Telecom Argentina SA (TEO) 2017 Q2 法說會逐字稿

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

At this time, I'd like to turn the call over to Ms. Barthe Dennin. Please go ahead.

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating on today's conference call.

As mentioned by our moderator, 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 share with you the results of the second quarter of 2017, ending June 30, 2017. We would like to remind all of those that have not received our press release or presentation 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 August 9, 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 and industry 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 up to the evolution of our financial results. 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.

The second quarter of 2017 brought better perspective for economic activity. The general expectation is that the economy is about to enter a rebound phase during the second semester of 2017, as the majority of economic sectors began to show positive signs. The slowdown in inflation is slowly consolidating as prices increases are heading towards lower level, while items composing for inflation are being closely watched by the Central Bank. Nonetheless, the described improvements in the macroeconomic context, consumers are still maintaining a cautious churn.

Please refer to Slide 3, where we included a summary of the current external front situation and FX rate evolution in Argentina. Regarding the (inaudible) trend that was observed during the first quarter of 2017, exchange rates experienced a rise during the last days of the second quarter as renewed demand in foreign currency market pushed the FX rate upwards. In fact, this demand pressure has increased during the month of July, moving the FX rate to even higher levels. Maintaining the quality observed during the last and present year, the Central Bank continued to allow the FX rate to be determined by the market, with market interventions that aim to reduce volatility.

As for interest rate, in an inflation-targeting context, the monetary authority reacted to higher readings in monthly inflation figures by increasing policy reference rates. Meanwhile, international reserves continued to show a solid situation. And in addition, Central Bank has expressed its intention of increasing the Reserves-to-GDP ratio over the coming years.

Finally, trade balance posted a deficit of ARS 2.6 billion during the first 6 months period of the year, mostly due to the growth in imports of capital goods, its accessories and transport materials, combined with a stable evolution of exports.

Turning to Slide 4. We follow with an overview of domestic macroeconomic situation and inflation. During the first 6 months of the year, the CPI measured by Buenos Aires city experienced a sustained decline from past year levels while looking at year-over-year figures, reaching 23.4% in June 2017. In particular, although monthly core inflation readings register a descending trend, as of June they remain slightly above headline inflation because of persistent price increases, mainly linked to food and beverage. In this sense, and although inflation seems relatively contained, general economic consensus is expecting should experience a lower reduction phase during the second semester of 2017.

As for the economic activity, overall performance was encouraging during the second quarter of the year. As in general terms, output advanced in most sectors during the second quarter. Specifically, agricultural production and construction activities have outperformed notoriously. As for industrial production, it is showing some sign of incident recovery, mainly pushed by sectors associated to construction.

As for the fiscal front, efforts of the national authorities are set to reduce primary deficit. In fact, current fiscal tariff has been achieved for first half of 2017, so economic consensus is expecting that the government will be able to meet the annual target of the primary deficit of 4.2% of GDP.

Finally, aggregate households consumption shows slight recovery, but consumer confidence levels remain volatile and are not registering, as of June 2017, significant improvement from the end of 2016. Consumption of durable goods, although recovering from weak levels of past year, still remain in a low base considering the historical figures.

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

Having gone through this introduction of the macroenvironment, 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 how our company is facing this process of transformation in relation to the evolution of the telecommunications industry.

The company is focusing towards specific strategic items in order to achieve full convergence of services. As we have explained in previous conference calls, our customer-centric vision means that we are transforming and adopting systems and processes in line with the customer insight. In this sense, we have just finalized the migration to our new charging platform, and we have successfully implemented both a visualized network core system and convergent charging system.

In addition, we are also in the process of developing an integrated and convergent CRM billing, collection and order management system. That is the remaining portion of the core systems in the chain of value of the business that will not only allow us to cover more flexible offering and better time to market, but also prepare us for the forthcoming area of customer information management, as we better manage and understand the behavior of our customers. This behavior understanding is becoming an important asset of more the telecom company's future offering.

Related to the CRM project, we are in the construction phase of the system. We are developing the CRM module with constant evolutions as we are implementing agile techniques. We expect to end this phase in mid-first quarter 2018 when we will be integrating the CRM billing, collection and order manager systems and commence the testing phase, with the expectations to go live in a greenfield manner in mid-second quarter of 2018.

On our content management front, we must work and are working in reaching alliances of values with OTT players that generate value for both parties and are in line with the preferences of our clients. We are focusing on this item through the relaunch of our personal store, with a selection of next-generation, value-added content features, improving the customer experience and the quality of our revenues. The first phase of the Personal Store of Telecom, with the mentioned new content, will be launched in November.

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 city, as we develop future based on blockchain, narrowband IoT devices and Big Data security services, among others.

Related to this [later], we have started to offer IT security services to customers by taking advantage of Internet-generated capabilities, understanding that this is a new revenue stream in our ICT offering. In addition to this, the company has developed a connectivity and IoT solution for the city of Buenos Aires at the public transportation area and has released the first IoT offering through Personal Bipy, a smart watch that combines localization and communication services designed for the parents of infants.

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. The company has been working in this sense through the release of a series of convergent products, such as Arnet + Voice and [Comboni].

We are in the middle of this process of transformation in the telecommunications industry. In order to fulfill the needs of customers during the digital area, it is important to develop a multifunctional team. Our company is addressing this digital revolution through an innovative offer of products and services, capitalizing the investments done in our networks, incorporating new interfunctional 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 from now onwards.

Let's move on to our business highlights. And please refer to Slide 8, where we highlight some of Telecom Argentina's key achievements during the second quarter and first half of this year. With respect to our business, it is worth mentioning that the 4G rollout continues, as 7.4 million customers are enjoying the LTE experience, and that these clients are contributing to increased mobile Internet consumption. In fact, consumption of megabytes per user per month grew by 88% in the second quarter of this year. In addition, data penetration also experienced an increase as frequent mobile Internet users reached 8.8 million, rising 12%. Moreover, it is worth to mention that there's been an improvement in the levels of mobile churn, achieving 2.1% in comparison with 2.9% observed during the first quarter of this year.

Moving on, on the fixed segment, we are registering a steady growth in ultra broadband subscribers, clients with the speeds of 15 megabits or higher, which now represent 15% of the client base versus 10% over a year ago. In turn, broadband ARPU increased by 37% versus the second quarter of 2016. Additionally, during the second quarter of 2017, revenues coming from Arnet + Voice bundle packs increased by 69%.

As for fixed voice, there were adjustments in monthly fees prices that were implemented during the first half of 2017 in both business and residential segments. As far as financials are concerned, service revenues in Argentina increased by 28%, mainly driven by a 67% increase in mobile Internet and the growth of 33% in fixed services. Moreover, we were able to improve EBITDA by achieving a 38% year-over-year growth, 730 basis points over inflation.

In terms of profitability, the positive trends evidenced in previous quarters continued, reaching a 31% margin for the first half of 2017, equivalent to 400 basis points growth versus the first half of 2016. In turn, net income attributable to Telecom Argentina reached ASR 3.6 billion in the first half of this year.

It is also worth to mention that on June 12, 2017, Telecom Personal canceled the Series 1 notes for an amount of ARS 571.5 million, and the global program for the issuance of negotiable obligations up to $1 billion or its equivalent in other currencies.

Related to corporate matters, on June 30, Telecom Argentina and Cablevisión announced their plan to merge their respective corporate structures and operations, with the aim of creating a leading provider of convergent telecommunication services. In order for this transaction to be effective, the shareholders' approval of both companies and the regulatory approvals are needed.

Finally, on the regulatory front, we can mention that after discussions maintained with the operators, the government granted the extension of approximately 2 years of the term of the 4G license and the deployment obligations, as it has considered the delay in the effective delivery of the 700 megahertz frequencies. In addition, the government has included roaming services within the coverage requirements considered in the terms and conditions of the 4G licenses. Finally, we were awarded with frequencies in the 2.6 gigahertz band.

Turning to Slide 9. We can observe the different drivers of growth of the group revenues, which can be explained by the highest Internet consumption evidence over the last 6 months, both in fixed and mobile segments. Here, we can verify that the actual revenue mix is changing, increasing the participation of mobile revenues, together with the fixed voice plus Internet, while handset sales have decreased its participation.

Fixed services reached ARS 9.3 billion, a 33% increase compared to the first half 2016. In particular, fixed voice plus Internet increased by 37%, mainly due to the migration to Arnet plus voice bundle packs that include both services.

Meanwhile, mobile revenues in Argentina achieved a growth of 25% year-over-year, mainly explained by an important expansion of mobile Internet in Argentina that grew by 67% versus the first half of last year. We will go into some detail of this in the following slides.

In Slide 10, we can review some highlights on fixed growth and ICT services. We can observe that the upsell in strategy of the company is pushing the increase of ultra broadband connections. During the second quarter 2017, the number of ultra broadband subscribers represented 15% over the total customer base versus a 10% in the second quarter of last year. This is in line with our home convergent strategy mentioned before. In this sense, it is worth noting that ARPU continues to increase, growing by 37% to more than ARS 356 per month.

Meanwhile, fixed data and ICT increased by 20%, mainly due to a combination of FX variations that affected those contracts that are adjusted by the peso to the dollar exchange rate and an increase in the number of clients that we service with ICT. This is a good evidence of the strong position that Telecom in the corporate and small and medium market as an integrated provider, leveraging connectivity solution services with data center solution services.

Turning to Slide 11. We can go further into the evolution of the fixed voice business. It is remarkable that Arnet + Voice bundle packs are gaining traction, with revenues that grew by 69% during second quarter '17 versus the first quarter of the year '16, achieving ARS 1.8 billion. As you can see, lines remain fairly stable, and these connections remained low, reaching 3.9 million lines at the second quarter of this year.

During the first half of 2017, there were implemented several price adjustments for the business and residential segments. These raising prices represented an increase of 22% and 97%, respectively. For the second half of this year, we are expecting some more adjustments. In fact, during August, we will adjust prices for both residential and business segments by 20%. These price adjustments contribute to the ARPU growth. In this sense, during the second quarter of 2017, the ARPU increased by 58% year-on-year to more than ARS 147 per month.

Moving on to Slide 12. We can see the focus on our value customer base, evidenced in the evolution of the mobile business in Argentina. 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 of the second quarter of 2017, has reached an average of more than 1.7 gigabytes per user per month, 88% higher than a year ago.

In addition, frequent data users grew by 12% versus, first with the first half of 2016, amounting to 8.8 million subscribers as of June 2017. Moreover, our customer base showed an increase, reaching 19.5 million clients as of June 2017. In turn, churn has experienced a reduction from past quarter levels, decreasing to 2.1% when compared to 2.9% during the first quarter of this year.

In addition, the increase in data usage has contributed to significantly increase the browsing revenues and its participation in the mobile revenue mix, which now represent 47% of our total mobile services mix, up from 35% verified a year ago. In addition, growth in ARPU has risen by 48%, reaching more than ARS 148 per month.

Please turn to Slide 13, where we included a review 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's high speeds are now available in more than 910 locations, including all capital cities on the Buenos Aires metropolitan area, reaching a coverage ratio of 93% of the population in such cities. More importantly, 4G customers totaled 7.4 million as of the second quarter of 2017. This rapid growth in subscribers that use the network has been the driver of data traffic as 4G now represents 69% of the total traffic.

On Slide 14, 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 half of 2017, we have invested more than ARS 3.4 billion in PP&E investments in core and infrastructure, representing 35% of the total technical CapEx. Mobile access, 31%, while investments in fixed access were equivalent to 20%.

If we compare the CapEx for the last 12 months ending in June 2017 to that of the similar period of 2016, we can evidence a raise of 10%, reaching ARS 10.9 billion. Moreover, we can observe that the evolution of the FTTH deployment shows an important increase of 195% when comparing second quarter '17 versus the first quarter of this year, as we have accelerated the pace and increased the number of zones of the fixed access network with fiber as we aim to improve significantly our connectivity speed offering, in line with our home connected strategy.

In addition, it is important to mention that in July 6, 2017, Telecom Personal, as we mentioned before, was granted with 400 -- 40 megahertz in the bands of 2.6 megahertz, following an action process launched by the government after the refarming process announced early this year.

The slow evolution of our CapEx is related to operational issues, as we have redefined the network planning process together with our practice for research, construction and installation of sites for the mobile access network, so as to increase the volume and reduce time to service. Despite the performance in the first half, we continue with the expectation of a significant increase in the level of CapEx to that invested during 2016.

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. The positive business trends that Germán just described have resulted in a very positive performance in almost all financial results.

Please turn to Slide 16, where we can analyze our consolidated revenues and EBITDA. As of the first half of 2017, consolidated revenues amounted to ARS 30.5 billion, reaching a growth of 20% year-over-year. In turn, service revenues grew at a higher rate of 27%, thanks to the strong performance of 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 38% as we have concentrated in improving our revenue quality and profitability. EBITDA margin increased significantly by 400 basis points to 31% for the second 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 last year.

Please refer to Slide 17, 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, and these actions have positively impacted our cost structure as OpEx has grown below inflation levels of revenue growth. Despite the increased cost of labor and fees for services, maintenance and materials that have negatively affected our margins, effective cost management has delivered good results in interconnection costs and taxes, together with savings and commissions in handset costs that, in turn, were affected by lower additions. In almost all cost items, the performance has been below inflation after renegotiation process undertaken with vendors and service suppliers, together with the efficiency action taken across our organization. Moreover, savings and maintenance services were achieved, thanks to the modernization of the network initiated with the 4G rollout.

Let's turn to Slide 18, where we can verify that our operating income amounted to almost ARS 5.9 billion, with a 57% increase year-on-year. EBIT growth, that turned higher than EBITDA growth, can be explained by the slowdown and the increase in D&A and disposal and impairment of PP&E, which stood at 15% year-on-year. This contributed to expand operating margins to 19% of consolidated revenues as of the first half of 2017.

Meanwhile, net income attributable to Telecom Argentina reached more than ARS 3.6 billion, increasing by 110% on the first half of 2017. This improvement can be explained by a combination of the previously mentioned increase in operating income and better financial results, which we analyze in the following slide, with some increase in net income positively affected margins, which increased to 12% of consolidated revenues.

Please turn to Slide 19, where we show the breakdown of different components that explain the increase in our bottom line. EBITDA expansion reached almost ARS 2.6 billion. As we mentioned before, the increase in D&A and disposal -- and disposal and impairment of PP&E of approximately ARS 0.5 billion moderately impacted the growth of our operating income. Nevertheless, it's worth noting that the net financial results positively affected the net income by almost ARS 0.8 billion, mainly driven by the combination of lower losses on FX results due to a reduction in the peso depreciation in the first 6 months of 2017 versus the same period of last year and lower net interest paid that, in turn, can be explained by a lower average interest rate during the period in conjunction with a strong reduction in our net financial position. Meanwhile, income tax expense increased by more than ARS 1 billion. All of these factors generated a final expansion of our bottom line, which reached more than ARS 3.6 billion.

Regarding our financial position and cash flow. As you can see on Slide 20, net debt amounted to more than ARS 5.4 billion in the first half of 2016. Net debt decrease was mainly associated with an increase in operating cash flow. In particular, operating free cash flow was strongly influenced by the increase in EBITDA and by a greater efficiency in working capital.

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

(Operator Instructions) And we'll take our first question from Fernando Suarez with AP Partners -- with AR Partners.

I was just wondering if the trend you are seeing in your costs, especially the non-salaries one, will keep performing below inflation level.

Fernando, excuse us. Probably, we have an audio problem. Can you repeat your question, probably a little higher in the volume and a little bit more pause?

Yes. Sure. I was wondering if you can -- you have some guidance on the non-salaries related to costs and if this will keep on growing way below inflation levels as it has been up to now.

Fernando, thanks for your question. Really, we are very confident that we will maintain this trend because it's not the results of a quarter since the third quarter of last year. So this is the fourth quarter where we're keeping that trend, and that's because we have been gaining productivity in almost all our OpEx lines. So we are very confident to maintain that trend.

Great. And I think an additional question would be more related to how you will generalize the data consumption in the upcoming, let's say, in the upcoming year based on you have already deployed 4G equipment for most of, let's say, half of your customers. How do you plan to extend that to keep on growing on that offering? And how to integrate other services?

Well, that's a very good question. And it's more than a Telecom question, it's an industry question. In our experience, the data usage and data traffic is complicating every year. That is what we are experiencing every time we get into a new city and we put interaction our 4G services and infrastructure. What -- and that's why on the base of our strategy, what we are showing in our strategy is that based on the new systems that we are implementing and the new type of solutions that we are developing and launching, as we mentioned, the IoT and the partnership with OTT content providers, we will be able to get into new revenue streams that today we are not -- are not part of our offering. That's on one side.

On the other side, remember that on January next year, this will be a full convergent market, a 4-play market. And the millions of our clients in the mobile service will be participating also of this 4-play convergent offering. And that, for sure, will be a driver in increasing the revenues of our mobile business.

(Operator Instructions) And we'll take our next question from Rodrigo Villanueva with Merrill Lynch.

My first question is related to CapEx. I understand that you expect to accelerate deployments during the second half of the year. But I was wondering if you could give us a sense on the magnitude of CapEx, probably relative to sales. So far this year, you have invested 13% of sales, and I just want to know if, for the full year, this percentage should be lower than what you had in 2016. That would be my first question.

Yes. Thank you for the question. For -- in our plans, the outlook that we have, our forecast is to be around 20% of our revenues in capital expenditure for this year, accelerating the CapEx investment in the second half of this year. And the delay in some investments are due to -- first of all, as we mentioned, we have changed the way we design -- determine and implement each site where we want to be in a very integrated way with the marketing department. And also, for the first time in Argentina, you know that there is a new offering of tower companies, and we have been analyzing this alternative during the first half of this year. And we have selected a short list of future partners, and we will be accelerating the deployment of new sites through this partnership with tower companies.

The other segment of CapEx investment is, as we have mentioned, FTTH. And although we have increased in almost 200% our production in the second half compared -- in the second quarter compared to the first quarter, after several years not investing in Fiber-To-The-Home, and this being the first year that we have a learning curve, preparing our teams and developing contracts with new providers. Again, during the second half, we will be accelerating the production of the second half. So these are the 2 main areas where we will be accelerating our investment. And so our outlook is to gaining productivity in CapEx regards in the second half and get to that 20% of the revenue that were in our plans.

Understood, Germán. And my second question is regarding fixed revenues. I understand that you raised prices by 20% from August. So I was wondering if you could give us a sense on what to expect after these positive impacts from price increases phase out in terms of fixed revenue growth.

Yes. That's a good question. We don't have plans to have another increase in the fixed services during this year. But we have to consider that although this revenue increases, we are below the average prices of Latin America in these type of services. So we'll be continuing -- in a continuous mode, evaluating the prices and the opportunity to increment prices accordingly in the coming months.

(Operator Instructions) And we'll take our next question from [Alexandra Nesmar] with REDD Intelligence.

I was just wondering if there is any updates on the merger with Cablevisión, particularly there are some reports on potentially having to divest in spectrum in 2.5 gigahertz bands? Or any other updates that you could provide?

Alexandra, can you repeat the second part of your question, please?

Yes. Sure. So I was wondering if there is any updates on the merger with Cablevisión, and particularly, I'm wondering about the potential need to divest the spectrum. There were some reports after the merger came out that this might be one of the requirements. Otherwise, I'm just wondering if there's any additional information you could provide.

Alexandra, not much of an update since we made public the transaction on June 30 and we announced that the next step for the approval of this transaction was the shareholders agreement that was summoned for August 31, so in a couple of days or in a couple of weeks. And after that, we will be debating the request of authorization to the regulatory entity, to the ENACOM, and not much about that. But the rest, I would say, it's pure speculation. I don't know where that information came from.

And there are no further questions in the queue at this time.

Okay. Thank you very much for participating in the call, and we hope to meet again in our next quarterly call.

Thank you very much to everyone.

This concludes today's conference.