Telecom Argentina SA (TEO) 2013 Q1 法說會逐字稿

Good day everyone and welcome to the Telecom Argentina first quarter 2013 earnings conference call. Today's call is being recorded. Participating on today's call we have Mr. Stefano De Angelis, Chief Executive Officer of Telecom Argentina; Mr. Guillermo Rivaben, Head of the Mobile Unit; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Finance 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 to everybody on behalf of Telecom Argentina. I would like to thank everybody for participating in this conference call. The purpose of this call, as Karina has just mentioned, is to share with you the consolidated results of the Telecom Argentina group that corresponds to the first quarter of 2013 ended last March 31, 2013.

We would like to remind you that for all of those that have not received our press release or 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'd like to go over some Safe Harbor information and other details of the call as usually we do in our quarterly conference 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 and regulations.

Our press release dated April 29, 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.

The agenda for today's conference call as seen in slide 2 is for us to go over the general market overview, followed by the discussion of the business highlights, a review of our financial figures and finally, we will end 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 where we include some snapshots of the current Argentine macroeconomic environment. The levels of economic growth continue showing signals of [weak] recovery where certain sectors are exhibiting positive trends while others, like the (inaudible) and consumption continue to be the main lagers.

The harvest here has started and will be a key factor for the rest of the year in terms of the level of economic activity and constraints in the external sector. Interest rates remain low in real terms, stimulating private spending, especially private consumption that is also affected by the levels of wage increases, government transfers to the private sector and inflation levels. It is worth mentioning that different sectors of the economy under presence of reaching agreements with the labor unions, a necessary step to sustain consumption levels.

Moreover, the continuous uncertainties in the FX market might affect the normal evolution in terms of activity and prices in the economy.

Our trade bands continue to deteriorate due to lower agricultural export and increasing energy imports. On the fiscal front, the national tax collection rose by 26% year-on-year, especially helped by VAT, income tax and import related taxes. This performance was achieved thanks to a steady consumption trend, increase in imports and higher nominal prices in the economy.

And having gone through this introduction of the macro context in which we operate, let me pass the call to our CEO Stefano De Angelis, who will go over the business highlights.

Thank you, Pedro. Good morning to everyone. Please refer to slide 5, where we show the business highlights of the first quarter of the year.

On the mobile business, the postpaid segment experienced an outstanding performance, representing more than two-thirds of the quarterly net adds and contributed to the consistent VAS revenue expansion. At the same time, we continue streamlining our customer acquisition and retention costs.

Regarding the fixed business, it is worth mentioning the data services evolution that responded at strong year-on-year growth rate thanks to the solid position into our corporate client market. In retained broadband services, we continued announcing our valuable position with compelling offers and focusing on the up sale of our broadband services that increased ARPU and helped to control churn.

When it comes to our financials, we are being able to sustain revenue growth even with limited nominal price adjustments. Moreover, we continue to deliver healthy cash generation, reaching ARS1.4 billion in the last 12 months, thanks to a strict cost control policy aimed to limit the influx of incremental costs, mainly coming from direct and indirect [labor] advantage.

Please turn to slide 6 to comment on the mobile business performance. Our focus in smart phone sales and mobile Internet services continued to deliver a solid set of results, helping half to consolidate revenue share leveraging. Postpaid client expanded by 7% year-on-year and in first quarter represent more than two-thirds of our quarterly net debt, standing for 53% of our domestic mobile subscriber base that ended with a 3% year-on-year expansion, in total 19.1 million access lines.

Combined ARPU showed a 13% year-on-year increase with a control level of churn while the consumption levels in terms of minutes and texts per user expanded by 6% and 1% year-on-year.

ARPU increase was achieved thanks to a better customer mix and a higher penetration of value added services, despite the very moderate growth in traditional services.

In terms of market share, we estimate that among the three main providers of the market, relevant personnel maintained a 33.5% market share in terms of subscribers.

Now please go to slide 7, where you can see that our mobile business continued leveraging on value added services to sustain revenue expansion, thanks to our successful market in mobile Internet value proposition, together with our focus and customer convenience to improve customers' value perception.

In this quarter, the value added services represent 55% of service revenues. As seen in the chart on the right side, SAC and SRC before capitalization decreased year-on-year in first quarter to 14.5% of service revenues, down from 16.4% one year ago. Efficiency was achieved mainly in advertising and handset subsidy. SAC and SRC were refocused towards stimulating the up sale of plans and packs in the full pay segment.

Please turn to slide 8 for a snapshot of our Paraguayan operation. Our clients in Paraguay reached 2.3 million, expanding by 6% year-on-year. Specifically postpaid customers rose by 19% year-on-year showing a solid market position, leveraging the mobile Internet services to sustain revenue expansion and market position.

In this quarter, we started to acquire our first LTE customers, as we were the first operators who launched 4G services in this country. We expect that these events will strengthen our market position based on value and innovation and will contribute to continue growing in the postpaid segment and value added services revenues.

It is worth mentioning that new regulation ruling against on-net calls promotions improved the incoming-outgoing traffic ratios and improved the competitive environment.

In the first quarter (inaudible) revenues converted the pesos rose by 32% year-on-year, while operating income before D&A increased by [30]%. We should also highlight that the local currency appreciation to the Argentine peso amplified the performance of revenues in profits denominated [interests].

Slide 9 shows the evolution of mobile revenues growing in the first quarter of the year by 20% year-on-year to ARS4.4 billion. Mobile Internet revenues posted the highest year-on-year growth rate of the business with a 42% increase while traditional (inaudible) content revenues expanded by 22%.

Retail voice and wholesale services were up by 13% and 5% respectively, while equipment sales rose by 28%. The Paraguayan operations posted a 32% growth in pesos and now account for 6% of consolidated mobile revenues.

Please refer to slide 10 as we move to the performance of the fixed business. The fixed broadband subscriber base grew by 4% while the ARPU rose by 20% year-on-year making wireline broadband revenues increase by 26% in first quarter 2013 when compared to that one of one year ago. These results were achieved thanks to the continued value enhancing proposition with compelling offers that include video streaming services, bandwidth increases and the synergies coming from the commercial agreement with the leading satellite TV provider to offer combined products.

In order to continue with our value proposition, we are targeting to make available by year-end a commercial offer of 10 megabyte or more to 60% of our customer base.

Slide 11 shows the performance of fixed voice line totaling 4.1 million with a monthly ARPU of ARS49.5, increasing 6% year-on-year with a monthly charge of 0.6% in the first quarter.

Moreover, we continue to achieve outstanding results in the corporate ITC segment where we were able to reach a robust revenue performance of 31% growth year-on-year thanks to our approach of an end-to-end service in (inaudible).

As we continue to slide 12, retail voice revenues increased 4% thanks to higher penetrations of supplementary services, as well as flat pricing and despite tariffs of basic services continue without changes.

As noted in the previous slide, data services expanded by 31% year-on-year, thanks to billing and integrated ICT offers to the corporate segment while Internet services expanded by 26% year-on-year. Both services represented 49% of our consolidated fixed revenues that as of the first quarter totaled ARS1.6 billion, showing an overall expansion of 14%.

Slide 13 shows the evolution of our consolidated capital expenditures and invested ARS741 million in the first quarter or 12% of revenues. Our efforts have focused toward the overall network budget increase enhancement of the availability of voice and data availability so as to deliver an improved customer experience.

One of our main projects continue to be the FTTC network rollout in key areas today mobile launching retail high-speed broadband offer by the year end. Moreover, the 3G mobile network enhancement continues to be our top priorities so as to face the demand for additional services of our customers and the lack of additional [factors].

To better explain how we plan to achieve these roles, in slide 14 we detail the main action plans of our CapEx program. On the access network front, we have launched an expensive deployment plan to migrate to 6-sector site architecture while we continue exploring the incremental coverage through unconventional sites that both will contribute to have incremental capacity and coverage.

On the frequency integration side, spectrum refarming still in 3G devices penetration has aimed to increase the delivery of data services while we optimize spectrum optimization. Moreover increasing of our FTTx deployment should reposition us in the top level of the market in terms of broadband availability and capacity.

On the core or backbone of our network, our plans include the increase in capacity to address the continuous growth in data traffic as well as we increase the security in our transport network with additional fiber optic rings. We also plan to add backhaul capacity to improve customer experience in mobile services while adding new technology that will reduce the current levels of network workload.

In slide 15 we show the main KPIs for the next few years of our CapEx program. In this sense, we should be [trebling] the number of 3G sites. More than 90% of our sites should be connected with Ethernet technology while we should be doubling our international bandwidth capacity.

Finally, we should multiply the FTTC notes of cabinets by more than 5 times, significantly improving the capacity, the validity of our fixed broadband access.

Now we'll pass the call to Adrian who will go over our financial performance.

Thank you. The business performance that Stefano described was reflected in our financials allowing us to continue posting growth both in terms of revenues and profit. In slide 17, we are showing the evolution of consolidated revenues and operating income before depreciation and amortization. In the first quarter of 2013, consolidated revenues reached ARS6 billion with a growth of 18% when compared to the same quarter of 2012. Even with limited price adjustments in our businesses, as we said before.

It's important to underline that revenues coming from regulated tariff services account for less than 9% of total revenues, 200 basis points less than last year, due not only to the growth of mobile and broadband businesses, but especially because of frozen tariffs since 2001.

Operating income before the depreciation and amortization totaled ARS1.8 billion, representing 13% of revenues and growing by 9% year-on-year with some specific cross items impacting significantly, as we will see in the next slides.

In slide 18, we can see the evolution of our operating income before depreciation and amortization with the effect of the different cost items on the margin. This first quarter the 18% revenue growth was partially compensated especially by the increase in labor related costs and taxes.

(Inaudible) expenses grew by 28% as we were impacted mainly by rate adjustments and higher Social Security expenses. Meanwhile, taxes increased due to the impact of higher turnover tax rates connected by the provinces that reached to 5.3% of revenues, up from 4.6% one year ago, making the overall item of taxes and fees with the regulatory authorities to increase by 30% year-on-year.

Additionally, the other item that has been growing significantly in the value added service costs, but in this case as a consequence of a 165% growth of revenues specifically related to that.

Furthermore, the cost control efforts allowed to maintain almost all of the other items in the same range or below the growth of revenues even with higher volumes (inaudible) than the same period of last year, including the connection marketing and sales and overhead, such as services, fees, maintenance and materials. As a result of this combination, total operating expenses reached ARS4.3 billion, resulting in a 23% year-on-year increase.

Moreover, in slide 19, we can see the (inaudible) and the marginal analysis of our cost structure. Direct costs, labor costs, represented 20% of our total operating costs of 14.3% of revenues. The increase in labor costs derived in the negative impact in the margin of 110 basis points.

In the same direction, taxes and regulatory fees that had increased by [30]% year-on-year now represent 14% of our operating costs and 9.9% of our revenues with a negative impact in the margins of almost 100 basis points. These two effects represent over 80% of the margin loss reported for the quarter.

On the cost saving side, we have streamlined our commercial costs through the redefinition of agent commissions and targeting the handset subsidies in contract up sale, increasing marketing handset costs by 16% year-on-year with a positive contribution of 60 basis points in our margin.

Finally as we just mentioned, costs related to (inaudible) services more than doubled following the evolution of revenues and increasing penetration, representing 3% of [infrastructure] and 2.2% of our revenues.

Please turn to slide 20 to consider the performance of our operating income. The operating income before depreciation and amortization performance, together with a lower impact of amortization and depreciation led to an operating income of ARS1 million, representing an 18% margin in the first quarter of the year and growing at higher pace when compared with the full-year 2012 evolution. These results, together with the positive financial and holding results allowed us to post a net income attributable to Telecom Argentina of ARS802 million, growing that by 15% year-on-year.

Regarding our financial decision, in slide 22 you can see that the Telecom Argentina group continues to report a healthy free cash flow generation that amounted to ARS1.4 million in the last 12 months, allowing us to reach a net cash position exceeding ARS4 billion.

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

(Operator instructions) Federico Ray, Raymond James.

I would like if you can give us an idea of salary increases for this year.

For the salary increase, at the moment the discussion regarding the DLC contract has not started. We start to discuss this in the next month, between May and June. Please give us the opportunity to observe what is happening the market with the other question regarding the other sectors.

And what is happening today we are moving into a dynamic of the labor costs of between 22% to 24% and this would be normally a strong benchmark for our discussion. Another opportunity that we may explore which we'll discuss with the unions different in month that move from the 12 month time horizon to an 18 or 24 month horizon. That may give us some other flexibility.

Sam Dillon, Barclays.

Just a quick question on your smart phone penetration and what the ARPU uplift is you're seeing from your traditional handset users to those who move on smart phones.

This is Guillermo Rivaben, the (inaudible) for the Mobile Unit. So actually we have sustained growth in terms of smart phone compared with the rest of the market and today we have reached more than 20% of our customer base with smart phones. And when you see this (inaudible) that is how you can see the pace. For the near future we are running at a 50% penetration in our sellout coming from smart phones. If you hold to the core (inaudible), we are today in about 96% of our sellout of our 3G content.

I'm just wanting to get a sense of what the ARPU uplift is for a traditional low end mobile user versus someone who up sells themselves to a smart phone. What is the mix change in your ARPU?

Well actually if we take -- we have a program specifically for smart phone customers that is our program that we call Personal Black. Today on that segment we are at ARS260 in terms of ARPU compared with the regular postpaid basic customers that is average ARS135. That's the rate between our regular postpaid and a postpaid customer is inside the smart phone program.

Sean Glickenhaus, HSBC.

Thanks for the update on the fixed broadband strategy. Just a quick question, I'm sorry if you already covered this, but I was wondering the -- you had a decline sequentially in the broadband subscribers. I was hoping you could -- in the loss of market share -- I was just hoping you could explain what's going on in the market. Thanks.

In terms of the broadband wireline market, let's lead with (inaudible) what is happening on the market generally. We see a very rational approach from the main competitors in terms of pricing. On the other hand, we see a market that is going to [saturation] in Argentina and in the northern region where we operate meaning that we do not see a substantial customer base -- market customer base increase.

What regards (inaudible) in Telecom Argentina we see in January and February we experienced negative net adds. In the month of March, we moved back to a positive growth. And the fact that we are now authorities not only the marketing levers, what we are working strongly is on the network because that's -- an example. We have more than 50,000 backlog lines or DSL (inaudible) if we will be able in the next month to work strongly on the network more than in the marketing, I'm sure that we will be able to move back to a growth that again is not growth driven by marketing by a market by demand at the existing and that until today was not carried by telephone.

We have no further questions in queue.

Thank you to everybody for participating in our call. And any further questions, just don't hesitate to call us, especially our investor relations team. Good morning to everybody.

Once again this does conclude today's conference. We do thank you all for your participation.