Telecom Argentina Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 12, 2024

There are 5 speakers on the call.

Operator

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 Ariel Lassi, Chief Financial Officer and myself, Luis Ria Luego. The purpose of this call is to share with you the results of the Q4 fiscal year 20 23 ended on December 31, 2023. If you have not received a press release 3.

Operator

If you have not received a 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 isores. 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 and 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.

Operator

Such uncertainties include, but are not limited to, the effects of ongoing and economic regulations, possible changes in the demand for telecoms, products and services, the effects of potential changes in general market and economic conditions and in legislation. A press release announcing the company's results as of the end of fiscal year 2023, a copy of which was included in a Form 6 ks and sent to the SEC, describes certain 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 7 seventy seveneighteen of the Comisionacion de Valores or CMB, which establishes that the re expression will be applied to the annual financial statements for intermediate and special period ended as of 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.

Operator

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 and A session. Now let me pass the call to Gabriel, our CFO, who will start with the presentation.

Speaker 1

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 'twenty three 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.

Speaker 1

In 2023, our CapEx was approximately $598,000,000 equivalent to 23% of our revenues. We have successfully executed our CapEx plan despite having faced certain delays due to 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 5 gs. Our cash flow generation remains strong despite the challenging context. Without considering the 5 gs spectrum acquisition during 2023, we were able to generate approximately $400,000,000 in free cash flow before dividends and interest payments.

Speaker 1

In real peso terms, this figure amounts to BRL324 1,000,000,000 and represents an improvement compared with 2022. Our mobile subscriber base continues to grow, increasing almost 4% year over year. Mobile data usage measure 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 unit customer reached more than 1,400,000, increasing 10% year over year.

Speaker 1

Additionally, our pay TV business continues to grow in Paraguay. Our fintech, personal pay, has already achieved a relevant market position, reaching more than 2,000,000 onboarded clients as of December 2023, while becoming the 2nd player in the market in terms of clients' remunerated account balances. 5 gs rollout is underway. We acquired 100 megahertz of spectrum in the 3.5 gigahertz band, and we currently count with more than 105 gs sites working in Z 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.

Speaker 1

Moving to Slide 4, it shows the company's figure of 2023. Telecom's revenues totaled $2,500,000,000 Revenues measured in constant pesos decreased 9% year over year as we have improved our path through of inflation to our revenues. We generated $716,000,000 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.

Speaker 1

You see the same pond of periods, spot exchange, redfuge is 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 a general reference and are not obtained through any type of dual currency account in US dollars carried out by the company. Due to these, figures in U. S.

Speaker 1

Dollars as of the end of fiscal year 2023 had been temporarily affected by the above devaluation of the peso that took place in mid December. Telecom's mobile subscribers in Argentina amounted to 21,000,000, increasing more than 760,000 when compared to 2022. Broadband and paid TV clients have totaled 4,100,000 and 3,400,000, respectively. Fixed voice subscribers considering IP telephone lines amounting to 2,900,000 during 2023. During 20 23, our total convergent unique customers amounted to 2,300,000, increasing from 2,100,000 a year before.

Speaker 1

Up to date, 46% of our broadband customers have a mobile market. Our regional operations remain very solid. We are the 2nd most important player in the mobile market in Paraguay and in the pay TV market in Uruguay, with $2,300,000 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 percent, and in January 2023, it has been of 20.6% for the month.

Speaker 1

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 path 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.

Speaker 1

This was mainly related to the good performance of our prepaid segment, where we registered a stronger customer recharge rate. We managed to increase our subscriber base for the 5th quarter in a row. In general terms, our postpaid customer base has been registering a downselling to prepaid, not affecting the overall mobile customer base. Our postpaid participation over 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.

Speaker 1

Thanks to this, we have been able to revert the trend registered during the last quarter of 2022 and the Q1 of 2023 and stabilize our broadband subscriber base in a challenging competitive environment. In turn, we have observed a reduction in ex DSL accesses, which we are migrating to FTTH. Moreover, average speeds in our customer base keep growing. 85% of our subscribers have speeds of 100 megabytes or more. In pay TV, our Flow platform continues to perform well and our pay TV accesses have remained steady quarter over quarter.

Speaker 1

In the Q4 of 'twenty three, Flow's unique customers reached 1,400,000, increasing by 133,000 total clients or 10% when compared to the same period in 2022. FlowFlex, our broadband subscription modality, also delivered good results during fiscal year 2023. The reduction of sales 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 volume segment continues to register a reduction in accesses, mainly in our traditional fixed copper network, which we are replacing partially with the new IP telephone accesses over our HFC and FTTH networks.

Speaker 1

Moving to Slide 7, it shows the breakdown of our revenues. Service revenues totaled over ARS1.9 trillion, decreasing 10% in real terms versus fiscal year 'twenty two, showing a 108 percent nominal rise, reflecting the strong influence of the price increase we performed. Our revenue breakdown as of December 2023 showed 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 path through of inflation to revenues. Mobile represents 40% of the revenues, while broadband and pay TV adapt to almost another 40%.

Speaker 1

The rest is composed of fixed telephony data revenues representing almost 12% of our revenues and equipment sales 7.4 percent. 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.

Speaker 1

Our strategy is to continue to uphold the quality of our service, improving our NPS, which has registered an improving trend since 2019. In this sense, 5 gs is a pillar. The deployment of 5 gs 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 evolve based on the consumption and evolution of 4 gs to 5 gs handsets. Turning to our broadband segment.

Speaker 1

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 X DSL connections, which we are actively offered to migrate to FTTH, while also performing overlay of on HFC, seeking to decompress that 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 our entertainment platform.

Speaker 1

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 Q4 of 'twenty three, where we managed to stabilize 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 2nd most important player in the mobile market with 2,300,000 customers, and we also have a fixed broadband and pay TV offering in that country with 274,000 and 106,000 subscribers respectively.

Speaker 1

We have a fintech business in Paraguay through our digital wallet, Vigera Personal, which count with 288,000 clients. This operation has a strong EBITDA margin of almost 50%, while remaining almost unlevered 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.

Speaker 1

During the last year, we started a cybersecurity business in Chile under the brand name OIppo. There, we are expanding our presence in the market and growing our customer base. In Slide 10, we present 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, sorry, and data center services, digital tools to enhance productivity and Internet of Things services, which include special custom tailored solutions for connectivity and remote monitoring.

Speaker 1

We have a specific set of business initiatives for the agriculture segment, mining industries and oil and gas companies. During the last week, we presented 1st connectivity cluster in rural areas. The project aims to cover an area of more than 500,000 hectares with continuous connectivity where telecom will enable new mobile sites with 4 gs technology and IoT networks. We are also present in the Fintech business with our digital wallet, Personal Pay, which currently comes with more than 2,000,000 onboarded clients. We launched it a year ago, and in an industry with exponential growth, we already have a relevant position.

Speaker 1

During this year, it has incorporated a new functionality of remunerated balances of all its users. As of December 2023, we have funds for our clients invested in mutual funds for over Ps 110,000,000,000 and our fintech is the 2nd most important in terms of client account balances in the market. Additionally, we count with other initiatives such as personal smart home, where we provide the the motor services, solutions and equipment for home monitoring, security, digital interconnection and automation. Tieta 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.

Operator

Thank you very much, Gabriel. In Slide 11, we provide an overview of our main financial figures. Consolidated revenues grew by 110% on in nominal terms during 2023, reaching more than ARS 1,100,000,000,000. When analyzing said figure adjusted by inflation, revenues amounted to more than ARS 2,000,000,000, 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 grant after price increases to return our customers in a strong competitive environment.

Operator

As mentioned, this lag has been reducing during this year, thanks to our 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 percent during 2023. In turn, EBITDA margin in real terms was 28.1%. Additionally, our operating costs before D and A have also grown below inflation, decreasing 10% in real terms versus the fiscal year of 2022. We have continued to manage our cost structure to reduce the impact of inflation.

Operator

During the Q4 of 2023, we managed to increase our margin for the Q3 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 of 2023, the company was able to contain the pressure coming from inflation in most of its cost lines as most of them experienced a decrease or remained 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.

Operator

The company's efforts have been very successful as evidenced by most cost lines 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 ARS759 1,000,000,000 in total 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 percent of consolidated revenues.

Operator

And in historical figure, the same margin was 20.3%. The company had a net loss of ARS249,000,000,000 in 2023, mainly due to the influence of the strong devaluation that the PEXO experienced in real terms, which affected our financial debt denominated in foreign currency. Slide 14 displays a summary of the company's CapEx in BP and E and intachable assets during 2023, which amounted to more than ARS 483 billion for an equivalent of ARS598,000,000 at the official FX rate. This figure includes the investment in 5 gs spectrum for an equivalent of $214,000,000 This amount is almost 23% higher when compared to the previous year in contract pesos. Our consolidated amount of CapEx for the fiscal year 2023 represented more than 23% of our revenues when included in the 5 gs spectrum and around 15% of our total revenues without considering said investment.

Operator

Our investment level was influenced by restrictions in fiscal year 20 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, 2 29 new mobile sites were deployed, while 1418 existing sites were upgraded. We have acquired 5 gs spectrum, 100 megahertz in a 3.5 gigahertz band, and we are already using to provide this new technology.

Operator

Additionally, up to date, we count with 105 gs sites working on safe band. In our fixed access network, we increased the deployment of new FTTH over 15,000 new logs, 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 2022.

Operator

Our cash flow generation remained very robust, factoring in the macroeconomic situation in Argentina. Has been affected mostly by a lower EBITDA in real terms, a higher CapEx mainly associated with the investment in 5 gs spectrum. Without considering this one off investment, our cash flow generation before dividends and interest payments would have been equivalent to more than $400,000,000 In dollar terms, total free cash flow generation experienced a reduction of approximately $330,000,000 in 2023. In fact, without considering 5 gs spectrum, the reduction would have been of $115,000,000 mostly explained by the huge devaluation we already discussed. Slide 16 shows our key figures for 2023.

Operator

The conversion to U. S. Dollars is obtained by converting these figures in constant pesos as of the end of each period and also in the end of period spot FX for each year. Our gross debt amounted to $2,600,000,000 as of December 31, 2023. The company holds cash and equivalents for $344,000,000 having a net debt of around $2,300,000,000 EBITDA as of the end of fiscal year 2023, using the aforementioned conversion method for figures in pesos to U.

Operator

S. Dollars, was approximately equivalent to $717,000,000 Slide 17 gives more insight regarding the impact of the macroeconomic situation on our figures and debt. The FX increase of +132 percent in December of 2023 impacted our figures measured in U. S. Dollars.

Operator

The magnitude and timing of this evaluation 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 Costa 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 converted to U. S. Dollars decreased 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.

Operator

Also, given the 5 gs spectrum auction, we had to take an additional loan of US120 $1,000,000 to finance this strategic asset. This was also a factor on our debt. Additionally, during 2023, the past administration imposed an average of restrictions to access the FX market to pay for imports. In 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.

Operator

In 2023, we successfully issued local notes for a total par value of $480,000,000 equivalent at an average negative yield of minus 6.5% and with an average tenor of 3 years. With these transactions, we reduced the participation of our cross border debt with very convenient cost and tenures. 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.

Operator

Total outstanding debt as of December 20 23 amounted to more than $2,500,000,000 We have successfully paid down or refinanced all of our financial debt commitments during 2023. We have refinanced more than $600,000,000 in a very challenging year, of which more than 50% were cross border maturities. During 2023, we've turned mostly to local capital markets to refinance our maturities, but we maintain a very good relationship with our main creators, such as the multilateral and export grade agencies. As we have been working to concentrate our maturity profile, the remaining maturities going forward remain manageable. Slide 19, we summarize some important highlights regarding the company's resiliency to a tax risk.

Operator

In our balance sheet, we count with physical assets such as a real estate and telecommunications infrastructure that are valued in U. S. Dollars, sorry, and are bought sold and leased in that currency. Also, our position is composed mostly by U. S.

Operator

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 above inflation when it begins to slow down as we manage our discount and promotion policies.

Operator

Leverage on the recovery of our clients' purchasing power or wealth 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 and L with more revenues tied to the U.

Operator

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.

Operator

We are investing in new technologies such as 5 gs and FTTH 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. We have a solid and stable free cash flow generation before dividends and interest payments, generating between $400,000,000 $500,000,000 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%.

Operator

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 and A session, which we will open immediately. 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 Q1?

Operator

And how are your clients taking price increases amid inflation levels? And could you please provide some color on CapEx for 2024?

Speaker 2

Okay. This is Roberto. Good morning, everyone. Just to go back to the 1st 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.

Speaker 2

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 the for the 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.

Speaker 2

Prices are increased by inflation, but ARPU is increased at least 70 5%. 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 percent 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 list prices are a little higher than inflation because we are trying to pass through as much of 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, very taking care of each customer, trying to give them the best experience and the price that they can pay without losing our trend.

Speaker 2

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 taking 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.

Speaker 2

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 1st. 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 the reduction of inflation that will help us recover prices beyond that. So we are the prospect inflation for prospective inflation for March April will go below 20%.

Speaker 2

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 the lower level and that will increase our capacity of trespassing and passing the inflation through prices. In terms of CapEx, our budget is around $500,000,000 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 $350,000,000 That's something that we will monitor as long as we see that the numbers are there, that the 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.

Speaker 3

Hi, good morning. Thank you very much for taking my questions. I have 2. The first question is regarding margin improvements. So you did a very strong job there in improving margins despite revenues declining in real terms.

Speaker 3

I understand that's coming on cost cutting. Is there more room to improve margins that way or further improvements will 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 250,000,000 I didn't understand the difference between the 250,000,000 and the 500,000,000.

Speaker 3

You said 500,000,000 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.

Speaker 2

Thank you, Marcelo, for the question. I will start with the CapEx thing. $350,000,000 is a maintenance CapEx. It's the minimum minimum that the company can do. That means being able part of the CapEx are licenses, agreements, things that are currently paid.

Speaker 2

So there's no way we can reduce CapEx beyond that. The difference between $350,000,000 $500,000,000 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 5 gs, we have already took 100 sites using 3.5 gigahertz band, C band, but we are thinking of postponing the implementation of more sites depending on our feasibility of doing so. So the $150,000,000 in between means that it is CapEx that is needed, but we can postpone it.

Speaker 2

For 5 gs, we remember we can make you remember that we only have 8% of our customer base with 5 gs 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. 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.

Operator

The first one was related about the possibility of greater cold cutting model. We I mean, the you

Speaker 2

can take a look into our cost base. If you take a look into licenses, licenses agreements, we have been very, very aggressive renegotiating all that stuff because that goes those are contracts in U. S. Dollars. Therefore, they were fully impacted by the devaluation, and we have been able to renegotiate them.

Speaker 2

I don't see on the dollar contracts any other space. In pesos, our structure in pesos, we're always challenging that. I mean, we've been very successful reducing all our OpEx in pesos significantly and trying to match and keeping the margins up. Our main concern, not main concern, but main challenge is on the labor cost side. Labor cost usually runs at inflation rate.

Speaker 2

And we have been very successful with 1 of the unions on the labor cost. And yesterday night, we finally closed the deal with 1 of the hardest unions that was making strikes. And we've been very tough trying to make sure that labor is growing with inflation, but growing with inflation with at least with a month lap or lag, sorry. So we are trying to push labor cost at a speed that we can support. Unions are trying to go beyond that, and we've been able to challenge that negotiation.

Speaker 2

And yesterday night, we closed a deal with this union, special union. But it is something that we are challenging on an every day basis. And this is we can manage sustaining the margin. The upside of the margin will come from sales, from revenues.

Operator

So we have another question coming from Andres Coelho from Scotiabank. Andres, we will unmute you, so you can proceed with your question. Thank you very much. You're unmuted, Andres. Go ahead, please.

Speaker 1

Okay. Thank

Speaker 4

you. Yes, I'm wondering how long do you think it will take you to catch up with FX depreciation from an EBITDA standpoint? Because clearly, in the Q4, the very sharp FX depreciation was so quick and happening at the very last month of the year that this impacted your whole EBITDA figure. But I'm wondering how long are you expecting or how many months it will take you to go back to EBITDA of over $1,000,000,000 Do you think that that's going to take a long time or if you think that maybe in the middle of the year you can catch up with the prior EBITDA level? Thank you.

Speaker 1

Thank you, Gautam, for the question. Well, of course, it will depend on how successful the government plays the game with inflation. If, as it seems up to now that we inflation is decreasing, I will say it has begun with a medium 20s. Now we are speaking of in the range of 15s and going down. That will help a lot significantly, but it will take at least 1 year, 1.5 years to fully outpace that inflation and translate that into prices.

Speaker 1

Also you must have in consideration that the ability to price inflation changes according to the size of the inflation. This is we have like and this is theoretical, but forgive me, but just to explain it easily, we have like some behavior up to the high 20s or 30s percent, a different behavior from there to 100%. And then from 100% on, the behavior is pretty different. My conclusion on that, I'm sorry if I am not more precise, is that if you look at how we have coped with that, the company has been pretty successful in terms of coping with the trend. Of course, there is a gap that we need to recover.

Speaker 1

But as you can see from the graph that we put in the presentation, when the inflations began to come down, for us, it's easier to go with that. And as I said, probably with the type of projections that we are seeing presently, if the government is able to succeed with its program, it will take, in some extent, roughly something more than 1 year, 12 months to fully price that. But up to now, as you can see, the trend has been pretty favorable in terms of keeping up with these very high inflations.

Speaker 2

[SPEAKER CARLOS GOMES DA SILVA:] Andres, I can beat on that. If you take a look into our broadband ARPU at December, it was between $6 $9 $6 I think it was. That was because the price in pesos divided by the new foreign exchange rate totaled $6 If you take a look to the same product in March, in February, I would say, it's around $15 You take the pesos and you divide it by the foreign exchange and the pesos have an inflation rate of 40% and you divide it by the foreign exchange that was almost fixed because the current impact was well behind the inflation rate. And that creates something like you have increased your prices in dollars almost double more than double to $15 So this is the equation that we need to take a look. We need to make sure that the company is robust in pesos and making sure that we are able to translate inflation into prices.

Speaker 2

Because if you take a longer term period, you will see that inflation and devaluation goes along. I mean, there's no there's a match at the end of the story that keeps that 2 variables together. So this is going to be something that we will see probably in the Q1 that we will have a momentum of gaining dollars, but actually you need to take a look into our pesos balance sheet because that's what gives you the idea that we can, at the

Speaker 1

end, being able to be successful. I will take advantage of this question. And although this is related to the period at the beginning of 2024, I would like to share with you some comments on our covenants and financial ratio. As you may know, the part of the company related to multilateral agencies, which is mostly in the range of $1,000,000,000 here we have greater like IFC, IIC, IDB, FINBERA from Finland Government, EDC from Canada and CBB from China. As of December of 'thirty one, that was roughly 1 third of our debt.

Speaker 1

These loans, among other provisions, have the obligation to comply with certain financial ratios, which are calculated based on contractual definitions. The relevance of net debt to EBITDA and EBITDA over interest net. Those are calculated on a quarterly basis along with the presentation of the company financial statements. Considering the complexity of Argentina's economic situation, which prevented the early and accurate estimation of the ratios, the company proactively requested an update from its lender a waiver to the enforceable rights regarding the compliance with the net debt to BTO ratio until March 15, 2024. This waiver was conditioned upon certain obligations during the signing period which have been met to date.

Speaker 1

Subsequently, the company continued negotiations with the creditors during 2024 and the beginning of the year with all the lenders and obtained a new waiver effective until March 31, 2025. This waiver allowed for an increase in the maintenance debt to EBITDA ratio above the original established level, raising it to 3.75 for the calculation period between December 31, 2023 December 31, 2024, also allowing a maximum consolidated net debt of €2,700,000,000 on each calculation date, among other matters. On the other hand, during the terms of the waivers, the payments of dividends under certain conditions is permitted during the period from October 1, 2024 to December 31, 2024, while in compliance with the maintenance net debt to EBITDA ratio of less than 3 and for a maximum amount of $100,000,000 As of December 31, 2023, the company has complied with the aforementioned conditions. These waivers, which have already been granted, are specifically related to the extent that we have this situation, but because of the volatility of the FX foreign exchange policy, the price adjustments and the FX adjustment not necessarily run at the same time. As the market normalization is getting there, but it should be.

Speaker 1

But as the closing of the year, if you take in consideration that Argentina went through the evaluation of 140, 15 days prior to the closing of the period, there was no ability to price that immediately. And that generates this type of situation. So to avoid that, this waiver was granted by the creditors who have them, which are the ones that I have already described. Also and although this is unaudited, but just to give you some color between the relationship of the valuation and this price adjustment, if we consider an audited calculation of the ratio of debt as of the end of January, it is below 3. So this is a precautionary move that we did with our creditors to allow us to move through this situation until the market completely regularized in good shape and with no surprises.

Speaker 1

But on the other hand, the company is working steadily to solve the situation as soon as possible. As part of these waivers, also we were granted the possibility of selling our Puerto Madero building, which is empty today. As you may know, it has been empty since the pandemic and is a very important real estate asset and, of course, use those proceeds to pre cancel them. We will keep you on track of that. All that was released to the market yesterday.

Speaker 1

But in case you have any further consideration, we will be more than happy to provide additional information about this that although it's for the next period, it is very relevant information.

Operator

So we have no further questions up to moment. Thank you very much for participating in our quarterly conference call. Please do not hesitate to contact our Investor Relations department for any further inquiries you may have. Good morning to all. Have a nice day.

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Earnings Conference Call
Telecom Argentina Q4 2023
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