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Telecom Argentina S.A. (NYSE:TEO)

Q4 2013 Earnings Conference Call

February 28, 2014 10:00 AM ET

Executives

Pedro Insussarry – Head, Finance

Stefano de Angelis – CEO

Adrian Calaza – CFO

Analysts

Michel Morin – Morgan Stanley & Co. LLC

Rodrigo Villanueva Bravo – Merrill Lynch

Santiago Petri – Franklin Resources

Operator

Good day everyone, and welcome to the Telecom Argentina TEO Fourth Quarter 2013 Earnings Conference Call. Today’s conference is being recorded. Participating on today’s call, we have Mr. Stefano de Angelis, Chief Executive Officer; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Head of Finance and Ms. Solange Barthe Dennin, Manager of Investor Relations.

At this time, I’ll turn the call over to Mr. Pedro Insussarry, Please go ahead.

Pedro Insussarry

Hi, good morning to everybody and behalf of Telecom Argentina I would like to thank you for participating in this conference call. As mentioned by Catherine, our moderator, the purpose of this call is to share with you the consolidated results of the Telecom Argentina Group that correspond to the fiscal year at 2013 and then on last December 31.

We would like to remind all those that have not received our press release or presentation that you can call our Investor Relations office to request any documents or download them from the Investor Relations section of our website located at www.telecom.com.ar/investors. Additionally, this conference call is being broadcasted through the webcast feature available in subsection and can also be replayed through this same channel.

Before we continue with the conference call, I would like to go over some Safe Harbor information and other details of the call, as we usually do in our traditional quarterly conference calls, we would like to caution that during the conference call and Q&A session, we may produce 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 public emergency law and complementary regulations, the effects of ongoing industry and economic regulation, possible changes in demand for Telecom products and services, and the effect of marginal factors such as changes in general markets or economic conditions in legislation or in regulations.

Our press release dated February 27, 2014, a copy of which is being included in the Form 6-K report to be 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.

The agenda for today’s call as seen in Slide 2 is to go over the general market overview, followed by the discussion of the business highlights, of review our financial figures and finally, we will end the call with a Q&A session as we normally do with the financial community.

Having gone through these procedural matters, I’ll now go over a brief macro overview as an introduction to the general operating environment.

Please refer to Slide 3 where we included some snapshots from the Argentine macroeconomic environment. After experiencing good first half 2013, the economic showed some signals of deceleration due to slowdown in construction and industrial activity. This is due to mainly to the consequences of decrease in export to Brazil such as car exports. The main slowdown in the Brazilian economy together with stable commodity prices may have an impact in 2014 economic activity. Moreover it is an important evolution of the Argentina peso in January, 2014, it was expected that inflation may accelerate in 2014. During the fiscal year 2013, pro-cyclical monetary and fiscal policies such as the income tax deduction, the expansion of public, social expenditures and the increase in consumer lending helped to sustain private consumption.

In January, 2014, the government published a new CPI Index that reached 3.7% for the first month of the year consequently waging decision are presumed to start at a high level than previous years.

On the external front, trade balance was impacted by the increase in energy import despite the increase in agricultural exports. In order to preserve the levels of FX reserves, the new monetary policies were applied such as an acceleration in pace of the depreciation, increase in interest rate and new taxes.

Finally, tax collections push public revenues up however public expenditures continue to grow at the higher pace deteriorating the fiscal balance.

And having gone through this introduction of the macro context in which we operate, let me pass the call to our CEO, Stefano de Angelis, who will go over the business highlights. Stefano?

Stefano de Angelis

Thank you, Pedro. Good morning to everyone. Please refer to Slide 5, where we have a summary of the main achievement for the – on the mobile business we continue with interesting phase of revenue expansion of 26% year-over-year despite limited price adjustment. Moreover our 3G customer base continue to increase reaching 8.9 million clients as a consequence of our tremendous power in smartphone phase that reached 73% share of handset sellout. More outstanding is that this achieve with the reduction in handset subsidies.

Regarding the fixed business you can note that we continue with the FTTx deployment to improve our valuable position and we have increased more than three times our FTTC intervention. Furthermore, it is remarkable that evolution of the corporate data business where revenues rose 31% with an acceleration in recent quarters. Is notable that the 20% broadband ARPU increased in the fourth quarter and the positive trend in broadband Netx where we have achieved the highest level of addition in the last two years.

When it comes to our financials, it is important to note during this fiscal year, our net financial position increased to 5.4 billion pesos in cash. After having paid 1 billion pesos in dividend and preferred shares buyback for 0.5 billion pesos. It is worth mentioning the solid financial structure achieved due to healthy financially policies applied that is invaluable hardship in a challenging macro context.

Please turn to Slide 6 for comment on the mobile business performance. As of December, our customer base totaled 20.1 million with a 6% year-on-year expansion, supported by postpaid growth with an increase of 7% versus fiscal year 2012. Meanwhile during fourth quarter, there has been monetary ARPU rose 9% to 69 pesos when compared to the same period of 2012, posted by non-voice ARPU with [+18%] growth in the quarter but being impacted by non-recurring FX that we will explain afterwards.

We can’t highlight that the mobile unique internet users that measures the number of stuff that use internet at least once a month reached 6.7 million customers in the quarter increasing by 31% versus by four quarter 2012. These are results of our work commercial focus towards smartphone sellout, effort of our strategy to support value added services growth. As a consequence of our value added services strategy and smartphone push, we can see that another substitution for us towards IMS services, the increasing portion of multi users customers with higher ARPU mitigate the SMS substitution aspect. As an example in a customer segmentation who usage analysis a triple play customer who uses voice, SMS and data all together generates 1.5 times the ARPU of two play voice plus SMS stuff. The participation triple play modality use has increased 10 percentage point reaching 50% of our active customer base.

In Slide 7, you see the event that they have affected the fourth quarter mobile service revenue performance. In this sense we can separate this and recurring and non-recurring FX. As for recurring impacts the increase invest content revenue started to converge at lower or more controlled growth rate after having experience significant expansion rate along 2013. This aspect represents approximate five percentage point in the decline of the growth rate of fourth quarter 2013 mobile service revenues when compared to the third quarter 2013 goals. On the non-recurring FX, we can point out that the six week promotion in [Kuwait] launched to sustain the Xmas campaign as such as the triple credit on recharges plus the impact of the delayed the price adjust impacted in seven percentage point in the decline growth rate.

In Slide 8, we saw this service revenue performance they grew by 20% in 2013, supported by the increasing data and internet services that particularly in this quarter rose by 25% and 67% year-on-year respectively. Due to this expansion value added services revenue increased by 33% year-on-year reaching 58% participation of service revenues in full year 2013. This performance has helped us to maintain our revenue leadership while optimizing our commercial goals. In full year 2013, SAC and SRC decreased 380 basis points when compared to full year 2012. Quarterly SAC and SRC cost decline to 11.2% of service revenue holding 300 basis points from 14.2% a year ago.

This was achieved thanks to a structural review of the subsidy policy where postpaid subsidies were significantly reduced a margin in the handset subsidies, the prepaid segment were increased.

Please turn to Slide 9 for a snapshot of the Paraguay operation. Our customer base in Paraguay reached 2.4 million increasing by 5% year-on-year while postpaid customers rose 13% year-on-year improving the customer base mix. In this market, we are focused our strategy mobile internet with Núcleo and become market leader. As a result of this value added services as a percentage of service revenues represent 54% in full year 2013. Moreover, we have continued to increase our capacity and coverage together with the spending our key network in order to sustain our leadership in the mobile internet business.

Finally, the margin of operating income before D&A represented 37% of net revenues. Slide 10, shows the evolution of mobile revenues for full year 2013 where we can see that we have grown by 27% year-on-year to 20.3 billion pesos sustained by the growth in browsing and data content revenues. Revenues coming from mobile internet services and data continued to be the main drivers of growth increasing by 67% and 25% respectively.

Retail voice and wholesale services were both up by 7% and 5% respectively while handsets increased by 63% due to the increase in volume and the price effect of the general reduction in subsidy and have been sold more sophisticated devices. Please refer to Slide 11 and as we move to the evolution of our fixed business. The fixed broadband confirmed the positive trends we have been seeing since second quarter 2013 with 38,000 net adds in the fourth quarter 2013, while the ARPU rose by 20% year-on-year to 154 pesos with the controlled evolution of charge.

In this sense, we have been able to increase our value proposition in 2014 in the marketing incremental speed offering such as the 10 megabyte speed in the retail market, thus flowing to improve our broadband pricing.

Slide 12 shows the evolution of our corporate ICT and other center set LIS that delivered a 51% revenue growth year-on-year. Moreover, fixed voice client remain stable at 4.1 million and we were able to record a monthly ARBU of 54 pesos per month and increase of 9% year-on-year. This performance was achieved thanks to our continuous strategy of ICT offerings plus our bundled offers of broadband value added services voice and basic supplementary services.

We can see in Slide 13 that during full year 2013 fixed business revenues expanded by 16% year-on-year and totaled 7 billion pesos representing 26% of consolidated revenues. This expansion was mainly due to the growth of our residential internet services where revenues increased by 26% year-on-year or 528 million pesos followed by other revenues that contributed with 31% year-on-year growth or 228 million pesos revenue increase.

Despite basic voice services are cut with chosen tariff, in full year 2013, we were able to increase revenue coming from this service by 7%. Nowadays only one third of our revenues in the fixed business are price checked due to the tariff fees in the basic services.

Slide 14 shows the evolution of consolidated capital expenditures. We have invested close to 4.9 billion pesos in full year 2013, they reprints 18% of revenues while in fourth quarter 2013 CapEx increased by 83%. It is notable that despite delays in authorization and import process, a strong increase in PP&E CapEx was achieved. During the year actions were adopted to achieve a significant improvement in the levels of network performance and quality of service in the mobile services. These actions included the implementation of the second 3G carrier, the expansion of our capacity and coverage to new cell site, the immigration of site to access set configuration plus the upgrade of the access network. All these resulting in the significant increase of the number of interventions in our mobile access network.

Moreover, we can also refer to the FTTx rollout deployment to improve commercial offer and user experience.

Having gone through the business highlight now I’ll turn the call to Adrian Calaza who will go over our financial performance.

Adrian Calaza

Thank you, Stefano. Now I’ll go through our consolidated financial figures that reflect the business performance that our CEO just described. It is multiple solid economic and financial structures that allow us to keep our business strategy in a challenging macroeconomic country.

Please turn to Slide 16, where we show the evolution of consolidated revenues and operating income before depreciation and amortization. In the full year 2013, consolidated revenues reached 27.3 billion pesos, we have 23% year-on-year growth particularly fueled by the mobile services, corporate data and internet business as we mentioned before. It is important to underline that revenues coming from regulated tariff services account for just 8% of total revenues. Due not only through growth of mobile and broadband businesses but also because of we continue to be affected since 2001 by decrease of basic voice tariff.

Operating income before depreciation and amortization totaled 7.6 billion pesos in 2013 representing 27% of revenues and growing by 15% year-on-year, moreover fourth quarter growth was somehow impacted by fixed revenues and cost effect as we will see in next slide. So in Slide 17, we layout the evolution of growth in operating income before depreciation and amortization, so the fourth quarter of 2013, when compared with the growth of the third quarter 2013, and the fact is that affected the evolution of its growth.

As we deeply explained before specific events affected the mobile ARPU in the fourth quarter of 2013, and is represented approximately 10 percentage point in the growth rate of the fourth quarter, but it is necessary to repeat that most of them are non – recurring. Moreover, during the fourth quarter of 2013, we experienced acceleration in the level of commercial activity when compared to one year before when the level of handset sellout, as you may remember, had declined significantly. In terms of increasing commercial cost, this affected the growth rate of the operating income before depreciation and amortization by three percentage point and should be also a non- recurring effect.

In addition, specific cost incurred to comply with the quality of service, new regulation and the significant increase in voice distribution cost mainly postal cost impacted the growth greatly by approximately three percentage points. In this issue, we saw significant improve in the customer experience against our competitors that you may see in the chart that reflect the official audit perform by the CNC.

On the positive side, the structure review of handset subsidies and other efficiency gain represented an improvement of approximately three percentage point in the growth rate of the operating income before depreciation and amortization.

Please move to Slide 18, where we can see the full year evolution of our operating income before D&A and the most relevant component of this evolution. With consolidated revenues growing by 23% year-on-year, sale cost expanded about this level. For example, the change in mix in the handset sellout towards more sophisticated devices despite it has represent significant increase revenues and is consequently reaching mobile by rate services we saw an increase in the cost of handsets of 52%. In the same direction, direct labor cost grew by 27% year-on-year after the new bargaining agreement that impacted our margin in 50 basis points. The increase in direct taxes on revenues strongly impacted the margin in 70 basis points, growing 33% year-on-year due to increase municipal levy and charges but especially to high provincial to the lower tax rate in specific district such as Buenos Aires city – Buenos Aires province in Mendoza. Additionally, the strong growth of revenue is coming from value added services even with high margin of contribution has the country wide cost impacted our margin in 110 basis points. On the other hand, improvements in interconnection, distribution of cost and other marketing and sales cost such as pricing up to partially mitigate the impact of inflation in other items.

Please turn now to Slide 19, to consider the performance of our operating income that reached 4.5 billion pesos with the 14% increase in the full year 2013. Meanwhile the net income attributable to the Telecom Argentina reached 3.2 billion pesos growing by 19% year-on-year.

Regarding our financial position in Slide 20, you can see that the Telecom Argentina group continues to report a healthy operating figures flow generation that reached 3.8 billion pesos in the fiscal year 2013, equivalent to 14% of our revenues, allowing us to reach net cash position of approximately 5.4 billion pesos. Furthermore, 1.5 billion pesos returned to shareholders through the dividend payments and share buybacks.

As seen in Slide 21, solid financial policies limited our exposure to FX risk where our un-leverage balance sheet with no financial debt denominating foreign currency between recurrently tagged as sub-optimal capital structure represents today a strategic assets in the current Argentina macro environment.

Additionally, during this year we have implemented solid financial policies in order to limit any potential impact coming from the depreciation of the pesos, in the sense we have adjusted our financial investment strategy to include FX denominated or adjusted bonds entered into NDF contract plus the timely strategy with the working capital that have allow us to significantly reduce the exposure to FX rate. When we look at the net balance of account payable to denominate in foreign currency.

Moreover, a limited impact in P&L it show where cost are almost matched by revenues in foreign currency coming from international traffic, corporate data and international roaming.

So having now concluded with the presentation and with the final remarks, we are more than pleased to answer any questions you may have. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Michel Morin of Morgan Stanley.

Michel Morin – Morgan Stanley & Co. LLC

Yes, thank you, good morning, everyone. And obviously there has been more volatility in the macro and currency markets since the beginning of this year, so I was hoping that perhaps you could update us on what you have seeing year-to-date in terms of the impact of using these on your fundamentals? Is there has been any impact? And then separate to that, if you can help us understand what kind of impact we should anticipate from moving to the first second billing? Which I understand happened towards the end of the last year? So this will be also the first quarter was in place. Thank you.

Stefano de Angelis

Hello, Mike, Stefano de Angelis. I step on the second question. First of all, the second billing is something that we were let me say expecting by say almost two years? So we were providing our commercial offer in order to face something that we were expecting then you say not in the way that happened in December, it was announced that surprised the industry but something that we were expecting along 2014. In this sense, you have to remember that the impact is limited by this, let me say set up fee that represent 30 seconds of the [exit embarrass], so it is not a full impact of the first, second billing methodology. In this sense, let me say we do expect a significant impact taking into account that first of all the minute of usage of our prepaid customers that this – the one that our full impacted by the second billing is low when compared to today, one does data and postpaid that are secured by the tax. Let me say that they have been the bonder of way of acquiring our services. Second, we may have expected elasticity. Third, we were just moving into tax of minutes, effects of daily, unlimited call or net, so we do not expect significant impact, and we do not think that this going to affect our revenues goal expectation along 2014. Regarding the impact of the macroeconomic turmoil. First of all, as Adrian was presenting in his speech, we have let me say a zero net balance in our P&L. We got today US dollar, if we eliminate the handset, that’s our US dollar based in the cost and that the price always follow the US dollar trend, if we see the OpEx and the revenues, we have let me say a zero balance sum in the revenues that they value as dollar impact and the cost that the US dollar impact. This means that we are imagined to be able to pass through the US dollar impact in cost into the revenues that are something that we are expecting today. Second, different is impact on CapEx. If we look at CapEx, we have approximately 500 million of capital expenditures that is denominated in dollars is 50% of our CapEx. This may create an impact on the CapEx that’s why we are not giving a guidance on CapEx because it is important for us to understand the evolution in the next – of the US dollar exchange rate then we are just talk and into analyze the volumes of CapEx that we are in our budget just to see because it is clear that all these is related to STDs, all these is related to the access mobile network deployment. We won’t be impacted by the US dollar because we need to continue invest in the mobile network and in the STD. On the other hand, it is important to remark that – sorry it would be along that – but in this moment we are working each day and each hour in this manner. If we look at the CapEx of 2013, we have achieved 4 billion to 9 billion because we were anticipating some CapEx for example we have both hold beneath in terms of IT service, for the data center, for the next let me say 80 months, so this will protect today Telecom Argentina from any impact into this part of the CapEx deployment.

Michel Morin – Morgan Stanley & Co. LLC

Thank you, that’s very helpful. My question was also more specifically on, has the macro development impacted consumer behavior in terms of your customers? Have you noticed any change in dynamic in terms of perhaps recharge activity on the prepaid perhaps increased churn on postpaid? In fact I am not sure that I saw your mobile churn number in the release so I was also hoping that you could provide that? Thanks.

Stefano de Angelis

Listen, I give you a short term view because honestly it is very difficult at this moment to have a medium and long term view on this matter. In the short term, what if happen and what may happen we can expect a reduction – for example in the number of handsets today because older market is reducing the financing of the handsets and electrical devices. If this let me say may have limited the impact and indirectly in our smartphone penetration and data users penetration, but we do not expect a negative impact on the global financial of Telecom Argentina. On the other hand, looking at January and February, we are not seeing any impact in terms of the consumption, and in this sense in the short term, we do not expect a negative impact coming from the reduction of the consumption of our customer, related especially to the mobile service.

Michel Morin – Morgan Stanley & Co. LLC

Okay, thank you very much.

Operator

And our next question will come from Rodrigo Villanueva, Merrill Lynch.

Rodrigo Villanueva Bravo – Merrill Lynch

Thank you, good morning. And I was wondering if you could share with us any update regarding the transaction of Telecom Italia with impact for consolidated Telecom Argentina?

Has there been any change in the operations of Telecom Argentina? And I also wanted to ask if is there any pay along right figured by this acquisition that would be my first question.

Stefano de Angelis

First, we may expect the evolution to be close in the next let me say three to six months but it is an expectation, it is difficult for us to answer something that is not affecting Telecom Argentina, is entirely manage Telecom Argentina, so we signed a filing in December and we are expecting that the process would be completed in the next plan. Okay, in terms of the impact for Telecom Argentina, I can say that the impact will be approximate to zero because if we look at the declaration of that multiple reinforce, its intention to sustain the investment, the capital expense towards the Telecom Argentina, yet we are firmed that in the Fintex policies to maintain the managers of the company, so in the sense we do not see any discontinuation of the present policies offering and level of investment of the company. On the contrary, we may expect a relief in the regulatory context because we have not to forget that today we are limited by the Telco electronic situation and in order to – even in sometimes of bureaucratic activities that we have to firm as a company, we have lot of committee that if needed in order to crusade the independence of Telecom Argentina from Telefonica, all these will be a waste with a closing of the [ordination] and then regarding it will take longer – honestly, I don’t know, and the HDA is a public filing on this associate so you may see what this published and you may find information you need.

Rodrigo Villanueva Bravo – Merrill Lynch

Okay, thank you very much, very clear. And my next question is regarding EBITDA margin. And we have seen EBITDA margin declining by an average of 200 basis points for the last several years. I was wondering if around 27.5% – 28%, you would think these levels are sustainable going forward. Or we should continue to see an erosion of margins due to inflationary pressures?

Adrian Calaza

Rodrigo, hi, I am Adrian, well, yes this last year we saw margin take dig around 200 basis points. This is a matter of inflation and we are able to not just revenues coming from volumes but especially from prices at the same pace of inflation. This last year even with limited price adjustments, we manage to increase the revenues in a very significant level, almost matching inflation, but again some cost affected more than this 33% especially our labor cost related. It’s something that we try to manage, we will try to maintain the actual level but it depends a lot on the – for example on the union bargaining this next month and also some other buyable of the macro context. So we cannot assure you that we will maintain the actual level, so we will try to make our best effort in order to achieve it.

Rodrigo Villanueva Bravo – Merrill Lynch

Understood, thank you very much, Adrian.

Operator

(Operator Instructions). We will go next to Santiago Petri, Franklin Resources.

Santiago Petri – Franklin Resources

[Question inaudible]

Stefano de Angelis

No, we are not performing any adjustment on our balance sheet. It is not allowed under the actual rules in Argentina, but even more under IFRS you need to have an accumulated a 100% in three years in order to be allowed to adjust the balance sheet.

Operator

And with that it does appear that we had no further questions on line, the phone line. We would like now to turn the conference back over to our speakers for any additional or closing comments.

Stefano de Angelis

Okay, thank you everybody for participating in this call and feel free to contact us for any additional questions you may have. And everybody have good day and weekend. Plus those in Latin countries, they will enjoy the carnival holiday. So good day to everybody. Bye, bye.

Operator

And with that ladies and gentlemen, that does concludes today’s conference call. We like to thank you again for your participation.

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