Telecom Argentina SA (TEO) 2008 Q2 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone. And welcome to the Telecom Argentina second quarter and fiscal year 2008 earnings call. Today's conference is being recorded. Participating on today's call, we have Valerio Cavallo, Chief Financial Officer; Federico Rossi, General Director of Telecom; Pedro Insussarry, Finance Director; Solange Barthe Dennin, Manager of the Investor Relations Division. At this time, I'll turn the call over to Valerio Cavallo. Please go ahead.

Okay. Good morning to everybody. I would like to thank you, everybody, for participating in this conference call. I am Valerio Cavallo, Chief Financial Officer of Telecom Argentina. And together with me are Federico Rossi, General Director of Telecom Personal; Pedro Insussarry, Finance Director; and Solange Barthe Dennin, Manager of the Investor Relations Division.

The purpose of this call is to share with you the consolidated results of Telecom Argentina corresponding to the first half and the second quarter of fiscal year 2008 ended on June 30, 2008.

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

Before I continue with the presentation, let me pass the call to Solange, who will go over 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 the (inaudible) 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 August 6th, 2008, a copy of which will be included in the Form 6-K, which was 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 one of the presentation. As usual, we would like to remind you that for all those who 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, this conference call is being webcasted through the webcast feature available in such section and can also be replayed through this same feature.

After having gone through this clarification, let me pass the call to Pedro, who will go over the market overview and business highlights.

Thank you. Let's start with some snapshots on the macroeconomic scenario. As seen in slide three, the Argentine economy continues to show growth in real terms, although at a slower pace and despite the conflict with the agricultural sector, has had an impact in the level of activity.

In the second quarter of 2008, the year-on-year growth rate reached 7%. Trade and fiscal balance are still positive, although the declining level of trade surplus was evident. In addition, the level of consumption continues to expand. However, the economy seems to have initiated a soft-landing process. And inflation continues to be the main problem to be solved in the short term.

Considering this macroeconomic scenario in Argentina, our company has well performed in the second quarter this year, both in terms of businesses and operating indicators and financials.

Let's start with the fixed line business. As we see in slide five, in this business, we continue to increase our lines of service at a moderate pace. In particular, the year-on-year growth rate was around 3%. And we have also added 2% in the first half of 2008.

The fixed line ARPU increased to ARS40 in 2Q '08 compared to ARS39 in 2Q '07. And this is a very positive evolution considering the frozen tariffs of regulated services. We were able to achieve this growth thanks to a continued process of commercial innovation. In particular, the most successful products have been the flat plan for local and long-distance calls, the SMS service for fixed lines, the introduction of new value-added services, and the increase in penetration of others that already existed.

Another example of offer innovation is our fixed line handset and integrated features, such as voice, music, and video functions. Besides bundling, promotions to acquire equipment that include SMS patch were also successfully marketed. Other products that combine packages of minutes for voice services and broadband internet access continued to be promoted during this quarter.

The success story in broadband continues. In slide six, we can see that Telecom's broadband subscribers reached 902,000, representing a 50% increase versus last year. This was achieved by a better network coverage, innovative commercial offers, and our strong brand positioning. As an example of commercial innovation, we have recently launched the first pure prepaid ADSL product named Arnet Recargable together with the first integrated fixed and mobile broadband internet access called On-the-Go that combines Telecom Argentina's ADSL and Telecom Personal's 3G services. Despite this growth and through effective pricing trends, we were also able to increase ARPUs of this service that in the second quarter reached ARS57.

Going to slide seven and to a description of the mobile business, Telecom Personal continues to grow. In the last year, we have added 1.5 million subscribers, equivalent to an increase of 15%. Specifically, in the first half of the year, we have added 700,000 subscribers; where in the second quarter, we have seen an acceleration in the level of the net addition. Specifically, in the second quarter of 2008, we have added approximately 500,000 customers to our base compared to 200,000 customers added in the first quarter.

We can highlight that the incidence of SAC and SRC as a percentage of service revenues has decreased compared to that evidenced one year ago. This was a result of a reduction of the incidence of all components as Telecom Personal continues to gain efficiency in its operations.

Moreover, in 2008, we have increased our customer retention efforts mainly through improving our customer care function and by making available voluntary handset upgrades for our customers where specific promotions were launched. This has resulted in 400,000 customers have then upgraded their handsets compared to 230,000 customers in the first half of 2007 with a consequent impact in SRC cost.

In addition, during the second quarter 2008, as a final step of the TDMA to GSM migration process, we have turned off the network that will result in efficiency gains in our operations.

Furthermore, as a result of improved commercial presence and a higher [capillarity] of commercial channels, we have increased our participation in the southern region of the country, where we have added 184,000 customers in the first half of 2008 reaching approximately 1.1 million subscribers.

We can also point out that Telecom Personal continues to grow with a value proposition. As seen in slide eight, Telecom Personal continues to grow with no dilution in customer value by maintaining the best market mix of prepaid and postpaid customers. In addition, the participation of value-added service revenues continues to be the highest in the market, with a rate of 29% of total service revenues.

This participation of VAS coupled with the introduction of packet-based products oriented toward the stimulation of usage has allowed us to change the declining trend of MOUs and increase ARPUs by 8% year on year. Having reached this level, we confirm that Telecom Personal continues to have the highest ARPU in the market.

Going to the investments that we have made during the period in slide nine, we can see that in the first half of 2008, we have incurred in higher CapEx that performed in the first half of 2007. We have invested in the capacity, coverage, and quality of our networks. We have continued to upgrade our networks with new services and to sustain our businesses by improving our support system.

In the first half of 2008, ARS337 million have been invested in the fixed line business and ARS379 million in the mobile business. Specifically in the mobile business, Telecom Personal has continued with the deployment of the 3G coverage, where approximately ARS100 million were invested.

In line with the expansion plans of Telecom Argentina Group, it is important to mention the acquisition of Cubecorp performed last month. This acquisition strengthened Telecom Argentina's data center service capabilities as the referred company comes with world-class infrastructure that enhances the offer of customized ICT services. This acquisition will also cover internal data center needs that are required to support the growth of our existing businesses.

And having gone over these business highlights, I would like to pass the call to Valerio, who will continue with a discussion of the financials.

Thank you, Pedro. The strengths that Pedro has just highlighted have resulted in good results for the company. And they have allowed us to maintain the level of profitability of our businesses while sustaining a high level of cash flow generation.

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

In terms of our revenues, we have been able to achieve a growth of 20% in the first half of fiscal year 2008. We were fueled primarily by the expansion of the mobile business that grew by 26% and now accounts for 65% of our consolidated revenues. This growth has allowed us to increase our OPBDA by 19%, reaching ARS1.7 billion that represents 33% margin for this year.

Moreover, the expansion of our OPBDA and the lower incidence of depreciation charges on revenues continue to positively impact our operating profit, as seen in slide 12. Operating profit grew by 44% with expansion of 400 basis points in the margin. This has also resulted in a very impressive improvement of our return on net invested capital that soared from 26% to 38%.

In addition, net income grew by 58% to ARS613 million. It includes a positive foreign exchange result of ARS85 million registered in the period related to the evolution of the peso to U.S. dollar foreign exchange rate that evolved positively during the semester.

Moreover, as seen in slide 13, the expansion of our OPBDA and the controlled level of CapEx have allowed us to generate, in the last [several] months, ARS1.7 billion of free cash flow. This resulted in a significant reduction in leverage of more than ARS1.4 billion to reach ARS1.3 billion of net debt at the end of the second quarter of 2008.

This permitted [us] to cancel in the first half of this year all scheduled payments until October 2011, where we only have 55% of this scheduled installment still outstanding. In addition, Telecom Personal has canceled the equivalent of ARS59 million in debt.

Going into the specifics of each business, in slide 14, we can see the evolution of our fixed line revenues. Despite we continued to have our tariffs frozen at pre-crisis levels, we have been able to expand our revenues coming from third parties by 11% to ARS1.8 billion, where the drivers were data and internet services, interconnection traffic, and other revenues that included the sale of telecommunications equipment. These revenue items grew by 34%, 9%, and 49% respectively.

As Pedro explained earlier, the growth in our ADSL connections has allowed us to significantly expand our internet business, where revenues have increased by 36% and the participation of the service in the fixed line business has increased from 16% in 2007 to 19% in the first half of this year.

Meanwhile, traffic generated by third-party mobile operators have contributed with higher interconnection revenues. In addition, we would like to mention that our revenues coming from monthly fees grew by 7% as a consequence of the expansion of our customer base and introduction of new services.

Meanwhile, measured service revenues have slightly increased by 1% as we start to evidence a certain impact of the mobile service in the usage of basic services. Finally, the evolution of public telephony revenues is related to the impact of the substitution effect of the mobile service and to improve the economic conditions in the country, trends that we see that will continue during the following quarter.

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 costs of 19% was a result of wage increases granted to non-unionized employees and of the impact of salary increases related to the collective bargaining agreement settled in June, last year.

Meanwhile, the increase of 69% in advertising expenses was a result of the commercial actions to promote new services and pricing plans, reinforce our brand positioning together with the effort to market our broadband service.

Despite inflationary pressures on the cost side of the business, we were able to maintain OPBDA flat in nominal terms in the first half of this year at the level of over ARS800 million.

With respect to the mobile business in slide 16, we can see the evolution of revenues. As a result of the expansion of subscribers, the increase of traffic and value-added service usage [saw] the revenues increased by 27%, while handset sales increased by 21%. In addition, the revenue generated by Nucleo increased by 21%. And we have experienced significant subscriber growth in this operation.

Slide 17 shows the unconsolidated income statement for Telecom Personal. In this case, total revenues grew by 26% to approximately ARS3.1 billion. Operating costs increased by 20% to ARS2.3 billion. Higher expenses are mainly related to the expansion of our operation and are a result of higher network access costs, labor costs, commercial care, costs associated to new value-added services, information technology, and taxes.

Meanwhile, commercial expenses grew at a rate below the overall cost structure as subscriber acquisition and retention costs have declined when compared to the first half of 2007. This trend is associated both to the reduction in subsidies that were eliminated in the prepaid segment in the second half of 2007. In addition, the Company is working with its commercial channels to gain efficiency in the structure of [commission].

Therefore, Telecom Personal in Argentina delivered a 50% increase in OPBDA to over ARS780 million for the first half of fiscal year 2008. It's very important to highlight that the OPBDA margin continues to expand as seen in previous quarters from 21% reported one year ago to 26% for the current first half. This result was achieved by a lower impact of SAC and SRC in the margin, equivalent to approximately 500 basis points.

Finally, net income for Telecom Personal climbed to ARS381 million in the first half fiscal year 2008, up from ARS130 million registered one year ago.

Finally, in slide 18, we can see the performance of Nucleo, our cellular operation in Paraguay. We can show increasing revenues denominated in pesos of 21% while maintaining a healthy level of OPBDA that increased by 2% with a margin of 32%.

We must note that Nucleo continues to face an increasingly competitive market, where operators have launched 3G services. And they have announced their commercial offers. Despite this, Nucleo achieved a very strong subscriber growth of 24%.

As the final part of our presentation, we would like to share with you what we expect from our operations for the rest of the year. Assuming that the current macroeconomic conditions don't change, we expect that consolidated revenues will grow at a rate of approximately 20%, a very positive evolution taking into account the performance of 2007 and that a part of our fixed line revenues continue to be frozen.

With respect to our operating profit before depreciation and amortization, considering that our costs are being affected by inflationary pressures, we expect that the OPBDA will continue to increase in nominal terms, while profitability will decrease in second half of the year when compared to what we registered for full fiscal year 2007.

As we have reiterated in previous conference calls, due to seasonality, the profitability for the first quarter of each fiscal year is normally higher than what is expected for the full fiscal year. Consequently, although we expect to continue growing in terms of nominal OPBDA, our expectations for profitability margins for the full 2008 fiscal year are that they will be slightly lower to those registered in this first half 2008, as we expect a higher level of commercial activity in the second half of the year in the mobile and broadband business and the impact of the inflationary effect in our cost structure.

With respect to CapEx, our expectation is that the Telecom Group will be investing the equivalent of approximately 15% of revenues. Our budget contemplates an amount of approximately ARS1.6 billion. For 2009, we expect that the total CapEx as a percentage of revenues will be similar to that of 2008.

Finally, we have the pleasure to announce that yesterday evening, the board of directors of Telecom Argentina has designated Mr. Franco Bertone as General Director of Operations for the Telecom Argentina Group. Mr. Bertone has replaced Mr. Marco Patuano, who has accepted the position of CFO of the Telecom Italia Group as we have informed the relevant authorities last month.

And then in concluding with the presentation, we are more than pleased to answer any questions you may have. Thank you.

(OPERATOR INSTRUCTIONS) We'll take our first question from Rizwan Ali.

Good morning. My question was regarding the macro situation. Inflation has been around roughly 2%, 2.5% per quarter. Do you expect full-year inflation to be closer to 20%? And also, I just want to get your idea of what GDP inflation growth are you factoring in for next year.

And second question was regards to depreciation. It appears that depreciation went down quite significantly. Should we expect your position going forward to be around the same level as second quarter?

Okay, Rizwan, regarding the macro situation and in respect to expectations of inflation, we are in similar levels as what you've mentioned, between 20% to 25%. At least that's what we are seeing in certain items of our cost structure. With respect to GDP growth, for next year, we are factoring something in between 4% to 5%. And with respect to depreciation charges, yes, we expect that they will be similar in the second half as what you've seen in the second quarter.

And do you expect inflation to come down in '09?

That's a very good question. I mean, the pricing dynamics in Argentina are pretty complicated. Inflation, as we've mentioned in the speech, is, I would say, the most important factor that the authorities have to tackle in the short term. In order to reduce pricing expectations, that will take some time. And if there is some type of decline in inflation, we expect that that will be more into the second half of 2009 more than in the first half of 2009. But that will also depend on how the economy performs in this second half of the year.

One last question, if I may.

Go ahead.

Value-added services increased quite a bit. Is it still primarily SMS? Or are you observing that customers are using more and more services or additional features.

Good morning. It's Federico Rossi from Telecom Personal. We have reached 83% of SMS market. And 17% is the number that we released in the second half of increasing our data and value-added services, generally speaking.

Thank you.

You're welcome.

We'll take our next question from [Andre Rezende] with Goldman Sachs.

Hi. This is actually [Lucio Waldress]. Thanks for taking the call. Got a couple questions--one of them, [PO] just amortized a substantial amount of debt in this quarter. And next quarter, if everything goes according to the plan, PO should report already a positive number in retained earnings line. And actually, my question is how much of the current debt position has dividend covenants? And when does dividend--does debt levels mature?

Okay. Just to clarify, Lucio, there are no restrictions to pay dividends in the terms and conditions of our debt, nor in Telecom Argentina nor in Telecom Personal. The restrictions are basically related to the possibility of absorbing accumulated losses in the accounts of our shareholders' equity--

Which should happen next quarter already, correct? You're pretty much close to the breakeven point right now.

If everything evolves as what we have seen in the first half of the year, we should end the year with positive retained earnings. You must also take into account that before being able to distribute a dividend, we have to reconstitute the legal reserve that we had absorbed in 2005 -- if I'm not mistaken -- of ARS277 million. And after that, having reconstituted this reserve, we are able to distribute 95% of the remainder in '08.

Okay.

The other 5% will continue to be added to the legal reserve up to the maximum amount of 20% of the adjusted capital amount.

Okay. And just switching subjects a bit, of your current debt position today, how much is denominated in foreign currencies? And how much do you have hedges on?

Substantially all is in foreign currency. And at this time, we do not own the debt. We do not have hedging. We don't have in contract to get any hedge with respect to foreign exchange.

All right, thanks very much.

Okay.

We'll take our next question from Marcelo Menusso with Deutsche Bank.

Hi. Good morning. Just a little more questions on the debt part. From my understanding, most of the debt reduction is through pre-payments of amortization. I'd like to know if that's correct or if the Company's also buying bonds in the market, and if not, if it would consider to do so.

Your information is correct. All the debt reduction in Telecom Argentina that has basically -- that's debt that is callable at any time, at par, is done through pre-payment mechanisms that we do every April and October. And at this time, we're not buying any debt in the market. We're not doing any open-market transactions.

Would you consider to do so, or--?

It will depend on the conditions of the market.

Okay. Do you have an estimate of how much debt you expect to pre-pay in October?

At this time, we're not in the position of disclosing that information yet.

Okay. Thank you very much.

We'll make it public once the Company has taken a decision on that.

Okay. Perfect. Thank you.

You're welcome.

We'll take our next question from Mauricio Fernandes with Merrill Lynch.

Good morning, everyone. Pedro, you mentioned on answering a question from Lucio about the restrictions around dividend. And you said it pretty clearly that it's only related with retained earnings now and then considering the legal reserves. Now is it gone, that restriction on the debt restructuring that you needed for every $100 you paid in dividends, you needed to pay to amortize about $200, if I'm not mistaken, of the overall debt or restructured debt?

Yes, that continues. But that's not a restriction. That's basically an acceleration to the prepayment that we have to do if we have to pre -- if we have to -- if we pay dividends.

Okay. So what you need -- sorry. Go ahead.

Yes, no, go ahead here.

So what you need is -- so first you reach breakeven. Then you can stick to that legal reserve. And then you're free to do whatever you want. And then the only thing you need to do is the math of how much dividends you can pay relative to how much cash you have versus the amount of debt you would need to pay because of the dividend you want to pay. Is that correct?

In general terms, that's correct, yes. In order to pay dividends, I have to have the sufficient cash for the dividend and to pre-pay the debt in order to comply with the pre-payment ratio that you've mentioned.

Okay. Good. I just wanted to clarify that. Thanks a lot, Pedro.

You're welcome.

(OPERATOR INSTRUCTIONS) We'll take our next question from Gustavo Palazzi with VR Capital.

Thank you for your presentation. My question was related to the cell phone business. There seems to be like increasing competition. And the marketing seems to be reaching a very high level of penetration. And do you see concerns in the generation of EBITDA from that sector? Like there was a strong growth last year quarter on quarter. And this year, the growth in EBITDA from quarter on quarter seems not to be as last year.

In general terms, we believe that there is room to increase the profitability in the mobile sector. And we believe that a normal level of profitability could be around 30% of our revenues.

Okay.

And, gentlemen, we do not have any other questions at this time. I'd like to turn the conference back over to you for any additional or closing remarks.

Okay. Thank you, everybody, for participating on the call. And any further doubt that you may have, please call our office. We'll be more than willing to answer any questions you may have. Thank you very much. Bye, bye.

Once again, this does conclude our conference call. You may now disconnect.