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Executives

Pedro Insussarry – Head of Finance

Franco Bertone – CEO

Adrián Calaza – CFO

Analysts

Michel Morin – Barclays Capital

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

Alexandre Garcia – Citigroup

Telecom Argentina S.A. (TEO) Q4 2010 Earnings Call February 22, 2011 10:00 AM ET

Operator

Good day everyone and welcome to the Telecom Argentina Fourth Quarter 2010 Earnings Conference Call. Today’s call is being recorded. Participating on today’s call, we have Mr. Franco Bertone, Chief Executive Officer of Telecom Argentina; Mr. Adrián Calaza, Chief Financial Officer; Mr. Pedro Insussarry, Head of Finance; and Mr. Solange Barthe Dennin, Manager of Investor Relations.

At this time, I’d like to turn the conference over to Mr. Pedro Insussarry. Please go ahead, sir.

Pedro Insussarry

Good morning to everybody, and thank you for participating on this conference call. The purpose of this call, as said by our moderator is – sorry, as mentioned by moderator, is to share with you the consolidated results of Telecom Argentina that correspond to the fourth quarter and fiscal year 2010 ended on last December 31st.

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

Before we continue with the conference call, I would like to go over some Safe Harbor information and some other details of the call. We would like to clarify that during the conference call and Q&A sessions, 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 or complementary regulation, the effects of ongoing industry and economic regulation, possible changes in demand for Telecom products and services, and the effects of more general factors such as changes in general market or economic conditions, in legislation, or in regulation.

Our press release dated February 21, 2011, a copy of which is being included in a 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 one of the presentation.

As usual in our quarterly conference calls, the agenda for today, as seen in slide two of the presentation, is to go over general market overview, then we’ll go over through some business highlights, and after that we’ll go over some specifics of the evolution of our financial figures, and we will end the call with our traditional Q&A session.

I’ll go over the brief market overview as an introduction to the general operating environment. In slide three, we include some snapshots of the current Argentina macroeconomic environment. You can note that a strong economic recovery helped Argentina to regain pre-crisis levels of growth, with a better global economic context, with low interest rates, rising commodity prices and a higher interest in emerging markets coming from the investor community. The agricultural and industrial sectors were the main drivers of growth.

Strong commodity prices and a better harvest from last year helped the agricultural sector, while an outstanding performance of the auto industry lifted the overall industrial production. It’s worth mentioning that investments in key sectors are needed to maintain the current high levels of growth and release the economy from infrastructure and supply bottlenecks.

Several factors like the growing household income from a healthier labor market, government transfers to the low-income segments, and an expansive monitory policy stimulated private consumption. High inflation was a consequence of the increase in demand from the private sector, significant expansion in public spending and some supply strains, especially in the food segment.

Moreover, steady FX rates and low interest rates also stimulated consumption over savings. In this context, the government benefited from the recovery as a slight increase in fiscal surplus was registered, despite reaching a record level of fiscal spending to GDP.

In 2010 (audio gap) and the last debt swap reduced uncertainties in the sovereign debt solvency. Finally, the trade balance remained robust, despite growing imports compensated with the rising commodity prices and growing export to Brazil, which helped to sustain a strong surplus and to increase Central Bank international reserves.

In this challenging macroeconomic context for Argentina, our company has more than well performed in 2010, both in terms of its business and operations, as we will explain during the conference call.

And having gone through this introduction let me pass the call to Franco Bertone, who will go over the business highlights. Franco?

Franco Bertone

We are happy to announce our 2010 results, they’re quite good and Q4 figures are even better. Revenues grew 20% over 12 months and 25% in the fourth quarter. Data and value-added service grew twice as much and 4 times voice revenue.

EBITDA, EBIT, and net profit posted double-digit growth although we experienced some dilution in EBITDA margin due to the combined effect of frozen wireline tariffs and inflationary pressure affecting OpEx. Line in service increased by 2.1 million to 23.7 million in total.

We captured an estimated 46% of mobile net adds in Argentina, outperforming competition for the second year in a row. Broadband delivered solid revenue performance with record low churn rates though market grew more than we expected diluting our market share in H1. Strong Q4 sales partially compensated lesser performance of previous quarters. Consolidated net financial position grew by P$700 million to exceed P$1.2 billion.

Slide five of the presentation we mailed to you highlights mobile revenues displaying an accelerated pace in Q4. This was as high as 63% for value-added services. 2010 net adds share was significantly higher of our market share, particularly for smartphone sales.

Broadband performance strongest point is a sustained churn reduction, which dropped to a record low 1.2% a month in the last quarter. Also, worth mentioning is the launch of broadband fixed and mobile convergent offer for the mass market successfully performed in Q4.

Our of our financial performance, we draw your attention this 25% fourth quarter revenue growth, as well as the outstanding Telecom Personal bond US$173 million that was fully canceled by the year-end.

Let’s address some details of our mobile operation in 2010, referring to slide number six of the presentation. In Argentina, we experienced strong quarterly results with a 17% year-on-year ARPU increase. 12-month customer base growth was 13% posting 120 basis point increase of our estimate market share to 31.8%. This matches with a 46% share of the 12-month net adds, as mentioned before.

Slide seven shows value-added service revenues, a 46% 12-month expansion. This was as high as 63% in quarter four. This is our way of adding value for our customers, handset upgrades and related value-added usage, with an all-time high 42% of service revenues in Q4.

Migration to All Inclusive Plans contributed to deliver high ARPU. SAC and our retention costs rose to 16.1% in Q4 from 14.8% in Q4 last year, due to a mix change of handsets and an increase in the average costs because of new taxation affecting imported devices. The tax increase represent 110 basis points of service revenue. Higher advertising costs in the last quarter partly were due to the title sponsorship of 2011 Personal Dakar Argentina and Chile.

Slide eight shows how our mobile revenues developed in Argentina reaching P$9.5 billion, an increase of 25% or P$1.9 billion compared to 2010 (sic) 2009 . As already mentioned, value-added service played a strongest part in revenue expansion with P$1.1 billion or 46% 12-months growth. Prepaid traffic and monthly fees revenues were up 18% and 15% respectively. Handset sales were up 28%.

Let’s move to wireline with slide nine, lines in service kept growing at 1% rate and the average monthly bill was up 5% compared to 2009 reaching P$44 a month, thanks to supplementary service and package pricing that resulted in an increase of minutes called per client.

Slide 10 shows the evolution of broadband subscriber base that was slightly below competition year-on-year. In Q4 we experienced a strong rebound with over 40% of quarter net adds that contributed 50,000 new customers to our base that is now approaching 1.4 million lines, a 14% 12-month increase. Estimated market share among top three players is 35%. Churn is down to 1.2% per month in the fourth quarter from 1.8% in fourth quarter 2009.

Wireline revenues presented with slide 11 show the Internet broadband to be the key revenue growth driver increasing 30% year-on-year. Third-party revenues totaled P$4.6 billion, a 12% increase or P$483 million compared with 2009.

Regulated tariffs in the fixed business telephony continue to be frozen at 2001 prices, although our wireline business dependency on regulated price capping service decreased from 51% to 44% over the last 12 months. Both monthly fees and voice measured service grew 5% due to customer base expansion, tax pricing and higher penetration of supplementary service. Interconnection revenues dropped 3% because of decreased incoming traffic from third-party operators.

Slide number 12 shows that CapEx is up 16%, totaling P$2 billion or 13% of consolidated net revenues. We continue to invest through an integrated approach among service platforms, access and core networks. 2010 CapEx was focused to improve of customer mobile broadband experience, accelerate backhaul deployment, as well as expands, secure and integrate backbone networks. Cost of local roaming was also reduced while improving coverage. We also invested in IT platform to upgrade customer care and business operation performance.

While having gone through the business highlights, I’ll pass the call to Adrián, who’ll go over the financials.

Adrián Calaza

Thank you. The business highlights, as mentioned by Franco Bertone, have reflected into significant results in terms of revenues and profitability. Please refer to slide 14 where we can see the evolution of revenues and operating profit before depreciation and amortization.

In the fiscal year 2010, consolidated revenues reached P$14.7 billion growing by 20% when compared to 2009, the highest rate in the last three years. We can also notice that prices – regulated revenues currently accounts for only 14% of total revenues, not only because of the growth in tariffs of the basic telephony, but mainly due to the significant growth of mobile value-added service and fixed broadband.

Throughout 2010, our revenue growth has allowed us to increase our operating profit before depreciation and amortization by a significant 17% totaling P$4.6 billion. This rate is slightly lower than the revenues won basically due to the effect of an intense commercial activity and inflationary context mainly reflected on labor costs related. For further details, please refer to slide 15 where we can see the breakdown of our consolidated cost structure.

On this slide, we are focusing in efficiency to sustain profitability being in an inflationary context, where this efficiency is derived from a leaner cost structure, thanks to unified operations, lower incidence in interconnection costs, deployment of CapEx to reduce OpEx and maintaining a close look into labor-related costs.

When we consider cost as a percentage of revenues, marketing and sales expenses represented 22.3%, while labor and interconnection costs represented 12.8% and 9.5% respectively of consolidated revenue.

In 2010, marketing and sales expenses were influenced mainly by the increase in mobile broadband, the change in the mix of handset sales, higher volume of handsets upgrades in order to sustain a value-added service growth, and the impact of the technological tax that resulted in higher SAC and SRC costs.

Savings in interconnections and network usage costs were achieved due to stimulation of on-net traffic investments that allowed reductions in domestic roaming expenses, thereby achieving cost efficiencies. Also, it is notable the decrease in bad debt expenses of 9%.

As seen in slide 16, operating profit rose at a 16% year-on-year growth, reaching P$3.2 billion. Please also note that in 2010, financial and holding results accounted in a loss of P$34 million, a decrease of P$295 million versus 2009.

This was mainly due to lower foreign exchange losses of P$211 million together with a gain in net financial interest of P$84 million in 2010 versus the same period of last year as a consequence of the significant reduction in leverage experienced by the company.

Consequently, thanks to these operating results and the reduction in financial expenses, net income reached P$1.8 billion for the fiscal year 2010, equivalent to a year-on-year growth of 30% on the expected financial side.

In slide 17, we can see our operating free cash flow generation in 2010. Despite an important growth in CapEx and the payment of dividends, we are able to report a net cash position of P$1.2 billion. That represented an increase of P$755 million in 12 months.

Finally, it’s important to mention that the Board of Directors of Telecom Argentina have proposed to the shareholders’ meeting a cash dividend payments proposal of P$915 million equivalent to P$0.93 per share.

Having concluded the presentation, we are more than pleased to answer any question you may have. Thank you very much.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Michel Morin with Barclays Capital.

Michel Morin – Barclays Capital

Good morning. I was hoping to ask about subscriber growth, in particular, I think it was a little bit light relative to our expectations, but we also saw lighter than expected subscriber growth at América Móvil in the fourth quarter.

So I was wondering if you can comment a little bit about what do you think are the reasons for this? And then I did not catch your post-paid net additions, so I don’t know if you could share that with us. Thank you.

Operator

Please stand by. Mr. Morin, sorry at this time we are unable to hear you.

Pedro Insussarry

Yes, give us a minute. We’re gathering the information on Michel’s question. Hold on, please.

Operator

Thank you.

Franco Bertone

Well, answer your two questions about the subscriber growth in Q4, it’s pretty normal in the industry if we have some maintenance of the customer base over the last four quarters and filtering out customer advance do not meet our standards of ARPU and traffic over the last quarter.

So I mean you’ll see the figures of the fourth quarter just affecting of the maintenance work only on the base for the full year. As far as the cost base Q4 growth, I mean we don’t disclose.

Pedro Insussarry

Amy, can we go to our next question unless Michel has a follow-up.

Operator

(Operator Instructions)

Michel Morin – Barclays Capital

Yeah. I might go on.

Pedro Insussarry

Yeah, sure.

Michel Morin – Barclays Capital

Hi. So I’m sorry, I’m not sure if I got the last part, you said you don’t disclose the post-paid net adds, is that right?

Franco Bertone

Yeah. But I’m prepared to say the thing that post-paid growth rate was higher than prepaid in the fourth quarter.

Michel Morin – Barclays Capital

Okay. In terms of year-on-year growth rate you mean?

Franco Bertone

Correct, yes.

Michel Morin – Barclays Capital

Okay. And then given that we had fewer net additions, I was also a little bit surprised to see that your subscriber acquisition costs and retention costs still continued to creep up as a percentage of sales.

And specifically we saw commissions go up and advertising go up. So, I think obviously that had an impact on margin in the quarter. Is there – should we expect that that little uptrend continues again into 2011 or are we kind of as high as we might go on that line item? Thank you.

Franco Bertone

Yeah. Advertising and subscriber acquisition costs go together with gross adds, not with net adds. And gross adds has been in line with previous quarter. In general terms, I would say that as was commented during the presentation that we had a significant impact, about 110 basis points of the – applying the full application of the new taxation of imports of telecom sets that produced that 110 basis point effect on – over revenues in the fourth quarter. A seasonality effect on advertising costs and particularly as I mentioned in the presentation last quarter advertising costs weren’t affected by the title sponsorship that we did on the car event this year and that it’s a seasonal effect.

Michel Morin – Barclays Capital

Okay, great. Thank you very much.

Franco Bertone

Okay.

Operator

Thank you. (Operator Instructions) Our next question will come from Rodrigo Villanueva with Bank of America/Merrill Lynch.

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

Hi, good afternoon. My first question is regarding your dividend proposal. Last year the dividend payout ratio over 2009 profits was of around 76%, so I was wondering if you could share with us why this year you proposed a payout ratio of only 50% on 2010 profits. Thank you.

Franco Bertone

Yes, the payout ratio that is over the last year that still is around 93% of paid capital in the company, reflects the fact that we are expecting in 2011, the frequency spectrum option that has been announced by the authority in the market. And we’ll be bidding competitively for that.

I mean we need to expand spectrum, for the current operation it comes at 50 megahertz and 1.9 gigahertz bandwidth. And we are not considering to take debt to fund our offer for the spectrum being auctioned and therefore I mean we had a more prudent approach in that respect.

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

Okay. Thank you. So in terms of dividend payout ratio going forward, what would be more reasonable to expect for you to be proposing something along the lines of the 50% or probably past 2011 that you’re not going to have more cost related to spectrum, we could see it going up to around 75% or so. Is that reasonable to assume? Thank you.

Adrián Calaza

That is okay. The thing is that, as we already mentioned, we don’t have a dividend policy in the company. And as Franco was telling you, 2011 will be kind of particular in the financial side because of these auctions of spectrums. So I can give you a forecast of dividend for the next years, but we usually try to distribute our free cash flow.

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

Okay, understood. Thank you very much. And a second question would be regarding your wireless subs and net adds. I was wondering if you could provide us with a breakdown between voice users and 3G modem users. And also if you have seen any type of cannibalization between your mobile and your fixed broadband products? Thank you.

Franco Bertone

Yes. Our current share of 3G sets is about 10%. It has increased substantially over the last 12 months. It’s 10% of our customer base of the 60 million that we are operating. And then, second question, no, I mean we haven’t seen any cannibalization effect of mobile broadband over wireline broadband. As a matter of fact, we are leveraging on those two products.

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

Okay. Thank you very much. Yes, please go ahead.

Franco Bertone

And combined products. Okay?

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

All right, understood. Thank you very much.

Adrián Calaza

Thank you.

Operator

Thank you. (Operator Instructions) And we’ll take our next question from Alex Garcia with Citigroup.

Alexandre Garcia – Citigroup

Hi, good afternoon gentlemen. I have a few questions. First one is regarding the options that you guys just mentioned. What is exactly for sale? What is the capacity that is for sale? And how far from the spectrum cap are you guys? That will be my first question.

My second question is regarding salary readjustments. And I was wondering if you guys could refresh how much of your costs are related to inflation and how much of your CapEx are also related to inflation? Thank you.

Franco Bertone

Yeah, one minute.

Pedro Insussarry

Alex, give us two minutes.

Franco Bertone

We’re ready, we’re ready. Well, as far as the frequency spectrum being auctioned, we are talking how the – at least we are interested to 850 megahertz in the metropolitan area of Buenos Aires and 1,900 megahertz in the rest of the country.

Our current frequency allocation is about 10 megahertz and below the current frequency cap, and therefore we are going to take advantage of hopefully and that’s where we are bidding for – the access we are bidding for in the coming auctions. As far as your question about OpEx and CapEx exposures into ForEx, currently OpEx is 80% in local pesos and 20% in dollars or foreign currencies.

And in the case of CapEx is approximately half and half, slightly more in our currency than it is about 60% than it is in local currency. The overall effect on OpEx is in the range of 14% coming from the blend of the fact that the 80% OpEx in local currency is exposed to inflation and 20% in dollar it is. I hope I answered your question.

Alexandre Garcia – Citigroup

Yeah, yeah, you did. And if I may, how was negotiations regarding with the unions are developing – it has been settled already, how much they are asking for or (inaudible) the union that is left to negotiate salary readjustment this year? Thank you.

Franco Bertone

It’s a bit early for that, I mean, our negotiation with (inaudible) to around June of the year. So it’s a bit early for the question.

Alexandre Garcia – Citigroup

Okay. Thank you, and good luck on that negotiation.

Franco Bertone

Thank you.

Operator

And we’ll take a follow-up question from Rodrigo Villanueva.

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

Yes. Hi. I was wondering if you could share with us your 2011 CapEx forecast, please. Thank you.

Adrián Calaza

Yeah, our budgeted CapEx for 2011 is P$3.5 billion and is in the same range of consolidated revenue that we had in 2010.

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

Okay. And just to clarify, does these – would you be planning to – the spectrum that you’re going to buy is including the CapEx or it would be expensed? Thank you.

Franco Bertone

No, it’ll not be expensed, but it is not included in the CapEx figures we provided. There would be an additional capital expenditure for 2011.

Rodrigo Villanueva Bravo – Bank of America/Merrill Lynch

Okay. Thank you very much.

Franco Bertone

Welcome.

Operator

Thank you. (Operator Instructions) And sir, there are no further questions at this time.

Pedro Insussarry

Well, thank you very much for being at this quarterly conference call. Thank you very much for your questions. Do not hesitate in contacting our Investor Relations colleagues at any time for further inquiries you may have. And thank you and good morning to you all and have a nice day. We expect to meet you soon again.

Operator

Thank you. That does conclude today’s presentation. Thank you for your participation.

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