Telecom Argentina SA (TEO) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TEO second quarter 2016 earnings conference call. (Operator Instructions)

As a reminder, this conference is being recorded today, Wednesday, August 10, 2016.

I would now like to turn the conference over to Pedro Insussarry, Head of Finance. Please go ahead, sir.

Good morning to everybody. On behalf of Telecom Argentina, I'd like to thank you for participating on this conference call.

The participants of today's conference call are German Vidal, Chief Executive Officer of Telecom Argentina; Ignacio Moran, Chief Financial Officer; Solange Barthe Dennin, Manager of Investor Relations; and myself, Pedro Insussarry, Head of Finance.

As mentioned by Carlton, the purpose of this call is to share with you the results of the second quarter of 2016, ended on last June 30.

We would like to remind all those that have not received our press release or our presentation, they can call our Investor Relations office to request them or download them from the Investor Relations section. Additionally, this conference call and slide presentation is being broadcasted through the webcast feature available in such 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 we usually do in this type of events.

We would like to clarify that during the conference call and Q&A session we may produce certain forward-looking statements about Telecom future performance, plans, strategies, 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 public emergency law and complementary regulation; the effects of ongoing industry and economic regulation; possible changes in the demand for telecom products and services; and effects of more general factors, such as changes in general market or economic conditions, in legislation, or in regulation.

Our press release dated August 9, 2016, a copy of which has been included in a Form 6-K report furnished to the SEC, describes certain factors that may affect any forward-looking statement 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, first, to go over a general market overview; followed by the discussions of the business highlights, strategies, and performance; and then, we'll go over the financial figures. Finally, we will end the call with a Q&A session, as is customary in our quarterly conference calls with the financial community.

Having gone through these procedural matters, I will go over a brief overview of the macroeconomic environment in which we operate. Please refer to slide 3, where we include a snapshot of the current Argentine situation.

Throughout the second quarter of 2016, the Argentine economy continued to show a weak performance, in line with the trends observed in past quarters. In these six months, the macro context has been strongly influenced by reforms and policies taken by the new administration in office, which were guided by the general objective of adjusting fiscal and external imbalances. The macroeconomic context has evolved into a tougher environment, combining a mild recessive scenario with inflation, FX, and interest rates at high levels.

This being said, the change in the economic policies and better expectations [will] expect the performance of the economy in the future has positively affected the external sector and the FX market, preventing from further impacts and instability.

The central bank continues executing an inflation-targeting policy, together with a managed floating-FX regime which during this quarter was aimed to detain an extensive appreciation below rates of ARS14 to the dollar, but at the same time with more stringent monetary policy to curb inflationary expectations.

On the external front, the final settlement with holdouts through an historical issuance in the international market of $16.5 billion practically concluded the default phase that Argentina went through the past years and brought stability to central bank reserves, while at the same time generated a strong confident effect paving the way for external financing.

Regarding inflation, the CPI measured by private consultants for June 2016 showed (inaudible) acceleration, reaching 41.7% on the year-on-year comparison. This rise in inflation levels can be explained mainly by the impact of the depreciation of the peso, which in turn followed by -- together with important increases in utility and transport tariffs that took place during the period, which in turn followed by a second round of adjustments in a general relative pricing; [despite, this continues] at high levels where signs of deceleration in price inflation towards the second half of the year, as shock effects of the depreciation of the peso and the tariff increases begin to fade away.

As for the economic activity, a general output reduction was observed in comparison to the last year cumulative figures, as almost all sectors are being strongly affected by the economic context. Important decreases in activity were registered in sectors like construction and agricultural, as these were impacted by, on one side, the decrease in public investment and, on the other side, lower harvest due to climate effects.

As of the first half of 2016, industrial production continues in a recessive phase in the last 12 months, with certain improvements in specific sectors like chemicals and plastic supplies, but with strong declines, for example, in car and steel production. These are mainly related to a lower demand coming from Brazil.

Finally, the trade balance posted a surplus of approximately $0.5 billion during the first months of the year, although still small in magnitude but reflects a positive trend towards the future.

Regarding salaries, it's worth mentioning that during the first six months the collective bargaining agreements that were negotiated with annual contracts were settled with an average increase of 34.2%. Meanwhile, agreements that were closed considering a six-month period were settled with an average increase of 20.3%.

As for the fiscal front, accounts continued in a delicate situation, although national authorities have begun to undertake certain measures in order to reduce the growth of public expenditures, such as reductions in subsidies. It is important to note that the moderation in expenses is being executed at the same time the new administration is implementing several tax reductions and social measures aimed to lower (inaudible). So, the final [secular reduction] in the fiscal gap in the coming periods is yet to be seen.

Nonetheless, authorities expect that fiscal deficit currently at important levels should gradually decrease over 2016 and following years.

In order to describe certain economic trends that impact specifically our business, in slide 4 we have included the evolution of sales in the retail and electronic sectors and the performance of consumer confidence index and financing.

Private consumption has significantly decreased from the levels registered last year and, more importantly, when considering electronic appliances. Taking (inaudible) a look at reported sales, we note that the consumption, particularly in electronical appliances, has registered a sharp fall in the first six months of the year.

It is important to note the fact that last year consumers were expecting the adjustment in the FX rate and the consequent increase in prices and, therefore, decided to anticipate the purchase of durable goods during the last two or three months of 2015, supported by consumer financing plans implemented by the previous administration to support the levels of consumption and activity. Due to this, the market is still in the phase of digesting the [merchant] consumption surplus of last year.

Moreover, aggregate households consumption figures seem to have dropped significantly in the second quarter of the year, as families are being strongly affected by increases in tariffs and inflation.

Having gone through this introduction of the macro environment, let me pass the call to German Vidal, who will go over the business highlights, strategies, and performance. German?

Thank you, Pedro. Good morning to everyone, and thank you for your attendance. Before we continue with the presentation, I would like to present myself. My name is German Vidal, CEO of the Telecom Group, and I took office in May 12.

My previous experience is working for more than 18 years in the technology and telecommunications sector. I began my career in IBM, where I worked for more than 10 years in different management positions in the sales and marketing function, not only in Argentina and also in Europe.

And then, in 1997 I worked for the start-up of MetroRED Argentina, a telecommunications company that was very innovative in the local market and in the Latin America market, copying a business model of another company owned by Fidelity and very well known and successful in Europe, [Code]. There, I became the director of marketing and sales, then the general manager of Argentina and the region, including Brazil.

And then, with another private equity, CoInvest, we sold the company to Telmex, where I became the director of products, marketing, and the data center business unit.

After that, I moved to the professional services business, being the president and general manager of Korn Ferry for more than 10 years, putting special focus in the development of the technology and telecommunications business.

We would like to thank you again, all of you, for joining us today and really express our happiness to be part of this wonderful enterprise named Telecom Argentina. My colleagues and me that joined the Company in recent weeks or months are happy and anxious to contribute to the growth and value of this Group that we understand is one of the best projects, most challenging, and with a lot of opportunities of Argentina.

We know that there are challenges ahead, but we also know that this Company has the positioning, the strength, and the capacity to guide the transformation in the telecom market and to be the leader in convergent services and solutions of connectivity with an agile, efficient, and client-centered organization. I would like to go over some of these issues in a coming slide.

Going back to the presentation, please refer to slide 6, where we are putting together some of the achievements the Company has reached during the second quarter of this year.

Turning to our business highlights, we continue to drive our commercial strategy towards value segments, where we have continued to stimulate the use of data and internet, with very good results in this sense.

During the second quarter of 2016, we have achieved an increase of more than 337,000 adds in the postpaid segment, representing an annual growth of 5%.

In line with the context that Pedro has just described, we have started to refocus the handset sale business, where we concentrate our efforts in upselling in the postpaid market, but we must also gain efficiency in the [purchase to sale] process to improve profitability. Regarding this, we have made the decision to redefine this business as a complete business unit itself, more than just an additional product of our product offering.

The Company has continued to progress in the reconversion of its commercial offering of mobile services, and we can highlight that the penetration of clients with data-centric plans now represent 67% of the total postpaid base in the second quarter.

More than 3 million subscribers can enjoy 4G services, while data consumption continues to improve. In this sense, data consumption has boosted, where we can see that 4G customers increased their usage by 156% when compared to that of non-4G clients.

Furthermore, we continue to see evolution in the base that is using mobile internet, as data penetration grew by 13% year on year, achieving 8.7 million unique users.

Moving on to the fixed broadband segment, we can notice a steady growth in ultra-broadband connections, that now represent 31% of the total client base versus a 22% over a year ago. In this case, ARPU grew with 29% versus the second quarter of last year.

It is worth mentioning that during this quarter some adjustments in the fixed voice monthly fee prices were implemented in the residential segment.

As far as financials are concerned, the growth trend of service revenue has improved. Service revenue growth in Argentina reached 31%, mainly driven by the growth in mobile internet and fixed data and broadband, which increased by 74% and 46%, respectively.

In a challenged economic scenario, we were able to increase EBITDA by 32% year over year, reaching a 27% margin for the first half.

In addition, it is important to bear in mind that there will be a significant improvement in the dividend payments for this year, as the [payout] ratio was increased to 59% and the dividend per share will be ARS2.06.

Finally, in terms of corporate governance, it is important to mention that there was a change in the control of the Company, as we will explain in the following slide, and that related to this change of control the new controlling shareholder has announced a public tender offer for the shares that are traded in the market.

Please let's move to slide 7, where we show the new shareholders structure following the change of control of the Company. We have a new senior management team after the appointment of Ignacio and myself. We have new senior executives that were appointed in the areas of the COO; the human resources; internal audit; government relations, communication, and media; strategy, innovation, and business development; and, very recently, procurement.

Since we took the responsibility of leading this Group to a new transformation, we have started to implement some changes based on six main pillars, as seen in slide 8. This is a Company that has an ongoing business that follows a strategic plan that has a CapEx program of ARS40 billion for the following three years, and we will continue with that plan.

But now, with the new controlling shareholder, we have the advantage of being a Company fully oriented to the local market, and we must benefit for that. We are convinced that is a competitive advantage against our competitors. Now, we have the capability of developing a strategy fully oriented and tailored for the local market and, of course, gaining in speed to market for our clients.

Also, we are adopting a customer-centric vision where we must transform and adapt systems and processes in line with the customer insight.

In line with the trend in the market, we must take advantage of our position of an integrated operator and go beyond what has been done in terms of convergence of service and think and work towards the concept of digital consumers with multiple means of connectivity.

Furthermore, we must aim our vision towards capturing the opportunities of a connected home and grow our business with the possibilities of the multiple individuals that live in such homes and satisfying our clients' needs in every step of their lives.

On the content front, we must work in region alliances with OTT players that generate value for both parties and are in line with the preferences of our customers.

As an operator with a state-of-the-art technology in terms of data center and connectivity, we must take advantage of this and improve our capabilities of Cloud services, with a strong focus towards small and medium companies and large customers.

Having gone through this, let us move to the performance of our business, and please turn to slide 9. Here, we can see the evolution of our revenues and which services have grown the most.

We can see that revenue growth has taken an accelerated pace, and this is related to the incremental usage and price adjustments.

At first glance, we can verify that in the actual revenue mix services that represent the drivers of growth of the business, such as broadband and fixed data and mobile internet, have been increasing significantly versus one year ago, while the participation of handset sales has risen, achieving a 16% of total revenues.

In particular, retail fixed voice increased by 36%, mainly due to price adjustments in the corporate and residential segments. Likewise, retail mobile revenues increased by 28%. We will go into some details of this in the following slide.

So, let us move to slide 10, and here we can review the performance in the fixed broadband and ICT services. We can note that ultra-broadband connections continue to increase, adding 40% of new adds when compared to last year.

Total subscriber base continues growing, while maintaining low levels of churn. It is encouraging to see that ultra-broadband subscribers represent 31% of the total customer base, and this is an effect of our upselling actions.

Additionally, ARPU has increased by 29%, to almost ARS260 per month, as a consequence of bundling offers, upselling actions, and, of course, price adjustments.

Meanwhile fixed data ICT grew mainly due to the effects of the increase in the exchange rate, as these contracts that are set in hard currency.

Let's move to slide 11, and there we describe the performance of the voice fixed line business. We can note that the lines in service continue to show a stable trend, combined with a steady market share, maintaining 4 million lines in the second quarter and a market share of 47%.

During August 2015 and February 2016, we have started to implement certain monthly fee adjustments to business customers. Also, residential tariffs were increased during the month of May 2016. It is worth mentioning that even after the significant adjustments our average monthly fee remains below to what our regional LatAm peers are charging, and we will take in the near future some actions on this. This explains the ARBU increase that grew by 45% year on year, to almost ARS94 per month.

Moving on to slide 12, we can notice that we continue to hold a strong position in the value segment of the mobile business, as we advance towards monetization of data traffic in line with the actions taken to increase 4G penetration.

As a consequence of this strategy of focusing in value segments, we have been able to improve our customer profile and increase the participation of postpaid subscribers, [thus continuing during to the second quarter] the postpaid market in terms of flow share. In connection to this, we can underline that 67% of the total postpaid subscribers that have data-centric plans.

Complementary to this, unique users grew by 13% year on year, amounting to 8.7 million subscribers as of June 2016.

Browsing revenues have significantly increased its participation, mainly explained by a raise in the data usage of 51% year on year. Thanks to these increases, our browsing revenues now represent 35% of our total mobile service revenue mix, up from a 26% registered last year.

Please turn now to slide 13, where we have included some milestones and data on our 4G rollout. As the deployment of Personal LTE network continues, 4G coverage expands throughout the country. The network is now available in more than 440 locations, including all provincial capital cities and Buenos Aires and its metro area, with a coverage of 70% of the areas in these cities. Now, 4G customers surpass 3 million, with a higher participation in the metro Buenos Aires region.

In addition to this, consumption of 4G customers increased their usage by 156% when compared to that of non-4G, influenced mostly by the access to video content. It is worth mentioning that Personal plans continue to enjoy the fastest download speeds in the market.

On slide 14, we exhibit the evolution of our consolidated CapEx, [where we have focused] our efforts on the network deployment. During the second [quarter], we have invested in PP&E approximately ARS4.5 billion. That is equivalent to 18% of our consolidated revenues, an increase of 85% when compared to that of a year ago.

Moreover, we can see that the evolution of total new mobile sites, new 4G sites, and areas with ultra-broadband registered important levels of growth.

In line with the actions we have mentioned before, we are focusing our efforts to enhance customer experience throughout quality improvements and innovation.

Having gone through the business highlights, strategy, and performance, now I will pass the call to Ignacio Moran, our CFO, who will go over our financial performance.

Good morning for everyone. Thank you, German. I am Ignacio Moran, CFO of Telecom Group. Same as German, I took the position in May 12.

In relation with my previous experience, I started my professional career at Arthur Andersen, actually E&Y, where I worked six years at the area of bank and capital markets. I later joined Banco San Juan, part of a group of four regional banks, as a member of the executive committee (inaudible).

Then, I worked in YPF, all in that company, two years as CFO and three years as COO. Finally, from 2012 until I joined Telecom, I worked again in banks and capital markets.

Returning to the presentations, please turn to the slide 16, where you can see the evolution of our consolidated revenues and EBITDA. During the first half of 2016, consolidated revenues reached ARS25.4 billion, with a 37% year-on-year growth. [In turn], service revenues grow at a pace of 31%, with a strong performance of (inaudible), internet service, mobile [voice], and fixed broadband, together with the corporate ICT service.

In fact, it is interesting to see that when we look at the quarterly performance of the service revenues coming from the operations in Argentina, we can note that there has been an acceleration of growth since second quarter of 2015, reaching a level of 31% in second quarter 2016.

Moreover, EBITDA shows a positive evolution year on year, growing by 32% and accelerating the pace of growth from previous quarters, but still a lower level than revenue growth, that with a [maintaining] margin to 17% (sic - see slide 16, "27%") of total revenues.

Please refer to slide 17, where we show the evolution of EBITDA with a breakdown of the (inaudible) and the different components. The Company has been taking some actions to gain efficiency in its operations. Despite increased costs of handsets and other expenses that have negative [effects] margins, relative savings were obtained in marketing and sale costs, fees of service, maintenance, and materials.

Let's move to slide 18 to review the performance of our operation income, that reached ARS3.7 billion with an increase of 18% year on year. EBIT was mainly affected by the 45% growth in depreciation and amortizations not only due the important network deployment, but also to the [decision] of 4G spectrum.

Operating margins amounted to 15% of consolidated revenues.

Meanwhile, net income as attributable to Telecom Argentina reached ARS1.7 billion, falling by 12%, affected mainly by higher financial losses as a consequence of the change in our net financial position and FX results, as we will see in the following page.

Please turn now to slide 19, where we show the evolution of our net income. Despite we have been able to expand EBITDA by ARS1.6 billion, as we mentioned before, the increase in depreciation and amortization and result of disposal and write-down of PP&E of more than ARS1 billion is impacting the growth of our operating income.

In addition, net financial results were negative by more than ARS0.9 billion due to the depreciation of the FX rate occurred during the six-months period, coupled with a rise in the interest rates and significant change in our net financial position after the spectrum and dividends payment, when compared with the same period of the last year.

All of this impacts the evolution of our bottom line. Even so, [it] reached ARS1.7 billion.

In page 20, regarding of our financial position, you can see that the net debt amounted ARS5.4 billion in first half 2016.

Operating free cash flow generation was influenced by the increase in CapEx, in line with our aggressive deployment plan, and by the evolution of working capital related to the increase in financial plans for the sale of handsets and the increase in inventories, mainly as a result of the increase in FX rate. However, cash flow generation was positive affected by the lower tax payment.

It is worth noting that during the month of April 2016 the Board of Directors decided to distribute ARS0.7 billion in cash dividends, which were available to shareholders as of May 13, 2016. In addition, it decided to [withdraw] and distribute during the month of August the amount of ARS1.3 billion as a second payment of cash dividends that will be made available to the shareholders and [depositary agents] on August 26.

Considering the total dividends payment of ARS2 billion, this year the payment ratio will be equivalent to the 15% (sic - see slide 20, "59%"), and dividend per share will result in ARS2.06, or ARS10.30 per ADR. It is notable that considering the six-year average and 2016 payout ratios both are above the levels reported by other LatAm peers.

Lastly, on slide 21, we present the level of leverage and interest coverage that Telecom currently has. We can observe that Telecom presents low level of leverage and very high level of interest coverage, and this is a result of the strong balance and cash flow generation that the Company has.

Finally, I want to say that, as Pedro mentioned at the beginning of the presentation, the current economic situation in our country is basically [start driving] by an economy adapting to new relative price and lower activity levels. Given this, we are focused on seeking greater operational efficiency in terms of costs and improve the quality of sales in terms of profitability.

Having concluded with the presentation, we are more than pleased to answer any questions that you may have. Thank you very much for your time.