Telecom Argentina S.A. (TECO2) Earnings Call Transcript & Summary

Good morning. On behalf of Telecom Argentina, I would like to thank everybody for participating on this conference call. The participants of today's conference call are Roberto Nobile, Chief Executive Officer; Gabriel Blasi, Chief Financial Officer; and myself, Luis Rial Ubago. The purpose of this call is to share with you the results of the fourth quarter of fiscal year 2023 ended on December 31, 2023. If you have not received our press release or presentation, you can call our Investor Relations office to request the documents or download them from the Investor Relations section of our website located at inversores.telecom.com.ar. I would like to go over some safe harbor information and other details of the call. We would like to clarify that during the conference call and Q&A session, we could mention certain forward-looking statements about Telecom's future performance, plans, strategies and objectives. Such statements are subject to uncertainties that could cause Telecom's actual results and operations to differ materially. Such uncertainties include but are not limited to, the effects of ongoing and economic regulations, possible changes in the demand for Telecom's products and services, the effects of potential changes in the general market and/or economic conditions and in legislation. Our press release announcing the company's results as of the end of fiscal year 2023, a copy of which was included in our Form 6-K and sent to the SEC, describes other factors that may affect any forward-looking statements that could be mentioned during this call. The company has reflected the effects of the inflation adjustment adopted by Resolution 777/18 of the Comisión Nacional de Valores, or CNV, which establishes that the re-expression will be applied to the annual financial statements for intermediate and special periods ended results and including December 31, 2018. Accordingly, the reported figures corresponding to the fiscal year 2023 included the effects of the adoption of inflationary accounting in accordance with IAS 29. In this presentation, we will also include figures in historical values, which are easier to understand. Our press release is complemented by our earnings presentation. Please read the disclaimer contained in Slide 1 and Slide 2 of this presentation. Today, we will go over our business and financial highlights and end the call with a Q&A session. Now let me pass the call to Gabriel, CFO, who will start with the presentation.

Thank you, Luis. Good morning, and welcome to everyone. Moving to Slide 3, it summarizes our highlights as of December 31, 2023. Our main operational and financial achievements were, our EBITDA margin during fiscal year '23 was 28.1%. We managed to improve the margin on a year-over-year basis due to effective cost management initiatives and an improvement in the pass-through of inflation to revenues. In 2023, our CapEx was approximately $598 million, equivalent to 23% of our revenues. We have successfully executed our CapEx plan despite having faced certain delayed due tighter import restrictions in Argentina. The current focus of our CapEx is on the expansion of our FTTH technology as well as expanding our mobile network and developing 5G. Our cash flow generation remains strong despite the challenging context. Without considering the 5G spectrum acquisition during 2023, we were able to generate approximately $400 million in free cash flow before dividends and interest payments. In real peso terms this figure amounts to ARS 324 billion and represent an improvement compared with 2022. Our mobile subscriber base continues to grow, increasing almost 4% year-over-year. Mobile data usage measured in average monthly gigabytes per user has grown 11%. In broadband, our FTTH accesses keep growing rapidly. And during the last quarter, they have contributed to stabilize our customer base, while our HFC network has remained fairly stable. Flow unique customers reached more than 1.4 billion, increasing 10% year-over-year. Additionally, our pay TV business continues to grow in Paraguay. Our fintech Personal Pay has already achieved a relevant market position reaching more than 2 million onboarded clients as of December 2023 while becoming the second player in the market in terms of clients' remunerated account balances. 5G rollout is underway. We acquired 100 megahertz of spectrum in the 3.5 gigahertz band and we currently count with more than 100 5G sites working in Ghz band. During the year, we successfully paid down or refinanced all of our debt maturities during the year while improving the composition of our debt. Moving to Slide 4, it shows the company's figure of 2023. Telecom's revenues totaled almost $2.5 billion. Revenues measured in constant pesos decreased 9% year-over-year as we have improved our pass-through of inflation to our revenues. We generated $716 million equivalent in terms of EBITDA. Our EBITDA margin was 28.1%. It is important to remark that the figures in dollars included in this presentation are obtained converting figures in constant pesos as of the end of a specific period, using the same point of period spot exchange rate -- if you listing some noise, we are having a huge thunderstorm in Buenos Aires, sorry for the noise, using the same end of period spot exchange rate. These figures are included merely for the purpose of providing the general reference and are not obtained through any type of dual currency account in U.S. dollars carried out by the company. Due to these figures in U.S. dollars as of the end of fiscal year 2023 has been temporarily affected by the abrupt devaluation of the peso that took place in mid-December. Telecom's mobile subscribers in Argentina amounted to 21 million, increasing more than 760,000 when compared to 2022. Broadband and pay TV clients have totaled 4.1 million and 3.4 million, respectively. Fixed voice subscribers considering IP telephony lines amounting to 2.9 million during 2023. During 2023, our total convergent unique customers amounted to 2.3 million, increasing from 2.1 million a year before. Up to date, 46% of our broadband customers have a mobile bundle. Our regional operations remained very solid. We are the second most important player in the mobile market in Paraguay and in the pay TV market in Uruguay, with 2.3 million and 119,000, respectively. Slide 5 shows our price adjustment during 2023. The accumulated inflation in Argentina for the fiscal year 2023 was 211.4% and in January 2023, it has been of 20.6% for the month. Since May 2023, we have adjusted our pricing policy responding to a rising inflation scenario. Moving to monthly prices increases. We have increased both the frequency and magnitude of our price increases to improve our pass-through of inflation to our service revenues in an increasingly complex environment. Thanks to these measures, we have been able to reduce the lag versus inflation during the fiscal year 2023. Slide 6 shows the evolution of our products. In our mobile segment, we have observed a total increase of more than 760,000 subscribers, representing an increase of 3.8% year-over-year. This was mainly related with a good performance of our prepaid segment, here we registered a stronger customer recharge rate. We managed to increase our subscriber base for the fifth quarter in a row. In general terms, our postpaid customer base has been registering a down selling to prepaid, not affecting the overall mobile customer base. Our postpaid participation of our total mobile subscribers continues to be strong, reaching 39% of our total mobile customer base. In our broadband segment, we have observed growth in FTTH accesses while our HFC accesses have remained relatively steady. Thanks to this, we have been able to revert the trend registered during the last quarter of 2022 and the first quarter of 2023, and stabilized our broadband subscriber base in a challenging competitive environment. In turn, we have observed a reduction in xDSL accesses, which we are migrating to FTTH. Moreover, average speeds in our customer base keeps growing, 85% of our subscribers have a speed of 100 megabytes or more. In pay TV, our Flow platform continued to perform well and our pay TV accesses have remained steady quarter-over-quarter. In the fourth quarter of '23, Flow's unique customers reached 1.4 million, increasing by 133,000 total client or 10% when compared to the same period in 2022. Flow Flex, our broadband subscriber modality also delivered good results during fiscal year '23. The reduction of service in our total pay TV customer base is in line with the decrease of serving the market as a whole for this segment. Thus our market share has remained constant. Our fixed voice segment continues to register a reduction in accesses mainly in our traditional fixed copper network, which we are replacing partially with the new IP telephony accesses over our HFC and FTTH networks. Moving to Slide 7, it shows the breakdown of our revenues. Service revenues totaled over ARS 1.9 trillion decreasing 10% in real terms versus fiscal year '22, showing a 108% nominal rise, reflecting the strong influence of the price increase we perform. Our revenue breakdown as of December 2023 show an increase in the participation of mobile services and equipment sales when compared to December 2022. Mobile and broadband are the segments where we have been able to greatly improve the pass-through of inflation to revenues. Mobile represents 40% of the revenues while broadband and pay TV add up to almost another 40%. The rest is composed of fixed telephony data revenues represented almost 12% of our revenues and equipment sales, 7.4%. Slide 8 walks us through our core businesses. We have a very good quality of product in mobile and the fastest network in the country. We are the leaders in terms of revenue share as our ARPU are higher than the competition by approximately 20%, 30%. We also have better pricing power in mobile. Our strategy is to continue to uphold the quality of our service, improving our NPS, which has registered an improving trend since 19 -- 2019. In this sense, 5G is a pillar. The deployment of 5G will be directed to the main high-density centers and large urban centers, seeking to maximize and prioritize investment with high-value mobile and convergent customers in these areas. It will all based on the consumption and evolution of 4G to 5G handsets. Turning to our broadband segment. Our network passes over 65% of the homes of the country, while the average speed of our network is over 100 megabytes per second. Our FTTH deployment strategy consists in deploying fiber, specifically in those areas with xDSL connections, which we are actively offered to migrate to FTTH, while also performing overlay on HFC, seeking to the compressed ad network and upgrade its performance. So in fact, we are leveraging on the very good quality of our HFC network, while actively migrating our legacy xDSL accesses. In the pay TV businesses, Flow is our IP video platform with the best experience.. Our value proposition in pay TV aims to transform the video business into entertainment platform. We are exploiting our Flow video platform, which we observe that has very good usage and NPS metrics in comparison with the legacy HD. In fact, we have seen good results in our pay TV during the fourth quarter of '23, where we managed to stabilize our customer base while we are still observing encouraging growth in our Flow platform, both in Flow Full and Flow Flex modalities. Slide 9 shows our regional operations. Our operation in Paraguay is performing very well. We are the second most important player in the mobile market with 2.3 million customers, and we also have a fixed broadband and pay TV offering in that country with 274,000 and 106,000 subscribers, respectively. We have a fintech business in Paraguay through our digital wallet billetera Personal, which count with 288,000 clients. This operation has a strong EBITDA margin of almost 50%, while remaining almost at level with a net debt-to-EBITDA ratio of only 0.03x. Our operation in Uruguay is currently focused on Pay TV, and we have 119,000 pay TV customers there. We have potential to grow in the local broadband market as the local regulator is beginning to open into competition. We are beginning to deploy a fixed broadband network in certain locations. During the last year, we started the cybersecurity business in Chile under the brand name Ubiquo. There, we are expanding our presence in the market and growing our customer base. In Slide 10, we present how we are building our digital business ecosystem. We offer B2B solutions and services to accompany the digital evolution processes of companies. Our main products include connectivity, cybersecurity solutions, cloud solutions and data center services, digital tools to enhance productivity and Internet of Things services, which includes special custom tailored solutions for connectivity and remote monitoring. And we have a specific set of business initiatives for the agricultural segment, mining industries and oil and gas companies. During the last week, we presented first connectivity cluster in rural areas. The project aim to cover an area of more than 500,000 hectares with continuous connectivity where Telecom will enable new mobile sites with 4G technology and IoT networks. We are also present in the fintech business with our digital wallet, Personal Pay, which currently comes with more than 2 million onboarded clients. We launched a year ago and in an industry with exponential growth, we already have a relevant position. During this year, it has incorporated a new functionality of remunerated balances of all its user. As of December 2023, we have funds for our clients investing in mutual funds for over ARS 110 billion, and our fintech is the second most important in terms of client account balances in the market. Additionally, we come with other initiatives such as Personal Smarthome, where we provide the modern services solutions and equipment for home monitoring, security, digital interconnection and automation. In the Personal, our retail store where our client can acquire a wide variety of electronic devices. I will now pass the call to Luis, who will go over our financial performance.

Thank you very much, Gabriel. In Slide 11, we provide an overview of our main financial figures. Consolidated revenues grew by 110% on nominal terms during 2023, reaching more than ARS 1.1 trillion. When analyzing said figure adjusted by inflation, revenues amounted to more than ARS 2 trillion, showing a decrease of 9% in real terms versus the same figure in 2022. The lag versus inflation is explained among others by the effect of certain discounts and promotions we ran after price increases to retain our customers in a strong competitive environment. As mentioned, this lag has been reducing during this year. Thanks to the pricing strategy, which delivered a strong pass-through of inflation to revenues. EBITDA increased by 120% year-over-year in nominal terms, generating an EBITDA margin of 29.1% during 2023. In turn, EBITDA margin in real terms was 28.1%. Additionally, our operating costs before D&A have also grown below inflation, decreasing 10% in real terms versus the fiscal year of 2022. We will continue to manage our cost structure to reduce the impact of inflation. During the fourth quarter of 2023, we managed to increase our margin for the third quarter in a row when compared to the same period the year before. This is a good indicator that our pricing and cost management strategies are guiding us in the right direction despite the headwinds coming from the macroeconomic situation in Argentina. Slide 12 shows the evolution of EBITDA year-over-year and the impact of different components of revenues and costs. During fiscal year 2023, the company was able to contain the pressure coming from inflation in most of these cost lines, as most of them experience a decrease or remain in line when compared with inflation. We observed good results in labor costs, programming and content costs, interconnection costs and some other items such as bad debt. The company's efforts have been very successful as evidenced by the most cost line keeping the same share of our revenues with almost every cost line decreasing more than our revenues in real terms. This allowed us to increase our EBITDA margin for 2023 in a year-over-year basis. Slide 13 shows the company's net results and EBIT. EBIT registered an improvement in 2023 due to the fact that in 2022, the company recognized an impairment of goodwill amounting to ARS 759 million in constant currency as of December 2023 that was allocated to depreciation, amortization and impairment of fixed assets. The operating margin during fiscal year 2023 was minus 6.1% of consolidated revenues and in historical figures, the same margin was 20.3%. The company had a net loss of ARS 249 million in 2023, mainly due to the influence of the strong devaluation at the peso experienced in real terms, which affected our financial debt denominated in foreign currency. Slide 14 displays a summary of the company's CapEx in PP&E and intangible assets during 2023, which amounted to more than ARS 483 million for an equivalent of $598 million at the official FX rate. This figure includes the investment in 5G spectrum for an equivalent of $240 million. This amount is almost 23% higher when compared to the previous year in constant pesos. Our consolidated amount of CapEx for the fiscal year 2023, represented more than 23% of our revenues when included in the 5G spectrum and around 15% of our total revenues without considering sales investment. Our investment level was influenced by tighter import restrictions in fiscal year 2023. In overall, and despite this situation, we have fully executed our CapEx plan for this year and the performance of our network is currently very solid. Technical CapEx was mainly composed by investment in our access network and technology. Our investments are mainly geared to enhance our access network. During 2023, 229 new mobile sites were deployed while 1,418 existing sites were upgraded. We have acquired 5G spectrum, 100 megahertz in a 3.5 gigahertz band, and we are already using to provide this new technology. Additionally, up to date, we count with 100 5G sites working on same band. In our fixed access network, we increased the deployment of new FTTH over 15,000 new blocks, including the overlay of our HFC network. We also improved the upstream capacity of our HFC network by almost 17,000 blocks. The balance of our CapEx was allocated to installations and customer premise equipment or CPE, which are installations and equipment in the homes of our clients and to international operations. Slide 15 describes our cash flow generation during 2023 compared with the same period of 2022. Our cash flow generation remained very robust, factoring in the macroeconomic situation in Argentina. It has been affected mostly by a lower EBITDA in real terms a higher CapEx, mainly associated with the investment in 5G spectrum. Without considering this one-off investment or cash flow generation before dividends and interest payments would have been equivalent to more than USD 400 million. In dollar terms, total free cash flow generation experienced a reduction of approximately $330 million in 2023. In fact, without considering 5G spectrum, the reduction would have been of $115 million, mostly explained by the huge devaluation we already discussed. Slide 16 shows our key figures for 2023. The conversion to U.S. dollars is obtained by converting these figures in constant pesos as of the end of each period and in the end of previous spot effects FX for each year. Our gross debt amounted to $2.6 billion as of December 31, 2023. The company holds cash and equivalent for $344 million, having a net debt of around $2.3 billion. EBITDA as of the end of fiscal year 2023 using the aforementioned conversion method for figures in pesos to U.S. dollars was approximately equivalent to $717 million. Slide 17 gives more insight regarding the impact of the macroeconomic situation on our figures and debt. The FX increase of plus 132% in December of 2023 impacted our figures measured in U.S. dollars. The magnitude and timing of this devaluation did not allow us to fully pass it through inflation to our figures by the end of fiscal year 2023. As mentioned, we are converting cost and peso figures using the FX as of the end of this year. And this means that the FX movement impacts fully on our fiscal year 2023 figures. In fact, our EBITDA in fiscal year 2023 compared to U.S. dollars increased by a fraction of the FX increase, minus 34% versus the last 12 months EBITDA as of September 2023, while our net debt remained almost constant. Also given the 5G spectrum auction, we had to take an additional loan of USD 120 million to finance this strategic asset. This was also a factor on our debt. Additionally, during 2023, the past administration impose an average of restrictions to access the FX market to pay for imports. Given the options currently provided by the Central Bank, we are managing the stock of commercial debt that was accumulated due to our aforementioned restrictions. During the last years, we have been very active in liability management, allowing us to improve the profile of our debt. In 2023, we successfully issued local notes for a total par value of $480 million equivalent at an average negative yield of minus 6.5% and with an average tenure of 3 years. With these transactions, we reduced the participation of our cross-border debt with very convenient cost and tenors. We continue to obtain cross-border financing even in this challenging context. We have entered into new loan tranches with IDB and CDB and a new export credit line with EDC. Slide 18 shows the breakdown of our financial debt. Total outstanding debt as of December 2023 amounted to more than $2.5 billion. We have successfully paid down or refinanced all of our financial debt commitments during 2023. We have refinanced more than $600 million in a very challenging year, of which more than 50% were cross border maturities. During 2023, we turned mostly to local capital markets to refinance our maturities but we maintain a very good relationship with our main creditors such as multilateral and export rate agencies. As we have been working to the concentrate on maturity profile, the remaining maturities going forward remain managed. On Slide 19, we summarize some important highlights regarding the company's resiliency to FX risk. In our balance sheet, we count with physical assets such as real estate and telecommunications infrastructure that are valued in U.S. dollar, and are both sold and leased in that currency. Also, our position is composed mostly by U.S. dollar-denominated assets. Additionally, our income statement provides flows that give us a natural hedge. Our operation in Paraguay covers almost 50% of our consolidated interest payments. We are able to pass through most of the inflation to prices even with inflation accelerating. And additionally, we have the ability to increase our revenues over inflation when it begins to slow down as we manage our discount and promotion policies, leverage on the recovery of our clients' purchasing power are well in effect as inflation reduces. In a context where FX stays relatively stable, this will allow us to increase our figures in U.S. dollars. We are hedged in terms of our P&L with more revenues tied to the U.S. dollar than expenses in that currency. Turning to Slide 20. We conclude with some final remarks, underlining some favorable highlights about the company. We managed to maintain our EBITDA margin in a challenging context in Argentina. In the fixed segment, we managed to stabilize our customer base in a strong competitive environment. We are investing in new technologies such as 5G and FTH in order to improve our connectivity services. We increased the participation of local financing, which has allowed us to take advantage of a lower cost of financing and to offset the increase in the base rate of our floating rate debt. Finally, we continue to provide long-term value for our investors. With our solid and stable free cash flow generation before dividends and interest payments, generating between $400 million and $500 million annually during the last 3 years, considering ordinary CapEx for each year. We paid a dividend every year since the merger and our weighted average dividend yield has been 7.7%. So with this, now we are more than pleased to answer any questions you may have.

However, before we start, we would like to remind you how you can address your questions during the Q&A session, which we will open immediately. [Operator Instructions] Thank you very much. Well, we have a question here from Ernesto Gonzalez from Morgan Stanley. I will read it. What trends are you seeing so far in the first quarter? And how are your clients taking price increases amid inflation levels? And could you please provide some color on CapEx for 2024?

Okay. This is Roberto. Good morning, everyone. Just to go back to the first and second quarter of last year that we have a little impact on customer base, and we -- at that moment, we said that we have a plan to keep our customer base at the end of the year at the same level as in 2022. And that was something that we could see in Slide 7 or 8. I don't know that, that trend was accomplished in a 200% inflation rate economy. So for this quarter, what we are seeing is the same trend. We are increasing prices on a monthly basis, very aggressively. We are -- we have been always -- we have been able to pass through around 75%, 80% of the inflation rate to prices -- to ARPU, not to prices. Prices have increased by inflation but ARPU has increased up to 75%. So what we are -- we have like a factory behind the scenes that make sure that all the customers that cannot pay have the price that they can pay, and that's the 25% margin that we are losing on the pass-through. That's the reason why you will see that our price increases in terms of the lease prices are a little higher than inflation because we are trying to pass through as much as inflation as we can. So -- and that has been the trend for the last semester in 2023 and it keeps on going in 2024. We are very -- taking care of each customer trying to give the best experience and the price that they can pay without losing our trend. So that's the whole idea. We are keeping our customer base at the same level. We have new customers getting into FTTH because we have like 5,000 blocks of FTTH already built by the last -- semester of last year that they are taken into production this quarter. So that's something that is -- that's the engine that keeps us moving forward. In terms of promotions and the news is that we increased our promotion prices -- promotional prices, especially for Internet, broadband fixed access and the combo, the bundle. And successfully, we have been followed by some of our competitors, except one that has not moved their promotional price, which is -- I mean, they are giving away their broadband for $3. But we believe that we can make a better industry, if we can increase the promotional prices a little bit. And we are -- as we are the leaders, we move first. Other competitors are following us and we believe that finally, this aggressive competitor will move also because it has nothing to lose. So the -- we are seeking a better outcome for this semester as well as we are also looking at a reduction of inflation that will help us recover prices beyond that. So we are -- the prospect inflation for -- prospective inflation for March and April will go below 20%, and that's a good story to count despite that there's a recession in the middle, but it's a good story at the end. So finally, we believe that we will be handling inflation rates at a lower level, and that will increase our capacity of trespassing -- passing the inflation through prices. In terms of CapEx, our budget is around $500 million. That's the basic maintenance CapEx that we need to keep this engine running at full speed. But we have been very cautious and we launched only $350 million. That's something that we will monitor as long as we see that the numbers are there that we have the cash and the inflation is lowering and the foreign exchange is stable. So this is the forecast that we're seeing and we are taking care of the use of the proceeds -- cash proceeds.

We have now a question coming from Marcelo Santos from JPMorgan.

I have two. The first question is regarding margin improvements. So you did a very strong job there in improving margins despite revenues declining in real terms. I understand that's coming on cost cutting. Is there more room to improve margins that way? Or further improvements would probably come as inflation goes down and you're able to have a recomposition of prices? That's the first question. And the second question is just a clarification on CapEx. So you said that you will do -- I didn't understand the difference between $350 million and $500 million. You said $500 million is the basic maintenance. But actually, you're planning to do a bit less and see how it goes. I just wanted to understand a bit better the difference between the numbers.

Thank you, Marcelo, for the question. I will start with the CapEx thing. $350 million is the maintenance CapEx. It's the minimum, minimum that the company can do. That means being able part of the CapEx are license agreements, things that are currently paid. So there's no way we can reduce CapEx beyond that. The difference between $350 million and $500 million is -- has to do with, for example, 7,000 blocks of FTTH that we have the equipment but we need to invest in labor to put it in production, for example, that's one thing. The deployment of 5G, we have already 100 sites using 3.5 gigahertz band, C band, that we are thinking of postponing the implementation of more sites depending on our feasibility of doing so. So the $150 million in between means that it is CapEx that is needed but we can postpone it. For 5G, we remember -- we can make you remember that we only have 8% of our customer base with 5G-ready devices. So that's not something that we really need to move so fast. If we don't start, we will never have it when our customers have their devices ready. But -- so we need to start but we can postpone the timing of starting with this full deployment. This is just to let you know the type of things that we are trying to at least postpone in terms of trying to match cash flow and CapEx implementations. The first one?