Telecom Argentina SA (TEO) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina, TEO, Third 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. Gabriel Blasi, Chief Financial Officer; Mr. Pedro Insussarry, Director of Finance; Gaspar Buscalia, Director of Administration, Planning and Control; and Mrs. Solange Barthe Dennin, Investor Relations Manager.

At this time, I'll turn the call over to Mrs. Solange Barthe Dennin. Please go ahead.

Thank you, Lori. Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating on today's conference call. As mentioned by Lori, the participants of today's conference call are Germán Vidal, Chief Executive Officer; Gabriel Blasi, Chief Financial 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 third quarter of 2017 ending September 30 of 2017. We would like to remind all of those that have not received our press release or presentation that they can call our Investor Relations office to request the documents or download them from the Investor Relations section of our website located at www.telecom.com.ar. 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 November 10, 2017, a copy of which has been included in a Form 6-K report furnished to the SEC, describe certain factors that may affect any of forward-looking statements 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 on Slide 2, is, first, to go over general matter and industry overview, then moving on to our regional 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 it 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 third quarter of 2017 show a consolidation process of the trends that were being observed during the first half of the year. Economic growth has accelerated, and the majority of the economic sectors continued to show positive signs. In general, slowdown in inflation continued to be observed, although, during this quarter, year-over-year reasons were heavily influenced by some comparison-based effects. With the described improvement in the macroeconomic context, consumers are finally beginning to adopt a more confident stance.

Please refer to Slide 4, where we include a summary of the current external fund situation and FX rate evolution in Argentina. Exchange rates experienced a depreciation trend that was already evidenced in the last days of the second quarter as volatility increased during the period before the primary election. In this occasion, the Central Bank exercised a strong intervention, but in a brief period of time, selling foreign currency in the exchange market and trying to minimize volatility and potentially disruptive dynamics that could affect the float in Brazil. Finally, the FX rate settled down but at higher levels than those observed during the first half of 2017.

As for interest rates and taking into account that the Central Bank is exercising an inflation-targeting regime, the monetary authority is currently trying to further dampen monthly inflation figures by increasing policy reference rates. Meanwhile, international reserves continued to show a solid situation, increasing due to sovereign debt issuance and despite the mentioned fact that the Central Bank sold currency in FX markets to avoid expensive depreciation of the peso. Finally, trade balance posted a deficit of $5.2 billion in the first 9 months of the year, mostly due to the growth on import of capital goods, its accessories and passenger vehicles combined with a stable evolution of exports.

Turning to Slide 5. We follow with an overview of domestic macroeconomic situation and inflation. During the third quarter of the year, the CPI measured by the Buenos Aires [Citi] experienced an increase from the second quarter when looking at year-over-year figures, reaching 26.2% in September 2017. In particular, there was a strong influence of a low base of comparison effect due to temporary cancellation of past tariff adjustment occurring August 2016 that had come into force in April of that year. In return and although inflation has followed an uneven trend of decline, general economic consensus is expecting that the inflation should stabilize during the last month of the year.

As for the economic activity, output continued to improve in most sectors during the third quarter of 2017 as the level of activity is actually on a well-defined recovery path. Specifically, agricultural production and construction activity have outperformed [indiscernible] well, adding a positive dynamic to the market. As for industrial production, it is growing with renewed trend, mainly pushed by nonmetallic minerals and steel sectors, in turn, heavily influenced by construction activity.

As for the fiscal front, efforts of the national authority are set to reduce primary deficit. In fact, current fiscal target has been overachieved for 9 -- for the period of 9 months in 2017. So economic consensus is expecting that the government will be able to meet comfortably the annual target of a primary deficit of 4.2% of GDP.

Finally, aggregated household consumption has begun to recover at stronger pace as consumer confidence levels have risen indiscernible , achieving levels significantly higher than those observed over a year ago. Consumer confidence, reflected in purchases of durable goods, has led the way, growing rapidly during the quarter. Finally, it is expected that during the rest of the year, the situation will continue to improve for consumers as economic growth accelerates and inflation continues to decrease. In this macroeconomic context that we illustrated, Telecom Argentina has outperformed the market in terms of revenue growth and profitability increase when compared to past year's figures.

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. Before we continue, we would like to welcome Gabriel Blasi, our new CFO, to our management team. Gabriel is a well-experienced professional with an extensive curriculum in the banking and corporate sectors and with a long practice in capital markets after having executed many important transactions in the past. We wish Gabriel all the best with his responsibilities in the Telecom Group.

Now we invite you to a quick review of our vision and strategy. Please refer to Slide 7, where we want to share with you how we are transforming the company so as to be competitive and leaders in what will be the new era of the telecommunications industry. As we have explained in previous conference calls, the company is focusing on certain strategic avenues in order to achieve this transformation, and we have set specific marks and actions in this continuous process. 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 a virtualized network core system. And the results of these actions are starting to pay results. Despite we are still not where we want to be, we have experienced an improvement in our mobile NPS, growing it more than 10 percentage points in the third quarter, becomes positive for the first time since 2012.

On the content management front, we must work in reaching sustainable alliances that generate value for the company and for the OTT players but must be aligned with the preferences of our clients. We are focusing on these items through the relaunch of the Personal Store with a selection of next-generation value-added content features, improving the customer experience and the quality of our revenues. The platform and application provider was already selected during the quarter, and the plans to go live in March '18 is on schedule. Becoming a digital telco involves connecting digital consumers with multiple screens and devices to make the total connection possible.

Related to this, we have been organizing our business according to the new [devolve] concept that is a model development and operation process where software development and the operations work side by side with agile techniques to gain efficiency in the time to market of our products and services but very close to the customer front. We are starting to implement this new concept in new products such as IPTV, mobile financial services, big data analytics and cybersecurity services. In addition to this, the company has developed a connectivity and IoT solution for the City of Buenos Aires. In the same line, we signed a contract to deploy state-of-the-art technology for fully connected premises that will house the participants of the Youth Olympic Games that will take place in Buenos Aires during 2018.

In terms of security services, we have successfully developed denial of service to offer security services for our clients to prevent cyberattacks. For the convergent home, that implies a vision towards capturing the opportunities of a connected home and grow our business with possibilities of the multiple individuals that live in such homes and satisfying our clients' needs in every step of their lives, the company has accelerated the pace to the FTTH and FTTC rollout and has relaunched the bundled offer, Combo Único that combines ultra broadband and mobile services in order to reach a penetration of 80% in convergent services.

Despite these achievements, we are still in the middle of this process of transformation. As we can see, our company is addressing this digital revolution through an innovative offer of products and services, capitalizing the investments done in our networks, incorporating new intersectional work, methodologies and challenging certain market practices in order to become more profitable.

Please move to Slide 8, where we show how the digital era is transforming our business. The digital transformation is a turning point of the industry. Connectivity was this necessary step but insufficient when we look at the drivers of growth of the market for the future. Connectivity is basically connecting people with devices, and therefore, we must strengthen our capacity as convergent player, where operate a convergent multi-platform business, connecting multiple and always-on devices. Last, we must have the capacity to analyze and transform the data that our business generates into information that is useful to understand the consumption trends that our customers have.

On the other side, we must continue to be innovative in the solutions we present to the market, where we must constantly develop and launch new products and solutions with a focus in OTT, IoT and industry vertical solutions. As an example, IoT market is expected to more than double in the following 5 years, presenting a tremendous opportunity for growth. But this opportunity also implies a strong communion between the development of technology, the possibility of growing the associated services, the creation of communities among our customers, whereby the possibility of offering services related to customer information management will be the driver of growth in the future.

Let's move on to our business highlights. Please refer to Slide 10, where we highlight some of Telecom Argentina's key achievements during the third quarter and 9-month period of 2017. With respect to our mobile segment, we can point out that internet services increased by 65% versus a year ago. Also, data usage boosted, with an average MBOU raising by 80% year-over-year. In addition, data penetration continues to improve to 9.4 million subscribers from 8.2 million a year ago. Moreover, browsing ARPU rose by 46% when compared to the same period of 2016. And this was influenced by the evolution in 4G clients, which almost doubled since September 2016.

As for the fixed segment, fixed data gained 22% when compared to the same period a year ago. Also, and thanks to the adjustments in monthly fee prices that were implemented during August of this year, ARBU reached ARS 155 per month, a 48% higher than a year ago. Despite these increases in prices, lines in service remained stable.

Moving on to the broadband segment. We registered a significant growth of 67% in ultra broadband subscribers, clients with speeds of more than 15 megabits. Additionally, during the third quarter of 2017, subscribers with a bundle of Arnet plus Voz packs increased by 213%. In turn, broadband ARPU increased by 33% versus the third quarter of last year.

As far as financials are concerned, service revenues increased by 27%, achieving ARS 41.6 billion, growing for the first time above inflation levels. Moreover, EBITDA improved by 40% in 9 months '17 versus 9 months in '16, growing for the first time in the last 6 years over inflation, in more than 10 percentage points. Finally, net income attributable to Telecom Argentina totaled ARS 5.6 billion in 9-month period of this year.

Related to corporate matters, on last August 31, the shareholders of Telecom Argentina and Cablevisión approved the merger by absorption of Telecom Argentina and Cablevisión, subject to the regulators' approvals. In addition, the exchange ratio of Cablevisión share for Telecom Argentina share was also approved. And the final merger agreement between the 2 companies was authorized to be executed. This agreement was signed on last October 31 at referendum of the ENACOM authorization.

Finally, talking about network matters, we can highlight that the company continued with the deployment of 4G services. As an example of this, now the service is available in all subway lines of the City of Buenos Aires, boosting the increase in data traffic by 200%. Furthermore, it is important to mention that the first site of Argentina with 2.6 [gigabit] mobile access technology is already available and was installed by our company. Additionally, new 4G infrastructure was inaugurated in the northern region of the country, extending the high-speed mobile internet service to many cities and localities that will improve connectivity and contribute to the development of the region.

Turning to Slide 11. We can observe the different drivers of growth of the group revenues, which can be explained by the higher Internet consumption evidenced over the last 9 months, both in fixed and mobile segments. As a consequence of this, we can verify that the actual revenue mix is changing, where the participation of mobile revenues is increasing, together with fixed voice plus Internet, while handset sales have decreased its participation.

Mobile revenues in Argentina achieved a growth of 24% year-over-year, mainly explained by an important expansion of mobile Internet in Argentina that grew by 65% versus 9 months of last year. Moreover, fixed services reached ARS 14.3 billion, a 33% increase compared to the same period a year ago. In particular, fixed voice plus Internet increased by 35%, mainly due to the migration to the Arnet plus Voz bundled packs that include broadband and voice services. We will go into some details of this in the following slides.

In Slide 12, we can see that the home convergence strategy is evidenced in positive results when we look at the penetration of the bundled broadband and voice packs and ultra broadband. During the third quarter of 2017, the number of ultra broadband connections rose by 67% when we compare it to that of the third quarter of 2016. In addition, we can see a notable evolution in the number of subs with bundled packs, which increased by more than 200% since the launch of the offer. In this sense, it is worth noting that ARPU continues to increase, growing by 33% to more than ARS 362 per month.

Meanwhile, fixed data and ICT increased by 22%, mainly due to a combination of the exchange rate variation that affected those contracts that are adjusted by the peso to the dollar exchange rate and an increase in the number of clients that use these services. This is a good evidence of the strong position as an integrated provider that Telecom has in the corporate and in the small and medium enterprises markets.

Turning to Slide 13. We can see the evolution of the fixed voice business. During August of 2017, a price adjustment was implemented for the business and residential segment. The rise in prices represented an increase of 20% for each segment. This price adjustment contributed to the ARPU growth. In this sense, during the third quarter of 2017, the ARPU increased by 48% year-on-year to more than ARS 155 per month. Despite the several price adjustments that we have introduced over the last year, lines in service continued to remain stable during the period.

Moving on to Slide 14. We can see the focus that we have had in our value customer base evident in the evolution of the mobile business in Argentina. As we have explained in the business highlights section, the growth in data usage has contributed to significantly increase the browsing revenues and its participation in the mobile revenue mix, which now represent 49% of our total mobile services mix, up from 37% verified a year ago. Moreover, intensity in data usage continued to increase. Heavy users are gaining participation, boosting the consumption of mobile data, which, as of the 9-month period of 2017, has reached an average of more than 1.7 gigabytes per user per month, 80% higher than a year ago. Frequent data users grew by 15% versus the same period a year ago, amounting to 9.4 million subscribers as of September 2017. In addition, browsing ARPU has risen for -- by 46%, reaching more than ARS 154 per month.

Please turn to Slide 15, where we included a review of our 4G rollout evolution. Personal 4G LTE network deployment continues on a fast-track mode as coverage continues to expand. 4G high-speed services are now available in more than 1,000 locations, including all capital cities and the Buenos Aires metropolitan area, reaching a coverage ratio of 92% of the population in that cities or 80% of total population. More importantly, 4G customers totaled 8.7 million as for the third quarter of 2017, almost doubling the 4G customers of 1 year ago. This rapid growth in subscribers that use the network has been the driver of data traffic since 2015, and it is expected to grow by 8.3x by year 2020.

On Slide 16, we present our consolidated CapEx figures, where we continue to focus our efforts in the deployment of our network, striving to improve capacity and quality of service. As of the 9-month period of 2017, we have invested more than ARS 5.7 billion in PP&E. Investments in core and infrastructure represented 34% of the total technical CapEx; mobile access, 29%; while investments in fixed access were equivalent to 21%. Moreover, we can observe that the evolution of the FTTH deployment showed an important increase of 200% when comparing to third quarter '17 versus one -- 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 and hence, the user experience.

This slow evolution of our CapEx is related to operational issues as we have redefined the network planning process as new regulatory goals and conditions were fixed, lowering the CapEx requirement that we have set for the year. In addition, we have changed our practice for the search, construction and installation of sites for the mobile access network, increasing the participation of towers provided by third parties with the objective of reducing the time to service in the installation process. This has delayed the investment but also reduced the CapEx in infrastructure as it will be delivered by the provider. Furthermore, we have defined the [acquisition] of a new IoT platform, and this has delayed the execution of related CapEx.

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

Thank you, German. The positive business trends that were just described by German have resulted in a very positive performance in almost all financial results.

Please turn to Slide 18, where we can analyze our consolidated revenues and EBITDA. As of 9-month period of 2017, consolidated revenues amounted to ARS 47.3 billion, reaching a growth of 22% year-on-year. In turn, service revenues grew at a higher rate of 27%, thanks to the strong performance of voice, fixed voice plus Internet, together with mobile service revenues and, more specifically, mobile Internet. Moreover, EBITDA showed a more than positive evolution, growing by 40% year-on-year as we have concentrated in improving our revenue quality and profitability. EBITDA margin increased significantly by 400 basis points to 30% for the third quarter of 2017. And looking at the quarterly performance, we can see that we have consolidated the improvement trend in margins evident since the third quarter of last year.

Please refer to Slide 19, where we show the performance of EBITDA and the behavior of the different components of revenues and costs. The company has taken actions to gain operational efficiency and manage its cost structure, and these actions have positively impacted our profitability as OpEx has grown below inflation levels or revenue growth. Despite the evolution of cost of labor and fees for services, maintenance and materials that has -- that have negatively affected margins, effective cost management and changes in the business models have delivered good results in [interconnection] costs, taxes and commissions. Moreover, handsets costs were affected by lower additions. It is important to note, in almost all cost items, the performance has been below inflation after renegotiation processes undertaken with vendors and service suppliers, together with the efficiency actions and changes in the different business models taken across the organization. Moreover, savings in maintenance services were achieved, thanks to the modernization of the network installed with the 4G rollout.

Please turn to Slide 20, where we can verify that our operating income amounted to almost ARS 9 billion, with a 63% increase year-over-year. EBIT growth that turned higher than that of EBITDA can be explained by a slowdown in increase of depreciation and amortization and disposals and impairments of PP&E, which stood at 12% year-on-year. This contributed to the expansion in operating margins to 19% of consolidated revenues as of September of this year.

Meanwhile, net income attributable to Telecom Argentina reached more than ARS 5.6 billion, increasing by 128% on the 9-month period of this year. This improvement can be explained by a combination of the previously mentioned increase in operating income and better financial results, which we will analyze in the following slide. The strong increase in net income positively affected margins, which increased to 12% of consolidated revenues.

Please turn to Slide 21, where we show the breakdown of different components that explain the increase of our net income. EBITDA expansion was more than ARS 4 billion. As we mentioned before, the increase in [SG&A] and disposal and impairment of PP&E of approximately ARS 0.5 billion marginally impacted the growth of operating income. Nevertheless, it is worth noting that the net financial results positively impacted net income by almost ARS 1.4 billion, mainly driven by a combination of lower losses on FX results due to reduction in the peso depreciation in the first 9 months of 2017 versus the same period of last year, and lower net interest paid that in turn can be explained by lower average interest rates during this period, in conjunction with the strong reduction in our net financial position. Meanwhile, income tax expense increased by more than ARS 1.7 billion as a consequence of the growth in operating results. All of these factors explain the expansion of our bottom line, which reached more than ARS 5.7 billion.

Regarding our financial position and cash flow, as you can see on Slide 22, net cash position amounted to ARS 0.5 billion in the third quarter of this year. Net cash position increased by mainly -- was mainly associated with an increase in operating cash flow. In particular, operating free cash flow generation was strongly influenced by the company's EBITDA increase and by 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 first go to Tales Freire, Bradesco.

I have 2 questions, if I may. The first one, the CapEx is running well below the guidance of at least ARS 13 million (sic) [ARS 13 billion] for the year, mostly on the back of large decline in CapEx for mobile network. I know that you already provided some color during the presentation, but I'd like to know if CapEx for the year should be indeed well below the guidance. And if you could provide a little bit more color on the reasons behind this sharp reduction in the mobile CapEx besides the substitution of company-owned towers to third-party towers. This is my first question, and then I'll make the second question. Hello?

Yes, here we are. Yes, thank you for the question. Yes, we want…

Sorry, but I think there is an echo.

Our outlook is that we will not reach the ARS 13 billion of CapEx for the year. It will be around ARS 11 billion. And as we have mentioned, the most important factors is the -- that the first half of the year, we redefined and restructured the way we are constructing sites. You know that last year, for the first time, tower corporations, companies came to Argentina. And for the first time, this market had the offer of international tower companies. We have redefined our model at the beginning of the year, and we preselected 3 companies. And that delayed the construction pace that we were having. But since the second quarter to the end of the year, we are improving our productivity, and we are confident that with this new model, having the tower companies as partners, we will be able to almost double the amount of sites next year. At the same time, we have -- yes. At the same time, we had some problems with some permits from different municipalities across the country for FTTH deployment. But we are sure that, again, next year, we will have the permits process working in a better way and that we will be able to have better KPIs in terms of productivity, both for sites and for FTTH.

No, that's great. So this reduction in CapEx, given these partnerships is something recurring that we should expect for the following years. Is that right?

Yes. Of course, the CapEx equation will be a result of the new company and the strategy of the new company and position of the new company if the government approves the transaction. But this lower CapEx this year was related to the reasons that I mentioned. Still, we can see that we have a lot of opportunities of investment based on the current new developments that we are going to be launching next year and this year in the last 1.5 months that we have to finish the year.

Okay. And then my second question is regarding the tax reform in Argentina. I know that there's still few details about it. But could you give us some color on the potential impacts that this reform could have for Telecom Argentina, please?

Well, with respect to the tax reform, what we can say at this time is that, [obviously], the tax reform will be positive for companies in general and we have 2 positive effects. One is the reduction of internal tax that potentially will have a positive impact in electronic products or electronic goods. That, in a way, will allow us to reduce pricing of devices in the market, on one side. And on the other, there is potentially a reduction in social security contributions that will reduce, in a way, the cost of -- or reduce labor costs. And finally, the impact or the effect of this will depend on what will be the dividend policy going forward. But there is a reduction in the income tax that will be, in a way, split, on one side, on the corporate income tax; on the other side, a dividend tax. But again, all these positive effects are still under revision. I mean, today, the bill will be presented to Congress, and our expectation is that there will be an extensive discussion on this, on the different bills that will be passed through Congress. So we are confident that the tax reform will have positive effects on corporations in general, but again, we will monitor the evolution of the discussions in government.

(Operator Instructions) And with no other questions in queue, I'd like to turn the call back over to our presenters for any additional or final remarks.

Well, thank you very much for participating in our quarterly conference call. Please do not hesitate in contacting our Investor Relations department for any further inquiries you may have.

So good morning to all. Have a nice day, and we expect to meet again soon. Bye.

And that will conclude today's conference call. Thank you for your participation.