Telecom Argentina SA (TEO) 2012 Q4 法說會逐字稿

Good day everyone and welcome to the Telecom Argentina, TEO, fourth-quarter 2012 earnings conference call. Today's call is being recorded. Participating on today's call we have Mr. Franco Bertone, former Chief Executive Officer of Telecom Argentina; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Financial Director; and Ms. Solange Barthe Dennin, Manager of Investor Relations.

At this time I'll turn the call over to Mr. Pedro Insussarry. Please go ahead.

Good morning on behalf of Telecom Argentina. I would like to thank everybody for participating in this conference call. As mentioned by [Cellular] 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 fiscal-year 2012 ended on last December 31st.

We would like to remind you that for all of those that have not received our press release or presentation you can call our Investor Relations office or download them from our Investor Relations section of our website located at www.telecom.com.ar/investors. Additionally, the 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 usually we do in our quarterly calls. 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, strategy 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, in legislation or in regulation.

Our press release dated February 27, 2013, 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 distributed earlier.

The agenda of this conference call as seen in slide 2 is to go over a general market overview, followed by the discussion of the business highlights, a review of our financial figures and 2013 guidance. And finally, we will 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. Please refer to slide 3 of the presentation where we include some snapshots of the current Argentine macroeconomic environment. After a hard landing at the beginning of the year, the second half of 2012 showed a more stable levels of economic activity while for 2013 a rebound is expected.

The main reasons for this improved scenario are, the first phase in the cash flow recovery that will not only provide growth in terms of production but also could generate a possible inflow in the current account that could contribute to a more relaxed administration of the trade balance fostering investments and consumption.

Secondly, the improvement in the Brazilian economy may contribute to revitalize Argentine industrial exports. Throughout 2012 weak economic conditions dampened growth from 1.9% -- to 1.9% down from 8.9% registered a year ago.

Service sectors like banking outperformed the rest of the economy while construction and agricultural sectors were the main lagers.

Private consumption was the main driver of growth as the evolution of nominal wages was close to inflation and negative real interest rates encouraged consumption over savings. On the contrary, investments levels suffered from tighter FX and import conditions.

Inflations remain high at -- at high levels and the same case goes for the evolution of salaries despite these have increased at a lower pace than previous years. Argentine international trade shrank in 2012 due to the exports and imports declines of 3% and 7% respectively. Finally on the fiscal front, the weak performance in the fiscal results increased the flows from the Central Bank and National Pension Funds.

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.

Thank you, Pedro, and good morning everyone.

After difficult second and third quarters, we managed to strongly recover in the fourth quarter, particularly in the margin operation despite of the macroeconomic context. We did better than competitors at the top line and delivered higher EBITDA growth retaining an increase in mobile revenue share leadership with a solid 21% year-on-year growth of our service revenue. Both MNP [year] was success, market by high net [workings] of the market, the highest net [workings] of the market, and especially high quality net adds.

Addition of our mobile value added service is paying off, delivering consistent growth to the business and brand leadership. In the wireline business, broadband and data services grew despite of a softer economy. In the fourth quarter, broadband posted an ARPU 22% year-on-year increase.

ICT business is taking shape, and we experienced a significant increase of all the backlogs, both from corporate and government clients.

Please turn to slide 6 to review 2012 results versus guidance. Targets were met for revenues and operating income before depreciation, amortization, the latter really being quite a close call. Revenues performance was 20% year on year -- growing 20% year on year while operating income before depreciation amortization a 10% growth where we met guidance despite the context that proved more challenging that we expected at the time of providing those guidances.

Capital expenditure trailed behind guidance, growing 2% year on year to ARS3.3 billion as delays in logistic affected the execution of part of the 2012 CapEx programs. Additionally, CapEx level was affected by the cancellation of the wireless spectrum auction.

Please turn to slide 7 to review our mobile business that continues to outperform competition, not only in customer acquisition but especially in revenue share that we consider the most relevant performance indicators. Our share remains in excess of 34% considering three main players of market where we have retained leadership.

As of December, our subscriber base totaled 19 million, growing 4% year on year, in line with competition, while more than half of the acquired customers were postpaid, thanks to smartphones, sell-out leadership and an improved customer experience.

Worth mentioning that despite of a single price adjustment performed in the third-quarter 2012 that also was limited to postpaid accounts only, mobile ARPU rose 13% year on year to ARS63 per month in the fourth quarter of 2012.

Please turn to slide 8 for revenue performance. Value-added service hit the 53% mark of service revenue thanks to our high-end and youth segment leadership coupled with the extensive adoption of mobile Internet in the mass market of our daily fixed rate branded Internet for ARS1.

We continue rationalizing acquisition and retention cost after the successful MNP implementation where we focused in promoting handset upgrades to 3G and smartphones to encourage data usage and also improve spectrum usage efficiency.

As seen in the chart to the right, acquisition and retention cost before capitalization decreased significantly in the fourth quarter to 14.2% of service revenue, down from 19.7% of a year ago.

Please turn to slide 9 for a snapshot of our Paraguayan operation that continues contributing value to the Company and increasing cash flow generation. Client reached 2.3 million, growing 7% year on year, of which postpaid customer was 21% year on year showing a solid market position reported by mobile Internet leadership that boosted value-added service revenue.

In 2012, revenues converted to Argentinean pesos rose 21% year on year while operating margin increased in 38%.

Slide 10 shows the evolution of mobile revenues, growing 22% year on year to ARS16.1 billion. Mobile Internet posted the highest year-on-year growth rate of 61% followed by data revenue with a 29% increase. Retail voice and wholesale services were up 11% and 6% respectively, while equipment phase rose by 30%. The Paraguayan operation posted 21% growth in Argentinean pesos and accounts for 5% on consolidated mobile revenue.

Please move to slide 11 for the performance of our wireline operation. Wireline broadband subscribers base grew 5%, while fourth quarter ARPU rose 22% year on year increasing wireline revenues by -- wireline broadband revenues by 21% in the quarter. That was achieved with product up-selling and video streaming and other services added to our customer base. Our network unit continues to deploy FTTC to increase broadband speed, and is worth mentioning that the broadband penetration of our wireline base reached 39%.

Slide 12 shows the performance of voice wireline where 6% ARBU increase was achieved with a stable monthly churn of about 0.5%.

5% retail voice revenue increase was delivered by higher penetration of supplementary services and flat pricing despite packs of basic services continues unchanged. In addition, in the ICT business we continue with solid results, increasing order backlogs both in government and private corporate segment.

The evolution of wireline revenue is shown in the next slide number 13. Third-party revenues totaled ARS6 billion, increasing 13% year on year. Internet and data services represent 45% of the wireline service revenues and are the main drivers of growth of the business, posting a 28% and 26% year-on-year growth rate respectively.

Slide 14 shows the execution of our CapEx plan. In 2012, we invested in the business almost ARS3.3 billion, 2% more -- only 2% more than last year. Out of this, ARS842 million were intangible -- went to intangible assets, decreasing slightly by 4% mainly because acquisition and revenue expenditure related to MNP implementation were rationalized.

Plant, property and equipment expenditures were ARS2.4 billion, increasing 4% year on year. Unfortunately, the initial delays in the logistics of our CapEx deployment resulted in postponing certain projects to 2013. And, moreover, the cancellation of the spectrum auction had an impact on the total CapEx expected to be invested in 2012. We are focused -- focus our effort in the core and access network improvement to enhance fault tolerance and improved customer experience.

We also continued extending the reach of our network to reduce roaming and avoiding call drops. FTTC deployment continues, and it is key to support our long-term strategy in the wireline business.

These were the business highlights, and I'll pass the call to Adrian who will go over the financial performance of the quarter. Adrian.

Thank you. The solid business performance that Franco just described was reflected in our financials, allowing us to post growth both in terms of revenues and profit.

In slide 16, we are showing the evolution of consolidated revenues and operating income before depreciation and amortization. For the full year of 2012, consolidated revenues reached ARS22.1 billion, with a strong growth of 20% when compared to 2011.

Particularly for the fourth quarter of 2012, revenues expanded at a 19% year-on-year growth rate. It's worth to mention that revenues coming from regulated tariff services accounts for only 10% of total revenues. Operating income before depreciation and amortization in 2012 grew by 10% compared to the previous year, totaling ARS6.6 billion and representing 30% of our revenues.

Quarterly margins increased more than 200 basis points, thanks to the revenue expansion and to cost control actions and savings in commercial expenses after the consolidation of mobile number portability process, leading to a growth of 16% in operating income before depreciation and amortization in the last quarter of the year.

It is worth to mention that before the ARS90 million one-time restructuring charge, operating income before depreciation and amortizations would have been ARS6,660 million, increasing 11% year on year and surpassing the target set for 2012.

Even more, if we consider just the fourth quarter, the operating income before depreciation and amortization margin before this charge is equal to 32.4%, 140 basis points higher than the one of the fourth quarter of last year.

In order to better understand our cost structure please refer to slide 17 where the breakdown of our consolidated cost structure is presented. During the last quarter of 2012, the previously mentioned ARS90 million corporate restructuring program charge was more than compensated by the efforts to control commercial cost through [redesign] of our agent's commissions and lower handset subsidies where the focus was the up-selling in postpaid customers. We can also note that the discontinued government subsidies in utility services accounted for approximately for 50 basis points loss in margins.

Please now turn to slide 18 where you can see the 2012 operating income totaled almost ARS4 billion with a 18% margin, while the growth in fourth quarter reached 17% year on year. This result, together with positive financial and holding results allowed us to post a net income attributable to Telecom Argentina of ARS2.7 billion, equivalent to 12% of consolidated revenues, representing a quarterly net income of ARS794 million, a 23% increase when compared with the last quarter of 2011.

Regarding our financial position in slide 19, we illustrate our free cash flow generation for the last 12 months of ARS1.4 billion, performing very well particularly in the last quarter of the year. The Telecom Argentina Group reached a net cash position of nearly ARS3.6 billion after having paid a cash dividend to its shareholders of ARS807 million in last May and ARS24 million to minority shareholders or our Paraguayan operations.

It is worth mentioning that the Group after following a cash generating approach in the recent years does not have outstanding debt instruments in the Argentinean operations and enjoys a rich cash positions, a significant positive factor given the prevailing local and international financial context.

Going on in the presentation that we approach to the end, please turn to slide 21 to revise the business guidance for this year.

Double-digit revenue growth shall come from improved customer experience, mobile data and increased broadband wireline penetration. Double-digit operating income before depreciation and amortizations growth shall be delivered additionally controlling operation and [carrying] cost with improved quality of service and a better customer experience.

We shall leverage our market extensive leadership to rationalize acquisition and retention costs. We shall continue streamlining overhead expenses. Additionally, we are expecting a significant increase in 2013 CapEx, up to ARS4.7 billion, representing a 17% of revenues and more than 40% growth year on year.

Our commitment to service quality and network enhancements for both wireline and wireless services will drive our efforts where the main focus is to improve customer experience.

The trailing demand for mobile Internet and the deployment of FTTC in our fixed networks will sustain the CapEx over revenue ratio close to 17% for the following three years. Investments are always conceived for us with an integrated and convergent approach seeking cost efficiency and superior capital allocation.

So having concluded with presentation, let me pass the call back to Franco for the final remarks.

Well, this is my last call as CEO of Telecom Argentina. As a matter of fact as of yesterday the Company appointed a new CEO, that many of you may know already is Stefano De Angelis from the Telecom Italia Group headquarter that has been appointed as of yesterday.

Unfortunately, he couldn't be with us today, but it would have been nice to introduce him to you, although as I believe most of them -- most of you know him already. So I think we should -- that's our presentation and hand it over back over to you for your question that we'll be very pleased to answer. Thank you.

(Operator Instructions)

Rodrigo Villanueva, Merrill Lynch.

I was wondering if you could give us an update on the potential for paying dividends with 2012 earnings, when shall we expect to hear about a potential dividend and how do you feel the government is behaving in terms of dividend distributions this year? That will be my first question. Thank you.

It was last year. It's a bit early to ask the question now but certainly is an important discussion we are currently having in the Board and among shareholders. I think that we will come up with a proposal for the general meeting in due time but not too late. And in general terms I would say that we are confident of the good experience, I mean, although with a reduced payout that we had last year where we were the -- by far the Argentinean company that paid the highest amount in dividend. This year there has been already new cases of Argentinean corporation that have managed and to distribute cash to their shareholder. So I think adding our last year experience and what is currently happening with other companies in the market, we think we can come back to you with some good news in not too much of a long time.

Okay. Thank you very much. And my next question would be on CapEx, which would be the main, I mean, the main use of this ARS4.7 billion, what would you be doing with this amount of money, if you could give us more color on this respect, that would be very helpful. Thank you.

(Operator Instructions) Ricardo Cavanagh, Itau BBA.

Jenny, Jenny, Jenny, hold on.

Yes.

We still have a second question coming from Rodrigo.

Okay, I apologize.

And we're trying to address, okay. Thank you.

Well, the CapEx we are projecting for 2013 is certainly high and aggressive, and basically we can certainly provide you details about that. But in general terms you should really consider that network platform particularly for mobile services is undergoing, it's not something we will be start doing in 2013, it is a process we have been initiating over a year ago. It is undergoing a major restructuring of the existing hardware and software of the network for 3G technology to cope with the growth of updated traffic, or data traffic that has been very -- has been very high in the industry globally, has been very high in Argentinean industry, has been even higher for us that we are clearly [receiving] that market.

So we are -- the usage profile of our customer is shifting very rapidly from users who make use of their terminals to make occasional voice call or send text messages or make an occasional browsing on the web, each terminal that are connected all the time and all the time they are online. The reflection of this customer behavior that obviously we do promote that is generating a growth of revenue and our revenue leadership in the market has direct -- very significant consequences of how the network is sized, is structured and is configures, and that's why we'll be concentrating, particularly next year, to make sure that the growth potential of the market and the growth potential of our brand, of our business doesn't get restricted by technical restrictions or elements related to technology, spectrum or other factor of the nature. So we are really targeting to stay ahead of time and grow the network capacity before our client requires.

Thank you very much, Franco, very clear. And all the best in your future endeavors.

Thank you.

Thank you.

Jenny, can we move to the following question, please.

Ricardo Cavanagh, Itau BBA.

And I have two questions. The first one is on mobile revenues, retail voice which is the outlook looking into 2013 for growth in that service, if you can describe a little bit, which has been the behavior explaining the 11% growth this year.

And secondly, on the competitive landscape. Well, last year the frequency auction was suspended, it was announced that a company named Arsat was going to take all that frequency. Are you expecting or how you are seeing the competitive landscape evolving after, well, that announcement, how do you envision that next year or few years to come? Thank you.

Give us two minutes, give us 30 seconds Ricardo.

I will stay, thank you.

Well, the 2012 to 2011 10% revenue increase is what you can expect in the near future to be maintained, but most likely with some dilution of the growth rate basically our commercial policy and our position in the market is targeting obviously data and browsing services. So I think that as much as the growth of lines of our subscriber base has been (inaudible) single digit for the last two years, more or less. The retail and wholesale voice is likely to get into high-single digit over the next few years. That's where we see going.

As far as the, how we see the market shaping with the entry of a new player, the state organization as already mentioned, we believe that this is the fourth player, as a matter of fact it's the fifth since we have also the presence of Nextel since many, many years. Something like that could have happened under different condition, I mean the entry of the fourth GSM operator with the future auction of additional licenses, I mean we definitely could have not ruled out that one. The fact that it is a local player sponsored by the government probably makes unlikely that an additional player will come from outside the market.

I think there is lot of room for cooperation with the state organization. We are doing that already into the long distance and core networks with program of swapping, exchanging fiber capacity that has helped rationalize. It certainly helped their entry in the market, but is also helping very much us to rationalize certain items of structural -- infrastructure that we need to expand and -- year by year.

As far as the mobile operation is concerned, given the penetration of those -- of these services in the Argentina market, given the population coverage that is close to 100% and the geographical coverage that is very high as well, we do not believe that the clear intention of Arsat that is to go and complement the missing, the shortage of services from existing operators, and, therefore, the coverage of area that currently do not enjoy mobile service will represent anything significant on the -- on the competition landscape in terms of number of users, compared to the customer base the three established operator already has. But we do believe that in general terms business plan for the mobile operations will not significantly depart from what we had planned last year because of the new entrant.

Okay. Well, thank you very much, and all the best for your future, and thanks again.

Thanks to you. Thank you.

(Operator Instructions)

Michael Morin, Morgan Stanley.

A couple of questions. First, in terms of your guidance, you say positive double-digit, I mean, that's obviously a very, very wide range, 11% to 99%. So I was wondering if you could help us a little bit maybe by talking about whether or not you think you can keep pace with inflation, and if the assumption here being that inflation is somewhere in the mid 20s.

And then secondly on your margins, 2012 was a down year, but you ended on a positive note, so related to the first question, is there any reason to think that in 2013 you might be able to protect, to better-protect your margins on a full year basis?

And then secondly, your cash is piling up. There was a question earlier on the dividend. I was wondering is there any other way that you've been contemplating returning cash to shareholders? Thank you.

Hi, Michael, this is Adrian speaking.

Hi, Adrian.

On revenues, let me tell you that, yes, it is a wide range double-digit, I know, we know. But you should obtain the same range of last year, 2012, that -- that should be something approximately.

So speaking about keeping pace on inflation, well, the official inflation is around 10% to 11%, and there are a lot of -- again, the range of inflations that we have is very wide, so we think that we are doing our best effort trying to deliver results as we did given the context.

On the -- on your last question, again, about dividend, I think that Franco said enough. We think that that is more than -- these are the comments that we can give to you.

So there is no other way that you can return cash to shareholders either via buybacks or other types of transactions.

Yes, I think that there are ways, of course. We are now in a period of that we cannot comment anymore.

Okay. And then, sorry, just to going back to the first question on guidance, I mentioned inflation. But I guess the other yardstick might be kind of what you expect to have pass through to your employees as part of the annual negotiation that's coming up. Would you expect to be able to keep pace at least with that as a benchmark? And I guess maybe, Adrian, if you can comment more broadly on what you've been able to do to raise prices recently and what the outlook is for you to do that in the coming months?

I will answer the first question. Well, our (inaudible) negotiations are around July, so mid of the year. I don't know if it, we are lucky or unfortunately we are the last ones in the negotiation. So I think that for that time of the year the number will be already set. So but it -- yes, it's maybe too soon. We can tell you that the first negotiations that we read were around 23%, last one was yesterday or Tuesday, the electricity union signed an agreement of around 23% in a year instead. So maybe we can expect a similar range for us.

Yes, in terms of price, factoring inflation into price, we are -- we came out of 2012 but it was very severe in that respect. I mean, it was as a matter of fact without choice. We decided not to, not to make discounts or specific offers or packages to improve our attractiveness with number portability. We didn't -- do not do that, but on the other side we did not maintain our tariff as we have been doing in the previous year.

Given the -- price effect factor is all we had with portability, and that was really part of the plan. We retouched our traffic on the postpaid segment in October, quite late, I mean, to have a significant impact on the 2012 results, but pretty well contrary a nice start in 2013. And we added already at the very beginning of the year, a maintenance program for the tariff that were not affected by the raise of October, so basically as of January this year all our customer base has been realigned recovering the gap that we left growing last year.

So for 2013 we have a more comfortable start, right from the beginning of the year, with prices that has been readjusted for all our customer base, for the full 12-month period. And that's part of our confidence of expecting to maintain and providing good guidance for 2013 as well.

On the other side, I mean, really you should consider the fact that our tariff structure is moving constantly towards flat pricing. And, therefore, the percentage tariffs that are announced and informed for regulatory obligations, I mean, to the market and to the customer and by the different operator in this market, has an effect of the actual income of the Company, very, very different because they only effects basically the traffic of minutes, for example, that do exceed the tariff pricing or the packaging.

So, I mean, it's quite a complex -- is quite a complex matter to represent (inaudible). And we definitely prefer to maintain our pricing level, launching new tariffs, launching new packages that carry along a larger content of traffic, data or supplementary services, rather than maintaining the same products and increasing their nominal price, that's how we see things going.

Okay, great. Thank you very much.

Welcome.

[Federico Ray], Raymond James.

I have a question regarding some information that you are posting on the, on page 10 in your presentation. You are showing a 29% year-on-year increase in data. I would like to know then how much of this comes from usage and how much from prices, in price increases. And if you believe this, the level of growth is sustainable or not.

Then I have two follow-up questions on CapEx and dividends. Thanks.

Well, that's very much in line to the answer I gave a while ago. I mean, it's -- because the way we sell data and the way the products are packaged, you can consider that vast majority -- I mean, ARS9 out ARS10 of this increase year on year comes from volume and customer base and not from pricing.

Okay, thanks. Regarding CapEx, you mentioned that you expect to be aggressive in this respect. That would be returning to the, to an average of 17% through revenues coming from the 16% recorded this year?

That's a very good appreciation. We will say around 17% certainly for 2013.

Okay. And final question regarding dividends. Do you expect -- when do you expect to have the shareholders' meeting?

Will be mid-April.

Okay. Thank you very much.

Okay.

Michael Morin, Morgan Stanley.

Hi, just a follow-up. I think on -- in the opening remarks you talked about the outlook for 2013 at the macro level being better or looking better than 2012. So I was wondering if you could elaborate a little bit on that. I mean, is that something that you are actually seeing in the business today?

And then secondly, can you maybe walk us through how you would see yourself being impacted if we were to see a more sudden currency devaluation considering where the parallel rate is, for example?

And more specifically, should we think of your CapEx budget as being really in dollars or in Argentine pesos? Thank you.

Michael, I'll take the first one and Adrian will address the second one.

With respect to the economic activity, we are expecting GDP growth around between 2% to 3% for the year, after a pretty difficult, I would say first -- sorry, second and third quarters last year with very moderate recovery in the fourth quarter. And we're starting to see probably in this first quarter of 2013 some indicators that could -- and it could show that there is slight growth coming through. So we are expecting a slightly better 2013 in terms of economic activity. And in general terms, we're starting to see some moderate signs of growth.

Yes, Michael, on your second question. We are almost neutral to the devaluation, possible high devaluation on our P&L. We have some OpEx terminated in US dollars but we also have some revenues in US dollar -- US dollar.

On the CapEx side, it's a bit different. You should think that around 50% or 60% over CapEx is generated in pesos, and the rest maybe in foreign currencies. But we've been working a lot also on this side, working on prices. It was very helpful on this side the agreements that we reached also in part of Telecom Italia Group.

So I think that the effect should be very limited. The only thing that I don't have the answer, if it is -- if it's -- it's a higher devaluation, can't affect the inflation rate. So this could be an effect. But on the foreign exchange side we don't think that we have, could have a big impact on the P&L.

Great. Thank you very much.

And there are no further questions at this time.

Well, thank you very much for being in our call today. A particular thanks from me as I'm leaving the Company, and thank you for the wishes you made me before. I hope we will meet in other opportunities in different geographies. So thank you so much.

And our Investor Relation group obviously will remain at your disposal for any further comments or debate or follow-up on today's call. Thank you.

This concludes today's presentation. We thank you for your participation.