Liberty Latin America Ltd. Q1 FY2022 Earnings Call

Good morning, and welcome to Liberty Latin America's First Quarter 2022 Investor Call. At this time, all participants are in listen-only mode. Today's formal presentation materials can be found under the Investors section of Liberty Latin America's website at www.lla.com. As a reminder, this call is being recorded and will be available under the Investors section of our website. Today's remarks may include forward-looking statements, including the company's expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. Actual results may differ materially from those expressed or implied by these statements. For more information, please refer to the risk factors discussed in Liberty Latin America's most recently filed annual report on Form 10-K and the quarterly report on Form 10-Q most recently filed with the SEC, along with the associated press release. Liberty Latin America disclaims any obligation to update any forward-looking statements or information to reflect any change in its expectations or in the conditions on which any such statement or information is based. In addition, on this call, we will refer to certain non-GAAP financial measures which are reconciled to the most comparable GAAP financial measures, which can be found in the appendices to this presentation, which is accessible under the Investors section of our website.

Thank you, Mike, and welcome, everybody to Liberty Latin America's first quarter results presentation. I'll begin with our group highlights and an overview of our operating results. Chris Noyes, our CFO, will then follow with a review of the company's financial performance. After that, we will get straight to your questions. As always, I am joined by my executive team from across the region. I will also have our new CTO, Aamir Hussain joining us for this call. I will get him and the rest of the executive team involved as needed during the Q&A following our prepared remarks. As a point of housekeeping, we will both be working from slides, which you can find on our website at www.lla.com. Starting on Slide 4 and our highlights for the quarter. Revenue was up by 1% on a rebased basis. This was a solid start to the year for the group, driven by strong performances in Costa Rica and C&W, which grew by 9% and 5%, respectively, and also a robust subscription revenue growth in Puerto Rico. In mobile, we are seeing strong results from our commercial focus on postpaid and delivered a record 121,000 additions in the quarter, significantly higher year-over-year. We are on track with our integration of previously acquired operations in Puerto Rico and Costa Rica, and this remains an important driver of our future free cash flow growth with over $85 million in synergies anticipated once these businesses are fully integrated. The transactions in Panama and Chile, which we expect to drive further value, continue to progress towards completion in line with previous expected timelines. Finally, we have accelerated our buyback activity with over $55 million of shares repurchased in the first quarter, which is our most active quarter to date. Turning to Slide 5 and our broadband Internet subscriber additions by market. We are focusing on Internet subscribers here as this is the key driver of our fixed consumer proposition. Starting with C&W in the upper left of the slide, we had a slight negative net addition for the quarter, driven by a channel focus on postpaid mobile and a turning away of our bad credit customers. We anticipate our net additions to return in future quarters. Year-over-year, first quarter financial performance was driven by growth of our base over the past 12 months, so you can see that in the chart. Moving across in the center of the slide and Liberty Puerto Rico. This continues to be one of our best-performing operations, and we delivered a good quarter with 8,000 broadband RGU additions, consistent with the last two quarters' performance. Further right on the top row to Costa Rica, where we have seen consistent growth in additions and added 9,000 broadband subscribers in Q1, 50% higher year-over-year. Moving to the lower left and C&W Panama, we had a strong quarter with 9,000 broadband additions, 80% up on the prior year period. We have continued to invest in our fiber networks in Panama, and it was our second largest market for new build and upgrade activity behind Chile in the quarter. Finally, VTR saw a reduced level of broadband losses in Q1 sequentially as our commercial activities had some positive impacts. However, the market continues to be intensely competitive. We remain focused on stabilizing our subscriber base in Chile, and I will cover our strategy here in more depth later in the presentation. Overall, the group generated broadband additions improving on Q4 levels. Moving to Slide 6 and our mobile performance. We have highlighted postpaid additions as this is our focus and a driver of growth in recurring revenue. Starting in the top left of the slide and C&W, our distribution channel initiatives have continued to drive strong performance with 50% growth in additions year-over-year and 25% growth sequentially. We expect this momentum to continue through the rest of the year. Turning to Puerto Rico, we had a particularly strong first quarter, adding 39,000 postpaid customers. This was driven by a government initiative, incentivizing mobile data access for teachers and students. Excluding these impact additions, we were broadly in line with prior quarters. Moving to the right of the slide in Costa Rica, this is our largest mobile operation in terms of subscribers and was acquired during the third quarter last year. In Q1, we added 44,000 postpaid subscribers here as we continue to grow our overall customer base and migrate subscribers from prepaid. On the bottom left of the slide, we present Panama's mobile subscriber performance. Building on a strong performance in Q4, we added 28,000 postpaid subscribers in the first quarter, driving 25% year-over-year postpaid revenue growth. In aggregate, we are building momentum and delivered a record quarter for postpaid additions, adding 121,000 subscribers, which was nearly double our Q4 performance. We are improving our postpaid to prepaid mix and growing our recurring mobile revenue. Next to Slide 7 and our B2B operations. Starting on the left of the slide, we delivered 4% revenue growth in Q1. This was driven by growth in B2B service revenue, particularly in C&W, where we won some significant contracts, as well as delivering growth in fixed and mobile subscription services. In the rest of the slide, we've outlined some of the products we offer across our B2B customers, starting with SMB in the center. This segment currently represents less than 20% of B2B revenue, but we've identified that we are underway and can generate increased penetration. As with all our customers, we aim to combine leading products with fantastic service, in this case, 24/7 support. From a product perspective, we have created packages that leverage our full service communications capabilities with smart solutions layered on time according to customer needs. Finally, to Slide 8, where we provide updates on the Chilean market as well as important integrations taking place in Puerto Rico and Costa Rica. Starting on the left of the slide with Chile. As we have mentioned previously, this is an extremely competitive market with multiple operators. Our focus here is to compete aggressively to win and retain customers. Consistent with this approach, we launched a new range of plans called Phoenix in March, a key month of the year, including back-to-school campaigns. With these plans, we introduced significantly lower price points for our products with a focus on our broadband offering, which carried the lead discount. As a result, we recorded our highest ever number of gross additions in March, adding 100,000 RGUs. However, I must say, churn remains a challenge given the competitive intensity. We also saw strong traction across our HFC footprint, further highlighting that price is a key decision factor for customers. From an inorganic perspective, we are progressing with approvals for the joint venture with Claro in Chile and anticipate closing the transaction in the second half. The combination is expected to drive significant annual synergies of over $180 million as well as consolidation in the market. On the right of this slide, we wanted to provide an update on the integration activity in Puerto Rico and Costa Rica. The key takeaway here is that both are on track. In Puerto Rico, we are entering an important phase as we look to start migrating customers to our new mobile core towards the end of the year. We anticipate completing all aspects of the integration at the end of next year, and we will see the full benefit of over $70 million in synergies during 2024. In Costa Rica, we are progressing similar work streams; however, we are slightly earlier in the process, given the acquisition completed more recently. Again, we anticipate seeing the full benefit of over $15 million in synergies during 2024. Across both transactions, we expect to deliver somewhere in the region of $90 million of synergies once integration activity is completed. Overall, we have had a steady start to the year and anticipate building operational and financial momentum through 2022. Our inorganic moves should drive additional growth in the coming years, particularly as free cash flow and synergies are achieved.

Thanks, Balan. In the first quarter, our revenue was $1.2 billion, reflecting a $54 million year-over-year increase. This was driven by the acquisition of the Telefónica asset in Costa Rica and organic growth. These two factors were countered by adverse currency movements, especially with respect to the Chilean peso, which impacted our U.S. dollar reported results. As Balan highlighted, we delivered modest rebased growth of 1% for the quarter, led by B2B and slightly positive rebased growth across both residential and mobile subscription revenue. In terms of our operating units, Costa Rica and C&W Caribbean & Networks were our best rebased performers in the quarter. Turning to adjusted OIBDA, we delivered $440 million in Q1, reflecting a rebased decline of 2%, of which roughly a percentage point of the decline is attributable to the impact of integration costs. Similar to revenue, Costa Rica and C&W Caribbean & Networks posted strong rebased growth on the back of subscriber volume gains over the last 12 months, which was more than offset by declines in Chile, Panama and Puerto Rico. In the third section, our P&E additions were $175 million in Q1 or 14% of revenue. Nearly 80% of our quarterly spend was directed to CPE, new build, upgrade and capacity. Importantly, we expanded our new build and upgrade by over 30% in the quarter compared to Q1 last year, reaching 167,000 homes. This build is virtually all fiber-based and across each of our operating segments. We incurred about $8 million of integration CapEx in the quarter and expect to incur about $40 million in Puerto Rico and Costa Rica for 2022. In the last chart, and consistent with the statement we made on our Q4 call, we delivered negative $57 million of adjusted free cash flow in the quarter. As a reminder, our first quarter is typically negative due in part to the phasing of interest and tax payments. Last year's Q1 result was particularly helped by favorable working capital from our newly acquired mobile business in Puerto Rico. Slide 11 highlights our revenue and adjusted OIBDA results by segment for Q1. Beginning with C&W Caribbean & Networks, we generated $445 million of revenue or 5% rebased growth and $193 million of adjusted OIBDA or 8% rebased growth. Once again, our Jamaican business led with double-digit rebased revenue growth, and nearly all of our residential markets delivered positively based growth. Each of our key product revenue categories remained steady as we posted 8% rebased growth in mobile, 5% in fixed residential, and 4% in B2B. With respect to our subsea business, which is within the B2B category, our growth was adversely impacted by a $4 million headwind relating to IRU accelerations, which largely occurred in Q1 2021. Adjusted OIBDA was propelled by double-digit rebased increases in the Bahamas and Jamaica, and our margin increased year-over-year by over 100 basis points to exceed 43%. Moving to Cable & Wireless Panama, CWP contributed $127 million of revenue and $41 million of adjusted OIBDA in Q1, reflecting flat rebased revenue growth and a decline of 8% in rebased adjusted OIBDA. Our results moved lower in Q1 from Q4, due in large part to the seasonally strong Q4 we experienced in B2B, particularly around project revenue. With that being said, our residential fixed revenue continued to build with 9% rebased growth, reflecting 75,000 RGUs we have gained in the last 12 months. Residential mobile revenue declined 3% from Q1 2021, primarily as a result of lower prepaid recharging activity, which more than offset strong growth in postpaid revenue. Adjusted OIBDA compressed year-over-year due in large part to an increase in costs to support higher levels of sales. In terms of Liberty Puerto Rico, I will cover it in detail on the next slide. Next to VTR, we reported $171 million of revenue and $47 million of adjusted OIBDA, reflecting rebased declines of 9% and 26%, respectively. As expected, Q1 was a tough quarter financially as the annualization impact of lower RGUs and ARPU pressure flowed through the results. Additionally, with our new pricing plans in March, we experienced tremendous sales activity and movements within our base, which impacted March results and will roll through the remainder of the year. Our adjusted OIBDA result was largely impacted by the decline in revenue and higher programming and commercial costs, including a settlement on our programming contract and marketing costs related to a music festival that had been delayed due to COVID. Finishing with Costa Rica. Led principally by continued strong performance in our newly acquired mobile business, we reported revenue of $107 million or rebased revenue growth of 9%. We delivered adjusted OIBDA of $30 million, which represents a double-digit rebased increase over last year's Q1. We incurred integration expense of $2 million in the quarter and are currently projecting integration costs of around $10 million for 2022. Next to Slide 12. I wanted to spend a few extra minutes on Puerto Rico. This is our first full quarterly comparison with mobile under our ownership. We reported revenue of $369 million, accounting for 1% rebased growth. The two charts on the left highlight our revenue components with the upper chart for Q1 2022 and the bottom chart for Q1 2021. First, our residential fixed business continues to be fueled by broadband growth as we reported $121 million of revenue in the quarter. Second, residential mobile service revenue of $117 million has remained flat over the year, which is a good result given competition and our rebranding from AT&T. The roughly $10 million decline we experienced in the total mobile category is attributable to lower equipment and inbound roaming revenue. Finally, on B2B and other, we are principally growing our mobile-related services, including equipment as the island continues to recover, and we are benefiting from increases in FCC funding. Turning to adjusted OIBDA, we delivered $144 million for a rebased decline of 4% year-over-year, which was in line with our own internal expectations. In the bridge walk, the principal drivers are highlighted. We benefited from the positive impact of increased services revenue, which was more than offset by a combination of a higher negative equipment margin, a lower net rolling margin, and net incremental integration costs. As Balan discussed, our integration is moving well ahead. For 2022, we are targeting roughly $50 million of integration spend split roughly 35% in direct and operating costs and 65% in CapEx. Both components of the integration spend are higher year-over-year and will begin to decline, particularly CapEx in 2023. Turning to Slide 13. At Q1, including VTR, which is held as an asset for sale on our balance sheet, we had $9.2 billion of total debt, $0.9 billion of cash, and $1.2 billion of availability under our revolving credit lines. We had gross leverage of 5.1x and net leverage of 4.6x. Our weighted average life is just under 6 years, and our fully swapped borrowing rate is under 6% as well. In the current FX and interest rate environment, our hedges are significantly valuable and in the money. Our debt maturity is largely termed out with only two maturities of note before 2027, our term loans in Costa Rica and our LLA convert, both of which are due in 2024. As we highlighted on our year-end call, we accelerated our equity repurchases. In fact, we bought 5.4 million shares for $56 million in Q1, our largest quarterly repurchase to date. Since the quarter-end, we have continued repurchasing at a healthy clip. Moving to the final slide. 2022 is clearly a transition year for Liberty Latin America with significant focus on integrations in Puerto Rico and Costa Rica and completing the Panama and Chilean transactions. Especially in Puerto Rico, we will be turning the corner as we exit 2022 with the integration spend decreasing and synergies ramping in 2023 as we drop off the TSA with AT&T by the fall of next year. Besides our core fixed residential recurring revenue, we continue to drive enhancements in our mobile business across the Caribbean and Central America as highlighted by Balan today. These regions have always been reliant on prepaid mobile, but we are starting to move the needle on postpaid adoption. It is very important to us to change the status quo and enhance the reliability and sustainability of the mobile revenue stream. Investing in our network remains a key strategic goal. We are shrinking our legacy copper footprint in our incumbent telco businesses, upgrading and expanding our fiber footprint across our largest operating businesses, and adding mobile capacity, all within a disciplined approach to capital spend. Besides CapEx and M&A, we are also investing in our business through our buyback program and believe it's a unique opportunity at today's prices given our medium-term growth and free cash flow outlook. With that, operator, if you can open up for questions.

Your first question comes from Mathieu Robilliard with Barclays.

Yes. I had a question about Chile and some maybe read across to other geographies. So your business in Chile, the cable business historically, as I understand it was a highly premium product, great content, great service and correspondingly very good ARPU levels. And obviously, over the past few years, things have changed. And I understand the pandemic didn't help, but I was trying to understand if part of the change was explained by the fact that maybe the plans weren't as competitive as one could have thought compared to fiber, which has been developing in Chile. So that was the first part of the question. But the second part was, is there any other geographies where you feel that maybe there could be increased competition from fiber-based competition and where you are exposed through a cable network that may not be as robust as a fiber product.

That's a great question and one we've been considering. We've analyzed it quite thoroughly. In Chile, we've experienced significant growth in a four-player market. Two of those competitors have long been fiber providers, and we consistently outperformed them. However, the landscape changed when two additional competitors entered the market, expanding it to six players, and now it's even a seven-player market. In a seven-player market, there's often a lot of unused capacity, as many companies have built fiber or infrastructure that are trying to maximize their networks. The contribution margin for that infrastructure is quite favorable, regardless of the pricing. The issue we face in Chile is not really about the technology; our product offers 500 megabits on broadband, and our video offering is top-notch, including HBO in our basic package and popular programs like CDF for football. The main challenge lies in pricing. In March, we tested a lower pricing strategy, reducing it to the third lowest in the market, not even the lowest. This resulted in gaining about 100,000 RGUs in just one month, marking our best month ever, and most of that growth was from our HFC network. Therefore, we believe the focus should be on pricing, which is why we're enthusiastic about our transaction with Claro. We see consolidation as necessary in the market for structural improvement, and the synergies from this merger will support our future growth. Both Claro and we share the same vision that this could lead to further consolidation in the market. Regarding your second question about whether this situation could occur elsewhere, we’ve assessed our other markets and do not see any that might shift to a six or seven-player landscape on the fixed side. We've also learned valuable lessons to preemptively address the challenges before they escalate in any region. For instance, Costa Rica and Puerto Rico have populations around four million, with Costa Rica slightly higher and Puerto Rico around three to four million. These smaller locations are unlikely to invite six or seven competitors, giving us confidence. We are now aggressively upgrading to fiber. In Panama, we plan to eliminate all twisted-pair copper lines, making it primarily fiber-based along with HFC. In Costa Rica, all our developments are strictly fiber. In Puerto Rico, the Uniendo funding we received is facilitating our network upgrade to fiber. Thus, we feel optimistic about the future and believe that the situation in Chile will not be repeated elsewhere. I hope that clarifies things.

Your next question comes from the line of Soomit Datta with New Street Research.

Yes. One question to start with, please. Just on postpaid wireless, you've featured that quite heavily in the earnings slide. I was just curious what sort of uplift are you seeing as ARPU when you're migrating from prepaid to postpaid? You've got different markets with different levels of postpaid penetration; Puerto Rico's high, Caribbean is low. When might we see some of those penetration numbers where they're lower moving up? And finally, is 5G relevant on any sort of near-term horizon in any of these markets? That would be the first question, please.

Sure, Soomit. We are actually quite excited about our postpaid growth for a couple of reasons. As you pointed out, the ARPU is higher, and it's quite a bit higher than prepaid, but more importantly, it's very predictable and stable cash flow. And finally, actually, my general counsel reminded me as well earlier this week that in addition to that, we get better visibility of our customers with postpaid over the prepaid cards. So we get better visibility of our customers. It's more stable. It's predictably cash flow, and it is a higher ARPU. Having said that, this region is mostly a prepaid region. It has taken us a few years to really push for this migration to postpaid. A lot of our managers here have a deep experience in FMC, and we've used that as a way to get people to move, but we've also incentivized and played with our prepaid pricing to make it more attractive for someone who tops up every month to move to the postpaid products. We are actually quite happy with that migration, but we're in the early days. I suspect there is a cap to that. We'll probably never get to like in the Western countries of 70%, 80% postpaid; it will certainly be south of 50%. I'm not really sure where the number ends, but we're hoping if we can get to even 30%, 40% postpaid, we'd be sitting pretty good. On 5G, as you know, we've launched 5G in Puerto Rico, and we are doing pretty well there. Handsets are readily available. It is a product that we have that is, I think, best-in-class on the island. As I look at the rest of our region, it's a tail wagging the dog, I guess. I'm not too terribly sure if we would be investing a lot in 5G; handsets are not readily available; it is expensive. If you recall when we first started this journey, we really needed people to get to 4G. Even then, 4G penetration is still not anywhere close to Western countries. So we're still focusing a lot on capacity and pushing more 4G handsets out there. We may do a few 5G trials in some cities, in metro areas, but we don't see any of our other operations where we'll go countrywide, 5G. We'll wait until the handsets are available; it would not be good capital spend to be ahead of the game on this one.

Okay. That's great. Just a quick follow-up then on wireless still, but just looking at Panama. Interested to get your thoughts on the announcement of Digicel looking to exit the market. I suppose one thing we're curious about is that we're still seeing subscriber losses there, still seeing revenues down a little bit in Panama. I think there was a reference to maybe the sort of external environment. Do you mind putting all of that into context? That would be really helpful.

Sure. I'll ask Guillermo, our General Manager for that region, to be ready to answer the second question as well. With our announcement of the Claro acquisition, we've transitioned from a four-player market to a three-player market, which we believe was necessary in Panama. We feel that this change is appropriate for that market. Regarding Digicel, we prefer not to comment on their current situation and options. I'll have Guillermo address the prepaid to postpaid revenue on the mobile side.

Yes. Thank you, Balan. In Panama, we see a slight decline in the total revenue mix when you compare Q1 last year with Q1 this year. That's a tale of two stories. Number one, the prepaid revenue has been somewhat impacted by very intense competition that is somewhat affecting the recharge activity. This is why we see when we compare year-to-year. On the flip side, we see very strong postpaid additions to your earlier question. Our strategy has been focused on getting stronger in postpaid to get all the benefits that Balan depicted, which is a more stable revenue stream. I would add one more additional value of the postpaid migration, which is the ability to do FMC, the ability to cross-sell a known customer on the postpaid side with fixed services as well. That strategy is pushing in Panama with very good results. Having said all that, we do see over the last few months stabilization of the prepaid activity measured by the amount of cannibalization that occurs in the market once all competitors are going very aggressively and self-cannibalizing the recharge activity.

That's great. And maybe just a very quick follow-up just on Digicel. I mean, if they've got assets for sale, I'm not sure how it all works, but if they do exit spectrum and towers, I guess, and maybe some infrastructure. Is that sort of something you'd be interested in looking at?

Soomit, at this point, we're just focused on closing our transaction with Claro, and we really haven't paid much attention to what's going on with Digicel. At some point in the future, we will look at that, but not right now.

Your next question comes from Matthew Harrigan with Benchmark.

I was curious if you had any thoughts on the video evolution in your markets, given everything that's happening in the U.S. with all IP Comcast and Charter. And then I think initially and more in Mexico and the U.S., Televisa launching VIX on an AVOD as well as an SVOD basis. What are the implications for your broadband business as well? And I think at one point, you even talked about having more flexibility for a more modest income demographic off an IP video offering, if I'm not mistaken.

Thanks, Matt. On the video front, interestingly enough, that announcement by Charter and Comcast and the Flexbox. We've actually launched a similar product 1.5 years ago. We did not use the RDK platform, which is what Comcast and Charter are doing, which makes absolute sense for them. For us, what we did was we went down the Android path, and we launched this now in Puerto Rico, Costa Rica, and Panama, and we'll soon launch this in a couple of the other islands, Trinidad, Jamaica. It's an all-IP box, very similar to the Flexbox. It doesn't take up any bandwidth. We feel really good about it, and the price has come down quite a bit as well. We've also been experimenting with putting that same, because it's all IP, on other devices like smart TVs and streaming dongles. Now we've also looked recently at our video strategy, and we've concluded that while the video product will not be a huge growth driver for us, it is necessary for us to continue to be a leader in broadband. So you sell your broadband product, you ship out this inexpensive IP box that goes with it, whether it’s a box that we ship ourselves or they can bring a fire stick to it. We have a video-associated product together with that broadband, and it seems to resonate with a lot of our customers, not all of our customers. We still sell a lot of standalone broadband products, but there are subsets of customers that would buy broadband from us only if we have the video product. We’re innovating on those technologies, and we feel pretty good about the path that we are.

And I guess the legitimate follow-up on that. What are your thoughts on AVOD versus SVOD in Latin America? I mean, Netflix actually was very sluggish in Lat Am last quarter, and Televisa is obviously very excited about their ViX product. Do you think it’s going to evolve to much more of an AVOD-centric market than in the U.S.? Or do you think the jury is still out?

I’ll share my personal opinion. At least in our region, AVOD is not an easy product to develop. That's why a lot of the big West Coast companies have stuck to the SVOD story. I think it’s similar in our region for sure. For companies that are in the advertising business, they’ve lived that, know it really well. I think they can make a go at it. But certainly, for businesses like ours, we’re perfectly happy with an SVOD product associated with a device. If somebody wants to add an AVOD to it, the way we develop our Android platform, we can put almost anybody on it, even an AVOD service. Sure. Thanks, Matt. Thank you.

That will conclude today's question-and-answer session. I'd like to hand back to Balan Nair for any additional or closing remarks.

Thank you. I'd say, first quarter, we feel we started off well, not as great as previous first quarters, but as we've kind of explained, I think if you go through our numbers, you can see the puts and takes. The underlying business is robust. It's still good. It's strong. We expect the rest of the year to continue to be strong. We continue to monitor Chile. Chile is unique. I want to reiterate, the rationale for us to do what we did in Chile, what we announced last year between Claro and us. For both our companies, it continues to make sense, actually, even more sense. Consolidation in Chile will make things better. We still remain bullish in that market, even though if you look at it now, you might scratch your head. Over the next couple of years, with consolidation and rationality in that market, things will improve. If you subtract Chile off it and look at our underlying business, I think we've got a good thing going here. Thank you, everybody, for your support, and we'll talk to you again next quarter.

Ladies and gentlemen, this concludes Liberty Latin America's First Quarter 2022 Investor Call. A reminder, a replay of the call will be available in the Investor Relations section of Liberty Latin America's website at www.lla.com. There, you can also find a copy of today's presentation materials. Thank you for your participation. You may now disconnect.