Telecom Argentina SA (TEO) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina TEO Third Quarter 2018 Earnings Conference Call. Today's call is being recorded. Participating on today's call, we have: Mr. Gabriel Blasi, Chief Financial Officer; and Ms. Solange Barthe Dennin, Investor Relations Manager.

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

Thank you, Brian. Good morning. On behalf of Telecom Argentina, I'd like to thank everybody for participating on this conference call. As mentioned by our moderator, the participants of today's conference call are Gabriel Blasi, Chief Financial Officer; and myself, Solange Barthe Dennin, Manager of Investor Relations.

The purpose of this call is to share with you the result of 9-month period ended September 30, 2018.

We would like to remind all those that have not received our press release, our 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 the 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 7, 2018, a copy of which was included in the 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 and 2 of the presentation.

The agenda for today's conference call, as seen on Slide 3, is first go over general macro overview, then moving on to our industry trends 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 characterization of the macroeconomic context in which we operate.

Please refer to Slide 5, where we included a summary of the current macro-evolution in Argentina's external front, as well as domestic activity and inflation.

During the third quarter of 2018, the macroeconomic environment has increased in complexity, strongly influenced by a second round of turmoil in the foreign exchange market, which resulted in even strong peso depreciation from the [peso] during the first half of 2018. Exchange rate experienced a depreciation that stood about 100% during the first 9 months of 2018, being this impact strongly concentrated in the second and third quarters of the year. A second round of volatility in exchange market was registered during August and September. The FX rate experienced a 42% increase during the third quarter of 2018.

Yet, again, a combination of external and local factors can be associated to this movement. In this context, the Central Bank exercised heavy intervention in an attempt to contain the foreign currency demand, thus affecting the international reserves position, which suffered a decrease during the quarter of almost $13 billion, mostly associated to these interventions and also to the -- commitment to the -- of the Central Bank to reduce the cumbersome stock of its note, known as LEBAC.

In addition, the monetary authority applied a strong increase in interest rates in order to counter the disruptive dynamics coming from abnormal behavior of the exchange market, which still prevails in high level as of this day.

However, considering another perspective, it is worth noting that the real exchange rate is nowadays in a reasonable level above the long-term average. The situation has not been [right] since 2010. The current level of exchange rate supports competitiveness and therefore, it is expected that they will allow the recovery of the trade balance, which has already begun in September 2018.

It should be mentioned that in October was announced a recommendation of the monetary policy scheme, which included a strict control of monetary aggregate and the introduction of a statutory note in bonds that defined nonintervention source for the monetary authority. The combination of this measure, together with the modification of the standby agreement with IMF to enlarge the amount involved by $7 million and to advance the disbursement for 2018 and 2019, ultimately led to some relief from the turbulence experienced in the exchange market.

As far as the internal funds is concerned, regarding inflation, during the third quarter of 2018, the CPI measured by the Buenos Aires City continued to experience further increase from the past quarter's readings, reaching 39.5% year-over-year in September 2018. During the last 3 months period, inflation has been considerably impacted by transport and utilities tariff increases, as well as raises in food and beverage prices, which were impacted by the FX evolution.

Inflation during September was particularly high, and it is expected to remain at high levels in October, while some levels of reduction in monthly figures should be feasible for the last month of 2018.

In relation to the economic activity, aggregate output is decreasing monthly due to the strong underperformance in agriculture activity, which was affected by climatic factors, while construction and commerce sectors reported downsize in their activity, too.

Industrial production also suffered a decrease, plunging deeper into recessive cycle and accelerating the pace of construction during the last month. Economic consensus published by the Central Bank [is] expecting the construction of the GDP in the order of 2.4% for 2018.

Lastly, higher volatility and economic variables and the rise in inflation have impacted overall household consumption, which is expected to remain flat due to the adverse impact of inflation on real income and due to the high uncertainty captured by low consumer confidence levels, which in turn, have fallen significantly.

Turning to Slide 6. We would like to introduce a brief wrap up over Argentina's long-term growth cycle. As shown, we can verify that Argentina has registered the highest rate of recovery after recession when compared with other South American peers. After the conclusion of the expected recessive process, it is foreseen that Argentina can return [eventually] to a sustainable growth path. Furthermore, as of June 2018, unemployment rate shows a slight increase as GDP decreased in the last quarter. But it still remains low and stable despite of the contraction in the economic activity. Pointed out that the recessive cycle should be minor than other episodes in our historical comparison.

Moving to Slide 7. We can find a summary of the impact of the economic context of durable goods consumption. Taking quantities of durable goods into consideration, consumption remained slightly above 2017 as to June 2018. Probably it will be heavily impacted during the remaining months of 2018, as a general slowdown in consumption is being observed. In context to this, cost of sales have decreased in the same period, mainly due to the economic context and also due to the fact that businesses are dollarized having this later effect a direct impact on prices.

As a summary, Telecom industries are considered the sensitive in nature, although they are not immune to changes in the economic cycle. Notwithstanding the challenging macroeconomic context that was described, Telecom Argentina has managed to generate a solid revenue growth and an operative profitability increase when compared to past year figures.

Having gone through this introduction of the macro environment, let me pass the call to Gabriel Blasi, who will go over the industry trends and strategy and the business highlights sections.

Thank you. Solange. Hello to everyone. As mentioned in the prior call, remember that the merger between Telecom and Cablevisión was considered an inverse acquisition under IFRS 3 business combination, with Cablevisión being the surviving entity for accounting purposes.

Thus, for the purposes of comparing the consolidated financial statements of Telecom Argentina as of September 30, 2018, first, the comparative figures as of December 31, 2017 and September 30, 2017 correspond to those that arise from the consolidated financial statements of Cablevisión at their respective dates; and second, the corresponding information of the 9-month period ending September 30, 2018 incorporates on the basis of figures corresponding to Cablevisión, the effect of the application of Telecom Argentina and method of acquisitions at its fair value in accordance with IFRS 3 guidelines and the operations of Telecom Argentina as of January 1, 2018.

On the other hand, in order to ease the understanding and analysis of the earnings evolution by its users, additional figures of the income statements are included, exposing on pro forma basis, the comparative figures for 9 months 2017, as if the merger between Telecom and Cablevisión had been effective during that period.

The variations of results versus 9 months 2017 identified in this presentation emanate from the comparison with the aforementioned pro forma information. Additionally, you may find a detailed pro forma comparison in financial table 6, 7, 10, 11, 14 and 15 included in our press release.

Moving to Slide 9, we can find some industry trends that we would like to share with you in order to clarify the strategic approach that the company currently has. The goal of the company is to offer to its clients in the near future a convergent offer of all our service. As you can observe, the previous quad-play experiences in European countries registered a very positive effect as the number of households with these services has been increasing rapidly during the recent years. In this sense, we believe that the company will be able to follow a similar path and to be the first options for the customers with a high-quality offering.

Moreover, it is expected that there is going to be a strong and rapid increase in the video OTT subscribers in the next years, almost doubling actual figures by 2022.

This growth of new subscribers will be accompanied by a higher demand for fixed and mobile connection speeds. In addition, it is expected that consumption patterns to change towards a more intensive usage of mobile internet.

Additionally, it is worth highlighting the growing importance of IoT devices. In fact, in 2019, the number of devices connected in the world reached an estimated number of 9.1 billion, with a greater participation of consumer devices, such as electronics and smart home appliances.

It is expected by 2025, the number of devices should increase 2.8x to more than 25 billion with a stronger presence of industrial devices as in energy, manufacturing and city transportation.

Let's move to Slide 10. We illustrate the challenges ahead for the company in order to address this industry trend. In this sense, we aspire to have best fixed-mobile network in the country according to the consumer needs as described. We have superior quality and coverage. This infrastructure will provide the technical platform in which the company will leverage to achieve its major objective, to be the leader in Net Promoter Score as the first option of value for the customer. Working towards this aspiration, the company's focused on clear set of strategic avenues:

First, we are taking step further into content. We intend to transform flow in an integrated of other platforms in the market. Furthermore, Flow will become an available platform for operators in as-a-service modality and a provider of IP video service. In addition, we are focusing on the relaunch of personal store as a marketplace of multiple video, gaming and music apps. On the network front, we intend to develop higher quality and capacity for broadband with the development of docsis 3.1 on the HFC network and the conversion of copper network into FTTH. Finally, it is important to remark that the company's mobile 4G network is already the fastest in Argentina. Now we are going beyond this by improving the coverage by the south of the country -- in the south of the country, sorry.

Moving on our business highlights. We can see that we have positive position today. Please refer to Slide 12, where we highlight some of our key achievements. During the first 9 months of 2018, Telecom's revenues totaled ARS 99.5 billion, increasing 29% year-over-year. Operating income before D&A totaled ARS 35.2 billion, implying a 35% margin on revenues achieved in a challenging economic context. In addition, fixed voice ARBU and broadband ARPU were up to ARS 237 and ARS 605 per month, respectively. Meanwhile, pay TV ARPU reached ARS 675 and mobile ARPU reached ARS 170. Moreover, and in relation with our subscribers, mobile subs in Argentina amounted to 18.9 million, of which 11.7 million subscribers were 4G clients.

Pay TV subs remain stable, amounted to 3.5 million and fixed broadband subs totaled 4.1 million. Fixed voice reached 3.6 million.

Regarding the customer base, it remains stable in relative terms. This is due to the growing use of telecommunications services, which increasingly affect the daily life of our customers, as they're allocating the relatively stable portion of their income of the services. As far as corporate matters, it is important to mention that on September 4, 2018, Telecom was informed that the merger with Cablevisión was registered in the Public Registry of Commerce under the responsibility of the Inspección General de Justicia. By this way, finalizing all formal and legal steps related to the merger.

Turning to Slide 13. We can observe the revenues breakdown where mobile services business still holds the main participation over Telecom revenues, followed by broadband and pay TV. We can highlight that the current revenue mix has a participation of mobile revenues of almost 35%, followed by broadband revenues, that apart from representing near 23%, show a fast-growing rate as well as pay TV revenues, which accounted for almost 22% participation.

In turn, fixed telephony and data represented around 13%, while devices achieved 8% of the total revenue. When compared with the 9 months 2017 consolidated pro forma results, we can see that service revenues grew by 29% year-over-year, reaching ARS 91.9 billion. As we already mentioned, mobile and broadband are the segments that mostly contributed to total revenues composition, generating revenues of ARS 34.5 billion and ARS 22.4 billion, respectively.

In addition, the pay TV revenues totaled ARS 21.4 billion, followed by fixed and data revenues with the aggregate amount of ARS 13.1 billion.

To a lesser extent, we can highlight the contribution of handset and others with ARS 7.6 billion and ARS 0.4 billion, respectively.

It should be observed that in general terms, the company revenues are still in the process of catching up with the acceleration in the inflationary context that we commented in our macro chapter, while the recovery in dollar terms should take a longer period of time related to this huge jump of the foreign exchange rate.

We will go to some details of this in the following slides. In Slide 14, we will go through the evolution of the company mobile business in Argentina. As the intensity in data usage continues to increase, we can observe that there has been a sustained growth in postpaid subscribers, which represent our high-value mobile segment.

As of September 2018, the postpaid subscribers accounted for 38% of the total customer base, up from 34% compared to the same period of 2017. In this sense, the intensity of mobile internet usage continues to increase, which for the 9 months of 2018, has reached an average of almost 3 GB per user per month, which is 52% higher than in the same period of 2017.

When we focus in the evolution of our 4G rollout, we can highlight that there has been an important increase of 4G subscribers, which totaled 11.7 million as of September 2018. This rapid growth in subscribers that use the 4G network has been the driver of increasing data traffic since 2015. Currently, the governance of our 4G network reaches more than 100 -- sorry, 1,500 locations and inclusive around 450 locations year-over-year. We can observe the differential in mobile internet usage as mobile internet connection speed increase per GB, per user, per month from 4G users that are almost 1 GB of our 3G use.

This please turn to Slide 16, where we include a review of our Internet and pay TV services segment, which aims to differentiate our scale through an enhanced customer experience.

Related to our broadband segment, we can point out that the number of subscribers grew more than 70,000 year-over-year, achieving 4.1 billion users. The aforementioned increase in subscribers was supported by the offer of higher connection speeds. As a consequence, subscribers with speeds equal or above 20 megabytes have increased to 34% of the total client base versus 20% over a year ago.

The measured effect, alongside with price adjustment applied, contributed to the ARPU growth. In this sense, during the third quarter of 2018, the ARPU of our broadband services increases by 35% to almost ARS 648 per month. Focusing on pay TV services during the first 9 months of 2018, cable TV subscribers remained stable, while Flow Boxes achieved ARS 167,000, and almost 951,000 subscribers were using the Flow application as of September 2018, increasing the [total use] from previous observer over a year ago.

Moreover, cable TV ARPU increased to more than ARS 718 per month in the third quarter of 2018, up 37% from the same period last year, while churn stood at 1.3%, up from 1.2% in the third quarter of 2017.

From Slide 16, we present the consolidated CapEx figures, where we continue to focus our efforts to keep our competitive advantage in terms of connectivity. During the first 9 months of 2018, Telecom has invested more than ARS 24 billion, being this amount 50% higher than the same period of last year. The consolidated amount of capital expenditures represented 24% of [technical] revenues, increasing from 21% in the same period last year as we have said, our competitors in terms of investment size.

Furthermore, we can verify that an important amount of technical CapEx was allocated to the access network, of which mobile access represents 55%; followed by fixed access, which was 36%; and others accounted for the remaining 9%.

The remaining of technical CapEx was mainly comprised of upgrades of our IT infrastructure and the transport network and of investment done on our international operations in Paraguay and Uruguay.

It is worth to highlight that during the 9-month period, Telecom continues with its efforts to improve both the fixed and mobile network. In order to achieve this goal, the company intensified the development of its network in the northern part of the country through the deployment of new sites and FTTH. Additionally, Telecom's Núcleo started the deployment of FTTH in Paraguay, reaching around 40,000 homes passed by September 2018.

Having gone through these business highlights, now I will pass the call to Solange, who will go over the financial performance.

Thank you, Gabriel. We will go over the impact that these positive business trends, described by Gabriel, generate over our operating income. Please turn to Slide 18, where we can analyze the consolidated revenues and EBITDA.

For the first 9 months of 2018, consolidated revenues amounted almost ARS 99.5 billion, reaching a growth of 29% year-on-year. In turn, service revenues grew 29%, thanks to the strong performance of pay TV revenues and interband revenues, followed by mobile service revenues and more specifically, mobile Internet.

Furthermore, EBITDA showed a strong evolution, growing by 36% year-on-year as we have concentrated in improving our revenue quality and profitability. EBITDA margin increased substantially by 180 basis points to 35% for the 9-month period of 2018.

It is important to highlight that the improvement of EBITDA margin is explained by a solid performance in cost management, as we will analyze in the following slides.

Please refer to Slide 19, where we show the performance of the EBITDA and the behavior of the different components of revenue and cost.

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 revenue growth and inflation levels. We can observe a positive evolution of labor cost over which the company is focusing heavily, alongside with fee for services, maintenance and materials, which in turn, were affected by lower network maintenance cost. Additionally, effective cost management has delivered good results in interconnection costs through better negotiation in international interconnection and also in handset cost, mainly affected by lower sell-out. This effect has been partially offset by increases in programming and content cost and other costs, which include bad debt expenses. Although this expenses have registered certain increase, they are in line with the nonperforming ratios observed in the financial system. The final outcome was the 180 basis points expansion, as described before.

Let's turn to Slide 20, where we can verify the company operating income totaled more than ARS 19.9 billion with a 44% increase year-on-year. EBIT growth that resulted higher than that of EBITDA can be explained by a slower growth in the increase of the depreciation and amortization and is also impairment of PP&E, which stood at 28% year-on-year.

This contributed to the expansion in operating margins to 20% of consolidated revenues, increasing 200 basis points when compared with the first 9 months of 2017, showing that the company was able to achieve solid operating performance through the course of this year.

On the other hand, Telecom registered a net loss attributable to the control income of almost ARS 18.6 billion. This net loss was mainly explained by higher net FX losses of approximately ARS 45.7 billion in the first 9 months of 2018, which can be explained by the peso depreciation that impacted mainly our current net financial debt position denominated in U.S. dollars.

It is important to highlight that as of September 30, 2018, the restatement criteria of the financial statement established in IAS 29 have not been applied. This circumstance must be considered in the evaluation and interpretation of the financial situation and the results presented by the company. If the comprehensive adjustment for the inflation is applied, an increase in the values of the nonmonetary item is expected up to the limit of the recoverable value with its consequent effect on the deferred tax and an increase in the net equity of the company, including the contribution of the owner.

Likewise, with respect to the result, an increase in depreciation and amortization due to the effect of the restatement of nonmonetary asset is expected, mainly those from the former Cablevisión business and an improvement in financial results, due to the positive results from exposure to inflation, due to the excessive monetary liabilities over monetary assets, all of them with the consequent impact on the line of income tax. It is worth to mention that inflation adjustment will be done following local guidance.

Turning to Slide 21. We present some pro forma key figures for the last 12 months as of the first 9 months of 2018 and the full year 2017. Company revenues achieved more than ARS 128.5 billion for the last 12 months period ended September 28 (sic) [2018].

Meanwhile, EBITDA amounted more than ARS 44 billion for the last 12-month period. Moreover, EBITDA margin reached almost 35%.

Regarding our gross debt, as of September 2018, amounted almost ARS 90.9 billion, but as the company holds an important cash and equivalents investment position, net debt reached almost ARS 68 billion. In fact, net debt-to-EBITDA ratio remains very reasonable and in line with levels considered sound within the Telecom industry.

Please move on to Slide 22, where we can analyze our adjusted maturity schedule. As we mentioned in our press release, in October 2018, the company was financed $500 million from the syndicate loan due 2019 through a new loan agreement due 2022. Additionally, $100 million of the original syndicated loan were prepaid using the [good position] of the company, leaving a total outstanding amount of $400 million.

Moreover, in October 2018, Telecom Argentina has also accepted a proposal from the IFC for an amount up to $350 million, with the purpose of financing investment needs, working capital and refinancing of liabilities.

Finally, in November 2018, the company was notified of the acceptance of loan offer by Deutsche Bank, London Branch, for an amount of up to $300 million.

As mentioned in previous calls, we have a manageable debt profile and many other sources of funds such as lender financing, local bank lines and access to local and international capital markets for the coming years, and as we mentioned, a very reasonable debt-to-EBITDA ratio. Moreover, the company holds the permanent optimization policy for the [third quarter] rate and [settlement] of its financial liabilities, and it's always analyzing possibilities on this front according to the evolution on the market conditions.

Before our Q&A session, let me pass the call to Gabriel for final remarks.

Buenas, Solange. As stated, it's important to address the issue that the company has refinanced almost completely the debt to gain a much better and comfortable profile. We've been able during this very tough environment to have a very significant improvement in costs. And it's important to us the fact that this improvement in costs is starting because we are still in the process of deployment of all our new systems, especially on the back and the front, and significant additional effects are going to come from there. But on the EBITDA evolution in Page 19, where we saw the different components, we -- it was very easily shown how we were able to cope with the cost structure at a very lower pace, that inflation phase, with only the exception of programming and costs -- our content costs, which are dollar-related. But all the rest of the costs of the company, they have been below inflation. Probably the only one that has been aligned to inflation has been the tax, as it is shown there. And we've been able to quickly offset the inflation effects on our revenue side.

Finally, we continue to move ahead, going deeper on the effects of the merge regarding our cost structure and our -- the different processes. Within that event, next year will be very significant with the evolution, as I already mentioned, of the new platforms related to back and front.

With this, I will open the session to questions, Brian.

(Operator Instructions) The first question will come from Fernando Suarez with AR Partners.

Notably, I saw that this quarter, wireless ARPU was the one with the highest increase, unlike previous periods where wireless ARPU was the slower one. I would like to better understand, how are you going to price your services going forward considering the economic turmoil and the recent devaluation which occurred? And where do you feel more comfortable to increase those prices?

Well, I hear you to some extent, garbled, but I'd say if I didn't understand properly, please, Solange, clarify. We have seen that our -- all the fixed business itself has been very, very able to receive the price increases. On the mobile, what you are observing is a very significant change in the fact that the company is able to grow, moving customers from prepaid to postpaid. This may, at the beginning of the process, of course, to provide, I will say, some marginal effect in terms of that -- to get that step done, at the first stage, you need to provide a fixed service, not prepaid, at low prices. But then once the customer begins to have the experience of the ability of the usage of more data, then you get more space for additional increases in price. The second aspect that I will mention regarding the behavior of the mobile is that at the beginning of all this movement in the market, it's that marginal effect also was related to the prepaid, in a way that when all the increases in the tariff mentioned by Solange, especially public services or utilities, affected the consumption ability of the customers, a significant part of the prepaid universe was these -- was that they just fix their expense to a fixed amount in pesos, meaning that in the past, that type of customers would have gone to the company, let's say, once a week and make the recharge. But now, once he gets there in terms of the total expense, he doesn't use it anymore. This is a third-party effect. We think that as it has happened in the past, this effect is going to recover once the initial hit of all these increases in prices gets milder. We are confident that the company is going to be able, as in the past, to offset the inflation effects in terms of the revenues. Of course, having said this, the question is depending on how big of the process continue to deteriorate, it may take some time longer. What we cannot expect is that the company is going to be able to price immediately movements like the 90% impact of devaluation. That type of movement takes longer for us to recover. But when you look at the long-term pattern in the past with similar movements of all businesses, you see that at the end, because of this aggregation constantly of having services or having additional capacity, the company is able to fully price that at revenue level.

Great. And my second question was, you can please quantify the impact of the disconnection of prepaid lines that ENACOM is forcing you to do? Is there any revenue reduction or cost reduction? Do you believe that maybe the overall measure have improved your client mix, considering that some should have upgraded their plans?

I didn't get the last part of your question, if anybody can repeat it. On the interconnection costs, the reduction is really a synergy. We are getting there a significant cost by putting really the 2 networks together. And this is a process that it has only started. The reason is that we are yet far away from the optimum point of how we make all these infrastructures interact. As you may recall, we have hired Bell Labs from Nokia, who are assisting us in developing this to the future. Additional savings also are going to come from the automation of the administration of the network. There are significant advances in that event, and the company is looking at that very carefully and very closely together with Bell Labs in terms of automize the co-administration of the network. I am not sure if I complete your question of the recent part that I missed. I am not at the office. I am in Paraguay, and I get some part of the message not complete.

Okay. Fernando -- I believe that Fernando was referring to the nominativity of the lines. Is that right, Fernando?

Yes.

Okay. Related to that, basically, as we know, there was -- there is on the market many prepaid lines that maybe could be -- that were not nominated. And therefore, there was a process started in order to have the identification for such lines. And the regulator established a process that in that process, they need to have the nomination of such lines for October 31. After that, what -- and the ENACOM has informed that the number of the lines that have been included in this process was around 65% of the lines were nominated. And basically, related to the ones that were not, basically, the process is that are suspended and eventually, the person that have a prepaid line has a possibility to go to the commercial office and ask to be activated, leaving the information requested. So it's a process that is...

My question is...

Yes. So basically, what I'm saying is it's a -- go, Fernando, I'm sorry.

My question is, is this measure positive -- is the amendment positive measure? Or the amount of disconnections will kind of damage some part of your revenues or improve your costs?

No, no. Of course, it's going to be positive because, basically, what we are going to have is, basically, the lines that are going to be in a way that are active, and even though you are going to have -- even -- are going to be reflected in the levels of ARPU.

(Operator Instructions) We will take our next question from Alejandra Aranda with Itaú.

Two questions, if I may. The first one, on CapEx. If you could give us a little bit of clarity on what's left of CapEx for this year and what can we expect in terms of CapEx in dollars for total 2018. And then what's the split plan of that $5 billion going forward or at least for next year? And then when you were talking, Solange, about inflation adjustments, there was some noise in the line. Did you give any -- at least ballpark number on the amount that, that adjustment could entail? That would be the 2 questions.

Going to your first question regarding the CapEx, we are thinking that as far as most of the CapEx of the year, it has already been deployed. The final figure in U.S. dollars at the end of the year would be close to $1.2 billion. So this is maybe slightly less than that. We have a combined effect in terms of why we didn't reach the $1.5 billion. Of course, the devaluation has a marginal effect in here. Also, the impact -- very relevant is that the construction of sites, getting all the approvals and all the requests related to the new sites takes a very significant part of the time frame. The company is going to almost double the amount of sites that were built last year, and that is a very big challenge for us. I will say that probably our CapEx now, the biggest challenge is to deploy -- to physically deploy the money more than really to get the investment in that. Regarding the future outlook that you asked for, we are just -- at present, we are discussing and establishing our CapEx for next year. And just to give you additional color, because I will not be able to dig in the details because we are in the process of establishing that, but the big picture is that the company has not thought in terms of not doing the $5 billion CapEx plan that we announced. We are moving in that direction. The discussion and the different uses of the different applications of that CapEx, we have already disclosed. There are no changes in that because most of that CapEx is really related to increase our coverage and to increase our level of service to our customers in terms that we are not changing that and the establishing of the company is the same. So having said that, what we are discussing, and this is related to the general environment of the country and to the new sites will be that way or the new spin of the economy in Argentina, it might bring up the decision to -- instead of doing the CapEx in 3 years, taking 1, 1.5 years longer period for fulfilling it. And the reason is that if everything moves slowly, including our competitors, which are investing much less than we are at present and at the same time, the economy as a whole slowing -- or has slowed down, in a way, there is no need or probably has -- is not the wisest decision to speed up the [area] of CapEx in an environment where the cost of capital has increased significantly. Having said that, as far as we are beginning to see some signs that the situation may not be so bad and at the same time that markets, especially on the external front, normalize, we allow us to finally design the annual size of the CapEx. But as I mentioned, for the time being, we have no thoughts in terms of stopping the process, or the most likely scenario is that we may add a couple of years instead of -- to the original 3 months.

And on the inflation adjustments?

In terms, sorry, of adjustment of what?

The inflationary adjustment, if you had a -- at least a ballpark number of how that will affect the balance sheet.

Well, yes, we can comment on that. Well, thank you for the question. Maybe we were not very precise on this. As you probably -- and this is a very important subject. As you probably know, it is mandatory for most of Argentinian corporations because of the country having gone through an inflation process, increasing 100% for a period of three years. According to IFRs international rules of accounting, it's mandatory to make an inflation-adjusted accounting. We have -- most this rule was established -- an obligation for Argentine corporations was publicly established in June, and -- but there is a window until December to present the complete adjustment. That's why at present, you will find most of the corporates with a footnote in the balance sheet explaining the situation and explaining that the adjustment is to be done. What I can tell you is that because of the very particular situation that our company has and the answer is completely related to our hedging, is that we will see a very significant effect of the inflation accounting. The reason to that is that the company has a very significant amount of fixed assets. We own more than 5,000 pieces of real estate as part of our business. And this has a lot of implication in inflation environment, meaning that up to now, you have seen the mark-to-market of our liability side. And it is still pending, the mark-to-market in inflation terms of our asset side. We might say that the impact may not offset completely the impact of the devaluation, but it's going to be close to that. Meaning that there are several aspects that yet are still to be clear in terms of regulatory approach, in terms of taxation, in terms of -- but the general picture, because of what I have already mentioned, it's very significant and will have a very important effect in the final result of the balance sheet. That is important to clarify because it's not the typical situation for the corporates and the listed companies in Argentina. About 70% of the total company, the accounting inflation doesn't provide additional results. And there's only 1/3 of the companies, we are in that group, because of its special balance sheet shape, have this positive effect.

Okay. Just to see if I understood correctly. So with this inflation adjustment, you believe that you won't probably be able to reverse all the negatives that you had, but you will likely be close to that.

Yes. I want to be clear on this, and I don't want to be misleading. Imagine that this adjustment is a very complex calculations. It implies to adjust the value of almost all the assets and liabilities of the company, especially -- I'm referring to those that are not mark-to-market. And it's a very complex calculation. We have already done, of course, several trials on this. The information I'm giving to you now is not audited and so might have certain changes. But the answer is that the impact will be significant and will be very material compared to the devaluation pace.

Okay. No, that's quite helpful. And an additional question, if I may. Sorry, I'm taking a lot of time. Given that you have the IFC loan and what you announced this morning of that syndicate loan of $300 million, you won't need to tap the market, at least in the near term, right?

Well, thank you again for your question. The issue is that the company has been speaking with investors all over the year. We have, as you mentioned, we have completed yesterday the final approval of this additional loan of $300 million and we have the mandate with IFC, meaning that there is -- let me put it this way. There is no refinancing risk at all at this moment for Telecom. Having said that, the market may always deliver additional opportunities in terms of cost structure. Some of the loans that we have at present have a taxation that is less favorable, that the treatment that locally we give to the -- only a synergy [to shareholders] to the bonds. And that comes into consideration that any opportunities that we may have to improve not only our profile of maturity but also our costs, we are going to be there. The reason why the company has not tapped the market again since February is very simple, is that when you look at the present market value of our 2021 bond, the $500 million note that was originally issued by Cablevisión, it has been traded on average 200 basis inside the sovereign. Now, the last week, this positive gap for us has reduced because of the improvement of the sovereign and not necessarily reflected in our bond. It takes longer because the bond is not so liquid in terms of daily trading. But in the medium-run picture, we can really assess that the -- that type of maturity has been trading 100 basis inside the sovereign at least. Having said that, the company understands that we went the market to look for funds, we might be requested an additional spread or basis for new money. That's logical, and we can compare with that. But because of the volatility of the market and because of the high variance established by the sovereign risk and, of course, because of the general turmoil and the situation of the portfolios in the Argentine risks, the impact was the requested amount was too big for the consideration of our query. So that's why we haven't been to the market. Our intention is to be in the capital market, both locally and internationally but we will be there at a price that makes justice to the credit profile of the company and to the ratios of the company that deserve really a very significant consideration. That's our perspective at least.

Our next question will come from Andre Baggio with JPMorgan.

I'd like to return to the point of the CapEx. This year, CapEx has been around 70% of EBITDA. And the company [whose] growth, it's more or less presumably inflation. So when we look at the environment of Argentina had, what is a reasonable capital allocation for this company in terms of the opportunities for growth?

If I understood you properly, what you are requesting is, how do we envision the future allocation of CapEx in the following year. Well, as I mentioned, we are now in the process of discussing this because the first consideration is that we need to have a clearer picture of what is our dollar EBITDA is going to be in the medium run, which is to some extent, because of the high movement that we have, we still don't have a clear picture if our EBITDA is going to be just clear as of September. Imagine that considering only in September, the comparison of that foreign exchange rate compared to the comparison of the foreign exchange rate today has a difference of ARS 7 billion in our final result, meaning that if we close the year today with the present foreign exchange rate, our result will be higher by ARS 7 billion. Having -- and that's without -- only related to FX, no operational consideration, no consideration on the adjusted inflation accounting. So having said that, we would like to have a clearer picture to exactly make the same type of consideration that you have made in a way of what proportions of our cash flows are going to be devoted to the future investments. In terms of the mix of the investment, as I mentioned, as we are regaining capacity in most cases and solving the year's lack of investment on the mobile, it won't change significantly in terms of the shape, but it will change probably in the pace of investment. We would very likely continue with -- as established, in the range of 40%, with 55% devoted to the mobile, with 36% devoted to the fixed. In general terms, what might change is that we might decide to focus more on the -- position the CapEx to grow, the CapEx to provide additional service to our customers. That's the part of the total discussion that we are having today. Unfortunately, of course, we are in the middle of that, we are going to have a clearer picture by mid-December when the process is finalized. I cannot give you much more details on this at this present stage.

Prefect. Just one small clarification. In Argentina, it's absolutely impossible to think about investments in pesos. It all needs to be negotiated with the suppliers in dollars, let's say. Using the peso plus inflation is not something that can be done in Argentina.

No. Well, we can have a very long conversation on this. The first one that you have is that you can't finance this in pesos. To give you some color, as you know probably better than we do, all the funding available in the financial market in Argentina, half is demand deposits that can be withdrawn from the banks in 24 hours and half is 30 to 40 days tenor deposits, meaning that it is very costly for the banks because they are lending their own capital at the end to provide a sensible peso long-term financing as there is no funding available. When you move to capital market, then this is similar. The company will consider, of course, peso financing but probably, we cannot get a tenor longer than -- in a very good environment, 2, 3-year, 5-year at most. And when you go to that, for instance, when you look at what is being lent now at mortgages in Argentina, [mean they all are] which is at the end, this is the inflation-related correction, plus 10 points is too high. In the medium run, it can be really extremely costly. That's why all Argentine corporations, especially the ones that invest medium to long term, switch to U.S. dollars. And as I mentioned, although this may happen still in the [time you show] a lot of [investment] in terms of cash flows, when you look in the medium term, the situation is not like that. If you look at our case, in our case, we have our operational income -- operational revenues and operational expenses in U.S. dollars at merge. The company is not unhedged on the operational side. They're only unhedged [8x] from the financial side, which is offset by the long-term investment that we are doing and mostly protected by our huge fixed asset base, as I already mentioned and for the CapEx, which by the way, [turns to] the same inflation. So at the end, as far as we tend to hedge our 12-month exposure in dollars, which is the devaluation that we really pay in the long run, the other is an accounting issue and the exposure to inflation, so that -- when the movements are pretty strong.

Our next question will come from Sam Epee-Bounya with Wellington Management. Hearing no response from Sam's line, we'll move on to the next question, and that is from [Julian Rios] with [Nomura Securities.]

I have a couple of questions with respect to your recently announced financing transactions. I wanted to understand if the IFC loan will be fully drawn by year-end to the full $350 million or whether -- and if not, what is the length of the drawdown period? And with respect to the Deutsche Bank loan, I want to ask you whether that will be expanded to $300 million and whether it will be fully drawn by year-end?

Okay. Thank you very much for your question. Regarding the Deutsche Bank, yes, it's going -- the $200 million are, for sure, going to be withdrawn prior to year-end and very likely the second $100 million tranche, too. Regarding the IFC, it might be the case but I cannot completely assure that. You know that like most agencies, IFC takes a longer time to make the -- all the analyses. We already have an exposure to them that makes us optimistic in terms that the process is not going to be too long. But by any -- but all the considerations that we have had and conversations that we had with them up to now were clear that the withdrawal of the loans should be prior to the maturity of the original bridge. This is at the end of January of next year. But as I mentioned, on the other hand, it is not a big issue as far as the company has a cash position of nearly $400 million. So although we are working towards that, that happens as soon as possible, we don't have any type of liquidity risk in this sense. With the withdrawal of the funds of Deutsche Bank next week, the equation will be completely solved.

Understood. You mentioned you have nearly $400 million in cash. Can you tell me if -- what proportion of that cash position is held in hard currency and whether it's held in Argentina or outside Argentina?

Yes. Well, at present -- the accountant, if I am not correct, Juan, please correct me. But I think that we are in the range of $380 million, probably near $200 million are held outside Argentina and 90% of the total consideration is held in dollar, as I mentioned, or near dollar assets. By near dollars, I mean that although that we may have some short-term securities that are dollar-denominated, but there are -- also have other type of consideration. The rest is peso and is related to our operational movement. But this is a very important issue related to our [way forward] as the company tends to have a very significant liquidity -- not only loaded but also very significant liquidity reserves. Regarding the consideration of having the dollars outside Argentina, is more a cost issue that -- a risk issue at this time. We haven't had any type of [calling] in terms of having the ability to buy or sell dollars at all. We, of course, are very sensible to that type of environment. But at present, it's more related to a cost equation. Under certain circumstances, the transactions in dollars, of course, are cheaper abroad than inside Argentina itself.

Understood. And lastly, on the dividends front, what are your -- what is your policy for doing a distribution? What capacity do you have to distribute dividends early in 2019?

For this year, we have distributed a very significant dividend at the beginning of the year, as many of the analysts may know. The reason was that we wanted to finalize any type of consideration related to the merge itself, and at the same time, to get a more efficient capital structure because the company has extremely, extremely an efficient capital structure at the moment. With those considerations, we paid a very significant dividend at the beginning of the year in several installments until March, and the total consideration was in the range of $1.2 billion. Having said that, we haven't yet disclosed our dividend policy, although there are considerations in that sense that have been publicly disclosed to the market by our controlling shareholders in terms of the intention. So the reason why we haven't done that is because we want to communicate it once the stabilization of the environment allows it to be completely accomplished or fully accomplished. We'll give you some color regarding that consideration, but I will make a carve-out for this year, and then we'll refer to that. The consideration is the policy that we, in the medium run, but is still -- it has to be confirmed, this $300 million per year or 50% of the free cash flow, which is the cash flow less the CapEx, as a general consideration. For this year, we are in the middle, as I mentioned, of the discussion of the final figures of the year. We need to know what will be the final result of the inflation adjustment, another consideration because we need to have a positive result to be able to pay a significant dividend. Up to now, at present, the type of loss that we show in our balance sheet, the dividend can't go over $60 million. But once all this accounting adjustment is fulfilled, the figure will be different. It will not be appropriate to give more color on this, as they are part of the equation that we still are pending to have a clearer view.

Understood. Before I let you go, on CapEx, can you tell me what proportion -- I know that you talked about the funding being dollar-based, and obviously, longer-tenure funding can be had outside of Argentina. But what proportion of the total -- I think you said potentially $1.2 billion, $1.3 billion in CapEx for 2018 is actually local currency costs as opposed to costs of machinery or other types of things that would be dollar-denominated?

In general terms, our CapEx is 65% in U.S. dollar and 35% in pesos.

(Operator Instructions) We will take our next question from [Gabriel Razin] with Bradesco BBI.

I have only one quick question. Do you have any expectations about when will Telecom Argentina be able to offer [4-play] plans?

Sorry, I couldn't get you. You have a...

If you have any expectations of when will Telecom Argentina -- expectations, if you have any ideas about when will Telecom Argentina be able to offer [4-play] plans.

I will repeat to be sure that I understood you properly. You're asking if we have expectations in terms of offering [4-play] next year, that was your question?

Yes, yes. Exactly.

The company is working towards that, but we need to fulfill some regulatory issues. At present, we are able to do so, but on the legal side, that will be allowed at the beginning of the year. We -- totally, we are going to start to offer different type of bundling, but still, we are discussing when we are going to do that because we need to have the implementation of our new front end to really provide the customer with a [4-play] experience. It is a common platform that we allow you to manage the whole relationship with the company in any device in a single structure. And that is going to be probably available in parts since March next year. I'm referring to the platform itself, to our new CRF, which we plan deployment alongside 2019. We are going to have a small deployment prior to year-end just for testing purposes.

It appears there are no more questions at this time.

Okay. If there are no more questions, I would like to thank you, all of you, for your time. And we'll see you on our annual call.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your phones and have a great day.