América Móvil, S.A.B. de C.V. (AMXB) Earnings Call Transcript & Summary

Yes. So good afternoon, ladies and gentlemen. I'm Diego Aragão, Latin American telecom analysts at Goldman Sachs. Today, I have with me Mr. Carlos García Moreno, CFO for América Móvil. Carlos, mucho gusto. Thank you very much for joining us today. It's always a pleasure to have you on the stage. Unfortunately, we are virtually this year, but it's good to see you. Hopefully -- I hope everything is well with you and family. And hopefully, we can see each other in person soon.

Thank you, Diego. Great to be here with you guys.

Yes. So look, so why don't we start talking about the recent transaction that you announced 2 days ago where AMX will sell the TracFone business in the U.S. to Verizon. And I mean it will be great if you can share with us the strategic reasons to do it, the financial structure of the deal, and -- which also includes like a part to be paid with Verizon common shares and the timing for the transaction, I guess, that would be great.

Sure, Diego. We'll as you know, TracFone is a company that was a real pioneer of prepaid in the U.S., okay? That's a company that was acquired a bit more than 20 years ago at that time still by Telmex. And what we have we believe that where the prepaid market was virtually nonexistent in the U.S. at that time, that it was going to develop. We have seen it develop also in Latin America. So we basically took a controller's platform and ended up developing distribution along the same line that we have learned in Mexico and then in other countries in the region. And it was a time, I have to say the year or 20 years ago, where most people in the U.S. were still very dismissive of the importance of the prepaid market, okay? So you had a lot of carriers out there that were content to have other people go and do the prepaid for them, okay? So long as you could source lines to the network, it seems to be a good business for them and they were not interested in doing the business themselves. Over the years, as you know, platform was, in the beginning, an MVNO. Didn't have any network of its own. They needed to buy capacity in the market and it was a reseller of this capacity. And what we have seen over the last several years is that the situation started to change. The prepaid market developed and gained scale, and that attracted some of the carriers that have not been interested at the beginning, attracted them to the market. So what you see is now the larger carriers have all become very important in the prepaid segment of the market. And this obviously has led to very different dynamics currently than we had in the past. For us, TracFone was one of a kind. It was the only MVNO in our portfolio. We have said repeatedly, I believe also, in your conference that we didn't consider it a core asset or a strategic asset. And over the years, we ended up receiving several expressions of interest for the company, okay? In some cases, people had wanted to purchase it outright. In some cases, people had wanted us to merge with them or to develop association of sorts. We had several bankers come to see us to IPO the business, okay? So -- but it was a company that we were always open to evaluate different options. And also at this time, we decided not to do anything. But this time around, given what I have just mentioned, there's been a very major change in the structure of the U.S. market. It is the case, but now many of the people we were getting capacity from are now our direct competitors in the market. So -- and we felt it that this time around, it makes sense for the company to be integrated with a network, okay? And that's what led to this deal with Verizon. I think it's a good deal for the company. TracFone has an extraordinarily good position in this prepaid segment. It has been acquiring capacity from Verizon. Part of the capacity was controlled by Verizon for a long time. But this will allow the companies to integrate more.

That's super helpful, Carlos. And just to be clear, I mean can you share some views on the -- is there any lock up period for you to eventually monetize the Verizon shares you'll receive? How should we be thinking about it?

I don't believe there's anything there that really discourage us in terms of selling the shares. I think -- if you think of it, these shares have performed extraordinarily well today. They are among the top performers in this sector globally. They have a good figure in yield that are more than sufficient to pay for the cost of our debt, okay? So it's not something that will be a burden to carry, on the contrary. And it's a good company, that we will be doing or even better with the new assets that they are acquiring. So it's a very liquid stock. It's -- it gives us many options, okay? We are not in a hurry to make any decisions today. But even if we're in a hurry, we know that we could exit if we so wanted.

That's great. Thank you, Carlos. And I guess, look, moving on, when we met last year during the Communacopia Conference, you mentioned that to investors how results for América Móvil we're improving in both Mexico and in Brazil. In fact, we have been seeing those markets really improving and catching up over the past 2 years, if I'm not mistaken. So they are the most important markets for the company. So I guess with results being very strong, mostly driven by your performance in the mobile business, albeit partially offset by the weakness -- the weak performance in the fixed business. So if you can walk us through your strategy, and the market dynamics in these 2 countries, especially considering the different portfolio of assets that you want in each one of them, I think that would be quite helpful.

Sure. Well, Diego, in Mexico and Brazil, we have almost the exact opposite in terms of the structure. We, in Mexico, it's 2/3 mobile, 1/3 fixed. In Brazil, it's 2/3 fixed, 1/3 mobile. In Mexico, it's 2/3 mobile, but it's the mobile part is the one that is growing more rapidly. In Brazil, mobile is growing very rapidly, but so is fixed broadband, okay? So the differences in the market is, I would say, in Mexico, we are today in the mobile here going against 2 players. And we've been holding on -- not only holding on, we've actually been able to improve our market share of revenues this year, just to give you an idea. So whereas we have seen the economic weakness, we had the effects of the lockdown in the second quarter. Fact of the matter that we have been doing better than anybody else and we are gaining revenue share. We are facing a bit more competition in Mexico on the fixed line part. But it is the case that for many years, we were handicapped by not being able to compete in the triple play segment of the market. All of the expansion in Mexico for the last 6 years or thereabouts was being driven by triple play bundles. And Telmex was not allowed to offer this kind of packages. It's still not allowed. But the fact is that this market is changing very rapidly, the PayTV market, and it is now increasingly being driven by streaming products. So end of last year, we came out with our first negotiation with Netflix, the best network together with the best entertainment, that's how we promoted it. And we were having strong results -- very strong results in the first quarter. I have to say that the work that we've done in Mexico over the last 3 years, in particular, in terms of speeding up the Telmex networks, has been fantastic to let us to gain more traction on the fixed broadband segment of the market, okay? On the corporate data networks, I don't think we have much competition, really. But in the mass market, in the consumer market fixed broadband, I think we're getting more traction with streaming. Even though, as you know, we haven't been given the PayTV concession that we have sought for so long. And we expect that by the time we got the functional separation in place, we would be able to get this PayTV license. It hasn't yet come but it increasingly seems that it is streaming, the thing that will be the bigger thing in the next 5, 7 years. In Brazil, it's -- on fixed, as I was saying, we've been growing revenues close to 10% year-on-year for quite some time. For many quarters, this has been the main driver of revenue growth. We have had, contrary to Mexico, issues with PayTV because we do have a big PayTV business in Brazil. And it has been suffering, we have seen revenue declines for quite some time. Mostly driven at some point by the economic conditions in the country, that's when it started going down and not necessarily because of the changes in the market that are taking place. But we continue, in spite of all of this, maintaining relatively stable our revenue share. In fixed broadband, I think we are #1. In PayTV, I think we're still #1, we're about 50% of the market. And we've been able to hold on to our revenue share in fixed broadband in spite of the growth of the new players. As you know, this fiber fixed-broadband entities that have taken up so much of the roaming in Brazil. And this is just to finalize with mobile in Brazil, okay? Mobile is -- we've been the best performer in the market for, I think, really 2 years running. The company has the best integration of fixed and mobile assets that there is in Brazil. We have a top of the line fixed-line platform that is supporting top of the line mobile platform, which is 4G or 5G-capable today. It is clear that we have the best quality for data services in the country. And that is what has given us all of the impetus the last several quarters. I think if you look at postpaid market share, be it by clients, be it by estimates of revenue, I think we've been gaining a lot of share the last couple of years, and we expect that this will continue as well. In mobile, 5G is coming along soon. And we are, I would say, far back in some of the elements that you need to have in place before you can think about offering 5G. So I think that this is a very important market for us, and we expect that we will be able to do well. You know that the market is consolidating -- has been consolidating for some time. It was the base of Oi. By now Oi is for sale, as you know. And it happens that the 3 players have teamed up to participate in the acquisition of the fourth player, of Oi. Chances are that this is going to be a quick process. Chances are that it will be completed probably, as far as the sale goes, in October, only next month. And then very likely, this is not something that will have too much leeway in terms of regulatory approvals. So maybe something to be said about the structure of the market in Brazil in mobile.

You are giving, Carlos, the spoiler of a few questions that I would make for you today, okay. But let me -- so let's go deeply first in Mexico. I guess you've touched on a quite interesting point. It's always one of the main debates and one of the main topics that investors raise is, first, what is the status in the function separation? And how should we be thinking about the timing on it? I guess this will be the first question in particular to Mexico. Secondly, any update in Red Compartida? I mean I guess we continue to receive some questions even though investors understand that there might be, like, some delays in the project that eventually the project not necessarily would end up affecting the industry as initially they thought? And third, I mean I guess you already mentioned our expectations to get the PayTV license. But until that time, I mean are you partnered with OTTs? And how is the penetration of OTTs in Mexico at this moment? So if you can just touch quickly on those 3 topics, I think that would be great.

See, well -- let me begin with Red Compartida. Red Compartida is basically tethering to Telefónica, have been running on this network. They are running also Telefónica on our network. And now it is also on AT&T's network. And I think it has been redirected somewhat by the new administration to basically build a new infrastructure that needs to be built in more -- in more rural areas, okay, where nobody has this infrastructure for many years. So Red Compartida, at least the level of the cities so far has not got much of an impact. Today, it's obviously providing capacity also to MVNOs, including the ones that have been set up recently, 1 by Televisa, 1 by Wal-Mart. And difficult to say what the impact has been so far. Another one that has been out there for some time longer, which is Megacable, hasn't gained much traction so far, okay? So we really haven't seen much on that part of the mobile space. As regards -- the first question was on which one, Diego?

It was regarding, like, the PayTV license. I mean until you get the license -- yes, it was the function separation and then the PayTV license. Apologies for that, Carlos.

Okay. So the function separation has been in place since March, okay? So there's a separate entity from Telmex. It has its own Board. It has its own management, separate from those of Telmex. They operate independently from Telmex. And their mandate is to give access to anybody that request it and to maximize the business or the wholesale business of Telmex, okay? So the economics of the business remained with Telmex, but it's an entity that is meant to have a single mandate, which is provide wholesale access to other entities. So to avoid conflicts of interest, they have, as I said, their own Board, their own management. This has been put in place since March. I don't think there's anything more to report there other than it was a pre-condition from IFETEL, at least that's how we understood it, for the PayTV license eventually to be handed over to América Móvil. As you might recall, Diego, the functional separation is really the last step of the telecoms reform that was enacted in the last administration. With the telecoms reform, Telmex was obliged to give access to its network to competitors, and the functional separation, which is this last step is only a means of discharging this obligation that Telmex has of giving access to other players. So the obligation have been in place since, I think, 6 years ago, but the way of doing it through this separate entity, okay, which has -- is independent from Telmex in terms of its management, that has been there only for the last 6 months or so. So nothing more to report there today other than with this, we think we should have completed the last requirement by the IFETEL for the PayTV license. We still do not know when that will be forthcoming. But it is the case, as I was explaining that, the handicap we had 5 years ago from not having PayTV license is probably not the same kind of handicap that we are having today if we look out the next 5, 7 years, okay? I think the -- I wouldn't know today. Maybe I can find out for you what's the share of the OTTs as you point out, but I don't really say it's significant.

That's quite helpful, Carlos. So if you don't mind, let's talk now about the hottest pick, let's say, topic in 2020, which is M&A, right? I mean clearly, you have been quite active in M&A over the past 2 years, buying an asset from Telefónica in Central America, Nextel in Brazil and now becoming part of this consortium, together with TIM and Vivo that recently present an offer to buy Oi mobile business in Brazil. So I guess starting with that, I mean it would be great if you can walk us through the latest regarding this joint bidding process for Oi. I mean you mentioned that you expect this to be fast. But if you can just give you -- give us a little bit of views on these, the next steps and the timing for this transaction, that will be quite helpful.

Sure, Diego. Well, as you probably heard, last week, we were given the status of the preferred buyer. It is the case that there's going to be, I think, an assembly in October. The details, it's certainly the shareholders and the lenders. But I think in the context of this process that they have, there will be a new round for the sale of the company, other bids will be accepted. And my impression is that in this new process as well as the stock course, the process, we will be given the right to match, okay, any other bids out there. So that's what we have. And I think these have been published last week. So again, as I understand it, barring any unforeseen changes, we should have a next round in October. I believe that the regulators have been following this very closely for quite some time. So I would expect that the regulatory approvals should not take too long, okay? They want -- I'm talking certainly about the telecom regulators, Anatel, they've been close to this process for a long time. But also, I think, more recently, a carrier became involved and they are reviewing this as we speak. So this -- we have talked about this in your previous conferences. And clearly, the market have already been consolidating. Today, Oi's revenue share probably on the mobile side, probably not much more than 12%, 11%, which is clearly down from the big levels that they had, which were close to 20% in the past. So there's been a consolidation effectively taking place with the other 3 players, the -- to the extent that the consortium that we have established. And so winning the company, well then this consolidation process that we have been seeing for some time will be completed in a very orderly fashion and a very timely fashion as well, okay? So I think that's a big merit just to ensure that we go from one status of the market with 4 players to another status in market with 3 players in a very stable manner. This is good for investment as well, less volatility.

Yes. No, fully agreed. Yes, that's helpful, Carlos. So just to be clear, I mean you don't see major risks, either, like, on the regulatory front or on the antitrust to have this deal approved by those 2 entities, right?

Yes. As I said, I would be surprised, quite frankly, if we were to run into issues. On the regulatory front, the regulators have been following the action, and probably part of the action for so long. It's been quite a while since Oi went into default for the first time. And this has taken much longer to solve than people had initially expected. I remember early on, many people thought it was going to be over in a year. But it's been probably coming 3, 4 years already?

It's 4 years, almost 4 years, now.