Earnings Call Transcript - TIGO Q2 2024

Operator, Operator

Hello everyone and welcome to our Second Quarter 2024 Results Call. This event is being recorded. Our speakers today will be our CEO Marcelo Benitez; our COO Maxime Lombardini, and our CFO Bart Vanhaeren. The slides for today's presentation are available on our website, along with the earnings release and our financial statements. Now please turn to slide two for the Safe Harbor disclosure. We will be making forward-looking statements which involve risks and uncertainties, and these could have a material impact on our results. On slide three, we defined the non-IFRS metrics that we will be referencing today throughout the presentation, and you can find reconciliation tables in the back of our earnings release, as well as on our website. With those disclaimers out of the way, let me turn the call over to our CEO, Marcelo Benitez. Marcelo?

Marcelo Benitez, CEO

Thanks, Michelle. And hello, everyone. Thanks for joining us to discuss the company's performance during the second quarter. This has been an outstanding quarter for us at Millicom. And before we begin, I want to express my heartfelt thanks to all the members of the TIGO team. We have strengthened TIGO’s market leadership and successfully implemented a more efficient platform to ensure the company's profitable growth for the years to come. Once again, a huge thank you. Now please turn to slide five for the highlights of the second quarter. The key highlight this quarter is our equity free cash flow, which reached $268 million and consistent with our current capital allocation priorities, we used this cash flow to reduce our net debt. So our leverage ended the quarter at 2.7 times, thanks also to the organic EBITDA growth of almost 20%, which is coming from continued growth in our mobile and B2B business and from the very significant efficiencies that we have unlocked over the past year. During this quarter, we've also made significant progress on several strategic projects that have the potential to greatly improve EFCF and return on capital across the group for the years to come. Bart will give you an update on some of these projects toward the end of today's presentation. Now let's review each of these highlights in more detail, beginning with our mobile business on the next slide. For a second consecutive quarter, mobile service revenue grew 5% in Q2. This is just an acceleration, compared to growth of just over 2% that we experienced during 2023. And there are four key drivers behind our stronger mobile growth this year. First, our network, we have invested in all our operations to enhance our mobile network capacity to support the growing demand for mobile data. This has enabled us to increase our carefully planned price increases, beginning with prepaid. Second, postpaid. We have continued to actively migrate our best prepaid customers to postpaid. This explains about half of our postpaid net adds, which have been consistently strong over the past year. As you can see on the chart on the left. Third, convergence. We continue to promote our convergence offerings, and this drives lower churn, higher ARPU, and better customer lifetime value. Fourth and finally, improved market dynamics in Panama and Guatemala. As many of you know, the telecom sector requires ongoing investments to keep up with the growing demands of our consumers. This ongoing need makes it challenging for small players to remain competitive over time and has contributed to a global trend of consolidation into two or three leading players. Fully in line with this trend, you have seen our recent announcements in Colombia and Costa Rica. Please turn to the next slide to look at our home business. As most of you know, over the past year we have prioritized profitability and cash flow over growth in this business. We have continued to charge installation fees driving quality for gross ads, we have implemented price increases across all markets, and we have become more return-focused on our network expansion. These initiatives have led to strong ARPU improvement, and as you can see, the benefit to EBITDA and cash flow is very clear, especially in Colombia. Now we are ready to move from a defensive mode to an offensive strategy. With very significant upgrades on HFC networks, offer simplification and increased commercial aggressiveness in low penetrating nodes, and we have strengthened our distribution and strong push on FMC. All of these initiatives combined have had an immediate beneficial impact on customer experience and have allowed us to reduce churn by 60 basis points. And we are starting to see our net adds flag in positive territory in Q2, as you can see in the chart on the right. We expect this improving trend to continue in the second-half of this year. And if we can deliver on this, our home business should be in a position to grow service revenue again in 2025. Please turn to the next slide to look at B2B, which had another solid quarter. B2B service revenue grew almost 6% organically this quarter. Over the last 12 months, our B2B business generated $970 million in service revenue. A big part of this growth is coming from digital solutions that grew 30% in Q2, and is now a quarter of a million dollar business. The two large Panama projects have contributed meaningfully to our growth over the past year. And this will create a tougher comparison for us as we get to Q4. But we continue to see solid underlying trends, and we hope to win more of these kinds of large projects in the future. Our solid B2B performance is also coming from continued growth in the SME client segment, especially in mobile. Now let's review our performance in our three largest countries beginning with Colombia on the next slide. The key highlight in Colombia this quarter is EBITDA margin at 39.5%. This is a new record for us in Colombia. There are three key drivers to our improved margins in Colombia. First, as you know, we have taken a lot of cost out of our business over the past year. Second, and as I mentioned earlier, we also made commercial decisions that have significantly improved the profitability and cash flow profile of our home business. And Colombia is our largest market for home services. And third, we continue to grow and gain scale in our mobile business. And this incremental revenue growth comes with very high margins, especially because most of the growth is coming from ARPU increase. Let's take a quick look at our Q2 performance in Guatemala on the next slide. As you'll recall, our Guatemala business faces some intense competitive pressure over the past two years, and competition remains very intense in the market. That said, we have seen a bit more stability since the second-half of last year. Let's not forget that we had two successful spectrum auctions last year. As a result, we now have spectrum parity which has fostered a return to a more rational competitive environment. We saw signs of this beginning in Q1 and this improving trend continues in Q2 with service revenue accelerating to 3% from 2% in Q1. And the savings from our efficiency programs have allowed us to translate low-single-digit revenue growth into high-single-digit EBITDA growth. Now let's take a look at Panama on the next slide. The key highlight this quarter is our mobile service revenue growth, which accelerated to 14%. This is the fastest growth we've seen since the post-pandemic boom we've experienced when mobility restrictions were lifted. A big driver of this acceleration in Q2 was the consolidation of the market from three to two players, which contributed to our mobile customer growth this quarter. On the right, you can see how the combination of mobile growth and cost and CapEx savings from efficiency programs have translated into a sharp increase in quarterly OCF since the beginning of the year. Panama, with its stable and dollarized economy, is securing its position as the second largest contributor to Millicom’s equity-free cash flow.

Maxime Lombardini, COO

Thank you, Marcelo. First, I want to congratulate you on your appointment as CEO. The company is in good hands and it's a pleasure working with you and the team through the end of this year and to support you beginning in January from my role on the board. Now, onto efficiencies. As you know, it has been the area that I focused on immediately when I joined as CEO less than a year ago. We started focusing on six key areas of opportunity as we prepare the budget for 2024. You can see these listed on the chart. We took action and implemented most of this during Q4 2023. And this is why we have been able to deliver such strong financial performance in the first-half of this year. Let me give you a few examples. We reduced by 24% the cost of centralized functions that generated no revenue. We reduced that count by more than 20% year-on-year, with reductions of between 15% and 30% in most geographies. As a result, total employee costs are down 15% organically, excluding restructuring costs. And we are not replacing employees with consultants. On the contrary, we have also reduced spending on external services by more than 15%. Then we reviewed every programming and content agreement and every software license that we added, and we found opportunities to switch to lower-cost and in-house solutions or to drop some vendors completely. We successfully have negotiated many contracts. Overall, we have reduced our spending on programming by almost 20% and IT spend by more than 10%. And finally, you have seen that our CapEx has declined meaningfully. Most of this decline is the result of our focus on efficiency. Payback is now the key word when challenging CapEx. The CapEx strategy is also supporting an ambitious network quality improvement. As Marcelo explained a few minutes ago, we have invested to increase speed on our HFC network. The same for mobile, where we pay attention to network quality. This provides strong customer satisfaction, which translates into churn improvement. As a result of this efficiency focus during the last quarters, Millicom is becoming a more efficient company, both in terms of process and economics. We are doing more, faster, with less OpEx and CapEx, and we are generating cash. It's a new DNA for the company. As you can see on the next slide, this has translated into very strong improvement in equity free cash flow in the second quarter of this year, compared to last year. This combination of strong EBITDA growth and cash flow generation is bringing the leverage down very quickly, as you can see on the chart on the right. And while we are very pleased with these results, I can tell you there is still more that can be done, and we are already taking steps to ensure that the company can continue to sustain and grow its cash flow well beyond this year.

Bart Vanhaeren, CFO

Thank you, Maxime. Now let's look at our financial performance beginning on slide 15. Service revenue was $1.36 billion in the quarter, this is up 5.5% year-on-year from $1.29 billion a year ago. For the second quarter in a row, we have some tailwinds coming from FX. Excluding these impacts, organic growth was 2.1% in the second quarter. And this is similar to our growth rate in recent periods when we exclude the large B2B projects in Panama. Our mobile business is up mid-single-digits fueled by ARPU growth, while fixed and other services declined low-single-digits. The performance in fixed reflects mid-single-digit growth in B2B, which partially offset a mid-single-digit decline in our home business. EBITDA was up 23.1% year-on-year to $634 million. As indicated to you last quarter, restructuring and other one-off costs continued to be part of the business for a while and this quarter amounted to $23 million. This is included within the $634 million of EBITDA we are not adjusting for it. The very strong growth reflects the combined effect of the service revenue growth I just discussed, but more importantly, cost savings from our efficiency projects. Equity free cash flow for the quarter was $268 million, which compares to an outflow of $24 million in quarter two of last year. The significant improvement is coming primarily from the EBITDA growth that I just discussed, from a significant reduction in CapEx and from better working capital management. Regarding the CapEx, although we have benefited somewhat from a slower phasing of our CapEx spend this year, we continue to expect that our CapEx for the full-year 2024 will be significantly lower than in 2023. More specifically, we now expect full-year CapEx of less than $700 million, which means a reduction of more than $100 million, compared to last year. Going down further to the service revenue by country on the next slide. As Marcelo already mentioned, Guatemala grew 3%. This compares to a growth of 2% in quarter one. As we now have the full quarter benefit of the prepaid price increase we implemented in February. Columbia's service revenue was once again flat in local currency. We continued to sustain high-single-digit growth in mobile, but this was offset by a double-digit decline in our home business. Adding to what Marcelo mentioned, we now see improving net ads in our home business and we hope this is the beginning of a new trend that will translate into a higher revenue going forward.

Marcelo Benitez, CEO

Thank you, Bart. Before we take your questions, I'd like to share with you the key priorities I've laid out for the second-half of this year. First, we must deliver on our 2024 targets. As you can see, we are well on our way, but there are still many risks that we have to navigate. Second, we need to execute on the strategic projects that Bart just talked about. Colombia and Costa Rica are the only two countries where we have not historically been able to grow our equity-free cash flow. And these projects should help us change this. Third, and as Maxime mentioned earlier, we are already taking steps to position the company to sustain and grow equity-free cash flow in 2025 and beyond. Now back to you, Michelle.

Operator, Operator

Thanks, Marcelo. We will now begin the Q&A session. And as a reminder, if you'd like to ask a question, please let us know by emailing us at investors@millicom.com and we'll add you to the queue. Also, before we begin, we want to caution you that we cannot answer any questions about the ongoing tender offer process. And I simply want to remind everyone that all of the information related to this process is available on our website. We cannot provide any commentary or offer any legal interpretations of that information. So with that disclaimer out of the way, let's go to our first question from Andreas Jossen from Carnegie. Andreas?

Andreas Jossen, Analyst

Yes, good morning, good afternoon to everyone. Two questions from my side. First of all, on the long-term plan that you revealed a couple of weeks ago, just curious to see where you see the further improvements from where we are now, so to say, from the 600 levels, so to say, and up to the 2026 long-term target? And secondly, on the announcement this week on Colombia, you mentioned a little bit about it Bart, but the main rationality behind the plans and ambitions that you have is it to gain scale and from there grow the profitability or are you encouraged on what you have done yourself in Colombia and feel that you can do that for Coltel as well and improve profitability through synergies on that side? Thanks.

Marcelo Benitez, CEO

Thank you very much, Andreas. I will take the first question, and I will let Bart to answer the second. We have still six months to go in 2024, so I prefer not to comment on ‘25 and ‘26 figures. But I think it's important for you to know how the process works. Every year we update our LRP, Long Range Plan. This is a very detailed update that is made with review with the countries and all the functional areas. It's also part of our impairment test in SOCs and auditors reviews it and they also challenge it. So it's a process that we do every year. And on the half of the year, what we do is basically we update, including the results of H1. So those are the numbers that you have seen that are out there. What I can tell you is this, we do believe one that our all operational initiatives and efficiency initiatives are recurring and sustainable. As Maxime mentioned, these are all an evolution of our way of working. I mean, more focused and agile organization. So this is here to stay, right, in Millicom. Second, the benefits from all these initiatives are going to be reflected on a full-year run rate in ‘25 and ’26. So today we are still implementing this, as you see. I mean we have severance in H1, we have a bit of severance also in H2, but in the coming years you will see the full effect. CapEx is going to grow a little bit, but very much in line with revenues and the focus on CapEx is going to be to strengthen our networks in order to capture the data growth in mobile and fixed. So with all that, we feel our view is that these levels of EFCF are sustainable over the coming years.

Bart Vanhaeren, CFO

Thank you, Marcelo. Maybe also just to add on the mathematics, if you look at the EFCF for the second-half that would put us well on track for reaching that number for next year that's for the modeling guys. As it comes to Colombia, I would want to start with last year. We had a tough year last year. We capitalized together with our partner, the business, and at the same time launched a rigorous transformation plan, right. And so last year we were negative, very significantly negative equity free cash flow transformed the business and are now well on our way to be nicely positive this year. So very strong in our organic business and full confidence ahead. Now the market is a challenging market where we have more than four mobile network operators, low ARPUs, and high spectrum costs. So it's a tough environment. Market rationalization totally makes sense, combining the two businesses, synergy of scale, allowing them better returns, better financial stability of the company that will then allow us to responsibly invest in the networks and ultimately in customer experience, and then on its turn, translating to sustainably and profitable equity-free cash flow for Colombia. So it's a bit of a mix of scale, rationalization, and then creating a strong number two operator that is able to invest in the networks.

Andreas Jossen, Analyst

Perfect. Thank you.

Operator, Operator

Thanks, Andreas. So next we're going to go to Stefan Gauffin at BNB.

Stefan Gauffin, Analyst

Yes hello. Two questions if I may. And hi Marcelo, nice to see you. And I'll start with a question for you. You mentioned that you talk about the return-focused investments to sustain market leadership and drive customer growth in the second-half of 2024? You also mentioned investments in Colombia in the home business, but is this specifically focused on home or is it both home and mobile? And then secondly, is it more broad-based across markets so any information you can give me there? And then I have a question perhaps for Maxime, but feel free to let the others jump in, but you say now that CapEx for this year will be below $700 million. A couple of years ago the guidance was for around $1 billion of CapEx on sort of a yearly basis. The lower CapEx is partly coming from a slowdown in the rollout of the fixed network and homes connected. So how should we think about the CapEx a little bit more medium-term? I mean, this year we're talking more about 12% CapEx to sales, whereas historically more like 15%. So any guidance here on how we should think here? Thank you.

Marcelo Benitez, CEO

Thank you, Stefan. Thanks for your questions. When we say return-focused, what we mean is first, we believe that our network is the main driver to capture this demand we see in mobile and fixed. And also it's a big driver for experience, right? So what we're doing is we're strengthening our fixed and mobile networks to capture this demand. And then after we go, I mean, after this first step, what we do basically is start to monetize this increase in demand in prepaid with very, very well-planned price increases, then migration to postpaid, then convergence, that is the third step. And the same comes in fixed, right? Investment in networks, increase of speed, monetizing, developing our pool of customers, and then it all ends up in convergence. So in Colombia, that's what we're doing. Last year was about focusing on short-term cash flow, but immediately we started to strengthen our fixed network. Then we started to see much more stable customer base, churn reducing, early churn reducing, and now we're ready to grow. So what we're doing is strengthening our commercial initiatives. We have more or less installed in the last four to five months 90 stores in Colombia that increase our capillarity and our reach to our postpaid customers. And we are working on all our channels in order to increase productivity and volume. So that's what you're going to see. And actually in Colombia, we are at the deflection point because in Q2, I mean, at the end of Q2, we started seeing net adds positive in home. And as you know, this is our largest home business in the group, right?

Bart Vanhaeren, CFO

And then in terms of longer-term CapEx, which I think was the other part of your questions that find as you know, and as Maxime said, there's been a lot of focus on efficiencies, not just on OpEx, but as well as on CapEx. And that's what you're seeing reflected in our performance this year. We obviously haven't given longer-term guidance, but as Maxime said, a lot of what we've been doing over the past year is sustainable and recurring in nature.

Maxime Lombardini, COO

Just to complement, Stefan, on CapEx, we did something quite simple on the home. We focused on HFC upgrades. We had a strong feeling, which was that it was possible to get much more from the current footprint in terms of bandwidth. So it is something which has been partially done already that we will try to finish by the end of this year. And it provides immediate strong return for the current customers in terms of churn, satisfaction, and acquisition. It is one of the explanations why the KPIs on home are strongly improving. On mobile, we are focusing on network quality. Very important because the volume of data that our consumers are using is growing as you know, and we want to deliver a perfect service. So we are very selective on the payback of the new coverage, both on home and mobile. And we are doing on home the FTTH in a very practical way, not expanding everywhere, but really going where we have a need, because we have customers with high options or because there are, we'd say, green fields where we have strong opportunities. And the last, but not least, we have renegotiated very strongly many, many contracts with the vendors or with the IT providers, and this has an effect in the medium term too.

Stefan Gauffin, Analyst

Okay, perfect. Thank you.

Operator, Operator

Thank you, Stefan. Next, we're going to go to Phani at HSBC.

Phani Kanumuri, Analyst

Thank you all for addressing my questions. My first inquiry concerns the Colombia transaction, which involves a combination of three different offers for the three sellers. How are these offers interconnected? Specifically, if the deal with Telefonica does not proceed, would you still consider purchasing the minority stake in EPM? What dependencies do you see among these transactions? Additionally, can you share how far along the process we are and what the next steps in this Colombia transaction look like? Lastly, I have one more question for Maxime. You mentioned there are additional efficiency measures that could enhance operating results. Could you elaborate on what these measures are that might improve margins in the future? Thank you.

Marcelo Benitez, CEO

Phani, I'll take the first question. We're still in the early stages of the process. We have a non-binding agreement with Telefonica regarding their majority stake in Coltel, and we are looking to acquire the minority positions in Coltel, as well as in our jointly owned operations. A key dependency here is that a merger between the two entities must occur. We can't maintain partial ownership without merging, and this merger will require regulatory approvals. Therefore, our partners will have decisive votes, as they too must consent to the merger. All four parties need to agree to this transaction. However, to realize the synergies and benefits I previously mentioned, a merger is essential. Thankfully, our partners have been reliable over the last decade, and while I can't speak for Telefonica, it seems their relationship with us has been strong as well. They are open to collaborating on potential synergies, but it could also be a favorable option for the minority partners to withdraw. They've expressed readiness to sell in the past, so this could be mutually beneficial, and we're prepared to step in. The next steps involve drafting long-term agreements with all stakeholders, including the government and EPM. This involves a privatization process governed by Colombian law 226, which lays out several steps, such as determining a minimum price and conducting an auction for the shares, during which we will submit an offer. This will take several months, followed by additional time for regulatory approval. Therefore, don't expect closure by the end of this year or early next year. We still have work ahead, but the momentum and reactions so far are encouraging. Maxime?

Maxime Lombardini, COO

Yes, so on efficiency, as Marcelo said, many are working in progress on the ERC, on the employees costs. We are continuing to reduce that till the end of the year, beginning of next year. So it will have a full impact next year and the years after. On the contractors, all the contracts that we have serve partly providing services on the sales, on field services, on IT, on G&A, we are really starting to work and we are confident we can decrease part of that. On content, we were locked into a big contract till the end of 2024. We hope we can do better for the future at the end of those contracts. On CapEx, I already mentioned. And very importantly, efficiency is not only on cost, but we think we can do better on the top line. It is something which is not easy to do, you can imagine, but it is going through offers, simplification, being more simple, we will be more efficient. We are pushing many commercial initiatives, both in terms of optimizing their cost and making them more efficient. And especially we are great believers in the FMC fixed and mobile convergence trend that we are pushing. Both pushing the mobile on the home customer base and pushing the penetration on home for both home and mobile. That would be the main lines, but we are confident that we can do still a significant improvement in the way we generate cash.

Phani Kanumuri, Analyst

Perfect, yes. Thanks everyone. Thanks, all the best.

Operator, Operator

Thank you, Phani. So we don't have any more questions in the queue, but we received a couple via email. So the first one, I think, Bart, this is one for you on Colombia. And the question is around the transaction or potential transaction? How much incremental EBITDA would the $1 billion of additional equity investment in Colombia bring to Millicom? And then, inter-market consolidation is usually very margin-accretive. Are there any thoughts around synergies? So that's the first question. And the second question is what we should expect for spectrum payments in the next few years at the group level? So Colombia?

Maxime Lombardini, COO

I'll take the first one. Margin on the additional $1 billion. So the $1 billion is equity value. So there's also the total investment enterprise value is bigger since you get debt into equity. That $1 billion may still fluctuate a little bit in terms of net debt adjustments when in between now and closing, as you would logically expect. But obviously, if we look at Colombia, it is still a country that is, although we have significant margin expansion, we're now at 39.5% of the EBITDA, but it is one of the countries that is not in the forties. Millicom Group is 43.5% of the EBITDA. Somebody told me this week this is the highest we had in ten years. So well done there. But we want to have all of our countries in the forties. So if you think about it, that's what I would want to do, at least to contribute from that investment. Now in terms of synergies, yes, in mobile-mobile, a fix-fix is typically as good as it gets. But, you know, allow me not to comment right now. We're still early in the process. Let us finalize the work. And then when things are done, we can give you a full explanation and how the math will work out on that investment.

Marcelo Benitez, CEO

Regarding spectrum, I would say first that we've gone through a lot of them. I mean, acquiring spectrum in Guatemala last year, Colombia, Panama. So I think most of the countries we've already gone through that process, there will be some countries like Honduras where we will need to invest. So that's on the more organic, let's say, side of spectrum requirements for the ongoing business. And then we have 5G, where we do see some auctions coming this year and next year. But we believe all these are coming with a very rational approach. That's what we've seen in all the countries. 5G handset penetrations are still very low. We're talking about 2%, 3% of our total customer base. So this will not come with a big CapEx, let's say, demand. And there is a lot of rationality in the countries when they put auctions in 5G.

Stefan Gauffin, Analyst

So question on Guatemala. So last quarter you did price increases on prepaid in Guatemala and then you said it was uncertain how that would be adopted in the market if competition would follow. So this quarter we did see the benefit on service revenue, but we also saw that you lost a meaningful number of subscribers in that market? So how are you seeing the progress in that market? How has competition responded? Are you seeing them following in terms of price increases? Thank you.

Marcelo Benitez, CEO

Thank you, Stefan. As I mentioned, the market in Guatemala has become more rational, which has led to an increase in our revenue growth from 2% to 3%. While there are some effects on the customer base during this transition, we do not view it as a concern. We have a strong presence in Guatemala with an effective commercial strategy, solid control over the prepaid sector, and a good distribution network. Our pricing remains very affordable, which reinforces our confidence regarding the customer base in the medium term. The focus now is on tactics, and we anticipate a more rational market and improved commercial dynamics in the upcoming quarters.

Stefan Gauffin, Analyst

Okay, thank you.

Operator, Operator

Okay, thanks, Stefan. So that was our last question for today. Thank you very much, everyone, for participating, and we'll see you next quarter.