Thank you for joining us today to discuss our second quarter financials and operating results. We have on the line Mr. Daniel Hajj, CEO, Mr. Carlos García Moreno, CFO, and Mr. Oscar Von Hauske Solís, COO.
Hi, Daniela. Hi, everyone. Thank you for being in América Móvil second quarter of 2019 report. Carlos is going to make the summary of the results.
Thank you, Daniela. Good morning, everyone. Well, in the quarter, new uncertainty regarding trade flows in the context of the so-called trade war with China helped bring about a greater deceleration in global economic activity, with 10-year U.S. Treasury interest rates continuing to fall in the latter part of the quarter. They ended June roughly 40 basis points below where they had been at the beginning of the quarter. Even though U.S. interest rates were not expected to keep on rising but were seen as falling in the latter months of the year, the U.S. dollar remained strong versus most currencies. Only the Mexican peso held its ground, appreciating in the second quarter against practically all the currencies in the region, 1.3% versus the dollar, 7.6% versus the EUR, 10.3% versus the BRL, 15.6% versus the COP, and 19% versus the ARS.
We added 1.6 million wireless postpaid subscribers in the second quarter, more than half of which came from Brazil, with Austria and Mexico contributing approximately 200,000 subscribers each. We also disconnected 1.2 million prepaid subscribers in the period, including 700,000 in Brazil and 399,000 in Nicaragua. On the fixed line platform, RGUs increased by 119,000 clients with 369,000 new broadband accesses, one-third of which came from Central America, with Brazil contributing 81,000 clients and Colombia 49,000, and a decline of 157,000 voice accesses. At 7.2% and 6.0% year-on-year, mobile postpaid and fixed broadband remain the main drivers of access growth, with mobile prepaid and pay TV declining 3.4% and 1.9% year-on-year. Fixed voice accesses were almost flat from a year before.
Before going on to the financial results, it is important to highlight that Argentina has been to be a hyperinflationary economy, and because of it, its financial results have to be presented in constant Argentinian peso terms. For purposes of our consolidated results, those results must be translated into Mexican pesos using the closing exchange rate of the relevant period. To ensure consistency in all our comparisons of consolidated figures that are done at constant exchange rates, we will exclude Argentina from our consolidated feeds. For reference, it must be said that in the second quarter, with nominal values, that is with no inflationary adjustments, and at average market exchange rates, Argentina would account for 3.4% of the total revenues of the company. Okay. On second quarter revenues, total MXN 250 billion, and our EBITDA MXN 78 billion. This is under IFRS 16.
Both our service revenues and our organic EBITDA declined in Mexican peso terms from the year earlier quarter, 3.1% and 2.5% respectively, reflecting the fact that the results of our international operations had fallen in Mexican peso terms on account of the strength of the peso. At constant exchange rates, again excluding Argentina, and as you can see in the slides, those of you that are looking at the presentation, you can see that service revenues were seen to accelerate, expanding from 0.8% in the first quarter to 2.3% in the second one. Organic EBITDA growth also picked up to 3.5% in the second quarter from -0.1% in the preceding one. Mobile service revenues were the main driver of revenue expansion, nearly doubling from 2.9% in the first quarter to 4.7% in the second one.
Fixed service revenues also improved, reducing their decline from -1.2% in the first quarter to -0.4%. We are seeing a strong growth in mobile and an improvement in fixed service revenues that are declining less rapidly than they used to be. The fastest growing business lines by revenues were fixed broadband at 7.7% year-on-year and mobile postpaid at 6.3%, as you can see in the slides. Prepaid revenue growth also picked up to 3.4%, as did that of corporate networks at 4.6%. On the other hand, the decline of pay TV and fixed voice revenues continued their decline. Mobile service revenues, again as you can see in the slide, rose very rapidly in Mexico, 8.3%, Brazil 8.9%, 6.9% in Dominican Republic, and 3.3% in Colombia.
Even in the U.S., where we are seeing nice ARPU gains, we've seen an increase of 1.4%. We did see some declines in Peru and Chile, mostly brought about by the reduction in interconnection rates that took place earlier in the year. Okay? On the fixed revenue platform, we saw revenues increasing 8.5% in Colombia, 4.9% in Ecuador, and 2.4% in the Dominican Republic. Also we have seen an improvement in the case of Mexico. They are now falling 1.3% compared to a decline of 4.5% that we had in the prior quarter. We are seeing, again, in some cases, very significant growth rates. Where we have had some declines, we are seeing less important decline this time around. EBITDA growth was, we mentioned, 3.5% at constant exchange rates compared to a decline of -0.1% in the first quarter.
EBITDA growth accelerated sharply in Mexico to 4.7%, and improved noticeably in Colombia and Ecuador to 8.4% and 6.9% respectively. Increases in the Dominican Republic, as you can see in the slide, of 6.4%, in Brazil 4.7%, and in the U.S. 8.2%. Very good increases of EBITDA in the main markets of the company. I am not mentioning Austria because Austria fell after restructuring costs. If you consider the results before restructuring costs, they had an increase of about 3.5%. Our operating profits were up 7.7% to MXN 37 billion, whereas our comprehensive financing cost of MXN 12 billion was down 63% from the prior year, thanks to our having posted a MXN 1.2 billion foreign exchange profit this quarter compared to MXN 30 billion loss last year in the same period.
The foreign exchange gains were instrumental in our turning a MXN 14 billion net profit in the period. That is the foreign exchange gains and our operating profits helped us come up with a net profit in the period, as you can see in the slide. Our net debt ended June at MXN 686 billion, including the capitalized portion of our lease obligations per IFRS 16. Excluding this, the debt stood at MXN 570 billion, which is roughly flat relative to a year before. In cash flow terms, our net debt did increase MXN 19 billion in the six months to June, partly to fund the acquisition of the Guatemala operation from Telefónica. Our outlays totaled MXN 92 billion, and they include capital expenditures of MXN 66 billion, acquisitions of MXN 6 billion, and contributions to pension funds in the amount of MXN 12 billion.
In addition, we had about MXN 7 billion in the shareholder distributions. Finally, you can see here in the slide that our leverage ratio ended up the quarter practically unchanged from the prior quarter at 1.98 times net debt to EBITDA. We still feel that we are very much on track to continue to reduce the leverage ratio throughout this year. Depending on whether we have the acquisition of Nextel closing this year or not, we might end up having a greater reduction of leverage than we were expecting initially. That is what I would have to say. I would like to pass the microphone back to Daniel for the Q&A session. Thank you.
Thank you, Carlos.
Okay, we can begin taking the questions.
Okay. At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Rodrigo Villanova from Merrill Lynch. Your line is open.
Thank you. Good morning, Daniel, Carlos, Oscar, Daniela. My first question is related to the economic environment in Mexico. I was wondering if you expect a negative impact on your Mexican operations as a result of the deteriorating economic outlook. The second question is related to ARPU in Mexico. At MXN 149 and increasing by 6% year-over-year, I was wondering if it's mostly related to higher usage or also to price increases implemented during the quarter in line with what AT&T has been doing. Thank you.
Okay. Hello, Rodrigo. On the question of the economic activity, well, as you pointed out, there's been some recent numbers that have shown industrial production coming down a bit. The GDP figure, I think, for the first quarter was a little bit weaker than expected. A fact of the matter is that a lot of this has been very much limited to mining and construction. That's been the sectors that have been more affected. The consensus economic growth expected for the country, and I just checked it yesterday, is still around 1.5% for the year. Okay? This is the most recent consensus, which is down from about 2% at the beginning of the year, but still not too bad. I think it's partly to do with what happens with oil production, which is important in the figures, but it's probably not that important directly in the economy.
It is the case that in the market, we have seen, as you are seeing now in the report, good increases in revenues and EBITDA, and this is very much driven by consumption. I think that we have a note in the full [Oi report, where we basically say that the data consumption per client in Mexico has increased by 120% year-on-year, and that the MOUs have also continued increasing significantly. I think that they have reached 500 and something minutes, 550 minutes, which makes it the most significant consumption of both in all of Latin America.
Great. To add a little bit more on what Carlos is saying, also remember that the telecom sector is a very defensive sector. It's important to know that I think telecom has become very important for the people, and is still using. What Carlos is saying, megabytes of use in Mexico increased around 120%, and ARPU 6.2%, as you are saying, minutes of usage. Overall, what I can tell you about Mexico is that Telcel and Telmex have substantially increased their investments here. Telmex has increasing their fiber, putting fiber to the curb, fiber to the home. We want to increase the speeds and give more capacity to all of our broadband clients. In Telcel, what we want is we're putting more 4.5G quality, and we want to connect more cities and more locations in the South of Mexico.
We're putting more money to invest and to have more connectivity in the South. All Mexico and specifically more in the South of Mexico. We still have the best network, the best quality, the best customer care centers, attention. Overall, the preference of the Mexicans are for Telcel at this time. It's a little bit in the market. I don't see a lot of increase in prices. We have been increasing a little bit in the prepaid side, in our case, reducing one day in one card. In the postpaid, we're not doing anything. We're still having the same prices, and that's what we have been seeing. Sometimes we have some increase on prices, but then in the market, we see some promotions of our competitors. It's very difficult to understand exactly what is happening in Brazil.
Everybody's saying that they are increasing prices, when you go to the market, then the promotions are reducing in Brazil also there. Talking about Mexico, I think the investments that we have been putting here are working very good, Rodrigo.
Understood. Thank you very much, Daniel and Carlos.
Thank you.
Thank you, Rodrigo.
Your next question comes from Leonardo Olmos with Santander. Your line is open.
Hi, good morning. All my questions are related to Brazil. The first one is related to fixed broadband. If you could give us an update in the context of Oi's strategic plan they released yesterday. We noticed a reduction in the loss of subscribers, which was good for NET or Claro. Looking ahead, what do you see are main challenges in terms of competition in Brazil? Could be Oi, could be the regional players. What do you see are main challenges for NET or Claro in Brazil?
Well, let's talk a little bit about Brazil and divide it in two. The first, talking about the wireless side, I think we have been doing very good. Prepaid revenue's growing 3%, postpaid revenue's growing 11%. I think for the last six or seven quarters, we have been growing very strongly our wireless revenue, and the network is improving a lot. The coverage has been improving also. We have been awarded by one of the best networks in Brazil. The investments that we have been putting in Brazil in the wireless side have been good and we have been growing very good in the postpaid and prepaid side. In the fixed side, I think broadband has been growing also. We have been growing 13%, the revenues in broadband. It's a good market.
I think we're a little bit behind our budget in broadband, I hope we can do our budget this year. Still, the growth in broadband, I think it's going to be We have been having more than 50% of the market share of the ultra broadband customers. In that case, all the ultra broadband customers that we have been having are consuming very well, and they are very happy. We have more than, I think, five million customers with high-speed broadband. The competition, Oscar can talk a little bit more on the competition on the broadband with these small players that we're having all around Brazil, I think we're doing good. On the voice, in the fixed voice, I think we are starting to reduce the decline that we have been having in the last quarters.
It's almost finished, this long distance and this type of services that we're having. Yeah, it's mainly stable. We're not losing too much more. In the TV, the TV is the one that is losing a little bit. We're losing not too many subscribers, but the ARPU is reducing a little bit because of the competition, and it's what is happening all around the world. People want to have fewer channels, more broadband, Netflix, and other streaming services. All around is reducing our ARPU, I think we can sustain that for the next year or so. Oscar can talk a little bit about what is happening in the market in the fixed broadband.
Yeah. As Daniel mentioned, there is this, what is called the small players. They are growing pretty rapidly in the areas that we don't have a network. If we look at our network, we have the HFC network cable ready with DOCSIS 3.0, and we could move easily to DOCSIS 3.1 to deliver really high speeds. All the new homes that we are doing in Brazil, we are doing with fiber. We are using GPON technology. As Daniel mentioned on the ultra broadband, we have more than 50% of market share. I think we have a good network, well-positioned in the market in Brazil. We know that our competitors are building fiber as well. It is a very competitive environment, but we think we have the right infrastructure to be a good player in the market.
We are going to do around 1 million houses.
1.5 million.
1.5 million houses.
Fiber
with fiber.
In Brazil this year.
Yes.
Oh, that's a good number. Yeah, thanks. That's useful. It's good that you mentioned the mobile part, Daniel, because I was going to ask you, was going to be my follow-up question. Once again, you had a very strong addition on postpaid. You mentioned on the earnings release that it's mostly related to prepaid upgrades. My question is, now that you're going to unify the brands all below Claro, do you think the 4P bundles will play an even more important role in the growth of postpaid mobile?
We are unifying our brand. The name of the brand is going to be all the, let's say, massive or residential and prepaid, postpaid is going to be Claro. Still, we're thinking on the corporate side, that is Embratel. All overall, the brand in Brazil, it's going to be Claro. We have our Combo Multi that is leading convergence on the fixed and mobile services, delivering the best value proposition in the market and delivering the most complete and convenient solution for all our customers. Also, if you can see, the churn has been going down. It's been very good, the churn. What Oscar is saying, we have a very good platform in Brazil. We have been investing for the last eight years, improving and increasing our investments the last three years.
We have a very competitive network in the wireless side right now, and in the fixed side, we are still growing and feel very comfortable on what we have.
Okay. That's very good. Thank you very much.
Yeah. Thank you.
Thank you.
Your next question comes from Fred Mendes with Bradesco. Your line is open.
Good morning, everyone, and thanks for the call. I have two questions as well. I think the first one is more of a follow-up on the last one, particularly on the prepaid on Brazil. The other players, they are showing a double-digit drop year-over-year, and you are going in the other direction. You actually show a 3% growth, which is quite interesting. Just trying to get a little bit more of color here. What do you believe is the main point of such a difference? Of course, you're reporting stronger results than the other players, but I think particularly on the prepaid, that definitely called the attention. As a follow-up, if you believe that the price, they are on a sustainable level. This will be my first one. The second one on Mexico, particularly Telmex.
How has the competition behaved, I think in the fixed segment, especially your strategy in terms of price? It looks like Telmex is being a little bit more aggressive on price. Finally, if you can give us an update about the potential pay TV license, this would be great. Thank you.
Question. The first one on the Brazil side, well, what you're saying is true. We have been growing in postpaid, but also in prepaid and beating our competitors there. I just want to tell you that I think mainly it's because we're having a very strong network. We are doing a lot investments in capacity, a lot investments in quality, and that is helping us to give a very good service. I don't want to talk about my competitors, but I think we have a much better network quality, capacity, coverage, in some cases, coverage than our main competitors in prepaid. That's why we are growing. Even though, I think, in some cases, with some packages, they are a little bit more aggressive than us in prices. I was in Brazil last week, the last two weeks ago, and I looked at the packages.
They have some packages for 15 days. We don't have packages for 15 days. They have been very aggressive in some packages, but we feel very comfortable with the network and with the brand, and the distribution also has been good. That's, I think, mainly why we are really growing in the prepaid side. In Mexico, you talk a little bit about Telmex. What I can say is, again, is that Telcel and Telmex has been really substantially increasing the investments here. In Telmex specifically, Oscar can talk a little bit where we're doing and what investments we're doing, but we're mostly putting fiber all around Mexico. Yes, we have been a little bit more aggressive in the broadband side. We have been growing. This year, we have been having around 100,000 new broadband subscribers.
Still, we are not gaining market share, but I think we are on track to again starting to gain market share. Oscar can talk a little bit about the network in Mexico.
Sure. What we are doing in Mexico is we have fiber to the home. We have almost 5 million home passes with fiber to the home. Then the rest, we are doing fiber to the curb in order to use the best technologies using copper. We are using VDSL and pair bonding to improve the speeds of the customers. We are covering all the segments of the market to have the best offering in broadband and combined with other products as Claro Video, Claro drive, security to bundle the offering with more value added than just broadband. It's the push that we are doing in Mexico.
The last thing in Mexico, I think since October, we have been making important changes in our commercial offer, increasing speeds, and including unlimited voice.
In all the packages
in all the packages that we have.
Yeah, that's right.
I think that's more or less what we have been doing.
That's right
in terms of in the commercial side in Mexico. The last one, you asked me about the, which one?
Pay TV. Pay TV, Daniel, please.
Well, I think, IFT has not resolved yet our application to provide pay TV services in Mexico. The application was submitted back in October of 2018. All of the applicable requirements have been met. IFT is conducting an internal review, we hope to receive clearance to compete in such a highly concentrated market soon. I think there is no competition in the TV market. As a result of that, prices has been consistently increasing in the pay TV market. This is affecting all the Mexican consumers. I hope they can give us the license soon. Telmex has only 39% of market share in the fixed broadband and TV segment.
Revenues.
In terms of revenues, we only have 39% market share, Telmex.
Right.
In this market.
Perfect. Very clear, Daniel and Oscar. Thank you.
Thank you very much.
Your next question comes from Cesar Medina with Morgan Stanley. Your line is open.
Hi. Great quarter, guys. Thanks for taking the call. The question was regarding the functional separation. What is the stage of the process? Then the second question, we saw a significant improvement in margins in the U.S. Can you comment on what are the trends that you're seeing in this market as well? Thank you.
Yes. Well, on the functional separation, the company's working diligently to assure compliance to IFT imposition as part of the functional separation. The due date for the separation is around March 2020. At this time, there is nothing specific to comment on this process. There's nothing more to comment on that. On the U.S., well, I think, and as I told in the first quarter, that TracFone is doing good. I think we are growing, or much of the gross adds of our subscribers has been improving. Revenues also has been improving. We are on track with our budget. If we can see 2019 for TracFone, my view is that we're going to have around the same EBITDA margin that last year, and we are going to grow, taking out SafeLink, around 300,000 subscribers, different than the last year that we lost subscribers.
All overall, TracFone is going to be much better in terms of net additions, and we're going to have around the same EBITDA that we have last year. That's more or less. If we have in one quarter, maybe we have a little bit more subsidies in one quarter than in the other one. All overall, I think we are on track with the budget that we have on TracFone.
Thank you.
Thank you.
Your next question comes from Carlos Legarreta with GBM. Your line is open.
Hi. Thank you. Good morning. Thank you for taking the question. In both in Mexico and Brazil, you saw an EBITDA expansion of mid-single digit. I was wondering if you could give us sort of some color on how much of that comes from just increased usage, or top-line growth? How much of that comes from internal efficiency at the OpEx level? Thank you.
if you see the numbers in both countries are both, no. We're increasing revenues, and we are really being cutting costs all around. The efficiencies have been very good. We have a more good networks, more efficient networks, digitalizing a lot of our things. We have really a good strategy on trying to digitalize everything that we have, customer care, IT.
Billing.
Come again?
The billing.
Billing, everything we have been trying to digitalize, and it's giving us a lot of efficiency. I can tell you that the Mexico, Brazil, and in Colombia, that we have been having a very good quarter in Colombia, it's because we're growing in the revenue side and we're cutting costs in the others.
Yeah. Again, just to summarize what we saw before, service revenues in Mexico are growing 8.3% on the mobile platform and the fixed line platform, where they have been falling, they have reduced their decline, and they were down only 1% in the quarter. If you look at mobile ARPU, mobile ARPUs in Mexico were up 6.2%. I think there's a lot to be said about top-line growth, supporting the growth of EBITDA.
Thank you. I understand. If I may, a follow-up. In the Mexican fixed line market, do you think the deceleration of the decline in this market in terms of top line, is it explained mostly by the improvement in the corporate segment, or are you also seeing an improvement on the mass market side?
I think we're doing very good in the corporate segment. We're doing good. We're going to improve more on the mass market. The big investments and the substantial investments that we're doing in the fixed side are also in the mass market.
That's perfect. Thank you.
Your next question comes from Juan Pablo Alba with Credit Suisse. Your line is open.
Hello. Good morning. Thank you for taking my question. My first question is just, I know there's been a lot of questions now in terms of the fixed side in Mexico, but just one last thing. I just wanted to get a little bit more color, if you may, in terms of if you're seeing any macro impact on the fixed side in Mexico regarding the mass market and also in terms of the Corporate, if you're seeing some government spending there or if it's only enterprise. That's my first question. My second question is just around Colombia and mobile market. I would like to see some color there in terms of what's driving the good results. That's it. Thank you.
Well, let's start in Colombia. I think in Colombia, we have very good improvements in service revenue, 5.2%, from 3.4 last quarter. Our increase in service revenue is very good. Postpaid is driving 6.1% of that growth. Also the fixed revenues, it has been very good. Broadband is increasing around 11%. I think in Colombia, in the prepaid and postpaid, we have been increasing a lot our capacity, our coverage. ARPU is growing 6.9%, we're selling a little bit more to our customers. Customers are using more our service, it's increasing. Also it's one of the countries where paid TV services is growing very good. In Colombia, I can see in the wireless and on the fixed, both doing excellent. Still, data usage is not so big. It's low.
I think we have still a good opportunity to increase that, selling a little bit more to our customers. I'm happy. Our networks have been improving, giving more 4.5G, and increasing speeds. All overall in Colombia is doing good. In Mexico, well, still we are not seeing, as Carlos is saying, still we are not seeing any recession. I'm sure that the government is spending less, we are not seeing that in our business at that time.
Thank you very much.
Again, to ask a question, please press star one on your telephone keypad. Your next question comes from Andre Baggio with JP Morgan. Your line is open.
Hi, good morning. I would like to know how is the outlook for América Móvil to get a pay TV license in Mexico. We have heard about this topic in the last quarters, but we have not seen any action. Do you think that this could happen till the end of the year?
We don't know. As I just said, IFT has not resolved yet our application. The application we submitted in October of 2018, we give them all the requirements that they need. We still don't know. We hope, as I said, the only segment of the telecom market that is increasing prices is in the pay TV, I think both for the Mexican people will be very good if they have more competition. That's what I see. I hope we can have the license at the end of the year.
Perfect. Can you clarify a little bit more on this pension payment? We have seen this throughout the year, a tremendous amount of payments to pensions in América Móvil, Telmex, and can you give some outlook that we'd expect on recurring basis in next years?
I don't understand your question. I don't think we have any change on the pension payments and pension fund on Telmex. We have been having that for time. There's nothing new, nothing change. I don't have the specifics here. There's nothing new on that pension fund.
Okay. That's all then. Thanks a lot.
Thank you.
Your next question comes from Carlos Sequeira with BTG Pactual. Your line is open.
Hi. Thank you. Good morning. I have just one follow-up question on Baggio's question on the pay TV license. My question is, how relevant would you think getting a pay TV license is today in Mexico? Given what has happened to the pay TV business in several different markets and you have other ways to provide pay TV services, is it really that important to have a license at this point in Mexico? Thank you.
Well, what you are saying it's right. I think the TV and the pay TV is reducing in some markets. Still, as you see, in Colombia, it's growing. I think it's important and that all the players have convergence, that they can give convergence. They can do fixed, broadband, and pay TV. That's the triple play, I think, in the house, people is expecting to have the three services, and that's really the reason why we are asking that. On the other, that's why we want to do that. The penetration in the pay TV in Mexico is still low. It's average, but still we can have a little bit more penetration there. The importance also is to have more competition. Prices, it's the only place where prices has been increasing, and we want to bundle our services with the pay TV.
That's the reason to have that.
It makes sense. Thank you.
Thank you.
There are no further questions queued up at this time. I turn the call back over to Mr. Daniel Hajj.
Okay. No, I think.
No more questions means you did a very good job.
I want to thank everybody for being in the call. Thank you.
Thank you all.
This concludes today's conference call. You may now disconnect.