Earnings Call: Q1 2018

May 14, 2018

Good day, everyone, and welcome to the Telecom Argentina CEO 1st Quarter 2018 Earnings Conference Call. Today's call is being recorded. Purchase fitting on today's call, we have Mr. Gabriel Bloste, Chief Financial Officer and Ms. Solange Bartay Denon, Investor Relations Manager. At this time, I'll turn the call over to Ms. Salange Bartay Dennan. Please go ahead, ma'am. Okay. Thank you, Madi. Good morning on behalf of Piacomodentina. I would like to thank everybody for participating on this conference call. As stated by our moderator, the purpose of this call is to share with you the results of the first quarter 2018 ended March 31, 2018. We would like to remind all of those that have clarified our press release presentation that they can call our Investor Relations office to request the documents or download them from the Investor Relations section of our 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 sections and can also be replaced with 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 will usually go in this type of events. We would like to clarify that during the conference call and Q and A session, we may present certain forward looking statements about telecom's future performance, plans, strategies on target. Such statements are subject to uncertainties that could cause telecoms actual results and operations to differ materially. Such uncertainties include what are not limited to the effects of ongoing industry and economic regulation possibly changes in the demand for telecom products and services and the effects of more general factors such as changes in their market or economic conditions in their situation or in regulation. I will personally make it May 11, 2018, A copy of lead has been included in a found 6 Ks report furnished to the SEC. Despite certain factors that any forward looking statements that we will be presenting in this session. First of all, we urge the audience of this conference call to review the came up to us containing slide 1 and 2 of the presentation. The agenda for today's conference call seen in slide 3 is first to go over our general macro and industry overview then moving on to our regional strategy will be followed by a little 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 its customary in our quarterly calls with the financial community. Having gone through various procedural matters, I will now go over a base card authorization of the macroeconomic context in which we operate. Continuing with the turn observed during the second half of twenty seventeen, economic activity continue to reduce residuals rate with a positive performance of most sectors. In turn, the pace of decline of inflows low to the 3 and regulated prices were impacted by tight hit while core inflation remained all and K2 when compared with the last month of 2017. In this context, private consumption is still showing a positive reaction on the adoption of a cautious stance ahead of evolution of net income for this year. Please refer to Slide 5 where we include a summary of the current external fraud situation and FX rate evolution in Argentina. Exchange rate experienced depreciated approximately 7% during the first quarter of 2018, but during this last days, the best of the appreciation has ramped up to almost 20%. In general terms, the central bank has exercised a heavier intervention that a search in diversification, selling currency for $2,000,000,000 in March, but reaching a total of $7,700,000,000 as of the 1st day of May 2019. As for interest rates, the Monetary Authority began to sides a reduction of policy reference rates during the first quarter as inflation targets for 2018 has been relaxed to 3% in December 2018, but as the peso depreciation began to rise in speed, an important It's implemented a sharp rise in order to avoid both see the dynamic in the exchange markets that can compromise the decentralization process. Meanwhile, a combination of international reserves show a positive balance as of March 2018 as capital inflows for international debt issuances allow a net increase to around $62,000,000,000. Now,withstanding this fact, pending provincial performed by the Central Bank brought the merchant level back to levels closer as of the end of 2017. Finally, trade balance accumulated a deficit of $2,500,000,000 during the past year, mostly due to the growth on imports of capital goods, its accessory and passenger vehicles combined with a nail evolution expo. Coming to Slide 6, we will follow with an overview of the domestic macroeconomic situation and inflation. During the first quarter of 2019, the CPI measure by the Buenos Aires City experienced a decrease from the full year 2017 reasons, we are looking at year over year figures reaching 25.4% in March 2018. During these 3 months period, it has turned evidence that inflation figures have a high persistence as increases in public services are being implemented. In particular, during this quarter, transport and electricity tariff had suffered increases. Besides this, core inflation measures remain still at similar monthly levels that both registered at the end of 2017 and partially affected by the FX rate evolution. This shows that inflation decline may slow down materially such that is reflected on the main economic incentive and inflation that is published by the central bank. As for the economic activity, outputs continue to grow during the first quarter of 2018 at a similar rate with the main pool of activity being exercised by the construction sector. Namil Delhaize, as agriculture has been affected strongly by climate factors. The total effect of our activity remains yet to be team. As for industrial production, it has expanded its growth rate during the first quarter of 2019, registering an increase of 3.9% versus the first quarter 2017 mainly pushed by car and steels and by intermediate and durable goods products Considering fiscal figures. During the first quarter of 2019, it can be observed that government efforts are centered on over achievement on the fiscal target, primarily deficit currency of 0.3% half of an expected target set of around 2.6%. In fact, national authorities have remained public we are considering our ambitious goal for 2018, certain the fiscal target to 2.7% of GDP from the previous 3.2% accounted for this year. Finally, as a date, hospital consumption has recovered only during the last half of twenty seventeen and continues to show a stable trend of growth. STAY consumers are cautious as how processing may be impacted by the evolution of inflation in relation to household income increases as it may be observed in consumer confidence evidence that remains volatile in the macroeconomic context described during the quarter, Telecom Argentina has managed to generate a solid revenue growth and a profitability increase when compared to past year figures. Finally, we deemed important to remark that in the current macroeconomic context the degree of uncertainty of economical variables has increased and in particular, FX monitoring and highly volatileized during these days. Having gone through this introduction of the macro environment, let me pass it over to Rodrigo who will go over divisional strategy and the business highlights section. Thank you so much. Hello to everyone. The merger between Telecom and Cablevision was considered an inverse acquisition under IFRS 3 business combinations, with Cabaretacion being the surviving entity for accounting purposes. Thus, the purposes of preparing the consolidated financial statements of Telecoma and Argentina. As of March 31, 2018, First, the comparative figures as of December 31, 2017, and March 31, 2017 correspond to those arise from the consolidating financial statements of Calvivision at their respective dates. And second, the corresponding information for the 3 month period ended in March 31, 2018 incorporates on the basis of figures corresponding to Galavician the effect of the application of telecoms, Argentina's method of acquisition and 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 their understanding and analysis of their needs evolution by infusers, additional figures of the income statements are included, exposing on pro form a basis the comparative figures of first quarter of 2017 as is the merger between telecom and calibration have been effective during that period. The variations of results versus first quarter 2017 identified in this presentation M and A from the comparison with the aforementioned performing formation. Additionally, you may find a detailed pro form a comparison in financial tables 6, 7, and 9, in periods in our press release. Please refer to Slide 8, where we want to share with you how we are transforming the company to be competitive and leaders in what will be the new era of the communication industry in our country. The major objective of the company is to become a fully convergent foreplay provider as well as a Net Promoter Score leader. This indicator shows overall client satisfaction with the service. As a consequence of this, we are able to quantify our customer satisfaction in relation with the price and the service. To achieve this goal and be able to deliver a value added proposal to recognize focus on 3 main pillars. The extension of coverage and the capacity of the network, the convergence of systems and the transformation of its services and culture. These pillars provide the foundation of achieving a list of items that are essential to reach our goal, which are improving the quality of services experience and media content, having a network with major market satisfaction, a fast and successful adequacy of processes and software allowing a customer centric culture and focusing on big data analytics are real time digital. We are confident that improving this among many other aspects will get us to the top. Please refer to slide 9, where we will show some of the industry trends and market evolution. During the past year's consumption habits have changed We can evidence the situation by taking a look over the content on demand growth with a yield segment, which represents a 54% of the total consumption. In line with this, we see that the usage of mobile devices has grown consistently replacing the usage of desktop computers and traditional TV. Therefore, there has been a strong and rapidly increasing data traffic consumption due to the fact that the possibilities in usage have also grown consistently. So, when we take a look over the market evolution, can see that there is significant potential for growth in the fixed broadband segment, which is today one of the main drivers of the company revenues. Regarding the mobile market, we evidence that the postpaid customers have a winning market over filtering subscribers. On the other hand, the pay TV market has shown stability in the last few years, mainly supported by both by the pattern of consumption of people over 45 years and the development of our demand platforms. Moving to Slide 10, we can take a look over the next steps that the company has been taking over the last month and the progress in every front. The opportunities offered by the merger are related to a customer centric vision strategy. In order to achieve the maximum potential of revenue growth and profitability, The company is carrying out a series of enhancements of its processes and technical platforms. With respect to that again, in particularly, we can highlight SAP integration. In this end, we received SAP prototype, which has been tested for implementation between June August of this year. Moreover, associated to the initiatives that have a high effect in the customer at the front end, we continue working in different development fronts and intensity testing activities in order to achieve the objectives of the implementation. In addition to this, and together with no Gabelli Labs, We are currently working on the consolidation of our backbone network and carrying out important network improvements. During the quarter, we conducted a test of 5G network under control environment will achieve a speed of 10 gigabits per second. Let's move to our business highlights. Referring to slide 12, where we highlight some of our key achievements during the first quarter of 2019. For the fourth quarter of 2018, Telecom's revenues totaled ARS 30,700,000,000, including percent over the year. EBITDA totaled ARS 11,800,000,000, resulting in a margin of ARS 38 In addition, fixed voice ARPU and broadband ARPU were up to 198 and 578 pesos per month, respectively. Meanwhile paid TV ARPU reached 6.37 pesos and mobile ARPU reaching MXN 161. Moreover, and in relation with our subscribers, mobile subs in Argentina amounted $19,500,000, of which $10,500,000 were 4G clients. Fixed based subs registered $3,700,000 and fixed broadband subs totaled $4,100,000. Finally, it is important to mention some relevant corporate matters. During the first quarter of 2019, Telecom issued 1184,500,000 new shares for Callevizion SA Shareholders. I mean, the merger between both companies. Additionally, during the quarter, the company has taken a syndicated loan for an amount of $1,000,000,000. Moreover, the company has declared by card division of AR4 1,000,000,000 and also it has distributed ARS13 billion in cash dividends in February 6,000,000,000 in March. Turning to Slide 13, we can see a brief summary of the merger between telecom and cattle ratio as well as the new ownership of structure. On January 1, 2018, the merger between telecom and Cablevision become effective. In order to complete the transaction, Telecom issued 1194,500,000 new shares for Cablivitian shareholders. All the resulting company share classes have equal economic and bulking rights. Therefore, the ownership of structure of the company change and calibration quality CVH become the controlling shareholder. Fintech Telecom LLC owns as of today 31.53% at company total capital to Class A shares where CDH owns 18.75 directly and also owns 20.06 percent and directly through BOT, Argentina LLC. In addition, floating shares that is Class B shares represent 29.65 percent of total capital and Class C shares account for 0.01 percent of company's total capital. In addition, fintechs Telecoms owns 8.24% of the total capital, so Class B shares. Turning to Slide 14, we can observe that the main driver of growth of telecom revenues are the ones coming from mobile, which is still the most prominent business of all. We can highlight that the current revenue mix has a participation of mobile revenues of almost 26% followed by broadband revenues that apply from representing more than 22% of the total, it is the most fast growing segment. Revenues related to pay TV services accounted for 22 percent of total revenues followed by the ones coming from fixed and data which represented almost 12% and devices with more than 7% of the total revenues. When compared with the first quarter 2017, consolidated pro form a results, we can see that the revenues grew by 27% year over year reaching 30 1698,000,000. As we already mentioned, mobile and broadband as the segments that no continues to the total revenues composition with $10,945 and ARS 7153,000,000 respectively. Additionally, the KTV revenues totaled 6666,000,000 followed by fixed and data with the aggregate amount of AR3625 1,000,000. To a lesser extent, we can highlight the contingent of handsets of others with ARS 2195,000,001 1,000,000, respectively. We will go in some details of this in the following slide. Slide 15, we will go through evolution company's mobile business in the country. As intensity data usage continued to increase, we can note the growth in the postpaid subscribers let me present our most valuable customers. As of March 2019, postpaid clients totaled 6.7000000, representing 76% of the total customer base. In connection to this, data penetration grew by 13% reaching 9,700,000 monthly unique users. Credit users are gaining participation, boosting the consumption of mobile data which as of first quarter 2019 has reached an average of more than 2.3 gigabytes per user per month. Which is 59% higher than in first quarter 2017. In addition, the significant growth in data usage has contributed to increase the growth in revenues and its participation in the mobile revenue mix, which now represent 51% of our total mobile services mix, up from 45% 35 a year ago. As far as dosing ARPU is concerned, which has risen by 35%, reaching more than 191p per month. Moving to Slide team, we included a review of our 4G rollout evolution. Casana's 4G LTE network deployment carries on swift fleet as coverage continue to expand 40 high speed services that are now available in almost 1000 two hundred locations. Including all capital cities at the Buenos Aires metropolitan area, reaching a coverage ratio of 94% of the population in such cities, 86% of total population. More importantly, 4G customers totaled $10,500,000 as of March 2018, This rapid growth in subscribers that use the network has been the driver of data traffic since 2015. Additionally, of this 4G traffic represents 71% of the total data traffic with an average consumption of 2 6 gigabytes versus 1.7 gigabytes for the non 4G users. Please turn to slide 17 where we include a review of our internet services segment with the positive or differentiation from customer experience. Related to our broadband segment, we can evidence that the number of drivers grew more than 155,000 year over year, achieving 4,100,000 users. The aforementioned increase in subscribers was supported by the offer of higher connection speeds. As a result, the number of winter broadband subscribers achieved more than 1,000,000 subs in the first quarter of 2018 from 225,000 subs in first quarter of 2017. Price adjustment contributed to the ARPU growth. In the sense, during the first quarter of 2017, the ARPU for broadband services decreases by 52% to more than 5.78 per month. Now let's turn to Slide 18. Where we can take a look over pay TV services during the first quarter of 2018. As we can see, cable TV subs remain stable. While flow boxes achieved 292 consultant at almost 707 constant subscribers using the flow app. Moreover, cable TV ARPU achieved more than 6.36 percent per month, while churn remained stable at 1.2%. As far as premium subscriber are concerned. They are growing at a rapid pace over the last quarters. And as of March, 2019, amounting waypoint 2,000,000 subs. Please move to slide 19 where we analyzed the fixed telephone evolution over the last quarter. As we can see lines in service remains stable. Despite of the fact that price adjustment took place over the quarter, we assessed a 3% increase, the mobile fee and 15% increase in the trade for our net plus both in February. As a consequence of these ARPU increases to almost MXN 200. During the first quarter of 'nineteen, fixed data and ICT services achieved ARS 1,000,000,000 with a growth of 27% year over year. It is important to mention that the appreciation of the Argentinian pesos, the American dollar was of 26% when compared with the same period. On slide 20, we present the consolidated CapEx figures where we continue to focus our efforts to give our competitive advantage in connectivity. In the fourth quarter 2018, Telecom has invested more than ARS6 1,000,000,000, 35 percent higher than the same period of last year. Furthermore, personal together with Nokia asset immunological partner contacted to the latest of 5G network under control environments We're achieving speeds of 10 gigabytes per second. The 5G standard is a technological resolution of more networks that powers the IoT in its main application will be Automotive Spaces houses connected to Smart Cities and at the intelligence applied to the industry and health. In addition, we can verify that the CapEx distribution has been 48% in cable services, 32% mobile services and 20% fixed services of the third quarter of 2018. It is important to mention that during February 2018, we announced that we would invest $5,000,000,000 between 2018 and 2012. This amount will be mainly used to increase the telephora mobile internet radio basis to extend the MGM next generation neighborhoods and to expand and improve the connectivity infrastructure is always to be able to provide multi play services in the framework of convergence. As we mentioned before, it is challenging by economic context, the evolution of main economic variables remain uncertain and will have to be closely monitored. Although the telecom industry is locally considered in transit sector, the mentioned CapEx plan is linked to the performance of the business, the strategic plan does not change although execution over time will depend on the macro business evolution. Having going through the business highlights, now I will pass the call to Solange who will blow our financial performance. Thank you, Gabriel. The positive business trends just described by Gabriel have been targeting a very positive performance in almost all financial results. Please turn to Slide 22 where we can analyze the consolidated revenues and EBITDA. For the first quarter 2018 consolidated revenues, amount almost ARS3.7000000000 reaching a growth of 27% year on year. In turn, service revenues grew 26% thanks to a strong performance of mobile service revenues of more specifically mobile internet together with blood run and ACD. Furthermore, EBITDA shows strong evolution going by 39% year on year as we have concentrated In improving our revenue quality and profitability, BBA margin increased substantially by 3 hundred basis points to 38% for the first quarter 2018. It's important to highlight that improvement of the EBITDA margin explained by synergies achieving interconnection financing costs, but also, but some one time cost savings related to the integration of both companies. Let's turn to Slide 23, we can verify the company operating income totaled ARS7.1 billion with a 59% increase year on year. EBIT growth that resulted higher than that of EBITDA can be explained by slowdown in the increase of the situation and amortization and disposal and impairment of PPME, which is stood at 17% year on year. This contributed to the expansion in operating margins 20 percent of consolidated results, including 4 100 basis points when compared with the first quarter of 2017. Meanwhile, net income attributable to the controlling company reached almost ARS3.5000000000, increasing by 17% year over year. This lower increase in net income was mainly explained by an important decrease in financial results linked to the vessel depreciation observed in the first quarter and higher net financial debt position and higher income taxes. As a result, net income margin stood at 11% down from 12% a year ago. Turning to slide 24, we present some pro form a key figures for the last 20 for the last 12 months as of first quarter 2018 and the full year 2017. Regarding company's revenues, they achieved more than 1,000,000,000 basis for the last 12 months period ended the first quarter 2018 showing an increase of 6%. Meanwhile, EBITDA amounted more than ARS 38,000,000,000 for the last 12 months period in 29% Moreover, EBITDA margin reached 34%. Regarding our gross debt as of March 2018 amounted to ARS 46,000,000,000 but thanks to solid price and equivalents and investment position of the company, net debt reached ARS 32,000,000,000. This also offers strong head against market volatility. Please move on to Slide 25 where we can analyze our net debt and maturity of the debt. The following is a description of the current maturity of the company We have positive notes issued on international amicable market, domestic capital market notes, debt removal, multilateral agencies, land of financing and overdraft with local banks. As we mentioned before, we issued a syndicated loan of $1,000,000,000 with Five Bank in February. We have a manageable debt profile and many other sources of funds such as vendor financing, local bank lines access to local international capital markets for the coming years, and a low debt to a GDA ratio. Moreover, the company is waiting for the right time to extend the turnaround of its debt according to an evolution of the market conditions. Having conclude with the presentation, we are more than pleased to answer any questions you may have. Thank you very much.