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

Good morning, everyone, and welcome to Cablevisión Holdings Conference Call. My name is Jamie and I'll be your conference operator for today. [Operator Instructions] Today, we will discuss Cablevisión Holdings results for the 9 months and third quarter 2021. 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 Fig Corporate Communications following the call. 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 question-and-answer session. The team will be discussing the results as per the earnings release distributed last Tuesday, November 9. If you've not received the report or need any assistance during today's call, please contact Fig Corporate Communications in New York at (917) 691-4047 or the company in Buenos Aires at +54 (11) 4309-3417. CVH has also posted a webcast presentation that can be found at www.cvh.com.ar under the IR section. Comments made by management may contain forward-looking statements about Cablevisión Holding's future performance, plans, strategies and targets. Such statements are subject to 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 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 conference call over to Mrs. Samantha Olivieri. Ma'am, please go ahead.

Thank you, Jamie. Good morning, 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 and to 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 the Decree 690/2020, later confirmed by the Congress declaring mobile, fixed voice, broadband and pay TV as 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 690/2020 and of ENACOM Resolutions number 1466/2020, 1467/2020 and 204/2021. On June 18, 2021, the second chamber of the Federal Court of Appeals on Administrative Litigation Matters resolved by majority to reject the extraordinary appeals filed by the National Government and ENACOM against injunction granted in favor of telecom. In October 2021, the same court extended the injunction granted in favor of telecom for an additional period of 6 months. As a consequence of such injunctions, telecom may manage the pricing policy of its services as before the Decree 690/2020. Now we will continue with an update of the tender offer process, then we will move on to a brief macro-overview into the company's operating results, followed by the review of the financial position. Let's move to Page 5, where you 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 Matters Court admitted the claim filed by Mr. Burgueño, in his capacity as a shareholder of Cablevisión Holdings and resolved that on basis of Paragraph K, Article 32 of the Resolution 779/2018, issued by the CNV Regulating Capital Market Law 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 the claimant, the CNV appealed such a decision with the Court of Appeals. For those unfamiliar with the term, CNV is Comisión Nacional de Valores, which is a local equivalent of the SEC. In September 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 proceedings about the price of the tender offer filled by this CVH with the Federal Civil and Commercial Court is still waiting for the first instance decision. We will keep the public informed about any news relating the tender offer process. Having gone through the discussion of the TO process, please let me pass the call to Valentina.

Thank you, Samantha. I will continue with a macro overview. Let's move on to Slide 6. Argentina's economy is going through a deep crisis with no precedent, worsened by the COVID-19 pandemic. And even though the second wave has been overcome and the economy has shown some level of recovery, the risk realized from new variant is turning the context more worrisome and challenging. Moreover, the mid-term elections are taking place in these complex scenario. And from a macroeconomic and financial perspective, it's results are detected in the government strategy moving forward. In addition, the cost associated with the required macroeconomic adjustment needed to address the prevailing imbalances will likely be greater, even the negotiations with the IMF to avoid a chance of falling into arrears next year. Regarding the economic activity, after a plunge of 2020, it has started recovery path, but at slower pace than the countries of the region. GDP is expected to close this third quarter of 2021 with an increase of 9% and 2.2% on an annual basis and convert to the previous quarter respectively. As a result of such expectations, the economic growth forecast has been revised upward to around 8% by the end of the year, mainly driven by the easing of restrictions during the second half of 2021 and the economic activities returning into normal. However, a lower dynamic is expected for the coming quarters. It is worth noting that the evolution of the economic activity has come with increasing inflation. As we can see in the Consumer Price Index graph, even though the government is tightening price control and reinforcing its intervention on the FX market as the main way to handle inflation, prices keep accelerating at a higher-than-expected rate, increasing more than salaries, regulated tariffs, and official FX rate. At the end of September of 2021, inflation was 52.5% on an annual basis, the highest rate registered in the year, even above the 36.1% inflation registered in 2020. Regarding the current account and fiscal balances, as we can see in the graph, Argentina has registered another period of current account surplus, mainly fostered by the FX and tourist restrictions and a high primary fiscal deficits. On the fiscal front, even though the primary fiscal account had a positive performance during the first half of 2021, public spending has accelerated since June, ahead of election, and expect it to maintain this growth pace until the end of the year, accounting for a primary fiscal deficit of 3.8% in terms of GDP. Lastly, it is important to mention that the Central Bank gross reserves remain weak, currently accounting around $42.5 billion, especially considering the sovereign foreign debt profile. As we can see in the last graph of the slide, even considering that Argentina has been benefited from the IMF's expenditure growing right to boost its FX reserve, a consistent and comprehensive macroeconomic problem with IMF is crucial in the short term to ease the burden of debt maturities. Summing up, we expect the Argentine economy to continue to show high levels of difficulties, especially considering that there is not a clear macroeconomic path. We still believe that a new agreement with the IMF is critical to achieve lower economic uncertainty. In the sense, the main challenges that the current administration will also face are the reduction of the fiscal and monetary imbalance, the ability to contain inflation as the economic activity recovers and the maintenance of the current situation, which has allowed the normalization of economic activities. Now I will pass the call back to Samantha.

Thank you, Valentina. We will now continue with CVH's key financials. Slide 8 shows the highlights for the 9 months 2021. The company has reflected the effects of the inflation adjustment adopted by resolution 777/2018 of the Comisión Nacional 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 9 months 2021 include the effects of the adoption of inflationary accounting in accordance with International Accounting Standard 29. For comparative purposes, the results restated by inflation corresponding to September 2020 contain the effect of the year-over-year inflation as of September 2021, which amounted to 52.5%. In this presentation, we include some figures and historical values for the sake of clarity. CVH owns 39.08% stake in Telecom. And as controlling shareholder of Telecom Argentina, it consolidates 100% of its operations. In constant currency, revenues for the 9 months 2021 dropped 7.7% from ARS 317.5 billion to ARS 293 billion, mainly driven by lower revenues from mobile services, broadband, cable TV, and fixed telephony and data services, partially affected by higher equipment sales revenues. EBITDA reached approximately ARS 95.2 billion in constant currency, an 8.9% decrease compared to 9 months 2020, driven by lower revenues, partially offset by lower operating cost. EBITDA margin decreased from 35.7% to 32.5%. EBITDA in nominal pesos amounted to ARS 86.3 billion, 26% higher than nominal EBITDA for 9 months 2020, while inflation for the same period was approximately 52.5%. Net income totaled ARS 1,392 million from negative ARS 1,681 million reported during 9 months 2020. The increase in net income is mainly the result of positive financial results versus negative figures in 2020, driven by FX differences as per IAS 29, partially offset by lower EBIT and higher income tax accounting as a result of the increase of the tax rate, passed by Congress in June 2021, applied to deferred income. The effects lag prevented the impact of losses in results due to the revaluation of the debt in dollars, as happened in previous quarters. The equity shareholders net income for the period amounted to ARS 509 million and is mainly the result of positive financial results from holding of the bonds received as a dividend in CVH level. Now let's continue on to Slide 9 for a discussion of the operating results in third quarter '21. Revenues in third quarter '21 decreased by 5.8% with prices for ICT services frozen for the most of 2020. Keeping up with the high level of inflation the Argentine economy has experienced over the past 12 months has been a challenge. Revenues in nominal terms increased 43% when inflation for the same period was approximately 52.5%. The main source of our revenues is our Fixed Infrastructure. Broadband, pay TV, and Fixed Telephony and Data Services amounted to 54.2% of the total, while other services participation stood at 38.4%. EBITDA increased by 26% year-on-year in nominal terms, representing an EBITDA margin of 30.4%, while EBITDA margin in real terms decreased to 29.5%. The net income for the period attributable to equity shareholders was ARS 1,590 million in constant pesos, mainly as a result of CVH participation telecom's net income and positive financial results from holding of bonds received as dividend at CVH level. Now let's move on to Slide 10. Mobile revenues represent approximately 38.4% of our revenues and decreased 8.4% in real terms when comparing third quarter '21 versus third quarter '20. Personal Argentina clients increased 4.7% to 19.5 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 ARPU 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 4G networks has been the main driver of data traffic increase. In Argentina, ARPU restated in constant currency decreased by 7.1% to ARS 568 in 9-month 2021 and monthly churn showed a significant improvement decreasing to 1.1% from 2.2% in 9 months '20. 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 portability net addition in Argentina and has been increasing the number of 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 5.2% in real terms. The broadband business has performed well despite a tough macroeconomic environment. The number of subscribers increased 1.8% to 4,248.3 and monthly churn increased to 1.5%. ARPU in real terms decreased approximately ARS 1,580.5 with prices frozen from May to December '20, price increases in January, June and September '21 and higher Internet speed sold to our customer base were not enough to compensate for the inflation. 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. Around 68% of the 4.2 million broadband customers reached in third quarter 2021 subscribed to services with speeds 50 megabytes or higher. Moving to the Cable TV subscribers. The customer base remains stable at 3.6 million, showing a slight increase year-over-year. Furthermore, Flow unique customers achieved 1.1 million, a 12% increase from figures observed over a year ago. During the last 12 months flow through, its Flow App version has continued to expand its penetration in areas where Personal has a great presence, mainly the northern region of Argentina. This has allowed an increase in the capture of Cable TV subscribers in regions which the company reaches through its XDSL and fiber to the home network. ARPU in real terms decreased by 10.7% to ARS 1,749.2 during 9 months '21 and monthly churn increased to 1.1%. Please turn to Slide 12. The company has been trying to offset the inflation impact on revenues and costs, but it's price increases were suspended in 2020 by a series of government decrees. Year-over-year inflation as of September 30, 2021 amounted to 52.5%, while inflation for the first 9 months of 2021 amounted to 37%. As of September 2021, our subsidiary Telecom has made the following adjustments to the prices of services: Mobile prices were increased by 10%; Pay TV services, including premium services such as HBO and FOX were increased by 10%; soccer pack increased by 19%; broadband prices for services with speeds up to 25 megabytes per second were increased 10% and for services with speeds higher than 25 megabytes by 8%; 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 Exhibits 19 to 22. The nominal price increases were in the range of the inflation for the 9-month period of 2021, but weren't enough to offset the internet annual inflation 52.5% year-over-year as of September, thus resulting in lower revenues when measured in constant basis. The 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. Amongst the most significant operating costs and expenses are salaries, fee for service, maintenance, materials and supply cost, taxes and fees with the regulatory authority and programming and content costs. On Slide 14, we show the performance of EBITDA and behavior of different performance components of revenues and costs. The company continues with its effort to expand efficiencies has shown some positive results despite a challenging economic context. Operating costs, excluding cost of equipment and handsets decreased in real terms 0.5% and bad debt expenses showed a significant reduction representing 2.2% of the total revenues in the third quarter '21 versus 3.2% in third quarter '20, thanks to actions taken during 2020, such as the increased digitalization of customer payments. Salaries increased above inflation, reflecting agreements reached with the different unions. Cost of equipment's and handsets increased above inflation, mainly due to higher cost of equipment sold. As a result, operating costs increased 0.8% in real terms. And driven by the reduction in revenues, EBITDA decreased by 18.6% in real terms, while margin contracted to 29.5%. Next slide, please. Third quarter 2021 CapEx as a percentage of revenues was 21.8%, lower than the same period of the previous year mainly as a result of investments in our network. Segment of CapEx was mainly allocated to network and technology and Customer Premise Equipment or CPE. The balance was allocated to our international operations in Paraguay and Uruguay. During third quarter '21, 39 new mobile sites were deployed and more than 500 existing sites were upgraded. The CapEx program will continue evolving according to Argentina's economic condition, network performance, and customer requirements. Going to the debt financial position as per Slide 17. As of September '21, we have reported a total financial debt of ARS 248.7 billion and net debt of ARS 221.5 billion, equivalent to 2.2 billion in U.S. dollars. 100% of the debt is at operating level in Telecom Argentina. Of the total debt, 74.3% is dollar denominated, 21.3% is in Argentine pesos, including dollar-linked local emissions. And the rest is in Guyanese and Renminbi. Our U.S. dollar cost of debt is approximately 6.3%. For the rest of 2021, maturities are manageable and very low. For 2022 and 2023, debt maturities remain within the range of $500 million each year and then reduce considerably until the maturity of our 2026 notes. Telecom Argentina is currently working on refinancing of 2022 maturities. Net debt to adjusted EBITDA coverage ratio as of the end of September 2021 was 1.8%. As a last remark on September 8, CVH paid the dividend in kind approved by the shareholders in the extraordinary meeting held in August for a gross market value of ARS 82.84 per share in the local market. That concludes our comments. We are now ready to take your questions. Operator?

[Operator Instructions]

Yes. I'm getting a question in the question box. This is a question from Alejandra Aranda from Itau. To the extent that you could comment on how you're viewing the company's performance and the challenge of maintaining profitability versus market share in the current context and how are you thinking about the trade off and what is your mandate or profitability threshold? Also given current restrictions, how are you thinking about CapEx and dividends?

Thank you for your question, Alejandra. First let, let me say that we encourage our investors to participate in Teleconference Calls to hear firsthand from their Management about the operation. They may provide guidance in terms of operating margins, CapEx, commercial plans, and any other relevant matter about the business. That being said, as a shareholder, as we've discussed before, Argentina has been going through a particularly difficult conditions in the past 2 years with high inflation, government intervention in the economy and a new regulatory framework, which have posted challenge for margins to the telecommunication industry in general. Given the context, margins for 2021 fall within CVH's expectations. Of course, it is a challenge to increase prices, but the industry as a whole has a need to compensate for cost inflation. So we expect other players will also find themselves in the need to increase prices in order to maintain profitability. Regarding the margin as Telecom Management stated in this week's earnings call, the next price increase will be communicated to be effective from January '22. Thus, we expect the margin of the fourth quarter to be in line with the margins for the third quarter and the year-to-end in about 32%, which given the macro context, as we said falls within our threshold. Margins for coming year will depend on the ability to increase prices and control costs, but we expect 2022 will present a macro scenario similar to 2021. Regarding CapEx, Telecom has given guidance of about $650 million to $700 million for 2021 and 2022. Next year CapEx may be adjusted according to the macro situation of Argentina and the company's cash flow balancing the need to ensure liquidity and the necessary investments in the network to guarantee performance and service levels. And as about dividend, CVH has a healthy liquidity position that allows it to cover its operative needs and no debt. Therefore, as long as there isn't any investment opportunity to fund, it could be reasonably expected that CVH will pass through to its shareholders any dividend collected from Telecom, as we have been doing during the past years. In addition, we think Telecom will continue being able to pay dividends without affecting of course its CapEx and operations.

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

Thank you, Jamie. Thank you all for your interest and your questions. Should you have any further questions, please don't hesitate to contact our IR team. On behalf of CVH, have a great day, everyone.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.