Telecom Argentina S.A.
Q2 2015 Earnings Call Transcript

Published: 8 Aug 2015

[Operator:]

Good day everyone and welcome to the Telecom Argentina TEO Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. Participating on today's call we have Ms. Elisabetta Ripa, Chief Executive Officer of Telecom Argentina, Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Head of Finance, Ms. Solange Barthe Dennin, Manager of Investor Relations and at this time I'll turn the conference over to Mr. Pedro Insussarry, please go ahead sir.

[Pedro Insussarry:]

Good morning to everybody on behalf of Telecom Argentina, I would like to thank you participating in this conference call. As stated by Josef our moderator the purpose of this call is to share with you the results of the six months period of fiscal year 2015 ended on last June 30th. We would like to remind all those that have not received our press release, our presentation, you can call our investor relations office to request these documents or download them from the Investor Relations section of our Web site located at www.telecom.com.ar/investors.htm. Additionally, this conference call and slide presentation is being broadcasted through the webcast feature available in subsection and can also be replayed through the same channel. Before we continue with the call, I would like to go over some Safe Harbor information and other details of the call, as we usually do in our quarterly conference calls. 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 the public emergency law and complementary regulations, the effects of ongoing industry and economic regulation, possible changes in demand for Telecom products and services, and effects of more general factors such as changes in general markets or economic conditions in legislation or in regulations. Our press release dated August 3rd, 2015, a copy of which is being 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 of the presentation. As usual the agenda for today’s conference call as seen in Slide 2 is to go over our general market overview, followed by the discussion of the business highlights, and then we will go for a review of our financial figures. Finally, we will end the call with a Q&A session as we normally do in our quarterly conference calls with the financial community. Having gone through these procedural matters I will now go over a brief macro overview of the -- as an introduction to the general operating environment. Please refer to Slide 3, where we included a snapshot on the current Argentine macroeconomic environment. During the first half of 2015 the Argentine economy continued with similar trends as in recent quarters, economic activity continued to slow to show a sluggish performance despite the improvements shown in certain sectors such as agricultural and construction and activities this was not enough to offset the declining trend in the rest of the economy. The industrial production index registered a decrease of 1.8% versus the first half of 2014, including improvements in oil and food more than compensated by decreases in car production, steel and manufacturing sectors in general. In addition to this the Argentine external competitiveness continued to be affected by a general depreciation of currencies occurred in recent months in Latin America, in comparison to what occurred with the Argentine peso vis-à-vis the currencies of our main commercial partners. Although consumer confidence showed a slight improvement during second quarter 2015 after recovery in first quarter 2015 consumption continued to lag registering erratic trend with very low levels of growth. On the other hand fiscal accounts continued to deteriorate as public expenditures and subsidies continue on the rise while the growth of fiscal revenues is not sufficient to advance the growth in the public spending. Moreover while CPI index published by the Federal Government reached 6.7% in the first half and 15% year-on-year, inflation index published by the city Buenos Aires reported an annual inflation close to 26%. For both results a moderate slowdown in the level of inflation was registered mainly as a consequence of the general slowdown in the economy. In addition collective buying agreements in several sectors were settled with rate increases of 32% on average while wages in the broader economy rose by approximately 28%. On the external front, the Central Bank reserves showed a slight recovery due to short-term external financing and the liquidation of exports during the first half. But it must be noted that during the period the trade balance continued to decrease in the second quarter of 2015 as exports accumulated 19 months of contraction due to lower commodity prices and general reduction in volumes. In the short-term the company faces challenged scenario on the external front. And having gone through this introduction of the micro context let me pass the call to our CEO, Elisabetta Ripa who will go over the business highlights. Elisabetta Ripa?

[Elisabetta Ripa:]

Thank you, Pedro and good morning to everyone. Please refer to Slide 5, where we’ve summarized the main action items for what we have been executing recently. Going to our business despite the macro contest that Pedro just described our focus on a commercial strategy towards value customers and the stimulation of data Internet usage is reporting good result. This six months period we have achieved 44% increase in positive growth. Our smartphone penetration continued to increase reaching 37% of our customer base giving us a solid base to continue growing in Internet browsing usage in line with the smartphone sell out reach 98% offer of devices coming from vendors was limited by cost trends on importation. In line with the strategy we have initiated the process of scheme simplification where our plans are adding a progressive data centric approach. Moreover as we concentrate mainly on our resources in the development of the 4G project we are in line to meet the goal we have set for the year. We are on track to cover all of the most important cities in the country with an encouraging growth of customers and use of the 4G services, while the main CPIs are showing very good signs of network performance with the consequent positive effect on a consumer experience and perception of quality of services. Furthermore mobile Internet users increased more than 13% in second quarter of 2015 while data increased by [76%] resulting in ARPU growth of 73%. In the wireline broadband we continue to grow with the 33% increase with a significant expansion in the participation of high speed connection that currently 22% of our customer base, compared with 10% a year ago. In this case our ARPU grew more than 36% versus second quarter 2014. Moving to the financials, our business continues to improve in terms of service revenue expansion trend achieving 21% increase driven by basically growth in mobile Internet and fixed broadband in Argentina. In the challenging economic environment we were able basically to increase EBITDA by 25% with an expansion in margin and reaching a 28% profitability margin during the semester. Also free cash flow performed well the generation for the last 12 months was close P$2 billion after paying P$1.5 billion in cash dividend and roughly P$5.8 billion. Please move to Slide 6 where we show the evolution of our completed service revenues. The 20% growth or P$2.8 billion in service revenues we reported was mainly have result of the expansions of voice and Internet services in the mobile business in Argentina as well as in the data and fixed broadband in wireline business. In mobile business we can highlight the growth in revenue coming from Internet services which continues to be one of the main drivers of development increasing by 89% and the relevant increase of voice services to the growth that we are evidencing in cost based services increasing pricing. In the fixed business Internet revenues that contributed with a 38% growth or P$572 million and followed by data revenue that increased by 23% year-on-year driven by ICT services and corporate solutions. I think it’s remarkable that data Internet both in the fixed and mobile business represents now 57% of our total service revenues. With respect to the evaluation of mobile data we can point out that we are registering a certain stabilization trend in user of person-to-person SMS after several callers of custom decline while content SMS has started to decline as a consequence of additional control implemented in our platform in order to improve customer experience loyalty and reduce claim. This trend in SMS profit was partially compensated by traffic increase. Going forward we definitely have said that this will be the trend for the fourth coming quarter stabilizing growth of mobile data and value added service participation on service revenue. The consolidated revenue performance was affected by the evolution of the peso to Guarani the Paraguay currency that affected revenue growth in pesos reported by Nucleo our subsidiaries in Paraguay and affecting our total revenue performance, despite this trend business performance in Paraguay was good with roughly 5% growth in the customer base and a continued growth in DTH business. I think this a notable performance in a market where inflation is almost inexistent. Furthermore the slowdown in growth of mobile service revenues in Argentina during the second quarter 2015 was affected by the different timing in the price adjustment vis-à-vis to what was implemented during last year, so it's just a matter of comparisons. We will go into some details of the business in the following slide and it's roughly on Page 7, we have some comments on trends about our mobile business in Argentina. As we mentioned before we continue with our strategy of focusing on value customers in data. During the period we have returned to grow in the postpaid segment where we had a very good performance capturing some percentage points of share in the market strongly in terms of cost driver but also and I think it's really important in terms of revenue. In addition 4G growths continued at steady space and in line with our plan of reaching 1 million subscribers using the service by the end of the year. We also have returned to grow in our customer base that has increased to 19.4 million subscribers becoming leaders in growth share in the postpaid segment and reaching as we mentioned a 44% growth in the process. It is important to highlight the fact that ARPU has increased by 23% during the first half of 2015 reporting roughly P$86 per month and more specifically the postpaid ARPU increased by 29% reaching the P$181 per month. In line with this commercial revamping we have started to redesign our value proposition, migrating our commercial offer to plans where the core is the data component with a strong stimulation of increasing data usage and with the aim of securing our growth from voice cannibalization. Now please move to Slide 8, where we focus on our strategy in the mobile business roughly in Argentina. The fact was the value creation is through monetizing of services definitely the strategy and this is achieved by facilitating the means to our customers to use more and better services. In the case of mobile Internet as we continued to advance smartphone penetration we can see that more and more customers are using the service as unique users rose by 13% and the volume of data increased by a solid 76%. These are the results of the browsing ARPU increasing by 73%, it's amazing. Where postpaid grew by 79% and prepaid customer increased at a faster rate of 88% for the upselling of data bundle. We can highlight that we have an opportunity see it for the future growth as Internet usage has only reached 40% of penetration in our customer base. As mobile browsing is low in prepaid segment so we can grow in the next future. We have a very interesting opportunity for additional revenue suspension in the macro context of course a better consumption trend and hopefully with the smartphone availability. Regarding the 4G network that is described on Page 9, since last December we have launched the services in 18 cities in basically 15 provinces of Argentina and in conjunction with the 4G deployment we are renewing a significant portion of our network with 2G, 3G and 4G integrated and modernized equipment with a state of the art technology adding backhaul link capacity and together to significantly increase our quality of service. We have simplified the transition towards this new technology as customer with a data enabled plan do not have to change their SIM card to start using the service in a seamless manner and definitely that was a competitive advantage. The results we are seeing I think are very good, on Slide 10 we have included some CPI and a comparison with local benchmark and international standards. We can comfortably say that our customers that use 4G are enjoying a service with the fastest download speed in the market that is equivalent to that of developed countries. They are eagerly adopting the service using different modalities of video and file exchange with downloading speeds that are 20 megabits on average and with peaks of 100 megabits. In this sense 4G represent definitely an excellent prospect in terms of monetizing and value creation as we are maximizing the use of best spectrum quality we have in the market. Let’s now move to Slide 11 to review the performance in the fixed broadband and ICT services. We continue we have steady trend of gaining customers and increasing ultra broadband connection. Subscriber growth continues at rate of 3% year-on-year while we’ve registered very low level of churn while ARPU has increased by 36%. We are now at level of P$202 per month as a consequence of building offer and price adjustments. The ICT services outperforming well we have good and continued increase in late light connections, price adjustment and offer new and innovative solutions. Let’s move now to Slide 12 where we describe the performance of the voice business lines. And note the line in service continued to show a stable trend with very moderate decline. ARPU continues to grow despite the monthly basis fee and traffic concept continued to be frozen. As we have been successful in the implementation of flat pricing and modeling schemes in order to partially compensate these efforts. Bundle with local traffic represent now the 50% of our customer base and I think this is the important to stabilize, growth and stabilized performance. On Slide 13 we exhibit the evaluation of our consolidated CapEx plan. During the first half of the year we have invested approximately P$4.7 billion equivalent to 25% of our consolidated revenues, including the spectrum payment performed in June. In line with the focus on a continued improvement of the network quality and service capability we have dedicated unit account resources to our access network mainly in our mobile business where a significant portion is allocated to 4G. In addition we have allocated additional investment to the core and best value infrastructure, set within our network with the capacity and the speed we need. The dedicated resources to the network allow us to say that we are on track to meet our target for the 4G deployment in terms of numbers of sites and cover population. Moreover we continue with the deployment of cyber for ultra broadband with FTTx technology where we are more than double the connection during the last year. And these CapEx efforts are also starting to present encouraging results in terms of quality of service. And in Slide 14 we have reported that including some network TPIs where all performance strengths are showing a positive evolution in terms of mobile network availability and access ability an installation as we clarifying for the broadband services. As usual developing CapEx spend are back end loaded towards the second half of the year so I think that definitely in the next few months we’ll see a ramp up in our capital expenditure. Well, having gone through the main results of the business highlight. I will pass the call to Adrian Calaza our CFO who will go over our financial performance. Thank you.

[Adrian Calaza:]

Thank you, Elisabetta Ripa. Please turn to Slide 16 where you see the evaluation of consolidated revenues and EBITDA. During the first half of this year consolidated revenues reached P$18.5 billion with a 19% year-on-year growth but with service revenues growing at a higher pace of 21%, thanks to a strong performance in Internet services both mobile and fixed broadband together with ICT corporate data service as we mentioned before. Moreover this year revenue performance was affected by the limitation in handset availability effect that we expected will be more moderate in the second half of the year. It is always important to remember that revenue growth is affected by frozen tariffs in the fixed services since 2002 in nominal terms on the regulated service that now account just 7% of total revenues. Moreover during this first half EBITDA showed a strong evolution year-on-year growing at the base of 25% maintaining in this quarter the same trend of the first quarter of the year. We must note that this performance has been achieved with high mergers in the handset business and that the growth of EBITDA coming from the operations in Argentina reached 26%. Please refer to Slide 17, where we showed the evolution on EBITDA with the breakdown of the components that impacted its evolution. In line with the actions taken in previous quarters we have continued with our efforts to control cost and to increase efficiency. In this context increased HR and labor related costs have negatively impacted our service revenue margin but thanks to our cost control efforts we have seen savings in interconnection costs and relative savings in fiscal services, maintenance and materials and taxes. As we have noted in previous quarters changes in the handsets business model drove to a significant reduction in handset subsidies and allowed us to post again a positive margin in handset business with positive contributions of P$596 million. We must note that as usual in our business in June the teleco industry has agreed with unions, a salary increase of approximately 31% for the next 12 months below the level of other industries. This agreement increased the first installment of 20% increase applicable in July and additional one-time installments later this year that will affect our operation costs in the second half of the year. Please turn to Slide 18 to review the performance of our operating income that reached P$3.1 billion with a 20% increase year-on-year with a 32% growth in the first half of 2015 in depreciation then amortization affected the EBIT, following the effect was incurrence of CapEx and depreciation of spectrum. Even though it’s interesting to underline that we maintain the same level of operating margins of the first half of this year. Meanwhile net income attributable to Telecom Argentina reached P$2.0 billion growing by 8% affected by lower financial results as a consequence of a significant change in our net financial position after the payment of spectrum and dividend distribution performed in the second half of 2014 and in last May as we will see in the next slide. Regarding our financial position Slide 19. Telecom Argentina Group continued to report a healthy operating free cash flow generation that reached approximately P$3.8 billion in the last 12 months. But after the payment of P$5.08 billion for spectrum in December of last year and in June and the dividend distribution we have registered for the first time since the third quarter of 2009 a net debt position now of approximately P$1 billion. Still and even applying almost all of our cash position in the spectrum payment, we are still maintaining a hedging strategy in order to mitigate the impact coming from the depreciation of the peso. In the sense to investment in different instruments we were able to maintain a total hedge equivalent to 56% of our net payables in foreign currency. Now having finished with the presentation we are more than pleased to answer any questions you may have. Thank you very much. Josef?

[Operator:]

[Operator Instructions]. We do have a question from Diego Aregao.

[Diego Aregao:]

So just want to understand, to better understand the trends on the 4G if you could you know give more colors on how ARPU is trending after the customer starts to use like your 4G network, I saw that the smartphone penetration is 37% right now, could you give more colors if those smartphones are 4G ready or this also considers 3G smartphones.

[Elisabetta Ripa:]

Thank you for the question, 4G definitely the upside of the market for the new technology is interesting, this is the position of personnel that historically is targeting youth generation and IM customers, I think we have definitely a very strong position in order to maximize the benefits and the results of our investment in this technology. Definitely the market has a strong willness of experiencing this technology and the quality has been really appreciate from our customers especially the black segment that have been sort of with the special attention of our CRM strategy and they're looking for to have a better coverage and a better IR penetration or availability of smartphone. Right now the 37% of smartphone penetration we have mentioned is referring to all that technology so we are referring to 3G and partially to 4G. The 4G availability so far that has been limited but in the second half of 2015 personnel will definitely distribute 95% of 4G in our portfolio we'll focus on the high penetration of the handsets that are definitely the enabler not only in order to experience the 4G network but also to move traffic from 3G to 4G network that a pre-commission in order to improve further the quality of our network, in order to that we’ll try to as I mentioned maximize the penetration of smartphone and we also maximize the bundles with new tariff plan and the new portfolio that will be focused 100% of data plan in order to segment more. The usage and the attitude of our market targeting especially the IEM customers serving well that show tariff all included or the voice and SMS and basically segmenting the market where the attitude of using data. The market definitely has a strong appetite for the 4G handsets and there are particularly that we cannot benefit from these opportunity adding more and more handsets on experiencing and using their latest model that are now available in the market, but definitely seeing that the business is going to improve in the next few months.

[Diego Aregao:]

And just to follow up is it soon to assume that those let's say customers that are enjoying the 4G technology are somehow -- let's say are you seeing some voice to data migration among those clients or it is too early to assume this migration?

[Elisabetta Ripa:]

I think that it’s definitely early to comment on this with the specific term. In marketing approach I think that we are segmenting the market and the customer base of 4G targeting the IM customers that you can easily understand and are not so focused on savings and are not so focused on limiting their experience in voice usage especially if we are referring to the ones that are or that cannot benefit from an unlimited packages on the voice traffic. So far the cannibalization in the market of voice is very limited, there are basically the evidence of the first three months of launch or complete launch of 4G, but it’s definitely more evidence is the cannibalization of SMS as we mentioned that effect that we have basically targeted and reducing the penetration of pay per use solution and we are moving forward bundled offer. The reduction and cannibalization is pretty much over and we basically reach the floor of the trends. We will answer you next time, in September we have some more time in order to experience the real trend.

[Operator:]

[Operator Instructions]. And it seems we have no further questions at this time.

[Elisabetta Ripa:]

Thank you.

[Pedro Insussarry:]

Thank you everybody for participating this 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 and we expect to meet you soon. Bye, bye.

[Elisabetta Ripa:]

Thank you.

[Operator:]

And that concludes today’s conference call. We thank you for your participation.