Telecom Argentina S.A. (NYSE:TEO)
Q2 2014 Earnings Conference Call
July 31, 2014 11:00 AM ET
Stefano de Angelis – Chief Executive Officer
Adrian Calaza – Chief Financial Officer
Pedro Insussarry – Financial Director
Solange Barthe Dennin – Manager of Investor Relations
Good day everyone, and welcome to the Telecom Argentina TEO Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. Participating on today’s call, we have Mr. Stefano de Angelis, Chief Executive Officer of Telecom Argentina; Mr. Adrian Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Financial Director 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.
Okay. Thank you, Greg and good morning to everybody on behalf of Telecom Argentina I would like to thank you for participating in this conference call. As stated, the purpose of this call is to share with you the consolidated results of the Telecom Argentina Group that correspond to the first half of 2014 and ended on last June 30.
We would like to remind all those that have not received our press release or presentation, you can call our Investor Relations office to request the documents or download them from the Investor Relations section of our website located at www.telecom.com.ar/investors. Additionally, this conference call and slide presentation 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 clarify 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 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 marginal factors such as changes in general markets or economic conditions in legislation or in regulations.
Our press release dated July 29, 2014, a copy of which was 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.
The agenda for today’s conference call as seen in Slide 2 is to first go over our general market overview, followed by the discussion of the business highlights, an overview of 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 of the presentation where we included a snapshot of the current Argentine macroeconomic environment. The second quarter of this year confirms the slowdown trend in the economic activity with a strong deceleration in the rest of the production that caused a domino effect in other sectors like retail wholesale commerce, transport and communication and manufacturing industry.
On the contrary the increase in interest rates contributes to growth of financial interrogation sector, and a good harvest season in the quarter supports the growth of the agricultural sector. This is not enough to offset the decline in the economy. Moreover, the level of potential was affected by these factors together with the decrease in real wages.
During the second quarter of 2014, new economic measures were implemented to support, for example, car sales mainly impacted by the decline in exports. We can say that after strong decline at the beginning of the year, the consumer confidence index showed a stable performance. Nevertheless, the decline in supermarket sales reached negative 1.3% in the first half of 2014, and in June specifically a decrease of 4.3%.
Additionally, the new CPI index reached a cumulative 15% in the first half of the year, in that the context, the collective bargaining agreements were settled rate increases on average of 31%. On the monetary front, some measures to reduce the loan interest rates and to mitigate the negative impact in the economy were taken. Moreover, central bank reserves showed a decrease of 21% year-on-year, but increasing since last April, mainly as a consequence of the liquidation of the liquidation of exports of the soybean harvest.
After having gone through this introduction of the macro context, let me pass the call to our CEO, Mr. Stefano de Angelis. Who will go over the business highlights. Stefano.
Stefano de Angelis
Thank you, Pedro. And good morning to everyone. Please refer to Slide 5 where we have a summary of the main achievements for the quarter. Our business continued with a similar revenue expansion trend registered in the recent quarters, achieving a 23% increase driven by the growth of 56% in mobile internet in Argentina. 55% growth in data and 26% increase in fixed broadband. In terms of clients, it is worth mentioning that as a result of our entrance strategy, during the quarter market penetration reached 30% of the total subs, while the mobile 3G customer base in Argentina continue to increase accounting 9.4 million.
In addition Smartphone sell out in the second quarter represented 81%. SEC and SLC continue to decrease, as a result of the sustainable reduction in handset subsidies. As we move into [indiscernible]. In this sense the second – our ARPU ratio decreased to 9.1 times in second quarter 2014 from 3 to 3.2 times one year ago. Our mobile subsidiary in Paraguay, Núcleo achieved a 10% increase year-on-year in the postpaid segment with a steady improvement in the customer mix.
Moreover, it’s important to highlight that broadband net ads continue to increase, reaching 92,000 in the last 12 months with an increasing ARPU of 20%. In this sense Goodyear cell cabinet deployment helped us to increase our broadband customer base while we are offering connections speeds of more than 10 mega to the retail and [indiscernible] enterprise markets, thus the more competitive with compelling commercials offers.
When it comes to our financials for this year our shareholders approved a total dividend payment of 1.2 billion pesos equivalent to a payout ratio of 37% for full year 2013. The first installment of 601 million pesos was paid in June and the second one will be paid in September. On a specific date to be determined by the board of directors in favor to deliver a consistent return to our shareholders as this will be the fifth in a row that we pay dividends.
Please turn to Slide 6 for comments on the mobile business performance. The current context of increasing inflection and slowdown in consumption, we follow a strategy that is focused in postpaid as a way to stabilize revenue stream and in sales mix as a way to secure future growth. As of June 2014 our customer base totaled 19.8 million with a 2% year-on-year expansion, while mobile unit internet user increased to 6.9 million customers in the quarter supported by 3G Smartphone sell out and contributing to the growth on innovative value added services.
Its consistent growth came with higher browsing ARPU and incremental usage of data. Monthly ARPU in second quarter 2014 rose 9% reaching 71.6 pesos when compared to the same period of 2013, bolstered by growth of 14% year-on-year in non-voice ARPU. In the postpaid segment we can see a positive evolution of ARPU that reached 145 pesos representing an increase of 21% versus second quarter 2013, driven by a growth of 26% in non-voice concepts.
Let’s move on Slide 7 where we show the mobile revenues performance. Inline with the strategy I just mentioned our revenue mix shows a healthy evolution despite prepaid has been affected by the retention in consumption. Internet services increased 56% year-on-year and therefore the total value added services revenue grew by 19% reaching 59% participation of service revenues in the first half of 2014.
Postpaid revenues rose by 24% in June 2014 representing 66% participation of service revenues. Meanwhile the prepaid sale mainly in traditional pay-per-use services continue to be strongly affected by the slowdown in the economic activity increasing pressure from the competition regulatory changes like the per-second billing and cannibalization of SMS.
Understanding the prevailing economic condition, we have launched the super chip offer to uplift credit recharges regain positive trend in 30 days recharging customer base with positive results. That is to say 18% increase in prepaid model in second quarter 2014 compared to first quarter 2014. On the other hand innovative pay-per-use value added services increased, 62% is shown in June 2014 when compared to June 2013.
Please turn to Slide 8 as we move to the evolution of our fixed business. The fixed broadband subscriber base continue with a positive trend adding 92,000 new accesses year-on-year where their ARPU rose by 20% in second quarter to 148 pesos with a stable evolution of churn. In this sense we have enriched our commensurate offer by increasing speeds to recapture flow share, where the 10 mega speed offering was the most demanded rising by three times. Thanks to the network deployment.
Also we can notice the evolution of our corporate data services that delivered a strong 60% revenue growth in our year-on-year in second quarter due to the expansion in ICT services. During the period an improved service provision in our competitive bundling offer was developed.
Slide 9 shows our consolidated revenues evolution, the growth we reported was a result of data internet and handset expansion , revenues increased by 23% year-on-year achieving 15.6 billion pesos. In the fixed business data revenues increased by 55% year-on-year or 242 million pesos followed by internet revenues that contributed with a 26% growth or 312 million pesos. In the mobile business we can highlight revenues coming from internet services which continues to be one of the main drivers to the growth increasing by 56% as well as 71% in handsets.
Moving to Slide 10 where we exhibit the evolution of our consolidated CapEx we can say that our focus was on capacity and coverage to ensure a consistent improvement in service quality. We have invested approximately 2.3 billion pesos during the first half of 2014 that represent 15% of revenues an increase of 46% versus first half of 2013. Its worth mentioning the increase of 64% in PP CapEx in Argentina versus first half of 2013.
During the quarter the mobile access rollout continued with a focus in service quality upgrade, from actions such as the deployment of new sites, the implementation of the second 3G carrier were developed to increase the capacity and capillarity of the net store plus optimizing the use of the existing wireless spectrum. This resulted in a significant increase of 159% in mobile access CapEx. Returning to the five-year rollout, we can highlight the fact that it has increased by three times year-on-year in order to offer higher Internet speed and plus being able to deliver a better navigation experience.
Let’s move now onto Slide 11 where a snapshot of the 3G and 4G spectrum option exhibited. On July 7, the government announced the long-awaited 3G and 4G wireless spectrum options. In 3G the spectrum to be optioned 1900 and 860 mega bands line to the regional process consult in September 2012. If we participate and win this spectrum will contributing improved capacity and quality in the short-term.
The government has left the 50 mega-cap for each operator and therefore our participation is limited to only some regional block. Then in the 4G active spectrum in AWS in 700 mega frequencies, licenses will be granted with the national coverage and the cap in this case was set in 60 megas per operator.
In addition, the terms and conditions include strong CapEx and service coverage requirements for both 3G and 4G with a 15-year license term. Confidently, we participated in both auctions and following the block scheme included in the terms and conditions would imply a minimum cost of $442 million.
Turning now to the business highlights now we will pass the call to Adrian Calaza, who will go over our financial performance?
Thank you, Stefano. Please turn to Slide 13, where we can – you can see the evolution of consolidated revenue and EBITDA. In the first half of 2014 consolidated revenues reached 15.6 billion pesos with a 23% year-on-year, particularly sustained by mobile services in Argentina and fixed broadband that represented 69% and 10% of consolidated revenues respectively.
It is important to underlines that this revenue growth was achieved even not only after negative attacks already mentioned, but decline in economic activity and billing by second, but most of all having [indiscernible] an effect regulated services in 2002. EBITDA total 4.1 billion pesos in the first half of 2014. Representing 26% of revenues and growing at a base of 14% year-on-year.
And back to Slide 14, where we zoom into the evolution of our EBITDA with its most relevant component. As mentioned before, with consolidated revenues growing by 23% year-on-year, but in the context of accelerating inflation and contraction in consumption, we have redoubled our efforts in cost control and efficiency gains, especially on SAC and SRC that continues to decrease, as a result of the sustainable reduction in Hazard subsidies, helping us to improve the return of allowance. Despite this consolidated operating cost increased about of topline levels, mainly due to increasing taxation and inflation and labor costs and labor-related costs.
As mentioned before, significant reduction in handset subsidies, allowed us to both for a second quarter in a row a positive margin in Hazard business. With sales growing by 68% percent versus perhaps 2013 while handsets cost increased by 47%. Labor costs grew by 35% year-on-year impacting our margin in 150 basis points, but it’s important to stand out that 122 million pesos were due to severance payments related to reorganization or restructuring costs.
The increasing fees for services, maintenance, and materials impacted in the evolution of EBITDA in 70 basis points, increasing by 32% mainly due to rises in technical maintenance, licenses of subsystems, and higher fees for services, all items affected by the peso devaluation.
Moreover, direct taxes on revenues impacted the margin in 20 basis points, growing by 25%. Mainly due to further increment in turnover taxes rate during the first half of this year, even though at a slower space when compared to fiscal year 2013.
Additionally value-added services costs mainly related to content continue to increased impacting our margin in 20 basis point, but this related to the significant expansion of value-added services with a high margin of contribution. On the other hand, thanks to strong focus on gaining efficiencies in costs, other marketing and sales costs, interconnection costs, and other costs positively impacted margin.
Please turn to Slide 15, you can see the performance of our operating income that reached 2.6 billion pesos with a 27% increase in the first half of this year. Considering a positive effect when compared with last year figures that included charges related to disposals of PPNB.
Meanwhile, net income attributable to Telecom Argentina reached 1.8 billion pesos growing back 24%. It is remarkable that financial results in the second quarter a strong net income growth in 2014 given that to the strong peso devaluation. We must note that the financial results in the second quarter were affected not only by a non-cash pre-tax loss of [indiscernible] million pesos related to purchases of U.S. dollars, U.S. dollars bonds, following accounting valuation standards of fixed-income securities at the official exchange rate that we will explain in a further slide.
Regarding our financial position as you can see in Slide 16. The Telecom Argentina Group continue to report healthy operating figures flow generation that reached approximately 1.6 billion pesos in the last 12-months. Allowing us to reach to present a net cash position of approximately 3.8 billion pesos after paying a significant amount of taxes and dividend.
As we highlighted in the last quarters, solid financial policy is implemented in the recent past have significantly limited our exposures to effect risks where our unleveraged balance sheet with no debt denominated in foreign currency represents a strategic asset Argentina macro environment even more today.
During the first half of 2014 we continued with our hedging strategy in order to mitigate the impact coming from the depreciation of the peso. In this sense, we achieved a total coverage equivalent to more that 120% of our net payables in foreign currency. Moreover, we are able to enjoy limited impact in our P&L as revenues in foreign currency almost matched our costs in hot currency.
On Slide 17, we have shown the affect in our net financial position of investments in Argentine bonds in notes were valued at amortized cost and their respected per value. It is worth mentioning that these bonds are non-restructured bonds and are under Argentine jurisdiction and local at financial position in the first half including financial instruments valued at first would amount 4.1 billion pesos.
Lastly in Slide 18, we can notice the evolution of declared dividends. For the fiscal year 2013 it was approved a dividend payment of 1.2 pesos stable in two equal installments. The first one was paid in June 10, and the second we will pay in September 2014. Considering both installments and its current ADR price and FX rate, Telecom Argentina with accomplish a dividend yields in U.S. dollars of 3.8% while showed 3.6%. Furthermore from 2014, the dividend paid increased by 49%.
Having now concluded with the presentation, we are more than pleased to answer any questions you may have. Thank you very much. I am sorry a final remark from Stefano.
Stefano de Angelis
Just as a very final remarks. As recently announced, I will resign on August 13 in order to take another responsibility in the Telecom Argentina. The appointment of the new CEO will be determined by specific Board of Directors of Telecom Argentina that will be held within the order. It's worth mentioning that this year in hazard was a very exciting experience and a very unpredictable context.
And I hope to have contributed, joined with all the people of Telecom Argentina, to grant a sustainable fact within report. I also would like thank you for your attention during this period ended the conference call we have we are performance, and I'm sorry for this very late announce, but prefer to announce this news before the conference call and not later on.
Now, again move to the question-and-answer. Thank you.
(Operator Instructions) And it appears we have no question at this time. I'll turn it back to management for any additional or closing remarks.
Stefano de Angelis
Okay Greg, can we refresh if we have any one in the queue? We’re open to any questions you have?
(Operator Instructions) And it appears that we still have no question at this time.
Stefano de Angelis
Okay. Thank you very much to everybody for participating in this conference call. And please do not hesitate to call us with any questions you may have. Good morning to all and we expect to meet again in the next conference call. Thank you very much.
That does conclude today's conference. Thank you for participation.
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