Telecom Argentina SA (TEO) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina fourth quarter 2010 earnings conference call. Today's call is being recorded.

Participating on today's call we have Mr. Franco Bertone, Chief Executive Officer of Telecom Argentina; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Head of Finance; and Ms. Solange Barthe Dennin, Manager of Investor Relations.

At this time I'd like to turn the conference over to Mr. Pedro Insussarry. Please go ahead, sir.

Good morning to everybody, and thank you for participating on this conference call.

The purpose of this call as shared by our moderator is -- sorry -- as mentioned by our moderator, to share with you the consolidated results of Telecom Argentina that corresponds to the fourth quarter and Fiscal Year 2010 ended on last December 31st.

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 the Investor Relations section of our website at www.telecom.com.ar/investors.

Additionally, this conference call is being broadcasted through the webcast feature available in that section and can also be replayed through that same feature.

Before we continue with the conference call, I 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-and-A sessions, 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 or 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 changes in the general market or economic conditions, in the legislation, or in regulation.

Our press release dated February 21, 2011, 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 1 of the presentation.

As usual, in our quarterly conference calls, the agenda for today, as seen in slide 2 of the presentation is to go over general market overview, then we'll go over through some business highlights. And after that we'll go over some specifics of the evolution of our financial figures and we will end the call with our traditional Q-and-A session.

I'll go over the brief macro overview as an introduction to the general operating environment.

In slide 3, we include some snapshots of the current Argentine macroeconomic environment. You can note that a strong economic recovery helped Argentina to regain pre-crisis levels of growth, with a better global economic context, with low interest rates, rising commodity prices, and higher interest in emerging markets coming from the investor community.

The agricultural and industrial sectors were the main drivers of growth. Strong commodity prices and a better harvest from last year helped the agricultural sector while an outstanding performance of the auto industry lifted the overall industrial production.

It is worth mentioning that investments in key sectors are needed to maintain the current high levels of growth and release the economy from infrastructure and supply bottlenecks.

Several factors like the growing household income from the health care labor market, government transfers to the lower income segments, and an expansive monetary policy stimulated private consumption. High inflation was a consequence of the increase in demand from the private sector, significant expansion in private spending and some supply strains especially in the food segments.

Moreover, steady FX rates and low income interest rates also stimulated consumption over savings. In this context the government benefited from the recovery as a slight increase in fiscal surplus was registered despite reaching a record level of fiscal spending to GDP. In 2010, and the last debt swap reduced uncertainties in the sovereign debt solvency.

Finally, the trade balance remained robust despite growing imports compensated with the rising commodity prices and growing exports to Brazil which helps to sustain the strong surplus and to increase Central Bank international reserves.

In this challenging macroeconomic context for Argentina, our Company has more than well performed in 2010 both in terms of its business and operations as we will explain during the conference call.

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

We are happy to announce our 2010 results, they are quite good, and Q4 figures are even better. Revenues grew 20% over 12 months and 25% in the fourth quarter. Data and value added service grew twice as much and four times voice revenues. EBITDA, EBIT and net profit posted double-digit growth though we experience some dilution in EBITDA margin due to the combined effect of frozen wireline tariffs and the inflationary pressure affecting OpEx.

Lines in service increased by 2.1 million to 23.7 million in total. We captured an estimated 46% of mobile net adds in Argentina outperforming competition the second year in a row. Broadband delivered solid revenue performance with record low churn rates though market grew more than we expected diluting our market share in H1. Strong Q4 sales partially compensated lesser performance of previous quarters. Consolidated net financial position grew by ARS700 million to exceed ARS1.2 billion.

Slide 5 of the presentation we made to you highlights mobile revenues displaying an accelerated pace in Q4. This was as high as 63% for value-added services. 2010 net adds share was significantly higher of our market share specifically for its smartphone sale. Though the performance' strongest point is a sustained churn reduction which dropped to a record low 1.2% a month in the last quarter.

Also worth mentioning is the launch of broadband fixed and mobile conversion offer for the mass market successfully performed in Q4. Out of our financial performance, we draw your attention the 25% fourth-quarter revenue growth as well as the outstanding Telecom Personal bond $173 million that was fully cancelled by the year-end.

[Let's provide] some details to our mobile operation in 2010 referring to slide number 6 of the presentation. Argentina experienced strong quarterly results with a 17% year-on-year ARPU increase. Twelve months customer base growth was 15% posting a 120 basis point increase of our estimated market share to 31.8%. This mentioned with the 46% share of the 12 month net adds mentioned before.

Slide 7 shows value-added services revenues at 46%, 12 months expansion. This was as high as 63% in quarter four. This is our way of adding value for our customer handset upgrades stimulate a value-added usage to an all-time high, 42% of service revenues in Q4. Emigration to all-inclusive plans contributed to deliver higher ARPU. SAC and our retention costs rose to 16.1% in Q4 from 14.8% in Q4 last year due to a mix change or handsets and increase in their average costs because of new taxation affecting imported devices.

The tax increase are at present 110 basis points of service revenues. Higher advertising costs in the last quarter partly were due to the type of sponsorship of 2011 Personal, Dakar, Argentina [NG] . Slide 8 shows how our mobile revenues developed in Argentina reaching ARS9.5 billion, an increase of 25% or ARS1.9 billion compared to 2010. As already mentioned, value-added services played a strongest part in revenue expansion with ARS1.1 billion or 46%, 12 months growth. Prepaid traffic monthly fees to revenues were up 18% and 15% respectively. Handset sales were up 28%.

Let us move to wireline with slide 9. Lines in service kept growing at a 1% rate and the average monthly bill was up 5% compared to 2009, reaching ARS44 a month thanks to supplementary service and package pricing that resulted in an increase of minutes called per client.

Slide 10 shows the evolution of broadband subscribers base; it was slightly below competition year-on-year. In Q4 we experienced a strong rebound with over 40% of quarter net adds that contributed 50,000 new customer to our base; it is now approaching 1.4 million lines, alive, 14% 12 month increase.

Estimated market share among the top three players is 35%. Churn is down to 1.2% per month in fourth quarter from 1.8% in fourth-quarter 2009. Wireline revenues presented with slide 11 show Internet broadband to be the key revenue growth driver increasing 30% year-on-year. Third party revenues totaled ARS4.6 billion, a 12% increase or ARS483 million compared to 2009.

Regulated tariffs in the fixed business telephony continues to be frozen at 2001 prices, though our wireline business dependency on the regulated price cap in service decreased from 51% to 44% over the last 12 months.

Both monthly fees and voice measured service grew 5% due to customer base expansion, text pricing, and higher penetration of supplementary services. Interconnection revenues dropped 3% because of decrease incoming traffic from third-party operators.

Slide number 12 shows that CapEx is up 16% totaling ARS2 billion or 13% of consolidated net revenues. We continue to invest through an integrated approach among service platforms, access, and core networks. 2010 CapEx was focused to improve our customer mobile broadband experience, accelerate backhaul deployment and -- as well as expand, secure and integrate backbone networks.

Cost of local roaming was also reduced while improving net coverage. We also invested in IT platforms to upgrade customer care and business operation performance.

Well, having gone through the business highlights, I will pass the call to Adrian who will go over the financials.

Thank you. The business highlights mentioned by Franco Bertone have reflected into significant results in terms of revenues and profitability.

Please refer to slide 14 where we can see the evolution of revenues and operating profit before depreciation and amortization. In the Fiscal Year 2010, consolidated revenues reached ARS14.7 billion growing by 20% when compared to 2009, the highest rate in the last three years.

We can also notice that (inaudible) regulated revenues currently accounts for only 14% of total revenues not only because of the frozen tariffs of the basic telephony fixed services but mainly due to significant growth of mobile by value-added service and fixed broadband.

Throughout 2010 our revenue growth has allowed us to increase our operating profit before depreciation and amortization by a significant 17% totaling ARS4.6 billion. This rate is slightly lower than the revenues one, basically due to the effect of an intense commercial activity and the inflationary context mainly reflected on labor costs related.

For further details, please refer to slide 15 where we can see the breakdown of our consolidated cost structure. On this slide, we're focusing inefficiency to sustain profitability in an inflationary context. Where this efficiency is derived from, a leaner cost structure, thanks to unified operations, lower incidence in interconnection costs, deployment of CapEx to reduce OpEx and maintaining a close look into labor related costs.

When we consider our cost as a percentage of revenues, marketing and sales expenses represented 22.3% while labor and interconnection costs represented 12.8% and 9.5% respectively of consolidated revenues.

In 2010, marketing and sales expenses were influenced mainly by the increase in mobile gross adds . The change in the mix of handset sales, higher volume of handsets upgrades in order to sustain our value added service growth, and the impact of the technological tax that resulted in higher SAC and SRC cost.

Savings in interconnections and network usage costs were achieved due to stimulation of on-net traffic investments that allow reductions in domestic roaming expenses thereby achieving cost efficiencies. Also it is notable the decrease in bad debt expenses of 9%.

As seen in slide 16, operating profit growth at a 16% year-on-year growth, reaching ARS3.2 billion. Please also note that in 2010 financial and holding results accounted in a loss of ARS34 million, a decrease of ARS295 million versus 2009.

This was mainly due to lower foreign exchange losses of ARS211 million, together with a gain in net financial interest of ARS84 million in 2010 versus the same period of last year as a consequence of the significant reduction in leverage experienced by the Company.

Consequently, thanks to these operating results and the reduction in financial expenses, net income reached ARS1.8 billion for the Fiscal Year 2010 equivalent to a year-on-year growth of 30%.

On the strictly financial side, in slide 17, we can see our operating free cash flow generation 2010. Despite an important growth in CapEx and the payment of dividends, we are able to report a net cash position of ARS1.2 billion that represented an increase of ARS755 million in 12 months.

Finally, time is important to mention that the Board of Directors of Telecom Argentina proposed to the shareholders meeting a cash dividend payment proposal of ARS915 million equivalent to ARS0.93 per share.

Having concluded the presentation, we are more than pleased to announce --- to answer, sorry -- any questions you may have. Thank you very much.

(Operator Instructions). Michel Morin, Barclays Capital.

I was hoping to ask about the subscriber growth in particular. I think it was a little bit light relative to our expectations, but we also saw lighter than expected subscriber growth at America Movil in the fourth quarter. So I was wondering if you can comment a little bit about what you think are the reasons for this. And then I did not catch your postpaid net additions, so I don't know if you could share that with us. Thank you.

Please stand by. Mr. Insussarry, at this time we're unable to hear you.

Yes, give us a minute. We're gathering the information on Michel's question. Hold on please.

Thank you.

Well, your two questions about the subscriber growth in Q4; it's pretty normal in the industry to have some maintenance of the customer base over last four quarters and filtering out customers that do not meet our standard of ARPU and traffic over the last quarter. So you'll see the figures of the fourth quarter, just [affecting of that] maintenance work is only on the base for the full year.

As far as the postpaid Q4 growth, we don't disclose -- (technical difficulty).

Amy, can we go to our next question --

Sir, once again if you would like --

-- Michel had a follow-up?

Yes, actually am I still on?

Yes, sure.

Yes, sir.

Hi, so I'm sorry, I'm not sure if I got the last part; you said you don't disclose the postpaid net adds, is that right?

Yes, but I'm prepared to say the fact that postpaid growth rate was higher than prepaid in the fourth quarter.

Okay. In terms of year-on-year growth rate you mean.

Correct, yes.

Okay. And then given that we had fewer net additions, I was also a little bit surprised to see that your subscriber acquisition costs and retention costs still continued to creep up as a percentage of sales.

And specifically, we saw commissions go up and advertising go up. So I think obviously that's had an impact on margin in the quarter. Is there --- should we expect that that little uptrend continues again into 2011 or are we kind of as high as we might go on that line item? Thank you.

Advertising and subscriber acquisition costs go together with gross adds, not with net adds. And gross adds, that's been in line with previous quarter.

In general terms I would say that as was commented during the presentation that we had a significant impact about 110 basis points over the applying -- the full application of the new taxation or import of telecom sets that reduce that 110 basis point effect on revenues in the fourth quarter. A seasonality effect on advertising cost and particularly as I mentioned in the presentation last quarter advertising costs were affected by the title sponsorship that we did on the Dakar event this year and that it's a seasonal effect.

Okay. Great, thank you very much.

Thank you. (Operator Instructions). Rodrigo Villanueva, Bank of America Merrill Lynch.

My first question is regarding your dividend proposal. Last year the dividend payout ratio of 2009 profits was of around 76%. So I was wondering if you could share with us why this year you proposed a payout ratio of only 50%, 2010 profits. Thank you.

Yes. The payout ratio that is over the last year the sale is around 93% of paid capital in the Company reflect the fact that we are expecting in 2011 the frequency spectrum option that has been announced by the authority in the market and we are -- we will be bidding competitively for that.

And we needed to expand our spectrum for the current operation at 850 megahertz and 1.9 giga bandwidth. And you know we are not considering to take debts to fund our offer for the spectrum being auctioned for them and we have a more prudent approach in that respect.

Okay, thank you. So in terms of dividend payout ratio going forward what would be more reasonable to expect for you to be proposing something along the lines of the 50% or probably past 2011 that you're not going to have more cost related to spectrum, we could see it going up to around 75% or so, is that reasonable to assume? Thank you.

That is okay. The thing is that as we already mentioned, we don't have a dividend policy in the Company. And as Franco was telling you 2011 will be kind of particular in the financial side because of these auctions of all spectrum. So I can give you a forecast of dividend for the next years but we usually try to distribute our free cash flow.

Okay, understood, thank you very much. A second question would be regarding your wireless subs and net adds. I was wondering if you could provide us with a breakdown between voice users and [pre-modem] users? And also if you have seen any type of cannibalization between your mobile and your fixed broadband products? Thank you.

Yes, our current share of 3G sets is about 10%, has increased substantially over the last 12 months to 10% of our customer base of the [60] million that we are operating. And second question now, I mean, we haven't seen any cannibalization effect of mobile broadband over wireline broadband. As a matter of fact, we're leveraging on those two products.

Okay, thank you very --

And to fine -- fine products, okay.

All right, understood thank you very much.

Alex Garcia, Citigroup.

I have few questions. First one is regarding the auctions that you guys just mentioned. What is exactly for sale, what is the capacity that is for sale? And how far from the spectrum cap are you guys? That will be my first question.

My second question is regarding salary readjustments, and I was wondering if you guys could refresh how much of your costs are related to the inflation and how much of our CapEx are also related to inflation? Thank you.

Alex, give us two minutes.

We're ready, we're ready. Well, as far as the frequency spectrum being auctioned we're talking of -- at least we're interested to the 850 megahertz in the metropolitan area of Buenos Aires and of the -- on the 1900 megahertz in the rest of the country. Our current frequency allocation is about 10 megahertz below the current frequency cap and that's what we're going to take advantage of hopefully. And that's where we're bidding for -- what we actually we're bidding for in the coming auction.

As far as your question about OpEx and CapEx exposures to Forex, currently our OpEx is 80% in local pesos and 20% in dollars or foreign currency. And in the case of CapEx, it's approximately half and half slightly more in hard currency than it is -- about 60% -- than it is in local currency.

The overall effect on OpEx is in the range of 14%, coming from the blend of the fact that the 80% OpEx in local currency is exposed to inflation and the 20% in dollar [use]. I hope I answered your question.

Yes, yes, you did. And if I may, how is negotiations regarding with the unions are developing -- has it settled already? How much they are asking for or if there is any union that is left to negotiate salary readjustment this year? Thank you.

It is a bit early for that. I mean, our negotiation with an year of time to around June of the year, so it's bit early for the question.

Okay, thank you and good luck on that negotiation.

Rodrigo Villanueva.

Yes, I was wondering if you could share with us your 2011 CapEx forecast, please? Thank you.

Yes, our budgeted CapEx for 2011 is ARS2.5 billion. And it is in the same range of consolidated revenues that we had in 2010.

Okay. And just to clarify does this -- would you be planning to -- the spectrum that you're going to buy is included in the CapEx or it would be expensed? Thank you.

No, it will not be expensed, but is not included in the CapEx figures we provided. It will be an additional capital expenditure for 2011.

Okay, thank you very much.

And sir, there are no further questions at this time.

Well, thank you very much for being at this quarterly conference call. Thank you very much for the questions. Do not hesitate in contacting our investor relation colleagues at any time for further enquires you may have, and thank you. Good morning to all and have a nice day. We expect to meet you soon again.

Thank you. That does conclude today's presentation. Thank you for your participation.