Telecom Argentina SA (TEO) 2019 Q1 法說會逐字稿

Good day, everyone, and welcome to the Telecom Argentina TEO First Quarter 2019 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 would like to turn the call over to Ms. Solange Barthe Dennin. Please go ahead, ma'am.

Thank you, Apres. Good morning, on behalf of Telecom Argentina I would 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 results of the 3 months' period ending March 31 of 2019.

We would like to remind all 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 harbor (sic) [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 the Q&A session, we might 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 effect of ongoing industry and economic regulation, possible changes in the demand for Telecom's products and services and the effect of more general factors such as changes in general market or economic conditions, conditions in legislation or in regulations.

Our press release dated May 9, 2019, a copy of which was included in our 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 to go over general macro overview, then moving on to our strategy, which will be followed by the discussion of our business highlights. And then 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, let me pass the call to Gabriel Blasi, who will go over a brief characterization of the macroeconomic context in which we operate.

Hi. Thank you, Solange. Good morning, everybody. Please refer to Slide 5 where we included the summary of the evolution of some macro variables in Argentina regarding FX rate, inflation and monetary policy.

During January and February of 2019 effects on monetary variables continued to stabilize keeping with the trend observed during the last month of 2018. The peso depreciated less than 4% as of the end of February and interest rate started to move downwards at an accelerated pace due to a quick reduction in the country's premium and stable inflation readings observed up to that stage.

In this context, capital inflows increased and thus the Central Bank began to acquire foreign currency from the private sector as the FX rate moved downward to the lower band of the nonintervention zone as defined. This contributed for the monetary authority to exercise a reduction in interest rate keeping the stock of monetary regulation instruments with low variation. The mentioned scenario quickly changed course during late February and March.

Firstly, inflation readings for February came in higher than expected due to utility and transport tariff increases signaling for an equal behavior of inflation for March, as a reason the core inflation began to rise mostly pushed by food and beverages.

In turn, volatility in exchange market began to rise rapidly after the reductive stillness of the preceding months. The peso experienced depreciation of almost 11% during March and the Central Bank reacted quickly rising aggressively monetary policy interest rate and exercising intervention in future markets trying to rapidly erase the relaxation of such during January and February and continued increase. March inflation readings confirmed that month's inflation was accelerating -- March inflation, sorry, confirmed that March inflation was accelerating. The economic context deteriorated further in April with increased volatility in foreign exchange markets and further increases of country risk premium to level higher than 900 basis points.

In this scenario, the Central Bank reacted, announcing a bid to end the nonintervention zone scheme being able to sell currency below the higher limits previously imposed and extending the maximum daily amount that we will be able to sell if this limit is breached.

Turning to Slide 6, we can observe the behavior of activity and consumption during the period under analysis. According to last available data, the economy contracted around 2.5% during 2018. The rate of deterioration of economic activity was higher during the last quarters of that year mostly due to the low performance of agriculture, commerce industry and construction sectors. At this stage, most of the economic consensus is affected, that the context will stabilize, and then very gradually begin to register economic growth, most probably towards the second half of the year, and finally consolidating in 2020, all affected by a political calendar. While looking at unemployment figures, although it can be noted that the rate has risen during 2018, probably we'll experience some further deterioration during this quarter, but when compared with others, strong economic downturns in Argentina's history shows a better evolution.

Lastly, higher volatility in economic variables and the continued rising inflation have impacted overall household consumption, particularly in the case of delivery of goods as it is expected that it will remain depressed due to adverse impacts of inflation on real income and due to the higher uncertainty captured by low consumer confidence readings, which in turn have fallen significantly.

Notwithstanding the challenging macroeconomic context just described, Telecom Argentina has managed to maintain a solid operating profitability.

Having gone through this introduction of the macro environment, I will go over the strategy at the business in sections.

For the figures, including the financial statements, the company has accounted for the effects of inflation adjusted adopted by Resolution 777/18 of the Comisión Nacional de Valores or CNV, which establishes that their expression will be applied to the annual financial statements for intermediate and special periods ended as of March 31, 2018 inclusive. Accordingly, the reported figures corresponding to first quarter 2019 include the effects of the adoption of inflationary accounting in accordance with IAS 29. Moreover, over this presentation, we will discuss figures in historical value in order to easily understand an analysis of the earnings evolution by its users in a similar way as analyzed by the management of the company with the aim of reaching a better understanding of these figures in nominal terms. Additionally, I would aim to reach a better understanding of the figures presented on our press release, we encourage our financial community to consider that release in combination with this earnings presentation.

Let's introduce our strategy chapter alongside with some trends that are shaping the current market context in the industry. No longer is the main emphasis on traditional bundles for example, fixed broadband bundle with fixed voice and full broad-based TV. In Slide 8, we can find some industry trends on how operators incentivize the new bundles. Operators need the bundling strategy that is relevant and incentivize the consumer not only to purchase, but also to renew. In many cases, most operators found OTT video as demand side driver. Nowadays, bundling OTT video services not only differentiates each operators bundle from another, it also entices users to the bundle. In this sense, OTT video in the bundle is a must-have because OTT video is the #1 service that customers are adding to fixed broadband bundles currently. In fact, it is expected that by 2023, the broadband bundles that include OTT will reach 50% of total broadband bundles in Argentina.

On the other hand, the most prominent next-generation bundle is expected to be fixed broadband with mobile. Mobile in the bundle is about locking up the household. The new baseline for bundles with mobile is to give the option of adding more than one line to the bundle. This strategy seeks to reduce churn rate and lock up as much as the household as operators are able in a single offer. Meanwhile, more build-your-own or BYO bundles emerged in 2018 and 2019, which mainly include pay TV, OTT video and even smart home. We will see in coming slides that the company is following some of these strategies specifically in offers that includes mobile value.

Moving to Slide 9. We can illustrate how the company is planning to become a simple, agile and customer-focused company, and to lead convergence without affecting market value leveraging on experience as differentiating factor. In order to achieve leadership in the market share, revenue share and in the corporate market, 6 strategy avenues were defined. The main guidelines behind these involve enhancing the commercial and operational model by product, region and segment, leading convergence and growth in value-added services, or VAS, in the corporate market, the boosting of new businesses, transforming into digital company, promoting a high-performance organization and developing the best conversion by new proposal.

The commercial and business vision will be possible by means of this idea, but it is also important to develop the technological and operating infrastructure where they will rest up on.

Precisely, in Slide 10, we present some guidelines of the current strategy that the company is following to address this sector and future business challenges.

In this regard, we are currently working over 4 transformation pillars in which we categorize a series of initiatives and projects that are being undertaken. Firstly, we can analyze the clients pillar that can be associated with client satisfaction that ultimately drives increases in NPS, ARPUs and market share. Over these, the company is currently working in a series of initiatives such as business support system, BSS, evolution through the FAN Project also while upgrading the digital experience of our clients and generating better and more effective offers through commercial intelligence.

Then comes the network pillar that aims to achieve higher network agility and performance and at the same time enable new business development by means of cloud strategy and data center evolution projects and its operation support system or OSS improvement. The company pillar that seeks to attain operational excellence and in this regard, the company has focused heavily so its back office transformation projects were up which seeks the integration of all the operations in the ERP platform, SAP4/HANA, consolidating an agile and a state of model for operations.

Lastly, cultural transformation is key across to the other initiatives as is the cornerstone of our culture pillar, which is centered on talent management, communication and the evolution of the processes within the operational model.

Moving to the business highlights. We can see where we're positioned today in terms of the businesses.

Please refer to Slide 12 where we highlight some of our key achievements. During the first quarter of 2019, Telecom's revenues totaled ARS 44.3 billion, decreasing 9% year-over-year in real terms. Please bear in mind that the total revenues contained approximately ARS 1.9 billion and ARS 18 billion for the first quarter of 2019 and first quarter 2018, respectively related to the re-expression in terms of the current measuring unit as of March 31, 2019. Operating income before G&A totaled ARS 14.5 billion implying a 32.7 margin over revenues, achieved in a challenging economic context.

In addition, fixed voice ARPU and broadband ARPU were up to more than 314 -- ARS 314 and ARS 819 per month, respectively. Meanwhile, pay TV ARPU reached ARS 871 and mobile ARPU reached ARS 225. It is worth to highlight that all of this were re-expressed in terms of measuring unit as of March 31, 2019. Moreover, and in relation with our subscribers, mobile subs in Argentina amounting to 18.4 million of which 12.5 million were 4G clients. Pay TV subs amounted 3.5 million. Fixed broadband subs totaled 4.1 million and fixed voice lines totaled 3.5 million.

As for the total customer base, we continue to observe that it remains stable in relative terms, and showing a change in the portfolio composition structures that generate higher value such as product and services upgrade bundling allowing to increase the share of value customers and converging clients in order to maximize ARPU in the future once the discounts and promotion starts to expire, and the economic context helps to improve the household consumption. Increasing revenues is also driven mainly through a combination of price increases and the growing use of telecommunication services, which more and more affect the daily life of our customers thus allocating a relative stable portion of their income for these services.

Finally, regarding corporate matters, it is important to mention that the ordinary and extraordinary general shareholders meeting held on April 24 approving cash dividend distribution of ARS 6.3 billion that was made available to shareholders on May 7.

This dividend payment represented an amount of ARS 2.93 per share or USD 0.33 per ADR. This implies a dividend yield of approximately 2.3% at the recorded price.

Turning to Slide 13, we can observe a breakdown of service revenues where mobile services businesses still holds the main participation over Telecom revenues, although very fine descending trend in share followed by broadband and pay TV. We can highlight that the current revenue mix has a participation of -- for mobile revenues of more than 33% followed by broadband revenues that apart from representing mere 32%, continue to register growth in share as well as pay TV revenues, which accounted for almost 22% participation.

In turn, fixed telephony and data represented more than 15% growing during this quarter, while devices achieved more than 6% of the total revenues. As we already mentioned, mobile and broadband are the segments that mostly contribute to the total revenues composition generating revenues of ARS 14.8 billion and ARS 10.1 billion, respectively. In addition, the pay TV revenues totaled almost ARS 9.6 billion followed by fixed and data revenues with aggregate amount of almost ARS 6.9 billion.

To a lesser extent, we can highlight the contribution of handsets and others with ARS 2.8 billion and ARS 0.1 billion, respectively.

It should be observed that in general terms that although the company's revenues are growing at a faster rate when looking at historical values, during this quarter the acceleration in inflationary context during the last quarter 2018 and the first quarter of this year as discussed in our macro chapter has posed a challenge. This is basically reflected in the figures we expressed for inflation. We will go into some details of these in the following slides.

In Slide 14, we will go through the evolution of the company's mobile business in Argentina. As the intensity in data usage continues to increase, we can observe that there has been also sustained growth in postpaid subscribers, which represent our high-value mobile segment. In fact, this segment has been growing steadily during the quarter due to a good result in the convergent offer to cable TV and Internet subscribers that added mobile clients of the company thus leading the mobile flow share in the market.

During the first quarter of 2019, postpaid subscribers accounted for an impressive 40% of the total customer base, up from 36% compared with the same period of 2018. Additionally, the intensity of mobile Internet usage continues to increase, which as of the first quarter 2019 has reached an average of more than 3.3 gigabytes per user per month, which is 48% higher than first quarter 2018. What we focus in the evolution for our 4G rollout, we can highlight that there has been an important increase of 4G subscribers, which totaled 12.5 million as of March 2019.

This rapid growth in subscribers that use 4G network has been the driver of increasing data traffic since 2015. Currently the coverage of our 4G network reaches around 1,540 locations, an increase of almost 400 locations year-over-year. Moreover, Personal's 4G network is the fastest network in the country according to the result of international referents who measure the network standards through the experience of the clients worldwide.

Please turn to Slide 15 where we included a review of our Internet and pay TV services segment, which aim to differentiate and upscale though an enhanced customer experience.

Related to our broadband segment, we can point out that the numbers of subscribers grew almost 40,000 year-over-year achieving 4.1 million users.

Therefore, I mentioned increase in subscribers was supported by the offer of higher connections fee. As a consequence, subscribers with the speeds equal or above 20 megabytes have increased to 44% of a total client base versus 27% over a year ago.

ARPUs were expressed in the terms of the measuring unit as of March 2019 for broadband services decreased to more than ARS 819 per month, price adjustment of 39% applied on average broadband plans compared with those as of the first quarter of 2018 contributed to upset the ARPU decrease in real terms.

In turn, churn increased slightly to 2% in the first quarter of 2019. For Personal pay TV services during the first quarter of 2019, Cable TV subscribers decreased slightly, while Flow Boxes achieved 602,000 practically resulting from figures observed over a year ago.

Finally, Cable TV ARPUs were expressed in terms of the measuring unit as of March 2019 reaching more than ARS 871 per month in the first quarter of 2019, while churn increased slightly to 1.5% in the first quarter 2019.

On the Slide 15, we present our consolidated capital figures showing a continuous investment effort to improve our network and quality services.

During the first quarter of 2019, Telecom has invested more than ARS 9 million -- ARS 9 billion being this amount 3% lower in real terms than the same period of last year. Nonetheless, the consolidated amount of capital expenditures increased to 20% of total revenues from the 19% registered in the same period last year.

Furthermore, we can verify that an important amount of the technical CapEx was allocated to network and technology in the assets network, the most important component represented almost 50% of network and technology CapEx. The remaining of technical CapEx was mainly comprised of installation and customer premise equipment, or CPE, and of the investment done over our international operations in Paraguay and Uruguay. It is worth to highlight that during the first quarter of 2019, Telecom continues with its efforts to improve both the fixed and mobile network. In order to achieve this goal, the company deployed more than 140 sites during the first quarter of 2019 and additionally more than 815 sites were modernized and modified to incorporate new frequency bands. Moreover, Telecom began to build up 600 new blocks of FTTH and 1,000 blocks of 2-way, 1 gigahertz HFC network. Due to the recent evolution of macroeconomic variables, the company has decided to develop its investment plan in longer period than announced with the objective of having greater financial flexibility and being able to withstand the actual economic volatility passing from the 27% of CapEx of revenues original plan to 26% in our annual budget and finally after the aforementioned revision further reusing to around 22%, 21% depending ultimately on the pace of the evaluation and inflation, although it may return to a situation foreseen in the annual budget depending on market conditions.

Concluding, as we mark in previous conference call sessions, one of the advantages of the company CapEx plan is that the investments are performed in a very marginal way. They are not huge projects involving large amounts of investment. So it is very easy to manage the company CapEx in response to changes in macroeconomic context without harming operational capacity competitiveness or capacity to generate funds meaning that the cash flow needs won't have to be stressed. Having gone through these financial highlights, now I will pass the call to Solange, who will go over our financial performance.

Thank you, Gabriel. We will go over the impact that these business trends just described by Gabriel generated over our operating income.

Let's move to Slide 18 where we can analyze the consolidated revenues and EBITDA.

For the first quarter of 2019, consolidated revenues on current terms grew by 38% reaching almost ARS 42.5 billion. When comparing in constant measuring unit terms, revenues amounted to more than ARS 44.3 billion, showing a decrease of 9% in real terms. The company has been increasing its effort on offsetting the high inflation effects discussed in our macro chapter over the top line. In this sense, increase in the average cable TV, Internet and mobile plans has been 39% when compared to those of the first quarter of 2018. In addition, the company is currently focusing on promoting higher usage of both fixed and mobile services, focused mainly on higher mobile client capture in the AMBA region leveraging its convergent offer possibilities. In turn, service revenue grew even more reaching a 40% increase thanks mainly to a better performance of Internet and in fixed telephony and data service revenues. Moreover, although EBITDA had experienced a lower growth, growing by 21% year-on-year in current terms, EBITDA margin remained stable from previous fiscal year's figures. EBITDA in real terms experienced a decrease of 21%, mostly affected by the performance of the top line to real terms. In fact, operating cost before depreciation and amortization decreased of around 2% versus first quarter 2018. EBITDA's margin decreased to 32.7% for the first quarter of 2019 as EBITDA of the first quarter of 2018 was impacted by temporary effects and one-off related to the merger transaction.

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 action have possibly impacted our gross profitability as we can observe how the company was able to generate a reduction in real terms of the cost structure.

It is important to know that this has been attained while going through an integration phase of the 2 merged companies, which involves the deployment of new system and processes. We can observe a positive evolution of handset costs that contributed positively to EBITDA margin growth, mainly affected by a lower sellout while cost management has delivered good results in interconnection costs through better negotiation in international interconnection. On the other hand, commission and advertisement decline is due to lower charges in agent commissions and due to a slight decrease in advertisements related to the synergies achieved after the merger that allowed to reduce costs even greater presence in media.

This effect has been offset by increase in labor cost mainly due to salary increases and greater severance payments due to a reduction of more than 1,800 employees or 7% in total employees' year-over-year and -- but they're expenses that reflect mostly the deterioration in the macro situation within our initial analysis. The final outcome was a 510 basis point reduction in EBITDA in real terms when compared with the first quarter of 2018, which as we mentioned was due to temporary savings and one-off in advertising, labor cost, and fees for services, maintenance, materials and supplies.

Let's turn to Slide 20 where we can verify the company's current operating income, totaled almost ARS 4.5 billion. The EBITDA decreased in constant measuring units that result higher than that of EBITDA, can be explained by the increase in depreciation and amortization and disposal and impairment of PP&E, intangibles and right-of-use, which increased almost 18% in real terms year-over-year. In addition, to higher depreciation and amortization due to the restatement of nonmonetary assets, the application of IFRS 16 to 2019 was -- has entailed an impact of more than ARS 600 million, mainly because of the aforementioned increase in depreciation amortization in real terms, operating margin has decreased to 10% of consolidated revenues. Moreover, Telecom registered a net income attributable to the controlling companies of almost ARS 1.3 billion, the variation of the net income when compared with the previous fiscal year can be mainly explained by both the previously mentioned decrease in operating income and by lower financial results explained by higher asset classes associated with the net financial debt position denominated in U.S. dollar, a lower high inflation adjustment gain reflected -- reflecting the positive effect coming from the exposure to inflation and higher interest expenses due to the overall increase in the net debt position converted to pesos.

Having gone through the summary of financial figure, let me pass the call to Gabriel Blasi, who will explain some key figures for the year and the composition of Telecom debt.

Okay. Turning to Slide 21, we'll present some pro forma key figures for the fiscal year of 2019 and 2018 in constant measuring units.

Company revenues achieved more than ARS 183 billion for the last 12 months as of March 2019. Meanwhile, EBITDA amounted for more than ARS 59 billion for the same period. EBITDA margin for the last 12-month-period as of March 2019 was 32.2. Regarding our gross debt as of the end of March 2019, it amounted more than ARP 91.3 billion, but as the company holds an important cash and equivalent and investment position, net debt reached approximately ARS 71.6 billion. In fact, net debt-to-EBITDA ratio remained solid in level of 1.5x, despite the devaluation of the currency during the first quarter and the escalation of inflation.

In Slide 23, we summarize the main milestones regarding the company's financial debt management. Regarding new debt obtained during the first quarter of 2019, in March 2019 the company entered into a loan agreement with International Finance Corporation, or IFC, for a total amount of up to ARS 450 million of which a disbursement for a total of ARS 290 million was received. Also worth noting our subsidiary in Paraguay, Núcleo completed successfully an issuance of 2 series of notes for a total amount of approximately $25 million with a year tenure. This issuance was a deal completed by a non-financial institution from the private sector in Paraguay, it was done in Guarani. Moreover, on May 7 we announced that the company had obtained a credit facility for an amount up to $96 million guaranteed by the Official Export Credit Agency of Finland or Finnvera thus obtaining an international loan at the very low rate that is LIBOR plus 104 basis points -- sorry LIBOR plus 104 basis points. When taking into consideration, Argentina current currency rate and with final maturity in 2026.

Finally, reflecting the active debt management that Telecom has been performing during the last quarters, we can observe that the maturity schedule going forward is continuously improving as tenures have been considerably extended mainly the concentrated principal repayment for year 2019 in spite of market conditions.

Please move on to Slide 24 where we can analyze the breakdown of the financial debt. As we mentioned in our previous press release in February 2019, the company canceled the final amount outstanding of the original syndicate loan facility for USD 1 billion for its own fund. In addition, during March 2019, the company partially prepaid ARS 100 million of the outstanding amount under a term loan due 2022. Moreover, IFC, an ICC loans also started the amortization schedule and thus the outstanding debt position will reduce further to ARS 62.5 million.

Finally, the total debt outstanding of the company as of March 2019 considering the new debt operation and cancellation just described before amounted almost ARS 2.1 billion so with almost no variation when compared to 2018 year-end. As mentioned in previous calls, we deem important to emphasize the manageable debt profile of the company helps as well as diversified source of funds currently available such as vendor financing, local bank clients while always analyzing the possibility of accessing to local and international capital markets, if market conditions deem reasonable and as we mentioned a low debt to EBITDA ratio. In this sense the company holds a permanent optimization policy for the term, rate and structure of its financial liabilities.

With this, I will open the session to questions having concluded with the presentation. We are more than pleased to answer any questions you may have. Thank you very much.

(Operator Instructions) We will take our first question from Guilherme Haguiara from Bradesco.

The first one I have it's more related to the top line and we have seen a challenging outlook for real growth considering how consumers are pressured and we were just wondering what can we expect in terms of your growth trends going forward? And if we can expect any kind of real revenue growth for 2019? Or at least for later in the year and after that, I'll have another question.

Thanks for your question. Well, in fact, it will really depend. We have made different scenarios, but it will really depend on the shape, the final inflation term, it will show from now to the end of the year, if all the provisions that are presently -- I will say the general consensus of the economy really present that inflation trend becomes more normalized and began to goes down, it will be quicker, the time frame that we need to cope with inflation, and to fully price that inflation in our revenues, think that at present inflation adjustment is done almost on a monthly base and the price increases have looked, we're not increasing prices at the same pace, but increasing prices we'll say probably 3x a year. So that means that in the meantime, you have these periods where you're not going vis-à-vis inflation through the evaluation of inflation in our own portfolio, although when you adjust the revenues you're showing that trend and that is showing the partial, I will say loss in real terms, meaning that as the situation normalize and the effect that comes when you have broken inflation of increasing income in real terms from the population, we will have asked in terms of getting again to full recovery inflation in our revenues.

If the inflation continues to be high and continues to go sub, that time frame will take longer, but if that's the situation at the end of the year, probably it would be harder for us to completely cope with that.

Having said that, when you look at the general picture in terms of how the company has been pricing, inflation, we have been vis-a-vis, I will say pretty good considering the fact that I mentioned that in one case you are adjusting on a monthly base and in the other case you are only adjusting probably on a quarterly base for the time being.

Okay. That's very helpful. My second question is on the EBITDA front. We were just wondering how big was the impact of the adoption of IFRS 16 on the EBITDA and how margins would look on a more comparable basis and considering the real decline in revenue, and also that the cost pressures seems to be quite high in perspective, what margin levels can we expect for 2019? And where are the main opportunities to gain efficiencies?

Yes, going to the third part of the question, I think that just to be clear, I would repeat part of the explanation, the comparison is to some extent that was possible because the first quarter of last year was extremely good one. We had a huge impact of the first part of the merge and part of that were synergies and part of that were one timers and temporary effects, all that motivated us when we're comparing with probably the best EBITDA that we had during last year.

Having said that, going to the second part of the question, regarding IFRS 16 was the total effect up to now has been ARS 600 million and in a very I will say general broad picture because it is difficult to say we're not quite sure how the rest of the year the interest rate will evolve in a single year, we're really moving up with very strong nominal rate hike ones, so really it's difficult to make an assessment on that. But just to give you some color that might represent up to 1% of EBITDA and maybe also slightly higher than that. That will give you just a good color in terms of the affect. And finally you have another question, your question had an additional -- you've also asked for what will be our expectations in terms of EBITDA margin. Well it is clear that the company is stabilizing upon this 130% devaluation and inflation over 50% that we have been suffered. We are stabilizing and still going on, still moving forward, we're stabilizing at different level in terms of our operational figures. So when you look at how the company is behaving probably, I will say you should wait for some type of trend as we went through during last year, but of course, at a lower stage, meaning that if you consider that the EBITDA figures that we mentioned about how it has one timers and probably a normalized EBITDA for last year upon all these effects was in the range of 35 or something like that as we did say with the beginning of the synergies being put in place. Today, probably we are more on the area of 32, 32 something as a final EBITDA margin for the year. Probably, it is difficult as I mentioned to give you a final figure as nominal variables are having such a big distortion in terms of the amount of monthly variation and it is difficult to give you -- I will say a more precise outlook, but I will start from there if you want to have a view on the rest of the year.

(Operator Instructions) And we have a follow-up question from Guilherme Haguiara with Bradesco.

On the topic of very strong depreciation in the peripheral and I appreciate your comment on the review of the CapEx plans, and I would really appreciate if you could just give us some more granularity on how the CapEx start is for the coming years, and considering that there has been a downwards reveal, what were the parts of your plan that you preserve more versus what did you kind of had to cut a little here and there to absorb the currency volatility.

Well, first of all, it's not an issue of foreign exchange rate. It's a combination because when you look at the general situation, you have a decrease in the level of activity of the economy, decrease in the purchase power of the population, you have a huge increase in interest rate of the economy, tends to come overnight, and a huge increase in countries. We rolled up together, we haven't stopped our CapEx, in fact if we look at our CapEx to revenue ratio, we still are highly over our competitors in that sense. What we have decided is that it will take longer meaning that we have not interrupted or we have not stopped it. So what you can expect is that we have one year -- from 12 to 18 additional months to the plan that we have proposed. What have we sacrificed, well mostly, although we have not yet shown that in our portfolio, what we have sacrificed is the ability of the company of going to new markets in the short run. This is a company that has improved very significantly the existing network coverage, our NPS is growing, it's a very direct result of the strategy by increasing our coverage on our capacity whenever where we are. But for instance, we are not deploying new sites in the southern part of Argentina that is something that it will take longer than expected because at this moment we prefer to strengthen what we already have, to provide best service to our customers, as a strategy it has not changed, in terms of providing the way to get the best NPS and start from there as a way of placing more. As I have explained, when you look at the behavior of the total portfolio, yes, maybe you can consider -- it might be considered that we are not optimizing cash generation in the short run by increasing the moat as we can, but we are having a very good behavior in terms of the shape and the quality of the portfolio that we are developing. As a result of the strategy of bundling mobile with the persisting customers of fixed Internet, especially on cable, we are having a very extremely successful result in terms of coming -- bringing up new customers for the best part to our postpaid mobile customer base. Of course, in the short run, this is not meaning an increase in ARPU or an increase in additional cash generation, but it is creating the base for us to allow us to do so as soon as the economy as a whole rebounds. Finally, when you look at the average of the CapEx, the CapEx ratio of the company is available today in the range of -- between 20%, 22% -- is almost 20% -- 15% to 20% higher than our competitors meaning that, that CapEx reduction is not harming the competitive environment at all.

That's very helpful. And if I may, just one question from my end. You mentioned the migration of prepaid to postpaid consumers, and we were just wanting to have a better visibility on how do you believe that price freezes impacted your mobile revenue performance during the second quarter on the prepaid front, and if you have been seeing any kind of more aggressive behavior from your competitors in the commercial side with discounts or any other type of incentives?

Well regarding the evolution of the prepaid to postpaid, we are doing, it is very successful, it has been in the range of 90,000 customers per month during 2018, and continues showing a very positive trend during this year. Of course, again, as I mentioned, when we do that, you're not having -- it takes up to one year to have the ability to increase prices in a steady way. So what you're building up is you're getting this customer used to be billed on a monthly base, used to be -- to have a consistent payment with fixed frequency, all that takes time, and until that is well established we don't begin to increase prices. That will take, for each, I will say each new true-up, or each new group, it takes up 12 months approximately, to deliver new capacity. And regarding -- I will say, I want to expect significant changes in the next quarter upon this trend. And having said that, we're facing or we're seeing some better behavior in some indicators like the prepaid and also in delinquency rate, the market is showing like I will say a flatter line in terms that it seems that the trend is not getting worse, but instead of that it's like that the market has bottomed, although it might be early to say.

And we will move on to our next question from Babatunde Ojo with Harding Loevner.

Just couple of questions for me. First is, do you mind giving your thoughts on your level of pricing power that you have, and of course, the products given the price control that has been announced by the government recently and does that in anyway impact some of your products, if so, which ones are impacted by it, and how does that feature into your ability to increase prices and to sort of compensate for the rising cost pressures that you experienced? The second question is on labor cost. Do you mind giving some sort of split between what is perhaps one-off, maybe severance payment and then sort of the new voluntary restructuring that you may have in that line item and then what is sort of recurring in that cost base because it seems to be the largest drag on your EBITDA margin year-on-year. And maybe in addition to that maybe talk a little bit about sort of wage inflation that you have agreed, which will start for the year, and what to expect on that line item? And the last question for me is on the synergy that you announced during the merger with Cablevisión, are those margins -- those synergy margins come true at all? And if so, can you sort of quantify what levels you have experienced or has this been distorted by the whole macroeconomic environment, just curious to know, to get an update on that.

Okay, going to the first one, well, definitely there is not a price control, first thing at all. What has happened, at least in our case, might be the situation has been different with certain products, or with certain baskets at a supermarket level, but in case of our services, what we have done is, we have agreed by various specific group of customers, low-income people, special conditions for certain tiers, but I will not tell it is a price control at all, and it does not imply any specific regulation in just what do we care of our own customers.

So to your second question regarding the different labor cost composition, I will say, well, the big part of the -- the big branch of the -- is the payroll. You have like one-timers, I will say probably it's like 15% to 20%. In this case, no more than that. In this case, you have like more in the range of 10% of the total -- sorry, for that, I say 15%. In the first quarter, you have the effect of the borrowed payment, which implied additional one timer and the reason is that because of the inflation process and because of the aggregation of additional percentages, it went slightly over budget. In terms of the general picture for the year, this is a process that is taking place meaning that we are in the middle of that discussion, for me it would be really, I'm afraid to give you today some color about that because we're in the middle of the cash out although we have achieved last year the success in terms of putting a single agreement within the 7 different unions that we have at present in the company. The way all that is reflected in each particular case might differ or might bring some misunderstanding what is fixed, but at the end, we move very similar with all the employees of the company in terms of adjustment. What I can try to advise in general is that this is not speaking from Telecom a specific case, but to give you some color on what has been the evolution of salaries increase in Argentina against inflation in this type of environment, typically these processes means that in the short run you have like a gap between 5% to 12% in the inflation index in the medium run. This is not specifically in the case of Telecom, what I'm referring is that if you take the general voice indices and you compare that with the inflation in the long run that's the type of situation that you get, to give you some color for any projects.

And regarding synergies, the last part of your question, well, of course, we materialize a lot of them, it's very difficult, really, this is a very difficult question, and the reason is that because of the huge transformation in terms of the nominal value of all the variables, it's very difficult to specify unless we have other units to give you a comparison. For instance, in terms of interconnection cost at network level, we have achieved very specific synergies because we have dropped certain type of connections. We had a different bargain process with our supplier and from there we have several examples besides the synergy that we have discussed in terms of our human resources costs. But what I can tell you is that we are going there. We're achieving them, the implementation of our systems, of the new systems, have a lot to do with this, to give you some considerations, remember that -- FAN, we allowed us to provide a single billing, that will provide for different type of billings. We have different call centers talk to those customers attached to each business line, all that is yet to come once we complete the going live of all the systems.

In the case of the back office systems, situation happens for implementation of HANA, and all what happens in the surrounding of SAP in terms of new systems, we are implementing compute for all the travel and operations related to the people, which is in the street for the company in different cities, it covers a huge part of our population. Also, we are implementing or in the process of defining implementation of Arriva for all the procurement. So really there are like many, many steps that are taking place, of course, when you ask me to linear synergy today, it's very difficult to give you a number as of today and in the middle of what we have movements of salary cost of more than 20% a year. But believe me that the company is really working towards that direction and it will deliver, probably it will take at least this full year to have a clear view in terms of the type of synergies that we can get from there. By the end of this year, we should have a much better picture and map of the implementation of each one of these systems, what it will imply in terms of resources that are freezing or that we can devote to a different proposition or a different activity within the company, sorry, not to give you deeper color on this, but this is a work in progress. Believe me that the cost is one of our biggest concerns, and we're very focused towards achieving additional efficiencies.

Okay. That's very helpful. Just a quick follow-up for me is on the quad play, just wanted to get an update on the implementation or launch of that, maybe if you could provide maybe any numbers in terms of number of your customers who are on quad play already or what's the level -- what's the progress on that front?

Well in terms of testing the market, we are very minor groups, but in terms of having the quad play full capacity in the way we go to the customer and in the way that we have a relationship with them because of our CRM, you will begin to see some proximity to that by the end of this year, probably in the last quarter you will -- although we have like different stages of going live of different part of the system after the end of the year, you will see not a complete picture from the other side, as a customer you might say, I'm quad play, well, when we are referring to quad play, meaning that having, I won't say these are the platforms in your mobile that would allow us to manage all the services that the company will provide to you and to have a single beginning. That will take at least the rest of this year to be completed, although we are going to deploy different stages of the system during this year.

Got it. And just last follow-up on the labor cost. Do you have a number for the amount of severance payment that you had this year and in this quarter -- sorry, and is that something that is still ongoing?

Sorry, up to now, yes, you have that in the financial statements on the 22 note, operational costs, you have a specific item, labor cost, and severance payments, there you have the retail, and I think that what you see now up to now is a good proxy of what you can see for the rest of the year.

And there are no more further questions over the phone.

Okay. So 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. Good morning to all. Have a nice day and we expect to meet again soon.

Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect.