Earnings Call Transcript - AMX Q1 2020

Operator, Operator

Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the América Móvil First 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.

Daniela Lecuona, Head of Investor Relations

Thank you. Good morning, everyone. We're here today to present our first quarter 2020 financial and operating results. We hope everybody's safe. We have today on the line, Mr. Daniel Hajj, our CEO; Mr. Carlos García Moreno, CFO; and Mr. Oscar Von Hauske, Chief Operating Officer.

Daniel Hajj Aboumrad, CEO

Thank you, Daniela, and welcome everyone, to the first quarter 2020 financial and operating report. And I'm going to pass to Carlos so he can give us a summary of the first quarter results. Carlos?

Carlos García Moreno, CFO

Hello everyone. Good morning. We shared our results yesterday, which indicate that our first quarter yield has shown limited impact from the pandemic so far. Our consolidated results were strong, with all major operations performing well. However, as contingency measures were implemented in various countries starting mid-March, operational trends began to shift. There is uncertainty regarding the duration or extent of the pandemic's overall effect in the countries where we operate. At América Móvil, we are committed to maintaining our top-quality services, prioritizing the health and safety of our clients and employees, and adapting our processes and commercial strategies to meet the needs of our subscribers. We will continue collaborating with our various stakeholders across all regions. The emergence of the coronavirus pandemic in China early in the first quarter, followed by its spread to other regions, first in Europe and then in the Americas, led to a chaotic response and raised concerns in financial markets about a possible economic downturn. In the weeks leading up to the partial lockdowns in various countries, we saw a sharp decline in economic activity and surging unemployment levels. Most Latin American currencies depreciated against the U.S. dollar, with the Mexican peso dropping by 25%, the Brazilian Real by 29%, and the Colombian peso by 24% compared to the end of 2019. In our operations, we added 1.4 million mobile postpaid subscribers in the first quarter, including 874,000 in Brazil and 215,000 in Mexico. Additionally, we included 3.5 million postpaid clients through the acquisition of Nextel Brazil. Fixed broadband remains the leading driver on our fixed-line platform, with 432,000 new connections, including 107,000 in Brazil and 105,000 in Mexico. Mobile postpaid and fixed broadband were the main contributors to access growth, at 7.8% and 3.5%, respectively, while other access lines continued to decline year-on-year. Our consolidated revenues grew rapidly, with significant revenue increases in operations including Mexico, Brazil, and Colombia. Consolidated revenues reached MXN 250 billion, reflecting a 1.8% year-on-year increase in Mexican pesos, with service revenue growing by 5.0% at constant exchange rates from the previous year, and EBITDA rising by 8.3%. Mobile services led revenue growth at 8.4%, the strongest rate in several quarters, while fixed-line services saw a slight decline. Mobile service revenues increased by 15.4% in Brazil, around 10% in Mexico, Colombia, and the Dominican Republic. Fixed service revenues grew about 10% in Argentina and Colombia, with Ecuador seeing a 14.5% increase. Postpaid revenue increased by 13.6% at constant exchange rates across América Móvil, partially due to the inclusion of Nextel. Revenue growth accelerated in several countries, with prepaid service revenue rising by 3.9% across the group, and 13% growth in Mexico, Colombia, and the Dominican Republic. Mobile ARPU increased in most countries compared to the previous year, spurred by data services and rising data consumption per client. Fixed broadband revenues rose by 7.8%, making it the second most dynamic business line after mobile postpaid, but could not fully offset declines in handset and TV revenues. Peru, Colombia, and Ecuador showed sequential improvements and achieved their best results in over a year. In Mexico, prepaid revenues increased by 13%, while postpaid revenues accelerated to 6.8%. On the fixed-line side, broadband revenues were around 3%, and fixed voice showed an improving trend, leading to a 12% rise in EBITDA. In Brazil, when including Nextel for full-year comparisons, mobile postpaid revenue growth was 17.2%, with improving trends in prepaid. On the fixed-line side, broadband revenues grew by 6.3%, while PayTV trended downwards. Nevertheless, EBITDA increased by 7.5%. In Colombia, service revenues grew at similar rates for both mobile and fixed-line platforms, approximately 9.5% each. Mobile prepaid revenues rose by 13.5%, with postpaid increasing by 7.7%. Fixed broadband service revenues continued to thrive, nearly reaching 13% growth. EBITDA rose rapidly in all main operations, especially in Mexico, with a nearly 12% increase. In Brazil and Colombia, EBITDA increased by 8.2%. Peru showed a notable 13.5% year-on-year increase. Financing costs reached MXN 79.6 billion, impacted by MXN 93 billion in foreign exchange losses due to the depreciation of the Mexican peso against the U.S. dollar and euro, leading to a net loss of MXN 29 billion for the quarter. Most of our debt is raised in international markets in hard currencies, and as a Mexican-based company, our revenues are subject to foreign exchange evaluations. We manage exposure from this funding through financial derivatives, significantly reducing it in recent months to align with the currency mix of our revenue base and equity investments. Our net debt in March stood at MXN 117 billion. In cash flow terms, it increased by MXN 24.6 billion year-to-date, aiding in funding a seasonal rise in working capital. Our net debt-to-EBITDA ratio for the last 12 months was 1.7x and 1.87x under the previous IAS17 methodology, which we continue to use for comparison. With that, I will turn it over to Daniel.

Daniel Hajj Aboumrad, CEO

Thank you, Carlos. Yes. First question?

Operator, Operator

Your first question is from someone at Bank of America. Please state your first and last name. Your line is open.

Rodrigo Villanueva, Analyst

Yes, thank you. Hi good morning, Daniel, Carlos, Oscar and Daniela. I hope you and your families are well considering the crisis that we are going through. This is Rodrigo Villanueva from Bank of America. I have a couple of questions. First, why has growth across countries in Latin America been pretty solid for AMX over the last several quarters, mostly driven by increased data usage? Now that many customers are probably using more Wi-Fi networks due to the stay-at-home measures, would you expect to see a significant reduction in wireless data growth? That would be my first question. Thank you.

Daniel Hajj Aboumrad, CEO

Good morning, Villanueva. I don't hear you very well. The question was about whether capacity is a standout issue since people are using a lot of Wi-Fi. I can tell you that after nearly a month of lockdown in all countries, wireless capacity is growing approximately 10% more than what we have been experiencing. However, there's another aspect to consider. In commercial areas, where we typically have a lot of traffic, that traffic is shifting to residential areas. So, it's not just about traffic growth; it's also about traffic relocating within the same city. In tourist-heavy locations, we are seeing a rapid decline in traffic as it moves to places where people currently reside. This increase is incremental, around 10% more than before, but we're particularly focused on the traffic movement. Overall, the significant investments we've made in recent years in areas like 4.5G, 5G readiness, network modernization, fiber installation, and enhancing our backhaul have positioned us with what I believe is the best backhaul in Latin America. Our single RAM infrastructure allows us to transfer traffic quickly from 2G to 3G to 4G to 4.5G. All these improvements have contributed to our excellent capacity, and we have stress-tested our networks, confirming that everything is functioning perfectly.

Rodrigo Villanueva, Analyst

Understood, thank you very much, Daniel. And then my second question is related to CapEx deployment. At the beginning of the year, the target was around $8.5 billion. I believe you already revised this number, probably 20% lower. I was wondering if there is a possibility to take it even lower than that? And where would you be focusing your investments in 2020? Thank you.

Daniel Hajj Aboumrad, CEO

Yes, that's an important question. First, I want to emphasize that we currently have the best networks in Latin America. The investments we've made over the past five years in areas like frequencies, infrastructure, 4G, 4.5G, 5G, and VoLTE have proven effective. Our networks are performing exceptionally well, and traffic is increasing without issues. However, it's challenging to predict what will happen going forward. Regarding the COVID situation, I foresee the second quarter facing lockdowns in various countries, which means fewer people will be out and about, leading to limited activations. I don't anticipate significant sales in prepaid or handsets, although handset traffic may increase moderately. In the third quarter, we might encounter broader economic challenges around the world, making it difficult to foresee developments for the rest of the year. We can defer a substantial portion of our capital expenditures without compromising on quality or capacity, ensuring we maintain the best technology available. We can reduce spending significantly, well below 20%.

Rodrigo Villanueva, Analyst

Thank you very much.

Daniel Hajj Aboumrad, CEO

I don't have a specific number. We are a very flexible company, so we can wait until we have more clarity before deciding which projects to proceed with, defer, or discontinue. As circumstances change, I believe we will accelerate projects like our online initiatives since our online traffic is substantially increasing compared to in-person activities at our customer care center. We may need to halt some projects, so we need to evaluate the overall situation and traffic trends before making any decisions.

Rodrigo Villanueva, Analyst

Understood, Daniel, very clear. Thank you very much.

Daniel Hajj Aboumrad, CEO

Thank you.

Operator, Operator

Your next question comes from Marcelo Santos from JPMorgan. Your line is open.

Marcelo Santos, Analyst

Hi, good morning. Thanks for taking the question. I hope you are well and stay well. The first question would be if you could give a little bit more detail on the behavior in the last two weeks of the quarter, especially in the main markets, Brazil, Mexico, maybe Colombia, on how the different lines behaved? Like, we saw, for example, prepaid very strong in Brazil and Mexico in the quarter, but how did that behave towards the end of the quarter, if you could anticipate a bit of what happened in April? This is the first question.

Daniel Hajj Aboumrad, CEO

Yes. Well, the COVID crisis and the lockdown started in the first week in Austria, maybe the second and third week in the other countries. So in April, we locked down all the countries in Latin America. I think Europe, Austria, is different than what we have in Latin America. In Latin America, what we're seeing is very different things in each of the countries. I think we have stronger lockdowns in countries like Ecuador and Peru. In Mexico, Brazil, and Colombia, we passed from Phase 1 then to Phase 2, and now we are in Phase 3 in Mexico, let's say. Overall, in the main countries, we see a big reduction in handset sales. People are not going out and buying handsets. On the postpaid side, I think activations are decreasing. Revenue, I think, is okay. In prepaid, there are not big reductions on the prepaid side as people who can't go out or they don’t have the money to buy these cards. So more or less, this is what we see in the big countries. In others where the lockdowns are stronger like Ecuador and Peru, where some regulations indicate you cannot disconnect subscribers, we see a little bit of people who are not paying. We need to see when the lockdown is lifted to determine how many of those will pay and how many accounts will cancel. Overall, during April, we were seeing indicators: activations are low, handset sales are declining quickly, and revenue is a bit less than we had in March.

Marcelo Santos, Analyst

Thank you. Just a follow-up on this first question. Does broadband remain at a strong pace in April? This will be the follow-up. The second question is, could you summarize whether the main government actions in the countries affected you in a relevant way? You mentioned Peru, you mentioned Ecuador, but are there other important government actions that impacted you elsewhere? Thank you.

Daniel Hajj Aboumrad, CEO

I mean, in broadband, broadband is doing well. It's still growing even with everything closed in April. Let's see what's going to happen in May and June. But broadband, fixed broadband is growing. It has been a very good product that people are consuming. So that's doing okay. I think it's the best product right now in terms of the lockdown. It's the one that people are asking for. Other products, Oscar can talk about later regarding what we're selling, because many people are working from home, and we're experiencing a lot of sales on these products. As for governments, in Mexico, I think we've been helping with prepaid. We provided maybe 28 million customers with a free package of minutes and SMS during April. We offered all of our prepaid customers this package for free, allowing them to talk some minutes and send SMSs for no cost. We also implemented some reductions in our plans for this period. If you can't pay, then we reduced the rent for two or three months until everything is settled. We're having different emergency plans across the countries to assist people and ensure they stay connected. Regarding regulators, I think it's only in countries like Ecuador and Peru where they allowed people not to pay due to lockdown. I find that to be a flawed approach, and it's limited to those countries and maybe a few others in Central America.

Marcelo Santos, Analyst

Perfect, thank you very much, very clear.

Daniel Hajj Aboumrad, CEO

Thank you.

Operator, Operator

Your next question comes from Maria Azevedo from Santander. Your line is open.

Maria Azevedo, Analyst

Hi, thank you everyone for taking the questions. My first question is on competition. So you're seeing lower churn, especially where the stores are closed and players are adopting a more defensive mode. Telefónica is reducing focus in some countries. Do you think you can be a bit more aggressive commercially, or is it time to be more defensive?

Daniel Hajj Aboumrad, CEO

I don't see a more aggressive approach on the commercial side in April. Everyone seems a bit cautious, which makes sense since there are few people out buying. Therefore, it doesn't make sense to introduce more aggressive products in April, and I doubt it will change in May either. I'm uncertain about when this lockdown will end and when people will start going out and shopping again. As for competition, we need to prioritize taking care of our customers, ensuring quality, offering more online options, and maintaining our capacity, quality, and excellent service. Those working from home require reliable service, and we are providing that. Overall, in Latin America, we have the best networks by far.

Maria Azevedo, Analyst

Thank you very much. This is very reassuring. As a follow-up question, as you're approaching your leverage targets and cash flow remains strong, do you see any interesting M&A opportunities, not only in Brazil but also in LatAm in general? If you can comment anything on synergy expectations from the Nextel Brazil acquisition, that would be very helpful. Thank you very much.

Daniel Hajj Aboumrad, CEO

I didn't catch the first part of the question. But regarding Nextel, we're working on the synergies. I believe it was a very beneficial acquisition for us. We incorporated 3.5 million postpaid customers into our base in Brazil, and we're diligently working on these synergies. We are not expecting to realize them immediately, but this year we will focus on that plan. In terms of other mergers, we are not seeing any opportunities at this time. Our focus is on maintaining strong financial health to ensure liquidity and being prudent with inventory management. Today, liquidity and cash are very critical, and we are taking care to manage that. But no, we are not currently looking to acquire or merge with other companies short-term. We are always open to opportunities but are not seeing any currently.

Maria Azevedo, Analyst

Perfect, thank you very much.

Daniel Hajj Aboumrad, CEO

Thank you.

Operator, Operator

Your next question comes from Carlos de Legarreta from GBM. Your line is open, please go ahead.