Telecom Argentina - Q1 2023

Transcript

Luis Rial Ubago (Head of Investor Relations)

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating of this conference call. The participants of today's conference call are Roberto Nobile, Chief Executive Officer, Gabriel Blasi, Chief Financial Officer, and myself, Luis Rial Ubago. The purpose of this call is to share with you the results of the first quarter ended March 31 of 2023. 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, possible changes in the demand for Telecom's products and services, the effects of potential changes in general market and/or economic conditions, and in legislation. Our press release dated May 9, 2023, a copy of which was included in our Form 6-K 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 31 of 2018. Accordingly, the reported figures corresponding to the first quarter of 2023 include 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. Please read the disclaimer contained in slide one and two of our presentation. Today, we will.

We will go over our business and financial highlights. We will end the call with our Q&A session. Now, please let me pass the call to Gabriel, our CFO, who will start with the presentation.

Gabriel Blasi (CFO)

Thank you, Luis. Good morning, welcome to everyone. Moving to slide three, it summarize our highlights as of March 31 of 2023. Our main operational and financial achievements were our EBITDA margin during the first quarter of 2023 was 30.3%. While we continue to observe pressure from labor costs, we successfully contained increases in other cost items. In last 12 months, first quarter 23, our CapEx was approximately $695 million, equivalent to 17% of our revenues, despite facing tighter import restrictions in the first quarter of 23. Our focus is now on the expansion of our FTTH network to consolidate our position in the fixed market. Cash flow generation has continued to be strong and stable despite the challenging context.

In the first quarter of 2023, we were able to generate approximately $166 million in free cash flow before the dividends and interest payments. This represents an increase of approximately 40 million compared with the same period of 2022. We continue to increase our prices more frequently. Our revenues observe smaller gap versus inflation in a rising inflation scenario. We have paid dividends in kind on May 3rd, 2023. Mobile subscriber base continue to grow with a strong post-paid performance, growing 1.6% year-over-year. Mobile data usage measured in average monthly gigabytes per user has grown 12.3%. In broadband, we have observed growth in our FTTH technology, which has become our main focus while our HFC network has remained stable. Flow unique customers reaches 1.3 million, increasing 10% year-over-year.

Our fintech Personal Pay continues to grow, reaching almost 1 million onboarded clients for the first quarter, 2023. We are preparing for 5G. We currently count with 194 5G sites, mainly functioning with DSS technology over 4G spectrum. We presented our integrated annual report, our first publication unifying the company's financial and sustainable management information in a single document. Moving to slide four, it shows the company figures for the first quarter of 2023. Telecom's revenues total $1 billion. Revenues measured in constant pesos decreased 10% year-over-year. We generated $311 million equivalent in terms of EBITDA. Our EBITDA margin was 30.3%. Telecom's mobile subscribers in Argentina amounting to 20.5 million, increasing in more than 320,000 when compared to the first quarter of 2022.

Broadband and Pay TV clients have totaled 4.1 million and 3.4 million respectively. Fixed voice subscribers considering IP telephony lines amounted to 3 million during the first quarter of 2023. Our commercial strategy has allowed us to increase our total convergent unique customers to 2.3 million from 2.1 million in the first quarter of 2022. Up to date, 49% of our broadband customers have a mobile bundle. Regarding our regional operations, we currently have 2.3 million mobile subscribers in Paraguay and 125,000 Pay TV clients in Uruguay. Slide 5 shows the evolution of local inflation. The accumulated inflation for the first quarter of fiscal year 2023 was 21.7%. Year-over-year inflation in Argentina as of March 2023 has been 104.3%.

Inflation rate for the month of March 2023 was 7.7%. Thus, we believe that the local inflation will remain high during all 2023. As mentioned before, the impact of our industry in the CPI is very low, as communications has a weight in the index of only 2.8%. Slide six shows our price adjustment policy during 2023. During the second half of 2022 and the first quarter of 2023, we have adjusted our pricing policy responding to a rising inflation scenario. We have increased both the frequency and magnitude of our price increases to improve our path through of inflation in an increasingly complex environment. Thanks to these measures, and although we continue to observe a lag versus inflation, we have been able to improve our revenue trend in real terms as of the first quarter 2023.

Slide 7 shows the evolution of our products. We are pleased to report positive result in our mobile segment, with an increase of over 245,000 postpaid subscribers, representing a 3% growth, and over 75,000 prepaid subscribers, a 0.6% increase. Our postpaid clients now make up 42% of our total mobile client base. Although our broadband accesses have decreased by 155,000, -3.7% year-over-year, mostly by DSL, we observe growth in FTTH while our HFC segment remains steady. Our client base with internet speed of 100 MB or more increased by 113%. Despite a reduction of 139,000 paid TV subscribers, which represent a 4% decrease year-over-year, our Flow platform continued to perform well.

In the first quarter 2023, Flow's unique customers reached 1.3 million, increasing by 116,000 total clients or 10% when compared to the same period in 2022. Our fixed voice segment experienced a continued reduction in accesses, mainly in traditional fixed copper lines, but we remain confident in our overall strategy and our ability to adapt it to the changing market conditions. Moving to slide eight, it shows the evolution of our service revenues. Service revenues totaled ARS 200 billion, decreasing 10% in real terms versus first quarter 2022. Our revenue breakdown as of March 2023 showed an increase in the participation of mobile services when compared to March 2022. The breakdown is as follows. Mobile revenues, 40.8%. Broadband revenues, 21.9%. Pay TV revenues, 18.6%.

Fixed telephone and data revenues, 11.4%. Equipment sales revenues, 6.5%. Thanks to our pricing strategy, we were able to adjust the trend showing the year-over-year decline of our revenues in real terms, even with higher inflation levels. We currently observe a gap versus inflation in terms of our revenues of 10%. Slide nine describes the main trends in our mobile and broadband businesses. During the first quarter of 2023, the mobile market remained stable in terms of portability, with no significant changes. Our postpaid performance have been solid, increasing the postpaid participation of our mobile customer base to 42%. Mobile internet usage has continued increasing, reaching an average of 5.6 GB per user per month during the first quarter 23 and growing over 12% year-over-year. Additionally, we continue to increase our average broadband speeds.

81% of our total subs have speeds of at least 100 megabytes per second, comparing with 37% during the first quarter of 2022. This means that our subscribers with speeds above 100 megabytes have multiplied by 2.1 times. Thanks to our commercial actions, we doubled the connection speed for our clients in FTTH and HFC technologies during the previous year. Additionally, we have observed growth in FTTH connections, which increased by 74% versus the first quarter 2022 respectively. Moving to slide 10, it shows our businesses in Paraguay. Our operation in Paraguay continued to build a solid track record. Núcleo generated $50 million and $24 million equivalent in revenues and EBITDA respectively during the first quarter 2023. The EBITDA margin of Núcleo as of March 2023 was very strong and close to 50%.

As of March 31 of 2023, mobile customers totaled 2.3 million. The mobile financial service that our subsidiary provides, Billetera Personal, reached over 285,000 subscribers. Fixed internet services subscribers amounted to more than 245,000, growing 17% versus the first quarter of 2022. In the pay TV segment, Flow customers totaled 97,000, growing 10% year-over-year. The fixed network deployment in the main cities of Paraguay growing 14% versus first quarter 2022, and reaching 683,000 homes passed. Slide 11 shows some key performance indicators of our fintech Personal Pay. As of March 2023, Personal Pay's onboarded clients reached more than 955,000, growing 12 times year-over-year.

We find that this growth is very encouraging, we are also growing outside of Telecom client base, as 15% of these clients belong to other local telco operators. The total payment number has also been increases accordingly. In March 2023, it reached almost 1.5 million operation, and it has multiplied by more than 23 times when compared to March 2022. Total payment volume has increased by 78% in comparison to December 2022. Growth in our digital wallet is leveraged on a strong value proposal for the company clients and for clients outside Telecom as well. We offer a range of strategic partnership with various shops and businesses, providing our clients with exclusive benefits.

During the first quarter, Personal Pay continued to expand the differential of its product, incorporating the new functionality of remunerated balances for all its users, which allow them to generate profits by simply having their money available in the wallet. I will now pass the call to Luis Rial Ubago, who will go over our financial performance.

Luis Rial Ubago (Head of Investor Relations)

Thank you, Gabriel. In slide 12, we provide an overview of our main financial figures. Consolidated revenues grew by 81% on nominal terms during the first quarter of 2023, reaching more than ARS 200 billion. When analyzing said figure adjusted by inflation, revenues amounted to more than ARS 214 billion, showing a decrease of 10% in real terms versus the same figure in 2022. This lag versus inflation has observed a downward trend as we adjusted our pricing policy, as we mentioned before, and is explained, among others, by the effect of certain discounts and promotions we grant after price increases to retain our customers in a strong competitive environment. Service revenues showed a 82% nominal increase, reflecting the price increases we mentioned before.

EBITDA increased by 55.4% year-over-year in nominal terms, generating an EBITDA margin of 30.7% in the first quarter of 2023. EBITDA margin in real terms was 30.3%. Additionally, our operating costs before D&A have also grown below inflation, decreasing 4% in real terms versus the first quarter of 2022. We have continued to manage our cost structure to reduce the impact of rising labor costs. Slide 13 shows the evolution of EBITDA year-over-year and the impact of different components of revenues and costs. During the first quarter of 2023, the company was able to contain the pressure coming from inflation in the majority of its cost lines, as most of them experienced a decrease or remained in line when compared with inflation.

We observed good results in programming and content costs, interconnection costs, and some other items like handset costs. The company's efforts have been successful, as evidenced by these cost lines now decreasing their share of revenues. These cost management initiatives have partially offset the rise in labor costs, which have increased above inflation and explain most of the margin contraction year-over-year. Labor costs represent 24% of our revenues versus 21% in the first quarter of 2022, and have increased 4% in real terms when compared to the first quarter of 2022. Fees for services, maintenance, and materials have also affected by the increase in salaries of contractors.

Operating costs, excluding amortization, depreciations, and fixed asset impairments, total ARS 149.7 billion in the first quarter of 2023, representing a decrease of ARS 6.8 billion or minus 4.4% compared to the first quarter of 2022. Slide 14 shows the company net results and EBIT. The EBIT decrease in constant currencies is explained mainly by the decrease in EBITDA in real terms. This, combined with the inflation adjustment over D&A, resulted in an operating margin of minus 1% of consolidated revenues. In historical figures, the same margin was 21%.

In the first quarter of 2023, the company had a net income of ARS 28 billion, mainly due to positive net financial results of almost ARS 19.4 billion and to a positive income tax of almost ARS 11.8 billion. Slide 15 shows a summary of the company's CapEx in PP&E and intangible assets during the first quarter of 2023, which amounted to more than ARS 25 billion or an equivalent of $121 million at the official FX rate. This amount is 24.2% lower when compared with the same year last period. Our consolidated amount of CapEx for the first quarter of 2023 amounted to 12% of our total revenues. We're studying the fact that we observed certain levels of seasonality in our CapEx.

Our investment level was influenced by tighter import restrictions in the first Q of 2023. As we commented in other opportunities, our CapEx plan is flexible, and we have been investing way above the global average ratio of CapEx to revenues during previous years, and the performance of our network is currently very solid. technical CapEx was mainly composed by investments in our access network and technology. The balance was allocated to installations and customer premise equipment, or CPE, and to our international operations. During the first quarter of 2023, 21 new mobile sites were deployed, while other 361 existing sites were upgraded, and 52 are under construction. We expanded our FTTH network over 2,200 new blocks, including the overlay over our HFC network.

We also increased the penetration of our HFC network by 4,300 blocks. Up to date, we count with 194 5G sites, most of them working on the DSS technology. Slide 16 describes our cash flow generation during the first quarter of 2023, compared with the same period of 2022. Our cash flow generation has remained robust. Despite experiencing a lower EBITDA in real terms, our free cash flow has increased due to a reduction in CapEx and working capital during this period. In the first quarter of 2023, our free cash flow before dividends and interest payments amounted to approximately $166 million, which represents an improvement compared to the same period in 2022.

Slide 17 shows our key figures for the first quarter of 2023 in constant measuring unit converted to the effects of each year. Our gross debt amounted to $2.7 billion as of March 31, 2023. The company holds cash and equivalents for more than $440 million as of the same date, having net debt of almost $2.3 billion. Our net debt to EBITDA ratio is 2.1 times, remaining relatively stable versus the one obtained by the end of the fiscal year 2022. Slide 18 shows the breakdown of our financial debt. Total outstanding debt as of March 2023 amounted to almost $2.7 billion. We currently have a very clean maturity profile.

As mentioned before, we have been working to increase the participation of peso-denominated debt issued in the local capital markets. Nowadays, our debt denominated in foreign currency is 67% of our total debt. We expect to continue accessing the local capital markets for our potential financing needs, as we have been doing lately. During 2023, our debt maturities are very manageable. Almost 50% of the maturities for this year are denominated in pesos, which can be easily refinanced in the local markets and with local financial institutions, taking into account the solid credit profile of Telecom. Additionally, we have entered into a new export credit line with Export Development Canada, or EDC, for up to $50 million on May the 5th, 2023.

With this, now we are more than pleased to answer any questions you may have. However, before we start, we would like to remind you how you can address your questions during the Q&A session, which we will open immediately. Please use the raise hand button to let us know that you want to formulate a question. We will let you know when it's your turn to speak, and we will unmute you so you can proceed with your questions. Thank you very much. Hi, we have a question coming from Froylan Mendez from J.P. Morgan. Hi, Froylan. We will unmute you so you can proceed with your question. Thank you. Yes, very fine. Thank you, Froylan.

Froylan Mendez (Research Analyst)

Thank you. Thank you guys for taking my question. Could you explain a little bit more your goals on the FTTH network expansion? What are the CapEx implication and within the goal that you have, how much is overlay and how much is incremental footprint? Thank you.

Luis Rial Ubago (Head of Investor Relations)

Hi, Froylan. Hello, everyone. This is Roberto. I don't have the details right now, but definitely the idea that we have is to expand, like, 10,000 blocks in new fields, in green fields, and another 10,000 blocks overlay. When you compare to the number of blocks we have in HFC, we have 140,000 blocks in HFC. We're trying to build the HFC, the FTTH overlay on HFC on the main cities. That's the whole idea, especially in the Buenos Aires and Cordoba. That's our main focus. We will keep on deploying the overlay in other areas. Our focus is to make sure that all the main cities of Buenos Aires are covered with FTTH overlay HFC.

Roberto Nobile (CEO)

Greenfield is very few blocks comparing to our whole footprint. That's... I mean, we have done something new in Mendoza, but that's 2,500, 2.5 thousand blocks in Mendoza. We are starting some deployment in San Juan. Those two cities we have never been there, so it's a whole greenfield deployment. Apart from that, we are all working on trying to upgrade our copper network and, on the other side, robusting our services in the HFC footprint.

Luis Rial Ubago (Head of Investor Relations)

We have another question from Ceferino. Please go ahead, Ceferino.

Froylan Mendez (Research Analyst)

Thank you. What are the CapEx implications of these FTTH plan? Should we expect an increase in the short term, or it should go into your run rate CapEx levels that we see today? My second question would be regarding mobile pricing. Do you see peers following a similar price scheme as yourselves, like increasing the frequency of price hikes to match inflation? Thank you.

Roberto Nobile (CEO)

Okay. Yeah, probably I didn't answer that on the previous question. Thank you for asking again. The idea is to keep on having the same level of CapEx. We are not thinking of a migration from HFC to FTTH, but we are thinking of services over 300 megabytes per second being migrated to FTTH, not all of them. Despite that, ONTs, which are the CPEs that run in the homes of our customers when you are serving FTTH services, are like 40% less expensive than cable modems, which are the CPEs that are used in HFC. Actually, there is. It is convenient for the company to increase the number of FTTH customers of new customers, so that they...

If you take a look into what we are buying, we are not buying, like 70% of our CPEs today are ONTs on it for FTTH services, despite previously 100% was cable modems for our HFC network. This is a combination that really improves our CapEx expenditure. I can't remember the second question. Luis, can you help me?

Luis Rial Ubago (Head of Investor Relations)

Yes. It was regarding the how we are seeing the pricing from the competition in the mobile segment.

Roberto Nobile (CEO)

Yes. Pricing on the mobile area is. I mean, we're all followers. We're all followers of inflation, so that's been something that the industry has been moving with inflation throughout the year. If you take a look into post-paid prices increased more than 100%. This is not only us. Probably the others are a little behind, maybe 20% or 30% below that in terms of ARPU. Definitely we are all moving and trying to move forward. There was one competitor that instead of increasing prices. We increased prices in January and in March. This competitor increased like a third part of our price increase in March and do it in April also. Different strategies, but we're all following or trying to catch up inflation.

The main problem we have is not on the mobile. I wouldn't say on the mobile. ARPU is doing well. The industry has some troubles trying to increase prices or adjust prices to inflation. We're not talking about increased pricing. We are adjusting prices to inflation on the fixed services, on the broadband and on TV services. That's where other competitors are very aggressive on prices. We call about they are selling three empanadas. It's a way of saying that it is really very, very cheap. We have this increase of inflation during this last semester in Argentina has really challenged us the way we deliver the price increases. As of last year, we were increasing prices every three months.

This year, we started this, the year with a 20% increase in January and a 10% increase in March. That's a 30% increase. If you consider our customer base, it's exactly the same as in Argentina. 30% of them have a formal salary, which increased with inflation, and the 70% of the others are not part of the formal employment of Argentina, therefore their income is not following inflation, it's below that. We have a very high pressure from our customers, trying not to being increased so much. In this first quarter, we have a little more, more of our customers are calling to our reps, our call centers, asking for a rebate or for a discount, additional discount.

We have an 85% of success in terms of trying to giving the customer a discount and keeping them satisfied. But we have more customers calling us, so that 85% was not really enough. We need to increase that number. We have our goal of net at 0 for the next quarter and for the next quarters coming. We're trying to rework our procedures and the way we increase prices on a monthly basis to reduce this risk and trying to make sure that we can keep all our customers with us.

Luis Rial Ubago (Head of Investor Relations)

It seems we have no more questions for the moment. Thank you very much for participating in our quarterly conference call. Please do not hesitating in contacting us. Well, we are the investor relations department for any further inquiries you may have. Good morning to all, and have a nice day. Thank you very much.

Roberto Nobile (CEO)

There is one question from Julieta Rozenza.

Luis Rial Ubago (Head of Investor Relations)

Okay. Sorry? What? I'm sorry. I think I got it directed to you, Roberto. Do you wish to answer that? We don't have the question right here.

Roberto Nobile (CEO)

Sorry, you may ask Julieta.

Luis Rial Ubago (Head of Investor Relations)

Yes. We will unmute. Julieta, we will unmute you right away, so you can please proceed with your question. I'm sorry. Julieta, you are unmuted. Please proceed with your question. Sorry. I'm sorry, Julieta. Please send out your question via email or let's have a call so we can proceed and answer that. Thank you very much. Good morning to all, and see you in the next call.