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Edited Transcript of TECO2.BA earnings conference call or presentation 10-Aug-22 10:59am GMT

Q2 2022 Telecom Argentina SA Earnings Call Buenos Aires Sep 5, 2022 (Thomson StreetEvents) -- Edited Transcript of Telecom Argentina SA earnings conference call or presentation Wednesday, August 10, 2022 at 10:59:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Gabriel Pablo Blasi Telecom Argentina S.A. - CFO * Luis F. Rial Ubago Telecom Argentina S.A. - IR Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Luis F. Rial Ubago, Telecom Argentina S.A. - IR Associate [1] -------------------------------------------------------------------------------- Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating on this conference call. The participants of today's conference call are Roberto 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 6-month period and second quarter of fiscal year 2022 ending on June 30, 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, positive changes in the demand for Telecom's products and services, the effect 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 on our operations and financial performance. The press release dated August 9, 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 777/18 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 31, 2019. Accordingly, the reported figures corresponding to the first half 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 values, which are easier to understand. Our press release is complemented by our earnings presentation. The audience should read the disclaimer contained in Slide 1 and Slide 2 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 Pablo Blasi, Telecom Argentina S.A. - CFO [2] -------------------------------------------------------------------------------- Thank you, Luis. Good morning, and welcome to everyone. Moving to Slide 3, summarizes our main highlights as of June 30, 2022. Our main operational and financial achievements were, our EBITDA margin during first half of '22 was 30.6%. We continue to perform cost management to reduce the impact of rising labor costs. Our CapEx for first half of '22 was approximately $300 million. Cash flow generation remained solid and stable. We moved forward with price increases of our services in a challenging inflation scenario. Our mobile subscriber base continues to grow. We launched a new solution to migrate Flow's analogic services to digital. Our fintech Personal Pay continues to grow, reaching almost 235,000 onboarded clients. We have launched Ubiquo, our cybersecurity company in Chile. We have acquired the company, Negocios y Servicios S.A., which strengthens our operations and footprint in the province of Mendoza. We have canceled the total amount of the principal remaining under the term loan for $140 million. We entered into a new loan agreement with IFC. And on July 15, 2022, we received a disbursement of $184.5 million. We have paid dividends in kind on June 2, 2022, for an equivalent of $150 million. We have closed the auction to buy 137,000 megawatts of renewable energy, which represents around 22% of the total megawatts consumed by the company. This will allow us to reduce our carbon emissions in 20% coming from a total of 281,000 tons. Slide 4 shows the company figures for the first half of fiscal year 2022. Telecom's revenues totaled $2.1 billion. Revenues measured in constant pesos decreased 10% year-to-year. EBITDA generation totaled $0.6 billion. Our EBITDA margin for the first half of 2022 was close to 31%. Telecom's mobile subscribers in Argentina amounted to 20.1 million, increasing in more than 800,000 total clients when compared to the first half of 2021. Broadband and pay TV clients remained almost constant totaling 4.2 million and 3.5 million, respectively. Fixed voice subscribers, without considering IP telephony lines, amounted to 2.2 million during the first half of 2022. Adding IP lines, our fixed voice subscriber base amount for almost 3.1 million. Our commercial strategy has allowed us to increase our total convergent unique customers to 2.1 million from 2 million versus the second quarter of 2021, while currently 50% of our broadband customers have a mobile bundle. Finally, turning to our regional operations, we have 2.3 million mobile subscribers in Paraguay and 132,000 pay TV clients in Uruguay. Moving to Slide 5, it shows the evolution of local inflation. Year-over-year inflation in Argentina as of June 2022 has been of 64%. Inflation has accelerated during the second quarter. Year-to-date inflation as of June 2022 was 36.2%, and we envision that the local inflation will remain high during 2022. The impact of our industry in inflation index is not meaningful, amounting only 2.8% of the index. In the last 4 quarters, communications price increases were below the general CPI index. Moreover, communications registered the lower year-over-year variation in comparison with other items of the CPI. Slide 6 shows our price adjustment during 2022. In mobile, during December 2021, mainly impacted in 2022, we have increased prices for postpaid and prepaid by 15% and 16%, respectively. In April, we have increased both postpaid and prepaid prices by 11%. In July, we have increased postpaid plan by 13% and prepaid plan by 7%. In broadband, the prices of our xDSL services have increased by 16% in January, 12% in April and 13% in July 2022. Prices of our HFC and FTTH services increased by 13% in January, 9% in April and 10% in July. The subscription prices of our pay TV services have increased by 13% in January. Additional services such as football pack and premium channels have increased up to 15% in the same period. Both in April and July of 2022 prices of our pay TV services increased by 12%. Prices of fixed voice basic services have increased by 16% in January, 12% in April and 30% in July. Slide 7 shows the evolution of our products. Mobiles segment postpaid subscribers have increased in more than 300,000 clients or 3.9%. Our postpaid share is currently 42%. Prepaid subscribers have increased in almost 500,000 clients or 4.4%. We have observed a strong growth in the prepaid segment driven by our commercial initiatives. Broadband. Accesses remain steady. We have experienced a reduction of accesses in the xDSL segment, and we continue growing HFC and FTTH segments. Pay TV subscriber base remained almost constant, registering a slight decrease of 0.8%. Growth is mostly leveraged on the performance of our Flow platform. Additionally, we have launched our new ISDB-T solution for analog pay TV customers, which allows the upgrade of their classic cable connection to digital. 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 350,000 lines. Moving to Slide 8, it shows the evolution of our services revenues. Service revenues totaled almost ARS 248 billion, decreasing 10% in real terms versus first half of '21 in a period where year-over-year inflation was 64%. Our revenue breakdown as of June 2022 show an increase in the participation of mobile and broadband services and a decrease in fixed telephony data services when compared to June 2021. The breakdown was as follows: mobile revenues, 39%; broadband revenues, 22%; pay TV revenues, 19%; fixed telephone and data revenue, 13%; equipment sales revenue, 6%. Slide 9 describes the main trends in our mobile and broadband businesses. As of June 2022, mobile postpaid subscribers amounted to 42% of our total customer base. The chart in the upper left shows the postpaid competitive landscape per month. During the first half of 2022, personal had a positive net inflow of mobile clients. Mobile Internet usage has continued to increase, reaching an average of more than 4.8 gigabytes per user per month during the first half of 2022. Additionally, we continue to increase our average broadband speeds. 77% of our total subs have speeds between 50 and 1,000 megabytes per second comparing with 63% during the first half of '21. This was mainly explained by the growth in HFC and FTTH connections, which increased by 5% and 103% versus the first half of '21, respectively. Our HFC and FTTH connections currently register average speeds of approximately 90 megabytes per second. Slide 10 shows our businesses in Paraguay. Núcleo generated $104 million and $50 million in revenues and EBITDA, respectively, during the first half of 2022. The EBITDA margin of Núcleo as of June 2022 was very strong and close to 50%. Revenues breakdown was as follows: browsing services, 42%; voice, 15%; data, 6%; broadband, 18%; TV services, 8%; and other services with approximately 12%. As of June 30, 2022, mobile customers totaled 2.3 million. The mobile financial service that our subsidiary provides named Billetera Personal reached almost 280,000. Fixed Internet services subscribers amounted to more than 220,000, growing 32% versus the first half of 2021. In the pay TV segment, Flow customers totaled 39,000 and Personal HD 51,000. The fixed network deployment in the main cities of Paraguay continued to increase, growing 39% versus the first half of 2021 and reaching 633,000 homes passed. Slide 11 shows some key performance indicators of our fintech, Personal Pay. As of June 2022, Personal Pay onboarded clients amounting to 235,000, growing 3x versus the previous quarter. Almost 15% of these clients belong to other local telco's operators. The number of prepaid card accounts have multiplied by more than 3x, amounting to almost 113,000. Additionally, Personal Pay's first advertising campaign in the local media was launched in July. I will now pass the call to Luis Rial Ubago, who will go over our financial performance. -------------------------------------------------------------------------------- Luis F. Rial Ubago, Telecom Argentina S.A. - IR Associate [3] -------------------------------------------------------------------------------- Thank you, Gabriel. In Slide 12, we provide an overview of our main financial figures. During the first half of 2022, consolidated revenues grew by 40% on nominal terms, reaching ARS 231 billion. When analyzing said figure adjusted by inflation, revenues amounted to more than ARS 264 billion, showing a decrease of 10% in real terms versus the same period in 2021. Service revenues show a 41% nominal increase. EBITDA increased by 24% year-over-year in nominal terms, thus generating an EBITDA margin of 31.2%. In turn, EBITDA margin in real terms was 30.6%. Operating costs before D&A decreased by 5.6% in real terms versus the first half of 2021 as the company continue to manage its 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. Operating costs were 5.6% lower in real terms. During the first half of 2022, the company has successfully contained the pressure coming from inflation in most of this cost line as almost all of them experienced a decrease or remained in line when compared with inflation. We have been observing good results in programming and content costs, interconnection costs and commissions and advertising. In turn, the main exceptions were labor costs and bad debt expenses, which have increased over inflation. Salaries increases with our unionized and non-unionized employees have closed beyond negotiation for 2021 and 2022 with increases of approximately 62%. Budget expenses increase was mainly explained by the harder economic situation in Argentina, which has a dire impact on our clients' incomes. Understanding the situation, our present ratio of bad debt related to total sales has decreased during the second quarter, reaching 2.1% and our collections are performing normally. On Slide 14, we show the evolution of our main business drivers during the first 6 months of 2022 compared to the evolution of inflation. It is important to remark that as inflation accelerates, we observe different adjustment dynamics over time between salaries and price increases. The adjustment speed of revenues versus inflation determined by the frequency and magnitude of price increases is currently slower than the adjustment speed of salaries. During the first half of 2022, when inflation accelerated, new salary agreements for the 2032 and 2022 period were closed increasing our labor costs. On the contrary, other service costs having been increasing not only below inflation but also below service revenues. In Slide 15, the company's net income totaled ARS 31.9 billion while EBIT was negative in real terms. The EBIT decrease in constant measure unit is explained mainly by the decrease in EBITDA in real terms. This, combined with the inflation adjustment or D&A, resulting in our operating margin of negative 3% of consolidated revenues. Historical figures, the same margin was 19%. In the first half of 2022, the company had a net income of ARS 31.9 billion, mainly due to positive net financial results of almost ARS 38.7 million and to a positive income tax of almost ARS 1.6 million. The positive financial results were driven mainly by inflation adjustment gains and lower net interest charges. Slide 16 shows a summary of the company's CapEx in P&E and intangible assets during the first half of 2022, which amounted to more than ARS 38 billion or an equivalent of $309 million at the official FX rate. This amount was 29.5% lower when compared to the same last year's period. Our consolidated amount of CapEx amounted to almost 15% of our total revenues. Technical CapEx was mainly composed by investments in our access network and technology. The balance was allocated to installations and customer premise equipment or CPE and to our international operations in Paraguay and Uruguay. During the first half of 2022, 30 new mobile sites were deployed while more than 40 were built and another 500 existing sites were upgraded. We expanded our FTTH network over more than 3,000 new blocks. Additionally, we performed an overlay with FTTH over our HFC network in 2,800 blocks. We also increased the upstream capacity of HFC network in 12,000 blocks. Additionally, we announced a new regional investment, mainly in the province of Mendoza. We will expand our FTTH network in that location to almost 100,000 homes, and we are going to build 58 new mobile sites to increase our mobile coverage. Slide 17 describes our cash flow generation during the first half 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. In the first half of 2022, the operating free cash flow amounted to approximately $256 million equivalent. The variation versus the first half of 2021 is explained by the decrease in our EBITDA in real terms. But the impact of free cash flow has been partially offset by a lower amount of CapEx during this year. In Slide 18, we see our key figures for the first half of 2022 in constant measuring units. Our gross debt amounted to $2.7 billion as of June 30, 2022, increasing 6.8% from December of 2021. The company cash and equivalents were almost $210 million after the dividend current payment of June 2022 or an equivalent of $150 million. In consequence, our net debt was almost $2.5 billion. Our net debt-to-EBITDA ratio was at 1.94x. Slide 19 shows a quarterly evolution of some key ratios. Our ratio of bad debt over revenues had a positive evolution since 2020, where it reached levels of 4%, mainly due to COVID-19. Currently, this ratio was mainly affected by the economic situation in Argentina. We are following up on this issue closely and monitoring our collection. In the first half of 2022, our bad debt over revenues ratio decreased to 2.4%. In the first half of 2022, our CapEx over revenues was almost 15%. This percentage is below the level of 2020 and 2021, mainly due to additional CapEx we did in advance during the previous year. Gross debt to EBITDA remained at 2.1x, while net debt to EBITDA was lower than 2x. Both ratios are very solid when compared with other telcos. Slide 20 shows the breakdown of our financial debt. Our latest liability management transactions have been very successful. During July, we received from IFC a disbursement for an amount of $184.5 million. Additionally, we have canceled the total amount of the principal remaining under the term loan due 2022 for $140 million. In 2022 and 2023, our debt maturities are very manageable and less than 50% of the maturities for those years are denominated in U.S. dollars. Total outstanding debt as of June 2022 amounted to $2.7 billion on a pro forma basis. 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 30% as of June 2022.