Earnings Call Transcript - AMX Q2 2021

Operator, Operator

Good morning. My name is Sade. I will be your conference operator today. At this time, I would like to welcome everyone to the América Móvil Second 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, the Head of Investor Relations.

Daniela Lecuona, Head of Investor Relations

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

Daniel Hajj, CEO

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

Carlos García Moreno, CFO

Thank you, Daniel. Good morning, everyone. The U.S. economy recovered rapidly, signs of higher inflation towards the latter part of the second quarter created uncertainty and confusion and drove price corrections in some segments of the financial markets. The yield on three-year Treasury notes, for instance, rose 15 basis points, which was equivalent to a 50% increase in yield as the market brought forward the expected path of increases in interest rates by the Fed. In several Latin American countries, inflation exceeded expectations and pushed some central banks, notably in Brazil and Mexico, to begin to hike interest rates. Foreign exchange volatility increased throughout Latin America. In this context, we added 4.2 million wireless subscribers in the second quarter compared to a loss of nearly 5 million in the second quarter of 2020 with 1 million, 1.1 million prepaid subscribers; Brazil accounted for half of the postpaid net adds of the quarter followed by Austria with 289,000 and Peru with 234,000. Colombia was next with 159,000 subscribers. As for prepaid, net adds totaled 2 million subscribers with Argentina accounting for 777,000 followed by Mexico with 432,000 and Brazil with 328,000. On the fixed-line platform, we added 128,000 broadband accesses with Argentina and Colombia each contributing over 50,000 clients. Year-on-year, mobile postpaid exhibited the fastest access growth with 10.7%. Mobile prepaid followed suit with 5.6% with fixed broadband coming in at a 3.5% pace. Both fixed voice and pay-TV declined slightly, down 3% year-on-year. Revenues totaled 253 billion pesos, slightly higher in pesos terms than a year before. At constant exchange rates, service revenue increased 5.3% year-on-year and importantly was up 1.8% on a sequential basis. It is to be noted that the second quarter of 2020 was when the effects of the pandemic, both in terms of commercial activity and revenue were more deeply felt, so the annual comparison may be somewhat misleading. But the first quarter of 2020 was largely free of the effects of the pandemic and happens to be a good reference. In the first quarter of this year, service revenue had risen 1.2% from the prior year. So, the service revenues and mobile service revenues are both greater than pre-pandemic levels. Prepaid and postpaid mobile service revenues are both at higher levels than they had prior to the pandemic with prepaid revenues surging on the strength of the economic expansion in Mexico, the U.S., Central America, Caribbean, and Eastern Europe. Prepaid revenues were up 9.5% and postpaid 4.4% year-on-year. For the fixed-line platform, revenue from the different business lines have exceeded trend over the last several quarters, led by fixed broadband that has increased levels of between 7% and 9%, and corporate networks that have gained ground in the last two quarters. Pay-TV and wireline voice are both showing improving trends. Second quarter EBITDA came in at 84.9 billion pesos, a 2.8% increase in nominal peso terms from the year-earlier quarter. At constant exchange rates, it increased 11.9%. However, adjusted for the carrier discounts obtained by Tracfone in the second quarter of last year, EBITDA had an even stronger performance, increasing 14.6%. The EBITDA margin was 33.6%, which was 0.8 percentage points higher than the year before in spite of the greater commercial activity. Our operating profit increased 9.3% to 44.7 billion pesos. Depreciation and amortization charges held steady at 19% of service revenues, resulting, given the increase in EBITDA, in an operating profit that was up 17.9% at constant exchange rates on an annual basis and 6.2% quarter-over-quarter. Correcting for the carrier discounts referred to before, the annual increase in our operating profit would have been 23.7%. We registered a net comprehensive income in the amount of 17.2 billion pesos, as foreign exchange gains of 21.1 billion pesos and gains in other financial expenses of 4.4 billion pesos more than offset our net interest expense of 8.4 billion pesos. Our net profit totaled 42.8 billion pesos in the second quarter, more than doubling that of the year-earlier quarter on the back of strong EBITDA growth and our net comprehensive financing income. It was equivalent to 65 peso-cents per share or 64 dollar-cents per ADR. In the six months to June, our operating cash flow allowed us to fund capital expenditures in the amount of 57.4 billion pesos; reduce net debt in the amount of 36.9 billion pesos, which was quite substantial, certainly for the first half of the year, and buy back shares in the amount of 11 billion pesos, also substantial. In addition, we reduced by 5.6 billion pesos our labor obligations. In fact, our share buybacks through June, which amounted to 765.1 million shares, topped those from each of the last six years through the same period. Our free cash flow has shown a trend of strong growth each year for the last six years, increasing over 80% in dollar terms in that period. And finally, our net debt-to-EBITDA ratio shrank in this quarter, standing at 1.64 times last 12 months EBITDA, down from 1.9 times a year before. So, we have had the largest correction in the net debt-to-EBITDA ratio that we have seen probably in as many as 10 years. So, with that, I would like to open this for Q&A.

Operator, Operator

Your first question is from Marcelo Santos from J.P. Morgan. Your line is open.

Marcelo Santos, Analyst

Hi. Good morning. Thanks for taking my questions. I wanted to ask about broadband in Brazil and Mexico. So, the first question related to Brazil is you have been losing subscribers in broadband, at least when we look at Anatel data until May. And we are seeing many players in Brazil going to fiber, new ASPs trying to list. We are seeing the large like Oi, TIM, Vivo creating these vehicles to invest in fiber. What are your plans in Brazil? How do you see this going? Do you plan to test yourself more in fiber, migrate maybe your cable network to fiber, and what would be the impact on CapEx? And on Mexico, I just wanted you to comment a bit on the competitive environment because you also saw some broadband losses in the quarter. So, if you could comment on that would be great. Thank you.

Daniel Hajj, CEO

Thank you, Marcelo. Oscar?

Oscar Von Hauske, COO

Yes. Hi, Marcelo. Well, first, talking about Brazil. As you know, we have cable networks in Brazil. So, what we’ve been doing is upgrading the network. So, we have a very strong plan to break down the nodes in order to deliver more speed to our customers. When you look at the new sales, 60% of the new sales are for a product that offers 240 megabits. So, we have already prepared the network for that. We believe that we will protect all the HFC network. By the end of the year, we will upgrade 70% of the network to really deliver the speed that the market needs. And secondly, talking about fiber-to-the-home, we already have 3 million home passes with fiber-to-the-home. We opened 110 new cities with GPON technology in order to be prepared with fiber. And when you look at those cities, the 110 cities, the penetration that we are achieving in those cities is quite relevant. We have a program to finish the year with around 5 million home passes with GPON. And when you look at the figures, we are the leaders in ultra-broadband in the marketplace. We are not only focused on the speed that we need to deliver, but we are also focused on the combo play that adds Claro Box and mobile, and that proposition has been working pretty well. And as you know, the ASPs are growing pretty rapidly, but in regions where we don’t have a network. When you look at the market share and where we have a network, we have even increased our market share a little bit. So, that’s the plan for Brazil. And in Mexico, when you look at the customer base, 43% of the internet base is already GPON and the rest is with VDSL. Just to give you a flavor on the first half of the year, we built 1 million home passes today with fiber, and we migrated 500,000 customers from copper to fiber. We want to increase that construction and migration in Mexico. Also in Mexico, the market has been well-received for the bundles that we are doing with the streaming providers. As you know, we have bundles with Netflix, with Disney Plus, and recently we launched with HBO Max. So, we are moving the customers to fiber as well in Mexico.

Operator, Operator

Your next question comes from the line of Leonardo Olmos from UBS. Your line is open.

Leonardo Olmos, Analyst

Let me discuss a bit the prepaid and postpaid division between mobile clients, noticed a lot of prepaid net additions, except for Brazil, of course, on postpaid. But if you can discuss how you see the largest indiscernible growth of the prepaid and postpaid mix, how do you see that playing out in 2021, considering that you and the market had a lot of these connections prepaid last year due to the pandemic? How do you see the prepaid playing out in the second half of 2021? Thank you.

Daniel Hajj, CEO

Well, we don’t hear you so well. We don’t know if you are talking about Mexico or Brazil. But I can tell you that, in my view, since the pandemic started, a lot of people are using more and more digital services. Of course, we had some disconnections last year in prepaid. But I can tell you that this year, today, we have more prepaid subscribers than what we had last year before the disconnections. So, people start to reconnect again and begin to use more. Our ARPU in Mexico, I’m talking about Mexico, the ARPU is higher than the first quarter of last year. People are using more, people are connecting and using more data. So, that’s more or less what I’m seeing. In the postpaid segment, people are still a little bit worried about the pandemic. They don’t want to get a bill every month. So, that’s why also some people are moving from postpaid to prepaid. But as we are seeing, they are using a lot of data as well. So, in prepaid and postpaid, all around Latin America, we’re seeing the same. Anything else?

Leonardo Olmos, Analyst

Yes, yes. Well, first of all, thank you for hearing. That was my question exactly. Just a quick follow-up. Besides Brazil and Mexico that were discussed specifically, which regions do you think hold the most potential for prepaid growth? Specifically prepaid growth? Thank you.

Daniel Hajj, CEO

Thank you. For the prepaid growth, I think Colombia, we’re growing in prepaid, all Central America, we’re growing also in prepaid, Dominican Republic, we’re doing well. Eastern Europe also, we’re growing on the prepaid side. So, overall, people sometimes don’t want to have a commitment every month, but they are moving to a prepaid platform. However, we think that they are having good ARPUs and consuming all the data. We’re okay on that.

Operator, Operator

Your next question is from Alejandro Gallostra from BBVA. Your line is open.

Alejandro Gallostra, Analyst

Hi. Good morning, everyone. Thank you very much for taking my question. We have been significantly increasing the pace of share buybacks in recent months and even before reaching the desired level of leverage. So, should we expect an increased amount of capital distributions to shareholders once you reach your 1.5 times net debt-to-EBITDA and complete the sale of Verizon, or are you already reaching your full levels of capital distributions to shareholders?

Carlos García Moreno, CFO

Well, I think what I mentioned in the overview a moment ago, we had actually a very good cash flow in this first half of the year, and that allowed us to pay nearly $2 billion of debt. This is before getting any of the proceeds from platform or whatever we might end up having with the towers. So, I think that that gave us confidence that we were very much on track to reach our desired levels. We need to wait on that number. So, I think that that’s all depending on the Company today. We will be reaching our levels. We are confident that the two things I mentioned, both the platform and the towers, are still on track to close this year. With that, I think that maintaining a good cash flow allows us to raise the share buybacks today with capital.

Operator, Operator

Your next question is from Carlos Legarreta from GBM. Your line is open.

Carlos Legarreta, Analyst

Hi. Thank you. Good morning. I have two questions, if I may. The first one regarding CapEx: we see that in the first six months of 2021, it’s actually down versus last year. Does this imply that you will pick up significantly during the second half, or has something changed there? And the second one, in terms of regulation in Mexico, there’s been a public consultation regarding the potential wholesale deregulation of rates for Telmex in certain municipalities. I’d like to understand if this can lead to perhaps the authorities granting Telmex a pay-TV license in those areas? Thank you.

Daniel Hajj, CEO

Well, on the CapEx side, we have our budget of 8 billion, 5% more, 5% less. So, we’re in that range, and we are on track for the first six months. We are on budget. We are not increasing anything else. What Oscar says about fiber-to-the-home in Brazil, and fiber-to-the-home in Mexico, we have a lot of fiber-to-the-home all around Latin America. Everything is included in this budget. So, that’s more or less. And on Telmex and pay-TV, I hope we can get it. There’s been a lot of time that the IFT has been saying that they are going to give us the TV. So, I hope that we can have the TV license for Telmex this year. So, as we said always, there may not be a company, a phone company, that doesn’t have pay-TV. I hope that we can get that pay-TV license this year.

Carlos Legarreta, Analyst

Do you think it’s reasonable to think that those processes are related or not necessarily?

Daniel Hajj, CEO

I don’t think so. I don't think it is necessarily related to that. We have been asking for the pay-TV for more than 10 years. Now, we’re requesting the pay-TV like we always have. So, I hope this year we can get it.

Operator, Operator

Your next question is from Arturo Langa from Itaú. Your line is open.

Arturo Langa, Analyst

Hi. Good morning. Thank you for taking my question. Just one, I wanted to see if you can provide any more details regarding Colombia and what you’re seeing there from the launch of Vox operation. Just to get a sense, how aggressive do you perceive them to be right now? What is the base case that we should be working with? Should we expect something like when AT&T entered Mexico or maybe when they entered Chile? Is that your working assumption or do you expect something much less aggressive? That would be very helpful. Thank you.

Daniel Hajj, CEO

I cannot compare what they do, AT&T in Mexico or the others in Chile or in Peru. So, what I think, one today in Colombia is very aggressive. Their plans are very aggressive. But I think it’s not only about aggressiveness. Now, you need to have a good network, good branding. We have quad-play, convergent, customer care centers, good distribution network. There are a lot of factors, including a good offer, okay? And with customers, we have a very good NPS in Colombia; people prefer us. So, of course, there’s strong competition there. There are three other big competitors, one being Telefonica and Vivo. But, we feel comfortable. We’re investing in the network; we have good quality there. And convergence is very important for us. We have been putting many of our subscribers on four-play. So, what can I say? It’s big competition, and there are good competitors. We’re competing against good competitors, but we believe we’re in a strong position in Colombia.

Operator, Operator

There are no further questions at this time. I will now turn the call over back to Mr. Daniel Hajj for final remarks.

Daniel Hajj, CEO

Okay. Well, it was a short call. Thank you, everyone. I don't know if you want to add something, Carlos or Oscar.

Carlos García Moreno, CFO

No, thank you.

Oscar Von Hauske, COO

Thank you.

Daniel Hajj, CEO

Thank you very much.

Operator, Operator

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