Telecom Argentina SA (TEO) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina, TEO, fourth-quarter 2013 earnings conference call. Today's conference is being recorded.

Participating on today's call we have Mr. Stefano de Angelis, Chief Executive Officer; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Head of Finance; 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, sir.

Okay. Good morning to everybody and on behalf of Telecom Argentina I would like to thank you for participating in this conference call.

As mentioned by Catherine, our moderator, the purpose of this call is to share with you the consolidated results of the Telecom Argentina Group that correspond to the fiscal year 2013, ended on as December 31st.

We would like to remind all those that have not received our press release or presentation that you can call our Investor Relations office to request the documents 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 subsection 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 traditional 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, strategies and targets. Such statements are subject to uncertainties that could cause Telecom's actual results and operations to differ materially.

Such uncertainties include, but are not limited to, the effects of the public emergency law and complementary regulations, the effects of ongoing industry and economic regulation, possible changes in the demand for telecom products and services, and the effects of marginal factors such as changes in general market or economic conditions, in legislation or in regulation.

Our press release dated February 27, 2014, a copy of which is being included in our Form 6-K report to be furnished to the SEC, describes certain factors that may affect any forward-looking statements that we may produce during this session. Furthermore, we urge the audience of this conference call to read the disclaimer clause contained in slide 1 of the presentation.

The agenda for today's call, as seen in slide 2, is 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 the call with our Q&A session, as we normally do, with the financial community.

Having gone through these procedural matters, I will now go over a brief macro overview as an introduction to the general operating environment. Please refer to slide 3, where we include some snapshots on the Argentine macroeconomic environment. After experiencing a good first-half 2013, the economy showed some signals of deceleration due to the slowdown in construction and industrial activities. This latter due mainly to the consequence of the decrease in exports to Brazil such as car exports.

The main slowdown in the Brazilian economy together with a stable commodity prices may have an impact in 2014 economic activity. Moreover, after an important devaluation of the Argentine peso in January 2014, it is expected that inflation may accelerate in 2014.

During the fiscal year 2013, pro-cyclical monetary and fiscal policies such as the income tax reduction, the expansion in public social expenditures and the increase in consumer lending helped to sustain private consumption.

In January 2014 the government published a new CPI index that reached 3.7% for the first month of the year, consequently wage negotiations are presumed to start at higher levels than previous years.

On the external front, trade balance was impacted by the increase in energy imports despite the increase in agricultural exports. In order to preserve the levels of FX reserves, the new monetary policies -- new monetary policies were applied, such as an acceleration in the pace of the peso depreciation, increase in interest rates and new taxes.

Finally, tax collection pushed public revenues up. However, public expenditures continued to grow at a higher pace deteriorating the fiscal balance.

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. Stefano?

Thank you, Pedro. Good morning to everyone. Please refer to slide 5, where we have a summary of the main achievements for the year.

On the mobile business, we continue with an interesting pace of revenues expansion of 26% year on year despite limited price adjustment. Moreover, our 3G customer base continued to increase, reaching 8.9 million clients as a consequence of our commercial focus in smartphone sales that reached 73% share of handset sellout. More outstanding is that this was achieved with a reduction in handset subsidies.

Regarding the fixed business, we can note that we continue with the FTTx deployment to improve our valuable proposition and we have increased more than three times our FTTC intervention. Furthermore, it is remarkable that evolution of the corporate data business, where revenues rose 31% with an acceleration in the recent quarter.

It's notable that the 20% broadband ARPU increased in the fourth quarter and the positive trend in broadband net adds, where we have achieved the highest level of additions in the last two years.

When it comes to our financials, it is important to note that during this fiscal year our net financial position increased to ARS5.4 billion in cash after having paid ARS1 billion in dividends and performed share buyback for ARS0.5 billion. It is worth mentioning the solid financial structure achieved due to healthy financial policies applied that is a valuable asset in a challenging macro context.

Please turn to slide 6 for comments on the mobile business performance. As of December, our customer base totaled 20.1 million, with a 6% year-on-year expansion, supported by postpaid growth with an increase of 7% versus fiscal year 2012.

Meanwhile, during fourth-quarter 2013, monthly ARPU rose 9% to ARS69 when compared to the same period of 2012, bolstered by non-voice ARPU with a high 18% growth in the quarter, but being impacted by non-recurring effects that we will explain afterwards.

We can highlight that the mobile unique Internet users that measures the number of subs that use Internet at least once a month reached 6.7 million customers in the quarter, increasing by 31% versus fourth-quarter 2012.

This is a result of our commercial focus towards smartphone sellout as part of our strategy to support value-added services growth. As a consequence of our value-added services strategy and smartphone push, we can see that in another substitution process towards IMS services the increasing portion of multi usage customers with higher ARPU mitigates the SMS substitution effect.

As an example, in a customer segmentation per usage analysis, a triple play customer who uses voice, SMS and data all together generates 1.5 times the ARPU of a two play voice plus SMS sub. The participation of triple play modality use has increased 10 percentage points, reaching 50% of our active customer base.

In slide 7 you can see the events that have affected the fourth quarter mobile service revenues performance. In this sense we can separate this in recurring and non-recurring effects, as recurring impacts the increase in VAS content, revenue starting to converge at lower or more controlled growth rates after having experienced significant expansion rates along 2013.

This effort represents approximately 5 percentage point in the decline of the growth rates of fourth-quarter 2013 mobile service revenues when compared to third-quarter 2013 [notes].

On the non-recurring effects, we can point out that specific promotion in prepaid launched to sustain the Christmas campaign such as the triple credit on recharges, plus the impact of the delay in the price adjustments impacted in 7 percentage points in the declined growth rates.

In slide 8, we can -- we saw the service revenues performance that grew by 20% in 2013, supported by the increase in data and Internet services that particularly in this quarter rose by 25% and 67% year on year respectively. Due to this expansion, value-added services revenue increased by 33% year on year, reaching 58% participation of service revenues in full-year 2013.

This performance has helped us to maintain our revenue leadership while optimizing our commercial costs. In full-year 2013, SAC and SRC decreased 380 basis points when compared to full-year 2012.

Quarterly SAC and SRC costs declined to 11.2% of service revenues, falling 300 basis points from 14.2% a year ago. This was achieved thanks to a structural review of the subsidy policy, where postpaid subsidies were significantly reduced and margins in the handset sales in the prepared segment were increased.

Please turn to slide 9 for a snapshot of the Paraguayan operation. Our customer base in Paraguay reached 2.4 million, increasing by 5% year on year, while postpaid customers rose by 13% year on year, improving the customer base mix. In this market we focus our strategy in mobile Internet, where Nucleo has become market leader.

As a result of this, value-added services as a percentage of service revenues represent 54% in full-year 2013. Moreover, we have continued to increase our capacity and coverage together with expanding our LTE network in order to sustain our leadership in the mobile Internet business. Finally, the margin of operating income before D&A represented 37% of net revenues.

Slide 10 shows the evolution of mobile revenues for full-year 2013, where we can see that we have grown by 27% year on year to ARS20.3 billion, sustained by the growth in browsing and VAS content revenues. Revenues coming from mobile Internet services and data continue to be the main drivers of growth, increasing by 67% and 25% respectively.

Retail voice and wholesale services were both up by 7% and 5% respectively, while handset sales increased by 63% due to the increase in volume and the price effect of the general reduction in subsidy and having sold more sophisticated devices.

Please refer to slide 11, as we move to the evolution of our fixed business. The fixed broadband subscriber base confirmed the positive trend we have been seeing since second quarter 2013, with 38,000 net adds in the fourth-quarter 2013, while the ARPU rose by 20% year on year to ARS154 with a controlled evolution of churn.

In this sense, we have been able to increase our value proposition putting in the market incremental speed offerings such as the 10 megabyte speed in the retail market, thus following to improve our broadband pricing.

Slide 12 shows the evolution of our corporate ICT and data center services that delivered a robust 31% revenue growth year on year. Moreover, fixed voice lines remained stable at 4.1 million and we were able to record a monthly ARPU of ARS54 per month, an increase of 9% year on year.

This performance was achieved thanks to our continuous strategy of service back offerings, plus our bundle offers of broadband value-added services, voice and basic supplementary services.

We can see on slide 13 that during full-year 2013 fixed business revenues expanded by 16% year on year and totaled ARS7 billion, representing 26% of consolidated revenues. This expansion was mainly due to the growth of our residential Internet services, where revenues increased by 26% year on year or ARS528 million, followed by data revenues that contributed with a 31% year-on-year growth or ARS228 million revenue increase.

Despite basic voice services are capped with frozen tariff, in full-year 2013 we were able to increase revenue coming from these services by 7%. Nowadays, only one-third of our revenues in the fixed business are price capped due to the tariff freeze in the basic service.

Slide 14 shows the evolution of our consolidated capital expenditures. We have invested close to ARS4.9 billion in full-year 2013 that represent 18% of revenues, while in fourth-quarter 2013 CapEx increased by 83%.

It is notable that despite delays in authorization and import process, a strong increase in PP&E CapEx was achieved. During the year, actions were adopted to achieve a significant improvement in the levels of network performance and quality of service in the mobile services.

These actions included the implementation of a second 3G carrier, the expansion of our capacity and coverage through new sale sites, the immigration of site to six sector configuration, plus the upgrade of the access network, all these resulting in the significant increase of the number of interventions in our mobile access network. Moreover, we can also refer to the FTTx rollout deployment to improve commercial offer and user experience.

Having gone through the business highlights, now I'll pass the call to Adrian Calaza, who will go over our financial performance.

Thank you, Stefano. We will now go through our consolidated financial figures that reflect the business performance that our CEO just described, but most of all solid economic and financial structure that allow us to keep our business strategy in a challenging macroeconomic context.

Please turn to slide 16, where we show the evolution of consolidated revenues and operating income before depreciation and amortization. In the full-year 2013, consolidated revenues reached ARS27.3 billion with a 23% year-on-year growth, particularly fueled by the mobile services, corporate data and Internet business, as we mentioned before.

It is important to underline that revenues coming from regulated tariff services account for just 8% of total revenues, due not only to the growth of mobile and broadband businesses, but also because we continue to be affected since 2001 with the freeze of basic voice tariff.

Operating income before depreciation and amortization totaled ARS7.6 billion in 2013, representing 27% of revenues and growing by 15% year on year. Moreover, fourth quarter growth was somehow affected by specific revenues and cost effect, as we will see in the next slide.

So in slide 17, we lay out the evolution of growth in operating income before depreciation and amortization for the fourth quarter of 2013 when compared with the growth of the third-quarter 2013 and the factors that affected the evolution of this growth.

As we deeply explained before, specific events affected the mobile ARPU in the fourth quarter of 2013 and this represented approximately 10 percentage points in the growth rate of the fourth quarter. But it's necessary to repeat that most of them are non-recurring.

Moreover, during the fourth quarter of 2013 we experienced accelerations in the level of commercial activity when compared to one year before when the level of handset sellout, as you may remember, had declined significantly. In terms of increase in commercial costs, this affected the growth rate of the operating income before depreciation and amortization by 3 percentage points and should be also a non-recurring event -- effect.

In addition, specific costs incurred to comply with the quality of service new regulation and a significant increase in invoice distribution cost, mainly in postal cost, impacted the growth rates by approximately 3 percentage points. In this issue, this brought significantly improvement in the customer experience against our competitors, as you may see in the chart that reflects the official audits performed by the CNC.

On the positive side, the structural review of handset subsidies and other efficiency gains represented an improvement of approximately 3 percentage points in the growth rate of the operating income before depreciation and amortization.

This said, please move to slide 18, where we can see the full-year evolution of our operating income before D&A and the most relevant components of this evolution. With consolidated revenues growing by 23% year-on-year, some costs expanded above this level. For example, the change in mix in the handset sellout towards more sophisticated devices despite it has represented as a significant increase in revenues and its consequent increase in mobile value-added services resulted in an increase in the cost of handsets of 52%.

In the same direction, direct labor costs grew by 27% year on year after the new bargaining agreement that impacted our margin in 50 basis points. The increase in direct taxes on revenues strongly impacted the margin in 70 basis points, growing 33% year-on-year due to increased municipal levies and charges, but specially to higher provincial turnover tax rates in specific districts such as Buenos Aires City, Buenos Aires province and Mendoza.

Additionally, the strong growth of revenues coming from value-added services even with high margin contribution has a counter impact on cost, impacting our margin in 110 basic points. On the other hand, improvements in interconnections discretional costs and other marketing and sales costs such as advertising helped to partially mitigate the impact of inflation in other items.

Please turn now to slide 19 to consider the performance of our operating income that reached ARS4.5 billion with a 14% increase in the full year of 2013. Meanwhile, the net income attributable to Telecom Argentina reached ARS3.2 billion growing by 19% year on year.

Regarding our financial position, in slide 20, you can see that the Telecom Argentina Group continues to report a healthy operating free cash flow generation that reached ARS3.8 billion in the fiscal year 2013, equivalent to 14% of our revenues, allowing us to reach a net cash position of approximately ARS5.4 billion. Furthermore, ARS1.5 billion returned to shareholders through the dividend payments and share buybacks.

As seen in slide 21, solid financial policies limited our exposure to FX risk, where our unleveraged balance sheet with no financial debt denominated in foreign currency, recurrently tagged as a sub-optimal capital structure represents today a strategic asset in the current Argentine macro environment.

Additionally, during this year we have implemented sound financial policies in order to limit any potential impact coming from the depreciation of the peso. In this sense, we have adjusted our financial investment strategy to include FX denominated or adjusted bonds, entered into NDF contracts, plus a timely strategy with a working capital that has allowed us to significantly reduce the exposure to FX risk when we look at the net balance of accounts payable denominated in foreign currency.

Moreover, a limited impact in P&L is shown where costs are almost matched by revenues in foreign currency coming from international traffic, corporate data and international roaming.

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

(Operator Instructions).

Michel Morin, Morgan Stanley.

Obviously, there has been more volatility in the macro and turnkey markets since the beginning of this year. So I was hoping that perhaps if you could update us on what you have been seeing year to date in terms of the impact of these moves on your fundamentals, if there has been any impact?

And then separate to that, if you can help us understand what kind of impact we should anticipate from moving to the per second billing, which I understand happened towards the end of last year? So this will be also the first quarter where that's in place? Thank you.

Hello, Michel. This is Stefano de Angelis. I start from the second question. First of all, the per second billing is something that we were expecting by, say, almost two years. So we were preparing our commercial offer in order to face something that we were expecting not in the way that happened in December. It was an announcement that surprised the industry, but something that we were expecting along 2014.

In this sense, you have to remember that the impact is limited by set up fee that represents 30 seconds of the existing tariffs. So it's not a full impact of the per second billing methodology. In this sense, we do not expect a significant impact taking into account that. First of all, the minute of usage of our prepaid customers, that is the one that are full impacted by the per second billing, is low when compared to the [Cuentas Clara] and postpaid that are secured by the packs.

Let me say that they have in the bundle a way of acquiring our services. Second, we may expect some elasticity. Third, we were just moving into packs of minutes, packs of daily, unlimited calls on net. So we do not expect a significant impact and we do not think that it's going to affect our revenues expectation along 2014.

Regarding the impact of the macroeconomic turmoil, first of all, as Adrian was representing in his speech, we have a zero net balance in our P&L because the US -- if we eliminate the handsets that are US dollar based in the cost and that the pricing always follows the US dollar trend, if we see the OpEx and the revenues, we have a zero balance sum in the revenues that have a US dollar impact and the costs that have a US dollar impact. This means that we are imagining to be able to pass through the US dollar impacts in costs into the revenues. That is something that we are expecting today.

Second difference is the impact on CapEx. If we look at CapEx, we have approximately 500 million of capital expenditures that is denominated in dollars. It is --

50%

-- 50% of our CapEx. This may create an impact on the CapEx. That's why we are not giving a guidance on CapEx, because it is important for us to understand the evolution in the next quarter of the US dollar exchange rates. Then we are just starting to analyze the volumes of CapEx that we have in our budget, just to see, because it's clear that all that is related to FTTx, all that is related to the access mobile network deployment won't be impacted by the US dollar because we need to continue to invest in the mobile network and the FTTx.

On the other side, it is important to remark that -- sorry, to be long in the answer, but in this moment we are working each day and each hour in this matter. If we look at the CapEx of 2013, we have achieved ARS4.9 billion because we were anticipating some CapEx, for example, we have both all the needs in terms of IT server for the data center for the next 18 months. So this will protect Telecom Argentina from any impact into this part of the CapEx deployment.

Thank you. That's very helpful. My question was also more specifically on, have the macro developments impacted consumer behavior? In terms of your customers, have you noticed any change in dynamic in terms of perhaps recharge activity on the prepaid, perhaps increased churn on postpaid? In fact I'm not sure that I saw your mobile churn number in the release. So I was also hoping that you could provide that. Thank you.

No, understood that -- listen, I give you a short-term view, because honestly it's very difficult in this moment to have a medium, long-term view on this matter. In the short term, what is happening and what may happen, we can expect a reduction, for example, in the number of handset sales, because all the market is reducing the financing of the handset and electronical devices.

And this may have a limited impact, an indirect impact in our smartphone penetration and data user penetration. But we do not expect a negative impact on the global financials of Telecom Argentina.

On the other hand, looking at January and February, we are not seeing any impact in terms of the consumption. And in this sense in the short term we do not expect a negative impact coming from the reduction of the consumption of our customers related especially to the mobile services.

Okay. Thank you very much.

Rodrigo Villanueva, Merrill Lynch.

I was wondering if you could share with us any update regarding the transaction of Telecom Italia with Fintech for control of Telecom Argentina? Has there been any change in the operations of Telecom Argentina? And I also wanted to ask is there any tag-along rights triggered by this acquisition? That will be my first question.

First, we may expect the operation to be closed in the next three to six months. But this is an expectation that is difficult for us to answer something that is not affecting Telecom Argentina. It is not directly meant to -- in Telecom Argentina. So we have signed the filing in December and we are expecting the process to be completed in the next months. Okay.

In terms of the impact for Telecom Argentina, I can say that the impact would be approximately to zero. Because if we look at the declaration of David Martinez, David Martinez reinforced his intention to sustain the investments in -- the capital expenditures in Telecom Argentina. He has reaffirmed in the Fintech policies to maintain the managers of the Company. So in this sense we do not see any discontinuation of the present policies offering and level of investment of the Company.

On the contrary, we may expect a relief in the regulatory context because we have not to forget that today we are limited by the Telco Telefonica situation and in order to even in some terms of bureaucratic activity that we have performed as a Company, we have a lot of committee that is needed in order to preserve the independence of Telecom Argentina from Telefonica. All this will be erased with the closing of the operation.

And then regarding the tag-along, honestly I do not -- I don't know. And they -- the [HTA] is a public filing on the SEC, so you may see what is published and you may find the information you need.

Okay, thank you very much. Very clear. And my next question is regarding EBITDA margin. We have seen EBITDA margin declining by an average of 200 basis points over last several years. I was wondering if at around 27.5%, 28% you would think these levels are sustainable going forward or if we should continue to see an erosion of margins due to inflationary pressures?

Rodrigo, hi. I'm Adrian. Well, yes, these last years we saw margins decline around 200 basis points. This is matter of inflation. It's all -- and if we are able to increase not just the revenues coming from volumes, but especially from prices at the same pace of inflation. This last year even with limited price adjustment we managed to increase the revenues in a very significant level, almost matching inflation.

But again some costs affected more than this 23%, especially were labor cost related. It's something that we try to manage each day. We will try to maintain the actual levels. But it depends a lot on the -- for example, on the union bargaining of this next month, of also the -- some other variables of the macro context.

So we cannot assure you that we will maintain the actual levels. We will try to make our best effort in order to achieve it.

Understood. Thank you very much, Adrian.

(Operator Instructions).

Santiago Petri, Franklin Resources.

The question is related to inflation adjustment in the balance sheet. Now that the official inflation on fiscal revenue is considerable, do you think that the government will allow companies to adjust balance sheets due to inflation? Thank you.

No, we are not performing any adjustments on our balance sheet. It's not allowed under the actual rules in Argentina, and even more under IFRS you need to have accumulated 100% in three years in order to be allowed to adjust the balance sheet.

Okay, thank you.

And with that, it does appear that we had no further questions on line, the phone lines. We would like to now turn the conference back over to our speakers for any additional or closing comments.

Okay, thank you everybody for participating in this call and feel free to contact us for any additional questions you may have. And everybody have a good day and weekend, especially those in Latin countries that will enjoy carnival holidays. So good day to everybody. Bye-bye.

Bye.

And with that, ladies and gentlemen, that does conclude today's conference call. We like to thank you again for your participation.