Earnings Call Transcript - AMX Q3 2021

Operator, Operator

Good morning. My name is Lauren and I will be your conference operator today. At this time, I would like to welcome everyone to the América Móvil Third Quarter 2021 Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. Thank you. Now, I will turn the call over to Ms. Daniela Lecuona, Head of Investor Relations.

Daniela Lecuona, Head of Investor Relations

Thank you. Good morning everyone. We're very pleased you could join us this morning to discuss our third quarter results. We have on the line Mr. Daniel Hajj, Chief Executive Officer; Mr. Carlos García Moreno, Chief Financial Officer; and Mr. Oscar Von Hauske, Chief Operating Officer.

Daniel Hajj, CEO

Thank you, Daniela. Thank you everyone for being on the call. Carlos is going to make a summary of the third quarter results.

Carlos García Moreno, CFO

Thank you, Daniel. Good morning, everyone. During the third quarter, it's our pleasure to share that we're prevalent in several industries at a global level. Capping inflation data continues to surpass estimates in the U.S. and other countries. The market consensus appears to shift in favor of the fair monetized authority moving more rapidly than anticipated with the expansion of the monetized base and the expectation of interest rates beginning to rise. This context, along with a mild correction in the U.S. government 10-year interest yield just prior to the end of the quarter, helped strengthen the dollar versus most currencies, including several Latin American ones. Regarding the operations in the third quarter, we added 4.2 million wireless subscribers, of which 2.2 million were postpaid clients, ending September with 302 million subscribers, representing a 7% increase compared to the previous year. Roughly half of the new postpaid clients came from Brazil, with Colombia contributing 313,000 subs and Peru 252,000. Mexico led the way in prepaid with 577,000 net adds, followed by Brazil with 307,000 and Argentina with 270,000. Our fixed line platform saw pay-TV net disconnections in Brazil, but these losses were more than offset by net gains in other countries. At the end of the quarter, Brazil's pay-TV subscribers were down 5% from a year ago, while Colombia's were up 6%, and the rest of our subsidiaries experienced a 3% increase. Overall, América Móvil saw a 2% reduction in pay-TV subscribers. For broadband accesses, Argentina was up almost 50% year-on-year, while Peru and Colombia grew by approximately 10% each. In aggregate, América Móvil's broadband accesses increased by 3% year-over-year. Our revenue totaled MXN253 billion in the quarter, marking a 2.6% decline in peso terms due to the appreciation of the Mexican peso against other currencies in our region. However, at constant exchange rates, service revenue increased by 4.5% year-on-year, slightly offset by cost expansion, which drove a 7.5% increase in EBITDA totaling MXN87 billion. Revenue growth was fastest in countries such as Peru, Eastern Europe, The Dominican Republic, and Mexico, ranging from 16.6% in Peru to 6.4% in Mexico. Central America, Colombia, Puerto Rico, and Austria all recorded growth in the 4% to 5% range. Mobile service revenue expanded by 5.9%, with fixed mobile devices and 5G services playing an increasingly important role in several countries, while fixed line service revenues increased by 1.6%. In the third quarter, both prepaid and postpaid mobile revenues grew by approximately 6%. Mexico and Brazil both saw an increase of 9% in mobile service revenue, with Peru posting 15.8% growth. Our European operations recorded nearly 11% growth, with Macedonia and Serbia both achieving revenue increases higher than 10%. On the fixed line platform, broadband and corporate revenue expanded by 5.6% and 4.6%, respectively, while pay-TV revenue fell by 5.2%. In Brazil, the trend indicates that clients continue to lower the cost of their pay-TV plans, reflecting a greater shift towards content from streaming services compared to traditional multichannel offerings. In Peru, fixed line revenue growth reached nearly 20%, with Colombia at 9.8%, and Eastern Europe at 9.2%, featuring Bulgaria showing 15% growth and Belarus and Serbia expanding their revenue by more than 20%. In Argentina, even with high inflation, fixed service revenues have risen almost 9% in real terms after accounting for inflation. Our EBITDA margin jumped to 34.6% from 33.2% a year prior, marking our highest EBITDA margin in nine years. Mexico, Central America, and the Dominican Republic were the primary contributors to this margin expansion. We achieved an operating profit of MXN47 billion in the third quarter, which rose by 4.7% in peso terms and by 10.4% at constant exchange rates compared to the prior year. Our comprehensive financing cost amounted to MXN35 billion, representing a 12% increase from the previous year, primarily driven by a foreign exchange loss. Our net interest expense decreased by 12% to MXN15 billion. Our net profit amounted to MXN15.8 billion, a decline of 16% from the same quarter last year. In the nine months leading to September, our cash flow enabled us to cover capital expenditures amounting to MXN91 billion, distribute MXN37 billion to our shareholders through dividends and share buybacks. Our share buybacks totaled MXN22 billion, a significant increase from last year's MXN1.5 billion for the same period. Our cash flow also assisted in paying down obligations amounting to MXN14.5 billion and reducing our net debt by MXN38 billion. At the end of the quarter, our net debt stood at MXN588 billion, or MXN488 billion when excluding leases. This latter figure was equivalent to 1.55 times EBITDA over the last 12 months. Net debt excluding leases related to EBITDA after leases showed a reduction of MXN59 billion compared to December.

Daniel Hajj, CEO

Thank you, Carlos. We can now start with the Q&A.

Operator, Operator

Your first question comes from Marcelo Santos from JPMorgan. Marcelo, your line is now open.

Marcelo Santos, Analyst

Hi, good morning. Thanks for taking my questions. I have actually two questions on broadband. The first is regarding Mexican broadband, as you've posted considerable new additions. Could you speak a little bit more on how these additions were comprised? Are these fiber additions? And second, during the question, if you can comment on the competitive environment in Mexican broadband? The second question is on Brazil's broadband, where you have been losing subscribers for the third consecutive quarter. We saw what you discussed in the Investor Day regarding your network being upgraded and prepared to offer higher speeds. What do you expect to happen with subscriber trends in Brazil? Do you believe you will recover from losses and start gaining market share?

Daniel Hajj, CEO

I’m going to start with Brazil and then Oscar can provide his insights. In Brazil, I want to emphasize that we have been improving and upgrading both our fixed and mobile networks. We've seen significant growth in fiber this year, with expectations of reaching around 2.5 million to 3 million home passes in fiber, and we might end with around 5 million home passes with fiber. Additionally, within our cable network, we've upgraded nearly all our offerings in Brazil to provide one gig of capacity. Thus, I can confidently state that our cable network is as competitive as fiber in terms of speed. I'll let Oscar provide further comments regarding our networks in Brazil and the state of broadband.

Oscar Von Hauske, COO

Sure. Well, in Brazil, as previously mentioned, we’ve been investing in bringing fiber closer to customers. We think that we are well positioned to meet market speed requirements even though the market is incredibly competitive. Traditional telcos have been upgrading their networks, and ISPs have started encroaching on our territories. This has increasingly intensified competition in terms of speed and pricing. Our network is designed to deliver the required speeds that the market demands, including the implementation of one gigabit speed across all networks. Besides speed, our product includes Wi-Fi mesh, enabling customers to distribute speed across their homes effectively. We are implementing several processes to enhance quality of service in our network. While the market remains challenging, we believe that our new products will lead to client growth in the upcoming quarters. Overall, we are growing broadband revenues in Brazil by around 5%, indicating positive performance despite challenges like piracy in the pay-TV sector. In terms of broadband, while the competition is increasing, we feel confident that we have the necessary network quality to compete effectively.

Daniel Hajj, CEO

I completely agree. In Mexico, we've revamped our market offerings. We recently launched one gigabit speed service as well, and the bundles we've developed with streaming providers have been performing well. We are actively migrating customers from copper to fiber, allowing us to adapt to changing market conditions. We believe the recent quarter showed promise, and we're poised to continue our efforts in the next quarter focused on enhancing our network distribution, our stores, and prioritizing digital sales.

Marcelo Santos, Analyst

Perfect. Very comprehensive answers. Thank you very much.

Daniel Hajj, CEO

Thank you.

Operator, Operator

Our next question comes from Leonardo Olmos from UBS. Leonardo, your line is now open.

Daniel Hajj, CEO

We're not hearing you.

Operator, Operator

We will take the next question. Our next question comes from Fred Mendes from Bank of America. Fred, your line is now open.

Fred Mendes, Analyst

Hello, good morning everyone. Thanks for the call. I have two questions as well. The first one is a follow-up on the answers you just mentioned. You indicated that broadband revenue was reduced by 5%. Is there a significant difference between FTTH and cable growth? I understand that the new project is focusing on FTTH, but is there a major difference in their respective growth rates? That will be my first question. Also in Brazil's mobile segment, ARPU was flat for the quarter. Do you see room for further ARPU increases, or are we starting to see a shift towards competition focused more on market share than ARPU?

Daniel Hajj, CEO

The mobile market operates differently than the broadband market in Brazil. In mobile, we currently face four competitors. In contrast, broadband sees many new entrants pushing fiber. Overall, I believe mobile is doing quite well. We've seen 8% to 10% annual revenue growth in mobile, particularly driven by postpaid segments, bundles, and overall performance. Mobile has continued to show strength over the past two years, and we anticipate this quarter will mirror that success moving forward. As for broadband, as Oscar mentioned, competition has intensified, and we believe that launching one gig speed across all networks will not be limited to only fiber or cable. We are enhancing our existing cable networks while simultaneously expanding fiber into new areas. Therefore, our strategy encompasses both fiber expansion and cable growth.

Fred Mendes, Analyst

Okay, very clear, Daniel. Thank you.

Daniel Hajj, CEO

Thank you.

Operator, Operator

Our next question comes from Chelsea Colón from Aegon. Chelsea, your line is now open.

Chelsea Colón, Analyst

Hi and thanks for taking the question. I was wondering if you could put a little more context around your recent M&A announcements in both Panama and Chile? From a strategic perspective, what were your thoughts behind selling the Panamanian business while entering into a joint venture and maintaining your involvement in Chile? What makes Chile a more attractive environment for you than Panama in the longer term?

Daniel Hajj, CEO

In Panama, we were the third competitor, but over the past year, our competition consolidated the local cable company, and now Liberty has also strengthened its position in mobile and fixed. We recognize that Panama is vital, but the population is relatively small, and this limits our capacity to grow substantially. Therefore, we felt it was prudent to sell the company in Panama. Conversely, Chile is a much larger market. We are well-positioned in Chile, as we have a strong mobile presence, personal TV services, and solid broadband offerings; thus, entering this 50-50 joint venture makes sense economically, and offers great potential synergies.

Chelsea Colón, Analyst

Are you concerned about regulatory approvals in Chile?

Daniel Hajj, CEO

No, as I mentioned, our combined position will not oversize the other two. We are committed to giving all the information to the authorities, and we have already submitted our application. Therefore, we do not anticipate any problems.

Chelsea Colón, Analyst

Great. Thank you.

Daniel Hajj, CEO

Thank you.

Operator, Operator

Our next question comes from Leonardo Olmos from UBS. Leonardo, your line is now open.

Leonardo Olmos, Analyst

Hello, can you hear me now?

Daniel Hajj, CEO

Yes.

Leonardo Olmos, Analyst

A quick one, everyone. I want to discuss the broader financial position you’ve maintained, especially regarding your share buybacks and cash dividends. What has been your strategy for the first nine months, and what are your future plans?

Carlos García Moreno, CFO

Hello, Leonardo. We have been providing ordinary dividends annually, typically ranging from 5% to 10%. We have consistently distributed excess cash through share buybacks to maintain our desired leverage target. Over the last five years, we operated above our targeted leverage but were unable to distribute capital effectively. Now, as you can see in the report, we have reduced our net debt significantly. With the benefit of proceeds from the TracFone sale yet to report, we can comfortably provide for buybacks while maintaining leverage targets.

Leonardo Olmos, Analyst

Okay, that's clear. Thank you very much and sorry for my connection problems earlier. Have a good day.

Carlos García Moreno, CFO

Thank you.

Operator, Operator

Our next question comes from Walter Piecyk from LightShed Partners. Walter, please go ahead.

Walter Piecyk, Analyst

Thanks. Is the TracFone transaction still expected to close by year-end, or are there additional SEC requirements?

Daniel Hajj, CEO

No, we believe we can close the TracFone transaction before the year's end as targeted.

Walter Piecyk, Analyst

Regarding the business, I understand that when companies are transitioning, there can be disruptions. In the U.S., I've noted aggressive rates from MVNOs. Has this created shifts within the market? I've also observed that Straight Talk lost subscribers this quarter.

Daniel Hajj, CEO

The only color I can provide is that in TracFone, as well as in other nations, we are experiencing challenges with handsets, especially in the low-end segments due to inventory issues. This shortage affects most Latin American markets and is particularly evident in the lower price ranges.

Walter Piecyk, Analyst

Great. A question for Carlos; your Investor Day was insightful, and the new leverage targets of 1.2 to 1.35 seem very prudent given your strong cash flow generation. Why not set even higher targets, maybe 1.5 to 2.5, to allow for even greater capital return leveraging low interest rates?

Carlos García Moreno, CFO

We maintain a conservative financial policy. Staying below 1.5 times our target allows us to remain agile and navigate potential financial fluctuations, particularly given the expectations of rising interest rates. The current strategy positions us well to weather any potential turbulence.

Walter Piecyk, Analyst

Thank you, Carlos. I appreciate your insights.

Carlos García Moreno, CFO

Thank you.

Operator, Operator

Our next question comes from Alejandro Gallostra from BBVA. Alejandro, your line is now open.

Alejandro Gallostra, Analyst

Hi, Good morning, Daniel, Carlos, and Oscar. I have a question regarding margins; you've shown impressive performance over several quarters across various metrics. How much further do you think you can push this, and what will drive that improvement? Do you think the telecom industry overall can reach new highs in profitability?

Daniel Hajj, CEO

What we've achieved across several quarters is largely thanks to the investments that have been made in digitalizing the company, aiding in cost control and efficiency. There remains significant growth potential in the region regarding broadband, 5G ARPU, fixed wireless broadband, and various offerings. We do face specific challenges in certain locations. However, we are optimistic about continued growth powered by our past investments and focus.

Carlos García Moreno, CFO

It's noteworthy that all operations, with one exception, are now delivering growth in both mobile and fixed platforms. This marked improvement reflects our strategic investments and focus on maintaining high-performance standards across business lines, positively impacting EBITDA margins.

Alejandro Gallostra, Analyst

Great. Thank you so much.

Carlos García Moreno, CFO

Thank you.

Daniel Hajj, CEO

I want to thank everyone for being on the call, and also thank Carlos, Oscar, and Daniela. Thank you very much.

Operator, Operator

This concludes today's call. Thank you for joining, and I hope you have a lovely rest of your day. You may now disconnect your lines.