Telecom Argentina SA (TEO) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina TEO First Quarter 2017 earnings Conference Call. Today's call is being recorded. Participating on today's call, we have Mr. Germán Vidal, Chief Executive Officer; Mr. Pedro Insussarry, Director of Finance; Mr. Gaspar Buscalia, Director of Administration, Planning and Control; and Ms. Solange Barthe Dennin, Investor Relations Manager.

(Operator Instructions) At this time, I'll turn the call over to Ms. Solange Barthe Dennin. Please go ahead, ma'am.

Thank you, Leo. Good morning, on behalf Telecom Argentina, I would like to thank everybody for participating on this conference call.

As mentioned by Leo, the participants of today's conference call are Germán Vidal, Chief Executive Officer; Pedro Insussarry, Director of Finance; Gaspar Buscalia, Director of Administration, Planning and Control; and myself, Solange Barthe Dennin, Manager of Investor Relations.

The purpose of this call is to general review the results of the first quarter of 2017 ending March 31, 2017. We would like to remind all of those that have not received our press release or presentations that they can call our Investor Relation office to request the documents or download them from the Investor Relations section of our website located at www.telecom.com.ar. 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 would like to go over some Safe Harbor information and other details of the call, as we usually do in this type of event. 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 ongoing industry and economic regulation; possible changes in the demand for Telecom's 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 May 10, 2017, 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 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 conference call, as seen in Slide 2, is, first, to go over general macro overview, then moving on to our vision and strategy, which will be followed by the discussion of our business highlights. And immediately after, we will go into the evolution of our financial figures. Finally, we will end the call with a Q&A session, as is customary in our quarterly calls, with the financial community.

Having gone through these procedural matters, I will now go over a brief macroeconomic overview of the environment in which we operate.

During the first quarter of 2017, the economic activity, although still depressed, began to show some slight improvement, especially during March 2017. The economy is beginning to react slowly to a less decent economic environment with lower inflation level and suggesting significant changes in relative prices, resulting mainly from tariff increases and FX movement. In this sense, relative improvements observed in certain sectors during the last quarter of 2016 are beginning to consolidate. Meanwhile, core inflation measurements are being closely monitored by the Central Bank in order to assure a declining trend in inflation, as they show certain level of acceleration in the February and March of 2017.

Please refer to Slide 3, where we include a summary of the current Argentine external fund situation and FX rate evolution.

Exchange rates experienced slight nominal appreciation during the first quarter of the year, mainly as a consequence of important inflows associated with the tax amnesty plan and sovereign provincial and corporate debt issuances. In this context, the Central Bank continue to [arrive] to its policy of loan intervention of the FX market, mostly allowing the market to freely establish the exchange parity, but continue with a tight monitoring policy. During the first quarter of 2017 the monetary authority kept a cautious view over monetary aggregates, which experienced an increase during the period, working them closely and in conjunction with inflation level, but generally holding policy interest rates at a steady level.

Finally, in the month of April, and responding to the acceleration on monthly core inflation reading, the Central Bank has exercised an increase in interest rates. As for international results, they experienced a notorious increase, mainly explained by the previously mentioned debt issuances and tax amnesty-related issues. In fact, reserves increased to its highest level since mid-2011.

Finally, trade balance posted a deficit of $1 billion on the first quarter of the year, mostly due to the growth in imports of capital growth and transport materials during March 2017.

Turning to Slide 4, we follow with an overview of domestic macroeconomic situation and inflation.

Regarding inflation, the CPI experienced a decline from past year levels when looking at year-over-year figures, reaching 35% for the city of Buenos Aires, while for national measurements, it declined level below 30%. In particular, during February and March, increases in electric tariffs took place, while mostly core inflation readings experienced an acceleration, mainly linked to increases in food prices. Nevertheless, inflation seems to be relatively contained and hidden to lower levels. In this sense, general economic consensus still expecting a reduction in inflation for 2017.

As for the economic activity, 2017 began with some slight improvement. Although overall, activity situation during the first months of the year was not particularly encouraging. And sectors performance remained mixed. Agriculture production has outperformed notoriously, while construction is reacting more slowly. In particular, industrial production is still showing a fragile and stable performance, slow improvement activity level, but still remaining in negative territory in the year-over-year comparison.

As for the fiscal front, primary deficit will have reduced versus the first quarter of 2016. Efforts of the national authorities are set to reduce growth in public expenditures during 2017. Although while narrowing the gap, fiscal expenses growth still remains over fiscal revenues growth.

Finally, aggregated household consumption remains weak and will need further consolidation as it is showing further signs of recovery from the last quarter of 2016. In fact, consumer confidence remains volatile, and figures are still showing advances and setbacks.

Finally, it is expected that during the rest of the year, the situation will improve for the consumers as economic growth steps up and inflation continues to decrease. Notwithstanding the macroeconomic context described, Telecom Argentina has managed to achieve important level of revenue growth and a significant profitability increase.

Having gone through this introduction of the macro environment, let me pass the call to Germán Vidal, who will go over the vision, and strategy and business highlights section.

Thank you, Solange. Good morning to everyone.

We invite you to a quick review of our vision and strategy. Please refer to Slide 6, where we want to share with you our thoughts on the evolution of the telecommunications industry and how our company is facing this process of transformation.

The company is focusing towards specific strategic items in order to achieve full convergence of services. Our customer-centric vision means that we are transforming and adopting systems and processes in line with the customer in sight. In this sense, we have just ended with the migration to our new charging platform, and we have started with the development phase of our new and convergent CRM order manager billing and collection system. This will not only allow us to have a more flexible offering and better trend to market, but also prepare us for the forthcoming era of customer information management, as we better manage and understand the behavior of our customers.

On content management front, we must work in reaching alliances with OTT players that generate value for both parties and are in line with the preferences of our customers. The convergent home implies that 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 home and satisfying our clients' needs in every step of their lives, in every step of their digital lives.

Becoming a digital telco involves not only connecting digital consumers with multiple screens and devices, but also implementing vertical solutions for different sectors of the market, such as health, agribusiness, financial services and Smart Cities, as we develop features based on Blockchain, narrowband IoT devices and Big Data, among others. We are in the middle of this process of transformation in the telecommunications industry, and we want to lead this process in Argentina. In order to fulfill the needs of the customers during this digital era, it is important to develop a multifunctional team. Our company is addressing this digital revolution through an innovative offer of products and services, capitalizing investments done in our network, incorporating new and (inaudible) work methodologies and challenging certain market practices in order to become more profitable. This is where we are standing now, and we plan to continue working over these general guidelines during the next 2 to 3 years.

Let's move on to our business highlights. Please refer to Slide 8, where we highlight some of Telecom Argentina's key achievements during the first quarter of this year.

With respect to our business, it is worth to mention that the 4G rollout continues as 6.5 million customers can enjoy the LTE experience, and that these clients are continuing to increase mobile Internet consumption. In fact, consumption of megabits per user per month grew by 79%, reaching an average of 1.4 gigabits per month as of the first quarter of 2017. In addition, data penetration also experienced an increase as frequent mobile Internet usage -- users reached 9 million, rising 13%. Moreover, we have observed a reduction in the levels of mobile churn, achieving 2.9% in comparison with 3.4% observed during the fourth quarter of last year.

Moving on to the fixed segment, we are registering a steady growth in user growth on subscribers. Clients with speeds of 15 megabits or higher, which now represent 13% of the client base versus a 9% over a year ago. In turn, broadband ARPU increased by 33% versus the first quarter of last year. Churn has also declined in fixed broadband to 1.3% from 2.2% in the fourth quarter of 2016. Additionally, as of March 2017, more than 1 million customers were migrated to bundled packs that include both fixed voice and Internet services.

As for fixed voice, there were adjustments in monthly fee prices that were implemented during February 2017 in business and residential segments. These increases in tariffs mainly explain why the average billing per user increased by 68% versus the first quarter of last year.

As far as financials are concerned, service revenues in Argentina increased by 28% versus the first quarter of 2016, mainly driven by a 67% increase on mobile Internet and the growth of 41% in retail fixed voice plus Internet.

Moreover, we were able to improve EBITDA growth, reaching 36% year-over-year, overperforming inflation for the first time in 5 years, reaching a 31% margin for the first quarter of 2017. In turn, net income attributable to Telecom Argentina more than doubled, expanding net income margins to 13% from a 7% observed over a year ago.

It is also worth to mention that, in April 2017, Telecom Personal and the Inter-American Investment Corporation, a member of the Inter-American bank group, enter into a USD 100 million 6-year loan agreement.

Finally, we deem important to mention some relevant corporate matters.

The Telecom Group has commenced a corporate reorganization process. Within this process, Telecom Argentina acquired Nortel's holding in Telecom Personal in order to achieve the 100% capital ownership of Telecom Personal.

Lastly, on last April 11, the Board of Directors of Conatel, the Paraguayan regulator, authorized TuVes Chile to transfer in favor of Nucleo 350 shares of TuVes, a [BTH] provider in Paraguay, representative of 70% of TuVes capital. With this authorization given by Conatel, Nucleo will proceed to close the transaction in the terms agreed with the sellers during the second quarter of this year.

Let us move to Slide 9 to further comment on the process of corporate reorganization.

On March 31 of this year, the Board of Directors of Telecom Argentina, Sofora Telecomunicaciones, Nortel Inversora and Telecom Personal approved a preliminary reorganization agreement, by which we agreed that Telecom Argentina will absorb by merger Nortel, Sofora and Telecom Personal. The reorganization is subject to the terms and conditions set forth in the preliminary reorganization agreement, which includes certain corporate and regulatory approvals to be obtained before the reorganization becomes effective.

The main purpose of this reorganization is to absorb and consolidate the operations, assets and liabilities of the absorbed companies into Telecom Argentina, as the surviving entity that will continue to be Telecom Argentina this year. This being said, Telecom will assume all the rights and obligations of each of the absorbed companies. Specifically, the objective of this project is to simplify the shareholder structure of Telecom Argentina in line with international standards and market practices, allowing significant simplification and consolidation of the management and operational structure of the participating companies, while incorporating significant synergies. We are aiming to conclude this reorganization during the current year.

Turning to Slide 10. We can observe the different drivers of growth of the group revenues, which can be explained by a combination of higher usage and price adjustment.

We can verify that the actual revenue mix is changing, increasing the participation of retail mobile revenues, together with fixed retail voice, plus Internet, while handset sales have decreased its participation. This later is related to the slow performance of consumption in the economy, as Solange explained previously. In particular, retail fixed points plus Internet increased by 41%, mainly due to price adjustments in the monthly fees for corporate residential segments and by the immigration of more than 1 million customers to bundled packs that include both services, while retail mobile achieved a growth of 22% year-over-year, mainly explained by an important expansion of mobile Internet in Argentina, which grew by 67% versus the first quarter of 2016. We will go into some details of this in the following slides.

In Slide 11, we can review some highlights on fixed growth and ICT services.

Upselling to higher speeds continued successfully. As ultra broadband subscribers now represent 30% of the total customer base, increasing by 45% when compared with the first quarter of last year. This is in line with our preparation plans where we need a significant penetration of ultra broadband connections as we plan to start offering media services in a quad play manner, starting in early 2018. In this sense, it is worth noting that ARPU continues to increase, growing by 33% to more than ARS 330 per month.

Meanwhile, fixed data and ICT increased by 19%, mainly due to a combination of exchange rate variations that affected those contracts that are adjusted by the peso-U. S. exchange rate and due to the organic growth in the number of clients. This evidences the strong position of Telecom as an integrated ICT provider in Argentina.

Turning to Slide 12, we can go further into the evolution of the voice fixed line business.

We can note that lines remain fairly stable, and this connections remain low, achieving 3.9 million lines as of the first quarter of this year. During February 2017, we implemented a price adjustment for business customers, raising the monthly fee to ARS 140 or by 22%. We also passed an additional price adjustment in the monthly fee for the residential segment, which implies an increase of ARS 75 or 97%. The mentioned price increase took together with those performed during last year, mainly explained the ARPU growth of 68% year-on-year to more than ARS 130 per month.

In a mature market, the growth opportunity will come from the cross-selling of services to 18% of our client base, following the strategic guidelines of converged income and customer-centric vision.

Moving on to Slide 13. We can verify that we continue enhancing our value proposition for the mobile business in Argentina, while improving the quality of our revenue.

As seen in our business highlights, the intensity in data usage continues to increase. Heavy users are gaining participation, boosting the consumption of mobile data, which as for -- of the first quarter of 2017 has reached an average of more than 1.4 gigabits per user per month, 79% higher than a year ago. In addition, subscribers that frequently use data grew by 13% versus the first quarter of last year, amounting to 9 million subscribers as of March 2017. In turn, churn has experienced a reduction from past quarter levels, decreasing to 2.9%.

In line with the actions taken to improve the quality of our revenues by promoting the usage of Internet data vis-a-vis the 2G-related data, the increasing data usage has contribute to significantly increase the browsing revenues in its participation in the mobile revenue mix, which now represents 45% of our total mobile services mix, up from 34% verified a year ago. In addition, browsing ARPU has risen by 48%, reaching more than ARS 140 per month.

Please turn to Slide 14, where we included a view of our 4G rollout evolution.

Personal's 4G LTE network deployment continues on a fast track mode. While coverage is expanding throughout the country, 4G high speeds are now available in more than 826 locations, including all capital cities on Buenos Aires metropolitan area, reaching a coverage ratio of 93% of the population in such cities. More importantly, 4G customers increased by 1 million from the past quarter, totaling 6.5 million as of the first quarter of this year. This rapid growth is intimately related with increasing data traffic, as 4G now represents 56% of the total traffic.

On Slide 15, we present our consolidated CapEx figures, where we continue to focus our efforts on the network deployment, striving to improve capacity and quality of service.

As of the first quarter of 2017, we have invested in PP&E almost ARS 1.7 billion, equivalent to 11% of consolidated revenues. Investments in mobile access have reached 35% of total technical CapEx during 2017, while investments in fixed access reached 25%, increasing versus the (inaudible) observed during the last year. Additionally, we can observe that the evolution of new 4G sites and installed ultra broadband registered important levels of growth. It is important to mention that we continue with our CapEx plan of over ARS 13 billion for fiscal year 2017. Due to seasonally and certain redefinitions in our planning process, the plan will be more backloaded to the second half of the year as compare to that executed last year.

Having gone through the business highlights, now I will pass the call to Pedro Insussarry, who will go over our financial performance.

Thank you, Germán.

Please turn to Slide 17, where we can analyze our consolidated revenues and EBITDA.

As of the first quarter of 2017, consolidated revenues amounted to ARS 14.7 billion, reaching a growth of 18% year-on-year. In turn, service revenues grew at a higher rate of 27%, thanks to the strong performance of retail fixed voice plus Internet, together with mobile service revenues, and more specifically, mobile Internet.

Moreover, EBITDA verified a more than positive evolution year-on-year, growing by 36%, as we have concentrated in improving our revenue quality and profitability. EBITDA margin increased significantly by more than 400 basis points to 31% for the first quarter of 2017. And looking at the quarterly performance, we can see that we have consolidated the improvement trend in margins evidenced since the third quarter of 2016.

Please refer to Slide 18, where we show the performance of EBITDA and the behavior of its different components.

The company has taken actions to gain operational efficiency and manage its cost structure, as these actions have reflected in on the overall cost performance, as OpEx have grown below inflation levels of revenue growth. Despite increased costs of labor and fees for services, maintenance and materials have had negatively affected margins, effective cost management has delivered good results in interconnection costs and taxes and also in commissions and as discussed that in turn were affected by lower additions and lower asset sales. In almost all cost items, the performance has been below inflation after reorganization actions taken with vendors and service suppliers. Moreover, savings and maintenance services were achieved, thanks to the modernization of the network initiated with the 4G rollout.

Let's turn to Slide 19, where we can verify that operating income amounted to almost ARS 2.9 billion, with a 45% increase year-on-year.

EBIT growth, that turned higher than EBITDA growth can be explained by a slowdown in the increase of G&A and write-down of PP&E, which stood at 24% year-on-year. This contributed to expand operating margin to 20% of consolidated revenues as for the first quarter of 2017.

Meanwhile, net income attributable to Telecom Argentina reached more than -- or close to ARS 2.2 billion, increasing by 111%. This quarterly improvement can be explained by a combination of the previously mentioned increase in operating income and positive financial results, which we will analyze in the following slide. Some increase in net income positively affected margins, which increased to 13% of consolidated revenues.

Please turn to Slide 20, where we show the breakdown of different components that explain the increase in our net income.

EBITDA expansion reached more than ARS 1.2 billion. As we mentioned before, the increase in D&A and results of write-down of PP&E of approximately ARS 0.3 billion moderately impacted growth of both operating income. Nevertheless, it's worth noting that the net financial results positively affected net income by almost ARS 0.2 billion, mainly driven by a positive combination of positive affected results due to the appreciation of the peso against the dollar and lower net income -- lower net interest paid that in turn can be explained by a lower average interest rate during the period and a slight reduction in our net financial position.

Meanwhile, income tax expense increased by more than ARS 0.5 billion. All of these factors generated a final expansion of more than ARS 1 billion in our bottom line that reached almost ARS 2 billion.

Regarding our financial position and cash flow.

As you can see on Slide 21, net debt amounted to more than ARS 3 billion in the first quarter of 2017. Net debt decrease was mainly associated with an increase in our operating cash flow and FX variations. In particular, operating free cash flow generation was strongly influenced by the company's EBITDA increase and by a better performance in working capital.

Lastly, in Slide 22, we picture the financial strength and sound financial position of the Telecom Group.

We can observe that during this quarter, the company has managed to achieve a reduction of its net debt, as mentioned before, and a further decrease in its leverage and an increase in its strong levels of interest coverage as a result of the strong balance sheet and steady cash flow generation.

Moreover, as part of the financial strategy, the company continues to seek diversification of its funding sources through the IFC loan agreement. And with the issuance of Series 3 and 4 notes, the company has successfully managed to extend the tenor of its financial debt and reduce short-term debt concentration.

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

(Operator Instructions) We'll take our first question from [Marcelo Santos] of JPMorgan.

It's actually regarding your reorganization that you mentioned in the first slide. I just wanted to know if you could provide some color on the exchange terms, for example, for investors who have Nortel and Sofora shares, how many shares they will get on Telecom Argentina? This it is the question.

Marcelo, unfortunately, we won't be able to provide that information today. Basically, the process is, we have filed the prospectus, the exchange -- or the merger prospectus at the local CNV. And until we're not authorized by the CNV to publish this prospectus, we won't be disclosing this information in order to maintain the legal basis of remuneration for all shareholders. So that is in the fact in terms of CNV, it doesn't authorize to publish the prospectus. We can't make public the exchange ratio of the Nortel shares to the Telecom shares. Okay?

Okay. And is there any timeline that we could expect to -- I mean, is there any timeframe that we could expect these to become public?

In the very near future. Unfortunately, it's the timing that we don't manage, but it's in the very near future.

(Operator Instructions) We'll move next to Rodrigo Villanueva of Merrill Lynch.

I was wondering if you could please elaborate on the efficiency measures implemented to achieve such strong margin expansion of more than 400 basis points, and if these would be sustainable over the coming quarters? That would be my first question.

And speakers, if you are responding, we are not able to hear you.

Yes. Here we are. Among several actions that we've taken, trying to gain efficiency in our workforce, on one side, trying to work on processes in order to improve basically efficiency, and also working pretty heartily on the quality of revenue that we generate. For example, in this case, we have changed the composition of our value-added service revenues by, as Germán mentioned in his speech, by converting in a way from traditional 2G data content into basically promoting mobile Internet as a way to have a much more healthy and profitable business. This not only, on one side, has impacted revenue growth, because, obviously, when you look at the performance of 2G data, obviously, we see a decline in this type of revenues. But on the other hand, as we had revenue-sharing contracts with these providers, it also implies lower costs for -- within our OpEx.

Lower (inaudible)

We have -- in terms of interconnection, we have worked pretty heartily in order to reduce the roaming charges.

Besides, we have a lower improvements. (inaudible) improvements on the customer acquisition management side, like our customer attention and the (inaudible) process we'll have -- we'll have in process because we have reduced our (inaudible),

Yes, we have reduced the physical invoices, we have merged them to digital delivery of invoices.

Yes. What we are committed is that this is not a one-time event. What we are committed as the management team last year is to create a more efficient platform of operations. And why? Because as we have mentioned, while we have designed a new strategy into the future that would let us lead the transformation of the market to a position of Telecom as the #1 company in the market that competes based on the management of the information and the information segment and market to differentiate ourself and our connectivity solutions, we need a very efficient platform of operations today. That's the only way to make that transformation and work in that transformation while we are having that very efficient operation to have a speeding to the market and get resources to use those resources in investment in OpEx and CapEx for this transformation we are involved in.

And very clear. And my second question is related to wireline voice prices. We have seen several strong price increases. I was wondering if you expect to see more price increases this year. And also, if you think this could accelerate fixed to mobile substitution at some point.

The prices? We have -- regarding fixed line pricing, Rodrigo, basically, we are expecting something by midyear, probably in the early second half of the year, an additional adjustment. And then with respect to mobile -- fixed to mobile substitution, when you look at pricing in the fixed line, we still have an advantage, as we still have prices that are below the average in the region in Latin America. But again, mobile to fixed -- fixed to mobile substitution is something natural in the industry. On the other hand, as Germán mentioned, the change in vision in terms of looking into the connected home, that also implies a change in nature of that fixed connection where basically that fixed connection is the base of relationship with the home and in order to grow vertically in the different services.

Yes. Absolutely, Marcelo, the question is a very good one. Really, sorry, Rodrigo. The question is a very good one. We are still talking about fixed and mobile, but in the future, we are going to be talking about home, with multiple services converging at home, and the mobile handsets at home are an additional computer. So what we see is that most of the increases in fixed line services are a catch-up on prices from the last decade that were fixed by regulatory pressure. But what we see in the future is that we have a lot to gain at home in terms of wallet share, especially, during next year where we are going to be launching the quad play with TV services.

Our next question is from Walter Chiarvesio of Santander.

My questions were already answered, so thank you very much.

(Operator Instructions) We'll move next to Alejandra Aranda of Itau.

Regarding the synergies that you first spoke at the beginning of the call. Germán, could you give us more insight on what those synergies might be on the corporate restructuring?

Okay. I'll take that, Alejandra. First of all, you have to understand that the corporate reorganization means that we will be merging 4 different companies into 1. So we will be merging Sofora, Nortel and Telecom Personal into Telecom Argentina. So in a way, going up the chain of ownership obviously will have a simplification in the dividend flows as the surviving company will be Telecom Argentina, and then different layers will disappear, on one side. Below Telecom Argentina, basically, into Telecom Argentina and Telecom Personal, we have many intercompany revenues between the 2 companies that pay taxes, and obviously, we'll have savings on that front. We still survive with many processes that are still based on a per company basis, and that, in a way, collide with the view of a convergent service that we mentioned in several parts of the presentation and the speech. It also implies simplification of, again, the processes that have.

The governance (inaudible)

The governance, excuse us -- for the Board of Directors, but we will have only one Board of Directors with the respective surveillance and governance bodies associated to the board. And this is just to start because once we have the reorganization effective that we expect that to happen during this fiscal year if we get all the authorizations necessary for the merger, we will start to find many other efficiencies that typically you'll see once you have the merged company. But those are just one -- some dimensions.

(Operator Instructions) And it appears that we have no further questions at this time.

Okay. Thank you, everybody, for participating at our quarterly conference call. Please do not hesitate in contacting our Investor Relations department for any further inquiries that you may have. Good morning to all, and have a nice day. And we expect to meet soon or in the next conference call.

Yes. Thank you, all, and thank you for the questions.

Thank you. This does conclude today's Telecom Argentina TEO First Quarter 2017 Earnings Conference Call. You may now disconnect your lines. And everyone, have a great day.