Telecom Argentina SA (TEO) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina TEO Fourth Quarter 2011 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 call over to Mr. Pedro Insussarry. Please go ahead, sir.

Good morning to everybody and on behalf of Telecom Argentina I would like to thank you for participating in this conference call. As mentioned by [Chrissy], our moderator, the purpose of this call is to share with you the consolidated results of Telecom Argentina Group that correspond to the fourth quarter and full fiscal year 2011 that ended in December 31st, 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 located at www.telelcom.com.ar/investors.

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

Before we continue with the conference call, I would like to go over some Safe Harbor information and other details of the call, as we typically do in every earnings 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 public emergency law and complementary regulation, the effects of ongoing industry and economic regulation, possible changes in demand for Telecom products and services, and the effects of more general factors such as changes in general market or economic conditions in legislation and regulation.

Our press release dated February 16th, 2012, 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 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, as seen in slide two, is first to go over the general market overview, then we'll go over some business highlights, and after that we will go over some specifics of the evolution of our financial figures where we have added a short reconciliation between IFRS and local GAAP figures for fiscal year 2011. And finally, we'll end the call with our traditional Q&A session.

Having gone through these procedural matters, I will go over a brief macro overview as an introduction to the general operating environment. In slide three, we include some snapshots on the current Argentine macroeconomic scenario. The year 2011 showed an Argentine economy with a substantial level of growth, although at the end of the year certain deceleration was perceived.

Moreover, tightening fiscal and monetary policies announced and gradually implemented by the government could slow down the economy during 2012, but could contribute to a more sustainable growth path for the future.

Furthermore, a strong drought affected the farmlands in the country in the recent months and may imply lower commodity outputs and somehow lower agricultural exports for 2012, hence affecting the country's trade balance.

Private consumption remains strong, although higher real interest rates and the reduction in public subsidies that could limit the performance of consumption. Wage negotiations are starting from lower levels than last year as inflation ended lower than was expected for the year at the beginning of 2011. Nonetheless, the reduction in energy and transport subsidies that may result in higher tariffs and fees could add pressure on pricing in the economy.

National fiscal surplus suffered an important deterioration due to a strong increase in public spending, although, as mentioned before, the government intends to tackle the problem by trimming subsidies.

Imports increased by 31% year-on-year in 2011, but in last quarter strong deceleration was evidenced, partly due to the increasing restrictions on imports. Furthermore, capital outflows decelerated in last months of the year, thanks to higher interest rates and the effects of regulations in the FX market that include a pre-approval of the tax office on certain Treasury transactions.

In this challenging macroeconomic context for Argentina, our company continues to report strong growth and results, both in terms of its businesses and financials as we enlighten during -- as we will enlighten during this conference call.

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. In 2011, we posted a solid, successful performance, leading mobile net adds and delivering a healthy growth in the fixed business. On slide five, we highlight our personal brand of restyling that was executed in the fourth quarter this year that strengthened our market position and contributed to deliver an outstanding performance in the postpaid segment in the quarter.

We also want to bring to your attention the improvement in our Paraguayan operation, both in market and financial performance. Throughout 2011, we continued focusing into voice with ADSL and mobile Internet bundles as well as introducing new products that help deliver a 28% revenue growth in our fixed broadband services and sustained a marginal growth in the fixed line segment.

In the four quarters, strong commercial and advertising and diluted our margins. Nonetheless, throughout the year our operational and financial performance exceeded the 2011 guidance we disclosed to the market a year ago.

Let's now address some details on the mobile operation, and turn to slide six, please. In the year, Argentine mobile market, we continued leading growth, posting an 11% year-on-year, well above our peers. Particularly in the quarter, we were absolute leaders in postpaid client acquisition that represented over two-thirds of the quarterly net adds. On an annual basis, postpaid subscribers grew by 18% year-on-year and currently represents 32% of our base.

Intensive advertising activities in the mobile brand restyling campaign stimulated postpaid adds and helped us retain in the leadership in the smartphone market while ARPU rose to ARS56 a 14% growth over the last -- in the last quarter.

Please turn to slide seven to review value-added service revenues, 55% year-on-year growth, reaching a record level of 48% to service revenues in 2011, while in the fourth quarter of the year half of our revenues -- of our service revenues were generated by value-added services.

With the launch of mobile number portability scheduled for mid March of this year, we have been implementing plans aimed to strengthen our market position, shaping a closer relation with our customer base.

We signed our mobile brand restyling in anticipation of an [impending] implementation with a strong focus in customer relationship and a concept of personal ownership of the telephone number. In addition, handset upgrades were increased to yield our customer base to stimulate usage and facilitate up-selling of services.

This activity contributed the incremental costs [various] margins, along with the typical seasonality of the last quarter of the year. The fourth quarter our subscriber acquisition and retention costs rose to 22% of -- 20% of service revenues, up from 16% reported in the same quarter of last year.

Please turn to slide eight, where we have a snapshot -- we provide a snapshot on our Paraguayan operation, which is back on track on the growth path. Nucleo has been operating in a healthy macroeconomic environment and in a consolidated four-players market where we have the number two position.

2011 was a successful year for our Paraguayan operation, where revenues in local currency rose 29% year-on-year, here again, above our peers. We also grew margin and reduced levels of CapEx. We posted a 15% increase in ARPU, driven by our premium network quality and leadership in mobile Internet.

Moreover, revised regulation fostered competition in SMS and voice traffic with lower interconnection rates. Financially, Nucleo holds a sound position thanks to improved debt structure where indebtedness was refinanced in local currencies with longer tenors and competitive interest rates.

Slide nine shows how our mobile revenues evolved, reaching almost ARS13.2 billion in 2011, a 31% increase, or ARS3.1 billion, when compared to last year. Value-added services played the strongest part in the growth, posting a ARS1.9 billion increase at 55% progress year-on-year.

Prepaid traffic voice and monthly fees revenues were up 14%, mobile interconnection revenues, 8%, and handset sales, 45%. Our Paraguayan operations posted a 32% year-on-year increase when valued in Argentine pesos.

In wire line business, as shown in slide 10, fixed broadband business performed very well during the year as subscriber base expanded 12% and ARPU rose 15% year-on-year in the fourth quarter.

Bundling and new products delivered churn reductions to new record low levels. Innovative services like OTT video streaming, Arnet Play and Arnet Turbo, that increases the client bandwidth feed as well as our new 10 megabits residential offer, contributed to client retention and customer experience improvement.

In slide 11, we show voice land line service increased, rose to 1% per year with an average monthly bill growing 7% over last year. Customers find attractive flat pricing proposition that is done through selling unlimited local minute packages or packages of 100 to 300 calls with no time limits.

The evolution of wire line revenues is shown in slide 12. Third-party revenues totaled ARS5.3 billion, is equivalent to a 15% increase, compared to 2010. Broadband and data services are the main drivers of revenue growth, increasing 28% and 23% year-on-year, respectively.

Meanwhile, fixed telephony business posted a 9% growth for voice measured services and a 7% growth in monthly fees, including supplementary services. Revenues coming from interconnection rose 11% year-on-year.

In slide 13, the evolution of CapEx that, in 2011 totaled ARS2.4 billion, 13% represent -- represent 13% of consolidated revenues, increasing 23% year-on-year. Executed CapEx strengthened our core network in order to accommodate fixed and mobile growing capacity.

We initiated deployment of Fiber to the Curb to increase fixed access bandwidth and we are also in the process of installing low visual impact cell sites to extend our mobile access network. Extended coverage also to the reduced domestic roaming costs.

Well, these were the highlights -- the business highlights, and I'll pass the call to Adrian, that will go over the financial performance over this period.

Okay, thank you. Good morning to everyone. The strong business evolution that Franco just mentioned allowed us to increase the levels of growth in terms of revenues and profitability and to achieve robust cash flow generation in 2011.

Please refer to slide 15. We can see the evolution of revenues and operating profit before depreciation and amortization. Consolidated revenues reached in 2011 ARS18.5 billion, showing a 26% growth when compared to 2010, one of the highest rates of the last years despite the frozen tariffs of regulated services now accounting for just 12% of total revenues.

Operating profit before depreciation and amortization for 2011 grew strongly by 23% when compared to the same period of last year, totaling ARS5.6 billion. It is worth mentioning that fourth quarter '11 margins were impacted by several one-off effects, specifically, our brand restyling, already mentioned, the launch of Arnet Play, and the intense commercial activity heading to mobile number portability increased SAC and SRC expenses.

Nonetheless, full year operating profit before depreciations and amortizations ended ahead of our 2011 guidance.

Now, please refer to slide 16, where we can see the breakdown of our consolidated cost structure. As mentioned before, here you can see the SAC and SRC increase that allowed our strong customer base growth, impacted our marketing and selling expenses relative [weight], but were partially compensated with the reduction on interconnection costs achieved through domestic roaming cost reductions and a restless focus in increasing efficiencies to mitigate cost inflation effects.

As seen in slide 17, operating profit rose at 26% year-on-year growth rate, reaching ARS4.0 billion, with the same margin of 22% reported last year. With this significant growth and the positive financial results coming from our sound financial position, Telecom Argentina Group posted a total net income of ARS2.4 billion, equivalent to a growth of 33% when compared to 2010.

Regarding to our financial position in slide 18, we illustrate cash generation for 2011 where again we have well performed, reaching a free cash flow of ARS2.2 billion. This result is in a net cash position of nearly ARS2.7 billion at the end of the year.

Finally, please turn to slide 19, where we have included a comparison between our main financial figures reported under Argentine local GAAP and IFRS. Let me remind you that as from the first quarter of the current fiscal year we will be reporting under IFRS accounting standards. But you will see, there is no substantial difference in revenues.

Moreover, for full year 2011 operating profit before depreciation and amortization would have been higher under IFRS, mainly due to the effect that part of the subscriber acquisition and retention costs are capitalized and deferred, thus increasing reported margins. Meanwhile, the reclassification of other expenses in IFRS standards above the operating profit levels would have impacted negatively our operating profit margins.

Finally, net income under IFRS standards would have been 5% higher than our current local GAAP, while CapEx would have been substantially higher due to the fact of SAC and SRC capitalizations, already mentioned.

For more information, we encourage the analysts and investor community to read the additional disclosure related to IFRS reconciliation included in notes in our financial statements. So, having concluded with the presentation, we are now more than pleased to answer any questions you may have. Thank you very much.

(Operator Instructions). And we'll go first to Richard Dineen. Your line is open. Richard, your line is open. You may want to pick up the handset or un-mute the phone. Okay, Richard, we cannot hear you. I'm going to go ahead and move on to Rizwan Ali. Your line is open.

Yes, thank you. I wanted to inquire about potential regulations related to dividend repatriation, if you could update us on what the central bank requirements are now. And second is I understand you're bundling quite a bit. Is Telefonica bundling their services as well? And if you have noticed any changes in the way Telefonica is competing in Argentina because of what's happening with the parent company, which is under quite a bit of pressure.

Rizwan, can you repeat your last question, please? If I'm not mistaken, first question was repatriation of dividends. Second?

Second is have you noticed any changes in the way Telefonica Argentina is competing in the market? In other markets, they are losing a bit of the market share and apparently they're not getting much support from Spain. So I'm just wondering if you've seen any changes in the way Telefonica is competing with you in this market.

And the last one is regarding Telefonica's bundling, similar to us.

That's right.

[Okay].

And we'll go next to [Mark Magerion]. Your line is open.

Chrissy, give us -- we still haven't answered Rizwan's questions. Hold on, please.

I'll wait.

Okay. I'll answer -- I'll take the first on, Rizwan. For the time being, we haven't heard nor read nor learned about any changes in the repatriation of dividends, so basically the regulation is the same as the last time we spoke. So with respect to that, there's no change. Okay?

And the following questions, Franco?

Yes. The two questions you raise about our operation in relation with Telefonica, specifically in terms of bundling, if that was the first question, we have so far quite a unique bundle proposal in the ADSL market, together with our mobile operations. So we are the only provider in the market that is offering bundles, fixed and mobile, broadband access.

It's a product we launched a while ago -- as matter of fact, two years ago -- that has been constantly reshaped with -- taking account our customer experience and has been fairly successful during 2001 and hasn't been much by competition so far.

As far as your observation about how is Telefonica doing in the market, well, it's not really for us to comment on that. What I am prepared to comment is our market share has substantially increased this year and in terms of net adds in a strong manner, particularly in the postpaid market. So we believe we came out in the lead during 2011 as far as mobile is concerned.

Chrissy, can we move to the following question, please?

Yes, I'm sorry. Mark Magerion, your line is still open.

Okay, thank you. Firstly, great job, everyone. The results all look fantastic. My questions are just briefly on the upcoming potential dividend, which -- for 2012. When can we expect any information on that. And then the next question is given your stock's current valuation, have you ever considered, given -- especially given your current cash position, a stock buyback?

Thank you for your remarks on our results. As far as the dividends, the decision of the Company is premature. We are two months away from shareholder meeting that usually takes place at the very back end of the month of April, so we'll let the market obviously know what our board proposal will be, but we aren't ready yet. And anything has not been dealt by our board yet.

And in terms of the cash position and it has been stronger increase in this year, I understand your observation, but we have no plans in that respect.

Thank you.

And we'll go next to Stanley Martinez. Your line is open.

Thank you very much for taking my question. First, a question on the mobile side. I note that the increase in VAS was largely additive to overall mobile revenues rather than substitutive. And, in fact, voice revenues looked to have grown 11% year-on-year. I'm just wondering if you expect that to continue under mobile number portability, or do you perceive that there may be some more competition on data plans, specifically from Mobistar?

And then just a couple of things on the OpEx side. You were right to note the increase in subscriber acquisition costs, but should we expect the increases in advertising and commission expense spending to remain constant at least in the first half of the year as you go through mobile number portability?

And then last, any visibility in terms of salary expense would be helpful. Thanks.

Yes. Revenue substitution from voice into data, they are both growing. A 10% growth in voice basically matches the 11% growth of our customer base. If there is a substitution factor, it's fairly marginal. And we do not anticipate that trend -- that pattern to change with portability. What is a definite fact is that growth rate of value-added services and particularly mobile Internet pace of rates is 10-fold the one of voice.

In terms of data plans, we don't believe that portability will shift the policy and the offerings of the main players in the market. I think that Telecom -- I'm sorry, the Argentina market is well ahead of regional peers in terms of intensity of data into the ARPU of their customers. So, again, we don't expect that to shift substantially, nor very noticeably, because of the coming number portability.

As a Company ourselves, obviously, we bet a lot on the data usage of our customers. We believe we have the highest data service revenue of the region and we have been taking this up a long while ago, and so we'll be consistent [wasn't] in the past, even in the future.

In terms of your mentioning advertising costs over 2012, in the year to come, certainly will be an increase of advertising costs, but not in percentage terms. We have a pretty virtuous percentage of advertising costs over our consolidated and business unit revenues and will not exceed what we had in the past year.

Thanks for clarifying that, Franco. And if I could just ask one follow-up question, Telefonica and NIHD have yet to report, of course, but is it your perception that you took share of gross decisions, i.e., share of gross adds, in the Argentine marketplace in the fourth quarter? In addition, I know your focus is typically on revenue market share instead of net additions, but in terms of growth additions, do you think that you were a gainer there?

We believe so.

Okay, great. Thanks.

And we'll go next to Walter Chiarvesio. Your line is open.

Yes. Hello. Congratulations for the result. I have kind of tough questions, but I have [to get in it]. In case that -- perhaps some regulations plus the possibility of a dividend payment this year. Could you please give some guidance about you have a strong cash position I guessing as well as you have investment opportunities that you think -- which you can use that cash in order to increase the value for the stock.

Projects -- may be accelerating investment projects that have some attractive return on this cash. If you -- if it were to [capping], then you will have the possibility to pay dividends or to reduce the dividend payment? Hello?

Yes. Give us a minute, please.

Okay.

Yes. We understand your concern about an important issue, but it is too early for us at this point in time to make any comment. The thing has not been dealt yet. And, as I said, we are two months away from the shareholder meeting.

All right. Thank you.

(Operator Instructions). We'll go next to Jennifer Leonard. Your line is open.

Hi. Good morning. Thank you. I was hoping you could tell us a little bit about your CapEx plans for 2012. And then also, if you could give us an update on the spectrum auction timing, that would be great. Thanks.

In terms of CapEx for 2012, we will be providing some guidance about our plans in the group conference next week. I'm prepared to comment on the fact that where the CapEx would be mainly focused, and the main focus of it will be on fixed network access into the FTTC network deployment that has been already initiated this year and will play a strong part of our capital investment in 2012 and '13.

As far as the spectrum auction is concerned, the process did start about two weeks ago with Phase I. This has been completed, it is a pre-qualification of the bidders. Phase II was scheduled to happen in the third week of March, although it's currently suspended -- it's been suspended two days ago and we have, at the moment, no anticipation when that would be resumed. But the process has finally started.

Okay, thank you very much.

And we'll go to our next question from [Masumet Dotta]. Your line is open.

Yes. I see the Paraguay numbers for 2011 were very strong. But it looks like, if I'm not mistaken, there was quite a slowdown in Q4. Is there anything sort of in particular which has driven that? Thank you.

In the fourth quarter, what we have is small FX change effect, but we are pretty sure that our Paraguayan operation is still performing well on fourth quarter.

The regulatory changes, which Millicom have talked about in that market, I believe there's been a move to equalize on-net and off-net prices. And I just wondered whether you could comment on the state of that regulation, whether that has happened yet in Paraguay and what impact, if it has, it's had on your business. Thank you.

This is Pedro, yes. Effectively, the change in regulation happened basically as you say. The change in regulation is to equalize pricing in terms of on-net and off-net type of offering. Or, in other words, operators must have a non-inclusive type of pricing and not to discriminate the interconnection charges. And that change in regulation happened by mid-year 2011.

Okay. And have you noticed a sort of particular change in kind of traffic patterns on the off-net flows that has presumably supported your business since then, or has there been no sort of significant change?

Well, basically what we feel is that the market is much more even in terms of offering and pricing, basically the previous regulation and there were, in other words, favored the largest player and basically discrimination of termination rates, both in SMS and voice traffic.

Okay, thank you.

You're welcome.

(Operator Instructions). We'll go next to Rodrigo Villanueva. Your line is open.

Yes. Hi. Good morning. I'm sorry, I joined the call late, so I was wondering if there's some guidance being provided for 2012. And also, if you could talk a little bit about any type of dividend to be proposed at the general shareholder meeting corresponding to 2011 earnings? Thank you.

Sorry you joined late. In 2012, I mentioned that we will provide some guidance for next year for 2012 operations in a week from now in the group conference call that will be held by Telecom Italia. And as far as your dividends question, as commented before, we are in an early stage of that. We are two months away from our shareholder meeting and the process in that respect hasn't started yet.

Understood. Thank you very much.

We expect that to happen -- the shareholder meeting to happen by the end of April, and therefore, our proposal will be disclosed to the market about five weeks earlier than that.

Understood. Thank you very much.

Thank you.

Another question would be is there any regulatory change that you expect for 2012 in the telecom sector? And is there any potential extraordinary expense related to CapEx that you could have this year? Thank you.

We expect a stable landscape from the regulatory point of view, of course. The main point is number portability. That is three weeks away and that was, I think, scheduled since a long time. We don't expect any other changes in the regulatory landscape.

CapEx expectations.

If we have any change in --. Yes, we don't expect any dramatic change at all or any exceptional item or investment during 2012. You'll see that even the new project that we'll be facing and it will be very focused on like the FTTC upgrade around access network will be within the framework of our typical CapEx to revenue percentage share that will be disclosed in a week, but we won't have any significant change from what we have been delivering over the last few years.

Understood. Thank you very much.

You're welcome.

And we'll go next to Richard Dineen again. Your line is open.

Oh, hi, guys. This is Sean Glickenhaus, actually. I know that the salaries expense line, that's negotiated once a year. Can you talk a little bit about how you can offset inflationary pressures on some of your other costs? That seems to have been a concern with some folks.

And the second question is just on number portability. It seems that there's a lot of action you're taking to prevent any weight from portability, but we've seen that portability -- it hasn't really had a negative effect in other countries in a big way. So I'm just wondering if you're being a little overly cautious on that issue. Thanks.

About your remark about how to offset salary cost increase, it's a good question and we work on that a lot. Basically, the salary cost increase as we have been experiencing this year and the year before are approximately in line with the growth rate we have in our top line, and so it hasn't altered so far substantially cost inflation. Our recipe to address that is basically to maintain stable the workforce numbers despite the growth, not only of revenues, but on number of lines we operate is still pretty strong.

This year, we hit the [26 million] line, 10% increase over last year, and our workforce did not increase because of that. So basically, offsetting exercise is [as the name] that is increase efficiency in the usage of our human resources.

The effect from portability that you were recalling, Argentine will be a good test case for the industry in general because, to the best of my knowledge, there isn't another at least regional market at least as balanced as the Argentine one among the three players. So that, in our opinion, will deliver a very limited net effect on the shares of market of each of the other player. But certainly, a strong competitive pressure in all of them to retain their position.

So that's the way we see it. We don't expect, as I said, market share to shift dramatically, but certainly we are aware and we are prepared to face stronger competition during -- in this space.

The fact that we have being improving our market position, quite substantially, as a matter of fact, over the last quarters when compared to the last two years, makes us quite comfortable that we are in a reasonably safe position to face always.

Okay. Thanks. Just one clarification on the IFRS EBITDA. Assuming there were no risk statements, the Q4 year-on-year growth, I get about 20%. Again, IFRS EBITDA growth, is that accurate? To the quarter?

Richard, can we get back to you on that?

But we believe it's not 20%.

Our feeling is that it's not 20%, it's lower than that, but we'll get back to you with a precise figure, okay?

No problem. Thank you.

You're welcome.

And we'll go to our next question from Rizwan Ali. Your line is open.

Yes, sorry. I may be repeating this question, but regards to share buyback, are there any restrictions or tax implications which may convince you not to have a share buyback in Argentina?

Rizwan, no, we believe there are not restrictions or additional taxes for buyback.

So, why would you not consider share buybacks?

Well, we think we discussed this issue very often, but we are in an industrial path and we believe in the actual conditions of the country. This is the accurate financial structure that we should have in this moment. And having spectrum auctions coming in a few months, we don't know what can happen with the AWS auctions also. So we think that this is the accurate financial structure that we need -- [in the actual context].

Thank you very much.

You're welcome.

(Operator Instructions). We have no further questions in the queue. I'd like to turn it back to you for any closing remarks.

The answer for Richard, basically, you are right. It's 20% year-on-year and [7%] compared to September 2011 and under IFRS standards, the growth in EBITDA or operating profit before depreciation and amortization. Okay? Franco?

Well, I have [enjoyed] this mass clarification. I want to thank you very much for being at this quarterly conference call. Please contact our Investor Relations for any further inquiries that you may have. And good afternoon to you all and have a nice day and look forward to meeting with you again soon. Thank you.

That concludes our call for today. Thank you for your participation.