Telecom Argentina - Q4 2022

Transcript

Luis Rial (Head of Investor Relations)

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating of this conference call. The participants of today's conference call are Roberto Nobile, Chief Executive Officer, Gabriel Blasi, Chief Financial Officer, and myself, Luis Rial. The purpose of this call is to share with you the results of the fourth quarter and fiscal year of 2022, ended on December 31st of 2020. 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 from law and industry and economic regulations, possible changes in the demand for Telecom's products and services, the effects of potential changes in general market and our economic conditions, in legislation, and the impact on COVID-19 on the global economy, specifically on the economies in countries in which we operate, as well as on our operations and financial performance.

Our press release, dated March 9th, 2023, a copy of which was included in our Form 6-K as submitted 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 re-expression will be applied to the annual financial statements for intermediate and special periods ended as of and including December 31st, 2018. The reported figures corresponding to fiscal year 2022 included the effects of the adoption of inflationary accounting in accordance with IAS 29. This presentation, we will also include figures and historical values which are easier to understand. The press release is complemented by our earnings presentation.

The audience should read the disclaimer contained in slide one and two of the presentation. The agenda for today's conference call includes our business and financial highlights, and we will end 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. Moving to slide three, that there summarize our main highlights as of December 31 of 2022. Our main operational and financial achievements were: Our EBITDA margin during 2022 was 27.5%. The main pressure comes from our labor cost, which was partially offset by cost management in other cost lines where we have successfully contained the effect of high inflation. Our CapEx was approximately $712 million, representing 17% of our revenues. Particularly, we are increasing the deployment of new FTTH. Cash flow generation remains solid and stable. We were able to generate $516 million equivalent in free cash flow during fiscal year 2022, almost the same figure that fiscal year 2021 in this challenging context.

As inflation is accelerating, we are increasing the frequency and magnitude of our price adjustments. Additionally, 16% of our revenues are in U.S. dollars, while FX increase has underperformed inflation. During the 2023 Mobile World Congress in Barcelona, we received the award of having the fastest 4G network in Argentina for, from Ookla. Our mobile subscriber base continues to grow with a strong post-paid performance, growing 5.7% year-over-year. Mobile data usage measured in average monthly gigabytes per user has grown 20%. In broadband, we observed growth in our HFC and FTTH subscriber base, and we have performed a special commercial action for these subscribers, doubling their connection speeds. Flow unique customers reached 1.3 million, increasing 15% year-over-year. We launched a version of Flow in a prepaid modality called Flow Flex.

Our fintech Personal Pay had a very good market reception, adding more than 710,000 onboarded clients during fiscal year 2022. We are also preparing for 5G. We currently count with 180 5G sites, mainly functioning with DSS technology over 4G spectrum. We continue to improve our debt maturity profile through series of successful local and cross-border transaction in 2022. Moving to slides four, shows the company figures for the fiscal year 2022. Telecom's revenues totaled $4.1 billion. Amidst the rising inflation environment, revenues measuring constant pesos decreased 12% year-over-year. EBITDA generation totaled $1.1 billion. Our EBITDA margin was 27.5%.

As of December 31, 2022, total mobile subscribers reached 20.2 million, increasing in almost 115,000 total clients when compared to the same period of 2021. Postpaid clients represented 14% of our subscriber base. Broadband and Pay TV clients totaled 4.1 million and 3.4 million respectively. Fixed voice subscribers considering IP telephony lines amounted to 3 million during the fiscal year 2022. We continue to focus on our convergent offer. Our total convergent unique customers have reached 2.1 million, while currently 52% of our broadband customers have a mobile bundle. Finally, turning to our regional operation, we have 2.2 million mobile subscribers in Paraguay and 130,000 Pay TV clients in Uruguay. Slide five shows the evolution of local inflation.

Year-over-year inflation in Argentina as of January 2023 has been of 98.8%. Inflation has accelerated as of July 2022, jumping to monthly levels of 6% or 7%. Fiscal year 2022 inflation was 94.8%. The impact of our industry in the 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. Moving to slide six shows our price adjustment during 2022 and the beginning of 2023. As mentioned, local inflation in Argentina is currently running at very high levels. In order to address this issue, we have performed five price increases during 2022 in mobile and four in the fixed segment.

We're continuing with this action over our prices during this year. In mobile during January, we have increased both postpaid and prepaid prices by 18% and 17% respectively. During this month, we're performing another increase in our mobile prices, postpaid plans by 13% and prepaid plans by 7%. The subscription prices of our Pay TV services have increased up to 19% in January, as well as additional services such as the football pack and premium channels. In March, we're performing increases in both by up to 13%. In broadband, the prices of our services have increased up to 19% in January, and during this month we're performing increases by 13%. In xDSL and 12% in HFC and FTTH services.

Prices of fixed voice basic services have increased up to 19% in January. We are increasing it up by 13% during this month. Slide seven shows the evolution of our products. The mobile segment postpaid subscribers have increased in more than 460,000 clients of 5.7%. Our postpaid clients represent a 43% of our total mobile client base. Total prepaid subscribers decreased by 3%. This evolution is explained mostly due to a decrease in non-recharging customers. Our recharging prepaid customers base continues to observe a solid performance, growing year-over-year and showing a higher volume of recharges when compared with the previous year.

Broadband, our customer base, experienced a decrease of 3.1%, but we continue to observe growth in the HFC and FTTH segments, which has partially offset a decline in accesses in the xDSL segment. Our Pay TV subscriber base has experienced a reduction of 84,000 accesses, which represent a decrease of 2.3%. Nonetheless, our Flow platform continued to show a good performance. During the fiscal year of 2022, Flow's unique customers reached 1.3 million, increasing in almost 169,000 total clients or 15% 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 376,000 lines or 52%.

Slide eight shows the evolution of our service revenues. Currently, almost 40% of our total revenues are generated by the mobile business, 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 business, on which an important part is denominated in U.S. dollars. The handset business represents almost 7% of our revenues. Our service revenues have amounted to ARS 680 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 the underperformance versus inflation.

In this sense, including other subsidiaries, approximately 16% of our revenues are related to the evolution of the FX. Slide nine describes the main trends in our mobile and broadband businesses. During 2022, Personal had a positive net inflow of over 30,000 of postpaid mobile clients from our competitors. Our postpaid performance has been very solid, increasing the postpaid participation of our mobile customer base to 43%. Mobile internet usage has continued increasing, reaching an average of over 5 GB per user per month during the fiscal year 2022, and growing by 20% year-over-year. Additionally, we continues to increase our average broadband speeds. 79% of our total subs have a speeds between 100 and 1,000 Mbps, comparing with the 32% during the fiscal year 2021.

This means that our subscribers with speeds above 100 MB have multiplied by 2.5x. During the last months of 2022, we doubled the broadband speeds of all our client base, which HFC and FTTH technology. Additionally, we have observed growth in the HFC and FTTH connections, which increased by 1% and 92% versus fiscal year 2021 respectively. Moving next slide shows our business in Paraguay. Our operation in Paraguay continues to keep a solid track record. Núcleo generated $210 million and $103 million equivalent in revenues and EBITDA respectively during the fiscal year 2022. The EBITDA margin of Núcleo's of September 2022 was very strong and close to 50%. As of December 31 of 2022, mobile customers totaled 2.2 million.

The mobile financial service that our subsidiary provides, Billetera Personal, reaches over 291,000 subscribers. Fixed Internet services subscribers amounted to more than 236,000, growing 20% versus the fiscal year 2021. In the Pay TV segment, Flow customer total 95,000. The fixed network deployment in the main cities of Paraguay continued to increase, growing 16% versus the fiscal year 2021 and reaching 660,000 homes passed. Slide 11 show some key performance indicators of our fintech, Personal Pay. As of December 2022, Personal Pay's onboarded clients amounted to almost 729,000, growing 49x versus 2021. We find that this growth is very encouraging. We are growing also outside of Telecom client base as of 20% of these clients belong to other telco operators.

The total payment number has also been increases accordingly. In September 2022, it reached over 1 million operations, it has multiplied by more than 16x when compared to March 2022. Total payment volume has increased accordingly by 40% in comparison to September. Growth in our digital wallet is levered on a strong value proposal from 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, such as interest remuneration on our clients account balance and a new client loyalty program. The slide 12 goes over our business strategy. The current competitive and macroeconomic environment remains challenging. Notwithstanding the situation, we have a strategic plan in place for the following years.

We seek to consolidate our core business through the following: maintaining our client base and leading in revenue share, increasing our service NPS and our prices in line with inflation. Increasing the efficiency of our network and operations, mainly through the new investment in FTTH and 5G to enhance our fixed and mobile network respectively. This year, we have an impressive deployment plan for our FTTH network. We have already started to deploy 5G DSS mobile sites working over 4G spectrum, and we are working to upgrade our core to full 5G as of 2024. Returning of our legacy technologies, mainly replacing our incumbents copper network and simplifying our architecture. We continue with cost management initiatives, mainly through the automation of customer care processes and commercial actions through our new CRM system, among others. Additionally, some of our real estate assets show the value opportunities.

We have sold technical buildings in Buenos Aires cities for a total amount of $6 million. We have other assets for sale, of which our old headquarters in Puerto Madero is the most valuable. Regionalization is one of our main goals. Our operation in Paraguay has a very solid performance and great growth potential, and we are analyzing some strategic opportunities to enhance our regional operations in Latin America. We are also exploring new businesses initiatives such as the expansion of our digital businesses. Personal Pay, our fintech business in Argentina, which may also grow in other countries of the region. Smarthome, offering home automation and security products, new commercial agreements involving our Flow platform as a pure OTT independent from our network. Also our B2B business shows great growth opportunities, involving mainly products different from traditional B2B connectivity, such as cloud and infrastructure, cybersecurity, and IoT.

Our regional cybersecurity brand, Ubiquo, which was launched with a commercial partner in Chile. We are leveraging this business strategy over a capital structure optimization which we performed in recent years. We have re-reduced our risk. Sorry. Our risk coming for our cross-border exposure, decreasing our ratio of foreign currency denominated debt over total debt from 95% in 2020 to 70% as of fiscal year 2022. In addition, we have significantly cleared our transfer and convertibility risk as all of our maturities have access to the official FX until 2026 according to current central bank rules. We have managed the cost of our debt, partially offsetting the increase in lower interest rates through our fixed rate debt and the new local issuances, which have advantages in terms of financial cost.

I will now pass the call to Luis, who will go over financial performance.

Luis Rial (Head of Investor Relations)

Thank you, Gabriel. In slide 13, we provide an overview of our main financial figures. During the fiscal year of 2022, consolidated revenues grew by 51% on nominal terms, reaching ARS 539 billion. When analyzing said figure adjusted by inflation, revenues amounted to almost ARS 729 billion, showing an increase of 12% real terms versus the same figure in 2021. This lag versus inflation is explained, among others, by the effect of some discounts and promotions we performed after price increases in order to retain our customers in a strong competitive environment. EBITDA increased by 31% year-over-year nominal terms, thus generating an EBITDA margin of 27.6%. EBITDA margin in real terms was 27.5%.

Additionally, our operating costs before D&A have also grown below inflation, decreasing 7.3% in real terms versus the fiscal year of 2021. We have continued to manage our cost structure to reduce the impact of rising labor costs. Slide 14 shows the company's EBITDA and the impact of the different components of revenues and costs. During the fiscal year of 2022, the company has been able to contain the pressure coming from inflation in most of these cost lines, as almost all of them experienced an increase or remain in line when compared with inflation. We have observed good results in programming and content costs, interconnection costs, and some other items as charges for lawsuits and other contingencies on rents and internet capacity, including our costs.

These cost management initiatives have partially offset the rise in labor costs, which have increased over inflation and explain most of the margin contraction year-over-year. Labor costs represent 25% of the revenues, have increased 2% in real terms when compared to the fiscal year 2021, but have decreased 4% during the fourth quarter of 2022 versus the fourth quarter of 2021. Slide 15 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 as of September 2022, which includes mainly the goodwill generated as a result of the merger between Cablevisión and Telecom.

In the fiscal year 2022, the company had a net loss of ARS 206 billion, mainly explained by the aforementioned impairment registered in September 2022 for a total amount of ARS 244 billion, which was partially offset by a positive income tax of ARS 26.5 billion and by a positive net financial result of ARS 62 billion. The positive financial results were mainly driven by inflation adjustment gains and lower net interest charges. Slide 16 shows a summary of the company's CapEx and PP&E and intangible assets during the fiscal year 2022, which amounted to over ARS 126 billion or an equivalent of $713 million at the official effects rate.

Our consolidated amount of CapEx amounted to 17.3% of our total revenues and is 24.2% below real terms versus the fiscal year of 2021. In this sense, our CapEx intensity has been reduced in all of the last years. Technical CapEx was focused on deployment and modernization of our 4G mobile access sites, the deployment of last mile network with FTTH architecture, installations and equipment in the homes of our clients or CPE. During the fiscal year 2022, 195 new mobile sites were deployed and more than 1,400 sites were upgraded. We are focused on the expansions of our FTTH network, which has increased over 10,600 new blocks. We performed an overlay with FTTH or HFC network in 6,600 blocks.

We also increased the upstream capacity of our HFC network by 18,000 blocks. We have deployed 180 5G sites, most of them working with DSS technology with connection speeds up to 15 Gbps. Slide 17 describes our cash flow generation within the fiscal year 2022 compared with the same period of 2021. We managed to keep a solid and stable cash flow generation during 2022 when comparing versus the previous year. As of December 2022, the operating cash flow amounted to approximately $574 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 fiscal year 2022 has been $516 million equivalent. Slide 18 shows our key figures for fiscal year 2022 in a constant measuring unit compared to the FX of each year. Our gross debt amounted to $2.6 million as of December 31 of 2022. The company holds cash and equivalents for $235 million, and our net debt amounts to approximately $2.4 billion. Our net debt to EBITDA ratio as of the end of fiscal year 2022 was 2.1x. Slide 19 shows the breakdown of our financial debt. Total outstanding debt as of December of 2022 amounted to almost $2.7 billion.

We currently have a very clean maturity profile. 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, where we have the maturity of our Class 1 Notes. As mentioned before, we have been working to increase the participation of peso-denominated debt issued in local capital markets. To give you a reference, in 2020, we had 95% of our debt denominated in foreign currency. Nowadays, it is 70%. We expect to continue accessing the local capital markets for potential financing needs. During 2023, our debt maturities are very manageable, and almost 50% of the maturities for this year are denominated in U.S. dollars. Slide 20 summarizes the financial transactions that we have performed during 2022.

During the last year, we strive to improve our debt maturity profile and capital structure. Have been very active in the local capital markets through issuance seats of notes. In this sense, we successfully completed the issuance of Class 12 to Class 14 Notes, issuing dollar-linked and BADLAR peso instruments. In August 2022, we reopened our Class 12 Notes, which were originally issued in March. We obtained $75 million equivalent from the market with a five-year tenure and a cost of minus 2% versus the FX depreciation. We also continue to obtain cross-border financing, even in a context challenging for Argentina. We have entered into a loan agreement with IFC, and during July 2022, we received a disbursement for $184.5 million.

Additionally, we received new disbursement of our loans with CDB, Finnvera, and EDC to finance the acquisition of telecommunications equipment from Huawei and Nokia. On slide 21, we summarize some relevant ESG highlights which we have accomplished during 2022. Regarding the environment, we can highlight the decrease that we have during 2022 in greenhouse gas emissions compared to the previous year. For scope 2 GHG emissions decreased by 10% year-over-year. We also want to highlight that we decreased the total energy consumed and the intensity of carbon emissions over energy consumed. We observed a 47% decrease in the tons of carbons emitted for each petabyte of energy consumed. Our goal is to reach 22% renewable energy consumption by the end of 2023.

In this sense, we are implementing different solutions, such as using machine learning methods to analyze data traffic to optimize power. Additionally, expanding our FTTH network over our copper network and HFC networks allows us to reduce our energy consumption. Regarding the social dimension, in November 2022, we received the Great Place To Work certification, which ratifies the satisfaction and commitment of our collaborators. Additionally, in September 2022, we carried out the Sustainability Week, an internal event held to raise awareness about ESG, which include the participation of both internal and external speakers. We also provide free-of-charge services to different educational institutions, hospitals, health centers, and other institutions. In terms of governance, we would like to highlight that all members of our audit committee are independent, in compliance with the New York Stock Exchange rules.

Regarding the compensation of our management, their remuneration has a variable component that is linked to performance during each fiscal year based on the objectives established at the beginning of each period. In terms of cybersecurity, during 2022, we add new protection technologies such as malware prevention, a new multi-factor authentication, threat intelligence solutions, and micro-segmentation technologies. We also received a certification from PCI, an information security international standard used for credit card payments. With this, now we are more than pleased to answer any questions you may have. However, before we start, we would like to remind you how you can address your questions during the Q&A session, which we will open immediately.

Please send a message to IR Telecom Argentina through the Q&A menu, identifying yourself and stating that you have a question, or alternatively use the hand button to let us know if 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. Hi, we have a question coming from Marcelo Santos of JPMorgan. Marcelo, we will unmute you, so you can proceed with your question. Thank you very much.

Marcelo Santos (VP and Equity Research Analyst)

I wanted to turn back to page 12 on the presentation, the one that you said about company strategy. Two questions there. On the hour assets and locked value, you mentioned that you sold $60 million in, I think, technical assets. You have your headquarters that you could sell in Puerto Madero. Of these other assets that you could still sell and unlock value, is there a range of values that we could be talking here? Would these be mostly sales leasebacks, or is really some of these assets you're not using, and you could really sell and wouldn't have to pay any kind of lease afterwards? That's the first question. The second question is the item just below regionalization.

Could you please discuss a bit more what are these opportunities that we could see in LATAM for Telecom Argentina? Thank you very much. These are the questions.

Roberto Nobile (CEO)

Thank you, Marcelo. This is Roberto. Good morning to everyone. Going back to our assets unlock value point on the presentation. You mentioned Puerto Madero, that's a significant asset that we have. We have projects of value creation projects on that site that we are working on, and they will be released pretty soon. Other assets, I mean, we have since We redesign and we reconstruct the network, the core network and the backbone, and we have a lot of sites that have been released for sale, and we are trying to sell those assets in the short-term.

We have already sold one of them, which is a big building in the center of Buenos Aires, that it was sold in $6.5 million. I mean, it used to be an old telephony central station. Going for further assets, if you consider, because probably your question is more concentrated on sites. We are not thinking of selling sites in Argentina, but we might look for a sale of a few sites in Paraguay to understand how we can create value out of them and start like a trial or pilot process. That's on the asset side. The other question was? Regionalization. Okay. Regionalization. We have various initiatives. We are trying to regionalize ourselves in two different ways.

Number one is searching for new opportunities of operations in the region. We are doing the discovery, and we are trying to understand which operation, first is on sale and second, could be a target for us. We are really looking after these opportunities. It has been a constant thing, and we are still doing that. On the other side, we believe that we can go beyond connectivity, and we have launched a pilot approach for cybersecurity. We have deployed a new company in Chile that will start selling cybersecurity portfolio to the Pacific Coast. That's a way of. We don't really think that it's necessary to have. Of course, it's, there's a lot of synergies when you have the network, but if you don't have the network, we have the scale for selling digital solutions to regional customers.

That's one of the things we are working. Despite that, we are also working on a regional Personal Pay solution. On the fintech side, we hope to launch Personal Pay. We already have our wallet in Paraguay, but we are working to launch Personal Pay as a brand, as a new concept in Paraguay soon. Hi, Marcelo. I guess you got an upcoming question. You can go ahead, please.

Marcelo Santos (VP and Equity Research Analyst)

Thank you. Yeah, no, I just want to thank you for the answering. A follow-up on the Puerto Madero office. How many square meters do you have there?

Roberto Nobile (CEO)

Thank you, Marcelo, for the question. 32,000 sqm built over 6,000 sqm land, and has the opportunities to build a new residential business, residential building next, and the same capacity of square meters. The project could be... It is really important. We have no more questions for the moment. Thank you very much for participating in our quarterly conference call. Please do not hesitating... Don't hesitate contacting our investor relations department for any further inquiries you may have. Good morning to all, and have a nice day.