Telecom Argentina SA (TEO) 2009 Q1 法說會逐字稿

Good day, everyone. And welcome to the Telecom Argentina's first quarter fiscal year 2009 earnings conference call. Today's call is being recorded. Participating on today's call, we have Mr. Franco Bertone, Chief Executive Officer, Mr. Valerio Cavallo, Chief Financial Officer, Mr. Pedro Insussarry, Finance Director, and Ms. Solange Barthe, Manager of the Investor Relations Division. At this time, I would like to turn the conference over to Mr. Insussarry. Please go ahead, sir.

Okay. Good morning to everybody. And first of all, I would like to thank everybody for participating on this call. And as you may know, the purpose of this call is to share with you the consolidated results of Telecom Argentina corresponding to the first quarter of fiscal year 2009 ended last March 31st.

The agenda for today as seen in the slide two of the presentation distributed today is first 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 we will end this conference 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. 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 the ongoing industry and economic regulation, possible changes in the demand for Telecom products and services, and the effects of marginal factors, such as changes in general markets or economic conditions in legislation or in regulation.

Our press release dated May 7th, 2009, a copy of which will be included in the 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'd like to remind you that for all those that have not received our press release or presentation, you may call our Investor Relations Office or download the documents from the Investor Relations section at the website at www.telecom.com.ar. Additionally, this conference call is being broadcasted through our webcast feature available in such section. And you can also replay it through the same feature.

Starting with today's conference call and as an introduction to the general operating environment, I will go over the market overview described in slide three. Some snapshots on the macroeconomic scenario that we can share with you are that throughout the first quarter 2009, the Argentine economy started to suffer the impact of the global financial crisis. This was evidenced through lower levels of consumption and investments, where the result was significant slowdown in GDP growth pace.

In addition, the industrial activity has decelerated in the last quarter, mainly in durable and capital goods. Private consumption is one of the components that show a better performance in this context of general slowdown, although it involves signs of deceleration. Nondurable goods and services, among those telecommunications, are one of the most dynamic sectors with a continuous expansion.

International trade decreased in the first quarter, where exports and imports decreased by 26% and 35%, respectively, on a year-on-year comparison. Notwithstanding, the trade balance continues to grow with an expansion of 12%.

The fiscal balance remains generating primarily services. But the federal government has capped expenditures while financing needs have been covered with the funds provided by the nationalized pension fund. Inflation is showing a descending trend despite some agility industries have benefited from tariff adjustments with a consequent impact in the economy.

Regardless of this challenging macroeconomic context, our company has well performed in this quarter, both in terms of businesses and operations, as we will see during the rest of the presentation. And having gone through this introduction, let me pass the call to Franco Bertone, who will go over the business highlights. Franco?

Thank you, Pedro. Good morning to everyone. I'm pleased to be with you at this quarterly conference call. In the first quarter, the Company has been able to sustain growth in revenues, operational margins, and market share, despite unfavorable economic condition and increased competition.

First quarter performance has been strong. We increased our market share in fixed, mobile, and broadband lines, both year to year and quarter on quarter. Revenues and margins posted results among the best ever in the Company recent history. Our net debt fell to an all-time low of 0.2 times our 2008 EBITDA.

This required financial discipline and cost control consistently applied across the Company, from marketing and sales expenses to operation and maintenance of our IT and network platforms as well as to our corporate overhead costs.

Consolidated revenues for the first quarter of 2009 grew by 14% to ARS2,829 million. Fixed line revenues were up 30%. Mobile revenues were up 16% in Argentina and 14% when consolidating the operation in Paraguay, which was affected by local currency devaluation and activity slowdown in that market.

It's worth noting that the revenue growth was partly due to mobile and broadband sales, where competition is increasingly aggressive. Effective pricing, strong sales of package products, and an overall improvement of the quality of service we offer to the marketplace through customer care and integrated operation of our network platforms has delivered this result.

Operating profit before depreciation and amortization posted a 4% year-on-year increase, totaling ARS917 million. Operating profit posted a 17% increase, totaling ARS625 million. Net income was ARS329 million, up 21% with respect to 2008 first quarter. With ARS1.5 billion operating free cash flow in the last 12 months, our net debt dropped to a record low of ARS0.5 billion.

Net adds of fixed line, broadband, and mobile outperformed the market year on year and quarter on quarter. 2.3 million year-on-year mobile net adds and 600,000 quarter on quarter boosted our market share 170 basis points since first quarter of 2008. 230,000 year-on-year broadband net adds and 27,000 quarter on quarter boosted our market share 70 basis points since first quarter of 2008. We estimate that our broadband flow share of net adds exceeded 50% this quarter.

These results are encouraging and show solid prospect of sustainable revenue growth, increasing margins, and market share despite our current environment.

Please refer now to slide five of the presentation we reviewed this morning. Our fixed line service kept growing at the moderate 2%, although twice as much as the market. ARPU was 2% up mainly because of increased penetration of packages of minutes for local-long distance calls with additional services, proving that our fixed line business continues to offer growth opportunities.

Slide six shows that our broadband subscribers also marginally grew above the market. Improved network coverage, innovative offers, strong brands, product advertising, and more effective customer operations delivered these results. Our market share reached 35% of the combined three main providers in the market. Effective promotion and pricing boosted ARPU by 17% to ARS62.

Slide seven shows fixed lines revenue evolution. Despite regulated tariff being frozen at 2001 levels, third-party revenues increased 13% to ARS979 million. Internet and data revenues posted a 49% and 11% growth, respectively. Interconnection services revenues were up 16%, thanks to third-party mobile operators that contributed to higher interconnection revenues, while public telephony revenues kept going.

Monthly fees revenue grew 6% due to customer base expansions, new services, and higher penetration of supplementary service. Despite a high penetration of mobile service in the market, our major service revenues were up 5%. Regulated services revenue dropped from 57% to 51% on wire line total revenues this year.

Slide eight shows that our 2.3 million new mobile subscribers posted 21% increase and outperformed the market. 607 net adds in first quarter 2009 were almost three times as much adds as 217 net adds we obtained in the first quarter last year. Stock and NOC remain stable at 17% of service revenue. High-value customers were retained through handset upgrades.

Slide nine shows that strong growth in the customer base did not lose customer value. We were able to maintain a good mix of prepaid and postpaid customers with a growing value-added service share of service revenues. MOU increased by 2%. And ARPU remains stable at 40 basis.

Value-added services account for 31% of service revenues versus 21% a month ago. Outgoing SMS per subscriber more than doubled, while total traffic of text messages posted 149% increase. Personal brand recognition strengthened mainly among youth and high-value customers.

Slide ten will display how mobile revenues did evolve. Service revenues increased by 17% as a result of expanded subscriber base, increased traffic, and value-added service usage. That was the main growth driver with a 27% increase. Handset sale, including handset upgrades, were up 8%.

Please turn to slide 11 for first quarter CapEx that was ARS234 million, quite in line with 2008. ARS126 million were invested in infrastructure that supports both our fixed and mobile operations. And ARS108 million were invested in mobile access and core platform, of which around ARS40 million were allocated to 3G technology.

Finally, we'd like to share with you our expectation for the operational 2009. Assuming that the current macroeconomic condition will not deteriorate, we expect that consolidated revenue for full fiscal year 2009 will grow in the range of 10% to 12%. We expect that inflationary pressure will decelerate as a result of a lower level of activity, contributing to keep costs under control.

Profitability will stay at similar levels as those in 2008. Our fixed line service will grow by approximately 1%, broadband connection approximately 15%. Mobile customers in Argentina will continue its current growth level with a stable ARPU. In Paraguay, the customer base will approach 2 million by the year end. CapEx will be in the range of 14% of consolidated revenue versus 15% reported in 2008.

We have gone over the first quarter business highlights. I shared with you what we expect for the remainder of the year. And I'm glad to pass the call to Valerio Cavallo, our CFO, who will continue with financials. Talk to you later in the Q&A session. Thank you.

Thank you. The trends that Franco Bertone has just highlighted have turned into very good results in terms of revenue evolution and levels of profitability taking into account that our business reported a high level of commercial activity. Meanwhile, we have sustained the strong cash flow generation evidenced in previous periods.

In slide 13, we can see the quarterly evolution of revenue and operating profit before depreciation and amortization. In terms of revenues, we have been able to achieve a growth of 14% in the first quarter of 2009. This was fueled primarily by the expansion of the mobile business that grew by 16% in Argentina and accounts for 65% of our consolidated revenues.

We can notice the revenues grew at a slower rate than in 2008, mainly due to the effect of the slower economic environment and to the impact of the Paraguayan operation. This growth has allowed us to increase our OPBDA by 4%, reaching ARS917 million with a margin of 32%. The reduction in the level of profitability when compared to first quarter 2008 is partially due to higher levels of customer additions and incremental commercial activity in both internet and mobile businesses.

It's important to highlight that we were able to change the trend of our operating profit before depreciation and amortization, where we reported a higher nominal figure in the first quarter of 2009 when compared to first quarter of 2008 and with the last quarter of the past year.

In addition, it's important to remember that due to seasonality, during the first quarter of each fiscal year, our profitability is normally higher than what is expected for the full fiscal year.

Although we expect to continue growing in terms of nominal operating profit before depreciation and amortization, we consider a very challenging target to maintain our profitability margins for the full 2009 fiscal year at the seasonal level as that evidenced for the full fiscal year 2008.

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 14. Operating profit grew by 17%. This has also resulted in a very impressive improvement of our return on net invested capital that soared from 39% to 44%.

In addition, net income reached ARS329 million, equivalent to a growth of 21%. This result was achieved in spite of the negative effect generated by the devaluation of the peso against the U.S. dollar, as we still maintain exposure to foreign currency in our debt, and by higher income taxes.

Furthermore, as seen in slide 15, the expansion of our operating profit before depreciation and amortization and the controlled level of CapEx have allowed us to generate in the last 12 months ARS1.5 billion of free cash flow. This resulted in a significant reduction in leverage of more than ARS1.1 billion to reach ARS562 million of net debt at the end of the first quarter 2009.

This has allowed us to cancel in the last 12 months all scheduled payments of Telecom Argentina until April 2012. In addition, Telecom Personal reached by the end of March 2009 a positive net financial position, thanks to a high level of cash flow generation.

We can point that the strong cash flow that the Telecom Group is generating, the low level of leverage, the extended profile of maturities that's resulting in a low level of rollover risk take us to the conclusion that the Company has a very sound financial position, particularly important in the context of global uncertainties.

Slide 16 shows the unconsolidated income statement of Telecom Argentina and a detail of the evolution of our operating costs. The increase of labor costs by 18% was a result of wage increases agreed in 2008. Meanwhile, the increase of 115% 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.

In addition, the inflationary context has strongly impacted the cost structure in general, such as the transportation and freight cost and the rental expenses. Despite the evolution of the cost side of the business, we were able to maintain operating profit before depreciation and amortization stable in nominal terms at a level of around ARS436 million.

In slide 17, we can see the unconsolidated income statement for Telecom Personal. In this case, total revenues grew by 16% to approximately ARS1.8 billion. As a result of the expansion of subscribers, the increase in traffic, and the value-added service usage, service revenues increased by 17%.

Operating costs increased by 20% to ARS1.3 billion. Current expenses are mainly related to customer acquisition and retention costs and to a less extent to higher network access cost, labor cost, customer care, cost associated with new value-added services, information technology, transportation and freight, and taxes.

Therefore, Telecom Personal in Argentina delivered a 6% increase in operating profit before depreciation and amortization to close at ARS448 million for the first quarter 2009.

It's very important to highlight that operating profit before depreciation and amortization profitability continues to expand, reaching 28% of service revenues for the quarter ended in March 2009.

In addition, operating profit increased by 21% to ARS364 million, mainly due to the operating profit before depreciation and amortization expansion mentioned before and the reduction in depreciation charges as the TDMA network was fully amortized in March 2008. Moreover, net income for Telecom Personal in the first quarter of 2009 climbed to ARS201 million, up from ARS181 million registered one year ago.

Finally, we can know that Telecom Personal has approved the dividend of ARS730 million to be paid by June.

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

(Operator Instructions) We'll take our first question from Alex Garcia.

Good morning, gentlemen. My question goes mostly concentrated on the mobile segment. I was wondering if you guys have perceived any change in the behavior of the customers towards a more rational standard, if they are -- I don't know -- looking for cheaper packages, reducing the recharging of prepaid credit, or looking for -- I don't know -- family packages, just to know if they're more controlled under your expenses. Thank you.

Franco Bertone [trying] to answer to your very interesting question, I think we have a very cost-conscious customer base in service. So we haven't seen any significant change in their behavior. Certainly, the growing increase that we have in messaging among our customers does represent to an extent a higher drive toward substituting voice with messages that have obviously a lower cost at the current rate. But all and all, as you see, our ARPU stayed stable 40%, although the content of the ARPU is shifting gradually from pure voice to messages and data. So in a nutshell, we don't have any negative anticipation of a more conservative approach to telecom, to telephone usage and data usage from our customers as of today.

Okay. Thanks. And if you guys allow me just another question, I just want to -- I believe I missed it. What was the guidance for what you guys expect for the growth in the mobile in the Personal subscriber base just to clarify that number please?

Actually, we haven't given any guidance to that extent. What we can comment is that the growth we had in the first quarter that has been in excess of 600,000 net adds has to an extent exceeded our expectation. And we believe that the old factor, the whole industry had good growth, although we believe from public figures that we came up on top in terms of net adds this quarter and last year.

So as I said, we haven't given any release into that respect. We certainly are convinced that there are still significant growth opportunities in the mobile sector for the remainder of the year. We don't feel too comfortable to release target number as the climate lying ahead is pretty uncertain.

Okay. Thank you.

We'll take our next question from [Mauricio Fernandez].

Thank you very much. Good morning, everyone. My question is regarding these potential or temporary changes that we're seeing at the Board of Directors from the preliminary rulings of the Antitrust Commission. I have two questions there. One is whether this is affecting in any sense the day to day of the Company. And number two, what are the next steps that we should be monitoring and timing related with them? Thank you.

Franco Bertone, try to answer your concern. We really don't have any specific concern about the future evolution of the composition of our Board. As a matter of fact, despite a number of restrictions that have been imposed to the Company recently by a number of regulatory agencies, the Company Board is working regularly as far as the business as usual is concerned. There are no restrictions imposed into that aspect. As a matter of fact, yesterday, we had our quarterly Board that approved the result that we are informing you about today and also handled the usual business according to our corporate governance with no changes from the past.

As far as the potential timing to the future of changes of lifting of the current restriction we have, it's really hard for us to make any guess in that respect, although, as I said, they may interfere with corporate governance at the shareholders' level that at the moment does not interfere with our commercial and operations.

Thank you. Just one more question on the same subject -- the transaction -- well, at least that's what seems to have come on the press that France Telecom has sold it's, if I'm not mistaken, about 2% stake to the Werthein family. So now today, for all intents and purposes, it's this 50-50 control split between Telecom Italia and the Werthein family. Is that correct?

And the second question is -- if there was a Board meeting, now that Telecom Italia cannot have members voting, who is -- is there any -- is anyone being -- it there anyone replacing that is considered independent or the Board meetings are happening with a lower number of members?

Well, as you probably know, the restriction that you're referring to has been suspended and currently do not apply.

Okay.

And as far as the shift of the 2% that you're referring to, really that happens two levels above our head into the controlling group. So it's not for us to comment about.

Okay. But it did happen, right?

Yes, it's what is -- you're right from public information. That did happen.

Okay. Thank you very much.

(Operator Instructions) We'll go next to [Gabrielle Vallero].

Hi. I have two questions. The first one is whether you could provide an estimate of the amount the Company plans to amortize under debt for this year and then next year. And then the second question is with regards to the government and if you see any changes in regulations regarding the foreign exchange that may have an effect on the voluntary amortization of Telecom's debt. Thank you.

Our gross debt is split the same part between Telecom Argentina and Telecom Personal. Gross debt of Telecom Personal is expected to be repaid at the end of 2010, while, as you know, the payment of the debt of Telecom Argentina is subjected to the clauses that were signed with our creditors in the restructuring of our structuring process. And we have already paid all our debt until April 2012. And if we are able to generate an excess cash, we will obliged to pay this excess cash in October this year.

As far as changes in the regulation of Banco Central of Argentina, we don't believe that there are changes during the next months.

Gabrielle, are you there?

Yes, I'm here. Now there has been excess cash generated, right? So will a voluntary payment be done in October, or -- ?

Yes.

Okay. Perfect.

We expect that there will be a cash generation that will oblige Telecom Argentina to pay to our credits amount of the debt.

Okay. And you expect more -- the possibility of voluntary amortization for April 2010? Or it's still too far to forecast?

Gabrielle, basically, the Company is obliged to apply its excess cash every semester, every April and October. So --

Yes.

It's the second semester of the year. Telecom Argentina generates excess cash. It should apply in April. That is the way we envision that Telecom Argentina will be paying down it's debt.

Okay. Thank you, Pedro.

We'll take our next question from [Baruk Faez].

Yes, hi, Pedro. Just a quick question on the dividends at Telecom Argentina level -- are you guys trying to declare a dividend -- can you actually declare a dividend in 2009?

To be able to declare a dividend, we must have a shareholders' meeting. If you look at the composition of our shareholders' equity, at this time, we have the sufficient balances to reconstitute the legal reserve that we had absorbed in 2005. And we still have a remainder of approximately -- close to ARS30 million of that legal reserve to be reconstituted. So the earnings generated during 2009 will be used for that purpose or part of it. And after reconstituting that small portion, the rest -- well, the shareholders' meeting to be held in 2010 will resolve what is the appropriation of those results. Just as a note, the Company is able to distribute after the appropriation of these legal reserves up to 95% of its net income as dividends.

But we should not expect that until the next shareholder meeting in 2010? We shouldn't expect dividends in 2009?

At this time, we don't envision a dividend payment during this year.

Okay. And on the Telecom Personal dividends that you mentioned in the call, is that -- do you face any FX issues there? I mean, are you going to pay those in dollars? How is that payment done?

Those dividends are paid to Telecom Personal shareholders. That's basically Telecom Argentina and a very small portion (spoken in Spanish). That is basically cash that primarily mainly goes to Telecom Argentina. And that will form part of Telecom Argentina's excess cash to be determined for the first semester on June 30.

And what percentage goes to [Northend]?

0.08%.

Okay. Okay. All right. I have no more questions. Thanks.

Thank you.

(Operator Instructions) We'll take a follow up from Alex Garcia.

Thanks for taking this extra question. It's regarding the level of debt that TEO has right now. It's very low and very conservative. I know you guys have restrictions from the debt renegotiation agreement. But my question goes to what would be the cost of debt if TEO were able to issue debt nowadays? I'm just wondering, like for instance, if you guys prepay entirely to debt renegotiation agreement loans in April 2010, right now, there's a lot of time from here to then. But you guys would need debt. I mean, there is no situation of a company without debt. I was wondering what would be the cost of debt nowadays if you guys were able to issue debt. Thank you.

Alex, I'll have to exercise my ability of envisioning the future to answer your question. But anyway, at current conditions, first of all, we'll -- at the time when Telecom Argentina will take decision of raising debt, the first question will be if it's going to be in local currency or in foreign currency. And I envision that we will do a mix of that depending on cost and tenor.

What we see in current conditions is that debt in local currency is basically very short term. And we envision that in these tenors that we're talking about three months. Three month's tenor should be in the range of around 20%, a little bit higher than that. In foreign currency for a tenor of approximately five years, we could be talking about something in the range of 10% to 12%.

Okay. Have no further questions. Thanks.

You're welcome.

(Operator Instructions) And we have no further questions at this time.

Okay. We want to thank you again for being at the conference. Please get in contact with us if you have any unanswered points as of today's meeting. And thank you very much for being present at this event. Thank you.

And that does conclude today's conference. We thank you all for your participation.