Telecom Argentina S.A.
Q3 2016 Earnings Call Transcript

Published: 11 Nov 2016

[Operator:]

Welcome to the Telecom Argentina TEO Third Quarter 2016 Earnings Conference Call. Today's call is being recorded. Participating on today's call, we have Mr. Ignacio Moran, Chief Financial Officer; Mr. Pedro Insussarry, Head of Finance; and Ms. Solange Barthe Dennin, Investor Relations Manager. At this time, I'll turn the call over to Mr. Pedro Insussarry, please go ahead sir.

[Solange Barthe Dennin:]

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 Ignacio Moran, Chief Financial Officer; Pedro Insussarry, Head of Finance; and myself, Solange Barthe Dennin, Manager of Investor Relations. The purpose of this call is to share with you the results of the third quarter of 2016 ended last September 30. We would like to invite all those that have not received our press release or presentation that they can call our investor relations office to request those 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 webcasted through the webcast feature available in subsection and can also be replayed through the same channel. Before we continue with the conference call, I would like to go over some Safe Harbor information and other [Technical Difficulty] do in this type of events. 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 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 markets or economic conditions in legislation or in regulations. Our press release dated November 8, 2016, 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. Today's conference call, as seen in Slide 2, is first, to go over a general market overview, followed by the discussion of the business highlights, and then we will go over our financial figures. Finally, we will end the call with a Q&A session, as it's customary in our quarterly conference calls, with the financial community. Having gone through these procedural matters, I will now go over a brief macroeconomic overview of the environment in which we operate. According to some economic indicators, during the third quarter of 2016, the performance of the Argentine economy continues to be weak, with a certain degree of contraction, although less important than previous quarters. In the first nine months, the national authorities continued with a gradual and needed adjustment process of several macroeconomic imbalances. During the third quarter, a notorious deceleration of inflation was observed, combined with stability in tax rates and decreases in interest rates, suggesting the possibility of a coming inflection point in relation with economic growth, which of course has yet to be developed and consolidated. Please refer to Slide 3, where we include a summary of the current Argentine external front situation and FX rate evolution. Related to exchange rates, the Central Bank continued executing and manage floating scheme, which has resulted in a stable FX rate in the levels of ARS15 to $1 in a fairly stable market. During this quarter, the Central Bank has continued to deregulate the access to the FX market and has relaxed somewhat the monetary grip imposed in previous quarter, with no significant impact in the market on the contrary. The monetary authority bravely exercised direct intervention in FX market. In turn, international reserves continue to produce stability, enabling to perform net debt payments in foreign currency that includes the partial cancellation of the repo agreement involving $5 billion contracted in January. Finally, we continue report – posted a surplus of $2.1 billion in the first nine months of the year, mainly responding to import reductions on year-over-year comparisons. Although this figure still remains small in magnitude, they reflect a rapid growth in foreign play to the rising exchange rates and adjustment of our domestic demand. Turning to Slide 4, we follow on an overview of domestic macroeconomic situation and inflation. Regarding inflation, the CPI shows a notorious deceleration reaching 37.9% on the year-over-year comparison. This decrease in inflation levels can be explained mainly because of the combination of a technical effect in regulated prices as gas tariff increases were reverted following the Supreme Court ruling of last August and a tangible downsize in core inflation measures which are level of 1.4% in month-over-month comparison. Moreover, as this tariff will come into effect in October but with more moderated fix, inflation should register a slight increase. In addition, the Central Bank announced that during September 2016, it will start to adopt an inflation targeting regime that will be officially implemented during 2017. This scheme foresees a reduction of inflation with a set of banks with the objective of achieving a target of 5% for the end of 2019. In this sense, general economic consensus is expecting a strong reduction in inflation for 2017. As for the economic activity, a general output reduction was observed in comparison to a year ago as almost all sectors are being strongly affected by shocks in nominal variables and in turn, by a reduction in demand following the rebalancing in the economy that we mentioned previously. Strong decreases in the level of activity had been registered in key sectors like construction and agriculture as public investment and outdated harvest and less crop production, correspondingly had been significantly reduced in comparison with past year result. However, a better performance is expected for the full 2016, especially in what is related to agriculture activities. As of September 2016, industrial production continues in a recessive state, although seasonally adjusted measures for third quarter 2016 have registered a change, reverting the contracted trend of previous quarters. This could be observed as an inflection point of the recessive cycle that industrial production is going through, although further consolidation of this recovery is yet needed. As for the fiscal front, accounts continued in a dedicated situation, although the efforts of the national authorities are set in order to reduce growth in public expenditures. It is important to note that certain expense moderation, including reduction in subsidies exceeds with several tax reductions. So the final effect on the physical deficit for the end of the year is yet to be seen. Nonetheless, general consensus expects that the fiscal deficit, currently at high levels, should similarly remain stable for 2016 and will gradually decline on following years. Finally, aggregated household consumption figures are still registering low levels and have dropped significantly from levels observed past years, as families are being strongly affected by general price increases. Although retail sales continue to register strong declines in volumes, decreases have begun to moderate during the third quarter. Particularly, consumer confidence remains weak but stable, and durable goods industry continues to face important reductions in consumption demand. It is important to note that the durable goods industry may as well have to digest certain consumption surplus are clear last year. Finally, it is expected that during the last part of the year, the situation will improve for consumer as fiscal incentive generated by tax reductions for lower income segments, including retirees, alongside with pension readjustments announced by the government, should fuel consumption by the last quarter of 2016. Notwithstanding the challenging macroeconomic context described, Telecom Argentina has managed to achieve important levels of revenue growth. Having gone through this introduction of the microenvironments, let me pass the call to Ignacio Moran, who will go over the business highlights.

[Ignacio Moran:]

Thank you, Solange, good morning for everyone. Please refer to Slide 6, where we are summarizing some of the key achievements that the Company has reached for the third quarter of the year. Coming to our business highlights, our commercial focus remained toward value segments, while we have continued to stimulate the use of data and internet. During the third quarter, we have increased our postpaid subscribers by 4% when compared to one year ago. Mobile internet consumption is increasing rapidly as megabyte per use per month MBOU are 60% higher for the third quarter of 2016 with an average MBOU of 133,000 for third quarter 2016. Our 4G roll-out continues as more than 4.3 million subs can enjoy 4G services in 600 locations over the country, while data consumption continue to improve. In this sense, average data consumption of 4G users have rose to 1.8 gigabytes per user, 125% higher than the average on non-4G clients. Furthermore, we deem important to highlight that data penetration grew by 10% year-on-year, reaching close to 9 million frequent users. Moving on to the fixed broadband segment, it's worth to notice that we are registering a steady growth in ultra-broadband connections that actually represent 33% of the total client base versus 25% over a year ago. In addition, ARPU grew by 25% versus third quarter 2015. As for the fixed voice, we can remark that ARBU reached ARS105 as of third quarter 2016, increasing 51% versus third quarter 2015, which is mainly explained by the adjustment in monthly fee prices that we have implemented during this year for the business and professional segment. As far as our financials are concerned, revenues increased by 36% in the nine month comparison, while service revenue growth reached 30%, mainly driven by the growth in mobile Internet and fixed broadband in Argentina, which increased by 77% and 42%, respectively. In the complex macroeconomic context that Solnge described before, we were able to increase EBITDA by 33% year-over-year, reverting the trends of recent quarters, and reached 26% margin for nine month 2016. In addition, it is important to bear in mind that a significant improvement in dividend payments took place during this year as a second cash dividend was distributed during the third quarter of 2016 for an amount of ARS1.3 billion, resulting in a total payout ratio of 59% and ARS2.06 total dividend per share for the year. Let us move to Slide 7, where we can see the evolution of our revenue, on which service has grown the most. We can see that revenue growth has taken an accelerated pace as a result of incremental usage and price adjustments. Taking a quick look, we can verify that in the actual revenue mix, the participation of handset sales have risen, achieving 15% of total revenues, while services that represent the drivers of growth such as broadband and fixed data and mobile internet in Argentina have been increased significantly versus one year ago. In particular, retail fixed voice increased by 40%, mainly due to price adjustment in the monthly fees for corporate and residential segments and fixed data growth of 42% in support of price adjustment and upselling to ultra-broadband. In turn, retail mobile achieved a growth of 28% year-over-year, in line with the previous quarter and mainly explained by an important growth of mobile internet in Argentina, which grew 77% versus third quarter 2015. We'll go into some details of this following slide. In Slide 8, we can find a review of the performance of fixed broadband and ICT services. We registered good results in upselling to higher speed, especially in ultra-brand connection as they continue to increase adding 34% of new adds. Then, it's encouraging to see that ultra-broadband subscribers now represent 33% of the total customer base. In addition, the total subscriber base has maintained low level of churn, while ARPU has increased by 25% to more than ARS270 per month. Meanwhile, in fixed data, ICT increased mainly due to the FX variation in contracts that are set in dollars. Turning to Slide 9, we describe the performance of the voice fixed line business. We can note that all the lines in service application has decreased, disconnections remained low as we continued to show a stable plan, achieving 3.9 million lines in third quarter 2016. Penetration of fixed voice lines in Argentina remains in high level when compared with the Russian average. In the months of August 2015, February 2016 and September 2016, we've implement certain monthly fee adjustments to business customers. In addition, residential tariffs were increased during the month of May of 2016. This price hike mainly explained the ARBU increase of 51% year-on-year to more than ARS105 per month. Moving to Slide 10, we can observe that we continue to hold a strong position in the value segment of the mobile business as we advance towards the improvement of our customer profile. As we mentioned in the highlights, we continued to increase our postpaid subscriber base while at the same time, increased the intensive of data use as heavy user with data centric plans, game participation. This has routed to the confirmation of mobile data which, as of third quarter, has reached an average of more than 1 gigabyte per user per month, 65% higher than year ago. Complementary to this, frequent data users grew at 10% year-on-year, amounting to close to 9 million subs as of September 2016. All of these have contributed to significant increase in the participation of growth in revenues, which now represent 37% of the total mobile service mix, up from 25% a year ago. Turning to Slide 15, we can observe -- sorry to Slide 11, we again have included a set of KPIs of our 4G rollout as the deployment of personal 4G LTE network coverage for coverage expands through the country. 4G high speed are now available in more than 600 locations, including all capital cities and Buenos Aires metropolitan area, reaching a coverage of 74% of the population. More importantly, 4G customers totaled 4.3 million as of third quarter 2016. We consider that it's important to note that transformation of 4G users is 125% higher than non-4G phones and 35% of total traffic is performed by net users, influenced mostly by the media content. On Slide 12, we present evolution of the consolidated CapEx where we continue to focus our efforts on the network deployment in order to increase capacity and progress and improved customer experience. During third quarter, we have invested approximately ARS7.7 billion, equivalent to 20% of consolidated revenues, 70% higher than a year before without considering the spectrum payment. Moreover, we can see that the evolution of third new mobile sites, new 4G sites and FTTX roll out registered an impact on level of growth. Having gone through the business highlights, I now will pass the call to Pedro Insussarry who will review our financial performance.

[Pedro Insussarry:]

Thank you, Ignacio. Please turn to Slide 14 where we can see the evolution of our consolidated revenues and EBITDA. In the first nine months of 2016, consolidated revenues amounted to ARS38.8 billion with a 36% year-on-year growth. In turn, service revenues in Argentina grew at a pace of 30%, thanks to the strong performance of the Internet services, both mobile and fixed broadband, together with the corporate ICT services. We find interesting to see that when we look at the quarterly performance of service revenue, it's coming from the operations in Argentina. You can note that there has been an acceleration of growth since third quarter 2015, maintaining levels of 30% in the last three quarters. Moreover, EBITDA showed a positive evolution year-on-year, growing by 33% and even accelerating the pace of growth from previous quarters. EBITDA margins stood at 26% for the nine-month period. But when we look at the quarterly performance, we can see that we have started to change the trend of recent quarters as the evolution improves when compared to the similar period of last year. Please refer to Slide 15, where we show the evolution of EBITDA with a breakdown analysis of its components. The Company has been taking some actions to gain operational efficiency and manage its cost structure. This slight increased cost [Technical Difficulty] labor and other expenses that have negatively affected margins relative savings were obtained in marketing and sales costs, fees for services, maintenance and materials, and interconnection costs. Let's move to Slide 16 to review the performance of our operating income that amounted to ARS5.5 billion with a 24% increase year-on-year. EBIT was mainly affected by the 42% growth in depreciation and amortization, not only due to the important network deployment, but also to the acquisition of the 4G spectrum. Due to this impact, operating margins declined to 14% of consolidated revenues. Meanwhile, net income attributable to Telecom Argentina reached almost ARS2.5 billion, falling by 10% as higher financial losses impacted our bottom line because of the change in our net financial position and FX result, as we will see in the following slide. Please turn to Slide 17, where we show the evolution of our net income. Despite we have been able to expand EBITDA by ARS2.5 billion, as we mentioned before, the increase in D&A and results on disposal and write-down of PP&E of almost ARS1.5 billion impacted the growth of our operating income. In addition, net financial results were negative by almost ARS1.5 billion, due to depreciation of the FX rate occurred in the first months of the year, coupled with the rise in the average interest rates during this period, and more importantly, a significant change in our net financial position after the spectrum and dividend payments when compared to the same period of last year. (technical difficulty) impacted the evolution of our bottom line, even though that has nearly again ARS2.5 billion. Regarding our financial position, as we can see in Slide 18, net debt amounted to ARS7.2 billion in the first nine months of 2016. Operating free cash flow generation was influenced by the increase in CapEx, in line with our aggressive deployment plans and by the evolution of working capital that nonetheless has registered a notorious improvement over the past quarters. In addition, during the month of August 2016, a second cash dividend payment was completed for an amount of ARS1.3 billion. Total dividend payment amounted to ARS2 billion for this year, implying a payout ratio equivalent to 59% and a dividend per share of ARS2.06 per share or ARS10.30 per ADR. This reflects the steady resolution that the Company has executed throughout the recent years. Lastly, on Slide 19, we illustrate the financial strength that the Telecom Group currently has. You can observe that nonetheless the Telecom Argentina group has increased its investments as a consequence of the spectrum acquisition, and the intense CapEx plan represents low levels of leverage and higher levels on interest coverage as a result of the strong balance sheet and steady cash flow generation. Having concluded with the presentation, we are more than pleased to answer any questions you may have. Thank you very much for your attention.