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

Good afternoon. My name is Nikki, and I will be your conference operator today. [Operator Instructions] This is Cablevisión Holding conference call, where we will discuss results for the third quarter and 9 months of 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 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 did not receive the report or need any assistance during today's call, please contact i-advize in New York at (212) 406-3695 or the company in Buenos Aires at 54-11-4309-3417. 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 Holding's future performance, plans, strategies and targets. Such statements are subject to the uncertainties that could cause Cablevisión Holding's 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 Holding's products and services and the effect of more general factors such as changes in the 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 the forward-looking statements. It is now my pleasure to turn the call over to Mr. Agustín Medina Manson. Please go ahead, sir.

Thank you, Nikki. Hello, everyone. As 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 want to thank coronavirus heroes like health workers, police officers, food suppliers and retailers, researchers in the scientist community, telecommunication and media workers and 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 taken by the Argentine government. Please move to Page 4. The government issued a decree that dictate the companies are not allowed to interrupt their services to vulnerable people that includes retired, people on welfare, among others, and small businesses when they stop paying their bills. In the case of fixed or mobile telephony, Internet and cable TV services, company will have to maintain a minimum service for a period of 180 days and must inform their prices to the ENACOM, the agency regulator. In May, due to COVID 19, the telecommunication industry and ENACOM agreed to freeze the price of ICT services until the end of August 2020. Besides the industry offered inclusive plans only under request with fixed prices until the end of December 2020. But in August, the telecommunication companies informed in their invoices that they were going to increase their prices, approximately 10.5% on average in September. However, the government issued a new decree which freezes prices until the end of the year and declares mobile, fixed voice and 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 this new government measure and will supervise telco prices in the country. This decree has been approved by the National Congress, but the regulation is still pending up to date. Now we are going to continue with an update of the tender offer process, then we will move onto a brief macro overview and 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, please. We mentioned in our last call, by the end of December 2019 a First Instance judge of the Federal Administrative Litigation Matters [indiscernible] admitted the claim filed by Mr. Burgueño in his capacity as shareholder of Cablevisión Holding and resolved that CVH have no longer an obligation to launch a mandatory tender offer as a result of the change of control in Telecom Argentina. While CVH did not appeal the court decision and agreed with the position of the claimant, the CNV, The Argentine Security Commission, appealed such a decision with the court of appeal. In September 2020, the Federal Court of Appeal on Administrative Litigation Matters dismissed the appeal filed by the Argentine Security Commission and confirmed the decision of the First Instance court in favor of the claimant, Mr. Burgueño. After this ruling, the CNV appealed the Federal Court of Appeal's decision. And in October 2020, the court denied a request filed by the CNV to have the case heard by the Argentine Supreme Court. The CNV filed at Supreme Court a complaint against the decision of the court of appeals. Now the Supreme Court has to evaluate if it will accept the case or not. Additionally, the legal proceeding that CVH has filed with the Federal Civil and Commercial Court regarding the price of the tender offer is waiting for the First Instance 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 third quarter of 2020, the Argentine economy continued to be immersed in a complex macroeconomic environment, especially marked by an increased fiscal deficit, monetary imbalances, high pressure on the foreign exchange market and the negative effect of COVID-19, which hit every sector of an economy that is going through its third year of recession. Regarding the economic activity, after higher-than-expected [indiscernible] in second quarter of 2020, GDP has shown signals of recovery. And it is expected to increase 10% as compared to the previous quarter, mainly fostered by some [indiscernible] of the lockdown measures and the partial normalization of activities. However, the economic activity still shows a weak recovery and it is expected to fall 13% on an annual basis by the end of the year, mainly due to the pandemic, the extension of some restrictions to prevent the virus from spreading and the difficulties derived from an increase in unemployment and macroeconomic imbalances. Quarterly inflation decreased to 39.9% on an annual basis, while the monthly variation was 2.8% at the end of September of 2020. It is important to mention that the depreciation in the economy, restrictions on mobility, frozen utility bill, an overvalued Argentine peso have decelerated the levels of inflation, which is expected to close at 38% year-over-year at the end of 2020. However, considering the monetary issuance that the Central Bank is carrying out and a bounce back in the activity, inflation is expected to increase for the next year. The reference rate stood flat at 38% at the end of September of 2020, in line with the policy implemented by the Central Bank to promote both, credit and an economic activity recovery. It is important to highlight that it decreased to 36% at the end of October, but since the only current way to finance the public deficit is monetary issuance, the Central Bank is expected to close the second half of the year, increasing the reference rate to a level of 38% in order to deal with the current monetary overhang. On the fiscal front, given the fall in the tax revenues caused by recession and foreign trade contraction and increase in public expenditure due to the COVID-19 crisis, the deficit increase is expected to range between 8% and 9% of GDP by the end of 2020. The expectations about the Argentine economy continued to show many difficulties. Although the result of the debt renegotiation process has been positive, the Argentine government also needs to reach a new agreement with the IMF and carry on its structural reform. In this sense, the post pandemic challenges will not only depend on certain measures, but also a clear long-term program to stabilize the economy and achieve a growth path. Now I will pass the call to Agustín.

Thank you, Valentina. Now we are going to continue with the CVH key financials on Page 8, it shows 9 months 2020 highlights. But please first remember that CVH owns 39.08% stake in Telecom Argentina and as controlling shareholder of Telecom, it consolidated 100% of its operations. It is important to remark that Argentina has become a hyperinflationary economy and inflation adjustment has been applied in our financial statements. Revenues for the 9 months 2020 dropped 4.6% to ARS 208.2 billion, mainly driven by lower revenues for 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 56.1% of the total, while mobile services participation increased to 38%, gaining share of total revenue as compared with last year. EBITDA reached approximately ARS 74.2 billion in constant currency, 2.6% increase compared to 9 months 2019, driven by lower operating costs. Among the most significant operating cost and expenses are salaries, fee for services, maintenance, materials and supply costs. EBITDA margin increased to 35.7%. [Audio Gap] cost and expenses represented less than 0.2% of the total cost of the company, showing a transparent corporate structure at CVH level. Net loss for the period totaled ARS 1,102 million from ARS 20.6 billion loss reported last year. The decrease in the net loss was mainly a consequence of lower income tax and lower negative financial results in the 9 months of this year, derived from less FX losses in a context of lower devaluation in real terms compared with last year. The equity shareholders income for the period amounted to ARS 501 million -- loss, was a loss, sorry. Now let's move on to Slide 9 for a discussion of the operating results for the third quarter 2020. Revenues in the third quarter 2020 decreased by 7.6%. This was attributable mainly to lower revenues in cable and Internet services, partially offset by higher mobile services revenues. Mobile revenues are accelerating, reaching a real growth of almost 3.1% when comparing third quarter 2020 versus third quarter 2019. Furthermore, the increase in the number of postpaid subscriber plus price increases applied during the year have been key to the inflation in the quarter. But when compared to third quarter 2018, mobile revenues had not reached the level of the 2 years ago. Fixed services decreased 9.3% in real terms. The company has been trying to offset the inflation impact on our revenues and costs. Annual inflation as of September 2020 amounted to 36.6%. Services revenue showed a 33.7% nominal increase, while mobile revenues grew more than 44.5% in nominal terms when comparing third quarter 2020 with third quarter 2019. EBITDA Increased by 32.9% year-over-year in nominal terms, thus generating an EBITDA margin of 34.4%. The company performed well in terms of cost control. Operating cost before depreciation and amortization decreased almost 9.8% in real terms versus third quarter of 2019. The loss for the period attributable to equity shareholders was ARS 1.4 billion in constant pesos versus the ARS 13.6 billion loss of last year, mainly due to lower negative financial results caused by lower depreciation of the currency. In third quarter 2020, CapEx as a percentage of revenue was 15.6%, 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. Let's move to the next slide to where we show the performance of EBITDA and the behavior of the different components of revenues and costs. The company continues with its efforts to expand efficiencies. Most of the components have evolved positively despite a challenging economic context, indicating improvement in most of the cases. Operating costs were lower in real terms and there was a positive evolution of handset cost. Moreover, operating efficiencies were obtained both in programming and content costs. There were no costs related to our premium football package during third quarter [ 2020 ] considering that the Argentine Football League was suspended due to the mandatory lockdown, a reduction of commission 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 -- but the expenses grew higher than inflation, impacted by the general economic context and the prohibition to disconnect customers. The result was a 155 basis point increase in the EBITDA margin in real terms compared to the third 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 third quarter 2020, postpaid subscriber accounted for 41% of the total customer base, up from 40% in third quarter 2019. Mobile subs in Argentina amounted to 18.6 million, mobile internet usage increased reaching an average of more than 4.1 gigabytes per user per month. Thanks to the CapEx deployment, Telecom has been able to increase the number of its 4G subscribers. This rapid growth in subscribers that use the 4G network has been the driver of data traffic increase. During the third quarter of 2020, more than 50 new mobile sites were deployed and more than 300 existing sites were modernized. In Argentina, ARPU restated in constant currency increased by 3.5% to ARS 401 in the 9 months 2020 and monthly churn stood at 2.2%. The commercial strategy was focused on achieving higher mobile portability through convergent offer and promoting the consumption of mobile Internet. Since the roll-out of the strategic CapEx plan and the convergent offer, the company has turned around a trend related with the portability net addition in Argentina. The company has been increasing the number of subs over the last 2 years. In the 9 months of 2020, the company increased the number of net addition by 54,000. On Slide 12, we present the broadband and Pay TV KPI. The broadband businesses have been performing well in spite of this tough macroeconomic environment. The number of subscribers increased 0.7% to 4,173 -- to 4.2 million subs and monthly churn increased to 1.2%. ARPU in real terms increased to approximately ARS 1,200. Price increases as well as the higher speed sold to the Internet customer base were not enough to compensate inflation. It should also be noted that due to our cross-selling strategy, fixed products have been offered with some discounts to encourage the positive mobile portability. Around 58% of the 4 million broadband customers reached in third quarter 2020 subscribed to services with the speed of 50 megabytes or higher. Moving to the cable TV subscribers, the customer base remains stable at 3.5 million showing a slight increase year-over-year. Furthermore, Flow Boxes achieved 1,170 customers, a 34% 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 personal has a great presence that is in the northern region of Argentina. This has allowed an increase in capture of cable TV subscriber in regions in which the company reached through it XDSL and FTTH network. ARPU in real term decreased by 11.7% during the 9 months 2020 and monthly churn decreased to 0.9%. Going to the debt financial position after -- Slide 14. As of September 2020, we have reported a total financial debt of ARS 172 billion and a net debt of ARS 131.6 billion, 100% of the debt is at the operating level in Telecom Argentina. Of the total debt, 88% is dollar-denominated, close to 9% in Argentine pesos and the rest in Guarani. Our U.S. dollar cost of debt is approximately 6.5%, while the cost of debt in pesos is 36.5% and in Guarani is 8.5%. Net debt adjusted EBITDA coverage ratio at the end of September 2020 was 1.4x. On May 28, 2020, the Argentine Central Bank decided that companies which have liquid assets abroad must first use those funds to pay their dollar commercial and financial debt. Thus not allowing local companies to access the official FX market unless they can prove that they do not have any liquid fund outside Argentina. This was the main reason why Telecom Argentina decided to initiate a debt management strategy. Please move to the next slide. On August 3, 2020, Telecom ended an exchange offer of its outstanding 6.5% notes due in 2021. Holders validity tendered $362.2 million of notes due 2021. The acceptance rate was 77.74%, high enough to demonstrate the company's solid credit profile and the appeal of the exchange offer. An additional amount of $135.4 million of notes due 2025 was raised. This amount plus a cash payment were used to cancel Deutsche Bank loan and CPPIB Credit Investments loan. In summary, the company issued USD 388.9 million of new amortizing notes due 2025 with an 8.5% semiannual coupon to improve its maturity profile. Moreover, on September 22, Telecom Argentina announced that it has successfully refinanced its loan with IFC and IDB Invest for an amount of USD 329.3 million. In the case of the IFC loan, 85% of the principal that was to be paid in 2021 was extended for 24 to 48 months. As for the IDB Invest loan, 85% of the principal that was to be paid in the fourth quarter 2020 and in 2021 was extended for 24 to 66 months. In total, the company partially repaid USD 40 million of the outstanding amount under the loans. Due to the above, Telecom Argentina has considerably optimized its capital structure. Additionally, on November 13, 2020, the Telecom Argentina Extraordinary Shareholders Meeting resolved to distribute dividends in kind as follows: 2030 Argentine global bonds for a nominal value of USD 157.6 million and 2035 Argentine global bonds for a nominal value of USD 271.9 million. As of today, the nominal value dividend amount of USD 429.5 million has a market value of approximately of USD 164 million, of which CVH is entitled to collect 39.08%. CVH's Board of Directors has resolved to call an extraordinary shareholder meeting to be held on 15th December 2020 to discuss a dividend distribution. To conclude, we would like to highlight Telecom digital transformation on Slide 17. Telecom is undergoing a transformation process with the target to become digital company. The objective of the Cloud Foundation Project is to integrate the different public cloud platforms with Telecom's processes in order to achieve additional efficiency, process automation and business flexibility. The final objective is to enhance the company's physical data center with higher virtual cloud capacity. Telecom is also implementing a payment microsite hosted in the AWS cloud. On July 1, Telecom has concluded the digital core implementation as part of its back-end transformation program 4UP. This has enabled Telecom Argentina to operate under unified convergent and efficient systems and processes. Regarding Telecom main BSS transformation project FAN, Telecom has continued with the migration process and 1.3 million lines have been added. There has been [indiscernible] migration during the pandemic, which has been also the largest in the industry. Currently, a total of 6.7 million customers can enjoy this new digital experience which offer a unified invoice and service process. We expect -- Telecom expects to complete the migration process by the end of the next year. Switch is Telecom new digital channel front and that includes e-commerce and self-service solutions that give Telecom B2C customer a convergent experience. It has an intuitive interface that summarize the clients' products and information in accordance with each profile. Through Switch, Telecom customers use more frequently its digital channels. Also, we would like to highlight that the pandemic and the mandatory lockdown have accelerated the Telecom's digital transformation path, because we have been able to keep the businesses ongoing and significantly increase the level of engagement. If we take a look Flow, Telecom IP video platform, it reached 94 million views during the third quarter of 2020, 5 million connected devices and a high level of usage, those customers used Flow for an average of almost 9.7 hours during the third quarter. Telecom has almost 1.2 million Flow Boxes inside homes, and 1.3 million [ Flow up ] thus advancing towards the objective of network digitalization. Additionally, Telecom continues adding value to Flow platform starting in November 2020. This was yesterday. Telecom integrates Disney+ streaming services with Flow. And Flow and personal customers will be able to access Disney+ free of charge for the first 3 months. Finally, the company has done an important effort to convince its clients to start paying online, collection through digital channels have increased to 67% of total collections from 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, please.

[Operator Instructions] It appears that we have no questions at this time. I would now like to turn the program back to Mr. Agustín Medina Manson for any closing remarks.

Thank you, Nikki. Thank you all for your interest in CVH and in our subsidiary, Telecom Argentina. We really enjoy sharing this time with you. And we look forward to meet with you again to discuss the results for the fiscal year 2020 in May -- in March 2021. Have a nice day. Bye-bye.

That concludes today's conference. You may disconnect at any time, and have a great day.