Telecom Argentina SA (TEO) 2012 Q3 法說會逐字稿

Good day everyone. And welcome to the Telecom Argentina, TEO, third quarter 2012 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, Finance Director; and Mrs. Solange Barthe Dennin, Manager of Investor Relations.

At this time I would 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 our moderator just mentioned, the purpose of this call is to share with you the consolidated results of Telecom Argentina Group that correspond to the third quarter of fiscal year 2012 ended last September 30.

We would like to remind you that for all those that have not received our press release, our presentation, you can call our Investor Relations office 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 the webcast feature available in sub-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 usually do in our quarterly conference calls. We'd 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 actual results and operations to differ materially. Such uncertainties include, but are not limited to the effect of the public emergency law and complementary regulations, the effects of ongoing industry and the current 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, in legislation or in regulation.

Our press release dated October 30, 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 the 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 is seen in slide 2, is to go over the general market overview, then we will go over some business highlights, and after that we will go over some specifics of the evolution of our financial figures. And finally, we'll end the call with our traditional Q&A session.

Having gone through these procedural matters, I'll now 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 environment. Argentina suffered weak economic conditions throughout the first semester of the year. Although in recent months some signs of moderate economic recovery were perceived. The drought effects on the agricultural production strongly impacted growth, mainly in the first half of 2012 while the service sector continued driving support to the economy.

According to official figures, in September the industrial production suffered a decline of 4.4% year on year, while in the first nine months of the year the reduction was 1.3%. Slightly more positive consumer confidence was received in the third quarter 2012 where the increase in wages and low real interest rates added purchasing power to consumers. Inflation remains stable at high levels, and in general wages negotiations concluded at lower levels than last year. Although telecommunication sector is a defensive sector, it is not excluded from the general economic cycle. The slowdown in economy affected fiscal revenues, making financial assistance from the Central Bank and the National Pension Fund system increasingly needed.

On the external sector, efforts to achieve a higher commercial surplus continued to kick in, while expected higher agricultural exports and stronger growth coming from Brazil will help to relieve the economy from external constraints and sustain a more favorable local context.

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. This quarter, the business grew at a lesser pace than the past year putting extra pressure on our margins. Though mobile sales were good, we consolidated leadership of MNP that delivers consistent inflow of high-value customers from competitors. We worked quite hard to stabilize subscriber acquisition and retention cost at a more conservative approach. Strong growth of mobile data required an access network design review to improve efficiency of frequency bandwidth usage or better service quality and usage experience.

The fixed service, extensive bundling of products delivered value, revenue growth and ARPU consistently expanding. CapEx freed due to the cancellation of the spectrum option is reassigned to improve coverage and capacity of mobile access network. Cash flow generation stayed strong as much as our balance sheet with no debt positioning in foreign currency. This is a value of peace of mind factor in the current context.

Please go to slide number 6. Our mobile business continues to outperform competition with outstanding execution in the post-paid segment that in the third quarter represented over 90% of net adds. Our subscriber base totaled 18.9 million, growing 6.3% year on year, above our competition, and reaching an estimated market share of 33.6% of the top three providers in the industry. We do believe that we retain revenue share leadership in the market, both for service and total revenues.

We did well with number portability, consolidating our leadership of port-in and net ports while capturing high-value customers from competition. Consistent growth of value-added services increased ARPU in the nine months by 12% to ARS66 a month.

Please turn to slide number 7, the revenue performance. Value-added service hit the 52% mark of service revenue, mainly because of growth of Internet service to 70% year-on-year and [contract] plan upgrade to all inclusive along with handset upgrade to promote date usage. This performance was achieved despite of no price adjustments so far, as the first adjustment of the year will be effective October, next October. We leverage our MNP and revenue share leadership to rationalize subscriber acquisition and retention cost that dropped to 16.2% of service revenue in the third quarter from 17.3% in the past quarter.

Please turn to slide 8 for a snapshot of our Paraguayan operation that continued to grow and deliver. Subscriber reached 2.3 million, expanding 9% year on year. Revenues converted to Argentinean pesos rose 22%, while operating margin increased to 38% of revenues, thanks to value-added service contribution as mobile Internet revenues more than doubled, [leverage of] top quality of our 3G network and brand position in that market. Free cash flow increased 53% year on year.

Slide 9 shows the evolution of mobile revenues, growing 33% (sic-see slide 9 "23%") year on year by ARS2.2 billion to ARS11.6 billion. On a quarterly basis mobile revenue grew -- growth was 20%. Mobile Internet posted the highest growth rate at 70% followed by data revenues with 29% year-on-year increase. Retail voice and wholesale services were up 12% and 3% respectively, while equipment sale were up 36%. Paraguayan operation posted 22% growth in Argentinean pesos and accounts for about 5% on consolidated mobile revenues.

Please turn to slide 10. Fixed broadband subscriber base grew 7% and ARPU 19%. Product repricing took place in the third quarter. Revenue coming from corporate data service increased 31% year on year doing very well in a challenging economic context. [Time budgeted curve] network rollout will allow upgrade in offers and speed to compete with cable providers, provide extensive bundling of products, provide us with a competitive edge delivering value to our customers.

Slide 11 shows a positive growth of fixed voice lines with a 5% ARPU year-on-year growth and a 5% retail voice revenues growth delivered by higher penetration of supplementary services and flat pricing.

The evolution of wired line revenues is shown in slide number 12. Third-party revenues totaled ARS4.4 billion, increasing 13%. Internet and data services are the main drivers of growth, posting 28% and 27% year-on-year respectively.

In slide 13 we show what we are doing about CapEx. This year so far we invested in the business about ARS2.2 billion, 23% more than last year. Of this amount, intangible asset were ARS642 million, increasing 25% mainly because of acquisition and retention expenditure related to MNP implementation.

PP&E expenditures were ARS1.5 billion, increasing 22% year on year to improve both our mobile and fixed network coverage and capacity. The mobile business IP backhauling improves high throughput user's user experience and currently reaches more than a half of our 3G cell site. On the fixed business FTTC rollout is approaching planned deployment speed with breakthrough results in terms of network performance. It is worth mentioning that the cancellation of spectrum option resulted in a redefinition and reallocation of our CapEx schedule.

Slide 14 shows how we exploit our network to sustain a growing business. We have laid out several projects to improve spectrum efficiency and network optimization. We are migrating cell site to fixed sector configuration, they will help maximizing coverage and capacity. A gradual refarming of spectrum carriers allocated currently on 2G technology to more efficient 3G will increase capacity. Meanwhile, we're investing to solve signaling complexity in an extensive low weight data traffic demand. Non-conventional sites and small cells are used to improve access in every concentrated area along with Wi-Fi and femtocell data offloading.

Fixed-mobile network integration is a proven key factor to success. And we are ready to leverage our existing infrastructure to support higher demand of mobile services. These were the business highlights that I wanted to share with you, and I'll pass the call to Adrian who will go over our financial performance in the quarter. Adrian, please.

Thank you, Franco. Good morning to everyone. The positive business performance just mentioned allowed us to sustain growth in terms of revenues and operating profit before depreciations and amortizations. Even though margins were affected mainly by commercial efforts, cost pressures due to inflation and some extraordinary factors.

In slide 16 we are showing the evolution of consolidated revenues and operating profit before depreciation and amortization. In the nine months period of 2012, consolidated revenues reached ARS16 billion with a strong growth of 20% when compared with the same period of 2011.

Meanwhile, and even without price adjustment, this is on our mobile business, as Franco mentioned, the growth of the third quarter of 2012 was 18% year on year. At the same time, revenues coming from regulated tariff services accounted for only 10% of total revenues. Operating profit before depreciation and amortization for the first nine months of 2012 grew by 7% when compared to the same period of last year, totaling ARS4.7 billion.

As mentioned before, several factors like the competitive environment and the inflationary context added pressure to our cost structure, combined with extraordinary factors such as higher energy cost due to elimination of subsidies affected our margin, that represented 29.5% of the consolidated revenues.

In order to better understand our cost structure, please refer to slide 17 where the breakdown of our consolidated cost structure is presented. As you may see, 2011 wage negotiations which involve a 31.5% increase has had a strong impact in our cost structure not only for our own labor costs but also for all labor cost -- labor-related costs such as call center and maintenance services even though the 2012 collective bargaining agreement ended with lower rates.

Moreover the elimination of energy subsidies enforced on December 2011 implied approximately 50 basis points loss in margins. And another similar loss comes from higher direct taxes. Additionally, the MNP efforts that allowed us to reach significant results showed the logical consequences on marketing and selling expenses, even though a more conservative approach toward SAC and SRC was already implemented in the third quarter of this year.

On the other hand, these cost pressures were partially compensated by our continued reduction on the interconnection costs together with lower proportional G&A costs.

Please now turn to slide 17 (sic) where you can see that operating profit totaled ARS2.8 billion with a 17% margin. Higher participation of CapEx and intangible assets such as SAC, SRC and IT resulted in increased depreciations and amortizations with -- combined with the effects in costs mentioned before impacted our EBIT, showing a slight decrease when compared to the nine month -- the same nine months of 2011. This result was partially compensated by positive financial and holding results that allowed us to post a net income attributable to Telecom Argentina of ARS1.9 billion, equivalent to 12% of consolidated revenues.

Regarding our financial position in slide 18 we illustrate our free cash flow generation for the last 12 months where we have performed positively, thanks to a strong operating free cash flow of ARS1.1 billion. This allows Telecom Argentina to reach a net cash position of nearly ARS2.7 billion after having paid a cash dividend of ARS807 million in last May and ARS13 million to our partners in our Paraguayan operations.

It is worth mentioning that the Group after applying a continuous leveraging strategy in the past years does not have outstanding debt instruments in the Argentinean operations which represents a significantly positive price, given the prevailing local and international context.

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

Thank you. (Operator Instructions)

Ricardo Cavanagh, Itau BBA.

My question is related to the plan to expand capacity given the cancellation of the frequency option. To what extent do you think that the alternatives that you are looking for could offset or support growth? Related to this, which is the level of CapEx that you expect to sustain as a percentage of sales going forward? Thank you.

Well, I mean, the cancellation of the spectrum option is a fact that is affecting ourselves and our competitors as well. So, basically, I mean, each one is, and certainly we are doing our best to compensate to an extent what would have been the allocation of additional spectrum for our business. I mean, it's -- spectrum is a rare thing, it's hard to replace it with network upgrade, but certainly we have the possibility of mitigating the effect of the fact that our usable bandwidth is not growing as much as our business does.

So we have been reviewing the network design and the basic leveraging on the technology that we are using on the network. There's a lot that we could do, not only improving our level of the policy of maintenance of operation of the network, also in terms of allocating network resources to generate additional capacity, basically to serve the high throughput data costumers that we have in greater share than our competitors.

We do not expect this to change significantly or change at all the overall CapEx, looking forward, as basically we are reallocating CapEx that was intended to be reused to purchase rights of spectrum usage into equipment and installations activities. So, I mean, the guidance we provided in the past won't change because of spectrum auctions being canceled.

Okay, thank you very much.

Thank you.

(Operator Instructions) Stanley Martinez, Legal & General Investment Management.

Franco, in light of the spectrum auction cancellation and TEO's net financial position, I realize that it's a few months earlier than you might entertain the question, but have you had any preliminary discussions with the Argentine government with respect to the potential dividend payment in 2013, maybe as a, potentially a quid pro quo in terms of any type of wholesale deals that might take place to support ARSAT when they potentially launch service and trunk with the TEO network?

May give you the easy answer that we haven't done -- that we haven't had the discussion yet.

Okay, and I mean, is it -- I would imagine it's a discussion that you would probably have more in the first half of the year. But as you look forward to that discussion is there anything that you can see that would adjust your net financial position between now and the time of a dividend payment that could potentially compete with a dividend for a -- what you would consider an adequate capital use?

No, I got your point, but no, we don't expect any change in between now and the time when the decision will be taken about the dividend policy for next year as a consequence of the spectrum situation or any other business aspect, no, we don't expect any change (inaudible).

Okay. And then maybe just the last point is, when do you think that we would expect TEO and other operators to begin entering into discussions with ARSAT in terms of entering some type of wholesale arrangement?

Well, I mean, there are (inaudible) in advertisement, we certainly have, and we certainly have proposed on that respect. We expect that to be, likely to take a formal approach in that respect in, maybe in a few months from now. But certainly we understand that's a potential course of action being considered by all parties involved.

Okay, well, thanks, thanks. I didn't realize it's a sensitive issue, but I appreciate your insights on that so far. Thanks, Franco.

Thank you.

Rodrigo Villanueva, Merrill Lynch.

A couple of questions, if I may. First, I was wondering if you expect marketing activity to remain as strong as in the last couple of quarters or if we shall continue to -- well, and if we shall continue to see commercial expenses at similar levels in the next couple of quarters.

And my second question would be a follow up regarding CapEx. I believe at the beginning of the year you were talking about ARS4 billion in CapEx for the year. Is this the amount that you continue to believe you will be investing? Thank you.

So in terms of commercial expenses I think the best indicator for it is the turn that our acquisition and retention cost has taken between second where we're particularly high, second quarter where we're particularly high, and the third quarter. Basically I think there is a room for us to capitalize and leverage on the good progress we made in terms of market shares and with satisfactory result we have from profitability.

So I think that the hype of that is behind us, and we will be delivering a consistent saving with respect to the recent past in that respect. As far as the CapEx level of ARS4 billion, we are experiencing some delays, they are not major. Some of them are due to certain delays and problems that some of our suppliers had in importing goods and equipment from overseas. This issue has been addressed and resolved, but this generates a couple of months delays in the implementation of certain major projects that account for the total of ARS4 billion.

So we will definitely invest the ARS4 billion. We will not reduce in any manner the level of investment. We'll probably take an extra, say, month or two past the 31st December to complete the projects that were scheduled to be completed within December because of that importing hiccups that we had. But, as I said, has been resolved.

Okay, thank you very much. So just as a follow up, shall we expect margins in the fourth quarter to increase slightly as a result of potentially slower or lower commercial expenses? Thank you.

You can expect better margin than last year in the fourth quarter. Last year, I mean, the fourth quarter was the beginning of the MNP preparation and investment and pressure on cost. A year is over; we got good result in that, as I said. And you will, I mean, a release of higher margin in the fourth quarter because of that.

Understood, thank you very much.

Thank you.

And there are no questions remaining at this time.

Well, thank you very much, and there is no extra question for us. I mean, we remain obviously available to reply to your enquiry through our Investor Relation department. And thank you very much for being with us today, and talk to you soon. Thank you.

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