Telecom Argentina SA (TEO) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina first-quarter and fiscal-year 2008 earnings conference call. Today's call is being recorded. Currently all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session.

Participating on today's call we have Marco Patuano, Chief Operating Officer; Valerio Cavallo, Chief Financial Officer; Pedro Insussarry, Financial Director; and Solange Barthe Dennin, Manager of the Investor Relations Division. At this time I will turn the call over to Mr. Marco Patuano. Please go ahead, sir.

Thank you. Good morning. I would like to thank everybody for participating on this conference call. I am Marco Patuano, Chief Operating Officer of Telecom Argentina. As we said before, together with me there are Valerio Cavallo, our Chief Financial Officer; Pedro Insussarry, our Finance Director; and Solange Barthe, our Manager of Investor Relations Division.

The purpose of this call is to share with you the consolidated results of Telecom Argentina, corresponding to the first quarter of the fiscal year 2008 ended on March 31, 2008.

The agenda for today, as seen in slide 2, is first to go over with a general market overview. Then we will go through some business highlights, and after that we will go over with some specifics of the evolution of our financial figures. And we will end the call with a Q&A session.

Before I continue the presentation, let me pass the call to Pedro who will go over with some Safe Harbor information and other details of the call.

Thank you. 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 effects of public emergency law and complementary regulation; the effects of ongoing industry and economic regulation; possible changes in the demand for Telecom's products and services, and the effects of more general factors, such as changes in general market or economic conditions, in legislation, or in regulation.

Our press release dated May 8, 2008, a copy of which is being 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 1 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 Investor Relations office or download them from the Investor Relations section of our website at www.telecom.com.ar.

Additionally, the conference call is being broadcasted through the webcast feature available in this section and can also be replayed through this same feature.

Having said this, and gone through these clarifications, let me return the call back to Marco Patuano. Marco?

Thank you, Pedro. Let's start with some macroeconomics metrics. The Argentinean macroeconomic evolution continued to show a strong pattern of growth in the real GDP. At the end of the first-quarter 2008 the year-on-year growth rate stayed above 9%. The trade and fiscal balance is once again positive, and the consumptions are steadily high.

In this macroeconomic scenario, Telecom Argentina has performed a brilliant first quarter both in terms of business, fiscal indicators, and financials.

Let's start with the fixed line. In the fixed line business we continue experiencing a growth in the lines in services. In particular, the year-on-year growth was around 3%. Also, in the first-quarter 2008 it has shown a positive net increase despite the fact that in the South Hemisphere it is vacation time.

ARPU is stable at ARS38, and this is another good news. It has been achieved thanks to a continued process of offer innovation. In particular, the most successful products have been the flat offers, both on local calls and long distance calls; the SMS from fixed lines; and the enlarged adoption of the voice value-added services.

Brand-new services have been launched at the video telephony, and they are in the very first stage of the commercialization. We will see the adoption rate during this year, even if the product is not expected to be a massive product due to the cost of the [operator].

The success story in the broadband is continuing. Telecom grew year-on-year 60%, leveraging on our strong brand positioning. Arnet has been evaluated as the Top of Mind 2007 by an independent evaluator. And leveraging on the continuing innovation in the offer.

Despite the growth, we're defending the ARPU that in the first quarter has been kept stable at ARS53. Recently we have increased our prices around 12%, with practically no impact on the churn rate that stayed significantly below 2%.

In the mobile, Personal is continuing to grow. In the year-on-year we have added 1.6 million customers, equal to 17%. Highlights of this quarter, the SAC or service revenue ratio is decreasing thanks to the cancellation of the handset subsidies on the prepaid sales. The mix, prepaid-postpaid, in the customer base is still confirming our success in keeping an important postpaid percentage in the base.

Thus revenues are still in the range of 29% over total revenues also in the first quarter. This is particularly important because we confirm the same percentage we had in Christmastime.

Messaging VAS are representing more than 80% of the total VAS revenues, but not-messaging VAS are growing at a faster growth rate. In particular, HDML traffic data is growing at 3-digit rate.

ARPU is growing 8% year-on-year, and personally I believe this doesn't need further comment.

Investments. Telecom. In first-quarter 2008 the investments are significantly higher than first-quarter 2007, accelerating our network capacity and coverage, upgrading our network, and supporting business and product innovation.

At the moment ARS144 million have been invested in the fixed network, and ARS100 million have been invested in the mobile. Access is in the fixed line the most important investment. Capacity and coverage in the mobile are the two most important issues that we are [recovering].

Well, these are the main highlights for business, so I will pass the call to Valerio Cavallo, who will continue with a description of the financials.

Thank you. The trends that Marco has just [described] have resulted in excellent results for the Company, beyond our expectations. They have allowed us to achieve important improvements in the level of profitability of our business while maintaining a high level of cash flow generation.

In slide 11 we can see the evolution of our revenues and operating profit before depreciation and amortization. After having experienced a significant growth in 2006 and 2007, we see that the business plans continue to have a positive effect in our performance for this fiscal year.

In terms of turnover, we have been able to achieve a growth of 21% in the first quarter of fiscal year 2008. We were fueled primarily by the expansion of the mobile business that grew by 27% and now accounts for 65% of our consolidated revenues. The growth has allowed us to increase our operating profit before depreciation and amortization by 28%; and improve our margin from 33% in the first quarter of 2007 to 35% for this year.

It is important to reiterate that this is level of profitability has exceeded our projections. In addition, due to seasonality during the first quarter of each fiscal year, our profitability is normally higher than for the full fiscal year.

Although we expect to continue growing in terms of nominal operating profit before depreciation and amortization, we consider a tough target, maintaining our profitability margin for the full 2008 fiscal year at the same level evidenced for the entire 2006 and '07.

Moreover, the expansion of our operating profit and the lower incidence of depreciation and charges on our revenue continue to positively impact our operating profit, as seen in slide 12. Operating profit grew by 49%. We had expansion of 500 basis points in the margin.

This has also resulted in a very impressive improvement [for] our return on net invested capital that has soared from 25% to 40% and a significant expansion of our reported net income that more than doubled to ARS272 million.

Moreover, as seen in slide 13, the expansion of our operating profit before depreciation and amortization and a controlled level of CapEx have allowed us to generate ARS1.7 billion of free cash flow in the last year.

This resulted in a significant reduction in our net debt from ARS3.1 billion in the first quarter of 2007 to ARS1.6 billion in the first quarter of the current fiscal year. This permitted to cancel on April 15 all scheduled payments until October 2011, where we only have 45% of this installment outstanding.

Going into the specifics of each business in slide 14, we can see the evolution of our fixed line revenues. Despite we continue to have our tariffs approaching pre-crisis levels, we have been able to expand our revenues coming from third parties by 10% to close ARS900 million, where the drivers were data and Internet services, interconnection traffic, and other revenues that included the sale of telecommunications equipment. This revenue -- the revenue items grew by 33% -- 8% and 68%, respectively.

As Marco explained earlier, the growth in our ADSL connections has allowed us to significantly expand our Internet business, where its participation revenues has increased from 21% in 2007 to 27% in the first quarter of the current fiscal year.

Meanwhile, traffic generated by third-party [bombay] operators have contributed with higher interconnection revenues.

In addition, we would like to mention that our revenues coming from monthly fees grew by 8% as a consequence of the expansion of our customer base and introduction of new services. Meanwhile, measured service revenues have slightly declined by 2% as we started to evidence a certain impact on the mobile service in the usage of the fixed.

Finally, the evolution of public telephony revenues is related to the impact of the substitution effect of the mobile and to improved economic conditions in the country, trends that we see that will continue during the following quarters.

In slide 15 we can see the unconsolidated income statement of Telecom Argentina and the detail of the evolution of our operating costs. The increase of labor cost of 24% was a result of wage increases granted in the collective bargaining agreement settled in June last year and to a higher level of [accountants mainly] in our network area in order to partially compensate the reduction in the [work time] implemented in 2007 and to improve our reporting standards.

Meanwhile, the increase of 18% in advertising was a result of the commercial actions to promote the new services and pricing plans, together with the effort to expand our broadband service.

Despite inflationary pressures on the cost side of the business, we were able to maintain operating profit before depreciation and amortization relatively flat in nominal terms at a level of over ARS400 million.

With respect to mobile business in slide 16, [look at] evolution of the revenues. As a result of the expansion of subscribers, increase of traffic and value-added service usage, service revenues increased by 29% while handset sales increased by 20%. In addition, the revenues generated by Nucleo increased by 16%, as we have experienced a significant subscriber growth in this operation.

In slide 17 we can analyze the unconsolidated income statement of Telecom Personal and Nucleo. In the case of Telecom Personal, total revenues grew by 28% to approximately ARS1.5 billion. Operating costs increased by 14% to ARS1.1 billion. Higher expenses are mainly related to the expansion of our revenues and are the result of higher network access cost, labor cost, customer care cost associated to new value-added services, information technology, and taxes.

Commercial expenses grew at a rate below the overall cost structure. Also, [sector] acquisition and retention costs have declined when compared to first-quarter 2007. This trend is associated both to the reduction in the subsidies that were eliminated in the prepaid segment and to the effect of lower costs associated to the migration of customers from CDMA technology to GSM, as this process practically concluded in 2007.

In addition, the Company is working with its commercial channels to gain efficiency in the structure of commissions.

Therefore, Personal Argentina delivered an 86% increase in operating profit before depreciation and amortization to over ARS400 million for the first quarter of fiscal year 2008.

It is very important to highlight that operating profit margin continues to expand, as seen in previous quarters, from 19% reported one year ago to 28% for the current first quarter. This result was achieved by the efficiency recovery of 200 basis points on pre-SAC margin and 700 basis points due to lower SAC and customer retention costs.

Finally, net income for Personal climbed to ARS181 million in the first quarter of fiscal year 2008, up from ARS63 million registered one year ago.

Finally Nucleo, which operates in Paraguay, showed an increase in revenues denominated in pesos by 16% while maintaining a healthy level of operating profit before depreciation and amortization that increased by 6% with a margin of 34%. We must note that Nucleo also operates in a highly competitive market; and despite this, it has achieved a very strong subscriber growth of 27%.

Having concluded with the presentation, we are more than pleased to answer any questions you may have. Thank you.

Well, once again, thank you for participating, and we are ready for the Q&A.

(OPERATOR INSTRUCTIONS) [Alex Garcia], Raymond James.

Good morning, gentlemen. I was wondering if you guys could give some color on the other expenses, which rose 40% year-on-year. What was the major accounts inside the others, and what would be -- what can we expect of a trend like that for 2008? Thank you.

(technical difficulty) The increasing cost, as you explained, 40% is basically related to services that we are buying from third parties and that are related to the increasing costs of labor. Obviously there is a direct relation to the increase in the overall activities of the Company. We have to remember it's higher than 20%.

You mean that inside these other expenses there are third-party service mostly?

Yes, there are presently third-party services, maintenance, cost of international telephony, and maintenance in the [red], in the network.

Okay, just to confirm, so you guys expect it to stay around 13% of net revenues throughout 2008?

Yes.

Okay. Thank you, gentlemen.

Dan Kwiatkowski, Schroder.

Good afternoon, and congratulations on the results. I thought they were very, very good. I've got a few questions, if I may. The first questions are modeling questions.

In terms -- can you tell us what the churn was in the quarter for the mobile business? Then can you also give me numbers for the number of employees in the mobile business and the number of employees in the fixed line business, please? That's the first question.

Patuano answering. Thank you for the congratulations. The churn rate in the mobile actually is 2.7% in the first-quarter 2008, and we are doing our best to push it down. Our expectation for the full year is a lower churn rate percentage.

To headcount, [Personal] at the end of March was 3,440 over a total of 14,874.

Okay, thank you. Second question is on your projections for net subscribers for the full year. I think you were pointing toward something like 12 million subscribers in the full year of '08. Obviously the first quarter is a seasonally weak quarter. But do you still expect to be hitting somewhere around that 12 million number full year?

Correct. This is my MBO. So I expect more than 12 million.

Right. Does that necessarily imply a weaker margin than you have seen in the first quarter?

Not necessarily. What we will try to do -- keep in mind that there are seasonal fluctuations of the margin. Traditionally the last quarter, with the Mother Days and Christmas, is significantly lower; and first quarter is a month with relatively low campaigns. So first quarter in general is a little bit more brilliant than other quarters.

Okay, great.

But all in all we expect a brilliant performance year-on-year.

Great. My last question is on your dividend policy. It still true that this year is a year where you will be paying down debt; and then 2009 is really the first year when you start expecting to pay dividends?

We don't expect to pay dividends in 2008.

But does that mean you do expect to pay dividends in 2009?

We don't expect to pay dividends in 2008.

Okay, thanks.

Thank you. Thank you very much.

Jose Bernal, with Standard New York.

Good morning, everybody, and congratulations on your results. My questions are related to your mobile business. First question is do you know, if you can tell us, what is the penetration in Argentina? Also what is your market share in this business?

My final question is regarding CapEx. What is the guidance for 2008? Thank you.

When we talk about penetration we have a nominal value and a real value. Let me talk about the nominal value. It is around 95%, and above 95%; and we expect that the full year will be above 105%. So this is the nominal penetration.

So I mean, probably there is a certain quantity of lines that are not making any traffic. In this case I just want to clarify once again that our policy is quite strict in terms of cancellation of non-active customers.

CapEx, what we expect is ARS1.7 billion fixed and mobile. This is the overall. You can split approximately half and half between fixed and mobile, probably slightly more fixed than mobile.

I don't remember if I am skipping any question, any part of your question.

Yes, the market share for --

Market share, sorry. We are almost stable in our market share between 28.4%, 28.6%. It is quite difficult to have -- how can I say -- the true number of the market. So what we do generally, we keep in consideration the revenue share; and we are still confirming higher revenue share than market share.

That is okay. Thank you.

Maura Shaughnessy, MFS Investment.

Yes, a couple questions. First on the cap spending side, you already answered the '08 number. Any sense as to what '09 would look like?

Sorry, it was very -- I really didn't hear you very well. You were asking CapEx 2009?

Yes.

A little bit more. If this year we are in ARS1.7 billion, we are forecasting something between ARS 1.8 billion and ARS1.9 billion, closer to ARS1.9 billion than ARS1.8 billion.

Okay. Can you help me out a little bit again on the capital structure optimization? Obviously your balance sheet is very inefficient now, but you have some positive retained earnings and hurdles to make and such.

Can you just talk about what -- how you think about cash flow priorities there in terms of optimizing the balance sheet?

I'll leave Pedro answer to you.

Okay, first of all we do not have positive retained earnings in Telecom Argentina. Basically we have still a negative balance of approximately ARS460 million. That is, I would say, the main barrier or hurdle to basically pay dividends to our shareholders.

As Marco mentioned before, taking into account the level of profitability, we are not expecting to pay dividends during this year. Okay?

Taking into account that main hurdle, the main allocation of our cash flow will be to continue to reduce debt, especially taking into account that we have an excess cash provision or a cash sweeper in Telecom Argentina's terms and conditions that basically oblige us to prepay debt over all the cash that we generate over our mandatory payments. Okay?

Marco Patuano. Just to add a more general concept, we consider our actual capital structure a strength in the sense that financial markets are quite turbulent right now. We have good terms of our debt, and we are in the position of taking profit of any window of good market and moving quickly in case of good opportunities.

So let me say that internally if in general terms we agree with you that the capital structure right now is not efficient, in the specific moment of the financial markets we consider our situation particularly good.

Let me just add, I appreciate the retained earnings balance is negative and it is what it is. But just in more general terms, though, how would you prioritize a dividend versus a share buyback? Especially given that the stock has been hammered so hard. Or third, other acquisition opportunities or investment opportunities, can you kind of prioritize the cash flow thoughts?

Today, priority number one is investment and to look around good opportunities in terms of business opportunities.

Is there any possibility in the future -- how do you think about dividend versus share buyback?

If you look into the terms and conditions of Telecom Argentina we are not allowed to buy back shares.

Okay, and there is no way that that --

Under the current terms and conditions we are not allowed to buy back shares.

There is no way that that issue is going to change anytime soon, especially when you are in the position to be issuing a dividend?

As Marco mentioned before, we are constantly monitoring the markets; and I would say again the capital structure that we have today gives us the strength not to be obliged to go to the market and to refinance our debt. We have a very flexible debt structure. This for us is a strength, taking into account the current market conditions.

The day in which we will go back to the market, we will be extremely flexible in considering all the opportunities and all the possibilities that there are, depending on the market condition at that time.

Right. No, I appreciate that. I just -- when that time comes, though, you'd think you would want to be as flexible as possible.

Correct.

Just one more question. What is the broadband penetration in your area right now, in your region?

We are in the range of between 22% and 25% in the penetration of households.

Okay. How would you expect that to grow over the next year or two?

We consider that a consistent target for 2008 could be to pass the barrier of 1 million customers -- in Telecom Argentina, I mean. And for 2009 I expect something around 1.2 million.

Great. Thanks very much.

You are very welcome.

Miguel Garcia, Deutsche Bank.

Thank you. My first question is regarding the investigation the regulators are doing regarding the acquisition of Telefonica, of a stake of Telecom Italia. I wanted to know what the timing is for this decision there by the government.

Secondly, what is the most probable outcome you are foreseeing? If we would see just an approval of the whole transaction with no conditions; or do you expect certain conditions to be put on the management?

Secondly, regarding the elimination of prepaid services, I want to know if this is following a trend in the market, or do you -- Personal is the first company doing this. Basically those are the two questions.

Thank you for the first question. We were waiting for the question, so thank you, Miguel. Well, we are in the process that -- the Antitrust is in the process of evaluating the impact on the Argentina market.

We haven't been notified of any specific result of the investigation. What we can say is that during the last two months of 2007 and the first two months of 2008 we had the pleasure of two persons from the Antitrust and from the Secretary of Telecommunications who have interviewed the managers, and myself, and almost 90% of the colleagues that are in this room right now. We have duly answered to all the questions that we received.

But unfortunately our crystal ball is broken, so I don't know what will be the end result of the investigation. To be honest, we have very little information about the timing, as well. A few weeks ago the former President asked, sent a letter to the Antitrust asking more details on the process, and we didn't have any answer. So we are waiting.

What I can say is that what is happening at the shareholders' level is not affecting at all the operation, as you can see with our results. We are keeping a sort of Chinese wall between the shareholders and the managers. The managers are 100% focused on the operations, and we are battling every single day with our competitors named Telefonica or Claro or whatever you prefer.

So I can confirm you that what is happening at the shareholder level and what is going on at the management level are two complete separate stories not affecting, thank God, each other. So this is something I would like to treat to very seriously because it is extremely important to pass to the market.

Your second question was a subsidy on the mobile market for prepaid customers. It is something quite normal in markets when they get closer to the saturation that the prepaid customers lose the benefit of the prepaid subsidy.

In this sense we are not the only one. In this sense almost all the industry have canceled the prepaid subsidy on the handset.

Nowadays we have a positive margin. We have a positive margin of around 15% on the handset sales. So the positive margin is something you need in order to recover logistic costs and distribution costs and so on and so forth.

So this is something you can see also in other markets. If you look at Brazil, for example, the dynamic was almost the same.

Okay. Another thing, there is a concern that since you guys are not getting a tariff increase on the fixed line part, and you are continuing investing, and you are -- the costs are growing because of the inflation is so high. Is there a risk that at some point your EBITDA margins become zero or insignificant on the fixed line side? Assuming that inflation could be as high as 30% or 40% in the next couple of years.

I'm touching wood right now. First of all, yes, it is true that tariffs on regulated services are still frozen. Let me say that a few signals of a more open-minded approach are going around in the market. That does not mean that we are having any kind of negotiation in course, because we have not. But it is not a taboo anymore talking about prices in public services.

We don't expect that the market pressure could drive the margin down to zero. We have to say that the percentage of revenues that are also in the fixed line coming from not-regulated services is increasing constantly.

We are working on tariffs on not-regulated services, as I said before. We are revised the prices for broadband, for example, and also in the wholesale we have increased prices in the last year. Data services for enterprises are having a very good performance; and we are launching ICT services that I personally believe will be a good driver for the future.

Regarding CapEx, it is true that we are investing quite much in infrastructure, in fixed infrastructure. But you have to keep in mind that fixed infrastructure are needed also for mobile business. So we are building access and transport, transportation.

So we consider that the money we are investing in our fixed infrastructure is -- I think that it is slightly incorrect to talk about fixed infrastructure. I prefer to talk about a transportation layer. Have I answered to your question?

Yes, you did. Thanks a lot.

Thank you very much.

Marcelo Menusso, Deutsche Bank.

Good morning. I think my first question is on page 4 of the release. It is regarding operational costs. Since that salaries and social security contributions is the highest increase among your operating costs, please correct me if I'm wrong, but I think that a large part is due to negotiations with unions, which apparently have been difficult in the telecom sector, including some strikes in 2007.

So I would like to know, how does it look going forward? Do you anticipate further salary increases? Or do you think the situation is pretty okay for '08?

Thank you, Marcelo, for the question. We have already signed the agreement for 2008 and 2009. I mean from July 1, 2008, to June 30, 2009. It has been agreed in a percentage of 19.5% salary increase.

It is particularly good because, as you said before, last year the negotiation was particularly bloody. We had a lot of days of strikes in which we suffered in the quality of services for our customers. At the end customers have been -- were suffering for delay in reparation mainly.

So this year we are not expecting to face any conflict. We have negotiated months before the date, and I am particularly satisfied. I saw really a good mood in the unions. They want to work. They want to work with us in order to push our growth. So everybody wants to work.

Okay. Then a final question. Could you update the prepayment? Tell me what is the current amount of [spending] (inaudible) 2011, 2014, and also Telecom Personal 2010 was?

Okay, this is in dollar equivalent. Of the 2014 we have approximately, after the prepayment, $485 million, okay? And the remainder goes to the 2011.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Dan Kwiatkowski, Schroder.

A follow-up question on the investment opportunities that you may or may not be looking at. Can you say are those entirely Argentine opportunities, or are you also looking outside your borders?

Argentine.

And telecom-related?

Yes.

Okay, great. Thanks a lot.

It appears we have no further questions at this time.

Thank you, everybody, once again. Thank you for participating in our conference call. Please feel free to call our Investor Relations department for any additional questions, and have a fantastic weekend.

This concludes today's teleconference. You may disconnect at any time. Thank you, and have a great day.