Telecom Argentina SA (TEO) 2008 Q3 法說會逐字稿

Good day everyone, and welcome to the Telecom Argentina third quarter 2008 earnings conference call. Today's conference is being recorded. Participating on today's conference, we have Franco Bertone, Chief Operating Officer, Valerio Cavallo, Chief Financial Officer, Pedro Insussarry, Finance Director and Solange Barthe Dennin, Manager of the Investor Relations division.

At this time it is my please to turn the conference over to Pedro Insussarry. Please go ahead, sir.

Okay, thank you very much, and good morning to everybody. And thank you very much for participating on this call. When the operator just mentioned, the participants of today's conference call are Franco Bertone, our Chief Operating Officer, Valerio Cavallo, our Chief Financial Officer, Solange Barthe Dennin, who's IR Manager and myself, Pedro Insussarry who is Finance Director of the Company.

And as you all may know, the purpose of this call is to share with you the consolidated results of Telecom Argentina, that corresponds to the nine month period in the third quarter fiscal year 2008 that ended last September 30.

The agenda for today's call, as you see in slide two, is to go over the general market overview. Then we'll go over some business highlights and after that we'll go over some specifics of the evolution of our financial figures. And finally we'll end the call with a Q&A session.

Before we continue with the conference call, I would like to go over some Safe Harbor information and other details of the call and information that you must have received by now.

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

Our press release dated November 6, 2008, a copy of which will be included in a 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 one of the presentation.

As usual, we would like to remind you that for all of those who have not yet 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 broadcasted through the webcast feature available in such section and can also be replayed through this same feature.

Following with today's conference call and as an introduction of the general operating environment, we'll go over the market overview described in slide three.

Some snapshots on the macroeconomic scenario that we can share with you are that the Argentine economy has started to slow down in real terms, although at a slower pace. This was despite the conflict with the agricultural sector and the global context that have had an impact in the level of activity. In the third quarter 2008 the year-on-year growth reached 7%.

Moreover, the trade and fiscal balance are still positive although it is expected that this situation may tend to decrease, as the commodity prices may affect the trend of both balances.

In addition, the level of consumption continues to expand. However the economy continues to slow down and inflation continues to be the main problem to be solved, although signs of lower pricing pressure have started to appear in the economy.

Considering this macroeconomic environment in Argentina, our Company has well performed in third quarter, both in terms of its businesses and operations. And having gone through this introduction, let me pass the call to Franco Bertone who will go over the business highlights. Franco?

Thank you. Good day. It's a pleasure to meet with you at this conference and I hope we'll have the opportunity to meet in person in the future. The Company during this period has continued to deliver growth, both in financial and operational terms. Consolidated revenues continue to increase, trailed by the expansion of our cellular service and broadband connection, despite in both markets a very competitive environment.

But the third quarter operating profit before depreciation and amortization totaled ARS2.5 billion, with an increase of 11%. Operating profit was ARS1.5 billion, with an increase of 28%. Net income reached ARS831 million, with an increase of 35% during the nine month period ending in September 2008.

We developed our customer demand with advanced technological solutions and innovative value propositions. With regard to the Internet business, we are upgrading our fixed line customers to ADSL products, improving our broadband portfolio, with solid results in terms of new subscribers and incremental penetration.

In this quarter, we experienced substantial growth in cellular subscribers, with increasing ARPU that caused an increase in subscriber acquisition and retention costs. We have doubled our net adds and handset upgrades as compared to last year, capturing the opportunities that the market still offers, but also securing our customer base in order to reduce churn.

In the fixed line business, we increased ARPU with new value added services and pricing plans that have allowed us to partially counter the effect of decreasing local traffic.

The intensified commercial activity has increased sales and retention costs affecting profitability of this quarter. I invite you to refer to slide five of the presentation we made to you this morning.

Our fixed line service keeps growing at a moderate pace. The year-on-year growth rate was around 20%, a quicker pace than the market. We believe that this market still offers opportunity despite being mature. ARPU increased to ARS40 in third quarter from ARS39 in third quarter 2007, despite frozen tariffs of regulated services.

We were able to grow because of sustained process of commercial innovation, flat plans for local and long distance calls, SMS for fixed line, new value-added services and penetration increase of those already offered.

We also market bundle promotions that combine packages of (inaudible) for voice services with broadband Internet access as part of our strategy of integrated offering of services to our customers.

Slide six shows the growth of our broadband subscribers. By the third quarter, we have reached 976,000 connections, a 44% increase versus last year. We achieved this by maintaining the levels of net ads despite reaching a level of broadband penetration of some 32% of households. With improved network coverage, (inaudible) offers strong brands, under tight connections and improved call center operation; we just passed the 1 million subscriber mark.

An example of our innovation drive is that we market the first integrated fixed and mobile broadband Internet access. On-the-Go is the program name, that combines Telecom Argentina ADSL and Telecom Personal 3G services. Growth has not deteriorated ARPU. Effective pricing increased revenue for subscribers to ARS66 per month.

Fixed line revenue devolution is shown in slide nine -- seven, I'm sorry, slide seven. Despite the regulated traffic being frozen at pre-crisis level, we expanded our third party revenue by 11% to ARS2.7 million. Data and Internet grew 34%.

Other revenues, that include the sale of telecommunication equipment, grew 54%.

Revenues from monthly fees grew by 7% as a consequence of the expansion of our customer base and introduction of new services.

Major service revenue has slightly increased by 2%, slightly below the growth of licensed services because of the impact of mobile in the usage of base services.

Traffic generated by third party mobile operation has contributed with higher interconnection revenues.

Public telephony revenues continued to be affected by mobile substitution.

I'd like to draw your attention to our revenue mix of non regulated versus regulated services that improved from 37% to 43%.

Slide eight is about mobile. In the last 12 months, we had 1.7 million subscribers, posting an 18% increase of our customer base.

In the third quarter net addition accelerated, having incorporated 600,000 new subscribers to our base, compared to 200,000 and 500,000 customer added in the first and second quarters respectively.

SAC and SRC, as a percentage of revenue, increased by 1%. This was a result of a combination of reduced handset subsidies because of voluntary handset upgrades and higher agent commission because of increased customer retention efforts.

During the nine months period of 2008, we upgraded 651,000 handsets, versus 377,000 in 2007.

Slide nine shows how we grow -- doesn't imply dilution in customer value by maintaining the highest market mix of prepaid and postpaid customers and the [I] is the participation of VAS for service revenue. VAS and package pricing to simulate usage delivered an 8% ARPU increase and sustained [revenue] growth.

Slide 10 shows the evolution of mobile revenues. As a result of the expansion of the subscriber base, the increase of traffic and VAS usage, service revenue increased by 25%, while handset sales increased by 30%.

Revenues generated by Nucleo, our operation in Paraguay, increased 10% because of subscriber growth.

Investments made in this period are shown in slide 11.

CapEx increased to ARS1,156 million. ARS581 million were invested in the fixed business and ARS575 million in mobile, of which ARS113 million in 3G coverage of Buenos Aires and Greater Buenos Aires areas and the main cities of the country. CapEx in fixed line business was invested in [back door] network capacity and technology evolution, broadband capabilities and support systems.

In addition to this operational CapEx, this quarter we acquired Cubecorp for $32 million. This acquisition strengthens Telecom Argentina data center service capabilities as the Cubecorp counts with world-class infrastructure for customized ICT services. This acquisition will also accommodate internal data center requirements of our existing businesses.

Finally, we would like to share with you what we expect from our operation for the rest of the year.

Assuming that the current macroeconomic condition will remain stable, we expect that full fiscal year 2008 consolidated revenue will grow at a similar rate as that we experienced in the first three quarters.

We consider this to be quite a positive prospect taking into account the 2007 performance, the tariff restrictions in our fixed line, and the fact that market is very competitive.

With respect to our OPBDA, considering that the costs are under inflationary pressure, we expect the OPBDA will continue to increase, while profitability for the full year will be similar to that that we experienced the first three quarters.

With respect to CapEx, our expectation is that the Group will be investing an equivalent to approximately 15% of its consolidated revenue. Our budget contemplates an amount of approximately ARS1.7 billion for 2008.

Right, these were the business highlights. I have been pleased to comment for you, and I pass the call to Valerio to continue with the financials of the three quarters. Thank you.

The trends that Franco Bertone has just highlighted have resulted in very good results in terms of a revenue evolution, while the level of profitability of our businesses has followed the trend of our commercial activity.

Meanwhile, we have sustained the high level of cash flow generation evidenced in previous quarters.

In slide 13, we can see the evolution of revenues and operating profit before depreciation and amortization. In terms of revenues, we have been able to achieve a growth of 20% in the nine month period of fiscal year 2008. This was fueled primarily by the expansion of the mobile business that grew by 25% and now accounts for 66% of our consolidated revenues.

This growth has allowed us to increase our OPBDA by 11%, reaching ARS2.5 billion; that represents a 32% margin for the year. Moreover, the expansion of our OPBDA and lower incidents of the depreciation charges on revenues, continue to positively impact our operating profit as seen in slide 14.

Operating profit grew by 28% with an expansion of 200 basis points in the margin. This has also resulted in a very impressive improvement of our return on net invested capital that soared from 28% to 36%. In addition, net income grew by 35% to ARS831 million.

Furthermore, as shown in slide 15, the expansion of our OPBDA and a controlled level of CapEx have allowed us to generate in the last 12 month ARS1.6 billion of free cash flow. This resulted in a significant reduction of leverage of more than ARS1.3 billion to reach ARS1.2 billion of net debt at the end of this third quarter of 2008.

This has allowed us to cancel in the first nine month period of this year all the scheduled payments of Telecom Argentina until October 2011. Therefore, since the issuance date of the notes, the Company has canceled 58.84% of series A notes and all of series B notes. In addition, Telecom Personal has canceled the equivalent of ARS59 million in debt.

We can point out that at the low level of leverage, the extended profile of maturities that result in a low level of rollover risk, together with the absence of derivative instruments that could result in future contingencies, take us to the conclusion that the Company has a very sound financial position.

In slide 16, 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 by 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 March of this year but effective in July.

Meanwhile, the increase of 90% in advertising expenses was a result of the commercial actions to promote new services and pricing plans. Together with the effort to market our broadband service and reinforce our brand positioning, through certain actions such as the official sponsorship of Argentine Olympic team.

In addition, the inflationary context has impacted the cost structure in general.

Despite the evolution of the cost side of the business, we were able to maintain OPBDA stable in nominal terms in the first nine month period of this year at a level of around ARS1.2 billion.

In slide 17, we can see the unconsolidated income statement of Telecom Personal. In this case, total revenues grew by 26% to approximately ARS4.8 billion. Operating costs increased by 24% to ARS3.6 billion.

Higher expenses are mainly related to the expansion of our operation and are a result of higher network access costs, labor costs, customer care, costs associated to new value-added services, information technology and taxes. (Inaudible) was mainly impacted by higher turnover taxes and incremental charges related to universal service as last year a reversal in provision was performed. Therefore, Telecom Personal in Argentina delivered a 32% increase in OPBDA to over ARS1.2 billion for the first nine month period of fiscal year 2008. It's very important to highlight that OPBDA margin continues to expand as seen in previous quarters from 24% reported one year ago, to 25% for the current nine month period.

Finally, net income of Telecom Personal climbed to ARS551 million in the first nine month period of the year 2008, up from ARS291 million (inaudible) one year ago.

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

Wendy, we're open to the Q&A session.

Great. The question and answer session will be conducted electronically today. (Operator Instructions). And we'll begin our question and answer session today with [Rodrigo Vadilinuva] with Merrill Lynch.

Hi, good afternoon. I have a couple of questions gentlemen. The first one would be related to the cost of handsets. We saw that during the third quarter, the cost of handsets increased 44% year-on-year, but on average the Argentinean peso only depreciated 2% versus the US dollar. Do you have any comment on this please? Hello?

Yes, give us a minute, Rodrigo.

Okay.

Hello, Franco Bertone answering to your question. Yes, the figures you mention obviously are correct. I mean, we have two drivers to explain that in fact.

One is the higher quality mix, let's put it this way, of the handsets that we are putting in the market, but equally the high end sets have a much stronger participation to the mix of cost particularly with the Smartphones that we have been selling over particularly the last quarter.

And the other one is the higher rate of substitution policy that we have been implementing to make sure our customers have suitable equipment to take advantage of the value added services we are marketing. So basically these are the two drivers of the increase you note.

Okay. My next question is related to the other costs that you have in your P&L. Could you please elaborate -- well, what is it that you register here? Could you please elaborate on the significant year-on-year increase of 160% during the third quarter?

Rodrigo, you said 150%?

Well actually, it's 164%. It is on page 12 of your press release and it's other costs. It increased from ARS58 million to ARS153 million.

Okay, you're looking at the quarterly number, right?

Yes, that's correct, I'm looking at the quarterly number.

Okay, give us two minutes. There are several -- you can imagine, there are several items there. Give us a minute.

Sure, no problem.

Rodrigo, basically that cost item or cost line, you have several items. You have rentals, you have rentals of international capacity, you have satellite connections. You also have the cost item related to the printing of telephone directories. You have the costs associated to the revenue sharing of value added services in the cellular business. I would say those are the main items in that cost line.

Okay. And well, what can we expect of these cost items? Should it remain similar to the levels we observed in the third quarter of 2008, or should it decrease going forward?

The components of that aggregate cost related to the business, and specifically the revenue sharing portion that we pay to our partners in the value-added service business will increase as the business increase. Also the capacity rental particularly to our gateways in the States will increase as the number of ADSL subscribers will do.

The remaining items, particularly the building costs and making of builds, etc., is basically the product of the inflationary price pressure that we have experienced this period. So we'll perform in the future based on the inflationary pressure that we can expect in the rest of the year and for the coming year.

So in general terms, we don't expect these amounts of costs to decrease but basically to grow specifically in this majority as the business grows and to some extent, I think inflationary pressure will remain in place.

Okay. Two more questions if I may.

Okay.

One is related to the EBITDA margin. What can we expect of this margin going forward? I -- well, I think you said it before, but I just want to make sure that I got it right. I think you said something close to 32% for the end of this year, for the whole year, and --

Yes, correct.

And my final question is related to CapEx for 2009. I don't know if you could share with us any guidance on this respect?

Rodrigo, we expect that in terms of percentage of revenues, it should be similar to what you see in 2008, around 15%.

Okay, that's for CapEx. And for the EBITDA margin?

EBITDA margin, basically what you said, that the guidance that we have right now, around 32%.

Okay, perfect. Thank you very much.

You're welcome.

We will now move to Rizwan Ali with Deutsche Bank.

Yes, two questions, good morning. First is your receivables went down quite significantly from second quarter to third quarter and I'm just wondering what the reason was?

And second is, with wireless (inaudible) above 100%, how long do you think this reasonably good sub-growth will continue? And whether you want to at some point slow down and start to improve your metrics in terms of reducing the subscriber acquisition cost or your other ratios?

Give us a minute, Rizwan. Thank you.

Yes, it's Franco Bertone. What you notice about our receivable is an indication of effectiveness of the improvement we put in place in our collection process. So it's just -- that's the straight answer.

As far as you mentioned about future growth in our subscriber base, I assume you're referring specifically to the mobile subscriber base. We certainly are experiencing a growing maturity to the market. The market has recently passed the 100% mark penetration. We are around 110% as we speak.

So we expect that in the future, the pace of growth will be naturally reduced. We always maintain and we will maintain in the future a fairly conservative approach in our sales activity, focusing our product and our advertising to high value customers. That is represented and testified by the fact that despite our customer base has sustained significant growth, our ARPU did not dilute at all, as a matter of fact did increase.

So in general terms, I think that the pace of growth in the future will be lower than one we experienced in the last one or two years. That does not automatically imply that the commercial cost will drop proportionally in the sense that certainly the subscriber acquisition costs will be reduced because of reduced customer acquisition, but certainly the costs associated to retention will increase, as the dynamics of the market will shift from fresh market to capturing subscribers of the competition.

So yes, we expect a slowdown in the growth of the subscriber base, but not a proportional reduction in the costs associated to acquisition and retention.

So what do you think explains this high penetration? Is it dual sim card phenomena or are you selling -- there's a reason in a lot of other markets why dual sim cards were very high. What do you think explains that in Argentina?

Well that's -- the Argentina market is going the European way really, where the penetration rate has exceeded 150%. We don't have detected a significant dual sim card activity in the market. We believe that at the current rate, what is the prevailing factor is many customers having two sets, one for business and one for private use.

And we believe that for the near future, the growth of the penetration will not affect dramatically ARPU as it would be affected if we were going in a double sim card type of approach. So for the near future, we believe that that will not happen in a significant manner in this market.

Thank you.

Thank you. I'll now move on to Alessandro Luciano, with Credit Suisse. One moment, please. Alessandro, go ahead.

Okay. Good morning, thanks for the call. I've just two quick questions, a follow-up on the accounts receivable question. Are you seeing an increase in the accounts that are overdue from customers and do you still have an expectation of that moving forward in 2009?

And then second question is, do you -- are you continuing your debt repayment program for 2009 and if so how much or what sort of target leverage are you comfortable with? Thanks.

Alessandro, well, basically in terms of receivables, we don't see any extension on the payment terms from our customers. Remember that we have a significant portion of our revenues coming from prepaid mortality, so it's specifically in the cellular business, so any deterioration in the macro environment in this portion doesn't have a significant impact in the level of receivables.

With respect to the debt repayment, if you want to call it, program, basically remember that in Telecom Argentina, we have the obligation to prepay debt due to the cash fee provision or the excess cash provision. And that's an obligation of Telecom Argentina as long as we have the current debt outstanding.

So answering specifically your question, in Telecom Argentina that will continue to be the case. And together with that, both in Telecom Argentina and in Telecom Personal we have -- we purchased some notes, and if this will continue, that will depend on the general market conditions. Okay.

And finally, with respect to your comment with respect to leverage, taking into account both the Argentine context and the global context, I would say that the level of leverage that we have today is a strength for the Company. And not only with respect to the leverage, but also with respect to the debt structure that Telecom Argentina has in place, where we don't see any risk with respect to rollover or respect to liability management. Okay?

Right, thank you.

You're welcome.

Thank you. Now we'll move onto from Credit Suisse, [Daniela Aslan]. Please go ahead.

Hi, good morning. There was some recent news about Telecom Italia taking over the operations in Argentina and I was wondering if you could give us some color about that?

And also, I know that you don't have derivative instruments, however I wanted to know if you hedged your dollar denominated coupon payments? Thank you very much.

Okay. Daniela, with respect to the call option, I won't go further to what has been announced by Telecom Italia and no further comments with respect to that.

I presume that you are referring to the exercise of the call option that Telecom Italia has on the participation of (inaudible) of Argentina, basically the 48% and plus the 2% participation in (inaudible). No further comments with respect to -- from our side, basically from Telecom Argentina.

Okay.

With respect to derivatives, yes you're right, we don't have any complex or derivatives that could have some type of contingency for the Company going forward. Basically what we have is what you see.

And with respect to the hedging of our debt to the local currency, which is basically hedging our debt to reduce the FX exposure, the Company is currently analyzing different alternatives that at this time we wouldn't like to disclose. You will get to know if we have done that during -- in time, when we publish our results during the next quarter.

Okay, thank you very much.

You're welcome.

(Operator Instructions).

No further questions, Wendy?

It looks like we just had a follow-up question re-queue. This will be from Rizwan Ali. Please go ahead.

One more question about your margins on the wireless side of the business. What is your service margin if you exclude or if you assume a zero growth scenario?

Rizwan, if you look at page 17 of the presentation, you'll see that margins before SAC and SRC are, for the third quarter, 43%.

Okay. Great, thank you.

Okay.

Thank you, sir. And gentlemen, it appears that we have no further questions. I'll turn the conference back over to you for any closing or additional remarks.

Well, thank you all for participating in the call and for your questions.

Any further questions you may have, don't hesitate to call us. Okay. Thank you very much for all -- to everybody. Thank you.

And ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. Have a great day.