Telecom Argentina S.A.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Solange Dennin:]

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating on this conference call. The participants of today's conference call are Roberto Nóbile, Chief Executive Officer; Gabriel Blasi, Chief Financial Officer; Fernando Balmaceda, Director of Investor Relations; and myself, Solange Dennin, Manager of Investor Relations. The purpose of this call is to share with you the results of our fiscal year 2020 and fourth quarter ended December 31, 2020. If you have not received our press release or presentation, you 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. This conference call and presentation is being broadcasted and can also be replayed through our investor website at institucional.telecom.com.ar/inversores.

[Gabriel Blasi:]

Thank you, Solange. Good morning, and welcome to everyone. Moving to Slide 4, which shows a summary of the company figures as of December 2020. During the fiscal year 2020, Telecom's revenues totaled $3.6 billion, revenues measured in constant pesos decreased 6.5% year-to-year. EBITDA totaled $1.2 billion, implying 34.1% EBITDA margin, which has been on the high side despite a challenging 2020 due to COVID-19.

[Fernando Balmaceda:]

Thank you so much, Gabriel. Turning to Slide 15, we show the evolution of global inflation. As of December 2020, the year-over-year increase in inflation has been 36.1%. During the fourth quarter of the year, inflation has accelerated to 11.3%. The breakdown that we are including shows that the share of communication services, the CPI amounts to approximately 2.8%. Communication services during 2020 have increased by 7.6% according to the official National CPI data published by the INDEC. Slide 16 shows that during fiscal year 2020, consolidated revenues on nominal terms grew by 33%, reaching almost ARS 257.3 billion. When analyzing said figures adjusted by inflation, revenues amounted to almost ARS 301.6 billion, showing an increase of 6.5% in the real terms. Service revenues showed a 33% nominal increase in a context where prices have been frozen for the most part of 2020, being mainly driven by mobile revenues, which grew more than 1% in real terms when comparing fiscal year 2020 with fiscal year 2019. EBITDA increased by 36% year-on-year in nominal terms, thus generating an EBITDA margin of 34.3%. EBITDA margin in real terms was 34.1%. The company performed well in real terms -- well in terms of cost control. Operating costs before D&A decreased by 9% in near terms versus fiscal year 2019. The company achieved an aggressive cost reduction. Slide 17 shows the company's EBITDA evolution and the impact of the reduction in operating expenses. There was a positive contribution to the EBITDA margin due to the reduction in handset costs, which decreased 24% in real terms, mainly to a lower sellout. Operating efficiencies have been obtained both in programming and content costs and also due to the elimination of segments, mainly related to sports. General fees, maintenance and material expenses have been reduced due to an optimization in the consumption of materials associated with our daily activity. Commissions and advertising expenses have also been reduced. Interfinancial costs increased in real terms, mainly due to the lower influence, while bad debt expenses also increased above inflation. The final result was 160 bps increase in any time real terms when compared with fiscal year 2019. Slide 18 shows the evolution of our collections and nonperforming debt. Collections through digital channels have increased to 67% of our total collections and now are at normal levels in terms of our collection periods. Please recall that our delays in collections was almost 30% at the beginning of the lockdown period back in March 2020. The general level of our nonperforming debt has increased during the last quarter of 2020, 1.3% as of December 2020. Slide 19 shows that the company's operating income totaled almost ARS 20.3 billion, EBIT has decreased 6% in real terms. Operating margin in real terms was 7% of consolidated revenues, very stable when compared to last year. When considering the historical figures, the same margin has increased to 20% from 18% in fiscal year 2019. Our net loss for fiscal year 2020 was ARS 5.1 billion, decreasing by 3.6% when comparing to last year's, mainly due to a reduction in income tax, which was partially offset by higher losses related to the net financial results. Slide 20 is a summary of the company's CapEx. During fiscal year 2020, CapEx amounted to more than ARS 55 billion or an equivalent of $662 million at the official FX rate. This amount is 37% lower when compared to last year's CapEx. We have almost finalized most of our system adjustments and improved our infrastructure during the first 2 years after the merger. Our CapEx program will continue evolving according to Argentina's economic condition, network performance and customer requirements. Technical CapEx were mainly composed of installation and customer premise equipment, or CPE. The balance was allocated to network and technology, and 2 of our international operations in Paraguay and Uruguay. During the fourth quarter of 2020, 89 new mobile sites were deployed and the capacity and security of more than 200 existing sites was upgraded. Moreover, we continue to increase the capacity of our HFC access network, mainly through segmentation and division of areas. Additionally, 1,800 blocks were enabled with FTTH, fixed access technology. In February 2021, we have begun with the deployment of 5G mobile sites in Argentina, which allows connection speeds up to 10 gigabytes per second, having a response 100x higher than the 4G networks. This new technology allows the client to connect multiple devices at the same time. Slide 21 describes our cash flow generation during 2020 when compared with the same period of 2019. As of December 2020, the operating free cash flow amounted to approximately $583 million. The reduction in CapEx mainly explained the additional $52 million in free cash flow when compared to the previous fiscal year. EBITDA in constant U.S. dollars remained relatively stable. Slide 22 shows our figures for fiscal year 2020 in constant measuring units. Company's revenues amounted to more than ARS 301 billion, while EBITDA amounted to almost ARS 103 billion. EBITDA margin was 34.1%. Our gross debt amounted to almost ARS 200 billion, decreasing 3.3% when compared with December 2019. The company's cash and short-term investments amounted to more than ARS 25 billion, mainly composed of cash and equivalents and investments in local mutual funds and other short-term investments. Net debt amounted to approximately ARS 174 billion. Our net debt-to-EBITDA ratio was 1.7x. During 2020, the company has canceled $200 million of debt and refinanced more than $770 million of its financial debt. Slide 23 shows the liability management transactions that the company has done during 2020. On August 6, 2020, Telecom has concluded an exchange offer of its outstanding 6.5% coupon notes due in 2021. Holders validly tendered $362.2 million of notes due 2021. The acceptance rate was 77.74%, high enough to demonstrate our solid credit profile and attractive proposal to note holders. An additional amount of $135.4 million of notes due 2025, new money, was raised to repay our loan with Deutsche Bank AG London branch and CPPIB Credit Investments Inc. The company finally issued $388.9 million of new amortizing notes due 2025 with an 8.5% semiannual coupon. On September, the company successfully refinanced its loans with IFC and IDB Invest for an amount $329.3 million. In the case of the IFC loans, 85% of the principal to be repaid in 2020 and 2021 was extended between 24 and 84 months. In the case of the IDB Invest loans, 85% of principal to be repaid in 2020 and 2021 was extended between 24 and 66 months. The company repaid almost $40 million of the loans mentioned above, optimizing its capital structure and extending its maturities. In Slide 24, we describe our latest financing transactions. We have successfully completed 2 bonds issued in Argentinian pesos in December 2020 for an amount of almost $120 million equivalent in 2 tranches, and in January 2021 for an amount of approximately $100 million equivalent. Additionally, in December 2020, the company excludes an import financing for an amount of CNY700 million, equivalent to around $100 million and expandable up to is CNY1.4 billion equivalent to $200 million with the China Development Bank, or CDB. As of December 31, 2020, approximately $3 million was in force under this financing. The increase in the final amount of such financing will be subject to an insurance from the China Export & Credit Insurance in which we're currently working on. Slide 25 shows the breakdown of our financial debt. Total outstanding debt as of December 2020 amounted to more than $2.3 billion. Our debt profile and capital structure has improved significantly after the exchange of our 2021 notes and the refinancing of our IFC and IDB loans. Our dollar-denominated maturities for 2021 amount to approximately $150 million, while the rest is composed of peso-denominated debt. For 2022 and 2023, our debt maturities remain within the range of $500 million and will then be reduced considerably until the maturity date of our 2026 notes. I will now pass the presentation to Solange for the final remarks. Thank you very much.

[A - Solange Dennin:]

Thank you, Fernando. With this, now we are more than pleased to answer any questions you may have. However, before we start, we'd like to remind you of how you can address your questions during the Q&A session, which will be opened immediately. (Operator Instructions) The first question that we have received is from Marcelo Santos with JPMorgan, that said, will you please comment more on the wallet initiative? What is the current size in users? What are the features currently enabled? Additionally, he asks, are the prices increases adopted by Telecom enough to sustain margins, perhaps, coupled with efficiency increases?

[Roberto Nóbile:]

Hello, everyone. This is Roberto. Going back to the first question regarding the wallet. Today, it's a project. We have put in place an NBP product that is already running. We are launching this application by June, by mid-2021. We already have more than 4 million prepaid wallets between brackets. These are customers that will constantly and in -- with high frequency, they will put money into this wallet between bracket and use it on a prepaid basis. So we are trying to leverage on prepaid. We are trying to leverage on our 2 million customers that use our fidelity club what we call Club Personal, where we give out prices and discounts with certain shops for our major customers. So we're trying to leverage our wallet on prepaid, on Club Personal, and of course, on all the transactions that we do within our own ecosystem. We have our own marketplace, where we have millions of transactions. Gabriel mentioned Switch. Switch is a new platform, a digital platform that we put in place, and it's working, and it's already producing a lot of synergies and new revenue streams for the company, and we're going to leverage on that. The project is in place. We are launching that in June probably. On the second question regarding if we can keep the margins either by inflation adjustment or synergies, we are looking for both things. What we -- we are confident that we will be able to adjust our prices by inflation, probably not always looking backwards. We will be trying to catch up inflation. That has always been the idea, and we are confident that we will keep on doing that as long as we are still working on synergies. The improvement in EBITDA margin last year was partially done with these synergies that are part of all the plans and all the things that we are working on, trying to put the 2 big companies into 1, and we have been very successful in doing that. So I assume that we will keep margins at the right level, and that will allow us to keep investing as much as our customers need.

[Solange Dennin:]

Thank you, Roberto. The following questions came from . What percentage of mobile clients use over 1 gigabyte of data and what percentage of broadband clients have over 25 megabyte speeds? The second question is what are your plans and date for further price increases for the remaining 2021? What were the drivers -- another question, what were the drivers of mobile and broadband subscriber loss for the third quarter of 2020?

[Roberto Nóbile:]

I will start with the last one, and we'll look for the right information on the first one. The loss is due to -- during the pandemia, the government decided to freeze any type of -- we were not able to disconnect any customers during the pandemia. So we've been dealing with customers with more than 6 or 7 invoices due, and we were not able to disconnect them. By the end of the year, that decree was not renewed. So we were able to work very hard on those customers trying to negotiate a payment. And for those that didn't pay, we decided to go forward with the disconnection. So the loss is due to that. It is due to the after-pandemia program. The second question regarding the inflation -- the adjustment of prices. We have already talked about it. Most of our, I would say, more than 90% of our customer, 95% of our mobile postpaid customers are over 1 giga. And that is the number. On the prepaid, we have like probably almost 100% are already above 1 giga. So we don't see -- I mean, our customers are using the mobile Internet very heavily. And that's why we were able -- because of all the investments that we did before the pandemia, we were able to keep the service running and being as long as open signal another -- other third parties agencies are telling us that we are the best service provider -- mobile service provider in Argentina. So that's the real thing. In terms of Internet, 70 -- more than 70% of our customers are over 20 megabytes. Those that are not over 20 megabytes, I can tell you that it is because they are on copper networks, probably networks that we need to upgrade through investments, and that will take longer if the conditions of Argentina keep the same.

[Solange Dennin:]

Thank you, Roberto. The following question came from . Can you please provide more details on the CapEx plan for this year, also on the perspective for 5G rollouts?

[Roberto Nóbile:]

Thank you for the question. We have several, I would say, plans for the CapEx of 2021 and it's the same thing that we did in 2020. We have a plan. We know exactly what to do. We have a strategy behind the plan of investment. But we need to make sure that the conditions and the payback of that investment is right there in place at the moment of investing. So last year, we were very cautious and until we have the precedent condition that was the refinancing of the debt of the 2021 bond, up to that moment, we were very, very cautious and trying to keep the CapEx at a very low rate. As soon as we have the -- a perspective of the near future that was good for the company, we keep rolling the CapEx, and we were able, for the most part, do almost $700 million in investments. That was the plan. But we -- if you take a look into the quarter-by-quarter basis, we were very cautious at the very beginning, and then we accelerated at the end. This year, we are doing the same thing. We have set a minimum CapEx of maintenance. Maintenance means making sure that we can have the CapEx for the churn, for new installations and on the turnover that we have on the CPEs investment. As long as the maintenance -- the minimum CapEx that we have to do on the networks to make sure that our customers do not suffer any problems in connectivity. That CapEx is around -- between $350 million and $400 million, $350 million probably is the right number. And on top of that, Fernando also mentioned that we have renewed the vendor financing with that turns into Nokia. We have the new financing from CDB for new equipment. And we also keep and renew the vendor financing from Cisco. So we are also leveraging on our partner -- technical partners to move forward with the CapEx. But obviously, we will do that if the conditions of the Argentine economic situation are good enough to make sure that the payback will be there. So $350 million -- between $350 million and $500 million could be that minimum and maximum. And if we are going forward with the adjustment of prices together with the inflation, we could probably think of going a little higher. But we will do that as soon as we feel confident that we can keep investing. On the 5G, we have launched 5G DSS, that means dynamic spectrum sharing. Our core is ready 45% -- almost 50% of our radios are already prepared for 5G all across our coverage. We have put in only 10 sites on DSS. We -- in our plan for this year, we have more than 250 sites deployed on 5G. That investment, obviously, is on hold, and it will depend how do we move forward depending on adjustment to the prices, the economic situation and also the customer base on 5G devices, that right now is very low due to our economic situation also.

[Solange Dennin:]

Thank you, Roberto. The follow-up question came . Would you please comment on the current status of the average discounts across products? Are they below the 60% we have seen last year?

[Fernando Balmaceda:]

Yes. The evolution of the different discounts that the company provides reached a peak during last year. But by the end of the year, it decreased reaching about levels of 30%, 35% of the customer base. But that's the total situation. Today, in the range of 30%, have some type of discount. Remember that due to the regulatory environment, the figures are not absolutely comparable. But we have a group of customers that were pushed to . For those customers that were put to because they didn't pay, the company has the campaign, providing certain additional financial relief to them, and we have recovered almost 70% of our customers to the customer base of the company.

[Solange Dennin:]

The following question came from Alejandra Aranda. How should we think about pricing strategy and increases during 2021? And if you could give us some guidance in terms of cost.

[Roberto Nóbile:]

Alejandra, I think we have talked about trying to keep prices adjusted by inflation. Always looking backwards, trying to catch up inflation. And in terms of costs, we are pushing cost at the minimum. We are confident that we will be able to sustain margins stable. The only cost that will be difficult to keep below inflation probably will be the labor cost. The government is pushing unions to move with inflation despite the price freeze, and that is something that we need to work on, and we are already working on. But that could be the only cost that will move with inflation or just a little below inflation. The rest of the costs are under control, and we will keep them under control. So we are working on maintaining and sustaining the margin rate.

[Solange Dennin:]

Thank you, Roberto. The following question came from . How do you plan to comply with the extension of Central Bank Communication "A" 2106 considering the remaining maturity of Class A notes 2021?

[Gabriel Blasi:]

I'll take it. Well, regarding our maturity of the bond 2021, as we have refinanced more than 80% of the 1 last year, there remains, mainly the $100 million that we have to pay this year is not reached by this regulation in terms of the specifically allowed payments to the debt that has been refinanced during 2020 with that condition, meaning that we can access to the -- absolutely free to comply with this term. It's important to address that the only significant maturity that we have in this year is . Because the rest of the maturities are local or minor and so we have no pressure on digitalization. Regarding our maturity in 2022 from a total outstanding of $516 million that we have maturing next year, only $140 million which is part of our term loan with our core banks, it's reached by -- theoretically, might be reached by this type of regulation, if Banco Central decides to move it forward, and we don't think that it's going to be difficult for the company to refinance this with its core bank because hearing that we have decrease in 2 years of $1.5 billion of outstanding to only $140 million of debt and also because these are the relationship banks of our business. Having said that, we are increasing our presence in the local capital market with different type of instruments to be sure that no financial stress is there. Also, I think it's important to recall what Fernando has mentioned is that we have already granted a credit line of up to $200 million subject to considerations with CDB, which have only used $20 million up to now.

[Solange Dennin:]

So going to the following question. The following question came from Guilherme Haguiara, BBI . Has ENACOM or the National State appealed the exemption with spend provision of Decree 690? What's your view on price regulation going forward?

[Roberto Nóbile:]

The ENACOM, of course, has appealed. That appeal is underway. And we are confident that the injunction is still in place and in full force. So that's -- and we believe that we will start taking notice of new injunctions coming from different courts. Moving forward, as I mentioned, we are confident that we will be able to go back to the pre 690 Decree, we are confident that we will be able to suspend that.

[Solange Dennin:]

Thank you, Roberto. The following question, I believe, you touched -- partially answered from . Can you walk through in more detail about the regulatory process of pricing about 5% under the provision 1466? How frequently would you be able to raise prices this year?

[Roberto Nóbile:]

Thank you for the question. Right now, the ENACOM has -- I will say something before that. On the appeal of ENACOM against our own injunction, for example. In that appeal, the ENACOM defined that they were not able to determine prices. They have no power to define or determine or put in place prices for the industry. That was written by the own legal department from ENACOM. Despite that, they issued several resolutions, implemented a 5% increase in January, a 7.5% increase in February for the mobile customers and another 5% for the fixed in March and a 2.5% increase in the mobile for March. In the mobile, by March, you already have 15% increase authorized by ENACOM and only 10% increase in the fixed services. That -- and there is no -- according to what we know, there is no idea how ENACOM will allow further increases in prices throughout the year. I mean there is no process already in place. There is no idea how they will do that. We believe and we're confident that we will have the right to increase prices adjusted by inflation throughout the year because of our appeal, not because of ENACOM allowing us, but just because a court will allow the industry to move forward.

[Fernando Balmaceda:]

Just a clarification regarding the question about the discounts. I am not sure if I set it out properly. The average discount today is on the 30% on the total customer base affected by this type of pricing.

[Solange Dennin:]

Thank you. The following question came from . A follow-up question, how are the company's plans for expanding operations and diversified businesses in Uruguay and Paraguay?

[Roberto Nóbile:]

As you have seen throughout 2020, we have invested a lot in Paraguay. We have increased our fixed network coverage. We have moved from 30,000 customers on broadband to 135,000 customers in broadband by the end of December 2020. So our idea of expanding our businesses outside Argentina are in place, are there. We're committed to investing in Paraguay, which is our operation and a very good operation with a very high margin. And if you compare our margins with our competitors, you will see that we are -- we have been very successful in that. In Uruguay, we are taking a close and very reasonable look at the possibilities. There are still some things that the government has to solve, that's the new -- we need to understand how the new policy or the new legal framework or regulation for the industry will come out after Congress debating the new telecommunication law. So we are waiting to see how it come out from Congress, what -- and incumbent will be able to do or not, working based or not if there is a convergence between fixed and mobile is one thing. If that's not allowed, the value creation is different. So we will take a look, but we will wait and see also.

[Solange Dennin:]

And we have the last question from , which says any news regarding new spectrum for 5G from ENACOM?

[Roberto Nóbile:]

No. There's no -- any leads. We should see in the future, 5G spectrum coming up and the remaining 4G spectrum coming out. We don't see that in 2021, basically because the industry is concerned of investments and also concerned on the payback of those investments. If we take a look at the previous bid, in 2014, '15, Telecom paid more than $500 million for the spectrum for 4G spectrum with a very clear close, saying that, that bid was making sure that all the companies will have the free access to price -- determination to price adjustments and that is not occurring now. So the same government is going against the bid and -- what was signed and offered in the last bid. So there are things to solve. I think that the 690 Decree is a problem right now. And I don't see new spectrum coming out very soon. It is something that the industry needs a spectrum if we want to move to 5G and new services. But we need to make sure that the context is good enough for new investments.

[Solange Dennin:]

Thank you, Roberto. As we have no more questions, we would like to thank everybody 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, and have a nice day.