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

Good afternoon, and welcome to Cablevisión Holdings Conference Call, where we will discuss results for the second quarter 2021. My name is Drew, and I will be your conference operator today. [Operator Instructions] I will now introduce our speakers. Mrs. Samantha Olivieri, Head of Investor Relations; and Ms. 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 Tuesday, August 10. If you have not received the report or need any assistance during today's call, please contact Big Corporate Communications in New York at (917) 691-4047 or the company in Buenos Aires at 54-11-4309-3417. PVH has also posted the webcast presentation that can be found at www.cht.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 the general market, economy 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 Ms. Samantha Olivieri. Please go ahead.

Thank you, Drew. Good afternoon, everyone, and thank you for joining us. Today's call will begin with a discussion of recent events, then move forward to a brief macro overview into the company's income statements and operating results, followed by a review of the financial position. Before discussing our results for the quarter, let me share with you the latest regulatory decisions by the Argentine government. Please move to Slide 4. The Argentine government issued a decree 690-2020, later confirmed by Congress declaring mobile fixed voice, broadband and pay TV and public essential services, and freezing their prices until the end of 2020, while instating ENACOM as a regulatory agency in charge of enforcing the decree and regulating the industry prices. In May 2021, the second chamber of the Federal Court of Appeals on administrative litigation matters, granted Telecom a preliminary injunction, suspending the effects of Sections 1, 2, 3, 4, 5 and 6 of Decree 690-20. And of ENACOM Resolutions Number 1466-2020,1467-2020 and 204-21. On June 18, 2021, the second chamber of the Federal Court for Appeals on administrative litigation matters resolved by majority to reject the extraordinary appeals filed by the national government and ENACOM against the injunction granted in favor of Telecom. As a consequence of such injunction, Telecom may manage the pricing policy of its services as before the decrease 690-2020. Now we will continue with an update of the tender offer process, then we will move on to a brief macro overview and to the company's operating results, followed by a review of the financial position. Let's move to Slide 5, where we will see a summary of the relevant aspects of the change of control tender offer. As we mentioned in our last call, by the end of December 2019, a first instance judge of the Federal Administrative Litigation Matter court admitted the claim filed by Mr. Burgueño in his capacity as shareholder of Cablevisión Holding and result that on basis of Paragraph K of Article 32 of the Resolution 679-2018. Issued by the CMV, regulating the capital markets not number 26,831 passed in May 2018, CVH no longer had 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's decision and agreed with the position of a claimant, the CNV appeals such decision with the Court of Appeals. For those unfamiliar with the term, CNV is the Commission Nationale de Valores, which is the local equivalent of the SEC. In December 2020, the court dismissed the appeal filed by CNV and confirmed the decision of the first instance court in favor of the claimant, Mr. Daniel Burgueño. Later in October 2020, the Federal Court of Appeals denied CNV's request to have the case heard by the Argentine Supreme Court [Foreign Language] and the CNV filed a complaint against this decision with the Supreme Court. Now it is the Supreme Court that has to evaluate if it will or not accept the case with no time frame to do so. Finally, I want to mention that the legal proceeding about the price of the tender offer filed by CVH with the federal civil and commercial court is still waiting for the first instance decision. We will keep the public informed about and use 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, Samantha. I will continue with the macro overview. Let's move on to Slide 6. As we have mentioned in previous calls, the Argentine economy is going through slight recovery after a significant GDP fall of around 10% in 2020, worsened by the COVID-19 pandemic. Even though the second wave has been overcome and the vaccination plan is progressing, the risk arised from new variant is turning the context more worrisome and challenging. In this complex scenario with legislative midterm elections taking place in the coming months, the government intends to reach these elections with an economic recovery, FX market stability and strengthened real income. Regarding the economic activity, after the plan of 2020, it has started a recovery path, but a slower pace than the countries of the region. GDP is expected to close the second quarter of 2021 with an increase of [ 15% ] on an annual basis, and a fall of 1.5% as compared to the previous quarter, showing a slowdown during the period, mainly due to lockdown measures enforced in April and May. However, growth expectations are around 7% by the end of the year, driven by an improvement during the second half of 2021 as economic activities returned to normal. It is worth noting that the economic activity evolution has come with increasing inflation. As we can see in the consumer price index graph, even though the government is tightening price controls and reinforcing its integration on the FX market as the main way to anchor inflation, prices keep accelerating at a higher-than-expected rate, increasing more than salaries, regulated tariffs and official FX rate. On an annual basis, inflation was 50.2% at the end of June 2021, the highest rate resister during the year even above the inflation registered in 2020. Regarding the current account balance, as you can see in the graph, Argentina has registered another period of current account surplus and high primary fiscal deficit. On the fiscal front, even though the primary fiscal account had a positive performance during the first half of 2021, a seasonal jump of the fiscal spending is expected during the second half of the year, which will be intensified by the coming elections and in the year with our primary fiscal deficit of 3.5% in terms of GDP. Lastly, it is also important to mention that despite the recovery during the first half of 2021, the Central Bank gross reserves remain weak, especially considering the suffering foreign exchange debt profile. As we can see in the last graph of the slide, even considering that Argentina will be benefited from the IMF special [ drawing ] rights to boost its reserve, a consistent and comprehensive macroeconomic program with the IMF is crucial in the short term. To ease the burden of debt maturities, maintain a solid level of reserves and achieve a sustainable growth path. Summing up, we expect the Argentine economy continues to show high levels of uncertainty, especially considering that there is no clear macroeconomic path and legislative elections are taking place during this year. We still believe that the new agreement with the IMF is critical for a well performance of the economy. In this sense, the main challenges that the current administration is facing are the reduction of the fiscal and maritime balances, the ability to lift FX restrictions and contain inflation as the economic activity recovers, the improvement of the health situation and the progress in the vaccination plan. Now I will pass the call to Samantha.

Thank you, Valentina. We will now continue with CVH's key financials. Slide 8 shows the highlights for the first half of 2021. The company has reflected the effects of inflation adjustment adopted by Resolution 777-18 of the Commission Nationale de Valores, which establishes the re-expression of figures must be applied to the annual financial statements for intermediate and special peers ended, as of and including, December 31, 2018. Accordingly, the reported figures corresponding to the first half of 2021, include the effects of the adoption of inflationary accounting in accordance with International Accounting Standards 29. For comparative purposes, the results were stated by inflation corresponding to June 2020 contained the effect of the year-over-year inflation as of June 2021, which amounted to 50.2%. In this presentation, we included some figures in historical values for the sake of clarity. CVH owns 39.08% stake in Telecom and as a controlling shareholder, it consolidates 100% of its operations. In constant currency, revenues for the first half dropped 8.6% from ARS 197 billion to ARS 180 billion, mainly driven by lower revenues from mobile services broadband, cable and TV and fixed telephony and data services, partially offset by higher equipment sales revenues. EBITDA reached approximately ARS 61.1 billion in constant currency a 6.7% decrease compared to the first half of 2020, driven by lower revenues, partially offset by lower operating costs. EBITDA margin decreased from 36.4% to 33.9%. EBITDA in nominal pesos amounted to ARS 58 billion, 26% higher than nominal EBITDA for the first half of 2020, while inflation for the same period was, as we mentioned, 50.2%. Net income totaled ARS 1,883 million negative from ARS 3,246 million reported during the first half of 2020. The decrease in net income is mainly the result of income tax accounting as a result of the increase of the tax rate passed by Congress in June applied to deferred income, partially offset by profits from foreign exchange differences as per IAS 29 and lower EBITDA in real terms. The FX lag prevented the impact of losses and results due to the revaluation of debt in dollars has happened in the first quarter '21. The equity shareholders' net loss for the period amounted to ARS 990 million. Now let's continue on Slide 9 for a discussion of the operating results for the second quarter '21. Revenues in the second quarter '21 decreased by 0.5% in real terms, with prices for ICT services frozen for most of 2020, keeping up with the highest level of inflation in the Argentine economy has experienced over the past 12 months has been a challenge. Revenues in nominal terms increased 34%, while inflation for the same period was 50.2%. The main source of our revenue is our fixed infrastructure. Broadband, pay TV and fixed telephony and data services amounted to 44.3% of the total, while mobile services participation stood at 37.7%. EBITDA increased by 16% year-on-year in nominal terms, representing an EBITDA margin of 32.8%, while EBITDA margin in real terms decreased to 31.5%. The net loss for the period attributable to equity shareholders was ARS 4,722 million, mainly as a result of the income tax rate change explained before. Now let's move on to Slide 10. Mobile revenues represent approximately 37.7% of our revenues and decreased 11.4% in real terms when comparing second quarter '21 to second quarter 2020. Personal Argentina clients increased 2.4% to ARS 19.3 million and postpaid clients amounted to 42% of total mobile clients compared to 41% in 2020. The company has been able to increase its postpaid subscriber base, improving its apple and reducing churn. Mobile Internet usage increased, reaching an average of more than 4.2 gigabytes per user per month in the first half of the year. 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 main driver of data traffic increase. In Argentina, ARPU restated and constant currency decreased by 6.9% to ASR 525.2 in the first half of 2021, and monthly churn showed a significant improvement, decreasing to [ 0.7% ] from 2.1% in first half 2020. The commercial strategy has been 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, the company has turned around its trend of negative affordability net addition in Argentina and has been increasing the number of its subs over the last 3 years. Please turn to Slide 11. Revenues for fixed services, including broadband cable TV and fixed telephony and data services decreased by 12.7% in real terms. The broadband business has performed well despite the tough macroeconomic environment. The number of subscribers increased 3.1% to 4,338 and monthly churn increased to 1.5%. ARPU in real terms decreased to approximately ARS 1,442.3, with prices frozen from May to December 2020, price increases in January and June 2021 and higher Internet speeds sold to our 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 affordability. Around 63% of the 4.2 million broadband subscribers reached in the second quarter '21, subscribed to services with speeds of 50 megabytes or higher. Moving to the cable TV subscribers. The customer base remained stable at 3.5 million, showing a slight increase year-over-year. Furthermore, Flow unique customers achieved 1.1 million, a 14.7% increase from figures observed over a year ago. During the last 12 months, Flow, or its Flow App version, has continued to expand its penetration in areas where Personal has a great presence, mainly in the northern region of Argentina. This has allowed an increase in the capture of cable TV subscribers and regions in which the company reaches through its XDSL and fiber to the home network. ARPU in real terms decreased by 15.8% to ARS 1,586.9 during the first half '21 and monthly churn stood at 1%. Please turn to Slide 12. The company has been trying to offset the inflation impact on revenues and costs, but price increases were suspended in 2020 by a series of government decrease. Year-over-year relation as of June 30, 2021 amounted to 50.2%. As of June 2021, our subsidiary, Telecom, has made the following adjustments to the price of its services. Mobile prices were increased by 10%. Pay TV prices, including premium services such as HBO and Fox were increased by 10%, and broadband prices for services would feed up to 25 megabytes per second, were increased 15%. And for services with speeds higher than 25 megabytes per second by 10%. Prices of fixed voice basic services were increased by 10%. These price increases have resulted in higher ARPU in nominal terms across all services as shown in Exhibit '19 to '22. The nominal price increases were not enough to offset the high inflation Argentina economy is experiencing, thus resulting in lower revenues when measured in constant pesos. Company will continue to monitor its cost structure, competitive environment and client behavior and household income in order to decide on future price increases to help compensate for inflation and maintain sustainability. Let's move to the next slide for a discussion of cost structure before we discuss quarter-over-quarter EBITDA performance. Among the most significant operating costs and expenses are salaries, fees for services, maintenance materials and supplies costs, taxes and fees for the regulatory authority and programming and content costs. On Slide 14, we show that the performance of EBITDA and the behavior of the different components of the 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 improvements in most cases. Operating costs, excluding cost of equipment and handsets decreased in real terms, 3.5% and bad debt expenses showed a significant reduction representing 2.2% of total revenue since second quarter '21 versus 4.6% in second quarter 2020, thanks to actions taken during the past year, such as the increased digitalization of customer payments. Cost of equipment and handsets increased above inflation, mainly due to higher equipment sales. As a result, operating costs decreased 0.3% in real terms. Nonetheless, this is not enough to offset the reduction in revenues and EBITDA decreased by 24.6% in real term, while margin contracted to 31.5%. Next slide, please. In the second quarter, 2021 CapEx as a percentage of revenues was 22.7% higher than the same period of the previous year, mainly as a result of investments in our network. Technical CapEx was mainly composed of installations and customer premise equipment. The balance was allocated to network and technology and to our international operations in Paraguay and Uruguay. During the second quarter '21, 3 new mobile sites were deployed and more than 590 existing sites were upgraded. The CapEx program will continue evolving according to Argentina's economic condition, network performance and customers' requirements. Going to the debt financial position as per Slide 17. As of June 2021, we have reported a total financial debt of ARS 240.3 billion and net debt of ARS 188.3 billion, equivalent to USD 2.2 billion -- sorry, USD 2.0 billion, 100% of the debt is at operating level in Telecom Argentina. Of the total debt, 75.2% is dollar-denominated, 20.8% is in Argentine pesos, including dollar-linked local emissions and the rest is in [ Guaraníes ] and Renminbi. Our U.S. dollar cost of debt is approximately 6.3%. On June 15, 2021, the company repaid the outstanding amount of the 2021 Class A notes with access to the foreign exchange market for a total of ARS 106.6 million, including interest. For the rest of 2021, maturities are manageable and very low. For 2022 and 2023, debt maturities remain within the range of $500 million this year and then reduced considerably until the maturity of our 2026 notes. Net debt over adjusted EBITDA coverage ratio as of the end of June 2021 was 1.6x. Now please move to the next slide, where we review the company's separate financial position and Telecom's dividend payment. As of June 2021, CVH had a cash and equivalent balance of ARS 1 billion, equivalent to $10.5 million, of which $10.3 million are denominated in U.S. dollars. On August 11, 2021, Telecom shareholders' meeting approved a dividend in kind for a total market value of ARS 35 billion or approximately $200 million at a ratio of $0.171977775 2030 global bonds and $0.086652089 2035 global bonds for each share of the company. CVH, through its direct and indirect interest in Telecom is entitled to 144.7 million 2030 global bonds and 72.9 million 2035 global bonds with a market value of approximately ARS 13.7 billion or $78.2 million. That concludes our comments. We are now ready to take your questions. Operator?

[Operator Instructions] And it appears that we have no questions at this time. I would like to turn the program back over to Samantha Olivieri for any closing remarks.

Thank you, Drew. Before we close this session, we would like to remind investors that on August 31, CVH will hold an extraordinary shareholders' meeting where its shareholders may vote regarding dividend payment in kind or in pesos. That concludes our call for today. We thank you for your interest in CVH. Should you have any further questions, do not hesitate to contact our IR team. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.