Telecom Argentina SA (TEO) 2010 Q1 法說會逐字稿

And good day, everyone, and welcome to the Telecom Argentina TEO first-quarter 2010 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, Finance 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.

Okay. Good morning to everybody and thank you for participating on this conference call. As our moderator has just mentioned, the purpose of this call is to share with you the consolidated results of Telecom Argentina that correspond to the first quarter of fiscal year 2010, ended last March.

We would like to remind you, for all those that have not received our press release or our 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 we can also be replayed through this same feature.

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 the public emergency law, the complementary regulations, 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 May 5, 2010, a copy of which is being included in our 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 the session. Furthermore, we urge the audience of this conference call to read the disclaimer clause contained in slide 1 of the presentation distributed this morning.

As usual in our quarterly conference calls, the agenda for today, as seen in slide 2 of the presentation distributed today, is for us 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 end the call with our typical Q&A session.

Following with today's conference call, I have an introduction to the general operating environment, I will go over the market review. Such snapshots on the macroeconomic scenario that we can share with you are seen in slide 3.

To start with, we can say that our economy continued to expand significantly in the first quarter 2010. Industrial output expanded strongly, over 10% year-over-year, mainly thanks to a higher demand of durable goods, including cars, chemicals, metal industry, and the robust growth of industrial exports.

On the other hand, food and beverages production declined 2% year on year, although it is probable that this area will recover after the record harvest that we are registering this year.

Overall, the telecommunications sector is well performing in this macroeconomic environment, significantly rising its revenues both in recession and expansive periods.

The combination of low interest rates, pro-cyclical measures, together with a stable exchange rate and especially fiscal policies is boosting private consumption. In this quarter, consumer confidence kept rising, with consumer spending more in durable goods like electronics and vehicles. Also, inflation has accelerated in the first quarter of 2010, due to higher food prices and -- that peaked during the quarter.

The primary fiscal surplus dropped to 1.3% of GDP versus 2.6% in first quarter 2009, as the government continued to expand its expenses at a higher pace than total income.

Capital outflows have slowed, thanks to the government's new debt exchange offer on the defaulted public debt, reducing country risk.

Regardless this challenging macroeconomic context for Argentina, our Company has well performed during this quarter, in both in terms of business and operations, as we will explain during the conference call.

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

Thank you, Pedro, and good morning, everyone. We are quite pleased with the result achieved by the Company during the first quarter of 2010, where we kept growing in revenues and margins and market share, in a competitive and challenging context.

(inaudible) is like (inaudible). This period has been quite positive in terms of the expansion of our client base in all segments -- Fixed, Mobile and Broadband, as we increase our market share in the three businesses.

In the Mobile business, in the first quarter of 2010, we experienced a strong Mobile customer base growth, where we have incorporated for 170,000 new clients, while our Mobile service revenue in Argentina rose at 17% year on year, driven by value added services that expanded at a 28% year-on-year rate.

Personal wireless broadband services are gaining traction, being Personal market leader in smartphone sales. Customer convenience strategies is leading Personal to a higher market share.

In the Fixed Line segment, attractive service packs, together with supplementary service, contributed to raise voice ARPU and customer base growth. Broadband revenue grew 34% year on year, based on a significant ARPU increase of 18% year on year, and a continuous customer base expansion.

Data revenues were up 23%, driven by the Business segment.

In the first quarter, total revenue exhibited a 15% year-on-year growth, with improving profitability, thanks to savings and interconnection costs and SAC and SRC, although inflation has had an impact in our cost structure. Hence, our EBIT margin increased to 23%. Meanwhile, we benefit from a sound financial position, with a strong cash flow generation.

And I will say, last but not least, we are pleased that after nine years, Telecom Argentina has resumed its dividend payment, with a 75% payout ratio.

Please refer to slide 6.

In 2009, we added 1.8 million new subscribers to our Mobile business, reaching almost the 15 million client mark in Argentina, an increase of 13%, once again outperforming our competition.

Our market share in March 2010 increased to 30.7% from 30% in the first quarter of 2009. Particularly in this quarter, our marginal market share reached 37%.

Focusing on customer service, Personal provides a diversified portfolio of services according to client request and needs. In order to reach higher value customers, we launched the Premium Personal Black offer, with personalized customer service, exclusive handsets, and special benefits. Also, to expand Data revenues, Personal launched a new campaign to promote social network mobile access, and contributed being a leader in the smartphone segment.

Slide 7 shows that SAC and SRC costs were reduced to 15.1% this quarter, from 16% in the first quarter of 2009, as agent commission and advertising increased less than revenues. Although it's worth noting that handset subsidies has risen significantly in the first quarter of 2010, due to a change in the mix sold, increasing high handheld devices and the average cost of them. Also, the internal tax, better known as -- locally known as technological tax, has increased the cost for handsets sold.

And as a result of the strategy followed by Personal, service revenues increased by 18% when compared to the first quarter of 2009, as the result of a larger subscriber base and incremental VAS usage. VAS revenues grew by 28%, reaching ARS646 million pesos in the first quarter of 2010, a 34% of total service revenues.

The growth of experience by our customer base did not dilute value. We were able to maintain a good mix of prepaid and postpaid customers, one of the highest in Latin America. Although summer seasonality slowed Mobile consumption, our ARPU was ARS41 in the first quarter this year, and MOU was 99 minutes, both higher than first-quarter 2009 figures. Meanwhile SMS consumption continued its outstanding growth.

Please turn to slide 8, where we show the evolution of our Mobile revenues in the Argentina market.

The first quarter of 2010, total revenues reached ARS2.061 billion, an increase of 17%, or ARS304 [billion] when compared to the same quarter of 2009. Value added services played a significant role in increasing revenue, with an increase of ARS142 million. That represents a 28% year-on-year growth. Value added services were fueled by growing SMS traffic and 3G services.

Prepaid traffic and monthly fees revenue expanded significantly, by 28% and 12%, respectively, due to the client-based expansion and successful service package they were offered. Meanwhile, handset sales grew 13% year on year.

In slide 9, we are showing that Fixed Line, in service, continued to grow at the rate of over 1%, while our competitor remained constant. This past quarter, the ARPU grew by 4% when compared to the first quarter of 2009, reaching ARS41.1 a month, mainly due to supplementary service, attractive commercial bundling such as flat rate in voice combined with broadband access and satellite TV.

Slide 9 shows the evolution of broadband subscribers, where the increase of 16% was achieved in the first quarter, reaching 1.2 million connections. Again, we have outperformed the market, with a marginal market share of 40%, and a 35% market share when we combine the three main providers in the market.

Additionally, despite client-based expansion, ARPU rose by 18% when compared to the first quarter of 2009, reaching ARS73 a month, while churn declined to 1.8% from 2% in the first quarter of 2009.

Slide 11 shows the evolution of our Fixed Line sales, where Internet is a key driver of growth, with nearly 80% of year on year Fixed Line revenue expansion increasing 34% from the first quarter of 2009. Data revenues posted an outstanding 23% increase in this quarter.

Third-party revenues totaled ARS1.1 billion, an increase of 11%, or ARS103 million compared to the first quarter of last year. Regulated tariffs in the Fixed business continued to be frozen at 2001 levels. Notwithstanding, we have a lower dependency on price-regulated services that now represent 47% of total Fixed Line revenues, and they were 51% a year ago.

Monthly fees and voice-measured services grew by 4% and 3%, respectively, due to customer-based expansion, new services, and more usage of supplementary services. On the other end, interconnection service revenue decreased by 9%, due to lower incoming traffic from third-party mobile operators. Also, public telephony revenues have fallen.

As far as the CapEx is concerned that we are showing on slide 9, investment in fixed assets have been increased by 47% year on year, having deploying CapEx for ARS343 million, [that yield] 11% of total Company's revenues.

As a full service company, Telecom has invested with a convergent approach and the view that an integrated platform to which Fixed and Mobile access networks are connected provides efficient services to our customers. As technology evolves, it demands more capacity from our network. That's why CapEx was driven by a need of incremental capacity and coverage, but also, with a strong focus on quality and innovation.

Well, these were the business highlights. I pass the call now to Adrian Calaza, to review our quarterly financials.

Thank you. Good morning to everyone. The strength previously highlighted by Franco Bertone have turned into good results in terms of revenues, margins, and profitability. The Group obtained high levels of cash flow generation, increasing our financial position that concluded the first quarter of 2010 with a cash balance equal to ARS860 million.

In slide 14, we can see the evolution of revenues and operating profit before depreciation and amortization. Consolidated revenues reach ARS3.2 billion, 15% more than those obtained in the first quarter of 2009. Such revenue growth and relative cost savings has allowed us to increase our operating profit before depreciation and amortization by 16%, reaching ARS1.1 billion resulting in a growth of the margin that reached 33% even though the microeconomic context explained by Pedro before.

Following with slide 15, we have the breakdown of our consolidated cost structure. Selling expenses represented 20%, showing a decrease in terms of revenues when compared to the first quarter of last year, by reducing advertising and keeping handset subsidies under control despite the impact of the technological tax.

Additionally, savings in terms of revenues we're obtaining on interconnection and roaming costs achieved due to the stimulation of unmet traffic between clients, and network investments that allowed a reduction in the expense of national roaming. Also, it is notable that the decrease in bad debts expanded by 26% versus the first quarter of last year.

Slide 16 shows us that the operating profit grows in line with OPBDA at a 16% year-on-year growth, reaching ARS763 million. Net income reached in the first quarter of 2010 ARS411 million, equivalent to a growth of 17%. It is worth noting that in the first quarter of 2009, Other Income was affected by a gain of ARS36 million related to tax matters. Segregating this effect, the increase in the net income would have been 30%.

Results allowed that the first-quarter 2009 figures were readjusted to incorporate the effect in depreciation and amortization of the re-estimation of useful lives of certain fixed assets, as we announced in the second quarter of 2009. This effect added ARS22 million to the first-quarter 2009 net income, ARS34 million to operating profit.

Furthermore, in slide 17, we can see that our strong operating free cash flow generation in last 12 months, even though the significant increase in tax payments due to the end of the tax credits for carry forward losses, helped Telecom to reach a net financial position of ARS860 million in cash, cash equivalents, and investments that represented a reduction in net debt of ARS1.4 billion since the end of the first quarter 2009.

We remind you that Telecom Argentina paid off all of its outstanding debt in the fourth quarter of 2009. Meanwhile, as of March 31, 2010, Telecom Personal's outstanding notes were equal to $174 million net of the market purchases performed during the period.

With this capital structure, we achieved an outstanding financial flexibility with no significant restrictions imposed by the covenants, as well as the lower interest expenses and FX exposure. Furthermore, as Mr. Franco Bertone mentioned before, and we have publicly announced, Telecom Argentina is reassuming dividend distribution, with a total dividend per share of ARS1.07, payable in two installments -- ARS0.7 per share already paid yesterday, and 0.37 payable in December, the 20th. This dividend implies a payout ratio of approximately 75%, meaning dividend yields of 6.8%.

We note that under an Argentine law, a tax on personal property is imposed annually to individuals, and/or individuals' estates domiciled in Argentina or in a foreign country, and entities domiciled abroad. The deduction of this tax for the fiscal year 2009 applies.

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

Thank you, sir. (Operator instructions) Now we'll go first to the site of Alex Garcia from Citigroup. Your line is open.

Good morning, gentlemen. My question is just, I'd like to have an idea on -- about these taxes over the dividend. I just wanted to -- I mean, it's clear that I believe local pension funds would not need to pay those taxes, but foreigners and some private investors do. So, I just wanted to have an idea in terms of a percentage of that, or the net value of the dividend that you guys paid yesterday, or proposed. That would be my question. Thank you.

Yes, Alex, the personal asset tax represents approximately 3.944% of the dividend paid yesterday. That's equivalent to approximately $0.0354 per ADR, so the net -- cents on the dollar, by the way -- so the net dividend per ADR is equivalent to [0.864094] per ADR, in dollars.

Great. Okay, thank you.

You're welcome.

(Operator instructions) And another question is from the site of Rodrigo Villanueva from BoA Merrill Lynch. Your line is open.

Hi, good morning. I was wondering if you could share with us if you think that the increase in EBITDA margin that we saw during the first quarter is expected to be sustainable throughout the year. Thank you.

We'll move on to our next question, so a follow-up --

No, no, no. Hold on. Hold on, [Kevin]. Give us ten seconds more, please.

Of your question about whether the increase that you noted in our EBITDA margin achieved in this quarter in relation to last year's quarter will be maintained, you should note that the profile of our EBITDA margin has a certain evolution during the year, each year, and that depends on the fact that certain important items from our cost base, for example, wages, are affected by a union renegotiation that takes place approximately around the end of the first semester, and also, the impact of cost inflation on certain supply and services as a part of our customer -- of our cost base as well, not necessarily trigger in at the beginning of the year.

So the answer that I am giving to you is that the improvement of our [rent]ability compared to last year will be maintained, but that doesn't mean that we will maintain the same percentage of EBITDA of the first quarter across the year.

Okay. Okay, thank you very much. And well I have another question related to the competitive dynamics in Argentina. You mentioned that you have been gaining market share year on year. So I was wondering if you could share with us what strategies are you using to achieve these, and if you have seen any increase in competition, either from Telefonica or from Claro in Argentina. Thank you.

Well, we managed to increase our market share over the last 12 months, and the -- as we presented, and as you recalled, market share over the last 12 months has been in excess of what the competitors have been able to do, I mean, by tight margins. We are not -- we are talking Mobile, for example, 37% over the last 12 months of being about 31% market share.

So there are limited adjustments, fortunately in our favor. I think they do depend by a number of initiatives that we have been putting in place. I would specifically mention the effective work we have been doing into customer retention and reducing churns, both in Mobile services, customer base, and Broadband, the strength that we have improved in our distribution. And I would definitely mention the portfolio of products and services that we have been developing over the last year that certainly increased the appeal of our brand and our Company compared to competition.

This progress that we made doesn't mean at all -- as a matter of fact, the opposite, in relation to the fact that the market remains very, very competitive. It's almost a perfect market, from a point -- given point of view, considering that we have three Mobile operators, and each one of them is in the range between 30% and 35% of market share. Therefore, the Mobile market is split in three almost equal parts.

And in the Broadband market as well -- I mean, the market share of the three main players are quite balanced, although we are obviously quite pleased that our one is growing more than the others.

So we still believe, and we are pretty realistic on the fact that the market remains very competitive, and particularly with the approach that the penetration of services, both in Mobile and Broadband, are reaching -- I mean, we are well over 100% penetration in Mobile, and well over 30% penetration in household, as far as the Broadband is concerned. You know, to such a level of a developed and getting close to maturity market, for which in the future, the growth of each of the players will depend more on customers shifting from one provider to the other than retail.

And we are very aware of that, and I think we have been in this kind of situation for -- at least for the last 12 months, successfully. So we plan to say that for the [core discount].

Okay. Thank you very much.

And we have a follow-up question from the site of Alex Garcia, again, from Citigroup. Your line is open.

Thanks for taking another question. We've heard that CapEx was (inaudible), around 11% of sales. And you guys, last quarter, you guys gave the guidance that CapEx throughout the year on a consolidated basis could reach 16% of net sales, because of 3G and increased capacity.

I -- my question is regarding, when should we expect a sort of CapEx concentration in the following three Qs of this year? I guess that's it. Thank you.

Yes, we do operate our investment plan in a cycle that -- they concentrate in the first quarter, negotiation on the early negotiation with our supplier. And therefore, there is an intrinsic fact that the first quarter CapEx versus revenue percentage is lower than the average expected for the year, and therefore, we -- this year, as well as -- it happened in the previous year. We expect that CapEx levels to revenues will be higher in the second semester than it will be in the first one. Although, this particular year, I mean, with the comparable CapEx expenditure on the 12 months, we had a -- almost a 50% increase in what was expended in the first quarter. This is just because -- I mean, we expedited our negotiation process. But still, you should expect higher percentages in the quarter to come.

Another question, if you'll allow me, kind of a follow on, on the previous question, is that you guys were gaining market share in all segments that you guys operate. But more specific on the Broadband segment, did you say it was like a strong -- is it -- you guys are stealing market share from the other two competitors equally, or is there any one that -- if it's possible to talk about it, okay? Or is there anyone that is -- that you guys perceive to have a weaker offer, and you guys are profiting more on (inaudible), or if it's equal? I guess that's it. Thanks a lot for all the questions.

Well, I mean, the -- there's still a limited, but still, it's there, a (inaudible), as far as Broadband market is concerned, and you should understand that because of the geography from the telecommunication point of view of the Argentinean market, we tend to overlap and to compete more with the cable than with Telefonica, being the fact that outside plants and access, fixed network, is quite separated geographically from the one that -- of Telefonica, while [cable operation], that is the third largest player, has a larger footprint in the northern area, where we operate, than it does in the southern one.

So when we are talking of shifting customers from existing operator to another one, we tend to have more of that with the cable than we have with Telefonica, because of the reasons I mentioned.

(Operator instructions) I'm showing no further questions at this time. I'll turn the call back to our presenters.

Well, of behalf on our team, thank you very much for participating in our quarterly conference call. Do not hesitate in contacting our Investor Relations department for any further questions or inquiry you may have. And thank you, all, again. Good morning, and have a nice day. We expect to meet again with you soon. Thank you.

And this concludes today's teleconference. Have a great day. You may disconnect at this time.