Telecom Argentina S.A. (NYSE:TEO) Q3 2022 Earnings Conference Call November 10, 2022 11:00 AM ET
Company Participants
Luis Rial Ubago – Investor Relations
Roberto Nóbile – Chief Executive Officer
Gabriel Blasi – Chief Financial Officer
Conference Call Participants
Luis Rial Ubago
Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating of the — 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 nine-month period and third quarter of fiscal year 2022 ended on September 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 our 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 valuations, possible changes in the demand for Telecom’s products and services, the effects of potential changes in general market and in our 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 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, 2018. Accordingly, our reported figures corresponding to the nine months period of 2022 included the effects of the adoption of inflationary accounting in accordance with IAS 29.
In this presentation, we will also include periods in historical value which are easier to understand. Our press release is complemented by our earnings presentation. The audience will 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
Thank you, Luis. Good morning and welcome to everyone. Moving to slide three, it summarized 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 US$580 million, representing 16% of our revenues. Cash flow generation remained 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 postpaid 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 minus 2.1% in U.S. dollars. We sold our Costanera building in the city of Buenos Aires for a total amount of $6 million. We received an advance of $2 million in September 2022.
Regarding ESG, in September, we held the Sustainability Week, an internal event in which both internal and external speakers participated.
Finally, we recorded a goodwill impairment, which includes the goodwill generated as a result of the merger between Cablevisión and Telecom in January 2018 for P$208 billion due to the deterioration of market conditions.
In slide four, shows the company figures for the nine-month period of fiscal year 2022. Telecom’s revenues totaled $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 approximately 20 million, increasing almost 500,000 total clients when compared to the same period of 2021. Postpaid 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 lines, amounted to 3.1 million during the first nine months of 2022.
We have increased our total convergent unique customers to 2.2 million, increasing 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 accelerated as of July of 2022, jumping to monthly levels of 6 points or 7%. Year-to-date inflation as of September 2022 was 66.1%.
The impact of our industry in 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 a very high level. 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 income need to close to 18%, 19% in comparison with the rest of the price increases that we did during the year. During this month, we are performing another increase in our mobile prices of 17% in 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 more than 460,000 clients or 5.7%. As we have mentioned, our postpaid clients represented 43% of our total mobile client base.
Total prepaid subscribers remain almost constant, increasing 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 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 reaching 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 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 U.S. dollars. The handset business represents around 6% of our revenues.
Our service revenues have amounted of P$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 nine describes 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 been 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 gigabytes 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 megabytes per second and 1,000 megabytes per second comparing with 68% during the first nine months of 2021. This was mainly explained by the growth in HFC and FTTH connections, with increase 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 totaled 2.3 million. The mobile financial service that our subsidiary provides Billetera Personal reached 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 totaled 44,000 and in Personal HD, 49,000. The fixed network deployment in the main cities of Paraguay continued to increase, growing 37% versus the first quarter of 2021 and reached 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 2.2 times versus the previous quarter. We find that this growth is very encouraging and we are growing also outside of telecom clients base, as almost 18% of these clients belong to other local telco operators.
The number of prepaid card accounts have multiplied by 2.6 times, amounting to almost 292,000. The total payment number has also been increasing accordingly. In September of 2022, it reached almost 917,000 operations and it has multiplied by more than 3 times when compared to June.
Growth in our digital wallet is leveraged on a strong value proposal for the company clients for clients outside telecom as well so 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
Thank you, Gabriel. In slide 12, we provide an overview of our main financial figures. During the nine-month period of 2022, consolidated revenues grew by 44% on nominal terms, reaching P$370 million. When analyzing set figure adjusted by inflation, revenues amounted to almost P$471 billion, showing a decrease of 12% in year on terms versus the same period 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 in the nine-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 these 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 our costs.
These cost management initiatives have partially offset the rise in labor costs, which have increased our 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 the EBIT. The EBIT decrease in cost on 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 P$163 billion, mainly explained by the aforementioned impairment for a total amount of P$208 billion and by a negative income tax of P$4.3 billion, partially offset by a positive net financial results of P$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, which aforementioned. The most significant goodwill held by the company was generated by the merger between Telecom Argentina and Cablevisión, which became effective on January 1, 2018.
It is important to remark that in order to determine the original value of this goodwill the consideration 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 Telecom on Safe Day was $36.63 per year. As of September 30, 2022, the price of the ADR of Telecom was $4.01, decreasing 89% versus the value considered at the effective date of the merger.
Due to the deterioration of economic conditions in Argentina and to the lower market value observed in the communications industry as a whole, Telecom 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 P$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 P$75 billion or an equivalent of $508 million at the official FX rate.
Our consolidated amount of CapEx amounted to almost 16% of our total revenues and is 24% below in real terms versus the first nine months of 2021. Technical CapEx was focused on a deployment and modernization of our 4G mobile access sites, the deployment of last mile networks with the TTH architecture, installations and equipment in the forms 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 have expanded our FTTH network over 5,700 new blocks. Additionally, we performed an overlay with FTTH over our HFC network in 4,600 blocks. We also increased the upstream capacity of our HFC network by 50,000 blocks, and 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 gigabytes per second. We expect to come with a total of 170 sites, probably, with DSS technology before the end of the year.
Slide 17 describes for 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 and 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 measuring unit. Our gross debt amounted to $2.7 billion as of September 30, 2022, increasing 9.7% from December 2021. The company holds cash and equivalents for $268 million and our net debt amounts to approximately $2.4 million. Our net debt-to-EBITDA ratio remains slightly below 2 times.
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 nine-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 period is slightly below the level of 2022 and 2021. Our maintenance CapEx is in the range of $300 million per year to $350 million per year. So we have a lot of flexibility in this sense as we are investing well above set figure.
Gross debt-to-EBITDA was at 2.2 times when net debt-to-EBITDA was lower than 2 times. [Inaudible] 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 and a yield of minus 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 to 2022 are mostly denominated in pesos and our debt maturities for 2023 are very manageable and less than 50% of these maturities are denominated in U.S. dollar.
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 we have 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 of 2022.
[Ends Abruptly]
Question-and-Answer Session
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