Telecom Argentina - Q3 2023

Transcript

Luis Rial Ubago (Manager 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 nine-month period and third quarter of fiscal year 2023, ended on September 30 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 November 9, 2023, a copy of which was included in our Form 6-K and sent to the SEC, describes certain factors that may affect any forward-looking statements that could be mentioned during this call.

The company has reflected the effects of the inflation adjustment adopted by Resolution 777/18 of the Comisión Nacional de Valores or CNV, which establishes that the reexpression will be applied to the annual financial statements for interim and special periods ended as of, and including December 31, 2018. Accordingly, the reported figures corresponding to the nine months period of 2023 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. Please read the disclaimer contained in slide 1 and slide 2 of this presentation. Today, we will go over our business and financial highlights and end the call with a 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, and welcome to everyone. Moving to slide 3, it summarized our highlights as of September 30, 2023. Our main operational and financials achievements were: our EBITDA margin during the first nine months, 2023, was 28.8%. We managed to keep the margin steady on a year-over-year basis, and we observed an expansion quarter-over-quarter. In the last twelve months, as of September 2023, our CapEx was approximately $644 million, equivalent to 16% of our revenues. Although we have faced certain delays due to the tighter import restrictions in Argentina, we are successfully executing our CapEx plan. Our focus is now on the expansion of our FTTH technology, as well as developing the 5G network. Our cash flow generation remains strong despite the challenging context.

During the first nine months of 2023, we were able to generate approximately $494 million in free cash flow before dividends and interest payments. This represents an improvement of approximately $125 million compared to the same period in 2022. We continue to implement price increases on a monthly basis. This has contributed to improve the service revenues trend in real terms, even in a rising inflation scenario. Our mobile subscriber base continues to grow, increasing almost 4% year-over-year. Mobile data usage, measured in average monthly gigabytes per user, has grown 13%. In broadband, our FTTH accesses keep growing rapidly, while our HFC network has remained stable. During the last quarter, new FTTH accesses contributed to stabilize our customer base and outgrew other technologies.

Flow unique customers reached almost 1.4 million, increasing 9% year-over-year. Additionally, our pay TV business continued to grow steadily in Paraguay. Our fintech Personal Pay continues to grow, reaching almost 1.6 million onboarded clients as of the first nine months of 2023. 5G inception is underway. We acquired 100 MHz of spectrum in the 3.5 GHz band, and we currently count with 245 5G sites, most of them working with DSS technology. During this quarter, we canceled our most important debt commitments for the year, and our maturity profile remains clear for the last quarter.

Moving to slide 4, it shows the company figures for the first nine months of 2023. Telecom's revenues totaled almost $3 billion. Revenues measured in constant pesos decreased 8% year-over-year, as we have improved our pass-through inflation of up to our revenues. We generated $850 million equivalent in terms of EBITDA. Our EBITDA margin was 28.8%. Telecom's mobile subscribers in Argentina amounted to 20.8 million, increasing in more than 750,000 when compared to the first nine months of 2022. Broadband and Pay TV clients have totaled 4.1 million and 3.4 million, respectively. Fixed voice subscribers, considering IP telephony lines, amounting 2.9 million during the first nine months of 2023. During the same period, our total convergent unique customers increased to 2.3 million from 2.1 million. Up to date, 46% of our broadband customers have a mobile bundle.

Our regional operations remain very solid. We are the second most important player in the mobile market in Paraguay and in the pay TV market in Uruguay, with 2.4 million and 121,000, respectively. Moving to slide 5, it shows our price adjustment during 2023. The accumulated inflation for the first nine months of fiscal year 2023 was 103.2%, and year-over-year inflation in Argentina as of September 2023, has been 138.3%. Since March 2023, we have adjusted our pricing policy, responding to a rising inflation scenario, moving to monthly price increases. We have increased both the frequency and magnitude of our price increases to improve our pass-through of inflation to our service revenues in an increasingly complex environment.

Thanks to these measures, and although we continue to observe lag versus inflation, we have been able to improve our revenue trend in real terms as of the third quarter of 2023. Slide six shows the evolution of our products. In our mobile segment, we have observed a total increase of almost 659,000 subscribers, representing an increase of 3.8% year-over-year. This was mainly related with the good performance of our prepaid segment, where we registered a stronger customer recharge rate. We managed to increase our subscriber base from the fourth quarter in a row. Our postpaid customer base has been registering a down selling to prepaid, not affecting the overall mobile customer base. Our postpaid clients make up 39% of our total mobile client base.

Our broadband accesses have decreased by almost 128,000, -3% year-over-year, explained mostly by a reduction in xDSL accesses. In turn, growing FTTH accesses has contributed to keep our broadband customer base stable and outgrew other technologies. At the same time, our HFC segment remains steady. Our client base with Internet speed of 100 MB or more increased by 79%. Despite the reduction of 142,000 Pay TV subscribers, which represent a 4.3% decrease year-over-year, our Flow platform continues to perform well, and our Pay TV accesses have remained steady quarter-over-quarter. In the 3Q 2023, Flow's unique customers reached 1.4 million, increasing by 112,000 total clients or 9% 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 7 shows the breakdown of our revenues. Service revenues totaled ARS 679 billion, decreasing 9% in real terms versus the first nine months of 2022, showing a 96% nominal rise, reflecting the strong influence of the price increases we performed. Our revenue breakdown as of September 2023, showed an increase in the participation of mobile services, equipment sales, and broadband when compared to September 2022. Mobile and broadband are the segments where we have been able to greatly improve the pass-through inflation to revenues.

The breakdown is as follows: Mobile revenues, 40.6%; broadband revenues, 21.5%; Pay TV revenues, 18%; fixed telephony and data revenues, 11.8%; equipment sales revenues, 7.3%. In slide eight, we describe the main trends in our mobile and broadband businesses. During the first nine months of 2023, Personal net inflow of postpaid mobile clients has remained stable. Mobile internet usage has continued increasing, reaching an average of 5.6 GB per user per month during the first nine months of 2023, and growing over 13% year-over-year. Additionally, we continue to increase our average broadband speeds. 84%, sorry, of our total subs have a speed of at least 100 Mbps, compared to 46% during the first nine months of 2022.

Additionally, we have observed growth in FTTH connections, which increased by 75% versus first nine months of 2022. Slide 9 shows our regional operations. Our operation in Paraguay is performing very well. We are the second most important player in the mobile market, with 2.54 million customers, and we also have a fixed broadband and Pay TV offering in that country, with 264,000 and 104,000 subscribers, respectively. We have a fintech business in the countries, our digital wallet, Billetera Personal, which comes with 283,000 clients. This operation has a stable EBITDA margin of almost 50%. Our operation in Uruguay is currently focused on Pay TV, and we have 121,000 Pay TV customers there.

During the last year, we started our cybersecurity business in Chile under the brand name [Núcleo]. We are expanding our presence in the market and growing our customer base. In slide 10, we present how we are building our digital business ecosystem. We offer B2B solutions and services to accompany the digital evolution process of the companies. Our main products include connectivity, cybersecurity solutions, cloud solutions, and data center services, digital tools to enhance productivity, and Internet of Things services, which include special custom tailor solutions for connectivity and remote monitoring in the agricultural segment. We are also present in the fintech business with our digital wallet, Personal Pay, which currently has more than 1.6 million customers onboarding. During this year, it has incorporated a new functionality of remunerated balances for all its users.

We currently have funds from our clients invested in mutual funds for over ARS 331 billion. Through Personal Smart Home, we provide domotic services, solutions, and equipment for home monitoring, security, digital interconnection, and automation. Finally, Tienda Personal is our retail store, where our clients can acquire a wide a variety of electronic devices.

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 11, we provide an overview of our main financial figures. Consolidated revenues grew by 98% on nominal terms during the first 9 months of 2023, reaching more than ARS 732 billion. When analyzing said figure, adjusted by inflation, revenues amounted to more than ARS 1 trillion, showing a decrease of 8% in real terms versus the same figure of 2022. This lag versus inflation 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. But most importantly, the adjustments we have done in our pricing policy proved effective, as this lag versus inflation has observed a downward trend, which has consolidated during the 3Q of 2023.

EBITDA increased by 102% year-over-year in nominal terms, generating an EBITDA margin of 29.6% during the first nine months of 2023. EBITDA margin in real terms was 28.8%. Additionally, our operating costs before D&A have also grown below inflation, decreasing 8% in real terms versus the nine months of 2022. We have continued to manage our cost structure in order to reduce the impact of inflation. During the 3Q of 2023, we managed to increase our margin in a considerable proportion when compared to the same period the 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 the different components of revenues and costs. During the nine months of 2023, the company was able to contain the pressure coming from inflation in most of these cost lines, as most of them experienced a decrease or remained in line when compared with inflation. We observed good results in labor costs, programming and content costs, interconnection costs, and some other items such as bad debt. The company's efforts have been very successful, as evidenced by most of cost lines keeping the same share of our revenues, with almost every cost line decreasing more than our revenues in real terms. This allowed us to increase our EBITDA margin for the first nine months of 2023 in a year-over-year basis.

Slide 13 shows the company's net results and EBIT. EBIT registered an improvement in the nine months of 2023, mainly due to the fact that in the nine months of 2022, the company recognized an impairment of goodwill amounting to ARS 495 billion in the currency as of September 2023. That was allocated to depreciation, amortization, and impairment of fixed assets. The operating margin during the nine months of 2023 was -5% of consolidated revenues. In historical figures, the same margin was 20.6%. In the first nine months of 2023, the company had a net income of almost ARS 85 billion, mainly due to a positive net financial result, ARS 61.5 billion, driven by inflation adjustment gains and positive effects results in real terms, and to a positive income tax of ARS 76 billion.

Slide 14 displays a summary of the company's CapEx in PP&E and intangible assets during the first nine months of 2023, which amounted to more than ARS 147 billion, or an equivalent of $421 million at the official exchange rate. This amount is 17.5% lower when compared to the same last year period. Our consolidated amount of CapEx for the nine months of 2023 amounted to around 40% of our total revenues. Notwithstanding the fact that we observe certain layers in seasonality in our CapEx, our investment level was influenced by tighter import restrictions in the nine months of 2023. In overall, in spite of this situation, we are on good track to execute our CapEx plan for this year, 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 nine months of 2023, 97 new mobile sites were deployed, while other 1,084 existing sites were upgraded. Additionally, to date, we count with 240 5G sites, most of them working under DSS technology. In our fixed asset network, we increased the deployment of new FTTH over 15,000 new blocks, including the overlay over HFC network. We also improved the upstream capacity of our HFC network by over 11,000 blocks. The balance of our CapEx was allocated to installations and customer premises equipment or CPE, which are installations and equipment in the homes of our clients and to our international operations.

In slide 15, we expand on 5G and the spectrum auction. In August, ENACOM approved the 5G spectrum auction in Argentina. On October 24, we acquired 100 MHz spectrum block in the 3.5 GHz band for $350 million, to be paid in pesos at the official FX rate. We have initiated payments related to the frequency bands following the schedules set forth in the auction documents. This new one allows us to have a greater efficiency in the use of our spectrum holdings and to encompass the growth in data traffic coming from greater usage from our customers. 5G holds strategic significance, offering improved customer experiences based on enhanced mobile broadband capabilities, fostering our competitive position and market penetration, and also enabling, enabling higher opportunities for bundling with entertainment in mobile.

Increased connected device capacity, reduced latency, network slicing, and higher overall reliability of the mobile network open new doors to interesting business use cases. The transition to 5G architecture brings exciting opportunities for various economic sectors, including agriculture and oil and gas, both important sectors in Argentina's economy. In slide 16, we describe our cash flow generation during the first nine months 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 gains during this period.

During the first nine months of 2023, our free cash flow before dividends and interest payments amounted to approximately $494 million, which represents an improvement compared to the same period in 2022. Slide 17 shows the breakdown of our financial debt. Total outstanding debt as of September 2023 amounted to almost $2.6 billion. In the 3Q of 2023, we canceled our most important prospective debt commitments for the year, significantly clearing our maturity profile for the remainder of the year. Almost 75% of the remaining maturities for this year are denominated in pesos, which can be easily refinanced in the local capital markets and with local financial institutions, taking into account the solid credit profile of Telecom.

Moreover, we are able to cover almost 50% of our consolidated foreign debt interest payments with the EBITDA generating in our operation in Paraguay. As we have been working to deconcentrate our maturity profile, the remaining maturities going forward remain manageable. Slide 18 shows our key figures for the first nine months of 2023, in constant measuring unit converted to the effects of each year. Our gross debt amounted to $2.6 billion as of September 30, 2023. The company holds cash and equivalents for the same period in the order of $389 million, having a net debt of about $2.3 billion. Our net debt to EBITDA Ratio as of September 2023 was 2.07x, improving quarter-over-quarter.

Our EBITDA margin for the last 12 months is on the same level as the one observed during the fiscal year 2022, being 27%-27.5%. In slide 19, we conclude with some final remarks, underlining some favorable highlights about the company. We are influencing the pass-through of inflation to our revenues while minimizing the impact in our customer base. We managed to maintain our EBITDA margin in a challenging context in Argentina. Our EBITDA also shows resiliency versus the FX depreciation. Even with a nominal FX price in 36% quarter-over-quarter, we managed to increase our EBITDA in U.S. dollars for the last 12 months as of September 2023, in comparison with the same last 12 months figure in U.S. dollars as of June 2023.

And we have a proven ability to pass inflation to our revenues and perform cost management. This indicates that in the mid-term, our mismatch against the FX rate is not significant. We are strategically developing future technologies, 5G, FTTH, and we are also creating our digital ecosystem.

Our financial condition is very strong. We have a manageable maturity profile, and we have kept our leverage steady. We increased the participation of local financing, which has allowed us to take advantage of lower cost of financing and to offset the increase in the base rate for floating rate, floating rate debt service. Finally, we continue to provide long-term value for our investors. We have a solid and stable free cash flow generation, generating $500 million-$600 million equivalent annually during the last three years. Our weighted average dividend yields since 2018 has been 7.7%, and we have paid a dividend every year since the merger.

So 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 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 question. Thank you. So, as we don't have any questions upcoming, I would like to thank you very much for participating. I'm sorry. We have one from Justin. Just in the nick of time, Marcelo. So we have a question coming from Marcelo Santos, from J.P. Morgan. Marcelo, we will unmute you so you can proceed with your question. Thank you very much.

Marcelo Santos (Analyst)

Can you hear me, Luis?

Roberto Nobile (CEO)

Hi, we can hear you.

Marcelo Santos (Analyst)

Thank you very much. Sorry, I got messed up in raising my hand, so that's why I almost missed the opportunity. Thank you so much for allowing me to make questions. First question is, if you could please provide a competitive environment update on both the broadband and the mobile segments in Argentina. The second question, if you could discuss a bit the plans on fiber rollout in Paraguay. Thank you.

Roberto Nobile (CEO)

Hi, Marcelo. Thank you. Thank you for the question. This is Roberto. Regarding the competitive environment in Argentina, in terms of mobile, as you can see, the situation is very stable. The main issue today, and you've seen that despite that, we are growing in terms of mobile customers. There has been a change in the composition, because of the restrictions of the high inflation and the domestic economies of our customers. There's a migration, a small migration from our customer base into prepaid. That could be the main factor in Argentina today. But the stock of customers is still growing, so that's on the mobile. So competition is not that aggressive.

We are all increasing prices on a monthly basis, I would say, trying to catch up with inflation, and that's probably the-- It's a healthy industry, I would say. On the fixed broadband, still we are facing some high competition from newcomers, but that has been offset. If you take a look into our last quarter, we have been growing our customer base. The first quarter of the year, and this was back to our conversation last call-- The first quarter was a really difficult quarter for us in terms of broadband subs. We had a huge impact of price increase because we were not doing it on a monthly basis.

We did straight in one big jump in terms of price, price increase, and that hit our customer base a little bit. But that has been restored, and our customers and I told you last quarter that we were expecting our customer base to be zero in terms of changes at the end of the year, and we are committed to do that. So I would say that despite the competition, the fixed broadband is healthy, too. I mean, we're all pushing our prices into trying to catch up with inflation, and our service is improving a lot. As you see, we are improving a lot in terms of capacity and in terms of speed and quality of broadband. So we are keeping.

We are still, and we will keep being the leader in the broadband, fixed broadband, vertical. And of course, we are still the best service in the mobile. And that's, and we have been very, very, very good at the measures on Ookla and Opensignal for the last quarters, and that has been kept very well. The second question?

Luis Rial Ubago (Manager of Investor Relations)

It was regarding the fiber rollout in Paraguay.

Roberto Nobile (CEO)

Fiber rollout in Paraguay is still-- I mean, we will start working on improving our penetration on our networks, but penetrations on what we have already deployed are very good, but we still need, we think that there is room for growth there. So for the next year, we will, I wouldn't say stop. We will not stop for sure, but we will reduce the number of blocks that we will deploy. But we will keep-- Our goal is to keep growing on our broadband subs, fixed broadband subs.

So now we don't have any further questions for the moment. So thank you very much for participating in our quarterly conference call. Please do not hesitate to contact our investor relations department for any further inquiries you may have.

Good morning to all, and have a nice day. Thank you.