Telecom Argentina SA (TEO) 2011 Q2 法說會逐字稿

(Operator Instructions). Good day everyone and welcome to the Telecom Argentina TEO Second Quarter 2011 Earnings Conference Call. Today's call is being recorded. Participating on our call today we have Mr. Franco Bertone, Chief Executive Officer of Telecom Argentina, Mr. Adrian Calaza, Chief Financial Officer, Mr. Pedro Insussarry, Head of Finance, and Mrs. Solange Barthe Dennin, Manager of Investor Relations. At this time, I'll turn the call over to Mr. Pedro Insussarry. Please, go ahead, sir.

Okay, good morning to everybody. On behalf of Telecom Argentina, I would like to thank you for participating in this conference call. As mentioned by John, our moderator, the purpose of this call is to share with you the consolidated results of Telecom Argentina that corresponds to the first half of the current fiscal year ended on June 30, 2011.

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 broadcast through the webcast feature, available in such section and 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 on the details of the call.

We would like to state 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 actual results and operations to differ materially. Such uncertainties include, but are not limited to the effects of public emergency law and complementary regulations, the effects of ongoing industry and economic regulation, possible changes in the demand for Telecom products and services, and the effects of more general factors, such as changes in general market or economic conditions, as legislation or in regulation.

Our press release dated August 1st, 2011, a copy of which is being included in a Form 6K 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 one of the presentation.

As usual, in our quarterly conference calls, the agenda for today is seen in slide two. Is first to go over general market overview, then we'll go over some business highlights, and after that, we'll go over some specifics of the evolution in our financial figures, and we'll end the call with our traditional Q&A session. Now, I'll go over a brief market overview, as in introduction, of the general operating environment.

In slide three, we include some snapshots of the Argentine market economic environment. We can note that the market conditions are giving support to the growth of our business. During the second quarter, the Argentine economy continued growing, based on the booming private consumption yielded by high commodity prices. The industrial production performed very well, mainly in the segments of non-durable goods, and the supply for construction. On the other side, the energy sector, was the main balance in the conflict of high demand and supply restraints.

It is worth noting that in the second half of 2011, we will have a presidential election where private consumption investments tend to go down. As already mentioned, consumption remains strong, promoted by low interest rates and extensive installment plans for the purchase of durable goods.

Moreover, despite high inflation, consumer confidence reaches a four-year record high level, although, it was stable through the recent months. Currently one of the reasons for the booming consumption is that wages are growing in a similar wage sensation in some cases, even faster, fostering consumption.

On the fiscal front, fiscal balance remain stable fueled by the economic recovery, although, public spending continues at record high levels. And it could suffer further increases due to additional expenditures related to the upcoming presidential elections. The trade balance was affected by growing imports and somewhat slow export growth. Capital outflows have increased in the second quarter of 2011, and will probably remain high during the election period.

In this challenging market economic conflict for Argentina, our company continues to deliver growth, both in terms of business and operations and we will highlight -- as we will highlighting -- as we will highlight them 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?

Thank you, Pedro, good morning to everyone. Second quarter 2011 posted a fairly solid performance in all lines of businesses. We led the mobile market with the highest of growth of net adds and subscribed lines, and we had a healthy growth in the fixed segment too.

As highlighted in slide five, please turn to slide five, we were leaders in the mobile net adds, while improving our mix of addition and recording record fast revenues that currently are as high as 46% of service revenues. Our Paraguayan operation, as well, performed well in a competitive environment.

Our position, as an integrated ITP provider is getting stronger, new product launches boost the fixed broadband business. Consequentially, internet and data revenues rose 28% year-on-year. The overall fixed business revenue posted a consistent 16% year-on-year growth in the first semester of 2011. Because of strong operating performance, our free cash flow exceeded the equivalent of $500 million during the last 12 months. Net income rose 41%, reaching ARS1.2 billion in the first half of this year.

Let me now address some details of our mobile operation that are detailed in slide six of the presentation. In the Argentine mobile market, we posted another strong quarter result, with a 16% year-on-year ARPU increase and a 13% customer based growth, posting over [0.5] million net adds in the second quarter. We have also continued gaining market share, with a 230 basis point increase. That is 33.2% market share in the mobile industry. This represent the market share of net adds, in excess of, 75% over the last 12 months.

This was accomplished from offering all-inclusive plans, that increased overall mobile usage, as well as, ARPU while enabling effective customer control of his/her communication expenses. Our value proposition, together with customer retention offers, resulted in a significant churn reduction in the postpaid segment. As a new way to boost mobile data usage, we successfully launched a mass market internet plan. Taking advantage of the increased penetration of data enabled handsets.

Slide seven shows, per semester, value added service revenue growing 60% year-on-year, reaching a record level of 46% of service revenues. This was achieved, mainly thanks to our market leadership, especially in the smart phone segment which helped to boost non-SMS revenues to record high levels.

The accelerated handset upgrade, targeting customer retention and ARPU stimulation, but still reducing subsidy for handset sold. In order to continue growing data services and reaching higher data usage from all of our customer base, we are pursuing mobile internet massification through convenient packaging offers such as the unlimited internet offer of ARS1 per day.

Slide number eight shows how our mobile revenues grew into ARS6.1 billion this quarter, posting a 35% increase of ARS1.556 million, when compared to the first half of 2010. Value added services played the greatest part in revenue expansion with a ARS876 million increase, that is a 60% growth year-on-year. Prepaid traffic voice and monthly fees revenues were up 15%, mobile interconnection revenue 9% and handset sales over 50%.

Our Paraguayan operations posted a 59% year-on-year increase, report in Argentine pesos. Revenue actually increased almost 30% and the balance is due to local of currency revaluation in compared to the Argentina pesos.

Please move slide nine, to comment now the wire line business. The broadband subscriber base grew in line with competition. We continue addressing the market with innovative ideas such as our bundling mobile and fixed internet broadband offerings, or our ADSL Turbo, where a customer can boost speed in their broadband connection at selected hours of the day, at their convenience or preference. In general, broadband maintained sustained ARPU growth and churn reduction, while the estimated market share, among the top three players, continued stable at 35%.

Slide 10 shows voice landlines in service that they keep growing above an annual 1% rate, and the average monthly bill is up 7% when compared to last year, to nearly ARS46 per month. The continued migration to flat plans in local and long distance calls delivered an overall increasing price per minute, despite operating with frozen tariffs.

The evolution of wire line revenues is showing in slide 11, third party revenues totaled ARS2.6 billion to 15% increase, or ARS343 million, compared to last year. Broadband and data services are key to our revenue growth. They increased 27% and 31% year-on-year, respectively. Meanwhile, fixed telephony business posted 9% growth for voice-managed services and a 7% increase monthly fee. Revenues coming from reconnections were up 12% year-on-year.

Slide 12 shows our third semester CapEx totaling ARS752 million. That is a 9% of consolidated revenue, with a 13% year-on-year increase. CapEx deployment is targeted to mobile and fixed network capacity and quality, in order to support provision of new services and improve their performance. In addition, we're investing in mobile technology that can be upgradable software configured, and will provide us with additional scalability and flexibility of our network management.

Finally, I remind you that you have the same government analysis spectrum option for the 1900 and 850 megahertz band in December of this year. I've gone through the business highlight and I pass the call to Adrian, who will go over the financials of the first semester.

Thank you, Franco. The business highlights, just mentioned by Mr. Bertone, have reflected into significant results in terms of revenues and profitability. Please, refer to slide 13, where we can see the evolution of revenues, and operating profit, before depreciation and amortization.

In the first half of 2011, consolidated revenues reached ARS8.6 billion, growing by 28% when compared to the first half of 2010. We can also see that prices of regulated revenues currently accounts for 12% of total revenues, mainly because of relative better performance of the fixed broadband and mobile business in recent years but, also, due to frozen tariffs of the basic fixed services.

Our operating profit, before depreciation and amortization, grew 25%, totaling ARS2.7 billion for the first half of 2011, with a slight reduction of the margin from 32% in the first half of last year, to 31% in this first half. For further details, please refer to slide 14, where we can see the breakdown of our consolidated costs structures.

Some few remarks about our construction that we would like to highlight. We continued our marketing and selling efforts, in preparation to more number portability, as well as, permanent focus in cost efficiencies to mediate the impact of inflation, together with CapEx deployment, intended to reduce ITX and network maintenance costs. This is reflected in the evolution of our costs as percentage of revenues were marketing and sales expenses represented 23.4%, increasing from 21.1% in first half of last year. Labor costs reached 12.7%, while interconnection costs represented 8.4% of consolidated revenues, and 10.1% in the same period of last year and other costs with a slight reduction, down to 15.3%.

As seen in slide 16, operating profit rose at 28% year-on-year growth, reaching almost ARS2 billion, thus maintaining our operating profit margin at the same level from last year of 23%. Thanks to this expansion and positive financial results, we reached, in the first half of 2011, a total net income of ARS1.2 billion, equivalent to a growth of 41%, when compared to the same period of last year, when we had negative financial results.

On the financial side in slide 17, we can see our free cash flow generation in the last 12 months of ARS2.2 billion. This allowed us to reach a net cash position of ARS1.2 billion, as of June 30th, that represented an increase of ARS910 million in the last 12 months. It is worth to mention that in April, Telecom Argentina paid its annual cash dividend of ARS915 million.

To conclude, we would like to go over with you how we are progressing with our business targets in accordance with our 2011 guidance disclosed on February 25. As you can see in slide 18, our revenue performance has been faster than what we had projected, basically, due to bigger performance in our customer base and higher ARPU, both in the mobile and fixed broadband businesses.

In line with the better performance, in terms of revenues, operating profits before depreciation and amortization, has grown faster than what was expected. But it is important to note that costs in the second half of the year are relatively higher, mainly due to inflationary impact in our cost structure and a higher level of commercial activity.

Finally, the rollout of CapEx in the first half of the year is typically slower than in the later part, mainly due to seasonality, the procurement process and logistical matters. In this sense, we project that we will be meeting the guidelines disclosed to the market.

Having concluded with the presentation, we would like to mention that all these financial data presented are in local GAAP. Remember that the Telecom Argentina Group will be adopting IFRS since January 2012. So, having concluded with the presentation, we are more than pleased to answer any question you may have. Thank you very much.

Thank you. (Operator Instructions). We will take our first question from Ricardo Cavanaugh, with Itau BBA, please, go ahead, your line is now open.

Yes, well, good morning everybody. I have two questions. The first one is on the net adds, you're showing 75% share, and that has been rising well, basically, in the past quarter, and compared to last year, that was very strong as well. What are the main factors that you attribute such a strong performance, relative to the rest of the market? And if you think that this large percentage share of net adds is likely to prevail?

And the second one, is you mentioned a growing component within value added services of non-SMS, if you could provide details on the percentage that non-SMS currently is representing within total value added services revenues. Thank you.

In relation to your remarks about the net adds market share we had is definitely strong, 75%. It's not the first time we hit a percentage as high as this. We don't expect it to be maintained in the future, as a guidance, for sure. But it certainly representing the fact that we are in a strong recovery path from the past few years in which we have been certainly affected by the restriction that the Company had as a consequence of the default of its debt. All that is behind our shoulders and we started a strong recovery, both in market share and revenue share. We definitely made some important and definite steps over the last few quarters.

We believe that this kind of growth and this kind of positioning is a stronger element of strength and security facing the profitability period that will start sometime early in 2012. As far as the value added services -- percentage of service revenues, certainly as (inaudible) explain important part, it's around 80% of the figure you saw there being indicated. There is a progressive dilution of this percentage, as SMS services, in absolute terms, are growing at a lower pace than the overall value added service revenues. And growth rates of new innovative value added services is about twice as much as the total one. So, that is a fair indication I can provide to you about the dynamics of that revenue stream.

Okay, thank you very much.

You're welcome.

Thank you, we'll turn our next question from Miguel Garcia with Deutsche Bank. Please, go ahead.

Thank you. My question is regarding the regulatory environment. How are the conversations regarding the possibility of offering video services and triple play, and also, are there telecom operators, maybe smaller ones, that are already authorized to do so? Thank you.

Yes, regulation in that respect, depends on the nature of the main license each operator is varied upon, and there is a non-symmetry in the market between cable service operators that do have access to providing telephony services to their customer base. And, operators like ourselves, that are telecom operators that cannot provide video services to their customer base, and the same condition as the cable operator can. That does not mean, in definite terms, that telecom operators cannot provide video services.

And, as a matter of fact, there is an element of interpretation of the Paraguayan regulation that gives certain options that are getting more and more interesting from commercially and marketing purposes as video technology does progress. As a matter of fact, one of our competitors has already launched video streaming services. It's an option that we have in front of us, and that we have been preparing network and system for and may be part of our future as well.

Do you have any date or estimate of when you could start doing something like that?

We're getting very, very ready.

Okay, thank you.

Thank you for the question. We'll turn now to Michel Morin with Morgan Stanley. Please, go ahead.

Good morning everyone. I was wondering if you can talk about the progress regarding salary negotiations for the second half of this year. If I' m not mistaken, you're probably in that process right now. And, secondly, in terms of the mobile market share are you noticing whether or not any of your competitors are perhaps disconnecting customers more aggressively? Or, in another words, do you feel that you're also gaining share of gross additions, in addition to net additions? And, are you gaining share of revenue in the mobile segment? Thank you.

As far as the negotiation with our union employment base, they have been already concluded. They will take place from July 1st, as salary. And, on an annualized based 12 month period, there are 31% end-to-end salary growth. The 31% will be applied in two quarters, in two installments. Last year were there, so there was a quarter that started in July, another one in November and a third one in 2011. This year it will be one in July 2011 and the next one -- to complete 31% there will be first quarter of next year. So, that's how the salary negotiations ended up.

As far as your observation about how we account for our customer base and disconnection and net adds, et cetera, and revenue, we do have a pretty consistent policy in that respect. Our criterion is pretty tight and conservative. I would say that the best proof of it is that our revenue share is increasing faster than our market share.

Right, okay, thank you. And, then, if I can just come back on the salary increase. Are you prepared to share with us what the increase was -- the portion of the 31% that went through July 1st?

Yes, 31%, 20% will be applied from July 1st and the balance from next quarter -- first quarter next year.

Okay, thank you.

Thank you.

(Operator Instructions). We'll go now to Clara Quiroga with Raymond James. Please, go ahead.

Hi, everyone, and thanks for the call. I have a couple of questions. First, if you can give us any guidance of CapEx for the auction of additional spectrum. If not, we can assume that the Company has really reserved enough funds from this investment? And, then, we can expect that the impair will be around 75% during 2012? Secondly, we saw some compression of margins during the quarter, if you see a further compression during the second half of the year, and given the number mobile portability has been postponed, do you believe that this could benefit 2011 numbers? Thanks.

Hi, it's Adrian Calaza speaking. For your first question, we don't know how much it would cost us, the additional spectrum, given it's a public bids with a based price. It's difficult to know how it will finish. So, yes, we'll write a reserved money for this auctioning. So, next year, we expect to pay the dividends in line with the free cash flow generation, as we already said several times.

So in order to be safe, we have additional spectrum auctions. We will have to reserve money. If not, we will try to increase our bidder rating. As a matter of fact, what we already said in different opportunities, we will not try to conserve money, if we don't need it. We will try to pay dividends to all our cash flow generation.

Yes, as far as your second question, maybe I'll take that about the margin for the second half. Yes, we expect to have higher impression in our margin in the second semester compared to the figures we just tabled with you. The fact that number portability may delay a little longer, because of process reasons, will not relieve, at all, pressure on margin on the second semester, because the cost associated with the implementation of portability are incurred beforehand and the additional revenues, if any, will occur after.

So, the fact of delaying a few months, so that, as of today, we don't expect to happen, but just in case it was the case, we don't expect that to reduce at all the cost of self-preparation. So, yes, we do have concern, which Adrian mentioned during the financial part of the presentation. That we expect lower margin in the second half than we had in the first one.

Okay, thanks.

Thank you, we'll take our next question from Alex Garcia with Citi. Please, go ahead.

Hi everyone, good afternoon gentlemen. Still on the guidance, when we tried to do the math it's kind of like, just basically, subtracting what you guys have reached on the first half of this year versus your guidance. The drop in margins is material. So, I just wanted to touch base on, basically, if you guys are being conservative on the guidance or you guys don't want to talk about any tariff fee raise throughout the second quarter? But, when we do the math, the drop in margins on second half is a bit material.

So, I just wanted to make sure if you guys are being conservative or -- and we should expect this guidance to be revised and/or to be beaten easily, especially on the EBITDA? That is my question. Thank you.

Yes, I would say, if had to mention a few factors of what we detected in doing the math, I would comment on the fact that this figure was stable over nine months ago, before we had visibility of the actuals of 2010, that were being strongly above our end-market expectation, as well. And, are stretched for a three-year period in which -- and growth rate, in revenues and margins, are growing less and less as we progress into the three-years period. So, when they compare the sum of the first six months, of a three-year period, also benefit of this different scale factor.

I will also say anyway stress the same thing second half of this year is significantly affected by the preparation work of portability that add up to the usual and traditional margin pressure that we experienced in the second half of the year, after July 1st. And, not only are employees' pay rates increased, I just provided before the scale of this increase, that similarly to that the majority of the unionized pay scale in the country [the affect].

And, therefore, not only human resources costs, but also, third parties costs, as far as they are based on personnel costs, also increased. So, that's typical of our yearly calendar and is affecting the second half. On top of that, we have the portability factor, and on top of that, as I said, we have a third semester of a three-year period in a prospect of declining growth rates and then, therefore, is effecting your projections.

Okay, great. And then, just 31%, 32% in the first half versus a sort of indication of a margin of 26% in the second half is a big drop. So, I was worried -- should we be worried or should we be more expecting 26%, a bit exaggerated, doesn't it? For the second half?

Maybe the comment is more appropriate to what you're saying is that, having achieved what we did achieve in the first semester, we are definitely confident that our yearly target will be met and surpassed.

Most important. Okay and just on one other question, if I may, have you guys done any exercise or what should we expect once TEO starts to publish IFRS numbers? We can compare the Teleco Italia numbers in the presentation and guidance versus the Argentine GAAP. But, just to refresh, what sort of changes should we expect once you guys start to publish IFRS numbers?

Yes, we understand your question and request. There is a full discloser of it in our press release that was published today, just to help you to cross-relate figures. And, our Argentinean euro-converted IFRS figures will be released in two days at the Group level. But, please refer to the press release we published yesterday -- today, I'm sorry to have the answers to your questions.

Great, thank you. Thank you gentlemen.

Alright.

Thank you. And there are no further questions at this time.

John, do we have any further questions?

No, there are no further questions at this time.

Yes, alright. I just wanted to thank all of you for being in our conference call today. Please, contact us at your convenience if you wish to do so. And, thank you to John for assisting us during the call. Thank you so much.

This does conclude of teleconference. You may disconnect your lines at any time. And have a wonderful day.