Telecom Argentina - Q1 2022

Transcript

Luis Rial Ubago (Head of Investor Relations)

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating on this conference call. The participants of today's conference call are Roberto Nóbile, Chief Executive Officer, Gabriel Blasi, Chief Financial Officer, Fernando Balmaceda, our Director of Investor Relations, and myself, Luis Rial Ubago. The purpose of this call is to share with you the results of our first quarter ending March 31st of 2022. If you have not received our press release or presentation, you can call our investor relations office to request the documents or download them from the investor relations section of our website located at inversores.telecom.com.ar. I would like to go over some safe harbor information and other details of the call. We would like to clarify that during the conference call and Q&A session, we could mention certain forward-looking statements about Telecom's future performance, plans, strategies, and objectives.

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 effects of ongoing industry and economic regulations, the possible changes in the demand for Telecom's products and services, the effects of potential changes in general market and economic conditions, in legislation, and the impact of the outbreak of COVID-19 on the global economy and specifically on the economies of the countries in which we operate, as well as our operations and financial performance. Our press release dated May the 10th of 2022, a copy of which was included in our Form 6-K and sent to the SEC, describes certain factors that may affect any forward-looking statements that could be mentioned during this call.

The company has reflected the effects of the inflation adjustment adopted by Resolution 777/18 of the Comisión Nacional de Valores, or CNV, which establishes that the reexpression will be applied to the annual financial statements for intermediate and special periods ended as of and including December 31st, 2018. Accordingly, the reported figures corresponding to 1Q of 2022 included the effects of the adoption of inflationary accounting in accordance with IAS 29. In this presentation, we will also include figures in historical values, which are easier to understand. Our press release is complemented by our earnings presentation. The audience should read the disclaimer contained in slide one and slide two of the presentation. The agenda for today's conference call includes our business and financial highlights, and we will end the call with a Q&A session.

Now, let me pass the call to Gabriel, our CFO, who will start with the presentation.

Gabriel Blasi (CFO)

Thank you, Luis. Good morning and welcome to everyone. Going to slide three, summarize our highlights as of first quarter 2022. We have achieved an EBITDA margin of 34.7% for the first quarter of 2022. Our annual CapEx for this year will be closer to $700 million. We continue with a strong cash flow generation. We continue increasing our prices under a local high inflation scenario. We have increased our number of clients in our fintech company to 76,209. Flow continues being our main product offering in cable. Our subsidiaries in Paraguay and Uruguay have performed according to plan. We are currently negotiating the refinancing of our main debt maturity this year, which amounts to $140 million. We will provide more information once the deal is closed.

We have launched our IoT and cybersecurity business, the latter based in Chile. We have increased the number of clients against first quarter 2021 in our three main products. We continue analyzing additional drivers of growth related to our industry, and we will pay dividends in kind before June 30, 2022. We are analyzing the possibility of buying 110,000 megawatts of renewable energy, which represents around 18% of the total megawatts consumed by the company. This will also allow us to reduce our carbon emissions by 17%, coming from a total of 281,000 tonnes, as part of our ESG plan. Slide four shows the company figures for the first quarter of 2022. Telecom's revenues total $1.1 billion. Revenues measured in constant pesos decreased 8% year-over-year.

EBITDA generation remained strong, totaling $367 million. Our EBITDA margin was 34.7% as stated. Telecom's mobile subscribers in Argentina amounting to 20.2 million, increasing by almost 1.4 million when compared to the first quarter of 2021. Broadband and pay TV clients have also experienced an increase year-over-year, totaling 4.2 million and 3.5 million respectively. Fixed voice subscribers, without considering IP telephony lines, amounted to 2.3 million during the first quarter of 2022. Our commercial strategy has allowed us to increase our total convergent unique customers to 2.1 million from 1.9 million versus the first quarter of 2021.

Up to date, 50% of our broadband customers have a mobile bundle. Regarding our regional operations, we currently have 2.2 million mobile subscribers in Paraguay and 134,000 pay TV clients in Uruguay. Moving to slide five, it shows the evolution of local inflation. The accumulated inflation for the first quarter of fiscal year 2022 was 16.1%. Year-over-year inflation in Argentina as of March 2022 has been of 55.1%. March 2022's inflation rate was 6.7%. Thus, we believe that the local inflation will remain high during all 2022. As mentioned before, the impact of our industry in the CPI index is very low, as communications has only a weight of 2.8% within this index. Slide six shows our price adjustment during 2022.

On mobile, during the last half of December 2021, mainly impacting 2022, we have increased prices of postpaid and prepaid by 15% and 16% respectively. In April, both postpaid and prepaid prices have increased by 11%. Broadband, the prices of our XDSL services have increased by 16% in January and 12% in April 2022. Prices of our HFC and FTTH services increased by 13% in January and 9% in April. Pay TV subscription prices have increased by 13% in January. Additional services, such as the football pack and premium channels, have increased up to 15% in the same period. In April 2022, prices for our pay TV services increased by 12%. Fixed voice basic services prices, sorry, have increased by 16% in January and 12% in April.

Moving to slide seven, show the evolution of our products. On the mobile segment, postpaid subscribers have increased in almost 500,000 clients or 5.7%. Prepaid subscribers have increased in more than 900,000 clients or 8.4%. Our postpaid clients represent a 41% of our total mobile client base. Broadband accesses have increased in 66,000, 1.6% year-over-year, mainly growing in the HFC and FTTH segments. In Pay TV, we gained 10,000 new accesses, showing an increase of 0.3%, mainly thanks to the performance of our Flow platform. In fixed voice, the reduction of accesses in traditional fixed copper lines has continued while our IP telephony accesses have increased in more than 400,000 lines. Slide 8 shows the evolution of our service revenues.

Service revenues totaled almost ARS 109.4 billion, decreasing 8.6% in real terms versus first quarter 2021. Our revenue breakdown as of March 2022 showed an increase in the participation of mobile and broadband services when compared to March 2021. The breakdown is as follows. Mobile revenues, 38.7%. Broadband revenues, 22.5%. Pay TV revenues, 18.6%. Fixed telephone and data revenues, 12.6%. Equipment sales revenues, 6.8%. Moving to slide 9, it describes the main trends in our mobile and broadband businesses. As of March 2022, postpaid subscribers amounted to 41% of our total customer base. The chart in the upper left shows the competitive landscape on wireless per month. During the first quarter of 2022, Personal had a positive net inflow of mobile clients.

Mobile internet usage has continued increasing, reaching an average of 5.0 GB per user per month in the first quarter of 2022. In addition, there has been an important increase in broadband speeds. 74% of our total subs have speeds between 50 Mbps and 1,000 Mbps, comparing with the 61% during our first quarter of 2021. It was mainly explained by the growth in HFC and FTTH connections, which increased by 7% and 125% versus the first quarter of 2021, respectively. The competitive advantages of our network and products are summarized in the following slide 10. Our three main strategic assets are broadband Flow and, as our main IPTV service, and mobile. Our broadband network has the best coverage in the country, consistently improving its service.

Average speeds have reached 88 megabytes per second in our FTTH network and 85 megabytes in our HFC technology, going through 60% of total homes in Argentina. Flow is our main and premium IPTV product offering direct access to video, other leading streaming applications, music and broadcasting to off-live shows and gaming events. Our mobile network is the fastest in the country, reaching almost 98% urban coverage. It has the best download, upload speed as measured by Speedtest in March 2022. Slide 11 shows our business in Paraguay. Núcleo generated $52 million and $24 million in revenues and EBITDA, respectively, during the first quarter of 2022, growing by a 2% and a 4% in hard currency respectively. Revenues breakdown was as follows. Browsing services, 42%. Voice, 15%. Data, 6%. Broadband, seventeen percent. TV services, 8%.

Other services, approximately 12%. Mobile customers totaled 2.2 million as of the end of March 2022. Clients of Billetera Personal, the mobile financial service of Núcleo, reached almost 276,000 customers. Fixed Internet services subscribers amounted to more than 209,000 customers, growing 35% versus the first quarter of 2021. In the pay TV segment, Flow customers totaled 36,000, and in Personal HD, 52,000. The fixed network deployment in Paraguay continues and now reaches 601,000 homes passed, growing 32% year-over-year. Slide 12 shows some key performance indicators of our fintech called Personal Pay. As of March 2022, Personal Pay onboarded clients amounted to 76.2 thousand. Almost 20% of the clients belong to other local telcos operators.

The number of prepaid card accounts have multiplied by almost 8x, amounting to 34,000. One of the most important aspects of our fintech company is that we almost have no acquisition cost since most of our clients are telecoms. I will now pass the call to Fernando Balmaceda, who will go over our financial performance.

Fernando Balmaceda (Director of Investor Relations)

Thank you, Gabriel. In slide 13, we provide an overview of our main financial figures. Consolidated revenues grew by 40% on nominal terms during the first quarter of 2022, reaching more than ARS 110 billion. When analyzing said figure adjusted by inflation, revenues amounted to more than ARS 117 billion, showing a decrease of 8% in real terms. Service revenues showed a 40% nominal increase, reflecting the price increases we mentioned before. EBITDA increased by 32% year over year in nominal terms, thus generating an EBITDA margin of 35.8% in the first quarter of 2022. EBITDA margin in real terms was 34.7%. The company continued to manage its cost structure. Operating costs before D&A decreased by 6% in real terms versus the first quarter of 2021.

Slide 14 shows the evolution of EBITDA year-over-year and the impact of different components of revenues and costs. Operating costs were 6% lower in real terms. Almost all our costs experienced a decrease or remained in line when compared with inflation. The two main exceptions were labor and added debt expenses. Salaries of our unions and non-union employees increased in line with inflation, approximately 50%. Our budget ratio was 2.7%. Said increase was mainly explained by the economic situation in Argentina, which has a direct impact on our clients' incomes. It is important to mention the company performed well in programming and content costs, thus generating commercial efficiencies. In addition, energy costs, rental charges, and internet capacity also experienced a reduction in real terms.

In slide 15, the company's net income totaled almost ARS 23.8 billion, while EBIT amounted to ARS 1.3 billion. The EBIT decrease in constant measuring unit is explained mainly by the decrease in EBITDA in real terms. D&A and disposal and impairment of fixed assets remain almost constant year-over-year. Due to the inflation adjustment, operating margins were 1.1% of consolidated revenues, while in historical figures, the same margin was 23%. During the first quarter of 2022, the company had a net income of almost ARS 23.8 billion, mainly due to positive net financial result, results of ARS 22.3 billion. Positive financial results were driven by an improvement in inflation adjustment gains, net interest, and FX results. Our income tax includes the following effects. One, the tax to be paid according to local tax legislation.

Two, the effect of applying the deferred tax method on temporary differences generated when comparing our asset and liability valuation according to tax and financial accounting criteria, which includes the effect of the income tax inflation adjustment. Our income tax amounted to a positive amount of ARS 28 million in 1Q 2022 versus a loss of ARS 5.007 million in 1Q 2021. The tax paid according to the effect of current income tax amounted to ARS 10,967 million in first quarter 2022 versus ARS 161 million in first quarter 2021. The effect generated by the application of the deferred tax method resulted in an income of ARS 10.995 million in 1Q 2022 versus a loss of ARS 4.846 million in 1Q 2021.

On May 6th, 2022, the company filed the income tax affidavit corresponding to fiscal year 2021, including, one, a restatement of the tax amortization of all fixed assets and intangible assets pursuant to the requirements of Section 87 and 88 of the income tax law. Two, the allocation of the computable tax losses carried forward from previous years in accordance with the procedure provided for in Section 25 of said law.

For further details of the above mentioned, refer to note 13 to the financial statements as of March 31, 2022, and to note five to the financial statements as of December 31, 2021. Slide 16 shows a summary of the company's CapEx and PP&E and intangible assets during the first quarter of 2022, which amounted to more than ARS 16 billion or an equivalent of $164 million at the official FX rate. This amount is 25% lower when compared to the same period last year. Our consolidated amount of CapEx amounted to 16% of our total revenues. Technical CapEx were mainly composed of investments in our access network and technology. The balance was allocated to installations and customer premises equipment or CPE, and to our international operations both in Paraguay and Uruguay.

During the first quarter of 2022, seven new mobile sites were deployed, while another 20 were built and more than 180 existing sites were upgraded. We expanded our FTTH network over 2,537 new blocks, including the overlay over our HFC network. We also increased the penetration of our HFC network, mainly through the segmentation of regions or areas. Additionally, we will be reallocating 10 of our technical buildings during this year, 2022. Slide 17 describes our cash flow generation during the first quarter of 2022 compared with the same period of 2021. Our cash flow generation continues showing a strong performance.

In the first quarter of 2022, the operating free cash flow amount to approximately $133 million equivalent, which drop is mainly explained by the decrease in our EBITDA in real terms. Slide 18 shows our key figures for the first quarter 2022 in constant measuring unit. Our gross debt amounted to ARS 298.4 billion as of March 31, 2022, decreasing 3.5% when compared to December 2021. The company holds cash and equivalents for more than ARS 46 billion, having a net debt of almost ARS 222 billion. Our net debt to EBITDA ratio is 1.7x, remaining relatively stable versus the one at the end of the fiscal year 2021. Slide 19 shows a quarterly evolution of our key ratios.

Our bad debt over our revenues ratio was mainly affected by the economic situation in Argentina. We are closely following up on this issue and monitoring our collections on a daily basis. In the first quarter of 2022, our CapEx over revenues was 14.1%. This percentage has reduced slightly due to additional CapEx we did in advance during 2021. Gross debt to EBITDA remained at 2.2x, while net debt to EBITDA continues to be lower than 1.8x. Both ratios being very solid when compared with other telcos around the globe. Slide 20 shows the breakdown of our financial debt. In 2022 and 2023, our debt maturities are very manageable. 46% of our total debt maturing in 2022 is denominated in pesos.

41% of our total debt maturing in 2023 is also denominated in pesos. We expect to continue accessing the local capital markets for our potential financing needs. During March, we completed the local issuance of Class twelve and thirteen notes for an amount of $22.7 million and $21.7 million, respectively. During the first quarter of 2022, we received two new disbursements under our credit facilities with China Development Bank and Finnvera, amounting to $18 million and $11.4 million, respectively.