Telecom Argentina - Q2 2023

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 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 this 6-month period, as 2Q ended on June 30, 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 [email protected]. 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 would 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 potential changes in general market and/or economic conditions, and in legislation. Our press release, dated August the ninth of 2023, a copy of which was included in our Form 6-K and sent to the SEC, described 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, 2018. Accordingly, the reported figure corresponding to the first half of 2023 included the effects of the adoption of the 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 1 and 2 of the presentation. Today, we will go over our business and financial highlights and 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)

Good morning, everybody. Thank you, Luis, and welcome. Moving to slide 3, it summarizes our highlights as of June 30 of 2023. Our main operational and financial achievements were: our EBITDA margin during the first half of 2023 was 28.4%. Pressure coming from labor cost lowered its intensity during the quarter, while we successfully contained increases in other cost items. In the last 12 months, as of the first half of 2023, our CapEx was approximately $655 million, equivalent to 16% of our revenues. Although we have faced certain delays due to tighter import restrictions in Argentina, we are successfully executing our CapEx plan. Our focus is now on the expansion of our FTTH network to consolidate our position in the fixed market. Cash flow generation remains strong despite the challenging context.

In the first half of 2023, we were able to generate approximately $308 million in free cash flow before dividends and interest payments. This represents an improvement of approximately $52 million compared to the same period in 2022. We continued to increase our prices more frequently. As of March 23, we began to implement our price increases on a monthly base. This has contributed to keep the service revenues variation year-over-year flat in real terms, even in the rising inflation scenario. Our mobile subscriber base continued to grow, increasing almost 3% year-over-year. Mobile data usage, measured in average monthly gigabytes per user, has grown 15%. In broadband, we have observed growth in our FTTH technology, which has become our main focus, while our HFC network has remained stable.

During the last quarter, new FTTH accesses contributed to keep our customer base stable and outgrew other technologies. Flow unique customers reached 1.3 million, increasing 7% year-over-year. Additionally, our pay TV business continues to grow in Paraguay. Our fintech Personal Pay continued to grow, reaching almost 1.2 million onboarded clients for the first half of 2023. 5G inception is underway. We currently count with 220 5G sites, most of them working with DSS technology. We have successfully canceled all of our financial debt commitments up to date, thus significantly cleaning our maturity profile for the remainder of the year. Moving to slide 4, it shows the company figures for the first half of 2023. Telecom's revenues totaled $2 billion.

Revenues measured in constant pesos decreased 9% year-over-year, as we have improved our passthrough of inflation to our revenues. We generated $573 million equivalent in terms of EBITDA. Our EBITDA margin was 28.4%. Telecom's mobile subscribers in Argentina amounted 20.6 million, increasing in more than 500,000 when compared to the first half of 2022. Broadband and Pay TV clients have totaled 4.1 million and 3.4 million, respectively. Fixed voice subscribers consider IP telephony lines amounting 2.9 million during the first half 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 half of 2022. Up to date, 48% of our broadband customers have a mobile bundle.

Regarding our regional operations, we currently have 2.3 million mobile subscribers in Paraguay, and 123,000 Pay TV clients in Uruguay. Following slide shows our price adjustment during 2023. The accumulated inflation for the first half of fiscal year 23 was 15.7%. Our year-over-year inflation in Argentina as of June 2023, has been 115.6%. Since March 2023, we have adjusted our pricing policy, responding to the rising inflation scenario, moving to monthly price increases. We have increased both the frequency and magnitude of our price increases to improve our passthrough 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 strength in real terms as of the first half of 23.

Moving to Slide 6, it shows the evolution of our products. In our mobile segment, we have observed total increase of more than 570,000 subscribers, representing an increase of 2.9% year-over-year. This was mainly related with the good performance of our prepaid segment, where we registered a stronger customer recharge rate. While we have observed significant net adds in our postpaid segment during the previous year, mainly due to the greater commercial activity coming from our digital channels, during 2023, we have observed self-time disconnections and down selling to prepaid. Our postpaid clients make up 40% of our total mobile client base. Our broadband accesses have decreased by 144,000, minus 3.4% year-over-year, explained mostly by a reduction in ex-DSL accesses.

We observe encouraging growth in FTTH during second quarter 2023. Increases in FTTH accesses contributed to stabilize our customer base and outgrew our technologies. Our HFC segment remains steady. Our client base with internet speeds of 100 megabytes of or more increased by 97%. Despite a reduction of 160,000 Pay TV subscribers, which represents a 4.6% decrease year-over-year, our Flow platform continued to perform well. In the first half of 2023, Flow's unique customer reached 1.3 million, increasing by 87,000, sorry, total clients, or 7% when compared to the same period in 2022. Our fixed voice segment continued to register a reduction in accesses, mainly in our traditional fixed copper network, which we are replacing partially with new IP telephony accesses over our HFC and FTTH networks.

Slide seven shows the breakdown of our revenues. Service revenues totaled ARS 479 billion, decreasing 10% in real terms versus the first half of 2022, showing an 87 nominal rise, reflecting the price increases we mentioned before. Our revenue breakdown as of June 2023, showed an increase in the participation of mobile services and equipment sales when compared to June 2022, as this is the segment where we have been able to greatly improve the passthrough of inflation to revenues. The breakdown is as follows: mobile revenues, 40.5%; broadband revenues, 21.4%; Pay TV revenues, 18.3%; fixed telephone and data revenues, 11.6%; equipment sales revenues, 7.4%. Slide eight describes the main trends in our mobile and broadband businesses.

During the first half of 2023, Personal had a positive net inflow of over 8,000 postpaid mobile clients from our competitors. Mobile internet usage has continued increasing, reaching an average of 5.5 GB per user per month during the first half of 2023, and growing over 15% year-over-year. Additionally, we continue to increase our average broadband speeds. 83% of our total subs have a speeds of at least 100 MB per second, comparing with 41% during the first half of 2022. This means that our subscribers with speeds above 100 MB have multiplied by 2 times, thanks to a commercial action which doubled the connection speeds of all our clients in FTTH and HFC technologies during the previous year.

Additionally, we have observed growth in FTTH connections, which increased by 72% versus the first half of 2022, respectively. Slide nine shows our business in Paraguay. Our operation in Paraguay continued to build a solid track record. Núcleo generated $102 million and $49 million equivalent in revenues and EBITDA, respectively, during the first half of 2023. The EBITDA margin of Núcleo as of June 2023, was very strong and close to 50%. As of June 30, 2023, Movil's customers totaled 2.3 million. The mobile financial service that our subsidiary provides, Billetera Personal, reached 280,000 subscribers. Fixed internet services subscribers amounted to more than 250,000, growing 14% against first half of 2022.

The pay TV segment continued to show a strong performance, as local customers total 100,000, growing 11% year-over-year. The fixed network deployment in the main cities of Paraguay growing 10% versus the first half of 2022 and reaching 696,000 homes passed. Moving to slide 10, it shows some key performance indicators of our fintech, Personal Pay. As of June 2023, Personal Pay's onboarded clients reached almost 1.2 million, growing 5 times year-over-year. We find that this growth is very encouraging, and we are also growing outside telecom client base, as 19% of these clients belong to the local other telco operators. The total payment number has also been increasing accordingly.

In June of 2023, it reached almost 2.2 million operations. It has multiplied by more than 8 times when compared to June 2022. Total payment volume has increased by 92% growth in comparison to March 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 partnerships with various shops and businesses, providing our clients with exclusive benefits. During the first half, Personal Pay continued to expand the differential of its product, incorporating the new functionality of remunerating balances for all its users, which allows them to generate profits by simply having their money available in the wallet, a feature that is working very well. As of June, Personal Pay is the number one fintech in customers' account balance remuneration.

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 11, we provide an overview of our main financial figures. Consolidated revenues grew by 88% nominal terms during the first half of 2023, reaching more than ARS 456 million. When analyzing the figure adjusted by inflation, revenues amounted to more than ARS 517 million, showing a decrease of 9% in real terms versus the same period in 2022. This lag versus inflation is explained, among others, by the effect of certain discounts and promotions we grant the price increases to retain our customers in a strong competitive environment. Additionally, the adjustments we have done in our price policy proved effective, as this lag versus inflation has observed a downward trend since the third quarter of 2022.

EBITDA increased by 75.5% year-over-year in nominal terms, generating an EBITDA margin of 29% during the first half of 2023. EBITDA margin in real terms was 28.4%. Additionally, our operating costs before DNA have also grown below inflation, decreasing 6.5% in real terms versus the first half of 2022. We have continued to manage our cost structure in order to reduce the impact of rising costs, explained by the inflationary environment. During the second quarter of 2023, we managed to maintain our margin constant when compared to the same period a year before. This is a good indicator that our pricing and cost management strategies are guiding us in the right direction.

Slide 12 shows the evolution of EBITDA year-over-year and the impact of different components of revenues and costs. In the first half 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 to inflation. We observed good results in programming and content costs, interconnection costs, and some other items. The company's efforts have been successful, as evidenced by these cost lines keeping their share over revenues constant versus a year ago. Most of the margin contraction year-over-year is explained by the evolution of our labor costs and people services, maintenance, and materials, which are also affected by the increase in salaries of contractors.

These costs represented 36% of revenues in the first half of 2023, versus almost 35% during the first half of 2022. This explains a big portion of the margin reduction. As they have been evolving below inflation during this quarter, still shows the good job that the company has been performing in terms of cost management. Operating costs, excluding amortization, depreciation, and tax asset impairments, total ARS 370.5 million in the first half of 2023, representing a decrease of ARS 25.6 million, or -6.5%, compared to the first half of 2022. Slide 13 shows the evolution of the effects, inflation, and of our average salaries.

Since 2021, the official effects have been has been increasing below inflation, thus generating an appreciation of the peso versus the U.S. dollar in real terms. In 2022, the inflation has segment accelerated notoriously, this real appreciation of the effect has been more acute. As we have been passing through most of the inflation to our ARPU, we have been able to observe a recovery in USD terms during the last 2 years, mostly during 2022. When analyzing the evolution of our salaries versus inflation during 2018 to 2020, in which we observed a milder inflation in Argentina, we know that in certain periods, salaries underperformed inflation. This has generated in a gap during certain months, which contributed to the expansion of our EBITDA margin.

Since 2021, inflation began to accelerate and move to higher levels. In this sense, salary adjustments become more frequent and began to trend inflation more closely. The mechanics that generated the underperformance of salaries versus inflation during certain months of the year were lost, mainly explaining the compression of our EBITDA margin, as we have analyzed in the last slides. There is a good opportunity for the recovery of our EBITDA margin with a normalization of the macroeconomic environment in the future, and with a return of inflation to milder levels in Argentina. Slide 14 shows the company net results and EBIT. The EBIT decrease in constant currency is explained mainly by the decrease in EBITDA in real terms. This, combined with the inflation adjustment or DNA, resulted in an operating margin of -4.7% of consolidated revenues.

In historical figures, the same margin was 20%. In the first half of 2023, the company had a net income of ARS 39 billion, mainly due to positive net financial results of almost ARS 22.5.4 billion, mainly driven by inflation adjustment gains and positive effects results in real terms, and to a positive income tax of almost ARS 37.6 billion. Slide 15 shows a summary of the company's CapEx in PP&E and intangible assets during the first half of 2023, which amounted to more than ARS 61.5 billion, or an equivalent of $240 million at the official tax rate. This amount is 26.2% lower when compared to the same last year period.

Our consolidated amount of CapEx for the first half of 2023 amounted to around 12% of our total revenues. Notwithstanding the fact that we observed certain levels of seasonality in our CapEx, our investment level was influenced by tighter import restrictions in the first half of 2023. As we commented in other opportunities, our CapEx plan is flexible, and we have been investing way above the lower average ratio of CapEx to revenues for the type of space in recent years, and the performance of our network is currently very solid. Technical CapEx was mainly composed by investments in our access network and technology. Our investments are mainly geared to enhance our access network. During the first half of 2023, 51 new mobile sites were deployed, while the other 702 existing sites were upgraded.

Additionally, up to date, we count with 225 key sites, most of them working under DSS technology. In our fixed access network, we increased the deployment of new XG-TH over 6,400 new blocks, including the overlay of our HFC network. We also improved the upstream capacity of our HFC network by almost 11,000 blocks. The balance of our CapEx was allocated to installation and customer premise equipment or CPE, which are installations and equipment in the homes of our clients and to our international operations. Slide 16 describes our cash flow generation during the first half of 2023, compared with the same period of 2022. Our cash flow generation was very robust.

Despite experiencing a lower EBITDA in real terms, our free cash flow has increased due to a reduction in CapEx and working capital needs during this period. In the first half of 2023, our free cash flow before dividends and interest payments amounted to approximately $308 million, which represents an improvement compared to the same period in 2022. Slide 17 shows our key figures for the first half of 2023, in constant measuring unit converted to the effects of each year. Our gross debt amounted to $2.7 billion as of June 30 of 2023. The company holds cash and equivalent for more than $310 million, having a net debt of about $2.4 billion.

Our net debt to EBITDA ratio as of June 2023 was 2.17-- 2.27 times EBITDA. Slide 18 shows the breakdown of our financial debt. Total outstanding debt after June 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 local capital markets. As of June 2023, our debt denominated in foreign currency was 67% of our total debt, but this share will decrease as the participation of our local debt is increasing. We have been very active in the local capital markets through a series of successful issuances of notes. Currently, our cost in the local markets for dollar-linked instruments is below zero.

As we have successfully canceled all of our financial debt commitments up to date, including the second installment of our classified amortizing notes, while the maturity of the 2019 IFC loan will be canceled today, we have significantly cleared our maturity profile for the remainder of the year. With almost 80% of the remaining maturities for this year are denominated in pesos, which can be easily refinanced in the local markets and with local financing institutions, taking into account the solid credit profile of Telecom.