Earnings Call Transcript - AMX Q3 2020

Operator, Operator

Good morning. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the América Móvil Third Quarter 2020 Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' 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. Please go ahead, Ms. Lecuona.

Daniela Lecuona, Head of Investor Relations

Thank you. Good morning, everyone. Thank you for joining us today to discuss our third quarter results. We have today on the line Mr. Daniel Hajj, CEO; Mr. Carlos García Moreno, CFO; and Mr. Oscar Von Hauske, COO.

Daniel Hajj, CEO

Thank you, Daniela. Welcome to the third quarter results. Carlos is going to make a summary of the report.

Carlos García Moreno, CFO

Thank you, Daniel. Good morning everyone. Well, following the massive monetary and fiscal stimulus introduced throughout the world since the advent of the pandemic, the third quarter saw a rebound in economic activity in most countries in our region of operation. Legal volatilities were both present in the prior two quarters. With the exception of the Brazilian real, which continued to deteriorate against the dollar, the main currencies in Latin America did not see much change over the period. As confinement measures began to be lifted towards the end of the second quarter, an improving trend became apparent in commercial activity. We added 3.2 million wireless subscribers; 1.2 million of them postpaid, and 1.4 million prepaid. Brazil led the way in terms of positive growth after adding 1.8 million subscribers, followed by Austria with 241,000, and Colombia which recorded 200,000. In the second quarter, we had lost 500,000 users. For the prepaid gain, Mexico gained the most with 1.2 million, with Colombia and Ecuador contributing approximately 300,000 each, Peru 237,000 and the Dominican Republic at 129,000. We recovered several of the prepaid subscribers that were disconnected in the second quarter, as mobility was restricted and making recharge difficult. In the fixed-line segment, we gained 446,000 new broadband clients, with every operation in LATAM contributing to an increase in accesses. Only Austria and Croatia saw central disconnections. Colombia and Mexico led the way with over 100,000 each, with Mexico's case seeing a doubling compared to both of the prior quarters. Altogether, mobile postpaid and fixed broadband remain our main areas of access, with the former increasing 5.7% year-on-year, and the latter 5.2%. Our prepaid subscriber base is still down 3.2% year-over-year, while Fixed Voice and PayTV accesses are down by 0.25% each. Our third quarter revenues rose 4.7% in Mexican peso terms from a year before, reaching MXN 260 billion. Our service revenues expanded 5.4%. At constant exchange rates, service revenues were up 1.5%, roughly part of price as in the preceding quarter. This is backed by continued strong performance of fixed broadband revenues and the recovery of mobile prepaid revenues, which were most affected in the prior quarter due to lockdown measures implemented throughout Latin America. Mobile service revenues accelerated to 3.5% from 2.3% in the second quarter while fixed-line service revenues maintained at a 1.4% state of decline. Across our operations, both MOUs rose 11% while mobile data per user was up 41%, resulting in a 5% increase in mobile ARPUs at constant exchange rates. Mobile service revenues were boosted by prepaid revenue growth, rising to 2.5% from a decline of 2% in the prior quarter. Our posted revenue decelerated complex to just under 5% year-on-year, while equipment revenues bounced back sharply. I will move on to more robust commercial activity. Despite the continued decline in fixed-line revenue, the gains observed in fixed broadband revenues from a pace of 7.3% to about 9.1% were offset by new revenue losses in fixed-line voice and PayTV revenues. Our EBITDA in the third quarter reached MXN 6.5 billion. Our EBITDA margin remained at 33.2%. At constant exchange rates, EBITDA increased 7.2%, more than twice as fast as it had in the preceding quarters, with Puerto Rico, Mexico, and the Dominican Republic posting significant advances. Mexico improved from a -10% decline in the second quarter to +1.3%, while the Dominican Republic rose from -5.5% to +5.8%, marking an 11 percentage point swing in both cases, which is especially notable as both countries have a high share of prepaid clients. Our EBITDA margin of 33.2% was 1.6 percentage points higher than in the same quarter last year. Our operating profit shot up 18% to MXN 45 billion, which was also the driver of a 45% increase in our net income, totaling MXN 19 billion. Our operating cash flow totaled MXN 164 billion, allowing us to cover our capital expenditures of MXN 91 billion and to reduce financial obligations by MXN 52 billion, including a MXN 47 billion reduction in our net debt. Our capital expenditures during the period were directed at ensuring adequate capacity in our networks and maintaining good quality of service. At the end of September, our net debt to EBITDA stood at 1.38 times, an improvement from the prior year’s 1.7 times, and lower than at the end of June. Throughout the year and in spite of movements in foreign exchange rates, we have kept our leverage ratio at or below 1.93 times. Looking at Mexico, prepaid revenues bounced back to +1.1% from a -4% decline in the second quarter, and fixed broadband revenues accelerated to 6% from 2%. These numbers were reflected in an EBITDA recovery, rebounding sharply from a -10% plunge in the second quarter to +1.3%. In Brazil, postpaid revenues continue to excel, posting a 9% increase year-on-year, whereas prepaid revenues fell by 5%, significantly below pre-pandemic levels. Fixed-line broadband revenues continued to perform well, expanding by 6.8% and maintaining a stable trend. The projected revenues in Brazil accelerated to -13.6%. In Colombia, we saw a favorable outcome as our service revenues expanded on both mobile and fixed platforms in the third quarter, almost matching growth rates from H1. Both prepaid and postpaid revenues expanded at rates similar to those in the first quarter, with fixed broadband revenues maintaining a strong growth base of 15% and PayTV revenues growing at 10%. EBITDA increased 3.4% in the quarter, supported by revenue growth and a reduced need for provisions on past due collections. Regarding Austria, both fixed and mobile revenues declined slightly, with growth hampered by the pandemic. Despite this, the company's adjusted EBITDA before restructuring increased by 4.7% due to reduced interconnection and roaming charges, along with cost-saving measures from larger funds. With that, I would like to conclude my remarks and turn it back to Daniel Hajj.

Daniel Hajj, CEO

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

Rodrigo Villanueva, Analyst

Hi, thank you. Good morning. Can you hear me well?

Daniel Hajj, CEO

Yes.

Rodrigo Villanueva, Analyst

Perfect, thank you. So, my first question is, if there is any update that you can share with us regarding the potential alternatives to create value from your towers? Anything related to timing, amount of towers or type of transaction would be very helpful. Thank you.

Daniel Hajj, CEO

Hi, Rodrigo. What we have been saying about the tower transaction is that we have around 60,000 towers in América Móvil, and we're working on the regulations to determine the best course of action. We have 15 countries, so the situation is different in every one of them. We are analyzing what's the best way to create value from the towers. We have nothing concrete to announce right now, but we're working hard to finalize this as soon as possible.

Rodrigo Villanueva, Analyst

Understood, Daniel. Thank you very much. Secondly, the Mexican government appears to be willing to raise the price for spectrum, particularly in frequencies expected to be used for budget purposes. So I was wondering if you could share with us how relevant this is for your next steps? Is there anything that you can do to prevent this from happening?

Daniel Hajj, CEO

We have been following that discussion in Congress and the Senate, and we do not agree with that approach. We believe they should not raise any fees on the spectrum because it's already very expensive. All this will do is delay the rollout of 5G or increase prices in other areas, which is not advisable. Currently, Mexico is at the highest levels of spectrum pricing; we're paying a lot, and we do not support any increase. We are keeping track of the discussions, but we don't know what the outcome will be.

Rodrigo Villanueva, Analyst

Understood. Thank you very much.

Daniel Hajj, CEO

Thank you.

Diego Aragao, Analyst

Good morning, everybody. Thanks for taking my question. I have just two short questions about Brazil. The first, if you can please share your expectations about M&A in the country. I mean, kind of like an agreement with Tim and Beadle, if you can just provide an overview about the next steps and your expectations in the mobile space. And secondly, if you can also share your expectations regarding the 5G spectrum auction that apparently should occur at the beginning of next year, if you can share anything on this topic that would be great.

Daniel Hajj, CEO

First of all, I think we had a very good quarter in Brazil. We're still growing well in postpaid subscribers and also in prepaid; our revenue in wireless operations is doing very good. In broadband, we're also performing excellently in Brazil. I believe the auction will happen before the end of the year, but we don’t know the exact dates yet. For 5G spectrum, I've heard rumors that it will be in the first quarter of next year, as you mentioned; others are saying it could be in the middle of next year. We’re not certain about the timeline. Currently, we have a small amount of our network operating on 5G; we've launched 5G in a very small town already. So we're moving in that direction. With the Nextel purchase, we have already integrated the company and are doing well in the wireless market with postpaid market share increasing each quarter. We are also focused on cost reductions throughout Latin America, including Brazil, trying to become a more digital company while saving on costs.

Diego Aragao, Analyst

Thank you. That's very helpful. And just to follow up on the postpaid in Brazil, because it was indeed quite strong. So I'm curious to understand where those customers are coming from? Do you feel this trend of prepaid shifting to postpaid, or do you believe that you are gaining share from competitors?

Daniel Hajj, CEO

I believe there's a significant shift from prepaid to postpaid occurring. Many prepaid customers from other companies are moving to us, as well as some of our postpaid customers migrating from other companies. We have a very good network, and our performance over the last year supports that.

Diego Aragao, Analyst

Alright, thank you.

Daniel Hajj, CEO

Additionally, you can see from the number portability data that we’re gaining more subscribers than any other company. That's where a lot of these postpaid subscribers are coming from.

Diego Aragao, Analyst

Okay, thank you.

Arturo Langa, Analyst

Hi, good morning. Thank you for taking my question. I'd just like to get your thoughts on your intention to reduce that? And potentially the towers in Southern America, but if the intention is still to reach 1.5 times EBITDA? And if so, how should we think about cash distribution to shareholders? Is inflation going to increase the distribution to shareholders? And if so, what level do you have in mind? What about negative share buyback? That’s my first question. Then, the second question is related to Colombia; how do you see the arrival of ONE in the country? Specifically, would you be interested in offering services to ONE like you did for them in China?

Daniel Hajj, CEO

Regarding your first question, I think the sale of the platform to Verizon should lower our net debt to EBITDA to around 1.5 times. This figure should be reached without resorting to the disposal of certain assets. We have a strong cash flow and expect this to remain solid for the next couple of years. From a financial perspective, we feel we're in a good position, which is something rating agencies have also recognized. It's essential to navigate through the economic uncertainty we’re currently experiencing with a lighter debt load. So maintaining a conservative approach to our company's financial structure is critical. Can you please repeat your second question?

Arturo Langa, Analyst

Can you share your thoughts on the arrival of ONE in Colombia? They have big obligations in terms of network rollout, and it's being discussed if there are roaming agreements. Would you be willing to provide what you did for them in Chile?

Daniel Hajj, CEO

I think regarding ONE, we are aware that they are in Chile and they've been aggressive. We have been preparing our company for years, enhancing our capacity and working to be ready once ONE enters the market. There's nothing else I can share at this moment, but we are ready to compete with them, as well as with Tigo and Movistar in Colombia. So far, we haven’t established any roaming agreements with ONE in Colombia.

Oscar Von Hauske, COO

Yes. As you mentioned, we are a fully integrated company in Colombia and have been performing well in mobile services, especially in convergence. We offer a set of products, including fixed broadband, fixed-line, mobile, and PayTV in various formats. We began focusing on the enterprise segment three years ago, delivering cloud services there. Consequently, we have a comprehensive telco-integrated solution on connectivity and have been successful in that enterprise space. While there may be more competition, we feel we are in a strong position.

Arturo Langa, Analyst

I appreciate your answer. Thank you.

Daniel Hajj, CEO

Thank you.

Walter Piecyk, Analyst

Thanks, Daniel. The trend for ARPU has been pretty positive since 2017. I understand that some of that is due to the postpaid/prepaid mix. However, COVID gave you a little bit of headwind in the last couple of quarters. Looking into 2021, assuming we're having some form of COVID recovery health-wise, though maybe not economically, do you think that, across your markets—especially the larger ones—you can get back to ARPU growth? Additionally, could you provide an update on the current mix of LTE traffic and your CapEx outlook? CapEx has reduced significantly this year; will there be a return to CapEx investment based on this LTE growth?

Daniel Hajj, CEO

Yes, well, what we have been seeing during the pandemic is critical. Our networks have proven to be strong as we successfully handled the increased traffic across all countries as people shifted from offices to remote work and increased usage at home. It resulted in a significant increase in broadband demands. We have invested heavily in our networks over the last three years, and that has positioned us very well to meet the increasing demand. It's essential to note that these trends accelerated digital payments, shopping, studying—essentially all facets of life. While I can't predict exactly what will happen in 2021, I can tell you that telecom is becoming increasingly vital every day. The lockdown has greatly accelerated digital adoption across all sectors. We are anticipating CapEx for this year to fall from projected levels between $8.5 billion to around $6 billion due to various execution challenges related to the pandemic lockdowns, which made it tough to execute. We also eliminated some unnecessary projects, resulting in delays. We are reevaluating our CapEx for next year, but I can't provide specific guidance just yet. The CapEx for this year will likely be around $6 billion, lower than our initial expectations.

Walter Piecyk, Analyst

That’s a steep decline. I don’t see usage declining that much. At a minimum, shouldn't you think that CapEx—as I know you don't want to give guidance for 2021 now—should at least remain flat in 2021 from that level?

Daniel Hajj, CEO

Compared to this year, yes, I would say it will be higher. The concern is based on several variables we need to manage. I don't want to make any commitments, but it's realistic to expect an increase in CapEx compared to this year.

Walter Piecyk, Analyst

But perhaps not at the $8 billion level from 2018 and 2019. I understand.

Daniel Hajj, CEO

Yes, it's going to be higher than this year, but I want to emphasize that we haven’t lost any capacity, and we’ve maintained very good quality, commercial progress at all our digital initiatives.

Walter Piecyk, Analyst

One last quick follow-up, Daniel, I apologize for that. When you mention execution, does that imply you're working with different radio vendors like Fujitsu or Airspan rather than traditional suppliers, or are prices coming down from Nokia, Ericsson, and Huawei?

Daniel Hajj, CEO

It's a combination of new vendors, but for radio, we're largely relying on established suppliers. However, there's quite a bit of cost-saving due to new technologies and innovations entering the market. A significant portion of our CapEx is dedicated to backbone infrastructure, fiber optics, and other digital elements—not so much on radio itself. In summary, we’re working with various vendors to optimize costs across the board while maintaining efficiency and service quality.

Walter Piecyk, Analyst

Thank you very much.

Daniel Hajj, CEO

Thank you.

Marcello Santos, Analyst

Hi, good morning. Thanks for taking the question. There are two actually. The first is about the pickup in broadband ads in Mexico; could you talk about the sources? You mentioned agreements with OTTs, but is there also demand driven by COVID, and what do you think about the sustainability of this higher growth in broadband? The second question is about the Brazilian reconnection in the fixed-line. What's your comment on that? Is it more related to PayTV specifically, or is this limited to DTH? Also on cable, what's the outlook here? How much more of a decline could we expect on DTH?

Daniel Hajj, CEO

Regarding the situation in Mexico, we have been optimizing our customer offerings and increasing customer loyalty. Furthermore, we are transitioning from copper to fiber where feasible and have introduced new packages, which include several add-ons. I believe we are also experiencing a pickup due to the effects of COVID; many are working from home, requiring faster internet speeds. The increase in overall connectivity demand is not unique to Mexico but is a trend across all our markets. In Brazil, the decline in PayTV revenues is being reflected in the overall market, driven by economic conditions. We are developing a new approach to transform standard PayTV into a more integrated entertainment hub, adding more functionalities and value to earn back revenues in the near future.

Marcello Santos, Analyst

Thank you.

Daniel Hajj, CEO

Thank you very much.

Cesar Medina, Analyst

Hi, thanks for taking my call. I have two questions related to the deleveraging process. The first is older than the towers that you're working on. How should we think about other divestitures, for instance, KPN? Once you reach that 1.5 level, what's next? Should we expect this division to shareholders, buybacks, dividends, or something on that front? I appreciate your thoughts on that. Thank you.

Daniel Hajj, CEO

Regarding your first question, we only know what we've seen reported in the media about the Swedish private equity bond. We are uncertain about what will unfold in the market, but we do anticipate some consolidation in Europe without specific details. Regarding our financials, despite uncertainties, we are well-positioned and prepared for marketable securities. Even if we undergo considerable asset divestitures, it won't impact our leverage. Moving forward, our cash flow will allow us room to reduce the debt, which we have actively pursued. We expect to see a meaningful decrease in net debt soon, which will place us below a 1.5 times EBITDA ratio.

Carlos Sequeira, Analyst

Thank you. Good morning, everybody. My question is, does América Móvil have any plan to convert its coaxial cable network in Brazil to fiber and fiber-to-the-home technology? We have a large cable network operation there and I was just wondering if you have plans to overlay it at some point.

Operator, Operator

Ladies and gentlemen, we are experiencing technical difficulties. The conference will resume in one moment.

Daniel Hajj, CEO

Sorry, we're back. Thank you. We pushed the wrong button; sorry.

Carlos Sequeira, Analyst

Do you want me to make the question again?

Daniel Hajj, CEO

Sorry.

Carlos Sequeira, Analyst

Okay. So my question is, does AMX have any plans to overlay its coaxial cable network in Brazil with fiber or fiber-to-the-home technologies? If not now, at some point in time, what is your outlook for the cable network in Brazil regarding the possibility of a hybrid approach?

Chelsea Colón, Analyst

Hi, and thank you for taking my questions. I was just wondering if you could provide a little bit more color around the performance in Chile. I'm just wondering how much of this performance do you think is due to competition in the market versus the effects of the pandemic? Also, if you could remind us of what technology you have on the mobile and fixed side in Chile?

Daniel Hajj, CEO

In Chile, we have various technologies available, including 3G and 4G, and we also have fiber to the home. The market there is a bit challenging, with ongoing interventions due to the pandemic. We need to work harder to improve our performance, though our technological capabilities remain strong. We are recently investing more in that area to enhance our market outcomes.

Chelsea Colón, Analyst

What is your exposure to the SME segment in Chile?

Daniel Hajj, CEO

I believe we have a solid position in that segment. Oscar can elaborate on our approach towards SMEs.

Oscar Von Hauske, COO

We're actively targeting SMEs, focusing on providing connectivity and additional digital solutions. Our direction is to create a consolidated and integrated offering to enhance SMEs' productivity. We enable them to adopt more digital practices, thus improving their revenue potential. It's crucial we position ourselves distinctively across this segment.

Daniel Hajj, CEO

Thank you.

Maria Azevedo, Analyst

Hi everyone, thank you for the call. Congratulations for the strong numbers. I have two questions. Firstly, to follow up on the question about CapEx, do you believe that network sharing and those initiatives can also help with the optimization of CapEx? How much do you expect to spend on 5G spectrum in 2020 and 2021? Secondly, I wanted to ask about the trend to monetize subscriber bases; several companies talk about digital wallets. How substantial do you see that opportunity in LATAM?

Daniel Hajj, CEO

About the 5G investments; I don't have a specific number on how much we'll allocate for 5G next year, but we plan to make gradual advancements on the rollout. The specifics hinge heavily on spectrum availability in various countries. I also think network sharing has potential benefits, especially in specific locations. However, I am cautious regarding it in urban areas where we have to ensure capacity and capability growth. Generally, I am supportive of network sharing in rural regions where growth is limited. Regarding digital wallets, we are developing our wallet called ‘Got Open’ that will enable users to cash in, cash out, and use prepaid credit. Given LATAM's reliance on cash, transitioning to a digital solution is indeed a promising opportunity.

Maria Azevedo, Analyst

Thank you very much.

Operator, Operator

There are no further questions at this time. I hand the call over to Mr. Daniel Hajj.

Daniel Hajj, CEO

I just thank everyone for being on the call. Thank you very much. Bye-bye.

Operator, Operator

This concludes today's conference call. You may now disconnect.