Cablevisión Holding S.A. (CVH) Earnings Call Transcript & Summary

Good afternoon. My name is Leo, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cablevisión Holding CVH Second Quarter and First Half 2020 Earnings Conference Call. [Operator Instructions] We will discuss results for the second quarter and first half 2020. This call is for investors and analysts only. Therefore, questions from the media will not be taken at this time. However, if you are a member of the media and have questions, please contact i-advize following the call. I will now introduce our speaker on behalf of CVH. We have Mr. Agustín Medina Manson, Head of Investor Relations; and Valentina Lopez, Senior Analyst. Additionally, Mr. Sebastian Bardengo, Executive Director and Chairman, will also be available for today's Q&A session. The team will be discussing the results as per the earnings release distributed last Wednesday. If you have not received the report or need any assistance during today's call, please contact i-advize in New York at area code 212 406-3695 or the company in Buenos Aires at 5411-4309-3417. CVH has also posted a webcast presentation. This presentation can be found at www.cvh.com.ar under the IR section. Comments made by the management may contain forward-looking statements about Cablevisión Holdings' future performance, plans, strategies and targets. Such statements are subject to uncertainties that could cause Cablevisión Holdings' actual results and operations to differ materially. Such uncertainties include, but are not limited to, the effects of the impact and duration of the COVID-19 pandemic, new or ongoing industry and economic regulations, possible changes in demand for Cablevisión Holdings products and services and the effects of more general factors such as changes in general market, economic or in regulatory conditions. We ask that you refer to the disclaimer in the earnings report or presentation for additional information regarding forward-looking statements. It is now my pleasure to turn the call over to Mr. Agustín Medina Manson. Please go ahead, sir.

Thank you, Leo. Hello, everyone. You know, we are living through a very difficult time. I would like to start the call by expressing my hope that you and your families are all healthy and safe in these uncertain times. Also, I would like to thank to all the workers who are at the forefront of the fight against coronavirus. Before discussing our results for the quarter, let me share with you the latest regulatory decision took by the Argentine government. Please move to Page 4. The government issued a decree in the case vulnerable people and small businesses stopped paying their bills, companies are not allowed to interrupt their services to them. In case of fixed or mobile telephony, Internet and cable TV services, companies will have to maintain a minimum service for a period of 180 days and must inform their prices to the ENACOM, the regulator. Also, in May, due to COVID-19, the telecommunication industry has agreed jointly with ENACOM to freeze the price of ICT services until the end of August 2020. Also, the industry offer inclusive plans only under request with fixed prices until the end of September 2020. In other, the telecommunication companies informed in their invoices that they were going to increase prices on average, approximately 10.5% in September. However, the government issued a new decree in which not only prices will be frozen until the end of the year, it also declares mobile, fixed voice, broadband and pay TV as public essential services. With this measure, companies will have to get approval from government to raise prices. The regulatory agency ENACOM will be in charge to enforce these new government measures and will supervise telecom prices in the country. CVH is analyzing the implication of the new decree for its subsidiaries and the eventual actions to adopt in order to safeguard the rights of the company and its stakeholders. Now we are going to continue with an update of the tender offer process, then moving on to a brief macro overview and to the company operating results followed by a review of the financial position. Later, we will review Telecom Argentina digital transformation. Let's move to Page 5. As we mentioned in our last call, by the end of December 2019, first instant judge of the Federal Administrative Court admitted the claim filed by Mr. Burgueño in his capacity as shareholder of Cablevisión Holding S.A., and we saw that CVH has no longer an obligation to launch a mandatory tender offer as a result of the change of control in Telecom Argentina. CVH did not appeal the court's decision and agree with the position of the claimant, while the CMB, the Argentine Security Commission, appealed such decision with the court of appeals. On May 15, 2020, the Federal Administrative Court granted an extension of the injunction that ordered the suspension of the tender offer process for a 6-month period. Additionally, the judicial proceeding that CVH has filed with the Federal Civil and Commercial Court regarding the price of the tender offer is waiting for the first instant decision. We will keep the public informed about any news related to the tender offer process. Having gone through the discussion of the tender offer process, let me pass the call to Valentina.

Thank you, Agustín. I will continue with the macro overview. Let's move on Page 6. During the second quarter of 2020, the Argentine economy continued to be immersed in a complex macroeconomic environment, marked by a strong fiscal and monetary imbalance, tightened controls on the foreign exchange market and high levels of uncertainty, especially from the results of the sovereign debt renegotiation process and the effect of COVID-19, which impacted on the social and economic front troubling the world as well as the Argentine context more worrying and challenging. Regarding the economic activity, the GDP [ branch ] during April of 2020, and it was worse than expected, mainly due to the mandatory lockdown effect. In this sense, a deep fall of around 16.6% and 19.6% is expected as compared to the previous quarter and the same period of 2019, respectively. Quarterly inflation decreased to 44% on an annual basis, while the monthly variation was 2.2% at the end of June 2020. It is important to mention that the depreciation of the economy, certain foreign exchange stability and the mandatory lockdown decelerated the levels of inflation, which showed a 2.3% monthly average increase during the first half of the year. However, considering the mandatory issuance that the Central Bank is carrying out, inflation is expected to range between 40% to 45% by the end of 2020. On the reference rate side, it stood flat at 38% at the end of June 2020 compared to the end of March, in line with the policy implemented by the Central Bank to promote both the credit and the economic activity recovery. On the fiscal front, given the fall in the tax revenues caused by recession and the increase in the public expenditure due the COVID-19 crisis, the deficit increase is expected to range between 7% and 9% of GDP by the end of the year. In this sense, it is important to highlight that since the only way to finance the public deficit is monetization, the Central Bank is expected to close the second half of the year, increasing the reference rate. Lastly, it is important to mention that on August 4, 2020, the Argentine government reached an agreement with debt holders, improving its previous offer and so avoiding the chance to go into default. Although the result of the debt renegotiation process has been positive, the expectation about the Argentine economy continued to show difficulties. In this sense, the post pandemic challenges will not only depend on short-term measures, but also structural reform that allow the country to stabilize its economy and increase its potential growth. Now I will pass the call to Agustín.

Thank you, Valentina. Now we are going to continue with CVH key financials. On Page 8, it shows the first half 2020 highlights. But first, please remember that CVH owns 39.08% stake in Telecom Argentina and as a controlling shareholder of Telecom Argentina is consolidated 100% of its operation. It is important also to highlight that Argentina became a hyperinflationary economy and inflation adjustment has been applied in our financial statements. Revenues for the first half of 2020 dropped 3% to ARS 131.2 billion, mainly driven by lower revenues from broadband and cable TV services in constant currency. The main source of revenue came from our fixed infrastructure, broadband, pay TV and fixed telephony and data services that amounted to 57% of the total, while mobile services participation increased to 38%, gaining share of total revenues as compared to first half of 2019. EBITDA reached approximately ARS 47.7 billion in constant currency, 5.5% increase compared to the first quarter of last year, driven by lower operating cost. Among the most significant operating cost and expenses are salaries, fee for services, maintenance, materials and supplies costs. EBITDA margin increased to 36.4%. Holding cost and expenses represent less than 0.2% of the total cost of the company, showing a transparent corporate structure at CVH level. Net income for the period totaled ARS 2,161 million, a decrease from ARS 9,041 million reported for the first half 2019. This was mainly a consequence of negative financial result in first half 2020, which was partially offset by a lower income tax. The equity shareholder income for the period amounted to ARS 879 million. Now let's continue on Slide 9 for a discussion of the operating results for the second quarter 2020. Revenues in the quarter decreased by 1%. This was attributable mainly to lower revenues in cable and Internet services, partially offset by higher mobile services revenue. Mobile revenues are accelerating, reaching a real growth of almost 11.1% when comparing second quarter 2020 versus the second quarter of last year. Furthermore, the increase in the number of subscribers plus price increases performed during the year was key to the inflation in the quarter. Fixed services decreased 5.3% in real terms. The company has been trying to offset the inflation impact on our revenues and costs. And annual inflation as of June 2020 amounted to 42.8%. Fixed service revenues showed a 44.5% nominal increase, while mobile revenues grew more than 59.7% in nominal terms when comparing second quarter 2020 with second quarter 2019. EBITDA increased by 59% year-over-year in nominal terms, thus generating an EBITDA margin expansion of 38.1% while EBITDA margin in real terms increased to 37.8%. The company performed well in terms of cost control. Operating cost before depreciation and amortization decreased almost 6.6% in real terms versus the second quarter of 2019. The loss for the period attributable to equity shareholder was ARS 305 million, mainly due to the negative financial results, partially offset by lower income tax. In the second quarter 2020, CapEx as a percentage of revenue was 18.8%, lower than the same period of the previous year, mainly explained by the company's strategy to protect its financial strength in the current environment. Technical CapEx was mainly composed of installation and customer premise equipment. The balance was allocated to network and technology and to our international operations in Paraguay and Uruguay. Turning to the next slide, where we show the performance of EBITDA and the behavior of the different components of the revenues and costs. The company continues with its efforts to expand efficiency. Most of the components evolved positively despite a challenged economic context, indicating improvement in most of the cases. Operating costs were lower in real terms, and there was a positive evolution of handset costs. Moreover, operating efficiencies were obtained both in programming and content costs. There were no costs related to premium soccer package during second quarter 2020, considering that Soccer League has been suspended. A reduction of commissions and advertising expenses, and there were also lower taxes and fees with the regulatory authority. On the other hand, interconnection and transmission costs increased above inflation, mainly due to the strong demand of data consumption related with the mandatory lockdown. Also bad debt expenses grew higher than inflation, impacted by the deterioration of the general economic context. The result was a 340 basis point increase in the EBITDA margin in real terms comparing to the second quarter of 2019. Turning to Slide 11. In terms of personal mobile subs, the company has been increasing its postpaid subscriber base in order to improve its ARPU. In the second quarter, postpaid subscriber accounted for 49% of the total customer base. Mobile subs in Argentina amounted to 18.8 million, increased by 2.2%. Mobile Internet usage has also increased, reached an average of more than 3.9 gigabytes per user per month. Thanks to the CapEx deployment, Telecom has been able to increase its 4G subscribers. This rapid growth in subscribers that use the 4G network has been the driver of increasing data traffic in the last years. During the second quarter of 2020, more than 39 new mobile sites were deployed. In Argentina, ARPU restated in constant currency increased by 6.9% to ARS 375.5 in first half 2020 and monthly churn decreased to 2.2%. The commercial strategy was focused on achieving higher mobile portability through convergent offers and promoting the consumption of mobile Internet. Since the rollout of the strategic CapEx plan and the convergent offer launched to cable TV and Internet subscribers that were not mobile clients of the company, the company has turned around a trend related with the portability with net addition in Argentina. The company has been increasing the number of subs over the last 2 years. In the first half of the 2020, the company increased the number of net additions by 27,000. On Slide 12, we present the broadband and Pay TV KPI. Regarding the broadband businesses, it has been performing well in spite of this tough macroeconomic environment. The numbers of subscribers decreased less than 1% to 4,000 -- 4 million clients, and monthly churn was stable at 1.3%. ARPU in real terms decreased to approximately ARS 1,160.5. Price increases as well as the higher speed sold to the interest customer base were not enough to compensate the 42.8% inflation rate in the year. It should also be noted that due to our cross-selling strategy, fixed products have been offered with some discount to encourage positive mobile portability. Of the 4 million broadband customer reached in the second quarter of 2020, around 67% of them subscribed to services with the speed of 20 megabits or higher. Moving on to the cable TV subscribers, the customer base remained stable at 3.5 million, showing a slightly increase year-over-year. Furthermore, flow boxes achieved 1,078, a 49% increase from figures observed over a year ago. During the last 12 months, flow through its flow up version has continued to expand its penetration in areas where personnel has a great presence that is in the northern region of Argentina. This has allowed an increase to capture of cable TV subscriber in regions in which the company reaches through its DSL and FTTH network. ARPU in real terms decreased by 8.2% during the first half of the year and monthly churn decreased to 1%. Going to the debt financial position as per Slide 14. As of June 2020, we reported a total financial debt of ARS 183 billion and net debt of ARS 130 billion. 100% of the debt is at the operating level in Telecom Argentina. Of the total debt, 86.8% is dollar-denominated, 10.3% in Argentine pesos and the rest in guaranis. Our U.S. dollar cost of debt is approximately 6.26%, while the cost of debt in pesos is 38% and in guaranis is 8.5%. Net debt adjusted EBITDA coverage ratio as of the end of June 2020 was 1.5x. On May 20, 2020, the Argentine Central Bank decided that companies which have liquid assets abroad must first use those funds to pay the dollar commercial and financial debt, thus not allowing local companies to access to the official FX market, unless they can prove that they do not have any liquid funds outside Argentina. This was the main reason why Telecom Argentina decided to initiate a debt management strategy. On August 3, 2020, Telecom ended an exchange offer of its outstanding 6.5% note due in 2021. In Slide 15, we show Telecom Argentina pro forma maturity profile as of June 2020 after the exchange. Holders validly tendered USD 362.2 million of notes due 2021. The acceptance rate was 77.74%, high enough to demonstrate the company's solid trade profile and the appeal of the exchange offer. An additional amount of USD 135.4 million of notes due 2025, new money, was raised. This amount plus a cash payment were used to cancel Deutsche Bank loan and CPPIB Credit investment loan. In summary, the company issued USD 388.9 million of new amortization notes due 2025 with an 8.5% semiannual coupon to improve its maturity profile. Maturity in U.S. dollar are within the range of $400 million to $500 million between 2021 and 2022 and are reduced until the maturity of our 2026 notes. To conclude, we would like to highlight telecom digital transformation on Slide 17. During June, the Telecom launched its own digital core as part of its back-end transformation program 4UP. This has enabled the company to operate under unified convergence and efficient systems and processes. With the implementation of SAP 4HANA and SAP Ariba, we have accomplished -- the company has accomplished this objective in its operating model. Based on best market practices, it allows the company to work in a simpler and more collaborative and transparent way. More than 6,000 employees were trained through 150 virtual webinars and more than 50 virtual internal courses. Regarding its main BSS transformation project fund, the company has been able to complete the third and fourth migration of mobile customer, adding 2.5 million prepaid and postpaid clients during May and now, respectively. Currently, a total of 2.8 million customers can enjoy this new digital experience supported by 2,500 commercial advisers. The company is also planning to keep on rolling migration waves throughout the year and end 2020 with almost all its mobile customer migrated to the new CRM. Also, we would like to highlight that the pandemic and the mandatory lockdown have accelerated the company's digital transformation path, not only because Telecom was able to keep the businesses ongoing, but also to grow significantly in terms of engagement. If we take a look at Flow, the IP video platform, the company reached 9.5 hours of average use per customer. It grew 30% in terms of users on the OTT platform. And finally, the company has done an important effort to convince its clients to start paying online. Collections through digital channels have increased to 65% of the total collection, more than the 50% observed at the beginning of the year. That concludes our comments. We will be pleased to take your questions. Operator, we are ready for Q&A.

[Operator Instructions] And it appears that we have no questions over the phones. So we will go to our webcast questions.

We have 2 questions from the webcast from [ Agustina Lourdu ], Elara Partners. Her first question is although you are still analyzing the impact of Decree 690, which are your first thoughts and how it may impact the expected CapEx for this and next year?

Thank you, Agustina, for your question. Going for what are -- what is our thought related with the new decree, well, this new decree took the whole industry assess our price. We didn't expect that decree, and we are evaluating and analyzing with our advisers what are the implications of this new decree and what are the steps that the company has to follow to protect the company and its stakeholders. And going to your question about CapEx, as of today, I can tell you what is going to be the CapEx for next year. As Telecom mentioned in their conference call, they were expecting a CapEx of around $550 million this year, close to $600 million. But now we have to wait and see how this decree will impact the company operating cash flow in the coming months.

We have a second question from Agustina and she's asking, in May agreement with ENACOM, the company was allowed not to raise salaries while prices were frozen. Is this still in place with the recent regulatory change?

Well, that agreement with ENACOM was until the end of August. As you know, all the industry announcing in our invoices that they were going to raise prices. And also in the industry, some of the price increases -- some of the salary increases were announced also. I believe that salaries increases will continue in August, but as you know, the fees of the ICT services are not allowed to increase and has to be restated as it was in August 2020. But the price that all the companies charge to its customer also are important for CapEx and also for salaries and other operating costs. So for companies, it is important to have some certainty related about the future and the capacity that they will have or not to increase prices of their services. I can't tell you more than that.

And it appears that we have no further questions. I'd be happy to return the call to Mr. Agustín Manson Medina for any concluding remarks.

Thank you, Leo. Thank you all for your interest in CVH. We will enjoy sharing this time with you and addressing our company information and your concerns and questions. And we look forward to speaking with you again soon. If you have further questions, do not hesitate. Contact our IR team. Have a great day. Bye-bye.

This concludes Cablevisión Holding CVH Second Quarter and First Half 2020 Earnings Conference Call. You may now disconnect. Have a good day.