Telecom Argentina SA (TEO) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina, TEO, second-quarter 2013 earnings conference call. Today's call is being recorded. Participating on today's call we have Stefano De Angelis, Chief Executive Officer; Adrian Calaza, Chief Financial Officer; Guillermo Rivaben, Director of Mobile Business; Solange Barthe Dennin, Investor Relations Manager, Pedro Insussarry, Head of Finance.

At this time, it is my pleasure to turn the call over to Mr. Pedro Insussarry. Please go ahead, sir.

Good morning to everybody, and thank you for participating on this conference call. As mentioned by Casey our moderator, the purpose of this call is to share with you the consolidated results of Telecom Argentina Group that corresponds to the first half of 2013 ended on June 30, 2013.

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 the documents 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 such sections, and can also be 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 calls. We would like to clarify that during the conference call and Q&A sessions, we may produce certain forward-looking statements that involve 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 regulation, the effects of ongoing industry and economic relations, 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 July 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 to go over the general market overview, followed by the discussion of the business highlights, and an overview of our financial figures. And, finally, we will end the call with our traditional Q&A session.

Having gone through these procedural matters, I will now go over a brief macro review of the introduction to the general operating environment. Please refer to slide 3 where we include some snapshots on the current Argentine macroeconomic environment.

The levels of economic growth show some signs of recovery thanks to an improving agricultural production and nominal wages increases that contributed to sustained consumption trends. During this quarter, industrial production was driven mainly by car manufacturing sector, while most of other industries continued with lower levels of activity.

The construction sector and the chain of supply appear to be an exception to this, as progress was registered when compared to the very weak second-quarter 2012. Basic sectors such as food and beverages, textiles and others, continue to show decreasing rates of growth. As mentioned before, private consumption improved slightly in the second quarter of 2013, thanks to wage increases, expansion and public social expenditures such as social plans and pensions increases, and the persistent low real interest rates that kept fostering consumer lending and spending. In this semester, annual agreements between unions and companies were reached, with salary increases that range between 23% and 27%.

On the external front, we can mention that despite increases in agricultural exports, rising energy imports continued to affect trade balance. The official exchange rate accelerated its depreciation pace, and the new plan to repatriate savings is being implemented.

Finally, public expenditures growth decelerated in the first half of the year, although it continues to grow above the pace of public revenues. The assistance from the central bank to service debt and the public pension fund systems continues to back the growth in government expenditures.

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

Thank you, Pedro. Good morning to everyone. Please refer to slide 5 where we show the business highlights for the first part of the year. On the mobile business, we continue leading the market in terms of revenue share. And we have outperformed the market in terms of year-on-year growth, while we have optimized our commercial cost structure.

In terms of resources and infrastructures, we have struggled our efforts in service quality improvement through strengthening the excess capacity so as to mitigate limited resources in terms of spectrum and size. It is also worth mentioning that 3G penetration now exceeds one-third of our subscriber base, while we have had a notable success in smartphone sellout.

Regarding the fixed business, it is worth mentioning the effort to enhance our value proposition by speeding FTTH deployment. It is also notable that 28% broadband ARPU increased in the second quarter. We have also returned to positive quarterly net debt in both fixed voice and broadband accesses.

When it comes to our financials, we continue with our strict cost controls to mitigate the impact of higher labor-related costs, the effects of the overall inflationary context and higher tax rates. A share buyback program was launched in May 2013, as announced.

Please turn to slide 6 for comments on the mobile business performance. Our focus in acquisitions in the high-quality segment of the postpaid continue to deliver excellent results, while the prepaid segment regained strength with 145,000 quarterly net adds. As of June, our customer base totaled 19.3 million, with a 3% year-on-year expansion, mainly driven by the growth in contract clients that showed a 6% year-on-year increase. Meanwhile, monthly [ARPU] reached ARS75.5, propelled by the expansion of value-added services.

Our smartphone and mobile Internet strategy continue to deliver great results, where we are providing through 3G services to almost 7 million customers or more than one-third of our base with a growth of 73% year-on-year. Moreover, are smartphone sellout currently surpasses 60%.

In slide 7, you can see that service revenues grew by 22% in the first half of the year, helped by the increase of data and Internet services, that particularly in this quarter, rose by 34% and 64% year-on-year, respectively. Thanks to this expansion, value-added services revenue participation reached 56% in the house, and this the highest in the region. This performance has helped us to sustain our service revenue leadership while optimizing our commercial costs, as quarterly SAC and SST costs have declined to approximately 11% of service revenues, down from 17% a year ago. This was achieved thanks to the subsidy elimination of certain segments that contributed to the overall subsidy reduction.

Please turn to slide 8 for a snapshot of our Paraguayan operations. Our clients in Paraguay reached 2.4 million, expanding by 6% year-on-year, while postpaid customers rose by 21% year-on-year, showing solid market performance. These were achieved by leveraging on our mobile Internet strategy, like the recently launched 4G LTE service, and were supported by the continuous mobile network expansion in terms of coverage and capacity.

In the first half, revenues in pesos rose by 39% year-on-year, but where value-added services revenues represented 54% of service revenues, boosted by growing Internet service revenues. Finally, operating income before D&A in Paraguay increased by 28% year-on-year.

Slide 9 shows the evolution of mobile revenues that grew in the first half of the year by 23% year-on-year to [ARS9.4 billion]. Revenues coming from or by the Internet services, contract in SMS were the main drivers of growth increasing by 53% and 28%, respectively. With data, voice and wholesale services were up by 10% and 12%, respectively, while handset sales rose by 41%, thanks to the increasing portion of 3G's smartphone and subsidy reductions. The Paraguayan operation posted a 39% growth in pesos and now account for 6% of consolidated mobile revenues.

Please refer to slide 10 as we move to the evolution of our fixed business. The wireline broadband subscriber base returned to growth in the quarter, and shows a 3% year-on-year expansion, while the ARPU rose by 28% year-on-year with a stable chart. We are speeding up the FTTx network deployment as to improve our bandwidth capacity, thus improving the value perception of our offering.

Slide 11 shows the evolution of our fixed voice lines that total 4.1 million. We have returned to positive net cash, and we were able to report a monthly ARPU of ARS53 that increased by 11% year-on-year. This performance was achieved thanks to the attractive package offering, where nowadays three-quarters of our customers have subscribed to flat pricing schemes. Moreover, the corporate ICT and other center services continue to deliver outstanding results, as robust revenue performance of 30% growth year-on-year was registered.

We can see in slide 12 that during the first half of the year, fixed business revenues expanded by 16% year-on-year and totaled ARS3.3 billion, representing 26% of the consolidated revenues. This expansion was mainly due to the growth of our residential Internet services, where revenues increased by 29% year-on-year or ARS266 million, followed by other revenues that contributed with a 30% growth or ARS103 million revenue increase.

Despite retail and wholesale voice services are capped with frozen tariff, in first half '13, we were able to increase revenues coming from these services by 6% and 5% year-on-year, respectively. Nowadays about one-third of our revenues in the fixed business are price regulated.

Slide 13 shows the evolution of our consolidated capital expenditures. We have invested ARS1.6 billion in the first half that represent 12% of revenues, where it is reasonable to expect a significant increase in capital expenditure in the second half of 2013, confirming our guidance of ARS4.7 billion or 17% of total revenues.

As we continue to be committed to provide quality services, we are aiming to double the 3G network capacity by year-end that has coped with a significant traffic growth, we continue to experience. Among other efforts, we have increased the international IP bandwidth capacity to improve the customer experience. Moreover, we can also mention that we are accelerating the FTTx rollout deployment as to be able to launch ultra broadband commence offers by year-end 2013.

Now I will 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, posting growth both in terms of revenues and profits that outperformed the market. Please turn to slide 15, where we show the evolution of consolidated revenues and operating income before depreciation and amortization.

In the first half of 2013, consolidated revenues reached ARS12.7 billion with a 22% year-on-year growth, particularly fostered by the second quarter 2013 revenues that expanded at a 27% year-on-year growth rate. It is important to tell investors on the line that revenues coming from regulated tariff services account for just 9% of total revenues, due not only to the growth of mobile and broadband businesses, but also because of frozen tariffs since 2001.

Operating income before depreciation and amortization totaled ARS3.6 billion in the first half of the year, representing [28%] of revenues and growing by 15% year-on-year. It is worth to mention that the second quarter represented a solid growth of 22%, thanks not only to the significant revenues growth, but also to a strict discretion of cost control and the optimization of commercial costs.

In slide 16, we can see the evolution of our operating income before depreciation and amortization, and the most relevant components that affected its evolution. We have consolidated revenues growing by 22% year-on-year. Some cost items expanded above this level. For example, the increasing taxes strongly impacted our margin in 80 basis points, growing 33% year-on-year, mainly due to increased municipality taxes and provincial turnover taxes.

Labor costs grew by 26% year-on-year and also impacted our margin. Additionally, value-added service costs expanded significantly at a pace of 147%, even though it is important to mention that these services have a high margin contribution. Thanks to an efficient cost approach, marketing and sales costs, fees for services, maintenance and materials, and other costs, grew at a lower pace compared with revenues, helping us to partially mitigate the impact of the other items.

Moreover, in slide 17, we can see the composition and the marginal analysis of our cost structure. In the first half of the year, direct labor expenses represented 21% of our total operating costs or [14.7%] of our revenues. Related to this, we have reached agreements with the unions involving an annual increase in salaries of around 25% that will be granted in two installments starting in July with a 15.5% rise. Finally, as we just mentioned, costs related to value-added service more than doubled, due to growth in broadband penetration and usage of services with high margin contribution, representing 3% of our cost structure and 2.4% of our revenues.

Please turn to slide 18 to consider the performance of our operating income that exceeded ARS2 billion with a 9% increase in the first half of the year. It is necessary to highlight that in this quarter, the Company reached ARS172 million charge related to disposals of PP&E. Furthermore, the operating income performance, together with positive financial and housing results, allowed us to post a net income attributable to Telecom Argentina of close to ARS1.5 billion, growing by 14% year-on-year.

Regarding our financial position, in slide 19, you can see that the Telecom Argentina Group continues to report a healthy operating free cash flow generation that reached ARS2.1 billion in the first half of the year, and equivalent to 16% of revenues, allowing us to reach a net cash position of approximately ARS5.1 billion.

It is worth to mention that the annual shareholders meeting approved the creation of a ARS1.2 billion reserve for a share buyback program that was launched in May. As of June the 30th, we have repurchased 3.3 million shares, paying approximately ARS83 million out of such reserve.

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

(Operator Instructions). Michel Morin, Morgan Stanley.

I was wondering if you can comment a little bit on the nature of the asset write-down that impacted your bottom line this quarter? And then, secondly, in your release, you mentioned that there was a new regulation approved July 1 regarding mobile quality. And I was wondering if you can elaborate a little bit more on that, and what we should expect could be the potential implications of this new regulation? Thank you.

Michel, I will -- it's Stefano. I will respond to the second question, then I will ask to Adrian to respond to the impairment of the assets.

In this space, the regulation that refers not only to mobile and fixed business is under discussion. Because, as you probably know, we have now 90 working days to define joint with the CNC retention of (technical difficulty) stock, two very important items that is the way to calculate the KPIs, because it is very different to say that you have a dropped call rate nationwide under 24 hours, for example, when compared to a dropped call that is calculated in the peak hour or for all the local area -- local areas of Argentina.

So we are now strongly discussing each week we have two different meeting, one for the network side and the other for the customer side, in order to, let's say, understand and define jointly with operators and the national we talk the way of calculating the KPIs.

That only would be very important to define if and what is the path to reach the target of quality that the (inaudible) have included in the resolution number 5. And in terms of amplification, if we look for on the network side, we can say that in terms of coverage, we do not see any significant expansion of coverage, because today our efforts is today and the target of capital expansion that we have -- you know that we have a lot of strain for this CapEx, especially for the new site in order to gain all the authorization.

So today the [ARS4.7 billion] CapEx is a very tough target and we're 100% concentrated to reach this. I don't think that this condition, excluding a spectrum auction, we have room to increase the level of CapEx for a problem of again of let's say market conditions, that means especially the authorization from the administer offices.

In terms of the customers, maybe that we are going to experience an increase in the call center cost to say the target, but here we expect to have a path of one to two years in order to reach this target. In the meanwhile we have to strongly work on improving the productivity of our call center and to improve the mix between the, let me say, the traditional call center services and the innovative one, like the Web and the [IVAR].

I pass to Adrian for the impairment.

So related to the charges here in our operating income, it is related part of it on the write-down of some information technology assets. And on the other hand some impairments we did and some particular assets on the fixed -- on our fixed operations.

Okay, great. Thank you very much.

Fon Dillon, Barclays London.

Hi guys, Fon here from Barclays. Three questions if I may. Firstly, on spectrum auctions, what are your -- what are the plans in the region specifically on 700 megahertz auctions? And do you believe there will be caps to prevent the current 5 spectrum holders from working together?

Secondly, is the current exchange rate regime having a negative impact on CapEx? Are you able to still buy equipment and is there any pent-up need to invest? And, finally, on subsidies, have competitors followed in removing subsidies? And do you have any intention to reintroduce them in the future? Thanks.

This is Stefano. I will answer to the question on the spectrum auction. As we understand by the public discussion of the national awards docket today, as you probably know, and we have approximately 200 megahertz between the 700 and the 1700 and the 2100 that was, let's say, reserved for the mobile business. At the moment there is not the process ongoing to get to an auction, let me say, in the short term, because the government today is strongly focusing on the quality. So we cannot expect by the year end to have an auction of this reserve frequency.

Different is the discussion on the spectrum that was reserved, again, to work faster, you know the that it was included in a public decree. And we're just waiting to understand if we make imagine any way of collaborating with in order to, let's say, better use these national resources more in the country.

For the assets I pass to Pedro.

Yes, this is Pedro Insussarry. With respect to the access to foreign exchange to pay basically imports related to our CapEx, no, we're not having any significant problems. Obviously, the process has become more complicated. Basically there is a lot of paperwork to be complied with and to be presented at the banks that recently sell the FX to us. But in terms of the effectiveness to pay and basically our ability to pay in a timely manner, fortunately, that is not the case.

We don't -- we are not suffering any delays with respect to this. So there is no effect on CapEx related to the FX market. With respect to subsidies, I will pass the call to Guillermo.

This is Guillermo Rivaben. Regarding subsidy, where we have a combination of factors. First one is that we get new portfolios smartphones. The cost for us of the smartphones are going down. We actually are introducing to the market smartphones with android fresh brands. They go $80.

On the other side we spread our offering in prepaid handsets where we could -- we had opportunities to increase also the price, then it is a mix of more quantity of handsets that we put on the market with very low prices. In a segment that we have a markup, not a subsidy. The combination of both factors gave us the better results in terms of a slower subsidy rate.

Just to add to this answer, you asked if this is an industry trend and the answer is yes. This is an industry trend. If I can make one point that is not 100% business related I would say that today in Argentina, if you look at the middle and high classes, you have the consequence of the macroeconomic environment, a large disposable income.

So and there is a very strong demand for this smartphone. So the price today is not, let me say, the barrier, for sure. And it is not the variable where the market is going to compete strongly, due to this stronger variable income and pesos from the middle and high classes in Argentina.

Okay, thank you very much, guys.

Allejandro Arrondo, Itau.

I have two questions if I may. The first one is regarding margins. I would like to know if we can expect them to keep deteriorating in the future or we could see a slight recovery towards year-end like we saw last year? The second one would be a follow-up on what you just said about smartphones. I would like to know what percentage of smartphones now account for your mobile clients?

(inaudible).

Okay. In terms of margins, you know that historically, the profitability margin was affected by the labor cost. If you look at this (inaudible) you may see that the labor cost is not strongly affecting the margin.

The margin -- and just because, first of all, we are able to stand the (inaudible) more than 20% growth in the top line of said in the growth in the labor cost. On the other side, we are strongly working on the efficiency side, strongly and further integrating the mobile and the wireline units in order to reduce the number of FTE or full-time equivalents.

In this we have, especially what affected the profitability was an increase that was decided in January of the provincial turnover taxes that that effectively, as Adrian was mentioning during the presentation, approximately 1 percentage point [of] margin. It is very difficult for us to forecast if this is something that after the one of, let me say, when you're affect of the 2013 this is going to continue in the next couple of years. Let's hope not. Probably, but it's not something that we are managing.

On the other side, what is affecting the profitability, the continuous growth in handsets, but let me say this is something that is (inaudible) dilution of the margin that is not considering the good results in terms of limiting the subsidy. This is not affecting the absolute margin of the Company and again more an objective impact that is not creating a problem from our side.

Last, we are strongly growing in terms of content revenue, content revenues have a profitability that is very good. Because it is the range of 70%, let's say as first margin. Clear when you in the past was growing in SMS, invoice, where the profitability is higher, than the gross margin is higher than 70%, again this is affecting the profitability, but again we have to look at the absolute trends of the [EBITDA].

Regarding the smartphones subsidization in the states and the customer data that to --.

Okay, I think that a very important mark to bring into consideration it seems in May, we reached 100% of our sellout of (inaudible) 3G. That is very important for our strategy in terms of giving more data capacity to our network. And smartphones we reached 50% of our sellout, which we owe to the total (inaudible) the total customer base. We're in about 25% of smartphone in that customer base.

Okay, thank you very much.

Rodrigo Villanueva, Merrill Lynch.

I was wondering if you could share with us your views regarding RSAT? And if you could tell us when we do expect to have additional competition coming from this Company? That would be my first question.

First then (inaudible). Okay, as regarding RSAT, it is difficult if we look at the public statement, we have the statement in late January announcing the launch -- the domestic launch of (inaudible). In the meanwhile, honestly, nothing is happening in terms of network deployment.

We know that there are a lot of discussion in order to understand the way of the launch of a national mobile operator was confirmed by the Minister of (inaudible) of planning the day that was announcing joined with Norberto Bernard, the Secretary of Communication, the new quality regulation. It was reaffirming that intention to launch the Libredot higher mobile services.

The way of doing it that may move from the soft one that is the MVNO operation to the (inaudible) that is a one with a development on the new -- of a new network in Argentina is something that I think is under discussion and for sure we are not participating to this discussion. We are waiting some related news and the forthcoming months.

Understood, thank you very much. My second question is regarding dividends. After approving ARS1 million, I was wondering when should we expect any distribution to take place?

As you know, we have been taking some steps in order to deliver value to our shareholders. We have obtained the approval in the shareholders meeting of last name to create two different reserves. One for future cash dividends. That one -- the one that you are mentioning of ARS1 million. And another for future capital operation and this approval was litigating to the Board of Directors the power to decide on the timing and the manner of use both reserved.

Our total intention, obviously, is to finally fulfill shareholder expectation for dividend payments. We are analyzing in this moment the current local context in order to decide when and how to allocate the dividend reserve. And in this moment we are focused on the share buyback program. That was approved in May by the Board. Using the reserved for future capital operation. An investment in which we strongly believe and we understand that we are executing very well. Be assured that this means we're adding value to the Company and to the shareholders.

Understood, and one final question. Looking at your press release, well, you still mention the same amount of shares that you had at the end of the previous quarter. What are you planning to do with the shares? Are you eliminating the shares that you are buying back or how shall we expected to proceed with that?

This is Pedro. Well, basically, what we are doing is we're keeping those shares in treasury. If you look at the evolution of our shareholders equity, you will see a new column that basically subtracts the amount of shares that we have repurchased from our shareholders equity. And basically on deal terms, we're keeping those shares and treasury we have three years to basically decide what we're going to do with the shares or cancel the shares, or basically (inaudible) pro rata with the existing shareholders.

And in terms of rights, the rights of those shares are suspended, so effectively as long as we continue repurchasing shares economic rights and voting rights of the existing shareholders will increase.

Okay, thank you very much, Pedro.

Michel Morin.

I just wanted to follow-up on that earlier question on dividends. I understand the sensitivities involved here, but just for the sake of -- for investors who either own the stock or are thinking about owning the stock, should they anticipate that the dividend is possible in 2013? Or is this possibly something that could get dragged out beyond the current calendar year?

Well, sure -- the dividend is something that (inaudible) for an annual base for sure by year-end, we will bring the dividend issue on the Board, and then we will see what the Board will decide. For sure the dividend is something that we intend to still consider as an annual way of distributing the results to our shareholders.

Okay, thank you very much.

(multiple speakers) something that we are postponing for the future year let's say.

Okay, so it's been approved by shareholders, but there still needs to be a Board level -- (multiple speakers)?

(multiple speakers) No, no. By the Board -- it was approved. Yes, it was approved by the shareholders, creating this reserve, empowering the Board to decide. What Stefano was mentioning that for sure before the year-end we will go back to the Board to see what the Company will decide on this issue.

Okay. Okay, and in terms of the buyback, that was announced a few months ago, is there any -- beyond the authorization that you have, which I think is valid for 12 months or so, is there a specific objective in mind in terms of what -- I don't know, thinking perhaps in terms of the controlling shareholders take, is there a target for the controlling shareholder to increase their stake to a certain level through these buybacks? Or is it really just liquidity management?

No, no. It's liquidity management, and the target is to completely use the (inaudible) created. The cost strain is represented by the limited floating that we have here in Buenos Aires locally in the (inaudible). But intention is to 100% use the reserve. But by next year, let's say, we have a target of use it until April. That is the day where we will discuss the distribution and the allocation of the results of 2013.

Okay, great. Thank you very much.

(Operator Instructions). Federico Rey, Raymond James.

I have a follow-up question on the CapEx plan. If I am not wrong you expect to invest like ARS4.5 billion during 2013 and so far in the first half of the year have invested like ARS1.5 billion. As it relates to understanding the ARS4.5 billion target is reachable, and which would be the main areas investment during the second half? Thank you.

As you -- the target is ARS4.7 billion to be specific. And as you know, all the industry, the telcos have a very significant participation in the (inaudible) and specifically in the fourth quarter of years in terms of CapEx accounting. This did not mean that the activities, the project are being rolled out in this month in our expectations is 100% to confirm this figure.

As I told before, the strong focus more than 50% of this CapEx is dedicated to the network. In the network it is very important that we are being supported by the central government and the regulatory were (inaudible) in the sense we have all the authorization in order to be able to sustain in our plan, especially for the access of the mobile, obviously.

Okay, thank you very much.

(Operator Instructions). It appears we have no further questions. I will turn the conference back over to our speakers for any additional or closing remarks.

Thank you very much for participating in our quarterly conference call. Please do not hesitate in contacting our investor relations department for any further inquiries. So you may have. Good morning to all. Have a nice day and we expect to meet again soon. Thank you.

Thank you very much. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.