nucleo, which operates in Paraguay, showed an increase in revenues denominated in pesos of 58%, while maintaining a healthy level of operating profit before depreciation and amortization margin of 39%. Moreover, Nucleo has expanded its customer base by 61% while it has increased its ARPU denominated in dollars by 7% during the last year. Nucleo operations are managed with a strong core focus on profitability, the healthy cash flow generation of the company, permitted a substantial deleveraging in recent quarters. And having concluded the presentation, let me pass the call back to Carlos Felices for final remarks.

Thank you, Pedro. In conclusion of what we have been discussing during this conference call, we can see that our operations continue to evolve very positively in line with our objectives for the fiscal year. Revenue growth is solid, fueled mainly by the cellular business, but also by the Internet and fixed line business. Additionally, cash flow generation in the fixed line business is permitting a reduction of our net debt. It is very important to consider that the Company continues to dedicate resources to the development of the business, taking advantage of the growth opportunities of the market in which we operate. Main areas of focus are investment in networks and in the acquisition of subscribers, enhancement of the portfolio of products, development of commercial channels and improvement of customer support functions.

Regarding our expectations for the year 2007, we expect that our business will continue to grow mainly in the cellular and Internet segments. Cellular margins should continue improvement as seen in the last quarters as we expect penetration to reach reasonable levels for Argentina and consequently, in fact, decreases as a percentage of revenues. We expect that the overall profitability margins will continue improving with a significant increase in our nominal amount of operation profits before depreciation and amortization.

In terms of CapEx, we will continue investing in the latest technology available, such as the recent announcement we did investment in information highway in the fixed line business and in introduction of the 3G services in the cellular business. According to our market demand expectations, we expect that consolidated CapEx will remain approximately in the range of 14 to 15% of revenues. And having conclude the presentation, we are more than pleased to answer any questions you might have. Thank you very much.

Operator, we are open to questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll go to Miguel Garcia from Bear Stearns.

Good morning. My first question is regarding the rate increase. Do you think with the announcement of these plans to upgrade the network and I don't know, maybe an increase in CapEx? I would like to know your guidance in terms of CapEx for this and next year. If it would be easier for you to get a rate increase from the government before the end of 2007?

And the other question is, you mentioned in the press release that you are upgrading the network to fiber optic to the homes. I would like to see if you could give more color about this and what percentage -- what proportion of phones you tend to approach and at what level, if it is higher to the curb or to the home? And lastly, I wanted to see if you could give me an update on the negotiations with the unions and when are the -- which is already increased, when is the next negotiation and should we see another increase in the wages?

A minute, because it is a long laundry list. Hold on please.

Okay, I will try to answer the multiple choice that you put in front of me. The first question is related to connect our investment with the price increases. I don't think it is going to be the case. We have an agreement with the government signed some months ago and the agreement is following some strategic steps. It has to go to the Congress and once the Congress approves it, it goes back to the executive. We think that these will take some an extra time, the one that we already generally thought and probably we could have some responses or ideas in the first quarter of next year. But I don't think the two events are connected. Our investments respond to our need to continue improving our capacity to take to our customers more and more innovative services. And the discussion with the government is in a separate way.

Following and connecting the first part with the second part of your question, we are expanding our fiber optic network in order to be closer and closer to the house of our customers. This is the plan that we are permanently reviewing and the investments that we did or we mentioned regarding the next generation network will put in this trend.

Regarding the negotiation with the unions, here we have two situations. The problem that we have at the end of last month was due to the fact that the unions wanted to incorporate into the telecommunications union some workers that today are under the construction union and that basically makes some maintenance activities. This was agreed with the unions and this agreement needs some perfection and but we have a PDO of approximately one year to conclude this or to have a paper including this new agreement that we are having with the unions.

We expect that at the end of the first quarter of the next year, we will have a discussion with the unions regarding further increases. All what expected this is that the level could be between 10 and 15% but it's a very preliminary view. Our understanding is that the government in line with the efforts to control inflation, will have a strong position regarding what type or what level of increases should be done. In conversations, in informal conversations that we have, it is our understanding that the increases could range between, as I said, 10 and 15%. I don't know if I was able to respond all your concerns or your questions.

Yes, that is good. I would like to know if you could give us a guidance on CapEx considering these new investments for '06 and '07 too?

Well, in terms of CapEx, our view is that when we compare the year 2007 with the 2006, the increases will be in the range of 30%. We will be -- if this year we invest 340 million approximately, as was mentioned, the next year we will be in the range of say, $400 million.

Thanks again. Thanks a lot.

You are welcome.

[OPERATOR INSTRUCTIONS] And we will now move on to Dan Kwiatkowski from Schroeders.

Hi, I have got a laundry list of questions too, so I will just ask them one by one. What are your expectations in terms of subscribers of ADSL for 2007? And what is your pricing strategy there?

The idea of the increase in ADSL is that we will be able to duplicate the base of customers that we have this year. In terms of prices, you know that this is a very competitive market and our view is that prices will remain as they are today.

Right. Okay. Then in terms of the cellular business, I think the [satsay] net subscribers have already surprised everyone on the upside. What are your expectations for 2007 in terms of growth of the market? We are already at sort of a penetration of about 70%. How much further can it go?

Well, I think the results of the year -- this year, I would like to confirm that, are very good. But are they for -- of a team that works very hard and very intelligently in order to achieve the results that we have seen today. Our expected penetration for the year 2007 is in the range of 85%.

So you are expecting similar growth in 2007 that you had in 2006?

What we are expecting is an important growth -- a big growth. But a little bit of deceleration in comparison with this year.

Okay, great. Thank you. Then, a question on your churn rate. What percentage or what number of the disconnects in your cell phone business was due to moving to GSM?

Part of the churn is the migration to the GSM. And a good part of our improvement in the ARPU is explained by this migration. I don't know if we respond your question.

I was wondering if you could give me a kind of figure?

Figure?

For that number.

Yes. Basically the migration from CDMA to GSM isn't as -- it isn't disconnection. It is basically a migration.

Yes. Okay.

Okay, so -- but again, what you also have in the process of migration, you also have migration of customers that were in GSM and are migrating again into GSM, basically because they want, especially in the prepaid segment, where you have customers that want to upgrade their handsets and basically they buy a new one with a new number. That represents approximately 20% of the disconnection corresponds to this effect.

Okay. Great, fantastic. My last question, in terms of uses of your free cash flow, you're quickly building free cash flow and the free cash flow is accelerating and probably in three years or so, you are not going to have any net debt left. What are you planning to do with your cash?

Well, when we arrive to the year third and we don't have, we will have the opportunity to talk again. But the intention is to continue doing what we have been doing. You know that we are investing, we are increasing our investments. But in a way that we have in this environment, the things and the control means that you should not see surprises in this line.

Okay, well thank you very much and congratulations.

Thank you.

[OPERATOR INSTRUCTIONS] And we will go to [Ruth Mizzoni] from Standard Bank.

Yes, hi. Congratulations on good results. I just have a question. When is -- what is your target leverage? What is your sense for what would be a good amount of leverage for telecom kind of on a going forward basis?

And then I have another question actually, which is what is post the restructuring, the management fee that Telecom Argentina pays to Telecom Italia?

Regarding the ratio that you ask in terms of leverage, our view is that should be 1, 1.5 times EBITDA.

Okay.

In terms of the management fee, we don't pay any management fee and for the time being, we don't have any expect that we will do it. Ruth, you may be referring to the margin contract that in the past, we used to pay a management fee. But that contract expired.

Okay. Excellent. Okay. Thank you.

You are welcome.

And we'll go back to Dan Kwiatkowski from Schroders.

Hi, I forgot to ask one question. That was on taxes. How much longer or what's the amount of your tax losses carry forward?

Okay. The expiration is going to take place at the end of the year 2007. In a consolidated basis, we have an amount of 700 million pesos, of which we have a provision of 205 million pesos.

Great. Thank you very much.

And we'll go back to Miguel Garcia from Bear Stearns:

Hi. Thank you for the follow-up. I wanted to ask you about this subscriber acquisition cost in the wireless operation. It says in your presentation that it represents 1% of the total cost. Given that the EBITDA margin is 16% and it doesn't look like there is a lot of space to improve margin, EBITDA margin, only by decreasing the subscriber acquisition costs. As the subscriber growth decreases, is there other cost other than subscriber acquisition cost that we can expect to decrease [in effect] to be able to improve your margin significantly?

Our view is that as we are increasing the number of customers month by month and as we mentioned, the number of additions will be similar or a little lower in 2007 compared with 2006. The participation of the subscriber acquisition cost will be lower as a total of revenues and that will produce the increasing margin that we are mentioning. Obviously we are working in some developments in efficient our structure, but the main reason of the decrease is a fixed amount of tax and a bigger amount of revenues.

Okay. So based on that, it would be hard to foresee EBITDA margin of the wireless operation reaching over 30% in the longer term?

We believe that 30% profitability is a medium term objective for the Company.

For the company consolidated figures, right?

No. Only for the mobile sector.

Okay, excellent. Thanks a lot.

Thank you. And gentlemen, it appears that we have no further questions at this time.

Okay. I would like to thank you again for participating in our conference call and please feel free to call our Investor Relations department for any additional questions. Thank you and good-bye.

Thank you. That does conclude today's conference. We thank you very much for your participation. Hope you have a great day.