Telecom Argentina SA (TEO) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina First Half And Second Quarter 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; [Adrian Tallassa], our newly appointed Chief Financial Officer, effective as of today; Mr. Pedro Insussarry, Finance Director; and Ms. Solange Barthe Dennin, Manager of the Investor Relations Division.

At this time, I'll turn the call over to Pedro Insussarry.

Please go ahead, sir.

Okay. Good morning to everybody. I would like to thank everybody for participating on this conference call. The purpose of this call is to share with you our consolidated results corresponding to the first half of fiscal year 2009 ended June 30, 2009.

As usual in our quarterly conference calls, the agenda for today is seen in slide two of the presentation that we distributed today, is first to go over the general market overview. Then we'll go over some business highlight. After that, we'll go over some specifics of the evolution of our financial figures. And we'll end the call with a Q&A session.

Before we continue with the conference call, I'd 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 general public emergency law and complementary regulation, the effects of ongoing industry and economic regulation, possible changes in demand for Telecom products and services, and the effects of more general factors, such as change in general market or economic condition and legislation on regulation.

Our press release dated August 6th, 2009, a copy of which is being included in the Form 6-K report to be 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 can call our Investor Relations office or download them from our 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 the same feature.

Following with today's conference call, as an introduction to the general operating environment, I'll 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 second quarter 2009 the Argentine economy seems to have flattened after two consecutive quarters of significant slowdown in activity.

In the first half of the year, industrial and agricultural output declined significantly, mainly due to international crisis and the severe drought that affected crops in Argentina. Inflation remains high, although it shows some signs of slowdown, especially in tradable goods.

Private consumption is still one of the components showing some resilience in this context of general slowdown, although it evolves with signs of deceleration. Particularly nondurable goods and services, among those telecommunications, are one of the most dynamic sectors with a continuous expansion. This quarter, the consumer confidence has increased for the third month in a row. And this performance could be a good sign for the month to come. Anyway, consumer sentiment continues at low levels.

Argentina currently holds a strong trade surplus, around 6% of GDP, which is explained by significant drop of imports coupled with a relatively better export performance, this latter due to good prices in farm commodities. This surplus was essential [to front] the high level of capital flight from the private sector, which has accelerated in this quarter by uncertainties caused by the midterm election.

Fiscal balance has deteriorated due to the dynamics of primary spending that grew by 29% year on year and fiscal revenues that increased by 14% year on year. Anyway, it shows the positive results of approximately 1.2% to GDP.

Regardless of this challenging macroeconomic context for Argentina, our company has well performed this quarter, both in terms of its businesses and operations, as we will see during the rest of the presentation.

Having gone through this introduction, let me pass the call to Franco, who will go over the business highlights.

Franco?

Thank you, Pedro.

Good morning to everyone. Thank you for being at this quarterly conference.

The first half of this year, the Company continued to grow in revenues, EBITDA margins, and market share, amid the unfavorable economic context and strong competition. As we show in slide five, the semester has been quite positive in terms of expansion of our fixed network, mobile, and broadband client base, where we increased market share in the three businesses. Increasing revenues and margin are satisfactory, considering the challenging market conditions.

On the mobile business, we experienced a robust mobile customer base growth, exceeding 1 million of net additions, well above the market, while we were able to maintain a stable ARPU, thanks to the strong value-added service performance fueled by wireless data and SMS as well as a vigorous on-net traffic expansion.

In the fixed line segment, broadband and data are the main drivers of revenue growth. Broadband ARPU shows an upside trend with a significant churn reduction, thanks to effective pricing and retention. [Ago] of our top brand recognition and competitiveness, of our value proposition to our customer, our flow share exceeded 50% in the first half. We see new opportunities in data and ITC solution that we delivered to the corporate segment.

Throughout this period, we continue with a sustained revenue expansion as consolidated revenues grew by 14% to ARS5.8 billion. Fixed line revenue grew by 13%, mobile sales by 16% in Argentina market. Operating profit before depreciation amortization increased by 9%, totaling ARS1.8 billion. Operating profit raised by 25%, totaling ARS1.3 billion.

In particular, second quarter OPBDA margins grew to 31.6% from 31.4% in the same period of last year. The Company net income totaled ARS703 million, a 15% increase when compared to the first half of 2008. Net debt dropped to an all-time low of 0.2 times EBITDA reaching ARS573 million, a reduction of 57% when compared to a year ago. This resulted from strong cash generation, financial discipline, and cash cost control programs across our organization.

Please refer to slide six of our presentation, where we show that our fixed line service maintained its growing rate at a moderate 2%, while competition showed a marginal decline. ARPU was stable when compared to the first half of the previous year, mainly due to attractive propositional service bundles of local and long-distance calls and value-added services. Despite frozen tariffs, the fixed line segment continues to offer valuable opportunities to expand the business, especially in association with ADSL

Slide seven shows that the evolution of broadband subscriber. Our client base continued to increase significantly, passing the 1.1 million, a 25% growth over the first half of 2008. Here again, we have outperformed the market. These results are delivered by improved network coverage, commercial drive, innovative portfolio services, and top brand recognition.

Our market share is 35% of the combined three main providers in the market. Effective promotion, pricing strategy, and the fact that customers that were incorporated last year have started to pay for the full price of their service increased our ARPU by 14% when compared to first half 2008, reaching ARS68 a month, while churn dropped from 1.9% -- I'm sorry dropped to 1.9% from 2.3% in second quarter 2008.

In slide eight, we show the evolution of fixed line revenues. Third-party revenues reached close to ARS2 billion, an increase of 13% or ARS226 million compared to what was reported in the first half of 2008, despite regulated traffic continued to be frozen at 2001 levels. Regulated services now represent 51% of the total fixed line revenues versus 57% a year ago.

Internet and data posted a 43% and a 23% growth respectively, representing together an increase of ARS171 million. Interconnection revenues grew by 12% because of third-party mobile operators that contributed to higher interconnection revenues, while on the other side public telephony revenues kept falling.

Monthly fees revenue registered a growth of 6%, due to the customer base expansion, new services, and higher penetration of supplementary services. Despite the high penetration of mobile service, we were able to post a 3% increase in measured service revenue.

Slide nine shows that in the last 12 months we added 2.2 million new subscribers to our mobile business, reaching 13.6 million clients in Argentina, an increase of 19%, and once again outperforming the market.

Our market share increased to 30% with more than 1 million net adds versus 714,000 net adds in the first half 2008. Sustained growth came with value generation.

SAC and SRC represented 16% of service revenues, while efforts were focused in both expanding our customer base and retaining high-value customers through handset upgrades.

Slide ten shows the growth experience in our customer base did not dilute customer value. We were able to maintain a good mix of prepaid and postpaid customers with a high participation of value-added service and service revenues. Thanks to package pricing, ARPU was stable at ARS40 a month.

Slide 11 displays the evolution of our mobile revenues. Service revenues increased by 18% as a result of a larger subscriber base and incremental value-added service usage. Value-added service revenue grew 33%. That is ARS258 million, reaching ARS1 billion in the first half of 2009. Currently, the services represent 33% of total service revenue.

In addition, monthly fees and prepaid traffic also grew significantly by 24% and 16%, respectively. Handset sales, including handset upgrades, increased a moderate 5%.

During first half of this year, CapEx, that is shown in slide 12, totaled ARS529 million net of materials. ARS298 million were invested in infrastructure that support both our fixed and mobile operations. And ARS231 million were invested in mobile access and core platform, which around ARS108 million allocated to 3G network expansion.

Finally, I would like to share with you our expectations for the rest of the operation of 2009. Assuming that current macroeconomic conditions remain substantially stable, we continue to expect that our consolidated revenue for the fiscal year 2009 will grow in the range between 12% to 14%. We expect to control the inflationary pressure in our cost, allowing us to maintain profitability and margin at similar level as those in 2008. CapEx will be in the level of 14% of consolidated revenues versus 15% recorded in 2008.

These were the second quarter business highlight that I shared with you and the 2009 expectation. And I'll pass it to Valerio, who will continue with the financials.

Thank you. The strengths that Franco has just highlighted have turned into good results in terms of revenue evolution and profitability, taking into account that our businesses reported strong commercial activity. Meanwhile, we have sustained high cash flow generation similar to that evidenced in previous periods.

In slide 14, we can see the evolution of revenues and operating profit before depreciation and amortization. The revenue growth has allowed us to increase our OPBDA by 9%, reaching ARS1.8 billion with a margin of 32%. It's notable the increase in the level of profitability in second quarter 2009 when compared to second quarter 2008, despite operating in an inflationary context.

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 15. Operating profit grew by 25%, totaling ARS1.3 billion. In addition, net income reached ARS703 million, equivalent to a growth of 15%.

When comparing 2009 first semester financial results to those of the same period of 2008, we can notice that our bottom line was negatively affected by the devaluation of the Argentine peso against the U.S. dollar and the euro. In the first semester of 2008, the peso appreciation, plus 4%, generated positive financial results, while in the first half of 2009, the peso has depreciated around 7%, being the main cause for the negative financial results reported in the period. [The near] difference on foreign currency exchange results was approximately ARS242 million. Segregating this effect, net income should have risen 62%.

Moreover, during this semester, we have reestimated the useful life of certain fixed assets, principally in the fixed business. This has resulted in lower amortization charges of ARS67 million during the first half 2009. In addition, we posted lower depreciation charges of ARS64 million due to the end of the useful life of a [TDV] network in the first semester 2008. These two effects resulted in lower amortization charge for ARS180 million that have positively impacted our EBIT and net income.

Furthermore, as seen in slide 16, 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 ARS1.2 billion of free cash flow. This resulted in a significant reduction in leverage of more than ARS757 million to reach ARS573 million of net debt at the end of June 2009.

Thanks to this, we had a positive net financial position in Telecom Argentina, while all scheduled payments until April 2012 have been canceled. 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 result 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 uncertainty.

Slide 17 shows the unconsolidated income statement of Telecom Argentina. We now see that revenues have grown at a higher pace than operating costs for the first time in several quarters. Revenues grew by 14%, while expenses increased by 11% when compared to first half of 2008. It was due to the implementation of strict [counter cost] policies.

The main cost variations were the increase of labor costs of 20% partly due to a one-time bonus payment granted to our employees in the second quarter 2009 and wage increases granted in 2008. In addition, the inflationary context has impacted the cost structure in general, where transportation and freight and rental expense of connectivity have increased by 25% and 75% respectively.

In slide 18, we can see the unconsolidated income statement for Telecom Personal. In this case, total revenues generated in Argentina grew by 16% to approximately ARS3.6 billion. As a result of the expansion of subscribers, the increasing traffic and the value-added service usage service revenues increase by 18%.

Operating costs grew by 14% to ARS2.8 billion. Higher expenses are mainly related to customer acquisition and retention actions. Moreover, this increase is also related to higher network access costs, labor costs, customer care, costs associated to new value-added services, information technology, transportation and freight, and taxes.

Therefore, Telecom Personal in Argentina delivered a 16% increase in operating profit before depreciation and amortization to ARS916 million for the semester. It's very important to highlight that operating profit before depreciation and amortization profitability continues to expand from 26% in the second quarter 2008 to 28% of services revenues for the quarter ended in June 2009.

In addition, operating profit increased by 25% to ARS749 million, mainly due to the operating profit before depreciation and amortization expansion mentioned before and by the reduction on depreciation charges as the [EDMA] network was fully amortized in March 2008. Moreover, net income for Telecom Personal in the first half of 2009 climbed to ARS445 million, a 17% increase when compared to last year.

Finally, we can know that Telecom Personal made a dividend cash payment of ARS730 million to its shareholders Telecom Argentina and Nortel Inversora.

And having concluded with the presentation, I will pass the call to Franco Bertone for a final remark.

Thank you, Valerio. I would like to inform that Valerio's leaving the Company as he has accepted a new important position in the Telecom Italia group. And Adrian Tallassa will replace Valerio as Chief Officer of Telecom Argentina. Adrian holds a degree in business administration and an MBA. He joined Telecom Argentina in 2007 as Director of Administration. He previously served as CFO of Intel in Bolivia, as Director of Administration and Control at Telecom Italia subsidiary in Buenos Aires, and as head of Investment Planning and Control at [team] Brazil.

We wish Valerio and Adrian all the best for their new responsibility. And we're certainly confident that both are going to do an excellent job in their new position as they did in their past one.

Now we are really pleased to listen to your answer and to your questions and provide our answers our best. Thank you.

(Operator Instructions)

And first we'll go to Miguel Garcia with Deutsche Bank.

Please go ahead, sir.

Thank you.

The first question is regarding the decline in churn. I wanted to see if there was anything particular in the quarter or that explained the lower churn. And the second question is if you could break down the payment in dividend between what was paid to Telecom Argentina and what was paid to Nortel.

Thank you.

As far as the churn is concerned, I think you're referring to the figure I mentioned before from 1.9% -- to 1.9% that is current performance. It was 2.3% a year ago. And that refers to broadband services.

As a matter of fact, we implemented a number of programs of retention on the commercial side and the customer relations side, a number of programs to improve our customer care process that obviously resulted in delivering good results. We particularly value this improvement because it happened at the time when we also experienced a strong increase in ARPU that I was mentioning before. It's strongly related to the fact that many of the promotional pricing that was applied to the sales of last year came to an end. And customers faced the full bill.

And so the fact that we've been able to reduce churn at this time I think is a promising sign for our future.

As far as the --

Miguel, with respect to the breakdown of dividends, let me first clarify an issue that according to Argentine legislation, corporations must have at least two shareholders. You cannot have -- you cannot own 100% of a corporation here in Argentina. That is why Nortel Inversora is shareholder of Telecom Personal in a very, very small participation from a stake in 0.001% of Telecom Personal's capital stock. And if not mistaken, [investment of] around ARS20 million -- sorry -- ARS20,000. So the [difference] is really, really minor to Nortel.

Okay. Thank you. And lastly, could you give a little more detail regarding your triple-play offering with DirecTV? And basically how many subscribers are actually subscribing to the three services?

Yes, it's a tricky question in the sense that we are not -- we don't call it triple play. It's technically regulatory not a triple play. It's a bundle of services that we are delivering in association with DirecTV on this market. As you know, I mean, we have restrictions in that sense that hopefully will be lifted in the future through the legislation that is currently being handled in the Congress. But there's no time set for this process. And we expect it to happen in the near future.

We obviously have a strong interest in the opportunity of developing or business towards integrating TV and entertainment with our telecommunications services. So we have been running to exercise. On the technical side, we had a strong program of testing our network with triple play platform, obviously without delivering commercial services. We have been doing that for the last 18 months. And we are continuously refining our network design for the future development of these services.

On the commercial side, we have been testing the water basically with this bundle service with DirecTV that has been launched in a limited manner, limited from the geographic point of view. We're starting certain areas of operation in the northern region. We are gradually extending those. We are not disclosing any specific figure at the time being. They are small figures because of the area where the (inaudible) the service is being delivered. But I can tell you that we are quite pleased of the response of the market and the fact that our customers value this prospect of purchasing entertainment services from the same supplier, Telecom, that provides them telecommunication services.

So -- but will you -- you're going with one offering combining the three services I imagine. Do they have -- that offering has a special rate? Also, the billing is one bill with all the services?

No, we have a limited integration into the provision services and the customer care. But it's clearly identified that we are bundling a service of our company and with the service of a different company that provides it and a different regulatory framework and their own license. But it has a bundled price. It's a commercial bundle if you want to call it that way. And the approach to the customer and the sales process is managed in an integrated manner.

So we are doing as far as we can in terms of delivering the service to the market considering the current restriction that, as I said, there's no timeframe to [be listed] in the near future.

Okay. Thank you.

And next we'll go to Alex Garcia with Raymond James.

Please go ahead.

Good afternoon, gentlemen.

I was wondering if you guys could give me some color regarding how much TEO should prepay on October from the debt renegotiation on October 15th, if you guys could have an idea, and if it's feasible to cancel to entire debt renegotiation agreement still this year or it's more likely on April 2010, April 1st.

That will be my first question. Thank you for taking it.

Okay. Alex, hi. Good morning. Basically, with respect to the mandatory payments that we have, the Company has generated approximately ARS935 million of excess cash. And this together with the interest payment will be paid on October 15th. And with respect to the rest of the debt, that's approximately depending on how our tax rates evolve approximately $240 million -- the equivalent of $240 million to be paid in October. And depending on the analysis that we're doing right now and depending on certain circumstances, we'll see what we will do with the rest of the debt.

Okay. Good.

And my second question is if you guys could give some color regarding the performance of the Paraguayan mobile market. You guys have commented before that that country was hit by the economic slowdown on the more fierce way than Argentina and the rest of the countries. And they are probably likely behind in terms of recovery.

And that's one of the major reasons why the wireless base has contracted. But I was wondering what happened to the Paraguay mobile market. The market overall also contracted. You guys haven't I guess lost market share. Is there any player with stronger promotion? And what can we expect regarding a rebound on the Paraguayan mobile market when, if it's possible, or if you guys have seen any signs of recovery there? Thank you. Thanks a lot.

I think that the analysis that you mentioned that we've delivered in the past is still valid. We don't see any major change either way in the market itself. As far as the figures of our company, particularly the customer base, you may have noticed that we had a marginal reduction of the customer base. That is due not to operating performance but to the fact that we have aligned the policy of considering active customers in that market to the policy that we have for the Argentinean market that are quite severe. So applying the same policy that was a write off of certain physicals compared to the previously recorded.

Since the market growth and performance of the Company, as I said, I mean, what we said in the previous quarter is still valid. And at this time, we don't see anything new happening shortly.

Okay. Thank you.

The following question comes from Jose Bernal with Standard New York Securities.

Please go ahead, sir.

Hello. Good morning, everybody. Congratulations on the results. Both my questions are related with the debt.

And first one is if you can please give an idea what is the total amount extending of the notes due 2014 denominated in dollars and also in euros. And the second question is about your strategy of the buybacks, if you have any company -- I would like to know if the Company has bought back any Telecom Personal and Telecom Argentina notes after May.

Thank you.

Okay. Outstanding and in terms of principle, we have approximately $40 million, approximately EUR164.5 million, JPY4.6 billion, and ARS13 million. That's the breakdown on each of the debts of Telecom Argentina in each currency. Okay?

With respect to the debt buybacks, first of all, we -- -obviously, we're constantly monitoring the market, as we have done in the past. We've taken -- basically, we've seen some opportunities. And basically where we see that the debt was trading at the level where we could purchase, especially with accessing locally the FX market, and basically that's what we've done up to now.

Now how the prices of our debt have evolved and taking into account the calculations or the mechanisms that you have to meet or the procedures that you have to meet in fact to be able to access the FX market or to buy foreign currency and to repay those bonds, unfortunately the prices are too high in order to be able to purchase debt with using local currency.

So until we -- again, we constantly monitor the market. But unfortunately, the market is trading at higher levels than what we could buy back debt at this time. Okay?

Okay. Thank you.

(Operator Instructions)

We'll take a question from [Richard Gates] with BR Capital.

Please go ahead.

Hi.

I'm wondering if you can tell me what restrictions you currently have on paying dividends at the Telecom Argentina level. Is there still an accounting restriction, or has that now gone away?

First clarification -- they're not restrictions. Basically, there are certain obligations you have -- that we have to meet in order to pay dividends and that the main obligation was that for every ARS1 of dividend that the Company paid that it had to prepay ARS2.5.

Didn't you previously have a loss carry forward issue as well so from an accounting perspective you weren't able to pay?

But that's not related to the terms and conditions of our debt. That's basically statutory according to Argentine legislation. You can't distribute losses basically.

Yes, and that's what I'm asking. Is that still a binding constraint? Or has that gone away as a binding constraint?

We have reverted the loss that we had. Currently, we have approximately ARS956 million of cumulative earnings.

Okay. So in theory, you could pay a dividend. But you would just be subject to this -- to the terms of your debt agreements.

As long as Telecom Argentina's debt is outstanding, yes.

Okay. And what are your thoughts at this point as to when and whether you would resume a dividend payment?

Basically, the -- what the Board of Directors will do in the following shareholders' meeting is to submit a proposal. And that will be approved or not by our shareholders.

And that's basically our following share meeting, not the one that the board has called for September 9th. The following meeting will be in April 2010. That's where we will submit the proposal with respect to the earnings appropriation with the cumulative earnings that we have at that time.

So that would -- just so I understand, that would be a proposal for distributing the 2009 earnings or not, I mean, depending on what the board decides.

That is a cumulative -- that has been accumulated up to December 31st, 2009.

Do you expect that the Company would consider instituting some sort of dividend policy so that there was predictability going forward in terms of dividend?

Yes, I would say so. I think it's the right answer to your own question. I mean, as what Pedro said, I mean, the limitation will be lifted in the near future. But we cannot anticipate any specific in the sense that our board has not established a dividend policy yet for the future. Obviously, we'll do it at the appropriate time. At the time, we don't have a policy set in that respect. So the possibilities are there. And we'll let you know when that will happen.

Thank you.

(Operator Instructions) And we'll take our next question from Rodrigo Villanueva with Merrill Lynch. Please go ahead.

Hi. Good afternoon. I have a couple of questions.

The first one is related to your strategy in terms of your subscriber base. We have been hearing from your competitors that they are targeting mainly postpaid subscribers as they are more loyal and they have higher ARPUs. Are you following a similar strategy?

Well, I think as everybody's following the same strategy. The point is to which extent the strategy's success will end. So far we have the highest ratio of postpaid to prepaid ratio in the market. So we are going for the same thing. And so far, we are doing better than the others.

Okay. Perfect. And my second question is regarding roaming and [KLRD] costs. We have been seeing these costs decreasing as a percentage of revenues from approximately 14% to 11% in this quarter. So I would like to know if this is a sustainable level going forward.

We are reshaping our offers and pricing to [incentivate] increasing traffic on net with respect to others. And that we achieved some results that exactly witness by the number you just mentioned. We certainly will maintain a strong focus on that. And I think the level we are currently at is sustainable or marginally can be improved.

Okay. Great. Thank you very much.

It appears we have no further questions. I would now like to turn the call back over to Franco Bertone for any additional or closing remarks.

Once again, thank you very much for being at this conference. And please feel free to call our Investor Relations group for any additional questions. And have a good day, all of you. Thank you.

Once again, this does conclude today's conference. We do thank you for joining us.