Earnings Call Transcript - LILA Q1 2023

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. Today's call is being recorded. I'll now turn the call over to Johanna Escobar, General Manager and Chief Executive Officer of Liberty Costa Rica.

Johanna Escobar, CEO

Good morning, and welcome to Liberty Latin America's First Quarter 2023 Investor Call. Today's formal presentation materials can be found under the Investors section of Liberty Latin America's website at www.lla.com. Following today's formal presentation, instructions will be given for the question-and-answer session. 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 the future growth prospects and other information and statements that are not historical facts. 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 obligations to update any forward-looking statements or information to reflect any change in 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 Investors sections of our website. I would now like to turn the call over to our CEO, Mr. Balan Nair.

Balan Nair, CEO

Thank you, Johanna, 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 by reporting segment. 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'm joined by my executive team from across the region, and I will invite them to contribute 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. We continue to drive organic volume growth in Q1, adding 65,000 subscribers across high-speed fixed Internet and mobile postpaid. Internet additions were particularly strong in the quarter, led by improved performance in C&W Caribbean. The results reflect net additions to all of our reporting segments, providing a solid operational start to the year. The group reported adjusted OIBDA of $407 million in the quarter. This represented a rebased growth rate of 4%, which was in line with our expectations and keeps us on track to achieve our financial goals for the year. Moving to our integration activities in Puerto Rico, Panama and Costa Rica. 2023 is a key year which will set us up to deliver significant value for stakeholders. Of note in the quarter, we began to migrate prepaid customers to our newly built mobile platform in Puerto Rico. We are also moving quickly to consolidate our operations in Panama following the lifting of certain restrictions earlier this year. Finally, I'm pleased to announce that in line with our previously stated capital allocation strategy, the company has authorized an additional up to $200 million for share buybacks. We continue to hold the view that the most compelling capital returns are in our own company. Turning to Slide 5. I'll begin our operating review with C&W Caribbean. I'm pleased to say that the economies in the regions are continuing to recover from the impact of COVID-19, and this is reflected in our strong performance. On the left of the slide, we present our Internet and mobile postpaid additions. Internet additions continued to build in the first quarter, as we added 11,000 RGUs, representing a significantly improved performance compared to the prior year period. Jamaica drove this improvement following the successful launch of our and FMC propositions. Investments in our networks have also driven increased market penetration, more than 80% of homes passed at C&W Caribbean are now Giga-Ready, meaning that they are capable of delivering broadband speeds of 1 gigabit per second or more. In mobile, we delivered another solid performance with 20,000 postpaid subscriber additions, 33% higher than in the prior year quarter. We continue to drive penetration of our FMC products and have exciting plans through 2023. In connection with our enhanced services and offers, we have implemented nominal fixed service and prepaid mobile price increases in select markets to reflect the added value being delivered to our customers. In most cases, these rate adjustments followed several years without any increase. Moving to the center of the slide and our revenue by product. The pie chart here depicts the well-diversified nature of C&W Caribbean's revenue, with B2B and consumer fixed the largest elements, followed by consumer mobile. We saw strong growth in mobile revenue during the quarter driven by subscriber additions over the past 12 months. However, this was more than offset by a decline in B2B revenue due to a strategic change that Chris will cover in his remarks. Without this, revenue would have grown by 2% in the quarter on a rebased basis. Moving to Slide 6 in our C&W Panama segment. Starting on the left of the slide, Internet RGU additions in Panama showed healthy growth sequentially and consistent performance year-over-year. We launched DOCSIS 3.1 and combined with our extensive 5G to home network, we offer speeds of 1 gigabit per second to more than 85% of homes passed. We expect that the significant investments will underpin continued growth. In mobile, we remain focused on postpaid and maintain a stable subscriber base in the quarter. In prepaid, we are targeting improved ARPUs through the mix of packages we offer and a focus on higher value customers. We think ARPU increases in prepaid are long overdue in our markets. Moving to the center of the slide and our revenue by product. In Panama, our largest products by revenue are mobile and B2B. Fixed is the smallest product area, but one of the fastest growing. In Q1, all our products in Panama showed growth, with fixed and B2B performing particularly strong as they grew 6% and 7%, respectively. B2B typically starts the year slowly after the seasonal peak in Q4. However, growth in mobile services and customer contract rents in the period drove a positive year-over-year result. Despite the decline in prepaid customers, mobile revenue was also higher year-over-year. Finally, to our integration update outlined in the lower right of the slide, we remain focused on integrating the Claro Panama operations. Following the lifting of restrictions in January, we have made good initial progress as we work to combine customer-facing aspects of the business such as stores, brands and propositions. We are advancing the integration of our back-office functions, and we are consolidating infrastructure and benefiting from associated savings, expanded coverage and capacity. Next to Slide 7, and Liberty Puerto Rico, our largest single market. Starting on the left of the slide, our Internet net additions were in line with the prior year period. We continue to invest in the expansion and upgrade of our networks in Puerto Rico and anticipate that this, together with our converged propositions, will drive sustained growth. We implemented price increases earlier this year and seen minimal impact on churn levels, as our network quality and propositions continue to resonate with customers. Turning to mobile, we have a postpaid base steady in the quarter continuing to record low churn levels at around 1% a month. In prepaid, we lost subscribers, which was impacted by constraints we have until the integration is complete. Heavy subsidies to attract new customers and to retain existing customers have led to lower ARPUs in the market. We may look at these price increases to help offset this impact. Moving to the center of the slide. Consumer mobiles are our largest product in Puerto Rico, with just under 50% of our revenue. This is followed by our fixed business representing one-third of the total and B2B at 15%. Fixed revenue grew in the quarter. However, mobile was lower as postpaid subscriber growth was offset by ARPU and prepaid subscriber declines. B2B is a growth opportunity for us given our relatively underweight market share position. To differentiate our propositions, we are introducing exciting new products, leveraging our leading network capabilities. As an example, we recently launched our Always On connectivity solution where the customer's network will run on fixed infrastructure by default. However, if that stops working due to, for example, a power outage, our modem will seamlessly switch to the mobile network to keep the customer connected. Finally, there are integration updates on the lower right of the slide. Integration is a significant focus for us in Puerto Rico, and we are now entering the latter stages of the process. Of note, our team is beginning to bring existing and new prepaid customers onto our networks and platform. A key milestone will be when we start to migrate postpaid customers in the fall. Turning to Slide 8 and Liberty, Costa Rica. Starting on the left of the slide, our Internet subscriber base remained stable in the quarter, with additions in line sequentially. In mobile, our market-leading business continued to grow, adding 13,000 postpaid subscribers in the quarter. The launch of Liberty Total FMC bundle in March is expected to drive adds and improved churn rates across Internet and mobile. Moving to the center of the slide. Consumer Mobile is our largest product, with close to 60% share of revenue. This is followed by our Consumer Fixed business, representing just under one-third and then a small but fast-growing B2B operations. Mobile and B2B drove revenue growth in Costa Rica year-over-year. We see potential for sustained growth in our B2B operations, as we are currently underweight in this area and can leverage products, propositions and capabilities from other parts of LLA to differentiate our offering in Costa Rica. We also plan to take price increases in Fixed this quarter. We anticipate that the increased value of speed and better WiFi will make the price increase go smoothly. Finally, to our integration update on the lower right of the slide, we anticipate 2023 will be the final year of integration activities related to Telefonica Costa Rica acquisition. We are on track to deliver synergies as anticipated with a full run rate level from the end of the year. Finally, to Slide 9, and our C&W Network and LatAm segment. Starting with wholesale on the left-hand side, where we grew revenue by 4% in the quarter, running through the highlights. Our 80% of revenue and cash flow is denominated in U.S. dollars, making the business very stable and predictable. We have a unique mesh network across the region with multiple points of redundancy, including the lowest latency connectivity from Colombia to the U.S., enabling us to provide comprehensive connectivity solutions. We continue to increase our capabilities, recently moving to 400 gigabit wavelength technology for our U.S. terrestrial networks interconnecting Latin America with key U.S. data hubs. In the center of the slide, you can see that wholesale accounts for most of their revenue with an approximately 75% share. Although a smaller part of this reporting segment, our LatAm B2B business is one of the fastest-growing areas across our group, with revenue up 12% in Q1. On the right of the slide, we provide some more color on this area. The chart here shows two different major product groups within our LatAm B2B business. The largest element remains connectivity. However, the highest growth area is value-added and managed services, which include cloud-based data center solutions, disaster recovery as a service, and cybersecurity solutions, among others. We expect the value-added services area to continue its strong growth trajectory, representing a larger share of B2B revenue over time, as customers look to increase the sophistication of the IT platforms and products. With that, I'll pass you over to Chris Noyes, our Chief Financial Officer, who will talk you through our financial performance before we take your questions.

Christopher Noyes, CFO

Thanks, Balan. Before I begin, as a reminder, we deconsolidated our Chilean business at the start of Q4 2022, so our reported results in 2023 will not include the operating results of VTR. For Q1, we delivered consolidated revenue of $1.1 billion, reflecting a $59 million increase over Q1 2022, after excluding the $171 million of revenue generated by VTR in the prior year quarter. We produced modest rebased revenue growth of 1% in the quarter. Our operating segments of C&W Networks and LatAm, C&W Panama and Liberty Costa Rica were our strongest performers with mid-single-digit rebased revenue growth. With that being said, C&W Caribbean also had a good quarter, but as reported revenue was impacted by a business decision to discontinue our legacy noncore B2B voice transit arrangement in Q1, which accounted for about $10 million of quarterly revenue. Although this will impact our revenue comparable all year, it will not adversely impact our adjusted OIBDA or FCF, as this arrangement was currently anticipated to be slightly loss-making. Next, moving to adjusted OIBDA. We posted $407 million in Q1, resulting in a $17 million reported increase over Q1 2022, excluding the $47 million generated by VTR in the prior year quarter. Our rebased growth of 4% was driven largely by Costa Rica, Panama, and C&W Caribbean, as we posted our best rebased growth result in six quarters. For 2023, we are targeting mid- to high single-digit rebased adjusted OIBDA growth for LLA. However, we expect growth will be somewhat muted in Q2 due in part to our comparative in Puerto Rico. And we expect the lion's share of our adjusted OIBDA growth to be significantly weighted to H2. Slide 12 highlights our key segment results. Beginning on the left with C&W Caribbean, we reported $354 million of revenue in Q1, reflecting a 1% rebased decline and $140 million of adjusted OIBDA, resulting in 8% rebased growth. The discontinuance of the aforementioned transit arrangement drove our rebased top line decline, while the remainder of the business reported rebased revenue growth. On this basis, our primary driver of growth was through residential mobile, consisting of service revenue expansion led by our postpaid efforts and higher inbound roaming. Our strong adjusted OIBDA rebased growth was largely fueled by Jamaica and improved operating leverage across many of our islands. We finished the quarter with a margin of nearly 40%, up significantly as compared to the prior year quarter. Moving to Cable & Wireless Panama, CWP contributed $165 million of revenue and $44 million of adjusted OIBDA in Q1, reflecting 4% rebased revenue growth and 16% rebased adjusted OIBDA growth. As an aside, our results moved lower in Q1 from Q4 due in large part to the seasonally strong Q4 we experienced in B2B and which is typical for us. Rebased top line growth was delivered by all three business categories: residential fixed, residential mobile, and B2B, with our strongest year-over-year growth derived from B2B, which was driven by growth in mobile services and an increase in the volume of certain government-related projects and residential fixed, which was helped by over 50,000 RGUs added over the last year. Adjusted OIBDA grew double digits in Q1, which was our best quarterly result since 2021. This year-over-year expansion has been helped by our value capture activities from the Claro Panama integration. Turning to the middle column, C&W Networks and Latin America, we generated $109 million of revenue or 6% rebased growth and $64 million in adjusted OIBDA or 4% rebased growth. Rebased revenue growth within our subsea network was the result of higher lease capacity. LatAm B2B service revenue also expanded through higher connectivity and managed service revenues. We ended Q1 with an adjusted OIBDA margin of 59% for the quarter. Second, from the right, Liberty Puerto Rico, Q1 revenue was $366 million, reflecting flat year-over-year rebased growth and a decline of $8 million from Q4, which is due largely to higher equipment sales during the holiday period. Residential fixed garnered modest growth on the back of volume gains during 2022, and residential mobile decreased year-over-year, as higher handset sales were not able to offset lower ARPU and a decline in prepaid and reseller mobile subscribers. Sequentially, our mobile service revenue and ARPU were stable. Adjusted OIBDA increased substantially from Q4, as we delivered $134 million in Q1, which reflected a rebased decline of 4% as compared to Q1 2022. Several factors contributed to this year-over-year decline, including a lower net contribution from roaming and higher operating costs. These were partly offset by lower direct costs following credits received in Q1 2023 related to historical equipment purchases. Wrapping up with Costa Rica on the far right, we delivered Q1 revenue of $129 million and adjusted OIBDA of $45 million, reflecting strong rebased revenue growth of 4% and rebased adjusted OIBDA growth of 28%. Revenue growth was driven to a large extent by our mobile operations as we have added over 80,000 postpaid subscribers over the last 12 months. Supported in part by our revenue growth, adjusted OIBDA expanded significantly year-over-year and benefited from lower integration spend and the year-over-year strengthening of the Costa Rica colon to the U.S. dollar, as we have certain costs in areas like programming that are denominated in U.S. dollars. Slide 13 highlights our results for P&E additions and adjusted FCF and reiterates our 2023 outlook on these metrics. For the first quarter, we incurred $145 million of P&E additions or 13% of revenue. We built and/or upgraded 90,000 homes in the quarter led by activity in the Caribbean and Panama. During the quarter, we incurred about $9 million of integration CapEx largely in Puerto Rico and expect integration CapEx to remain elevated throughout the year. Finally, we remain on track to deliver our 2023 target of 16% of revenue. Hence, we will see ramping of our spend over the next three quarters. In terms of adjusted free cash flow, we posted negative $50 million in the quarter, similar to our reported level of negative $56 million of adjusted FCF in Q1 2022. As a reminder, the first quarter tends to have heavier trade working capital requirements, and our interest expense tends to be higher in Q1 and Q3 due to the timing of payments. We expect our adjusted FCF before partner distributions to be substantially weighted to H2, especially Q4, and we remain on track to deliver our $300 million target. In terms of partner distributions, we are expecting about $40 million to be paid out to our partners in Q2 in Panama and Bahamas, with a nearly similar amount upstream to us at LLA to then be redeployed. Turning to Slide 14. At the end of Q1, on a consolidated basis, we had $8 billion of total debt, $700 million of cash, and $1 billion of availability under our revolving credit lines. We had gross leverage of 4.9x and net leverage of 4.5x, which was slightly improved versus Q4 2022. And our weighted average life was 5 years, and our fully swapped borrowing rate was just under 6%. During Q1, and as we briefly highlighted on the Q4 call, we refinanced our Costa Rican 2024 term loans with $450 million of new debt maturing in 2031. This credit silo is currently levered at 2.5x. This transaction, combined with a $25 million purchase of our convertible bonds due in 2024 that we made in the quarter, results in 95% of our debt due in 2027 or later. In terms of our stock repurchase activity, we bought $25 million in Q1. And at March 31, we had $32 million remaining under our authorization. As a result of continued business performance tracking to expectations, in particular, cash generation and the attractive level of our stock, our Board just authorized an additional $200 million through December 31, 2025. Moving to the final slide. To recap, we maintain solid broadband and postpaid subscriber volumes in Q1 as well as continued our positive B2B trajectory. Our volume growth over the last year has enabled us to maintain top-line performance, even in light of softer global macro trends and some ARPU compression. As we begin to selectively start using price increases more strategically, together with an increasing focus on FMC bundles and enhanced customer value propositions, these activities should help support our revenue ambitions. As highlighted on previous calls, integration execution is a primary focus for both our corporate and local operating teams. The next three quarters are critical for us, as we seek to deliver our value capture goals and be less reliant on the sellers of our acquired businesses in Puerto Rico, Costa Rica, and Panama. Turning to capital allocation. We channeled $50 million into equity in Q1 through both our buyback activity and retirement of a portion of our convertible bond. We will remain disciplined in our repurchases. But given our operating goals and our low stock price, we believe this is a highly accretive window for us to be opportunistic, and our increased buyback authorization supports that activity. And finally, we remain confident in delivering on our adjusted OIBDA, CapEx and free cash flow targets for 2023.

Operator, Operator

Our first question today comes from Jeffrey Wlodarczak from Pivotal Research Group.

Jeffrey Wlodarczak, Analyst

I had a couple on Puerto Rico. I was wondering how the TSA migration process is going initially. Is there a disruption for customers from that process? And do we assume that most of that $30 million in integration costs this year is related to the fact that you're operating under TSA and then you're building out your own network? And so that's what goes away next year. And then I have a follow-up.

Balan Nair, CEO

Jeff, thanks for the question, and I'll ask Naji to jump in here in a second as well. The TSA migration has started, and we started it on the prepaid side of our business, and it's going pretty well. There are disruptions to customers, however, in both the prepaid and postpaid because there are some handsets that just won't operate on our new network and some of the really older handsets with older operating systems. So we are doing one or two things. We are having customers come into our stores and we update the software for them or we are offering also opportunities for them to change out handsets. So that's really one of the big frictions in the migration. But the systems, we have it up. The network is functioning. So the network is the same for prepaid and postpaid, so the network is already up and running. And the work is progressing really well. On the integration costs, yes, some of the costs do go away next year. There's cost that we paid to AT&T as well as costs as we start paying for our licenses already on our new stack. And those are the overlaps this year that can anticipate next year, part of it.

Naji Khoury, Executive

Yes. I would just add that in terms of our customer migration, for the most of them, the majority will be completely seamless. And for the very few that you had mentioned will require some sort of intervention. But those that is a very low percentage. And the plan is to start already some prepaid and postpaid will start shortly, probably in H2.

Jeffrey Wlodarczak, Analyst

Got it. Are there any signs of fixed wireless access emerging in Puerto Rico or any of your other markets? As a wireless operator, is fixed wireless access potentially interesting for you as a way to expand your reach or as part of a fixed mobile offering?

Balan Nair, CEO

FWA hasn't gained traction in our markets for several reasons. Firstly, our fixed networks are quite strong, as are our competitors' networks. In most areas, we are positioned as the fiber or HSC provider, and our competitors have similar offerings. This makes it challenging for FWA to succeed. Unlike in the United States, we have extensive coverage, leaving little opportunity for anyone to capitalize on FWA. Although we've looked into FWA in certain situations, it consumes a significant amount of spectrum. Our current priority for spectrum is focused on our mobility services. There may be some niche opportunities for FWA that could work for us due to our scale, but if your business is solely FWA, it will be quite challenging.

Operator, Operator

The next question comes from Cesar Medina from Morgan Stanley.

Cesar Medina, Analyst

I had two questions. The first one is you had a very positive surprise on the margins for Costa Rica, certainly way ahead of our expectations. How sustainable these new level of margins is? And then second, to the extent that you can provide the high-level color, any comments on your joint venture in Chile and the overall state of competition? How is competition in Chile evolving after the joint venture?

Balan Nair, CEO

Sure. Let me address the question about Chile first and then move on to Costa Rica, inviting my colleague Guillermo to chime in on the Costa Rica discussion. In Chile, we have a solid partnership there, and we've gained valuable insights from them, as they have from us. Looking at the situation in Chile, there are several positive developments. We secured the 5G spectrum, and the transfer of our 3.5 gig was a significant achievement for us. There are promising opportunities in mobile, and we see potential for growth in mobile pricing, especially as our penetration is relatively low. We expect stability in the fixed business and fixed Average Revenue Per User. Overall, we feel optimistic, although there are still some structural challenges in Chile. The justification for our transaction remains stronger than ever, and we are already seeing the benefits of the synergies. Our local management team has performed excellently. In summary, while the full impact of the synergies is still to come, we believe it will ultimately be a favorable outcome for Chile. Now, regarding Costa Rica, a portion of the margin improvement is linked to synergies, which, as I mentioned earlier, will reach their conclusion this year, meaning we won't see that level of improvement again next year. I'll turn it over to Guillermo for any additional insights he may have.

Guillermo Ponce, Executive

Yes. Thank you, Balan, and thank you, Cesar. As you pointed out, we're still being benefited from synergies, and we will continue to do so throughout the year. Also, the exchange rate is helping in the comparison with last year. But the third element is that we continue to grow. And as you pointed out in the beginning of the presentation, we just launched our FMC proposition, and we're very bullish about it. And the growth prospects, both in fixed and mobile, continue to push the growth in the market in which we have demonstrated to have leadership both in fixed and mobile. So we're optimistic about it.

Balan Nair, CEO

Thanks, Guillermo.

Unidentified Company Representative, Executive

I'll add, Cesar, I mean I think the margin was quite good in the quarter. And certainly, our expectation would be to continue to improve on that as we go out.

Operator, Operator

The next question comes from Soomit Datta from New Street Research.

Soomit Datta, Analyst

Yes, a couple of questions, if that's okay, please. First of all, on pricing, I think you talked about lifting prices in Costa Rica in Q1, if I heard that correctly, and there's talk of strategic price lifts elsewhere. I'm not sure if that includes Puerto Rico. But I guess, just stepping back a little bit, it feels like maybe you're more willing to entertain price increases than in the past. I just wondered if you kind of concur with that view. And if so, I wonder what has kind of changed in terms of dynamics on the ground, and that's the first question. I do have a quick follow-up, if that's okay.

Balan Nair, CEO

This year, we are looking to implement modest price increases as we haven't adjusted prices in several years. We want to gauge the market's response while also preparing our commercial teams for potential future price adjustments. Our primary focus remains on volume growth, which we achieve alongside price adjustments where possible. In Puerto Rico, we've implemented a minor increase on the fixed side, and there's a possibility for adjustments in postpaid mobile as well. The fixed price increase was quite subtle and went largely unnoticed in the market. In Costa Rica, we will also apply a minimal price increase this quarter, along with similar adjustments in our Cable & Wireless business and Panama. We are strategically testing the market and refining our processes for price increases. We believe that the market is ready, especially since we haven't raised prices in three years. Customers recognize the quality improvements we've made, and while no one enjoys price increases, they are more acceptable when accompanied by enhancements in service. We've consistently improved speed and product offerings, making a small price increase more palatable for our customers.

Soomit Datta, Analyst

It's good to hear. Regarding Puerto Rico's wireless sector, it seems that service revenues for wireless have stabilized in the first quarter. There's some uncertainty related to accounting issues, but do you believe you've weathered the toughest pricing pressures on wireless in Puerto Rico? You mentioned potential price increases there, which might also be beneficial.

Balan Nair, CEO

Yes, I think so. In Puerto Rico, some of the price decline is due to accounting because we have an amortization of the handsets factored into the average revenue per user. While this does not reflect the actual price that our customers see, the ARPU reported includes adjustments to account for a portion of the subsidized devices. The subsidized devices caught us off guard as we attempted to match everyone during the holidays last year and into January of this year on handset subsidies for both retention and acquisition, which was quite successful. However, this resulted in significant expenses for devices that contributed to the ARPU. My colleague in Puerto Rico, Naji, has started to reduce some of the subsidies this last quarter, which will lead to more stability in the reported ARPU. Additionally, we are considering a price increase on the postpaid side, similar to the actions taken by mainland wireless operators.

Operator, Operator

Our next question comes from Kevin Roe from Roe Equity Research.

Kevin Roe, Analyst

Could you provide an update on the competitive landscape in Cable & Wireless Caribbean regarding postpaid and residential broadband? Additionally, how do you anticipate macroeconomic pressures might affect that business in the coming months and quarters?

Balan Nair, CEO

Sure. And I'll ask my colleague, Inge, to jump in here as well. We feel really positive about our Caribbean business for a few reasons. One, a lot of the economy is coming back. By the way, it's not coming back to where it was pre-COVID. So you see cruise ships coming back, but it's still a fraction of where it was in 2019. Hotels are back, but occupancy rates are still in the 60% range as opposed to the 80% range pre-COVID. So there's still upside yet to come as the economy fully recovers. Now Inge and her team, together with a lot of my other colleagues in this business have launched a couple of things. One, we've been really focused since COVID on taking cost out, and you'll see the margin expansion here, one, both on the COGS side. As some of you have noticed, COGS has improved. There's some really good work being done by teams, both on the programming side, on the commercial side. That took quite a bit of cost out. And secondly, our commercial teams have also launched some very innovative FMC products that have moved some of our prepaid customers up to postpaid. So I think in many cases, it's a duopoly in a lot of these islands. And our competitor there, Digicel, is quite, I think, motivated like us to create value. And when you have two competitors that are looking to create value and providing good service to their customers, I think everybody wins. And that's what we're seeing right now in the post-COVID world. And Inge is my colleague that runs the business, and I'll ask her to jump in here to provide a bit more color, Inge?

Inge Smidts, Executive

Thank you, Balan. Regarding the economy, we observe that while some areas are still not fully recovering, there is potential for further improvement. We are seeing the return of cruise ships and tourists, which, although not yet at pre-COVID levels, shows significant progress. The positive changes are evident when you visit these areas. From a broader perspective, we anticipate continued improvement. In terms of competition, as Balan noted, we have a strong competitor in the Caribbean. Our strategy focuses on two key areas: optimizing our spending to maximize returns and enhancing all aspects of our business, including mobile and fixed services, particularly through FMC and B2B. We have made substantial efforts in the B2B sector, especially targeting small and medium-sized businesses, and our large enterprise segment is also performing well. Overall, by offering the right propositions and maintaining an efficient cost structure, we believe we are well-positioned for the upcoming quarters.

Balan Nair, CEO

Thank you, Inge. That's helpful.

Kevin Roe, Analyst

Yes, that's super helpful. Just a quick follow-up, if I may. Balan, broadly, looking across your footprint, are there any new regulatory developments or risks we should be monitoring?

Balan Nair, CEO

We are always alert to regulatory issues. Our strong team, led by John Winter, my General Counsel, keeps track of various factors that could impact us. Right now, we are particularly focused on 5G spectrum availability, the methods governments will use to distribute it, and the local attitudes towards it. Most governments in the regions where we operate are business-friendly, as they must respond to their voters while also supporting business. My leadership team has invested significant time engaging with local politicians, and we've built strong and transparent relationships without asking for favors. We want them to recognize our commitment to the communities and our role as an economic growth engine. Overall, while we stay vigilant on regulatory matters, there is nothing on the horizon that concerns me.

Operator, Operator

Our final question today comes from Matthew Harrigan from Benchmark.

Matthew Harrigan, Analyst

Balan, could you share your thoughts on the structural dynamics of the Latin video market? I know you've explored the situation with your in-house streaming product related to any CPE costs. This could be appealing in specific markets and particularly among middle-income consumers. It also seems that Vix, or Televisa Univision, primarily targets the Hispanic audiences in the U.S. and Mexico. Currently, it appears that Netflix might be struggling or experiencing some stagnation. I'm interested in your insights regarding consumer preferences and how this is impacting your business, aside from just increasing demand for broadband and higher-speed services.

Balan Nair, CEO

Matt, I think the connection is a bit unclear, so I'll respond to the question I understood, and you can confirm if it's the one you meant. Regarding our video services, there are two aspects to consider. Firstly, we provide video services in Puerto Rico and Costa Rica, acting as the cable company in those areas. Until recently, this has been a stable situation, especially as some competitors have pulled back from the video sector and are no longer investing, resulting in a relatively stable video business for us, unlike in the U.S., where we see significant decreases in video subscribers. We have made two key investments in video. One is our IPTV set-top box, Hub TV, which is being rolled out everywhere. Since it’s an IP box, we can stream content to it and any other compatible devices. However, I want to emphasize that this is not a growth product for us. My management team and I are focusing on managing the video business carefully to conserve cash while generating some revenue without expecting growth. Our growth focus is directed towards postpaid services, fixed broadband, and our B2B sector. Video is a stable product for us, and I believe that our investment in Hub TV will likely be our last major move in video. We will maintain that stability and concentrate on the products that our consumers currently demand.

Matthew Harrigan, Analyst

And then very quickly, is the exploration of monetizing subsea network pretty much completely off the table or somewhat off the table in this macro environment?

Balan Nair, CEO

As I mentioned in the last quarter, we've appointed Ray Collins as the General Manager of that business. Ray has a strong background in M&A and also oversees my lead BizDev executive. We're always attentive to this business. The process we initiated last year concluded without results due to the state of the credit markets. Currently, this is a highly cash-generative business. When evaluating it, people often focus on EBITDA multiples, but that's not the right approach; it should be viewed as a multiple of free cash flow. From a yield perspective, considering free cash flow, the EBITDA multiples for this business are actually quite favorable. If we see a transaction that makes sense given current credit conditions, expectations on multiples may vary. However, Ray remains vigilant about opportunities. If something appealing arises, we will pursue it. Our management team is adept at evaluating these situations. If we don't find an opportunity that fits, this business continues to generate significant free cash flow, which we value. We are also exploring further investment options, and you can expect updates from me in the coming quarters as we look into expanding new routes and markets.

Operator, Operator

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

Balan Nair, CEO

Thank you, operator, and thanks, everybody, for taking the time on this call. I must say I feel really good about our first quarter. And first quarter usually sets the trend for the rest of the year, and this is coming in to our expectations. If you had a chance to look at my internal budgets, you will be equally pleased as I am with our first quarter performance. So I thank you all for your support, and we've got lots of work to do here in LLA, and we will continue to work really hard for you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes Liberty Latin America's first quarter 2023 investor call. As 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. You may now disconnect your lines.