Telecom Argentina - Q3 2022

Transcript

Luis Rial Ubago (Manager of Investor Relations)

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating on the conference call. The participants of today's conference call are Roberto Nóbile, 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 nine-month period and third quarter of fiscal year 2022 ended on September 30 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, 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 on our operations and financial performance.

Our press release dated November the 9th, 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 777/2018 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 ending as of, and including, December 31, 2018. Accordingly, our reported figures corresponding to the nine-month period 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 value 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. Moving to slide three, it summarizes our main highlights as of September 30, 2022. Our main operational and financial achievements were. Our EBITDA margin during the first nine months of 2022 was almost 29%. Main pressures came from our labor cost, partially offset by some other cost lines in which we have contained the pressure coming from high inflation rates. Our CapEx was approximately $580 million, representing 16% of our revenues. Cash flow generation remains solid and stable. We were able to generate $369 million equivalent in free cash flow during the nine months of 2022. As inflation is accelerating, we are increasing the frequency and magnitude of our price increases in a challenging scenario to cope with that trend.

Our mobile subscriber base continues to grow with a strong post-paid performance, growing 5.7% year-over-year. In broadband, we observed growth in our HFC and FTTH subscriber base. Flow unique customer reached 1.3 million, increasing 18% year-over-year. We launched a version of Flow in a prepaid modality called Flow Flex. Our fintech Personal Pay reached almost 528,000 onboarded clients. In August, we reopened our Class 12 issuance of local notes, obtaining $75 million equivalent at a yield of -2.1% in US dollars. We sold our Costanera building in the city of Buenos Aires for a total amount of $6 million. We received an advance of $22 million in September 2022.

Regarding ESG, in September, we held the Sustainability Week, an internal event in which both internal and external speakers participated. We recorded a goodwill impairment, which includes the goodwill generated as a result of the merger between Cablevisión and Telecom in January 2018 for ARS 208 billion due to the deterioration of market conditions. Slide four shows the company figures for the nine-month period of fiscal year 2022. Telecom's revenues total $3.2 billion. Amidst the rising inflation environment, revenues measured in constant pesos decreased 12% year-over-year. EBITDA generation totaled $0.9 billion. Our EBITDA margin was 28.7%. As of September 30, 2022, total mobile subscribers amounted to approximately 20 million, increasing almost 500,000 total clients when compared to the same period of 2021.

Post-paid clients represented 43% of our subscriber base. Broadband and Pay TV clients totaled 4.2 million and 3.5 million respectively. Fixed voice subscribers considering IP telephony items amounted to 3.1 million during the first nine months of 2022. We have increased our total converged unique customers to 2.2 million, increasing in almost 60,000 clients when compared to the third quarter of 2022. While currently 52% of our broadband customers have a mobile bundle. Finally, turning to our regional operations, we have 2.3 million mobile subscribers in Paraguay and 131,000 Pay TV clients in Uruguay. Slide five shows the evolution of local inflation. Year-over-year inflation in Argentina as of September 2022 has been of 83%.

Inflation has accelerated as of July 2022, jumping to monthly levels of 6 or 7%. Year-to-date inflation as of September 2022 was 66.1%. The impact of our industry inflation index is not meaningful, as communications has only a weight of 2.8% within this index. Moreover, communication services registered the lower year-over-year variation in comparison with other items of the CPI. Slide six shows our price adjustment during 2022. As we mentioned, local inflation in Argentina is currently running at very high levels. Accordingly, up to date, we have performed five price increases during 2022.

During the end of September, we have increased our prices for mobile, and during October for the fixed services, and these price increases were not above in magnitude close to 18%-19%, in comparison with the rest of the price increases that we did during the year. During this month, we're performing another increase in our mobile prices of 17% on average. In the current macro and competitive situation, it's encouraging to see that notwithstanding the fact that we are increasing the price to cope with inflation or our services more frequently, we have not observed any significant loss in terms of market share or substantial decrease of our customer base. Slide seven shows the evolution of our products. Mobile segment, postpaid subscribers have increased by more than 460,000 clients or 5.7%.

As we have mentioned, our postpaid clients represent a 43% of our total mobile client base. Total prepaid subscribers remain almost constant, increasing in almost 15,000 clients or 0.1%. This evolution is explained mostly due to a decrease in non-recharging customers. Our recharging prepaid customer base continued to serve a solid performance, growing year over year and showing a higher volume of recharges when compared with the previous year. Broadband, our customer base is stabilized. We will continue to observe growth in the HFC and FTTH segments, and we have registered a decline in accesses in the XDSL segment. Our Pay TV subscriber base has experienced a reduction of 61,000 accesses, which represent a decrease of 1.7%. Nonetheless, our Flow platform continued to show a good performance.

During the nine months of 2022, Flow's unique customers reached 1.3 million, increasing in almost 200,000 total clients or 18.3% when compared to the same period in 2021. In fixed voice, the reduction of accesses has continued, mainly in traditional fixed copper lines. On the other hand, our IP telephony accesses have increased in more than 370,000 lines. Moving to slide eight, it shows the evolution of our service revenues. Currently, almost 40% of our total revenues are generated by the mobile businesses, and then another 40% is generated by Pay TV and broadband. Fixed and data represent 12% and includes not only fixed voice, but also our B2B businesses, of which an important part is denominated in US dollars. The handset business represent around 6% of our revenues.

Our service revenues have amounted to ARS 440 billion, decreasing 12% in real terms. This gap versus inflation is considerably less in mobile and broadband service revenues, with Pay TV lagging the most. As mentioned, our fixed voice and data businesses include some portion of its revenues that are adjusted to the evolution of the official FX, which mainly explains underperformance versus inflation. In this sense, including our subsidiaries, approximately 16% of our revenues are related to the evolution of the FX. Slide 9 describe the main trends in our mobile and broadband businesses. During 2022, Personal had a positive net inflow of postpaid mobile clients from our competitors. Our postpaid performance has very solid, increasing the postpaid participation of our mobile customer base to 43%.

Mobile internet usage has continued increasing, reaching an average of almost 5 GB per user per month during the nine-month period of 2022. Additionally, we continue to increase our average broadband speeds. 79% of our total subs have speeds between 50 and 1,000 Mbps, comparing with the 68% during the first nine months of 2021. This was mainly explained by the growth in HFC and FTTH connections, which increased by 3% and 104% versus nine months 2021, respectively. Moving to slide 10 shows our businesses in Paraguay. Our operation in Paraguay continued to keep to a solid track record. Núcleo generated $156 million and $75 million equivalent in revenues and EBITDA, respectively, during the nine months of 2022.

The EBITDA margin of Núcleo as of September 2022 was very strong and close to 50%. As of September 30, 2022, mobile customers total 2.3 million. The mobile financial service that our subsidiary provides, Billetera Personal, reach almost 290,000 subscribers. Fixed internet services subscribers amounted to more than 230,000, growing 28% versus the third quarter of 2021. In the pay TV segment, Flow customers total 44,000, and in Personal HD, 49,000. The fixed network deployment in the main cities of Paraguay continue to increase, growing 37% versus the first quarter of 2021 and reaching 655,000 homes passed. Slide 11 shows some key performance indicators of our fintech Personal Pay.

As of September 2022, Personal Pay's onboarded clients amounted to almost 528,000, growing 2.2x versus the previous quarter. We find that this growth is very encouraging, and we are growing also outside of Telecom client base, as almost 18% of these clients belong to other local telco operators. The number of prepaid cards accounts have multiplied by 2.6x, amounting to almost 292,000. The total payment number has also increased accordingly. In September 2022, it reached almost 917,000 operations, and it has multiplied by more than 3x when compared to June. Growth in our digital wallet is leveraged on a strong value proposal for the company clients and for clients outside Telecom as well, through benefits in strategic shops.

We are currently upgrading the features of our digital wallet in order to offer additional possibilities. I will now pass the call to Luis Rial Ubago, who will go over our financial performance.

Luis Rial Ubago (Manager of Investor Relations)

Thank you, Gabriel. In slide 12, we provide an overview of our main financial figures. During the 9-month period of 2022, consolidated revenues grew by 44% on nominal terms, reaching ARS 370 billion. When analyzing said figure adjusted by inflation, revenues amounted to almost ARS 471 billion, showing a decrease of 12% in real terms versus the same figure in 2021. EBITDA increased by 24% year-over-year in nominal terms, thus generating an EBITDA margin of 29%, while EBITDA margin in real terms was 28.7%. Operating costs before D&A have grown below inflation, decreasing 7.1% in real terms versus the 9-month period of 2021. We have continued to manage our cost structure to reduce the impact of rising labor costs.

Slide 13 shows the company's EBITDA and the impact of the different components of revenues and costs. During the nine months of 2022, the company has been able to contain the pressure coming from inflation in most of its cost lines, as almost all of them experienced a decrease or remain in line when compared with inflation. We have observed good results in programming and content costs, interconnection costs, and some other items like charges for lawsuits and other contingencies on rents and internet capacity included in other costs. These cost management initiatives have partially offset the rise in labor costs, which have increased over inflation and explained most of the margin contraction year-over-year. Labor costs represent 25% of our revenues and have increased 5% in real terms when compared to the nine-month period of 2021.

Slide 14 shows the company's net results and EBIT. The EBIT decrease in constant measuring unit is explained mainly by the decrease in EBITDA in real terms and by the goodwill impairment commented by Gabriel, which includes mainly the goodwill generated as a result of the merger between Cablevisión and Telecom. In the nine-month period of 2022, the company had a net loss of ARS 163 billion, mainly explained by the aforementioned impairment for a total amount of ARS 208 billion and by a negative income tax of ARS 4.3 billion, partially offset by a positive net financial results of ARS 75 billion. The positive financial results were mainly driven by inflation adjustment gains and lower net interest charges. In slide 15, we summarize some important highlights regarding the impairment we just mentioned.

The most significant goodwill held by the company was generated by the merger between Telecom Argentina and Cablevisión, which became effective on January the 1st, 2018. It is important to remark that in order to determine the original value of this goodwill, the consideration paid was based on the fair value of the shares of Telecom on the last business day before the effective date of the transaction. The New York Stock Exchange market price of the ADR of Telecom on said date was $36.63 per share. As of September 30, 2022, the price of the ADR of Telecom was $4.01, decreasing 89% versus the value considered the effective date of the merger.

Due to the deterioration of economic conditions in Argentina and to the lower market value observed in the telecommunications industry as a whole, Telecom's share price in pesos has particularly underperformed inflation during 2021 and 2022, while fixed assets had increased their book values based on the inflation rate in accordance with the requirements of IAS 29. These market factors mainly explain the current difference between the book value of the goodwill and its fair value, which has determined the need to recognize an impairment of ARS 208 billion. That has impacted our EBIT and net income. Finally, it is very important to remark that the aforementioned impairment does not affect assets other than goodwill and has no impact over the company's operations, EBITDA, or its cash generation capacity.

For further details about this impairment, we encourage you to refer to note 26 to the consolidated financial statements as of September 30, 2022. Slide 16 shows a summary of the company's CapEx in PP&E and intangible assets during the nine-month period of 2022, which amounted to almost ARS 75 billion or an equivalent of $508 million at the official exchange rate. Our consolidated amount of CapEx amounted to almost 16% of our total revenues and is 24% below in real terms as of the first nine months of 2021. Technical CapEx was focused on the deployment and modernization of our 4G mobile access sites, the deployment of last mile networks with the FTTH architecture, installations and equipment in the homes of our clients or CPE.

During the nine month period of 2022, 64 new mobile sites were deployed, more than 1,000 sites were upgraded, and another 20 are under construction. We expanded our FTTH network over 5,700 new blocks. Additionally, we performed an overlay with FTTH over HFC network in 4,600 blocks. We also increased the upstream capacity of our HFC networks by 50,000 blocks. Additionally, we have expanded our FTTH network in Mendoza over 550 new blocks. As of September 2022, we have also deployed 109 5G DSS sites with connection speeds up to 15 GB/s. We expect to count with a total of 170 sites working with DSS technology for the end of the year.

Slide 17 describes our cash flow generation during the nine-month period of 2022 compared with the same period of 2021. Our cash flow generation is currently very solid, remaining stable when compared with the previous year, with the previous quarter. As of September 2022, the operating free cash flow amounted to approximately $413 million equivalent. The impact of a lower EBITDA in real terms on free cash flow has been partially offset by a lower amount of CapEx during this year. Our free cash flow before dividends and interest payments during the first nine months of 2022 has been $369 million equivalent. Slide 18 shows our key figures for the third quarter of 2022 in constant currency year-over-year.

Our gross debt amounted to $2.7 billion as of September 30, 2022, decreasing 9.7% from December 2021. The company holds cash and equivalents for $268 million, and our net debt amounts to approximately $2.4 billion. Our net debt to EBITDA ratio remains slightly below 2x. Slide 19 shows a quarterly evolution of some key ratios. Our bad debt over revenues ratio had a positive evolution since 2020, where it reached levels of 4% mainly due to COVID-19. During 2021, the low bad debt ratio was mainly explained by post-pandemic collection improvements. In 2022, this ratio was mainly affected by the economic situation in Argentina.

In the 9-month period of 2022, our bad debt over revenues was 2.5%. Our CapEx over revenues for the last 12 months as of September 2022 was 18.4%. This figure is slightly below the level of 2022 and 2021. Our maintenance CapEx is in the range of $300 million-$350 million per year, so we have a lot of flexibility in this sense as we are investing well above said figure. Gross debt to EBITDA was at 2.2x, while net debt to EBITDA was lower than 2x. Both ratios still very solid when compared with other telcos. Slide 20 shows the breakdown for financial debt.

In August, we reopened our Class 12 issuance of local notes, obtaining $75 million equivalent at a yield of -2.1%. Total outstanding debt as of September 2022 amounted to $2.7 billion. During the third quarter, we have been reducing our overdraft exposure with local banks. Our debt maturities for the next month of 2022 are mostly denominated in pesos, and our debt maturities for 2023 are very manageable. Less than 50% of these maturities are denominated in US dollars. Currently, our maturity profile is significantly clear. This means that under the current rules of the Central Bank, we have access to the FX market in order to pay down our debt with pesos up to 2026, when it comes the maturity of our Class 1 notes.

We expect to continue accessing the local capital markets for our potential financing needs. In fact, the participation of debt in our local capital markets has increased versus previous year, reaching approximately 31% as of September 2022. With this, we now 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 send a message to IR Telecom Argentina through the Q&A menu. Identify yourself, stating that you have a question or alternatively use the 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 question.

Thank you very much.

Gabriel Blasi (CFO)

We have a question from Ignacio Sniechowski from Invertir en Bolsa. Hi Ignacio, we will unmute you and so you can proceed with your question. Thank you. Hi Ignacio, we have unmuted you, so you can proceed with your question. Please say that aloud so we might answer it right away. Thank you.

Ignacio Sniechowski (Head of Equity Research)

Can you please unmute?

Gabriel Blasi (CFO)

You have to unmute you, Ignacio, so perhaps you can proceed. Manually unmute you.

Ignacio Sniechowski (Head of Equity Research)

Hello. Thank you for taking my questions. It's been a tough quarter for the company as inflation is accelerating. My two questions are related to this issue. The first question is regarding the strategy of the company to defend revenues in real terms, and then on the event of a further acceleration of the inflation rate, which is a scenario that cannot be discarded. The second question is also if there is room for some additional cost reduction programs in order to increase the operating and EBITDA margin, mostly to offset this decline in real term income. Thank you.

Gabriel Blasi (CFO)

Thank you, Ignacio, for your question. As you probably are aware, for the company, not only us, but for most of the companies in Argentina, with that type of services, it's much more difficult to cope with the figures when inflation rates accelerate constantly as we are having the situation now. Having said that, we have like short-term issues and long-term issues. From the revenue point of view, in the short run, as we have explained in the presentation, we go with more frequent and bigger increases in prices just to cope with inflation. These are not really real price increments, but just getting inflation.

Having said that, the limit to that is the competitive environment, and of course, the situation of the consumer in Argentina as a whole. On the cost side, in the long run, the answer to this is the addition of additional services that the company is building up, like the fintech, like OTT services and another new, like in the B2B environment. Of course, these are longer developments that take longer to develop, but we are working very steadily in that direction, and in the same way that we have implemented what we have committed in terms of investment.

When you look at the last five years, when we made the merger, we commit that the company was going to invest a $5 billion plan, and we have invested already more than $4.3 billion in that term. You can add more to that figure, some consideration of foreign exchange. We are confident that that will help to add additional layers of value to our business in the long run. On the cost reduction, when you look at the evolution of the cost structure of the company, both in the short and in the long run, the company has been extremely successful in terms of coping with the inflation pace.

Of course, this is the limit, and probably the picture that you are seeing today is not, for many different reasons, very favorable in that direction. Because as the nominal increases are not synchronized and are not equal, this type of serpent that it generates with increases from time to time on the revenues and with a recognition of additional costs are not completely synchronized. That brings some volatility to our EBITDA margin that we understand does not make the people and even us very happy, but it is that we need to cope with that.

Having said that, when you look at the general evolution of the cost of the company in real terms, this has allowed us to offset partially the huge increase in labor cost. The big problem in Argentina in general, as you probably know, and especially on election years, is the difficulty to cope with a very rigid labor market, with the salaries that cope with inflation pace, no matter what. This is the big challenge that we up to now have been able to cope with that through the cost reduction in the rest. Definitely is something that we put a lot of focus on this and that we plan further actions in the near future.

Roberto Nóbile (CEO)

Okay, Ignacio, this is Roberto. Thank you for your question. Just to add to what Gabriel was mentioning, we have a mismatch on a regular basis, unfortunately, between price increases and labor cost increases. You will see that we have been able to increase prices in January, in April, in July, in September. Probably October, not September, and then I will explain that. That is a mismatch against what we have been able to discuss with the unions in terms of salary increases. That is at the end of each quarter, that mismatch becomes a two or three points of EBITDA reduction that are temporary, because on the following month, we are able to get it back and to catch up with the same rate.

We are working internally to start increasing prices, taking into consideration that next year inflation will be as high as this year. We are planning to start increasing prices or adjusting prices to inflation every two months. It's not easy. It's not easy to do in terms of applications. We need to change the processes internally and the way to communicate to customers to fit in with the legal requirements in terms of communications and so on. We are planning to change the way we adjust prices for next year. For this year, we have increased prices in October.

In terms of mobile subs, we have started increasing prices for certain cycles, billing cycles in September, but the full impact of the increase will come through in October. If you take a look at the general costs, the general costs of the company have gone a little below our revenues increase, except for labor cost, which was what Gabriel was telling you. Labor costs are very difficult to manage, and they go with inflation. We have been working very heavily in the sizing of the company. If you consider December, January 2018, we were almost 27,000 people, and by the end of September, we are around 22,300 people.

That 20% reduction in labor cost is part of the. It's trying to counter the effects of the salary increases. We are planning to keep on looking for the best sizing for the company for the type of business we are dealing in the near future. We have a question coming from Alejandra Aranda at Itaú. Alejandra, we will admit you, and you have to unmute you manually, and please proceed with your question verbally. Thank you very much.

Alejandra Aranda (Research Analyst)

It's whether you have been able to advance with the regulator on other stuff in order to reduce costs. Like, one point you were discussing to take the copper workout. Is there any advancement on that?

Roberto Nóbile (CEO)

Alejandra, would you please repeat? We didn't get you properly. Thank you.

Alejandra Aranda (Research Analyst)

Okay. Can you hear me now?

Roberto Nóbile (CEO)

Much better. If you can repeat your question, Alejandra, sorry, we didn't get you properly.

Alejandra Aranda (Research Analyst)

Yeah. My question is on other cost measures, whether you were able to advance with the regulator on taking the copper network out in order to reduce costs, whether that is still on the table and if it's advancing or whether that is off the table.

Roberto Nóbile (CEO)

Thank you, Alejandra, for your question. There is no limitation from the regulator trying to shut down the copper network. The limitation we have is our resources to do that. That's a huge investment and we have a plan to shut down the copper network along the way, because it's not only building a new network over the copper network, or in some cases, we have the copper network overlaid already with the HFC network. It's a huge amount of investment migrating the customers from one network to the other. We primarily work with the migration of broadband customers that are already overlapped, and they have a better network to migrate to.

That's our first priority, but we still have telephone fixed lines that has no broadband product attached, that are still on the copper network, and we need to invest to migrate those to another services. That other services is VoLTE, is voice over LTE. It's another investment that we are planning to do, but as long as it is possible. We have one area that it was mentioned on the presentation. We sold one building, Building Costanera. That building was hosting a copper hub for the copper network. We are shutting down the whole area, and we have, like, 20,000 telephone customers in that area. It's a huge work trying to contact them and migrate them to another network.

We are doing that. That's part of a plan. That's part of what we have committed to the person that purchased the property. Going to the basics, it is in the plan. We will move as fast as we can with the CapEx restrictions we have. We have no more questions for the moment, so thank you very much. Thank you for participating in our call. Please to remind that the investor relations department is always open for any inquiries you may have. Thank you very much. Have a good day.