Telecom Argentina - Q3 2021

Transcript

Luis Rial Ubago (Head of Investor Relations)

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating in this conference call. The participants of today's conference call are Roberto Nobile, Chief Executive Officer, Gabriel Blasi, Chief Financial Officer, Fernando Balmaceda, Director of Investor Relations, myself, Luis Rial Ubago. The purpose of this call is to share with you the results of the nine-month period and third quarter of fiscal year 2021, ending on September 30 of 2021. 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 this 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, 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 November 9, 2021, a copy of which was included in a 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, which establishes that reexpression will be applied to the annual financial statements for the fiscal year ended December 31, 2018, and subsequent interim and special periods. Accordingly, the reported figures corresponding to the nine months of 2020 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 the presentation.

Gabriel Blasi (CFO)

Thank you, Luis. Good morning and welcome to everyone. Going to slide three summarizes our main highlights as of September 30, 2021. Our main operational and financial achievements were we presented a new corporate identity and our main brands have been consolidated under Personal, Flow, and Telecom. We have been able to increase prices during 2021 and to reduce the gap with inflation. We increased our CapEx plan for this year to a range between $650 million-$700 million. We will continue to invest in the best technology to maintain the solid performance of our network. We have achieved an EBITDA margin of 32.6% continuing with our cost management initiative despite the higher local inflation. Our payout is currently 2% of our total revenues, which is below industry standards. We have launched our fintech company, Personal Pay, in an open beta version. We currently have more than 8,000 registered clients.

Supporting our employees in terms of COVID-19 has been and will remain being a top priority for the company. We are working on the refinancing of our debt maturities due 2022. We seek to access local capital markets in case we need additional financing, because of the prior point. Our cash flow generation is strong. We are developing a new sustainability plan based on ESG standards. Inflation in Argentina is currently about 50% per annum. However, the impact of our industry on inflation index is only 2.8%. We have launched our new IR website, improving the way we communicate with our investors. Slide four shows the company figures of the nine months of 2021. Telecom's revenues totaled $3 billion. Revenues measured in constant pesos decreased 7.7% year-over-year.

Notwithstanding this, and due to the price increase performed, service revenues in constant pesos as of September 2021 during the third quarter of 2021. If we move to slide seven, we show our price adjustment during September 2021. Sorry, made a mistake.

Roberto Nobile (CEO)

Have increased.

Gabriel Blasi (CFO)

The service revenue in constant pesos of September 2021 have increased 8.5% when compared with the second quarter 2021. EBITDA totaled $1 billion. Our EBITDA margin was 32.6%. Telecom's mobile subscribers in Argentina amounted to 19.5 million, increasing in more than 860,000 total clients when compared to the first nine months of 2020. Broadband clients have also experienced an increase year-over-year, totaling 4.2 million. Pay TV subscribers have remained steady in 3.6 million when comparing the first nine months of 2021 with the same period of 2020. Fixed voice subscribers, without considering IP telephony lines, amounting to 2.5 million during the first nine months of 2021.

Our commercial strategy has allowed us to increase our total convergent unique customers to 2.2 million, with 49% of our broadband customers having a mobile bundle. Slide five summarizes the change in our corporate image and commercial brands. In October, the company launched a new institutional visual identity and changed its commercial brands. This rebranding aims to better express and enhance the synergies of our services. Personal now offers full connectivity to its customers with the best service experience, thanks to its fixed and mobile networks. Our Personal brand currently integrates our mobile, broadband, and fixed voice services, absorbing the Fibertel brand. Flow is the brand for all our Pay TV and content-related services. It is currently a true meeting point for entertainment, where the contents of the most important streaming platforms on the market are also integrated.

Finally, we have launched our Telecom brand for the B2B segment, previously named Telecom Fibercorp. The company will continue to offer digital solutions for the corporate and government segments, with focus not only in connectivity, but also in IoT services. The company has also renewed its institutional investor relations website, improving the contact and communication with its investors. Moving to slide six, it shows the evolution of local inflation. Last 12 months, Argentine inflation as of September 2021 has been 52.5%. Monthly inflation in 2021 has ranged from 2.6%-5.2%. The impact of our industry in the inflation index is only 2.8%. Therefore, we do not have an important impact on said index.

We envision that the local inflation will remain high during 2022, but costs adjusting to the general index posed a significant challenge to company margins, which we'll be able to deal with, thanks to the strong efficiencies achieved and a strong investment base. Moving to slide seven shows our price adjustment to September 2021. After having our prices constant for most parts of 2020, from March to December, we decided to increase prices by 20% during the first quarter of 2021. In June, we increased our prices again by 10%, and in September, we did a third price increase of 10% on average. In mobile, prices have increased 10% on average. In broadband, the prices of the services with speed up to or equal to 25 MB/s, mainly on our DSL services, have increased by a 10%.

Prices of services with a speed higher than 25 MB/s increased by 8%. All prices of Pay TV services, including the premium services as HBO and Fox, have increased by 8%, while our football pack has increased by 19%. Prices of fixed voice basic services were increased 10% on average. We have done a substantial contribution during quarantine as a working capital, avoiding bad debtor cutoff of price freeze not yet fully recovered, as we have seen. Mobile segment, moving to slide eight, is showing the evolution of our products. On the mobile, postpaid subscribers have increased 5.2%, while prepaid subs have increased 4.3%. Our postpaid and prepaid shares are 42% and 58% respectively. Fibertel. Our customer base increased 1.5% year-over-year, mainly growing to the HFC and FTTH segments.

In Pay TV, accesses have remained almost constant, mostly leveraged on the better performance of our Flow platform. In fixed voice, the reduction of accesses has continued, mainly in traditional fixed copper lines. On the other hand, our Fibertel IP accesses have increased by almost 370,000 lines. Slide nine shows the evolution of our services revenue. Service revenue totaled ARS 272 billion, decreasing 9% year-on-year versus nine months of 2020, in a period where annual inflation was 52.5%. Our revenue breakdown as of September 2021 is similar to our previous quarters, with a slight increase in mobile and broadband. The breakdown is as follows. Mobile revenues, 38%. Broadband revenues, 21%. Pay TV revenues, 20%. Fixed telephone and data revenues, 14%. Equipment sales revenues, 7%.

Our main trends in our mobile and broadband businesses are explained on slide 10. Postpaid mobile and broadband are the two main drivers of our performance. During this quarter, we have been able to grow both our postpaid and broadband clients. As of September 2021, postpaid subscribers amounted to 42% of our total customer base. The chart in the upper left shows the competitive landscape wireless per month. Personal is in blue color. Positive numbers shows incoming clients, and negative numbers show clients lost against the competition. Mobile internet usage has continued increasing, reaching an average of more than 4.2 GB per user per month in 2021. In addition, there has been an important increase in broadband speeds. 68% of our total subs have speeds between 50 and 1000 MB/s, comparing with 58 during the first nine months of 2020.

This was mainly explained by the growth in HFC and FTTH connections. On slide 11, we summarize the competitive advantages of our networks and products. Telecom's leadership in Argentina telecommunication markets is leveraged on three main strategic assets: broadband, Flow, as is our IP TV service, and mobile. Our broadband network has the best coverage around the country, achieving average speed of 82 MB/s in the case of our FTTH network, and 74 MB on our HFC technology, reaching 60% of homes passed over total homes in Argentina. Flow has evolved into a meeting point for entertainment, allowing clients to have direct access to video, music, gaming, and to other leading streaming applications in the market.

Our mobile network is the fastest in the country, reaching almost 88% urban coverage, and with the best download, upload speed as measured by Speedtest as of October 2021. Moving to slide 12 is a summary of our operations in Paraguay. Núcleo generated ARS 166 million and ARS 77 million in revenues and EBITDA, respectively, during the first nine months of 2021. The revenues breakdown was as follows. Browsing services 44%, voice 16%, data 6%, broadband 14%, TV services 8%, and other services with approximately 12%. As of September 30, 2021, mobile customers totaled 2.2 million. Clients of Billetera Personal, a mobile financial service that our subsidiary provides, reached almost 270,000 customers. Fixed Internet service subscribers amounted to more than 180,000.

In the pay TV segment, Flow customer total 30,000, and in Personal HD, 60,000. The fixed network deployment in the main cities of Paraguay has been increasing rapidly, reaching 480,000 homes passed. Additionally, Núcleo's internet subscribers total more than 180,000, increasing almost 1.5x versus the first nine months of 2020. I will now pass the call to Fernando Balmaceda, who will go over our financial presentation. Fernando?

Fernando Balmaceda (Director of Investor Relations)

Thank you so much, Gabriel. In slide 13, we provide an overview of our main financial figures. During the first nine months of 2021, consolidated revenues on nominal terms grew by 36%, reaching ARS 258.2 billion. When analyzing said figure, adjusted by inflation, revenues amounted to almost ARS 293 billion, showing a decrease of 8% in real terms. Service revenues showed a 33% nominal increase in a context where prices were frozen from March to December 2020. EBITDA increased by 26% year-over-year in nominal terms, thus generating an EBITDA margin of 33.6%. EBITDA margin in real terms was 32.6%. The company continued to manage its cost structure, with operating costs before D&A decreased by 3% in real terms versus the nine months of 2020.

Slide 14 shows the company EBITDA and the impact of the different components of revenues and costs. Operating costs were 3% lower in real terms. The company performed an efficient cost management process as almost all of our cost lines experienced a decrease in real terms, with exception of labor and handset costs, mainly due to the increasing prices and higher sales. Our EBITDA has been affected mainly by the higher labor costs due to salary increases that we agreed with our unions and non-union employees, which were in the range of 22.5% for the second half of 2021. It's important to mention that our bad debt expenses decreased by 55.4% versus the nine months of 2020, as a direct consequence of the several actions the management has been taking during 2020 and 2021.

Our percentage of bad debt related to total sales is very low, 1.8%, and our collections are performing normally. In slide 15, the company's operating income totaled almost ARS 1.2 billion, while EBIT has decreased 96% in real terms. The EBIT decrease in constant measuring unit is explained by the increase in D&A and by the disposals and impairment of fixed assets, which increased more than 12% in real terms year-over-year. Mainly due to the D&A increase, operating margins reached 0.4% of consolidated revenues, while in historical figures, the same margin was 19%. In the first 9 months of 2021, the company had a net income of ARS 1,025 billion, mainly due to tax expenses of only ARS 31 billion, which were partially offset by the company's positive net financial results of ARS 30.5 billion.

The income tax figure, which includes a higher charge coming from increase in the tax rate imposed by law, while the positive financial results were driven by an improvement in FX results in real terms and inflation adjustment gains. Slide 16 shows a summary of the company's CapEx and PP&E and intangible assets through the nine months of the year, which amounted to almost ARS 554 billion or an equivalent of $546 million at the official FX rate. This amount is 1% higher when compared with the same last year's period. Our consolidated amount of CapEx amounted to 18% of our total revenues, which is a very important ratio according to global industry standards. Technical CapEx was mainly composed of installation and customer premises equipment or CPE. The balance was allocated to network and technology and to our international operations both in Paraguay and Uruguay.

During the nine months of 2021, 120 new mobile sites were deployed and more than 1,500 existing sites were upgraded. The capacity of HFC access network continues increasing, mainly through segmentation of areas. We continue to deploy FTTH fixed assets technology. More than 7,000 blocks were commercially enabled, with other 2,500 were built. Slide 17 describes our cash flow generation during the nine months of 2021 as compared with the same period of 2020. Our cash flow generation is currently very solid. In the nine months of 2021, the operating free cash flow amounted to approximately $418 million equivalent. This variation versus the nine months of 2020 is mainly explained by the decrease in our EBITDA in real terms. Slide 18 shows our key figures for the last 12 months as of the third quarter of 2021 in constant ARS.

Company's revenues amount to almost ARS 389 billion, while EBITDA amounted to almost ARS 123 billion. Last twelve months EBITDA margin was 31.6%. Our gross debt amounted to ARS 248.5 billion as of September 2021, decreasing 9.3% from December 2020. After the dividend payment of August 2021, the company holds cash and equivalents of ARS 20 billion, having a net debt of ARS 223 billion. Our net debt to EBITDA ratio is 1.82x. Slide 19 shows the breakdown of our financial debt. As mentioned during the last quarters, our debt restructuring process has been extremely successful. Total outstanding debt as of September 2021 amounted to $2.5 billion.

For the rest of 2021, our debt maturities are completely manageable and very low. For 2022 and 2023, our debt maturities remain within the range of $632 million, and they reduce considerably until the maturity of our 2026 bond. We're working with banks and mutuals on the refinance of our 2022 debt maturities.