Telecom Argentina S.A. (TEO) Q3 2018 Earnings Report, Transcript and Summary

[Call starts abruptly] We would like to remind all of those that have not received our press release or presentation that they can call our Investor Relation office to request the documents 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 replayed through the 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 events. We would like to clarify that during the conference call and Q&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 Telecom's products and services, and the effect of more general factors such as changes in general market or economic conditions in legislation or in regulations. Our press release dated November 7, 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, we urge the audience of this conference call to read the disclaimer clause contained in Slide 1 & 2 of the presentation. The agenda for today's conference call as seen in Slide 3 is first to go over general market overview, then moving onto our industry trends 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&A session as it's customary in our quarterly calls with the financial community. Having gone through procedural matters I will now go over brief characterization of the macroeconomic context in which we operate. Please refer to Slide 5 where we included a summary of the current macro evolution in Argentina, as well as domestic activity and inflation. During the third quarter of 2018, the macroeconomic environment has increased in complexity, strongly influenced by a second ground of turmoil in the foreign exchange market. We think we're [indiscernible] from the upsell during the first half of 2018. Exchange rates experienced depreciation that shot up 100% during the first nine months of 2018, this impact strongly concentrated in the second and third quarters of the year. A second round of volatility in the exchange market was registered during September, the exchange rate experienced a 42% increase within the third quarter of 2018. Yet again, a combination of experiment and local factors can be associated to this movement. In this context, the Central Bank exercised head intervention in our attempt to contain the foreign currency demand, thus affecting the international research position which suffered adequately in the quarter of almost $13 million, mostly associated to this interventions and also to the commitment of the Central Bank to reduce the cumbersome stock office note known as LIBAX [ph]. In addition, the monetary authority applies strong increase in interest rates in order to counter this disruptive dynamics coming from abnormal behavior of the exchange market which still prevails in high level as of this day. However, considering another perspective, it is worth nothing but the real exchange rate is nowadays in a reasonable level above the long-term average. The situation has not been compromised [ph] since 2010. The current level of rate should form competitiveness and therefore, it is expected that they will allow the recovery of the trade bans which has already begun in September 2018. It should be mentioned that in October we've announced a rare combination of the monetary policy schemes which included a strict control of monetary aggregate, and the introduction of a strategic flow that defined non-intervention flows for the monetary authority. The combination of these measures, together with the modification of the standby agreement with IMS to enlarge the amounting ball by $7 million and to advance the disbursement for 2018 and 2019 ultimately led to some relief from the terrible experience in the exchange markets. As far as the internal front is concerned, regarding inflation, during the third quarter of 2018 the CPI measured by the Buenos Aires City continue to experience further increase from the past quarters reaching 39.5% year-over-year in September 2018. During the last three months period, inflation has been considerably impacted by transport and utility service increases, as well as [indiscernible] prices which were impacted by the FX evolution. Inflation during September was particularly high and it is expected to remain at high levels in October while some levels of reduction in monthly figures should be feasible for the last month of 2018. In relation to the economic activity, aggregate output is equated monthly due to the strong underperformance in agriculture activity which was affected by climatic factors like construction and common sectors reported downside in their activity too. Industrial production also suffered a decrease plunging deeper into recessive cycle and accelerating the phase of contraction during the last month. Economic consensus published by the Central Bank [indiscernible] the contraction of activity in the order of 2.4% for 2018. Lastly, higher volatility and economic variables on the rise in inflation has impacted overall household consumptions which is expected to remain in flux [ph] due to the adverse impact of inflation on real income and due to the high uncertainty capture by loan consumer confidence readers which in turn have fallen significantly. Turning to Slide 6, we will likely to news the brief of our Argentina's long-term growth cycle. As shown, we can verify that Argentina registered the highest rate of recovery after recession when compared with other South American peers. After the conclusion of the respective necessary structures, it is surely seen that Argentina can return quickly to sustainable growth back. Furthermore, as of during 2018 unemployment rate shows a slight increase and ability decrease in the last quarter but it still remains low and favorable despite of the contraction in the economic activity, pointed out that the restructuring structure should be mild that those articles in an historical comparison. Moving to Slide 7, we can find a summary of the impact of the economic context of durable goods consumption taking quantities of durable goods into consideration, consumption remains slightly above 2017 as to during 2018. Probably it will be heavily impacted in the remaining months of 2018 as a general slowdown in consumption [indiscernible]. In contrast to this, positives have decreased in the same period mainly due to the economic context and also due to the fact that devices are dollarized [ph] having this later effect and direct impact on prices. As a summary, telecom industries are considered the front city nature [ph] although they are not immune to changes in the economic cycle, notwithstanding the challenging market dynamic context that described, Telecom Argentina has managed to generate historic revenue growth and an operating profitability increase when compared to past year figures. Having gone through this introduction of the market environment, let me pass the call to Gabriel Blasi, who will go over the industry trends and strategy and the business highlighting sections.

Thank you, Solange, hello to everyone. As mentioned in the prior call, remember that the merger between Telecom and Cablevision was considered inverse acquisition under IFRS 3, business combination, with Cablevision being the surviving entity for accompanying purposes [ph]. That was the purpose of preparing the consolidated financial agreement of Telecom Argentina as of September 30, 2018. First, the competitive figures as of December 31, 2017 and September 30, 2017 were a response to those that arise from the consolidated financial statements of Cablevision at the respective dates, and second, the corresponding information of the 9 months period ended September 30, 2018, incorporation on the basis of figures corresponding to Cablevision, the effect on applications of Telecom Argentina [indiscernible] decisions, and deferred value in accordance with IFRS 3 guidelines and the operation of Telecom Argentina as of January 1, 2019. On the other hand, in order to reach understanding and analysis of the earnings evolution by CUPs [ph], additional figures of the income statements are included exposing the pro forma basis, the comparative figures for 9 months of 2017, as is the merger between Telecom and Cablevision has been effective during that period. The variations of result versus 9 months of 2017 identified in this presentation, managed [ph] of the comparison with their formation, performance information. Additionally, you may find a detailed pro forma comparison in financial table 6, 7, 10, 11, 14 and 15 included in our press release. Moving to Slide 9, you can find some industry trends that we would like to share with you in order to clarify the strategic approach that the company currently has. The goals of the company is to offer to it's clients in the near future, a convergent offer 4 hour service. As you cannot serve the previous quarter experiences in European countries registered a very positive effect as the number of households with these services has been increasing rapidly during the recent years. In the sense, we believe that the company would be able to follow a similar pattern and to be the first options for the customers with high quality. Moreover, it is expected that there is going to be a strong and virtual increase in digital OTT subscribers in the next years, almost doubling at figures by 2022. This growth of new subscribers will be accompanied by higher demand for frictional mobile connections speeds and deletion it is expected that the consumption patterns to change for us and more intensive usage of mobile internet. Additionally, it is worth to highlight the growing importance of IoT devices, in fact, in 2019 the number of devices connected in the world reached an estimated number of 9.1 billion with a greater participation of consumer devices such as electronics and smart home appliances. It is expected by 2025 the number of devices should increase 2.8x to more than 25 billion with a stronger presence of industrial devices such as energy, manufacturing and citizens foundation [ph]. Let's move to Slide 10, we illustrate the challenges ahead for the company we go over to address this industry trend. In business, we aspire to have the best fixed mobile network in the country according to the consumer needs as described. With superior quality and coverage this infrastructure will provide a technical platform in which the company will leverage to achieve it's major objective; to be leaders in net promoter score, and the first option for value for the customer, working towards this aspiration the company's focus on clear set of strategic avenue. First, we are taking a step further into compare, we intend to transform flow, better integrity in platform, the followed platform in the market. Furthermore, flow will determine available platform for operators, in as a service, modality, and a provider of IPDO service. In addition, we are focusing on the relaunch of personal store as a marketplace of multiple [indiscernible]. On the network front, we intend to develop higher quality and capacity for broadband through the development of DOCS 3.1 [ph] on the XHC network and the conversion of tougher network on the DTH. Finally, it is important to remark that the company's mobile 4G network is not really the fastest in Argentina. Now we are going beyond, this will improve the coverage by this [indiscernible], in south of the country side. Moving on our business highlights, we can say we are in positive position today. Please refer to Slide 12 where we highlight some of our key achievements. During the first landmark of 2018, Telecom revenues totaled ARS99.5 billion increasing 29% year-over-year, operating income before G&A totaled ARS35.2 billion, implying a 35% margin of the revenues achieved in a challenging economical market. In addition, fixed voice ARPU and broadband ARPU were up ARS237 and ARS605 per month respectively. Meanwhile, ATV ARPU reached ARS675 and mobile ARPU reached ARS170, moreover and in relation with our subscribers, mobile subs in Argentina amounted to 18.9 million of which 11.7 million subscribers where 4G clients. ATV subs remained stable amounting to 3.5 million and fixed voice subs total is 4.1 million. Fixed voice reached 3.6 million. Regarding the customer base, it remains stable in related terms; this is due to the growing news of telecommunication services which increasingly [indiscernible] of our custom as allocating ever-active stable portion of their income with this services. As far as good growth matters, it is important to mentioned that around September 4, 2018 Telecom was informed that the merger with Cablevision was registered in the parent Registry of Commerce under the responsibility of the [indiscernible]. By this verify arising all formal and legal aspects related to the market. Turning to Slide 13; we cannot serve the revenue breakdown while mobile service to [indiscernible] till holds the main depreciation over Telecom revenues, followed by broadband and cable TV. We can highlight that the current revenue mix as a participation of lower revenues of almost 75% followed by growth on revenues that apart from representing near 23% show the fact what we've rate as well as safety revenues which accounted for almost 22% participation. In turn, fixed telephone and index represented around 8% while devices achieved 8% of the total revenue. When compared with the 9 months 2017 consolidated pro forma results, you can see that service revenues grew by 29% year-over-year reaching ARS91.9 billion. As we already mentioned, mobile and broadband mostly contributed total revenues composition generating revenues of ARS34.5 billion and ARS22.4 billion respectively. In addition, the revenues totaled ARS21.4 billion followed by fixed and data revenues with the aggregate amount of ARS13.1 billion. We later experienced we can highlight the contribution of handset and others which is ARS7.6 billion and also ARS0.4 billion respectively. It should be observed that in general terms, the company revenues are still in the process of catching up with acceleration in the inflationary context as recommended in our macro chapter. While the recovery in volatile should take a longer period of time related to this huge jump of the foreign exchange rate. We will go to some details of this in the following slide. In Slide 14, we will go through the evolution of the company's mobile business in Argentina. As the intensity in data usage continue to increase, we can observe that there has been a sustained growth in post-paid subscribers which represent our high value mobile segment. So September 2018, the post-paid subscribers accounted for 38% of the total customer base, up from 34% compared to the same period of 2017. In this guidance, the intensity of mobile internet gives this continuous increase which for the 9 months of 2018 has reached an average of almost 3 gigabytes per user per month which is 52% higher than in the same period of 2017. While we're focusing the evolution of our 4G rollout, we can highlight that there has been an important twist of 4G subscribers which totaled 11.7 million as of September 2018. This rapid growth in subscribers that used the 4G network has been the driver of increase in data traffic since 2015. Currently, the current [indiscernible] of 4G network reaches more than 171,500 locations that includes around 450 locations year-over-year. We cannot serve the differential in mobile internet usage as lower internet connection speed increase at gigabytes per user per month from 4G users standup almost 1 gigabyte of our 3G use. Please turn to Slide 15 where we included a review of our internet and safety services segment which aims to differentiate our access to an enhanced customer experience. Related to our growth on segment, we can sort out that the number of subscribers grew more than 70,000 year-over-year achieving total 1 million users. Their formation increased in subscribers who are supported by the offer of higher connection speeds. As a consequence, subscribers with speed equal for about 20 megabytes have increased to 34% of the total client base versus 20% over a year ago. They mentioned effect announced that with price adjustment apply contributed in the ARPU growth. In this sense, during the third quarter of 2018 the ARPU for program services increases by 35% to almost ARS648 per month. Focusing on PayTV services; during the first 9 months of 2018 Cable TV subscribers remains stable while flow box has achieved 167,951 Telecom subscribers, we're using the through application as of September 2018 including previously from periods of server over a year ago. Moreover, Cable TV ARPU includes more than ARS718 per month in the third quarter of 2018, up 37% from the same period last year, voice churns to that 1.3%, up from 1.2% in the third quarter of 2017. On Slide 16, we represent a consolidated CapEx figures where we continue to focus our efforts to keep our competitive advantage in terms of Cable TV. During the first nine months of 2018 Telecom has invested more than ARS24 billion, in this amount 50% higher than the same period of last year, the consolidated amount of capital expenditures represented 24% of total revenues inclusive from 21% in the same period last year. As we have said this to our competitors in terms of investment size, furthermore we can verify that our important amount of payment [indiscernible] TV access network of which mobile access is to present 55% followed by fixed assets to 36%, and other accounted for the remaining 9%. The remaining of CapEx was mainly from piece of hard work of our IP infrastructure and the transformed network, and of investment done on our international operations in Paraguay and Uruguay. It is worth to highlight that during the nine month period Telecom continuously therefore improved both, the fixed and mobile network. In order to achieve this goal, the company intensified the development of it's network in the northern part of the country through their employment of new sites and FTTH. Additionally, Telecom to new [ph] starts the requirement of FTTH in Paraguay reaching around 40,000 homes started by September 2018. I've been going through this business highlights, now I will pass the call to Solange who will go over the financial performance.

Thank you, Gabriel. We will go over the impact that this positive business terms have -- as described by Gabriel generate over our operating income. Please turn to Slide 18 where we can analyze the consolidated revenues and EBITDA. For the first nine months of 2018, consolidated revenues amounted almost to ARS99.5 billion reaching the growth of 29% year-on-year. In turn, service revenues grew 29%, thanks to the strong performance of PayTV revenues and internet revenues, followed by mobile service revenues and more specifically, mobile internet. Furthermore, EBITDA show a strong evolution growing by 36% year-on-year as we have concentrated in improvement of our revenue quality and profitability. EBITDA margin increased substantially by 180 basis points to 35% for the nine months of 2018. It is important to highlight that the improvement of 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 on EBITDA as dedicated of the different components of revenue and cost. The company has taken actions to gain operational efficiency and manage it's cost structure and these actions have positively impacted our profitability, as always, it has grown below revenue growth and inflation level. We can observe a positive evolution of labor cost over which the company is focusing heavily alongside which fit for services, maintenance and material which in turn were affected by lower network maintenance cost. Additionally, effective cost management has delivered good results in interconnection cost through better negotiation in international interconnection, and also enhanced it's cost mainly affected by lower sellout. This effect has been partially offset by increases in programming and content cost and other costs, we conclude bad debt expenses. Although these expenses have registered such an increase, they are in line with the non-performing ratios observed in the financial system. The final outcome was the 180 basis points expansion that's described before. Let's turn to Slide 20 where we can verify the company operating income total more than ARS19.9 billion with a 44% increase year-on-year. EBIT growth that was higher -- consolidated higher than that of EBITDA can be explained by a slower growth in the increase of depreciation and amortization, and disposal and impairment of PP&E which stood at 28% year-on-year. This contributed to the expansion in operating margins to 20% of consolidated revenues, increasing 200 basis points when compared with the 39 months of 2017 showing that the company was able to attain solid operating performance through the course of this year. On the other hand, Telecom registered a net loss applicable to the controlled income of almost ARS18.6 billion. This net loss was mainly explained by higher net FX losses of approximately ARS45.7 billion in the first nine months of 2018 which can be explained by the peso depreciation that impacted mainly our net financial debt positions denominated in U.S. dollar. It is important to highlight that as of September 30, 2018, there is payment criteria of the financial statements established in the years 29 [ph] have not been applied. These circumstance must be considered in the evaluation and interpretation of the financial situation and the results percentage by the company. If the comprehensive adjustment for inflation supply and increasing the values of the non-monetary item is expected up to the limit of the recoverable value with it's consequent effect under the quarter and an increase in the net equity of the company including the contribution of the owner. Likewise, with respect to the results and increase in depreciation and amortization due to the effect of service payment of non-monetary assets, it is expected maybe those from the former combination business, and an improvement in financial results due to the positive result from exposure to inflation, due to the excess of monetary liabilities over monetary assets, all of them with the consequent impact on the line of income tax. It is worth to mention that inflation adjustment will be done following local guidance. Turning to Slide 21, we present some performance key figures for the last 12 months as of the first 9 months of 2018 under full year 2017. Company revenues achieved more than ARS128.5 billion for the last 12 months period ended September 28. Meanwhile, EBITDA amounted more than ARS44 billion for the last 12 months period, moreover, EBITDA margin breached almost 35%. Regarding our gross debt, as of September 2018 amounted almost ARS90.9 billion but as the company holds an important cost and equivalent and investment procedure, net debt reached almost ARS68 billion. In fact, net debt to EBITDA ratio remains very reasonable and in line with levers considered sound within the telecom industry. Please move onto Slide 22 where we can analyze our adjusted maturity scales. As we mentioned in our press release, in October 2018, the company refinanced $500 million from the syndicate loan view 2019 through a new loan agreement view of 2022. Additionally, $100 million of the original syndicated loan were prepaid using the cash position of the company, leaving a total of funding amount of $400 million. Moreover, in October 2018 Telecom Argentina has also accepted a proposal from AST for an amount upto $350 million with a purpose of financing investment needs, working capital and refinancing of [indiscernible]. Finally, in other versions of 2019, the company was notified of the acceptance of a loan offer by Deutsche Bank launched zonal [ph] branch for an amount of upto $300 million. As mentioned in previous call, we have a manageable debt profile and many other sources in front such as vendor financing, local bank lines and access to local and international capital markets for the coming years. And as we mentioned, a very economic debt to EBITDA ratio. Moreover, the company holds a permanent optimization policy for the term rate and structure of it's financial ability and it's always analyzing possibilities on this front according to the evolution on the market conditions. Before our Q&A session, let me pass the call to Gabriel for final remarks.

As Solange has stated, it's important to alert the issue that the company has refinanced almost completely today with a gain of much better on [indiscernible] profile, we've been able during this delta environment to have a very significant improvement costs and is important to alert the fact that this improvement cost is starting because we are still in the process of deployment of all our new systems, especially on the back and the front and yet a significant additional effects according to come from there but on the EBITDA evolution in Page 19 where we saw the different components, we think it was very easily shown how we were able to focus the cost structure at a very slower pace than inflation phase with only the section of a programming and of course important costs which are on a relative but on the rest of the cost of the company, they have been below inflation, probably the only one that has been aligned with inflation in the tax as it is shown there. And we've been able to bring the offset inflation effects on our revenue side. It's final, we continue to move ahead and going deeper on the effects of the merged valuing our cost of structure and our different processes, they -- the industry event next year will be very significant with the inclusion as I already mentioned of the new preference related to [indiscernible]. With this, I will open the session to questions.