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Telmex defiant in the face of adversity

Bnamericas Published: Tuesday, April 28, 2009
Despite the economic crisis, a challenging regulatory environment and now swine flu, Mexican fixed line operator Telmex (NYSE: TMX) is confident it can weather the storm and continue to see growth, Telmex's CFO Adolfo Cerezo told investors during a conference call on Q1 results. Mexico has been one of the Latin American countries hardest hit by the economic crisis, given that 80% of its exports go to the US. "Our industry is an important indicator of economic health... even so, as our customers adjust to changing economic realities, so do we," Cerezo said. In the first quarter Telmex saw net profit, revenues and Ebitda margins fall compared to 1Q08 levels. International long distance revenues continued to fall, with traffic dropping 29.3% year-on-year, principally due to the impact of the global economic crisis. Domestic long distance traffic rose 5%, however, primarily due to the adoption of packaged services, which is Telmex's main business focus today. Telmex added 512,000 DSL subscribers in the quarter for a total of 5.52mn clients at end-March. Aiding this growth in broadband, the operator over the last 10 years has helped finance the purchase of 2mn PCs that are sold packaged with an internet contract. The economic slowdown is, however, obliging the company to be more cost-wary. Cerezo said that the rate of layoffs seen over the past two years would continue in 2009 and probably accelerate after that. Nonetheless, he said, the company is also focusing on retraining staff members. Cerezo highlighted the company's solid financial situation in terms of servicing of debt, 79% of which is long term. "Telmex is particularly well positioned to handle these challenging conditions because we have a solid financial foundation, strong business strategies and a seasoned management team," Cerezo said. REGULATORY ENVIRONMENT Cerezo criticized telecoms regulator Cofetel's ruling that orders Telmex, the principal provider of fixed line services in Mexico, to consolidate 70 local calling areas (ASLs) into one. Cofetel has asked the transport and communications ministry ( SCT) to fine Telmex for failing to start the process by the stipulated deadline of April 4. The SCT claims the consolidation will reduce national long distance calling areas by 50% and save users some US$48mn per month. Cerezo said that Telmex had reduced the number of ASLs from 2,200 in 1998 to 397 at the end of the 2008. He added that the number of inhabitants and kilometers per ASL are similar to those in the US and Spain. Regarding pay TV, a market which the regulator has not yet allowed Telmex to enter, Cerezo said there was still no indication of when regulations might change in the operator's favor. In the meantime, cable TV operators, which are allowed to offer telephony, are consolidating the triple play services market but not charging competitive prices, Cerezo said. "It's amazing that in areas where cable companies operate, where they are the only alternative, how much they charge and how much prices vary from area to area," Cerezo said. He added that since Mexican pay TV and internet group Grupo MVS began offering its Dish Mexico satellite TV service late last year, competing satellite and cable TV operators have drastically reduced prices. Telmex has a billing agreement with Dish Mexico and to date, 55% of Dish clients have made payments through their telephone bills. SWINE FLU Referring to the swine flu outbreak in Mexico, Cerezo said Telmex has made it through difficult times before. He said it is hard to predict the impact it will have on telecoms traffic but added he believes traffic may increase given the restrictions on public gatherings. "We have faced adversity before, including extraordinary events like the current outbreak of swine flu. We have the human and capital resources to weather this adversity as well," Cerezo said.

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