Earnings Call: Q2 2019

Jul 17, 2019

Quarterly report

Thank you for joining us today to discuss our 2nd quarter financial and operating results. We have on the line Mr. Daniel Cash, CEO Mr. Carlos Garcia Moreno, CFO and Mr. Oscar Monjowski, COO. Hi, Daniela. Hi, everyone. Thank you for being in America Movil's Q2 of 2019 report, and Carlos is going to make the summary of the results. Thank you, Daniel. 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 Q2 against practically all the currencies in the region, 1.3% versus the dollar, 7.6% versus the euro, 10.3% versus the Brazilian real, 15.6% versus the Colombian peso and 90% versus the Argentinian peso. We added 1,600,000 wireless posted subscribers in the 2nd quarter, more than half of which came from Brazil, with Austria and Mexico contributing approximately 200,000 subscribers each. We also disconnected 1,200,000 prepaid subscribers in the period, including 7,399,000 in Nicaragua. On the fixed line platform, RGUs increased by 119,000 clients with 359,000 new pulp and accesses, onethree of which came from Central America, with Brazil contributing 81,000 clients and Colombia 49,000 and a decline of 157,000 both access. At 7.2% and 6.0% year on year, mobile postpaid and fixed broadband remained 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 deemed to be a hyperinflationary economy. And because of it, its financial results are 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 fee. For reference, it must be said that in the Q2, 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? Well, on the 2nd quarter revenues totaled ARS 250,000,000,000 and our EBITDA, ARS 78,000,000,000, if it's under IFRS 16. Both our service revenues and our organic EBITDA declined in Mexican peso terms from the year earlier quarter, 3.1 percent and 2.5 percent, 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 minus 0.1% in the preceding one. Well, mobile service revenues were the main driver of revenue expansion, nearly doubling from 2.9% in the Q1 to 4.7% in the second one. And then fixed service revenues also improved, reducing the decline from minus 1.2% in the first quarter to minus 0.4%. So 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 is 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, as again, as you can see in the slide, rose very rapidly. In Mexico, in the Dominican Republic and 3.3% in Colombia. And even in the U. S, where we're seeing nice ARPU gains, we've seen an increase of 1.4%. But we did see some declines in Peru and Chile, mostly brought about by the reduction in the connection 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. But 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. So we are seeing again, in some cases, very significant growth rates. And 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 rate compared to a decline of 0.1% in the Q1. But EBITDA growth accelerated sharply in Mexico to 4.7% and improved noticeably in Colombia and Ecuador to 8.4% and 6.9%, respectively. You see increases in the Dominican Republic, as you can see in the slide of 6.4 percent in Brazil, 4.7% and in the U. S, in the U. S, 8.2%. So very good increases of EBITDA in the main markets of the company. And I'm also mentioning Austria because Austria fell after restructuring costs. But if you consider the results before, the construction cost, they had an increase of about 3.5%. So our operating profits were up 7.7 percent to say ARS 7,000,000,000 whereas our comprehensive financing cost of ARS 12,000,000,000 was down 63% from the prior year, thanks to all having posted a ARS 1,200,000,000 foreign exchange profit this quarter compared to MXN 30,000,000,000 loss last year in the same period. The foreign exchange gains were instrumental in our turning of ARS 14,000,000,000 net profit in the period. That is the foreign exchange gains and our operating profit helped us come up with a net profit in the period, as you can see in the slide. Our net debt ended June at ARS686,000,000,000, including the capitalized portion of our lease obligations, the IFRS 16. Excluding these, the debt stood at ARS 570,000,000,000, which is roughly flat relative to a year before. In cash flow terms, our net debt did increase ARS 19,000,000,000 in the 6 months to June, partly to fund the acquisition of the Guatemala operation from Telefonica. I will outlast totaled ARS 92,000,000,000 and they include capital expenditures of ARS 66,000,000,000, acquisitions of ARS 6,000,000,000 and contributions to pension funds in the amount of ARS 12,000,000,000. In addition, we had about ARS 7,000,000,000 in the shareholder distributions. And finally, you can see here in the slide that our leverage ratio ended up the quarter practically unchanged from the prior quarter at 1.98x net debt to EBITDA. We still feel that we're very much in track to continue to reduce the leverage ratio throughout this year. And 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. So that's what I would have to say. I would like to pass the microphone back to Daniel for the Q and A session. Thank you. Thank you, Carlos. Okay. We can begin taking the questions. Your first question comes from Rodrigo Villanueva 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. And the second question is related to ARPU in Mexico at MXN 149 and increasing by 6% year on 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 and T has been doing? Thank you. Okay. Hello, Rodrigo. And on the question of the economic activity, well, as you point out, there has been some recent numbers that have shown the industrial production coming down a bit. And the GDP, I think, for the Q1 was a little bit weaker than expected. The 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. And 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. So 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. And it is the case that in the market, we have seen, as you are seeing now in this report, good increases in revenues and EBITDA. And this is very much driven by consumption. I think that we have a note in the U. S. U. S. Oil 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, 5:50 minutes, which makes it the more significant consumption of both in all of Latin America. Okay. To add a little bit more on what Carlos is saying. And also, remember that the telecom sector is a very defensive sector. So it's important to know that I think telecom has becoming very important for the people and is still using. And what Carlos is saying, megabytes of use in Mexico increased around 120% and ARPU 6.2%, as you are saying, minimums of usage. And all overall, what I can tell you about Mexico is that Telcel and Telmex has substantially increased their investments here. So Telmex has increasing their fiber, putting fiber to the curb, fiber to the house. So we want to increase the speeds and give more capacity to all of our broadband clients. And IntelCell, what we want is we're putting more 4.5 gs quality and we want to connect more cities and more locations in the south of Mexico. So 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. So we still have the best network, the best quality, the best customer care centers, attention. So all overall, the preference of the Mexicans are for Telcel at this time. So 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. But 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. So it's very difficult to understand exactly what is happening in Brazil. Everybody is saying that they are increasing prices, but when you go to the market then the promotions are reducing in Brazil also there. So 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, Rodrigo. 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 Fit to Broadband. If you could give us an update in the context of Oi's strategic plan that we released yesterday. We noticed a reduction in the loss of subscribers, which was good for Fernando Oclaro. But looking ahead, what are the main challenges in terms of competition in Brazil? Could be OE, could be the regional players? What do you see your main challenges for NAT or cloud in Brazil? Well, let's talk a little bit about Brazil and divide it in 2. The first talking about the wireless side, I think we have been doing very good. Prepaid revenues growing 3%, postpaid revenues growing 11%. I think for the last 6 or 7 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. So the investments that we have been putting in Brazil in the wireless side have been good, and we have been growing very, 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. And it's a good market. I think we are a little bit behind our budget in broadband, but I hope we can do our budget this year. And still, it could be very, very the growth in broadband, I think, is going to be We have been having mainly more than 50% of the market share of the ultra broadband think On the we have more than I think more than 5,000,000 customers with high speed broadband. So 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. But I think we're doing good. And on the voice, in the fixed voice, I think, yes, starting to reduce this line that we have been having in the last quarters. Yes, it's almost finished this long distance and this type of services that we're having. So yes, it's mainly stable. Yes, we are not losing too much more. And in the TV, the TV is the one that is losing a little bit. We're losing not too much competition. And it's what is happening all around the world. So people want to have less channels, more broadband, Netflix and other streaming services. So all around is reducing our ARPU, but I think we can sustain that for the next year. So but Oscar can talk a little bit about what is happening in the market in the fixed broadband. Yes. 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 HFC network cabled with ready with DOCSIS 3.0 and we could move easily to DOCSIS 3.1 to deliver really, really high speeds. And all the new homes that we are doing in Brazil, we are doing with fiber. We're using GPOWN technology. As Daniel mentioned, on the ultra broadband, we have more than 50% of market share. So I think we have a good network, well positioned in the market in Brazil. We know that our competitors are building fiber as well. So it's a very competitive environment, but we think we have the right infrastructure to be a good player in the market. We're going to do around 1,000,000 houses. 1,500,000. 1,500,000 houses. Fiber. Fiber. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. Fibers. It's good that you mentioned the mobile part, Daniel, because I was going to ask you what's 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. But my question is, now that you're going to unify the brands all below Claro, do you think the 4P bundles will be will pay 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 Sembratel, but all overall, the brand is going to be 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. And also if you can see the churn has been going down. It's been very good, very good the churn. So what Oscar is saying, we have a very good platform in Brazil. We have investing for the last eight years in improving and increasing our investments in the last 3 years. So we have a very competitive network in the wireless side right now. And in the PIC side, we are still growing and feel very comfortable on what we have. Okay. That's very good. Thank you very much. Thank you. Thank you. Your next question comes from Fred Mendez with Bradesco. Your line is open. Good morning, everyone. Thanks for the call. I have 2 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 like a double digit drop year over year. And you are going on the other direction. You actually show like 2% growth, which is quite interesting. So just trying to get a little bit more of color here. What do you believe it 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 we called the attention. Then as a follow-up, if you believe that the price they are on a sustainable level, this will be my first one. And then the second one on Mexico, particularly to Max, how has the competition behaved in the FIG segment, especially your strategy in terms of price? It looks like Telmex being a little bit more aggressive on price. And finally, if you can give us an update about the potential PayTV 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. And I just want to tell you that I think mainly is because we're having a very strong network. So we are doing a lot investments in quality, and that is helping us to give a very good service. So I against my other 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. So that's why we are growing. Even though I think they are in some cases with some packages, they are a little bit more aggressive than nothing prices. Hyundai was in Brazil last week, last week in the last 2 weeks ago. And I looked at the packages, they have some packages for 15 days. We don't have packages for 15 days. So they have been very, very aggressive in some packages, but we feel very comfortable with the network and with the brand and the distribution also has been good. So that's, I think, mainly why we are really growing in the prepaid side. In Mexico, you talked a little bit about Telmex. And what I can say is, again, is that we Telcel and Telmex have seen really substantially increasing the investments here. So 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. And yes, we have been a little bit more aggressive in the broadband side. And 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 you talk a little bit about the network for Mexico? Sure. What we are doing in Mexico is we have fiber to the home. We have almost 5,000,000 home passes with fiber to the home. And then the rest, we are doing fiber to the cure in order to use the best technologies using copper. So we are using BDSL 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 that just brought them. So it's the push that we are doing in Mexico. And 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 And all the packages. All the packages. I think that's more or less what we have been doing in the commercial side in Mexico. And the last one, you asked me about the which one? Pay TV. Pay TV, Daniel, please. Well, I think if Telk 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. And if Ete 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 market, in the TV market. And as a result of that, prices have been consistently increasing in the pay TV market. So this is affecting all the Mexican consumers. So 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, Telenex, into the market. Perfect. Very, 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. And the question was regarding the functional separation. What is the stage of the process? And 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 is working diligently to assure compliance to I-fifteen position 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. So there's nothing more to comment on that. And on the U. S, well, I think and as I told in the Q1, the TracFone is doing good. I think we are growing or much better growth. The gross adds of our subscribers has been improving. Revenues also has been improving. And we are on track with our budget. So if we can see 2019 for TracFone, my view is that we're going to have around the same EBITDA margin as last year, and we are going to grow taking out SafeLink around 300,000 subscribers, different than the last year that we lost subscribers. So all overall, TracFone is going to be much better in terms of net additions and it's going to and we're going to have around the same EBITDA that we have last year. So that's more or less. If we have in 1 quarter maybe we have a little bit more subsidies in 1 quarter than in the other one. But all overall, I think we are on track with our budget that we have on track. Thank you. Your next question comes from Carlos LaGuerreza with GM. Your line is open. Hi. Thank you. Good morning. Thank you for taking the question. So 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. Well, if you see the numbers in both countries are both north. So we're increasing revenues and we are really being cutting cost all around. So 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 smooth strategy on trying to digitalize everything that we have, customer care, IT, we have been having a very good quarter in Colombia is because we're growing in the revenue side and in we're cutting costs in the other. And again, you'll summarize what we saw before. Service revenues in Mexico are growing 8.3% from the mobile platform. And the fixed line platform, where they have been falling, they have reduced their decline, and they were down Mexico were up 6.2%. So I mobile ARPUs in Mexico were up 6.2%. So I think there's a lot to be said about top line growth supporting the growth of EBITDA. I understand. And if I may, a follow-up in the Mexican decline market. Do you think that the acceleration 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 improvement on the mass market side? I think we're doing very good in the corporate segment. We're doing good. And we're going to improve more on the mass market both as but that's the big investments and the substantial investments that we're doing in the big 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 think I know there's a lot of questions now in terms of 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. And my second question is just around Colombian mobile market. I would like to see some color there in terms of what's driving the good results and that's it. Thank you. Well, let's just start in Colombia. I think in Colombia, we have very good improvement in service revenue, 5.2% from 3.4% last quarter. So our increase in service revenue is very good. Postpaid is driving 6.1% of that growth and also the fixed revenues has been very good. Broadband is increasing around 11%. So I think in Colombia, in the prepaid and postpaid, we have been increasing a lot our capacity, our coverage. ARPU is growing 6.9%. So we're selling a little bit more to our customers. Customers are using more our service, so it's increasing. And also, it's one of the countries where pay TV services is growing very good. So in Colombia, I can see in the wireless and on the peaks both doing excellent. So it's still that usage is not so big. It's low. And I think we have still a good opportunity to increase that selling a little bit more to our customers. So I'm happy. And our networks have been improving, giving more 4.5 gs and increasing speeds. So all overall in Colombia is doing good. And in Mexico, well, still we are not seeing as Carlo is saying, still we are not seeing any recession or any I'm sure that the government is spending less, but we are not seeing that in our business at that time. Thank you very much. Your next question comes from Andre Baggio with JPMorgan. Your line is open. Hi, good morning. I'd like to know how is the outlook for American Mobile 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. So do you think that this could happen near the end of the year? We don't know. As I just said, IAPT has not resolved yet our application. So the application we submitted in October of 2018 and we give them all the requirements that they need. So we still don't know, we hope. And as I said, the only segment of the telecom market that is increasing prices is in the same TV. And I think what for the Mexican people will be very good if they have more competition. So that's what I see. I hope we can have the license at the end of the year. Perfect. And can you clarify a little bit more on this pension payments? We have seen this throughout the year, there's a special amount of payments to pensions in the American Palm Telmex. And can you give us some outlook that is you'd expect on recurring basis in the next years? Yes. I don't understand your question, but I don't think we have any change on the pension payments and pension fund on Telmex. We have been having that for a time. There's nothing new, nothing changed. And I don't have the specifics here, but there's nothing new on that pension fund. Okay. Thanks a lot. Thanks a lot. Thank you. Your next question comes from Carlos Saqueira with B. G. Pacheco. Your line is open. Hi. Thank you. Good morning. I have just one follow-up question on Baillieu's question on the PTV license. And my question is, how relevant would you think getting a PTV license is today in Mexico? I mean, given what has happened to the PTV business in several different markets and you have other ways to provide PTV services. Is it really that important to have a license at this point in Mexico? Thank you. Well, it's what you are saying, it's right. I think the TV and the pay TV is reducing in some markets. It's still as you see in Colombia is growing. But I think it's important and that all the players has convergence that they can give convergence. They can do peaks, broadband and pay TV. So that's the triple play, I think in the house, people is expecting to have the 3 services and that's really the reason why we are asking that. And on the other side, that's our reason. That's why we want to do that. The penetration in the pay TV in Mexico is still low. I don't think the penetration it's average, but I still we can have a little bit more penetration there. But the importance also is to have more competition. Prices is the only place where prices have been increasing and we want to bundle our services with a pay TV. So that's the reason to have that. Okay. Makes sense. Thank you. Thank you. There are no further questions. At this time, I turn the call back over to Mr. Daniel Hash. No, I think I want to No more questions, maybe we have a very good job. I want to thank everybody for being in the call. Thank you. This concludes today's conference call. You may now disconnect.