Telecom Argentina SA (TEO) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina fourth quarter and 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. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Financial Director; and Ms. Solange Barthe Dennin, Investor Relations Manager.

At this time, I'll turn the call over to Mr. Pedro Insussarry. Please go ahead, sir.

Okay. Good morning to everybody and thank you for participating on this call. You may know the purpose of this call is to share with you the consolidated results of Telecom Argentina that corresponds to the fourth quarter and fiscal year 2009, ended December 31, 2009.

We would like to remind you that for all those that have not received our press release or presentation, you can call our Investor Relations office or download them from 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 this same feature.

Before we continue, we would like to go over some Safe Harbor information and some 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 could differ materially. Such uncertainties include, but are not limited to, the effects of public emergency law and complementary regulation, the effects of ongoing industry and economic regulations, possible changes in demand for Telecom 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 March 9, 2009, a copy of which will be included in the 6-K form to be furnished to the SEC, describes certain factors that may affect any forward-looking statements that may produce -- 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 on our quarterly conference calls, the agenda for today, as seen in slide two of the presentation distributed today, is to go over a 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 statement. And we'll end the call with a traditional Q&A session.

Following today's call and as an introduction to the general operating environment, I will go over with the market overview. Some snapshots on the macroeconomic scenario that we can share with you, as seen in slide three, are that throughout the fourth quarter of 2009 the economic activity grew at a faster pace than the rest of the year. And probably 2009 will end with a fair increase in real GDP of 0.6%. Industrial and agricultural sectors, together with a stronger priority consumption, contributed to a significant recovery of the economy on the second half of the year.

Also, better than expected external conditions with low interest -- low international interest rates and a sustained demand for commodities will allow Argentina to return to a moderate growth for this year. Inflation remains high, being the main concern for the economy, and has shown some acceleration in fourth quarter 2009 as well, and in the first month of 2010. Food and beverages were the most (inaudible) segment. Another problem is that the primary fiscal surplus dropped to 1.5% of GDP from 3.1%, as the government expanded expenses in 2009 at a higher pace than its total income.

Consumer confidence has risen significantly in fourth quarter 2009 but it continues at a lower than pre-crisis level, mainly due to the effects of the stagnated labor market and high inflation. Despite this factor, consumer spending has expanded and is being fueled by low real interest rates, high inflation, stable exchange rate and expansionary fiscal policies.

On the external front, Argentina continues to hold a strong trade surplus, which is explained by a significant drop of imports, coupled with a relatively better export performance.

In fourth quarter 2009 a plan to reach a solution for the un-restructured public debt reduced the levels of country risk, but the recent discussion about the utilization of central bank reserves has delayed its implementation.

Regardless of this challenging macroeconomic context, our Company has well-performed in this quarter, both in terms of its business and operations, and we'll -- 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.

Thank you, Pedro, and good morning to everyone. We are pleased to say we are quite satisfied that -- with the results that we achieved during the fiscal year 2009, when we grew in revenues, profit, margins and in market share, all this despite the challenging context, in an unstable economic scenario and strong competition in the market.

In slide number five, we show that as we expanded our client base in all our segments, fixed, mobile and broadband, we increased our market share in all the three businesses. We experienced a strong mobile customer base growth, incorporating 1.9m new clients while value-added services maintained momentum, driven by short messages and data. Keeping focus on that, we ended fourth quarter 2009 being leaders in smartphone sales, with an estimated 69% margin of share in this segment, that we were able to present a multiplatform smartphone portfolio with the exclusivity in certain premium devices that helped us to achieve this result.

In the fixed-line segment, we were leaders in 2009 broadband net additions, with a 22% increase in ARPU and churn reduction. The strategy to bundle ADSL with fixed voice services helped lines-in-service expansion and helped us to retain our clients. We continued developing our ICT portfolio of services, making data revenues increase by 26% year-on-year.

We ended our 2009 achieving good financial results. The Company net income totaled ARS1.4b, a 46% increase when compared to 2008, afforded by a 15% growth in top-line revenues and margin rising to 32% of revenues while operating in a high inflation economy.

Telecom Argentina grew -- reached a financial position with more cash than debt for the first time in its history, as we reduced our debt by nearly ARS1.5b -- ARS1.4b, sorry, during the 2009 period. Meanwhile our CapEx levels are equivalent to about 14% of total revenue.

Please turn to slide six. We added 1.9m new subscribers to our mobile business, reaching 14.5m clients in Argentina market. It was an increase of 15%, outperforming the market. Our market share in December 2009 increased to 30.6%, gaining 120 basis points from last year.

In order to provide our customers the chance to make use of the latest technology on the smartphone, we approach this need with a multiplatform strategy where we launch certain premium devices on exclusive promotions. In fourth quarter 2009, we reached an estimated 69% market share in this segment that is very important to stimulate the usage of mobile services and G3 services.

In slide number seven, you can see that the subscriber expansion was achieved with a continued reduction in SAC and SRC, which in the last quarter represented 14.8% of service [net] revenues, against 17.7% in the same quarter 2008. It's worth noting that the increase of SAC and SRC expenses in the fourth quarter when compared to the previous quarter of the year was due to Mother's Day and the holiday season campaign.

Service revenues increased by 17% when compared to 2008, as a result of a larger subscriber base and incremental value-added service usage. Value-added service revenues grew by 34%, reaching ARS2.3b in 2009 and representing a 34% of total service revenues.

This year we launched Personal Musica, our music store, where more than 3.5m songs were downloaded since we started this operation last month. Currently Personal holds approximately an estimated 40% of digital music download market share.

The growth we experienced in our customer base did not dilute customer value. We were able to maintain a good mix of prepaid and postpaid customers, one of the highest in Latin America. Thanks to package pricing and tailor-made products offered, ARPU was ARS42 in the fourth quarter, while MOU continued to expand from previous quarters. Meanwhile, SMS consumption continues its significant growth.

Please turn to slide eight where we display the evolution of our mobile revenues in the Argentina market. Fiscal year 2009, total revenues reached ARS7.6b. That is an increase of 16% or ARS1.1b when compared to 2008.

Value-added service played a very significant role in increasing revenues, with an increase of ARS596m that represents a 34% increase. Monthly fees also and prepaid traffic grew significantly, both by 17%, due to the client base expansion and successful service packages that were offered. Meanwhile, handset sales, including upgrade, increased by 5%.

Slide nine shows that our fixed-line service continued to grow at a rate of 1.5%, while our competitor remained flat. This past quarter, the ARPU grew by 3% when compared to the fourth quarter of 2008, reaching ARS40.8 per month, due to attractive commercial bundling, such as fixed SMS and flat rate in voice, while combined with broadband access.

Slide 10 shows the evolution of broadband subscriber, where an increase of 18% was achieved in 2009, reaching 1.2m subscriptions. We have outperformed the market with a margin -- a market share of 45% in 2009. And we reached a 36% share when we combine the three main providers in the market.

Additionally, despite client base expansion, ARPU rose 20% compared to the fourth quarter 2008, reaching ARS71 per subscriber per month, while churn in 2009 declined to 1.8% from 2.0% that was the figure in 2008.

In December 2009 broadband accesses represented a 28% of our lines in service. This was achieved thanks to effective promotion, improved network coverage and an innovative portfolio of services.

Slide 11 shows the evolution of our fixed-line revenues where Internet is the main driver of growth, contributing in 2009 with a ARS323m increase.

Third-party revenues totaled ARS4.2b, an increase of 14% or ARS504m, compared to year 2008. Regulated tariffs continued to be frozen at 2001 levels. Notwithstanding it, we have reduced our dependency on price regulated services to now represent 51% of total fixed-line revenues, versus 56% a year ago.

Internet and data revenues posted in 2009 reached an outstanding 44% and 26% increase, therefore 44% increase on Internet and 26% increase on data year-over-year. Together they represent a 31% of total fixed business revenue.

Interconnection services revenue grew by 12%, due to incoming traffic from third-party mobile operators that contributed to higher revenues. On the other hand, public telephony revenues have declined.

Monthly fees and voice measured service grew 5% and 3% respectively, due to the customer base expansion, new services, and more usage of supplementary services.

Throughout 2009, a tough year from the macroeconomic point of view, we increased our CapEx by 6%, as we show in slide number 12, totaling ARS1.7b invested in the year. As an integrated full-service company, CapEx has been deployed with a convergent approach under the view of an integrated platform where fixed and mobile access networks are connected and give service to our customers. As technology evolves, it demands more capacity from our network. That's why our CapEx was driven through improved capacity and coverage, but also with a strong focus in quality and innovation.

Finally, I would like to share with you our outline expectation for the operation in 2010. Assuming that the current macroeconomic condition will remain stable, we continue to expect that our consolidated revenues for the fiscal year [announced in] 2010 will grow at double digits. We will continue working to mitigate the impact on inflationary pressure in our cost structure, in order to sustain profitability margin levels as those registered in 2009.

We expect that CapEx will be at the level of about 16% of consolidated revenues, versus 14% reported in 2009. This is in order to expand and improve access, backbone and backhaul facility of our platform.

These were our 2009 highlights that I shared with you, and also what we expect from 2010. And I'll turn the table to Adrian Calaza, our CFO, who will continue with details of our financial performance in 2009. Adrian.

Okay, thank you. Good morning to everyone. All these positive facts that previously highlighted Franco, have fed into outstanding results in terms of profitability, revenues and margin. We have obtained high levels of cash flow generation, achieving for the first time a financial position with net cash, concluding fiscal year of 2009 with a cash balance equal to ARS469m.

Going to our financial section in slide 14, we can see the evolution of revenues and operating profit before depreciation and amortization. Consolidated revenues reached ARS12.2b, 15% more than in 2008. That revenue growth has allowed us to increase our operating profit before depreciation and amortization by 17%, reaching ARS3.9b with a margin of 32%. The growth of profitability is remarkable when compared to 2008, even more when we consider that we are operating in an inflationary context.

In slide 15 we can see the breakdown of our consolidated cost structure. Selling expenses represented 31% while salaries and interconnection costs represented 18% and 16% respectively. Comparing this structure with 2008, savings in terms of revenues were made in -- mainly in selling expenses by reducing advertising and keeping handset subsidies under control, and especially in interconnection costs where it is noticeable that TLRD and roaming costs were reduced through an increase of on-net traffic and by the deployment and extension of our mobile network in the southern region.

The expansion of our operating profit before depreciation and amortization and the lower incidence of depreciation charges on revenues continued to positively impact our operating profit, as seen in slide 16, that grew at an impressive rate of 35%, reaching ARS2.8b.

In addition, even with the negative impact of the exchange rate that we had until last October when we prepaid Telecom Argentina's debt, net income reached to ARS1.4b and 11% of revenues, equivalent to a growth of 46% when compared to 2008.

Furthermore, in slide 17, we can see that thanks to a strong cash generation, resulting in a free cash flow of ARS1.7b, equivalent to 14% of our revenues, we finished 2010 with net financial position reaching ARS469m in cash, cash equivalents and investments that represented a reduction of debt for ARS1.4b versus year-end of 2008.

It is important to mention that Telecom Argentina paid all of its outstanding debt in the fourth quarter of 2009. The amount paid in principal and interest was equivalent to ARS1.3b, or $352m. Meanwhile, as of December 31, 2009 Personal's outstanding notes were equal to $180m, net of market purchases. In the first month of 2010, other market purchases were made by Personal, equivalent to $5.9m.

So with a [pure] and capital structure, we achieved a great financial flexibility with no restrictions imposed by covenants, as well as lower interest expenses and FX exposure.

And last but not least, we are pleased to inform you that the Board of Directors has proposed, for the first time since 2001, a cash dividend payment in the [period weighted] form of approximately 75% of net income, equal to approximately ARS1.05b or ARS1.07 per share, meaning an estimated dividend yield on yesterday's quotation of 7.8%.

For its effectiveness, these two votes will have to be approved by shareholders in a meeting yet to be announced. Please note that under Argentine law, a tax on personal property is imposed annually to individuals and/or individuals (inaudible) domiciled in Argentina or in a foreign country and entities domiciled abroad.

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

(Operator Instructions). We'll take the first question from Miguel Garcia with Deutsche Bank.

Thank you. Good morning. I wanted to focus a little bit on your value-added services in wireless. And I don't know if you give this information, but I wanted to know what percentage of the total value-added services represent SMS. And also, all these other services, how fast are they growing?

And second, if you could give us some more details on the wireless broadband business, the number of subscribers first. And second, if you are -- the behavior you're seeing in wireless broadband subscribers is more of a substitution of fixed wireless -- sorry, fixed broadband or is complementary to an existing account with fixed broadband. Thank you.

Well, I'll answer to your first question that was related to SMS. SMS still has the lion's share of our value-added services where I'm talking about 85% of that 34% of service revenue. The other 15% is generated by data, Internet access and innovative services that's obviously starting from zero -- close to zero. For example, I'm referring to music downloads are growing at tremendous paces but they represent a minor proportion of that.

Anyway, what we are seeing, that the growth of value-added service percentage over the total service revenue is still in this majority sustained by SMS. But the speed of growth of other services within the value-added service basket is growing faster than that.

Could you please recap your second question, please?

Yes. Well, within that 15%, I wanted to know how -- the wireless broadband business, how many subscribers you have. And also if the sale of wireless broadband is -- do you mostly to people replacing -- not replacing, but maybe not having fixed broadband? Or it's people that have already fixed broadband and for convenience they are hiring our contract in the wireless broadband?

Well, our current figure at the year end is about 0.5m 3G clients, just over that and about 130,000 3G modems. And it's hard to say whether these clients are using our mobile services instead of subscribing to the fixed-line service. As a matter of fact, as you know, we market both on the fixed and mobile distribution channels, in ADSL connection with the 3G modems. So we believe there is an overlap between the two.

Our view of this market is that none of the two products replaces the other. We believe there is an inherent value into mobility. So the way we market those and the way we are approaching the market is that our customer will both have fixed and mobile access over time.

Thank you. Sorry, can you clarify the -- or repeat the number again? You said you have 500,000 3G clients? How many of those are wireless broadband?

Right, 130,000 3G modems.

Excellent. Thanks a lot.

Thank you.

(Operator Instructions). We'll take another question from Miguel Garcia. Please go ahead.

Thank you. Can you give us a guidance in terms of CapEx for 2010 and also in terms of our EBITDA margin figure?

Yes. In terms of CapEx, I think that I mentioned in the closing statement of my part of the presentation. I'm happy to go over that again. We are envisaging a 2 point, in relation to revenues, increase in comparison with 2009. We posted a 14% CapEx over revenues in 2009. We estimate it at 16% in 2010. This is basically due to an acceleration program that we are putting in place next year. So we don't believe that it will be a recurrent percentage over the future. It is an accelerated program we are putting in place for 2010 to improve substantially our backhauling capacity of the network in such a way that we'll be able to serve properly the growing demand of mobile broadband. So 16% is what we envisage for 2010.

In terms of EBITDA margin we would like to -- you should consider that we are planning to maintain the same percentage of EBITDA margin over revenues that we achieved this year that in turn were 1% higher last year. So the 32% bracket is where we expect to be next year as well.

Great. You said 16%? Sorry, the number is one, six, right, for CapEx?

One, six, yes.

Okay, great. Thank you.

(Operator Instructions). The next question is from Rajneesh Jhawar with JP Morgan.

Hi. Thanks for the call. I had a question on dividends. For 2010 you are paying 75% of your 2009 net income as dividends. What should we expect as a formal dividend policy going forward?

The thing is we don't have actually an official dividend policy. We think that this rate of payout ratio of 75% is a comfortable zone for the Company, in terms of -- according to our previous flow, trying to assume not more debt for the next years. So I think that this is the sustainable number for the next years.

And I had a second question. This was related to the recent tariff increases we have seen in the market. What kind of response have you seen in the first quarter, in terms of usage? And what do you expect the ARPU to be as a result? Do you expect ARPU to be maintained or do you expect it to increase on the back of these tariff increases?

Well, I hope I won't disappoint you, but please don't have too much confidence in tariff increases. As you know, fixed-line tariffs are frozen. And market-regulated tariffs, let me put it this way, are regulated by competition. And as a matter of fact, we saw some announcements that are related to nominal tariffs that have been reset somehow by all operators in the recent few months that do not reflect in ARPU and do not reflect in actual tariffs paid by the customer because prevailing factors are promotions, are packaging of services.

And as a matter of fact, if you do the numbers right, that is you take revenues per subscriber and you apportion it to the number of minutes that a subscriber has been in conversation for a month, you'll see that in nominal terms, even in pesos terms, tariffs are pretty stable or as a matter of fact, if they move anywhere, they move towards being more competitive.

This is to say that our growth of 15% achieved in 2009 is not due at all to passing inflation factors into our pricing. But it's due to the expansion of our customer base and the growing quality of our customer base. So we do not expect to see any significant impact of tariffs into prices. We certainly factor a marginal increase of ARPUs because of attitude of consumption and of our customers, but not because of pricing effect.

Okay, thanks a lot.

(Operator Instructions). Next we'll hear from [Daniel Stilberg] with Barclays Capital.

Hi. Good morning, everyone. We see that mobile, data and value-added service are already 34% of your service revenue. And this level is by far the highest in the region when we compare with Brazil, Chile and the other countries. I would like to know why you think that Argentina is leading by far on that front. Thanks.

Yes, trying to answer your question with facts. Are you aware that there is a world championship of SMS messaging? And it took place in Argentina this year and was a world championship in this particular market. So there is an attitude of our market to that kind of service. It's sustained and sustainable. We haven't seen peaks of consumption of short messaging, due to either promotional or other non-recurring effects. I think it's well-rooted into the attitude and what our customers are used to.

So we believe that that strong percentage will be maintained and possibly will be increased in the future as the value-added services that are currently are playing a minor role in the total VAS contribution. I think we explained before that 85% of VAS contribution is SMS. So there is a large number of other services that are filling in the remaining 15% that, as I said, are growing at a much faster pace than SMS are doing.

So all in all, we are confident that this Argentinean leadership in the market and particularly leadership of our Company into the market, will be maintained in the future and possibly increased.

Okay, thank you.

The following question comes from Walter Chiarvesio with Banco Santander.

Hi. Good afternoon. First, congratulation for the results which came in very solid. And my question is regarding the dividend payments that were proposed to the shareholder meeting. And my question is, for the last year, shareholder meeting hasn't taking place finally. Do you see, or could you please comment on if there is any risk that the shareholder meeting does not take place this year due to the conflicts between the controller shareholders is any risk -- is there any risk of that to happen this year? Thank you.

I'm sorry. I thank you for your kind words, first of all. I'm sorry to say that we are not in a position to comment on that. And anyway, the call of the next shareholder meeting has not been scheduled yet, so that we are really not in a position to make any comment on that development.

Okay, thank you.

It appears we have no further questions at this time.

Okay. Thank you all very much for being in this conference call of our 2009 figures. Please do not hesitate to get in contact with our Investor Relations department for any further inquiries you may have. So good morning to all and have a nice day. Thank you all.

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