Telecom Argentina SA (TEO) 2014 Q2 法說會逐字稿

Please stand by, we're about to begin. Good day, everyone. Welcome to the Telecom Argentina Second Quarter 2014 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 America Argentina]; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Financial Director; and Ms. [Hollange Partadenny], Manager of Investor Relations.

At this time, I'll turn the call over to Mr. Pedro Insussarry.

Please go ahead.

OK. Thank you, [Greg], and good morning to everybody on behalf of Telecom Argentina, I'd like to thank you for participating in this conference call. As stated, the purpose of this call is to share with you the consolidated results of the Telecom Argentina group that correspond to the first half of 2014, ending on last June 30.

We'd like to remind you that for all those that have not received our presentation, that you can call our investor relations office to request the investor relations section of our Web site, located at www.telecom.com.AR/investor.

Additionally, this conference call and slide presentation is being broadcast through our webcast feature (inaudible), and can also be replayed through this same channel.

Before we continue with this conference call, I would like to go over some safe harbor information and other details of the call, as we usually do in our quarterly conference calls.

We'd like to -- we would like to clarify that during the conference calling Q&A section, we may produce certain forward-looking statements about Telecom's future performance (inaudible) then describe these as targets. Those statements are subject to uncertainty that could cause several actual results and operations to differ materially. Such uncertainties include, but are not limited to the effect of general public emergency law, complementary regulations, the effects of ongoing industry and economic regulations, 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 29th, 2014, a copy of which was included in our [Form 6k] report furnished to the SEC describes certain factors that may affect any forward looking statement that we may produce during this session.

For the (inaudible) 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 is seen in slide 2. It is first to go over a general market overview, followed by a discussion in -- of the business highlights, a review of our financial figures, and, finally we will end the call with the Q&A session, as we normally do, with the financial community.

Having gone through these procedural matters, I will now go over the brief macro overview as an introduction to the general operating environment.

Please refer to slide 3 of the presentation, where we include a snapshot of the current Argentine macro economic environment. The second quarter of this year confirmed the slow-down trend in economic activity, with a strong acceleration in [international] production that caused a domino effect in other sectors, like retail, wholesale commerce, transport and communication, and manufacturing industry.

On the contrary, the increase in interest rates contributes to growth of financial [interrogation] sector, and a good harvest season in the quarter supported growth of the agricultural sector.

This was not enough to offset the general decline in the economy. Moreover, the level of potential was affected by these factors together with the decrease in real wages.

During the second quarter 2014, new economic measures were implemented to support, for example, car sales, mainly impacted by the decline in exports.

We can state that after a strong decline at the beginning of the year, the consumer confidence index showed a stable performance. Nevertheless, the decline in supermarket sales reached negative 1.3 percent in the first half of 2014, and in June, specifically, a decrease of 4.3 percent.

Additionally, the new CPI index reached a cumulative 15 percent in the first half of the year, in that the context, the collective bargaining agreements were settled with wage increases on average of 31 percent.

On the monetary front, some measures to reduce the loan interest rates and to mitigate the negative impact in the economy were taken. Moreover, central bank reserves showed a decrease of 21 percent year-on-year, but increasing since the last -- since last April, mainly as a consequence of the liquidation of exports of the soybean harvest.

After having gone through this introduction of the macro context, let me pass the call to our CEO, Mr. Stefano de Angelis, who will go over the (inaudible) highlights. Stefano?

Thank you, Pedro.

And good morning to everyone.

This refers to slide 5, where we have a summary of the main achievements for the quarter.

Our business continued with a similar revenue extension trend, (inaudible) the quarter, achieving a 22 percent increase, driven by the growth of 56 percent in mobile [inter international arena], 55 percent growth in data and 26 percent increase in [fix-it] programs.

In terms of clients, it's worth mentioning that as a result of our [entrance] strategy during the quarter market penetration reached 30 percent of the total [shops], while the mobile [strategic] customer base in Argentina continued to increase, accounting 9.4 million.

In addition, [smartco] sellout in the second quarter represented 81 percent. [SAC] and [SRC] continue to decrease, as a result of the sustainable reduction in [onset] subsidies, as we move into positive territory we'll effect [quonset] sellout margin.

In this [dance] the second over our [ratio] decreased to 9.1 times in second quarter '14, from 3.2 times one year ago.

Our mobile subsidiary in Paraguay, [Nucleo], achieved a 10 percent increase year on year, in the [post-date] segments, with a (inaudible) improvement in the [capital money].

Moreover, it's important to highlight that movement in [our desk] continue to increase, reaching 92,000 in the last 12 months, with an increase in [ARPO] of 20 increase.

In this sense, [Goodyear self cabinet] deployment helped us (inaudible) to increase our (inaudible) customer base where we are offering connection speeds of more than 10 mega to (inaudible) enterprise market. Thus being more competitive with compelling commercial offers.

When it comes to our financials, for this year our shareholders approved a total dividend payment of 1.2 billion pesos, (inaudible) to a payout ratio of 37 percent for full year 2013. The first installment of [600 and one million pesos] was paid in June, and the second one will be -- it will be paid in September, on a specific date to be determined by the board of directors, being [able] to deliver a consistent return to our shareholders, as this will be the fifth year in a row that we pay dividends.

[Sister] was like [six full comments] on the mobile business performance. The current concepts -- context -- of increasing inflexion and slowdown in consumption we are -- we'll follow a strategy that is focused in post-paid as a way to stabilize revenue stream and in sales mix as a way to secure future growth.

As of June 2014, our customer base totaled 19.8 million, with a 2 percent year on year expansion, while mobile [unique internet] user increased to 6.9 million customers in the quarter, supported by 3Cs [martial] sellout and contributing to the growth on the novelty value-added services.

This consistent growth came with higher grossing ARPO and incremental usage of data.

Monthly ARPO in second quarter '14, rose by 9 percent, reaching 71.6 pesos, when compared to the same period of 2013, fostered by growth of 14 percent year on year in nonvoice ARPO.

In the post base segment, we can see a positive evolution of ARPO that reached 145 pesos, representing an increase of 21 percent versus second quarter '13, driven by a growth of 26 percent in nonvoice (inaudible).

Let's move on to slide 7, where we show the mobile revenues performance. In line with the strategy I just mentioned, our revenue mix shows an healthy evolution, despite pre-paid has been affected by the retrenchment in consumption.

Internet services increased by 56 percent year on year, and, therefore, total value added services revenues grew by 19 percent, reaching 59 percent participation of service revenues in first half '14.

Post-paid revenues growth by 24 percent in June '14, representing 66 percent participation of service revenues.

Meanwhile, the pre-paid sank. Many traditional pay-per-use services continue to be strongly affected by the slowdown in the economic activity, increasing pressure from the [opposition], [reverbatory] changes, like the [first-second million] and cannibalization of SMS.

And defending the prevailing economic condition, we have launched the super cheap offer to uplift [predatory] charges, to regain positive trend in 30 days recharging customer base, with positive results. That is to say, an 18 percent increase in prepaid, [small] in second quarter '14 compared to first quarter '14.

On the other hand, in novelty [pay-per-use] value added services increase of 52 percent is shown in June 2014, when compared to June 2013.

Please turn to slide 8, as we move to the evolution of our [fixit] business. The [fixit] broadbase subscriber base continued with a positive trend at being 92,000 new (inaudible) year on year, while the ARPO rose by 20 percent in second quarter to 148 pesos, with a stable evolution of charter.

In this sense, we have enriched our commensurate offer by increasing speeds to recapture flow share, where the 10 mega speed offering was the most demanded, rising by three times, thanks to the network deployment.

Also, we connote the evolution of our corporate data set. This is set delivered a strong 60 percent revenue growth in your on year in second quarter due to the extension in ICC services during the period, an improved service provision in our competitive funding offer was developed.

Slide nine shows our consolidated revenues evolution. The growth we reported was the result of data internet and [ancess dissention]. Revenues increased by 23 percent year on year, achieving 15.6 billion pesos. In the [fix it] business, data revenues increased by 55 percent year on year or 242 million pesos, followed by [internet] revenues that contributed with a 26 percent growth or 312 million pesos. In the mobile business we can highlight revenues coming from Internet services which continue to be one of the main drivers of growth, increasing by 56 percent, as well as a 71 percent in assets.

Going to slide ten, where we [exited evolution] of our consolidated CapEx, we can see that our focus was on capacity and coverage to ensure a consistent improvement in service quality. We have invested approximately 2.3 billion pesos during the first half of 2014. That represents 15 percent of revenues, an increase of 46 percent versus first half '13.

It's worth mentioning an increase of 64 percent in [PB topics] in Argentina versus first half '13. During the quarter, the (inaudible) access rollout continued with the focus in service quality upgrades. Some action such as the deployment of new sites and implementation of the second 3G target was developed to increase the capacity and (inaudible) of the (inaudible) in the use of the existing [wireless] sector.

This resulted in a significant increase of 159 percent in mobile access CapEx. Returning to the five-year rollout, we can highlight the fact that it has increased by three times year-on-year in order to offer higher Internet speed and plus being able to deliver a better navigation experience.

Let's move now onto slide 11 where a snapshot of the 3G and 4G sector option [exhibits]. On July 7th, the government announced the long-awaited 3G and 4G wireless [action] options. In 3G the spectrum to be optioned [19850] mega bands in line to the regional process (inaudible) in September 2012.

If we participate and win this (inaudible) with contributing improved capacity and quality in the short term. The government has left the 50 [mega-cap] for each [operator], and therefore our participation is limited to only some regional blocs.

Then in the 4G and the [spectrum] in AWS in 700 megas frequencies, licenses will be granted with the national coverage and the cap in this case was set in 60 [megas] [to the] operator.

In addition, the terms and conditions include strong CapEx and service coverage requirements for both 3G and 4G with a 15-year license term. Once again (inaudible), we participated in both auctions and following the block scheme included in the terms and conditions would imply a minimum cost of $442 million.

Turning now to the business highlights now we will pass the c all to Adrian Calaza, who will go over our financial performance.

Thank you, Stefano.

Please turn to slide 13 where we can -- you can see the evolution of consolidated revenues and [EBITDA].

In the first half of 2014, consolidated revenues reached 15.6 billion pesos with a 23 percent year-on-year growth, particularly sustained by mobile services (inaudible) in Argentina and fixed broadband that represented [69] and [10] percent of consolidated revenues respectively.

It is important to underline that this revenue growth was achieved even not only after negative attacks already mentioned, but decline in economic activity (inaudible), but most of all having (inaudible) effect regulated services in [2002].

EBITDA totaled [4.1] billion pesos in the first half of 2014, representing 26 percent of revenues and growing at a base of 14 percent year-on-year. And back to slide 14, where we zoom into the evolution of our EBITDA with its most relevant component.

As mentioned before, with consolidated revenues growing by we percent year on year, [put] in the context of accelerating inflation and contraction in consumption, we have redoubled our efforts in cost control and efficiency gains, especially on [SAC] and [SRC] that continue to decrease as a result of the sustainable reduction in [hazard subsidies], helping us to improve the return of (inaudible).

By (inaudible) consolidated operating costs increased above top-line levels, mainly due to increasing taxation and inflation and labor costs and labor-related costs. As mentioned before, significant reduction in [hazard] subsidies allowed us to boast for a second quarter in a row a positive margin in (inaudible) business, with [pace] growing by 68 percent versus (inaudible) first half of 2013 while (inaudible) costs increased by 47 percent.

Labor costs grew by 35 percent year on year impacting our margin in 150 basic -- basic points, but it's important to stand out that 122 million pesos were due to [severance] payments related to reorganization or restructuring costs.

The increasing fees for services, maintenance, and materials impacted in the evolution of EBITDA in 70 basis points, increasing by 32 percent mainly due to rises in [technical maintaining], licenses of systems, and higher fees for services, all items affected by the peso devaluation.

Moreover, direct taxes on revenues impacted the margin in 20 basis points, growing by 25 percent mainly due to further increments internal where taxes raised during the first half of the this year, even though at a slower pace when compared to fiscal year 2013.

Additionally, value-added services costs mainly related to content continued to increase, impacting our margin in 20 basis points, but this is related to a significant expansion of value-added services with a high margin of [outages].

On the other hand, (inaudible) back to strong (inaudible) and gaining efficiencies in costs, other marketing and (inaudible) costs, interconnection costs, and other costs positively impacted margin.

Please turn to slide 15. You can see that the performance of our operating income that reached 2.5 billion pesos, with a 27 percent increase in the first half of this year, considering a positive effect when compared with last year's figures that included charges related to disposals of [PPNB].

Meanwhile, net income attributable to (inaudible) Argentina reached 1.8 billion pesos, growing by 24 percent. It is remarkable that financial returns in the second quarter fostered a strong net income growth in 2014 given that to the strong peso devaluation.

We must note that the financial results in the second quarter were affected not only by a non-cash pre-tax loss of [2,002] million pesos related to purchases of U.S. dollars -- U.S. dollars bonds. Following accounting valuation standards of fixed-income securities at the official exchange rate that we will explain in a further slide.

Regarding our financial position, as you can see on slide 16, the Telecom Argentina Group continued to report a healthy operating (inaudible) generation that reached approximately 1.6 billion pesos in the last 12 months, allowing us to reach the (inaudible) net -- to present a net cash position of approximately 3.8 billion pesos after paying a significant amount of taxes and dividends.

As we highlighted in the last quarter, solid financial [qualities] implemented in the recent past have significantly limited our exposure to (inaudible) where our unleveraged balance sheet with no debts denominated in foreign currency represents the [strategic] assets in the current Argentine (inaudible) environment even more today.

During the first half of 2014, we continued with our hedging strategy in order to mitigate the impact coming from the [devastation] of the peso. In this sense, we achieved a total coverage equivalent to more than 120 percent of our net payables in foreign currencies.

Moreover, we are able to enjoy limited impact in our [PNL] as revenues in foreign currency almost matched our (inaudible) costs.

On slide 17, we have shown the effect in our net financial position of investments in Argentine bonds and notes were valued at amortized costs and their respective par value. It is worth mentioning that these bonds are not -- are [non-restructured] bonds and are under Argentine jurisdiction and local (inaudible). That financial position is the first half, including financial instruments, rather than (inaudible) value, would amount to 4.1 billion pesos.

Lastly in slide 18, we can notice the evolution of the (inaudible) declared dividends. For the (inaudible), it was approved a dividend payment of 1.2 billion pesos payable in two equal installments. The first one was paid on June 10th and the second we will pay in September 2014.

Considering those installments and at current [ABR] price and (inaudible), Telecom Argentina will accomplish a dividend yield in U.S. dollars of 3.8 percent while (inaudible) showed 3.6 percent. Furthermore, from 2002 to 2014, the dividends paid increased -- increased by 49 percent.

Having now concluded with the presentation, we are more than pleased to answer any questions you may have.

I'm sorry. A final remark from Stefano.

(inaudible) remarks. As recently announced, I will resign on August 13 in order to take another responsibility in the (inaudible). The appointment of the new CEO will be determined by a specific board of directors of Telecom Argentina. It will be filled within August the 13th.

It's worth mentioning that this year (inaudible) very exciting experience and a very unpredictable context. And I hope to have contributed, joined with all the people of Telecom Argentina, to grant a sustainable (inaudible). I also would like to thank you for your attention during this period and this conference call we are performing, and I'm sorry for this very late announce, but we prefer to announce this news before the conference call and not later on.

Now, we get into the question and answer. Thank you.

And if you do have a question today, signal to ask by pressing star-one on your telephone keypad. If you're using a speaker phone to join us, please make sure that your mute function is off and (inaudible). Again, that's star-one if you have any questions (inaudible).

It appears we have no question at this time. I'll turn it back to [management] for any additional or closing remarks.

OK, Greg. Can we refresh if we have anyone in the queue? We're open to any questions you may have.

Just a reminder to the audience it's star-one again, star-one.

And it appears that we still have no questions at this time.

Okay. Thank you very much to everybody for participating in this conference call. And please do not hesitate to call us with any questions you may have.

Good morning to all and we expect to meet again in the next conference call. Thank you very much.

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

(inaudible) the line privately. Is there anything else I can do for you?

Greg, how many we had in the queue?

It looks like total we had 13 participants join us today, but obviously none of them (inaudible) any questions.

Okay, thank you very much.

All right. You're welcome. Everyone have a great day.