Earnings Call: Q2 2018

Aug 13, 2018

Good day, everyone, and welcome to the Telecom Argentina TEO Second Quarter 2018 Earnings Conference Call. Today's call is being recorded. Participating on today's call, we have Mr. Gabriel Blasi, Chief Financial Officer and Ms. Solange Bartzenin, Investor Relations Manager. At this time, I'll turn the call over to Ms. Salange Bart Steneen, Investor Relations Manager. Please go ahead, ma'am. Thank you, Kevin. 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 to the conference call are Gabriel Glass, Chief Financial Officer and myself, a lunch barter then and manager of Investor Relations. The purpose of this call is to share with you the result of the first half twenty eighteen and in June 13, 2018. We would like to remind all those that have not received our press release or presentation that they can call our Investor Relations office to request a disconnect 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 broadcasted through the webcast feature available in such section and can also be replaced 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 this type of event. We would like to clarify that during the conference call and Q and 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 telecoms products and services and the effects of more general factors such as changes in general markets or economic conditions in legislation or in regulation. Our press release dated August 8, 2018, a copy of which was included in a 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, call to read the disclaimer clause contained in slide 12 of the presentation. The agenda for today's conference call as seen in slide 3 It's fair to go over general market and industry overview. Then moving on to our vision and strategy, which will be followed by the discussion of our business highlights and immediately after we will go into the evolution of our financial figures. Finally, we will end the call with a Q And A session as it's customary in our quarterly calls with the financial community. Having gone through this procedural matter, I will now go over a brief prioritization of the macroeconomic context in which we operate. The second quarter of 2018 was particularly tough when looking at the macroeconomic environment as the economic activity moved away from the stable growth rate observed during previous quarter. Strongly influenced by the underperformance in the agriculture set by the turmoil that was registered in the foreign exchange markets that resulted in a strong peso depreciation. In turn, inflation rates pick up impacted by the effect increase as well as the transport and utility tariff hikes. In this context. Private consumption decreased during the second quarter of 2018 and is expected to maintain a very cautious stance for the quarters ahead, depending on the evolution of real income for this year. Please refer to Slide 5, where we include a summary of the current external transition and FX rate evolution in Argentina. Exchange rate experienced a depreciation of approximately 55% during the 1st semester of 2018, while this impact was a strong concentrated in the second quarter. The movement in the peso to dollar exchange parity can be associated to a combination of external factors. From one side related with flight to quality and capital outflows from emerging markets and also to local factors. As a substance of Twin External and the fiscal imbalances amplified the initial effect. During the month of April May, the Central Bank exercised heavy intervention in an attempt to contain the foreign currency demand, thus selling more than $8,100,000,000. But finally, during June, the pace of interventions slow down, leaving most of the adjustment to be done via the exchange rate. In addition, the Monetary Authority exercised an important increase in interest rates in order to counter the disruptive dynamics coming from abnormal behavior of the exchange market, which still prevail in high levels as of these days. The combination of these measures together with the approval of a standby agreement with the INF ultimately led to some relief from the turbulence experience in the external front. Meanwhile, the international reserves position finally showed some marginal increase from the previous quarter due to the fact that the loss of reserves from the aforementioned FX market intervention was offset by inflows from the first disbursement of the IMF signed by agreement for $15,000,000,000 during June. Finally, trade balance accumulated deficit $5,100,000,000 during the first half of twenty eighteen, mostly due to the growth in imports of intermediate goods capital growth accessories and fuel, combined with the mill evolution of exports, which were strongly affected by the slowdown in the agriculture exports. Turning to Slide 6. We follow with an overview of the domestic macroeconomic situation and inflation. During the second quarter of 2018, the CPI measure by the Buenos Aires City experienced an increase as of the past quarter as well as from 2017 year end reasons. We reached 29.8% year over year in June 2018. During the last 3 months period, it has turned evident that inflation has reached a turning point in which the trend is moving to higher rates for the whole year. In fact, this view is reinforced by the main economic consensus published by the Central Bank. In particular, during the second quarter, transport and utilities tariff have suffered increases, and food and beverage adjustments were also relevant. And inflation declined should be observed during the last month of the year in order to achieve the target of 17 As for the economic activity, growth has reduced significantly during the second quarter of 2018. As the wheat and soybean harvest has been importantly affected by climatic Factor. While construction and commerce sectors supported downside in their activity too. Industrial production also observed reductions in the 1st semester of the year. Abandoning is recovery phase and entering into a recessive cycle, although still with a low phase of contraction and sustained mostly by cars and production, which are still outperforming according to the accumulated figures for 2018. As far as physical figures published during the 1st semester of 2018 are concerned, it can be note that government efforts are centered on the achievement of the fiscal target of 2.7% for this year. Primary deficit turn to 0.9% over achieving the expected target set of 1.1% for the 3rd 6 months of 2018. Lastly, although overall household consumption has on solidly to the last quarters of 2017. It was affected during the second quarter and it is expected that it will continue to be impacted during the following months due to the uncertainty coming from higher volatility and economic variables and the rise in inflation. As of June, consumer confidence ratings have fallen significantly and are as on a low historical level. In the challenging macroeconomic context described in the quarter, Telecoma, Argentina has managed to generate a solid revenue growth and an operated profitable increase when compared to past year figures. We do important to remark that the current macroeconomic context still remain with an important degree of uncertainty in the evolution of economic variables. Having gone through this introduction of the macro environment, let me pass the call to Gabriel Lassi, who will go over the vision strategy on the business highlights session. Thank you, Solange. Hello to everyone. As mentioned in the previous call, remember that the merger between telecom and Calabrio is shown was considered an inverse acquisition under IFRS III business combinations, with CableDC on being the surviving entity for accounting purposes. Thus for the purposes of preparing the consolidated financial statements of Telecom Argentina. As of June 30, 2018, further comparative figures as of December 31, 2017 June 30, 2017 correspond to those that arise from the consolidated financial statements of Cablevision at their respective dates and 2, the corresponding information for the 6 months period ending June 30, 2018 incorporates on the basis of figures corresponding to Cablevision, the effect of the of Telecom Argentina Metal of Acquisition at its first value in accordance with IFRS 3 guidelines and the operations of Telecom Argentina as of January 1, 2018. On the other hand, in order to ease the understanding analysis of the earning the evolution by its users, Additional figures of the income statements are included exposing on pro form a basis, the comparative figures for half of first half of twenty seventeen and if the merger between telecom and calibration has been effective during that period. Variations of results versus first half twenty seventeen identified in this presentation emanate from the comparison with the aforementioned pro form a information. Additionally, you may find a detailed pro form a comparison in financial tables 67 10, 11, 14, 15, including our press release. Moving to slide 8, we can find some three trends that we would like to share with you in order to clarify the strategic approach that the company actually has. In recent years, consumption habits are changing rapidly. This situation can be pictured out by taking a look over the on demand content growth with the Yale segment, which represent a 54% of the total consumption. In fact, third time projections highlights that it is expected that 80% of all internet traffic will be video in 2021. Moreover, it is expected that there is going to be a strong and rapid increase in fixed and mobile data traffic by 2021 to which will pose a challenge for telecom industry as a whole as average speed in mobile internet are projected to grow to 20 megabytes per second while average broadband speeds are expected to increase to 53 megabytes per second. In order to face this pent up in demand for higher speed and better connectivity experience, the company is undergoing a process of transformation in order to lead the new telecommunications industry in our country. Let's move to slide 9 to illustrate this fact. The major objective of the company is to become a convergent 12 play provider as well as a Net Promoter Score leader being the indicator of proxy of the overall client infaction with the service. To achieve this goal, telecom is focused on 3 main pillars: the increase of coverage and the capacity of the network the convergence of systems and the transformation of its culture. In this sense, we have reached some important milestones as of today. Over the coverage and network capacity front, the deployment of mobile sites has more than doubled in comparisons with the same period last year. Related to our convergence systems and services pillar, we have achieved an important goal as we complete the first step towards the convergence of systems with implementation of central finance SAP integration. As far as our culture not only defines who we are, but who we want to be. For this, the company is focusing on the personal and professional development of its collaborators on enhancing of their soft and health skills on fostering leadership abilities and promoting integration of diverse teams across the organization. Moving to our business highlights, we can see where we have positioned today. Please refer to slide 11 where we highlight some of the key achievements. During the first half of twenty eighteen, Telecom's revenues totaled ARS 64.2 billion, increasing 29% year over year. Operating income, therefore, D and A totaled ARS23.3 billion in playing a 36% margin of our revenues. In addition, fixed voice ARPU and broadband ARPU were up to MXN 20580.5 per month respectively. Meanwhile, Pay TV ARPU reaches ARS 6.53 and mobile ARPU reached ARS 165. Moreover, in relation with our subscribers, mobile subs in Argentina amounting 1,000,000 of which 11,100,000 were 4G clients. Pay TV subs remained stable amounting 3,500,000 and fixed broadband subs totaled 4,100,000 Finally, and regarding corporate matters, it is important to mention that on June 21, 2018, CVH has promoted and formulated a mandatory tender offer for Class B shares of Telecom Argentina due to having effectively obtained a controlling interest in the company. In addition, on June 21, 2018, antitrust regulator, a the merger between Telecom Argentina and Calabecian. Turning to slide 12, we can observe the revenues breakdown where mobile services business still holds the main participation over telecom revenues, followed by broadband and pay TV. We can highlight that followed by broadband revenues that apart from representing nearly 23% showed a fast growing rate as well as pay TV revenues which accounted for almost 22% participation. In turn, fixed telephony and data represented around 13% while devices achieve 8% of the total revenues. When compared with the first half twenty seventeen consolidated pro form a results, we can see that the revenues grew by 21 percent year over year reaching ARS64.2 billion. As we already mentioned, mobile and broadband are the segments that mostly contribute to the total revenues composition generating revenue for ARS22.400000000014.4000000000, respectively. In addition, The Pay TV revenues totaled ARS 13,900,000,000 followed by fixed and data revenues with the aggregate amount of ARS 8,200,000,000. To a lesser extent, we can highlight the contribution of handsets and other with ARS5 billion and ARS0.2 billion respectively. We will go in some details of this in the following slides. In slide 13, we will go through the evolution of the company mobile business in Argentina. As the intensity in data usage continues to increase, we can observe that there has been substantial growth in postpaid subscribers which represent our high value mobile segment. As of June 2019 postpaid subscribers grew as a percentage of the total achieving 37 percent of the total customer base, up from 33% compared with the same period 2017. In this sense, the intensity of mobile internet usage continues to increase, which as of the first half of twenty nineteen has reached an average of almost 2.5 gigabytes per user per month, which is 58 higher than the first half of twenty seventeen. When we focus in the evolution of our 4G rollout, we can highlight that there has been an important increase on 4G subscribers which totaled $11,100,000 as of June 2018. This rapid growth in subscribers that use the 4G network has been the driver of increasing data traffic since 2015. As 4G traffic represents 72% of the total data traffic with an average consumption of 2.7 gigabytes per versus 2 gigabytes per non 4G users. Please turn to slide 14 where we include a review, the review, sorry, of our internet and pay TV services segments which aim to differentiate and upscale through an enhanced customer experience. Related to our broadband segment, we can point out that the numbers of prescriber grew more than 100,000 year over year, achieving 4,100,000 users. The aforementioned increases in subscribers was supported by the offer of higher connection speeds. As a result, Prescribers with speeds equal or above 20 megabytes have increased to 21%, 29% sorry, the total client base versus 10% over a year ago. The mentioned effect alongside with price adjustment applied contributed to the ARPU growth. In this sense, during the first half of twenty nineteen, the ARPU of our broadband services increases by 42% to more than MXN 5.85 per month. Looking over pay TV services during the first half of twenty eighteen, cable TV subscribers remained stable, while flow boxes achieved 390,000 and almost 890,000 subscribers were using the flow application as of June 2019, increasing authorities read from figures observed a year ago. Moreover, cable TV ARPU increased to more than ARS 680 per month in the second quarter of 2018 up to 41% for the same period last year, while churn stood at 1.1% down from 1.2% in second quarter 2017, evidencing the good level of quality that pay TV services have. Moving to slide 15, we can find the perfect evidence of growth in connectivity demand and usage of merger screen display through the performance of the flow platform during the World Cup. Related to this fact, it is noticeable that the quantity of views through flow application and flow box of the World Cup event since its open ceremony increased by $6,500,000 and total usage of lower during the entire event increased by 20% being mobile, the most attractive device to watch the matches using the application. Additionally, 35% of total views were made through mobile phones, while personal postpaid clients did not consume the data pack due to strategic offer that was released for regulation of the World Cup. On slide 16, we present the consolidated CapEx figures where we continue to focus our efforts to keep our competitive advantage in terms of connectivity. During the first half of twenty nineteen, The Recomm has invested more than ARS 14,000,000,000. Being this amount 35% higher than the same period of last year, The consolidated amount of CapEx represented 22 percent of total revenues, increasing from 21% in the same period last year. Furthermore, we can verify that an important amount of the telecom CapEx was allocated to the FX network, of which mobile access represented 55% followed by fees accessed by 36% another accounting for the remaining 9%. The remaining of technical CapEx was mainly comprised of investment done on our international operations in Paraguay and Uruguay, and of upgrades of the transport network. If this were to highlight that during the 1st semester, Silicom continued with its effort to improve both the fixed and mobile network. In order to achieve this goal, the company continued with the upgrades of copper networks into fiber and HFC networks and deployed around 300 new mobile sites. Additionally, telecom acquired a 700 Megahertz band license in Paraguay that will allow the company's subsidiary of operator quality to mobile services. Having gone through this business highlights, Now I will pass the call to Solange who will go over our financial performance. Thank you, Adrian. We will go over the impact that this positive business plan that described by Gabriel generated over our operating income. Please turn to slide 18 where we can analyze the consolidated revenues and EBITDA. For the third half of twenty eighteen, consolidated revenues amounted almost ARS64.2 billion reaching a growth of 29% year on year. TV revenues and internet revenues followed by mobile service revenues and more specifically, mobile internet. Furthermore, EBITDA showed a strong evolution growing by 37% year on year as we have concentrated in improving our revenue quality and profitability. EBITDA margin increased substantially by 200 basis points to 36% for the first half of twenty eighteen. It is important to highlight that the improvement of the EBITDA margin is explained by a solid performance in cost management as we will analyze in the following slide. Please refer to Slide 19, where we show the performance of EBITDA and the behavior of the different components revenues and costs. The company has taken actions to gain operational efficiencies and manage its cost structure. And these actions have positively impacted our profitability as OpEx has grown below inflation levels of revenue growth. We can observe positive evolution of labor costs over which the company is focusing heavily alongside with commission and advertising, both of which were impacted by some temporary saving and one off. In turn, effective cost management has delivered good results in interconnection costs and physical services, maintenance and materials. Moreover, handset costs were affected by lower additions. These effects have been partially offset by increases in programming and content costs and taxes. The final outcome was the 200 basis point expansion just described before. Let's turn to Slide 20 where we can verify the company operating income totaled ARS3613.7000000000 with a 50% increase year on year. EBIT growth that resulted higher than that of EBITDA can be explained by slower growth in the increase of depreciation and amortization, which stood at 22% year on year. This contributed to the expansion in operating margins to 21 percent of consolidated revenues, increasing 300 basis points when compared with the 17. On the other hand, telecom register and net loss attributable to telecom Argentina of almost 4 point 9,000,000,000. This net loss was mainly explained by higher effect losses linked to the peso depreciation mentioned at our macroeconomic evolution chapter, which affected mainly our current net financial debt position denominated in U. S. Dollar. It is important to highlight that as of June 30, 2018, the restatement criteria of the financial statements published in year 2019 have not been applied. These circumstances must be considered in the evaluation and interpretation of the financial situation and the results presented by the company. If the comprehensive adjustment for inflation is applied and increasing the values of the non monetary items is expected up to the limit of the recoverable value with this consequent effect on the deferred tax and an increase in the net equity of the company, including the contribution of the owners. Likewise, we respect to the results and increase in depreciation and amortization due to the effects of the restatement of non monetary assets is expected mainly those from the former Cablevision business and an improvement in financial results due to the positive results from exposure to inflation due to the excess of monetary liabilities over monetary assets, all of them with a consequent impact on the line of income tax. Turning to slide 21, we present some pro form a key figures for the last 12 months as of the 1st semester and the full year 2017. Company's revenues achieved more than ARS 120,000,000,000 for the last 12 month period ending June 2018, showing an increase of 14% versus the 12 months ending December 2017. Meanwhile, EBITDA amounted more than ARS 41,000,000,000 for the last 12 months period, increasing 18% from the 12 months period 2017. Moreover, EBITDA margin reached 34%. Regarding our gross debt, as of the first half of twenty eighteen, amounted around ARS64 1,000,000,000, but sell through the solid cash and an equivalent and investment position as a company, net debt reached ARS 49,000,000,000. In fact, net debt to EBITDA remains very reasonable and in line with levels considered sound with the telecom industry. Please move on to Slide 22 where we can analyze our maturity schedule. We have a manageable debt profile and many other sources of funds such as vendor financing, log and bank lines and access to local international capital markets for the coming years as we mentioned, a low debt to EBITDA. Moreover, the company is looking to extend the general of its debt, analyzing several possibilities on this front according to the evolution on market conditions. Having concluded with the presentation, we are more than pleased to answer any questions you may have. Thank you very much.