Telecom Argentina SA (TEO) 2012 Q1 法說會逐字稿

Good day everyone, and welcome to the Telecom Argentina TEO first quarter 2012 earnings conference call. Just a reminder, 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, Finance Director and Ms. Solange Barthe Dennin, Manager of Investor Relations.

And at this time, it is my pleasure to turn the conference over to Mr. Pedro Insussarry. Please go ahead, sir.

Thank you Gloria, and good morning to everybody. On behalf of Telecom Argentina, I'd like to thank everybody for participating on this conference call. As Gloria mentioned, our moderator, the purpose of this call is to share with you the consolidated results of Telecom Argentina Group that corresponds to the first quarter of fiscal year 2012 that ended last March 31st.

We would like to remind you that for all those that have not received our press release or presentation, you can call Solange Barthe Dennin and her team or download them from the Investor Relations section of our website located at www.telecom.com.ar/investors.

Additionally, this conference call is being broadcasted through our webcast feature available in such section and can also replayed through the same channel. Before we continue with the conference call, I'd like to go over some Safe-Harbor information and other details of the call as we usually do in our quarterly conference call.

We'd like to clarify that during the conference call and Q-and-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 and complementary regulations, the effect 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 or in regulation.

Our press release dated February 3, 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 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 conference calls, the agenda for today, as seen in slide 2, is to go over a general market overview. Then we'll go over some business highlights, and after that, we'll go over some specifics of the evolution of financial figures. And finally, we'll end the call with our traditional Q-and-A session.

And now having gone through these procedural matters, I'll go over a brief macro overview as an introduction to the general operating environment.

In slide 3, we include some snapshots on the current Argentine macroeconomic scenario. During the first quarter 2012, private consumption maintained its impetus being the main driver of the economy. The international context has shown improvements as the moderate recovery in the US continues and dangers from Europe somehow recede, although risks remain high.

Regarding domestic factors, some deterioration has been noted after a complicated fourth quarter of 2011. The measures taken by the authorities seem to come into effect. Interest rates have decreased and capital outflows have eased although the industrial production has decelerated.

Measures taken in the FX market and monetary policy being rather accommodative drove interest rates to low levels stimulating -- or continued to stimulate private consumption. In this sense inflation remains high, while wages negotiations with unions have started somewhat at lower levels than previous years.

So fiscal front continues to show gradual deterioration despite the policies taken by the federal administration to trim transfers to private sector mainly through reductions in subsidies.

On the external front, capital measures were adopted in late 2011 to mitigate a potential deterioration of the balance of payments. Import decreased to its lowest level in the last two years while exports remain rather stable thanks to high commodity prices.

After having gone through this introduction of the macro context in which we operate, let me pass the call to Franco Bertone who will go over the business highlights. Franco?

Thank you Pedro, and good morning to everyone. 1Q '12 delivered solid top-line growth in margin. Sales were strong and we kept growing more than the market did. Overall performance stand in-line or exceeded guidance that we provided to the market.

Please turn to slide 5 for first quarter business highlights. Mobile business in Argentina retained market leadership of postpaid and brand restyling contained and being both movers to promote MNP were well received and strengthened our position in the market.

Value-added services continue to be the main driver of growth increasing 44% year-on-year to an unprecedented 52% of our service revenues.

Internet wireline revenues posted a strong performance. Our bundled wireline 3G broadband product is proving quite successful.

FTTC full deployment program started and is running according to plan. Since this fiscal year, we've adopted IFRS reporting and margin were affected by strong sales and intense marketing efforts along with operational risk of rising costs due to subsidized electrical power rate being discontinued by last August.

Nonetheless, financial performance stayed strong. Last week, we announced an ARS0.82 (inaudible) dividend per share that will be paid starting next week.

But now I direct some details of our mobile operation in slide 6 of the presentation. In the Argentinean mobile market we continued leading the growth with a 10% year-on-year, well above the past year. We scored top place in the quarter net adds being the strongest performers in the postpaid segment in anticipation of MNP.

On an annual basis postpaid subscribers grew by 17% year-on-year and currently represents 32% of our subscriber base.

Meanwhile, mobile ARPU rose to 55 (inaudible) or 16% year-on-year in the last quarter.

Please turn to slide 7 where we show that service revenue continued to expand as a consequence of value-added service growth and now represents more than half of our mobile service revenue as it reached a record level 15% participation of service revenue.

But also it's noteworthy to say that not only SMS revenue has grown by 38%, but also Internet service grew by 80% as the market starts to adopt a more sophisticated service approach that's reflected in our business development.

Having launched mobile number portability we have implemented several action plans aimed to strengthen our market position, shaping a closer relationship with our customer-base. Our mobile business trend refining was signed with time in anticipation with a strong focus in customer relationship and personalization concepts.

In addition, handset upgrades continue to yield our customer base stimulate usage and facilitate upselling of services. Distribution channel commissions were designed to increase focus in the quality of acquisitions together with customer retention. This generated some incremental costs this quarter affecting margin.

In first quarter 2012, our subscriber acquisition, or retention costs before capitalization rose to 16.4% of service revenue up from 15.3% reporting the same quarter of 2011.

Please turn to slide 8 (inaudible) hardline operation which made some progress in its overall performance. Nucleo has been operating in a healthy macroeconomic environment and ranks number two in a consolidated four players market slice.

This quarter, the Company continued its expansion trend, strong revenues, and margins. We enjoyed distinctive market position for innovation.

ARPU increased by 8% in local currency driven by our premium network quality and leadership in mobile Internet. Stronger management processes and tighter cost control improved our operational performance in the market.

Moreover, (inaudible) regulations fostered competition in SMS and voice traffic through lower interconnection rates taking the market to a much healthier shape where unlimited SMS and Voice promotion was discontinued with a positive impact on MOU and TOU.

Financially, Nucleo holds a sound financial position and thanks to an improved debt structure refinancing local currency with longer tenures and competitive interest rates.

On April 2nd, the Company paid a dividend to its shareholders Telecom Personal received equivalent of $5 million net after withholding taxes.

Slide number 9 shows how our mobile revenues evolved reaching more than ARS3.7 billion in the first quarter, a 29% increase, or ARS822 million when compared to the same quarter of 2011.

Data services played the strongest part in the revenue expansion posting a ARS367 million increase, a 38% growth year-on-year, followed by Internet with an increase of 80% equivalent to ARS123 million.

Voice and wholesale services were up 18% and 3% respectively while equipment sales rose by 34%. Our Paraguayan operation posted 34% year-on-year increase in Argentine pesos.

Please move to the wireline business presented in slide 10. Broadband performed very well this quarter. Our subscriber base expanded 11%, ARPU 16%, and [quarter] revenue grew 31% year-on-year.

Churn stayed low. Innovative services such as video streaming service Amet Play or Amet Turbo, that increases the client bandwidth as well as targeted 10 megabits residential offer contributes to client retention and improved customer experience.

Slide 11 shows that Voice landline service increasing (inaudible) in three years with an average monthly bill growing 7% year-on-year. Customers find attractive flat-pricing proposition with unlimited local call time or 100 to 300 call packages with no time limits.

The evolution of wireline revenues is shown in the next slide. Third-party revenues totaled ARS1.5 million or 14% increase year-on-year. Internet and Data services are the main drivers of growth increasing 31% and 21% year-on-year respectively. Meanwhile fixed retail business posted an 8% growth for paid voice services and 1% decrease in wholesale services.

Finally, slide 13 shows CapEx rollout totaling ARS690 million, a 13% of consolidated revenue and a 49% year-on-year increase. CapEx goes to improve wireline, fixed, and mobile access capacities and core networks.

The initial FTTC deployment to introduces access bandwidth, and we are in the process of installing low visual impact cell sites to extend our mobile access network at a faster pace.

So these were the business highlights I wanted to share with you. I'll pass the call to Adrian who will go over financial performance.

Thank you Franco. Good morning to everyone. The stronger business evolution that Franco Bertone just mentioned allowed us to sustain the levels of growth in terms of revenues and profitability and to achieve robust cash flow generation.

In slide 15, the evolution of revenues and operating profit before depreciation and amortization are shown. Please note that starting the current fiscal year, we have adopted IFRS reporting standards and for comparative purposes, 2011 figures have been restated under such standards.

Consolidated revenues reached in the first quarter of 2012 ARS5.1 billion with a strong growth of 24% when compared to the first quarter of last year, while the contribution of revenues coming from fixed services with regulated tariffs continue to fall, now accounting for 11% of the total.

Operating profit before depreciation and amortization for the first quarter of 2012 grew by 15% when compared to the same period of last year, totaling ARS1.6 billion. It is worth to mention that margins were affected by several facts.

Particularly, related actions to brand restyling and specific marketing campaigns initiated during the quarter together with the intense commercial activities that anticipated the implementation of mobile number portability were some of the factors that impacted margins. This was coupled by general increase in overhead that was affected by inflation. In addition, higher cost of energy due to elimination of subsidies for both Telecom Argentina and Telecom Personal also impacted margins.

Now, please refer to slide 16 where the breakdown of our consolidated cost structure is presented. As mentioned before, you can see that the SAC/SRC increased slightly impacted increase -- slight impacted our marketing and sales expenses joined by higher labor-related and energy costs is the last two items included in (inaudible).

These increases were partially compensated with the reduction in connection costs achieved through domestic roaming cost reductions and relentless focus in increasing efficiencies to mitigate cost inflation effects.

As seen in slide 17, operating profit rose 8% year-on-year reaching ARS1 billion with a margin of 20%. This result and the positive financial and holding results, Telecom Argentina posted a total net income of ARS708 million equivalent to growth of 11% when compared to 2011. Net income attributable to Telecom Argentina owners of the parent totaled ARS698 million.

Regarding to the financial position in slide 18, we illustrate our free cash flow generation of last 12 months where we are still well performing thanks to a strong operating free cash flow of ARS1.9 billion. This allowed us to reach a net cash position of nearly ARS3 billion at the end of the first quarter.

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

(Operator Instructions) Alex Garcia, Citi.

I have two questions. The first one is regarding what are the potential outcomes from your cash position? I mean, what are the alternatives? How flexible that is, is there a deadline you guys have to use it? That would my first question, where you guys could invest that money?

The second question is, very quickly, it's on provision for bad debt. And I saw that it jumped 77% year on year. I just wanted to see if there was anything punctual or you guys have observed some change in any one of the trend? Thank you. That was the two questions I have.

Hello, yes, and your two questions, as far as your use of cash availability is freely, we have no specific plan other than the increase of capital expenditure that we have been forecasting for the year that includes a strong acceleration program for data mobiles, a brand new program for FTTC deployment, and obviously the frequency spectrum action that we expect to be completed in the next quarter.

As far as the -- your remark about the bad debt, while it's a high percentage increase, but a very low figure in (inaudible) we are talking about an increase of ARS30 million compared to last year. As you indicated, it's really related to a specific effect related to form of sale of Internet dongles that our sale as postpaid I will say with contracts.

We must admit that this level of [in-satisfaction] in our customer that basically is a direct consequence of the shortage of spectrum we're still experiencing and therefore level of services doesn't meet expectation of certain categories of customers that tend to use mobile Internet as a replacement of ADSL connections.

That's the not the way this is designed, but it is the way part of the public is expecting the service to perform. It doesn't meet those expectation if the customer doesn't use the service any more and stops paying the bill and that goes directly to bad debt. It makes a significant percentage jump as you noticed in percentage term especially for -- in terms of actual dollars is a very limited effect of about ARS30 million.

A follow-up question if I may. It doesn't -- you guys have not seen an impact coming from the cutting, the subsidies on electric bills, some of the movements we expect like a reduction in the disposable income. That has -- those are -- these are other things, right? It doesn't -- they are not connected, right?

Yes, correct. I mean, we have not seen what you say. As a matter of fact, bad debt level remains -- with the exception of specific case that I mentioned before, record low and we haven't seen any impact on that performance coming from the overall macroeconomic scenario of the country.

Thank you guys. Thank you very much.

Thank you.

Gregg Abella, Investment Partners.

I'm going to deal with the elephant in the room here for a second. With these metrics, in my opinion, if this Company were located anywhere else in the free world, we wouldn't be dealing with a $14 ADR, it'd be closer to $30 or possibly $40.

So let me ask a quick question; I think that the issue really overhanging the stock seems to be whether or not the government would take some steps to nationalize Telecom Argentina. So have you been contacted at any level by the government regarding possible nationalization?

Yes, thank you for your question. (inaudible) find difficult to relocate somewhere else with our 5 million - 6 million clients, but we're quite happy to operate here.

No, we haven't had any indication and honestly we don't expect any surprise in that respect. The payment of dividends that was approved at the last shareholder meeting a week ago was approved unanimously by all the main shareholders, including our state control shareholders. And that I think is a good proof that we are in a quite (inaudible).

Well, then as a quick just follow-up, have you considered possibly the things that other corporations do to address a severe undervaluation of security such as a stock repurchase plan or something of that nature?

We have no plan in that respect, but always we're considering all possibilities.

I would hope that you would take a look at your valuation in the market and consider in the short term doing something to support the price of the stock because it just -- this evaluation is just obscene.

Yes, appreciate your comment. Gregg, we share your views in some way and we look at our evaluation every day. Yes, and we agree with the -- with your view on the metrics of the Company.

(Operator Instructions) Jennifer Leonard, Morgan Stanley.

I was hoping you could provide us with an update on the 2012 labor negotiations and then I have a follow-up question on spectrum auction.

Yes, labor negotiation has recently started, is a process about two-three months, and we expect it to be completed by the end of June, but really too early to give you an indication. That just started as planned and according to the usual yearly schedule we have and the rest of the industry has.

Okay, thank you. And then if you could just update us on the spectrum auction process at this point?

Well, the process is as a matter of fact somehow suspended or say being delayed on the verge of the conclusion of third phase and the third phase is basically is pre-qualification process. All the filing has been made.

Each one of the bidder had access to the opponent's bid and technical documentation as well as financial qualification. They may lead us to a -- some of the potential bidder not to qualify for the process.

We are really waiting for the formal resolution from the telecommunication authority anytime the next two to three weeks and after that we expected and it's planned to be a very quick phase number two with the actual auction taking place hopefully in the first half of June.

Okay, thank you very much.

Thank you.

[Felipe Pereira], Barclays.

I would like to ask a question regarding the voluntary reserve to finance working capital investments in the country that you did on Telecom Personal. According to your last balance sheet, the cash situation in Telecom Personal looked pretty okay, so if you could elaborate a little bit on the reasoning why almost ARS1.2 billion are being reserved on your subsidiary? Thank you.

It's -- the reason why balance sheet is structured that way is to comply with a [CMV] resolution of last year. They're really seen in concrete terms specified as non-allocated incomes -- I mean, all non-distributed incomes should be allocated to a specific reserve.

And they are the future dividends or future reserves. So honestly there is no much content and significance of those figures because they're really accounting figures and have very, very little relation with the actual investment levels what we have.

It's just the balance sheet has to be stated that way and that's why I wouldn't give much importance to the figure that do appear there because I said, there's -- they carry no relation with the actual investment plans that we are executing.

Thank you.

Thanks.

Federico Chapto, Raymond James.

I have two questions. The first one is related to your cash position considering that a big portion of that cash is peso-denominated. My question is what's the [room] and the strategy of the Company for preventing eventual changes in the currency to affect your cash position?

And the second one is regarding the working capital. We saw this quarter a net outflow of around $50 million. I was -- the question is, is that something you are going to see just this quarter and should we expect working capital to continue generating actually cash flow going forward?

Okay, I'll try to answer your two questions. The first one related with the -- with our local cash position, we will try to apply the -- locally for CapEx plan, and for -- we will try to maintain our conservative approach with the financial use of this cash. For preventing what you were mentioning, evolution of the exchange rate, we are working with some instruments such as [MDFs] or local funds. But our coverage for an exchange rate evolution, it's -- basically are our money that is in time deposits growth.

In -- related with second question, question of the working capital, it's basically normal in this period of the year, in the first quarter. We made a lot of our CapEx in the last quarter of last year. So we are basically saving all of this CapEx of the last quarter in the first quarter of the year.

Okay, thanks.

(Operator Instructions) Alex Garcia, Citi.

When I look at slide 8 from your presentation, I see MOU and messages dropping, but on the other hand, ARPU is coming up. Is it the -- my -- the first thing that comes to my mind is that your clients are doing -- using one of those messengers from the Internet and typing less SMSs and are calling less people.

So it seems that there is -- and we have seen that in the past, so I do understand that there is some change in the client behavior. My -- but my question is in terms of margins, like when we look at Voice, when we look at SMS, and when we look at data plans, how do you describe that? How does that changing behavior -- first of all, if you agree with my observation that clients are using more broadband and how does that play your margin?

Right. I think it's a very appropriate question. I think I made a remark on the -- on my speech before, I'll go back to it. What you notice is very much -- in the numbers is very much correct. ARPU is increasing strongly, but physical in terms of messages per month and the MOU and particularly messages per month are dropping.

The main reason for it is that sometime last year, as a matter of fact it was about a year ago, we reshaped in a very neat manner rates and pricing for Internet access in prepaid customers. We had I would say on average an adequate proposal for incentivating Internet browsing to our large prepaid customer-base.

On the other hand, the abilities and the qualities and the capacities of the terminals that -- of the cell equipment that customer-base has is very different and is very upgraded from what it was a year ago. And therefore we believe it was the right time this was about March last year to take advantage of the capacity of Internet browsing that the vast majority of the terminals used by our prepaid customer nowadays has to reshape our pricing and push strongly for a data usage that inevitably partially replace short messaging.

So that's exactly what it is and though on one side you see total reduced about 10%, but on the other hand revenues from the same SMS has increased as we discontinued certain very aggressive level of promotional discount we had in place. So the drop in physical number of messages exchanged by our customers did not affect SMS revenues at all, that SMS retail did increase.

But most importantly Internet browsing went up 80% in terms of revenues, and the largest factor of it is that Internet browsing community is now including a substantial portion of our prepaid customer.

You may remember the launch of the product that we did a year ago, that has been very successful, and unmatched in the market. It is ARS1 per month -- per day for Voice, free Internet browsing. If we go to margins, I think there's nothing in nature as profitable as SMSs and that -- we all know that.

So we are making sure that revenues coming from that kind of services will not be affected by lesser use of our customers. On the other hand, revenues that we generated and margin that we are generating on Data traffic are quite attractive as well.

And they're not as high as the SMS one, but as I'm sure you know, it's a technology platform that comes along with a mobile network switch and really requires just a server farm to relay the SMSs, while data services obviously require a much deeper level of investment and more sophisticated platform.

Yes.

I mean, it's quite profitable and I think the overall balance of all these things is in the number we presented, I mean where -- I mean, overall ARPU increased, overall profitability of the operation increased, despite that the most profitable element of it that SMS is going down in terms of value, that has been re-priced accordingly. I hope I addressed the point, but it was a very well -- good question.

Yes, no, very clear, very clear. Thanks again, guys.

Thank you.

And gentlemen, there are no further questions at this time. I would like to turn the call back over to you for any additional or concluding remarks.

Well, thank you so much for being in our conference call today. Have a good day, and please get in contact with us at your convenience through our Investor Relations equipment. Thanks.

And ladies and gentlemen, that does conclude our conference for today. I'd like to thank everyone for their participation.