Earnings Call Transcript - TIGO Q2 2025

Bart Vanhaeren, CFO

Hello, everyone, and welcome to our second quarter 2025 results call. This event is being recorded. Our speakers today will be our CEO, Marcelo Benitez; and myself, Bart Vanhaeren, CFO of the company. 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 2 for the safe harbor disclosure. We will be making forward-looking statements, which involve risks and uncertainties and which could have a material impact on our results. On Slide 3, we define the non-IFRS metrics that we will reference throughout this presentation. And you can find reconciliation tables at the back of our earnings release and on our website. With those disclaimers out of the way, let me turn the call over to our CEO, Marcelo Benitez.

Marcelo Benitez, CEO

Thanks, Bart. Good morning, everyone, and thank you for joining us today. The second quarter of 2025 was a defining moment in our journey, one where strong operational execution met with strategic acceleration. We're firing on all cylinders across commercial, financial, and strategic fronts, and we're doing it with disciplined focus and results. Most importantly, we are right on track to deliver our commitment of $750 million in equity free cash flow for the year. This was a quarter of strategic acceleration. We executed 3 major milestones in just a few weeks: acquisition of Telefónica's Uruguay operations, definitive agreement for Telefónica Ecuador, and the partial closing of our infrastructure transaction with SBA. We unlocked over $500 million in proceeds, declaring a special interim dividend of $2.5 per share, a clear sign of our confidence and capital discipline. To mark this pivotal momentum, we rang the NASDAQ opening bell in June, together with the Tigo top management team, a symbolic step forward as we deepened our footprint in South America and reaffirm our long-term commitment to the region and to shareholder value. Now turning to our performance. We added nearly 250,000 net postpaid customers, up from 178,000 a year ago. Home gained 41,000 customers, nearly 4x more than Q2 last year. Commercial traction and efficiencies are delivering profitable growth. Adjusted EBITDA reached a new high of 46.7%, up 3.2 points year-over-year. In this quarter, more than half of our operations achieved margins above 50%. Equity free cash flow for the quarter came at $218 million, bringing our H1 total to $395 million, $126 million ahead of last year. Leverage dropped to 2.18x, and we remain committed to keeping leverage below 2.5x. In short, we're not just growing. We are growing the right way.

Bart Vanhaeren, CFO

Thank you, Marcelo. Now let's look at our financial performance, beginning on Slide 14. Service revenue for the quarter totaled $1.28 billion, representing a year-over-year decline of 5.9% due to the adverse impact of foreign exchange this quarter, causing around $110 million in total FX headwinds. Now about $84 million of this originated in Bolivia, primarily due to the application of accounting standard IAS 21. Excluding FX impact, organic service revenue growth accelerated to 2.4% as our commercial push continues to drive performance. I think the story is clear and revenue is progressing in line with expectations. Mobile postpaid is growing double digits, boosted by pre- to postpaid migrations and FMC, while mobile prepaid remains on positive growth, creating the funnel for the future. B2B growth is driven by digital and our Home business was creating a drag to the top line. But as Marcelo explained, we're almost getting to positive territory, which then in turn will naturally uplift our year-over-year growth rate later on. EBITDA was up 1.1% year-on-year to $641 million, now reaching a margin of 46.7%. On an organic basis, EBITDA grew a solid 9.3% in the quarter, up from 6.9% in Q1 '25. This performance reflects ongoing discipline in cost optimization, which is now deep in our DNA and operating leverage, which continues to drive margin enhancement and operational efficiency.

Marcelo Benitez, CEO

If I can add there, Bart, I mean, our biggest fight is against inertia. So what we're doing is, we're still reviewing all the purchase orders from $1 to millions of dollars. But on the other hand, there is a big opportunity in the digitalization of the customer interface journey and also the digitalization of our internal processes. So we are exploring new tools. We are using machine learning. We are using AI. We have both agents for sales, etc. So those initiatives, we do believe that are going to start impacting next year.

Bart Vanhaeren, CFO

Equity free cash flow was $218 million in the quarter and $395 million in H1, up almost $126 million compared to $269 million in H1 of last year. This despite already prepaying around $20 million in CapEx originally scheduled for 2026 in order to benefit from an exceptional supplier offer. We continue to make solid progress in working capital management with concrete actions to optimize cash conversion cycles and reduce the seasonality of our cash flow throughout the year. We were able to deliver a strong H1 despite the continued adverse foreign exchange impact, thanks to our efforts to reduce our FX exposure. Reduced FX exposure led to both more sustainable EBITDA margins and better EFCF generation. So we are very pleased to see all these initiatives are now contributing to delivering a strong H1 EFCF.

Marcelo Peev dos Santos, Analyst

Can you hear me?

Bart Vanhaeren, CFO

Yes. Yes. Perfect.

Marcelo Peev dos Santos, Analyst

Well, the first question is about Guatemala. There was a visible improvement there. You mentioned a bit prepaid to postpaid. I just wonder if you could deep dive a bit more on the improvement and on the competitive environment that you're seeing in that country? And the second question is more about CapEx. So you mentioned in the release some acceleration in CapEx to advance revenue generation. What is the outlook for CapEx, especially in the coming years? These are the 2 questions.

Marcelo Benitez, CEO

Thank you for the questions regarding Guatemala. Last year, we began focusing on certain areas while operating independently. The first quarter was primarily about stabilization. Simultaneously, we initiated a strong shift of our prepaid customers to postpaid, which led to a 20% growth. It's important to note that postpaid penetration in Guatemala is quite low at only 12%, while our goal across all operations is to reach 50%. This indicates significant growth potential for postpaid in Guatemala. Additionally, we are setting up around 350 new sites to connect with new communities or expand our presence in existing ones. Overall, we anticipate sustainable growth driven by the migration from prepaid to postpaid, as well as an increase in average revenue per user in the prepaid sector, which we successfully implemented in the first half of the year and plan to continue in the second half. Our competitors are adapting, and we are enhancing our coverage.

Marcelo Peev dos Santos, Analyst

Just a clarification. When you say that rate is like rate to revenues, should we CapEx to revenues to be more or less that? Is that what we should understand?

Marcelo Benitez, CEO

Yes. That will be between 11% and 12% of revenues. However, we consider it in terms of dollars. The result is 11% to 12%, but our goal is to achieve between $650 million and $700 million.

Bart Vanhaeren, CFO

Thank you. Then we have a question from Andreas from DNB Carnegie. He might not be online, so we received a question through the investors. First question, Marcelo, you post accelerating service revenue growth pace in basically all countries. Can you discuss a bit more the drivers for this and how you can maintain these levels or even improve them further?

Marcelo Benitez, CEO

Yes. Well, basically, to give you a little bit of context, the constant is the increased demand for data. So in order to capture that, what we are doing is we are increasing the days connected and developing ARPU. So basically, the drivers are in increasing the days connected is the migration from prepaid to postpaid. Remember that we are only at 20% penetration of postpaid over total mobile customer base. There are countries like Peru that are at 45%, close to 50% and countries like Brazil that are over 50%. Our target is to reach 50% in all the territories. This brings an ARPU uplift of 50% compared to the prepaid ARPU. So there is a long runway there to increase the days connected and also to increase ARPU. The other driver is a price increase. And more or less, since we sell days connected, the traffic increases around 15% every year. So we need to capture that increase through ARPU development. So we are doing price increases in all the countries. So to give you an example, this year, the ARPU increase in prepaid is around 5%.

Bart Vanhaeren, CFO

Thank you, Marcelo. And the second question from Andreas was solid cost control, but have you identified further potential on the cost side? And is it correct that there is no restructuring costs booked for Q2? Do you expect any additional severance payments, restructuring costs in H2? So maybe I can answer that one. On the cost control, I think most of the big ticket item initiatives were taken last year and completed last year, and we now start to see the full run rate effect of that. So the associated cost with that also were mostly incurred in 2024. We continue to have restructuring costs. I think it's a handful of millions this quarter, but I don't want to call that out as every quarter, there will be something, and it's not, therefore, exceptional in nature. So let's just stick to the reported numbers rather than adjusting for it. We have, at this stage, no significant or material plans for further redundancy. So no big ticket item severance payments expected in H2.

Marcelo Benitez, CEO

If I can add there, Bart, I mean, our biggest fight is against inertia. So what we're doing is we're still reviewing all the purchase orders from $1 to millions of dollars. But on the other hand, there is a big opportunity in the digitalization of the customer interface journey and also the digitalization of our internal processes. So we are exploring new tools. We are using machine learning. We are using AI. We have both agents for sales, etc. So those initiatives, we do believe that are going to start impacting next year.

Bart Vanhaeren, CFO

Now we have a question from Eduardo Nieto from JPMorgan. So first, I wanted to discuss on your leverage target and the leverage guidance that you gave on under 2.5x. Just first to confirm that, that includes your latest M&A, latest dividends. And just if I think more medium term, if that's the level where you're comfortable or if there's any room to go any lower than that or basically the excess cash is going to be directed either to shareholders or other projects? Yes. So on the leverage, 2.5x, so originally, we always said this was excluding the strategic initiatives because they kind of come on top and outside of the budget. But what I can say, at this time, 2.5x definitely includes all of the dividends and special dividends. So that's included, yes. And then depending on the time of closing, I would say, of the different transactions, as Marcelo explained in the presentation, if we follow that path, then yes, we'll still, including the M&A, be around or below 2.5x leverage. We don't expect it to increase significantly above that even if everything should close this year, but we might go a little bit over it to then rapidly decline again on the back of our cash flow generation and EBITDA growth.

Eduardo Nieto Leal, Analyst

Perfect.

Bart Vanhaeren, CFO

And your second question... it was on the refi plan.

Eduardo Nieto Leal, Analyst

It was about refinancing. I believe our strategy remains unchanged. I prefer to raise debt in local currency, focusing on in-country local currency debt and repaying U.S. dollar debt primarily at HQ, as this approach is better from both a capital allocation and risk perspective. For instance, in Bolivia, where the currency was historically pegged to the dollar, we wisely had our debt in local currency, which greatly helped us navigate this period.

Bart Vanhaeren, CFO

So we continue to do that. Now the M&A projects cloud our standard liability management a little bit because we have quite a bit. So we will use the Lati proceeds for the payments of the M&A. As you know, there's still $270 million to $300 million net cash proceeds coming in the next months from the Lati sales. We have our EFCF generation, 2/3 of that goes through our dividends and then 1/3 of the equity free cash flow is then still reserved for paying for the M&A. And then I'm actively raising debt in countries to pay for the rest. You saw the announcement of the IDB loan in Salvador, but also I'm raising local currency debt in Guatemala, in Paraguay and even already raising in Uruguay to anticipate the closing. So once all of that is kind of stable and paid, we'll look at our liability management.

Gustavo Farias, Analyst

There are 2. So the first one on Colombia. We've seen recently WOM launching new low-cost mobile plans, which seem very aggressive. So just wanted to get a color on how you're seeing the pricing and the competitive landscape in the country. And if you could further comment on the regulatory agenda for the acquisition of the stake in Coltel.

Marcelo Benitez, CEO

Perfect. I will take the first part of the first question. You can take the second part of the first question. So basically, Gustavo, yes, WOM launched an unlimited offer in prepaid for $7. Telefonica has already an even more aggressive offer in the market. So basically, what we see is in order to succeed in prepaid, our understanding and our experience has to do with not only pricing, you need to have a strong network and a strong distribution. We've seen this kind of behavior in many of our countries, as an example, Digicel in Panama. So these are very tactical offers. But since they are not complemented by network experience and channels, they are not typically sustainable because the customers are expecting the full experience, right? So on that side, I do believe that this is tactics, business as usual and not a long-term trend.

Bart Vanhaeren, CFO

Yes, in Colombia, we have two transactions occurring simultaneously. On one side, our minority partner, EPM, has announced a minimum price and is currently listing shares on the local stock market in preparation for Phase 1 of the privatization law, Law 226. Once this is complete, they can initiate Phase 1 for the Sector Solidario and then proceed to auction their shares. The listing should be finalized soon, allowing them to start Phase 1 for Sector Solidario, and no further regulatory approvals are needed, making it largely a process-driven effort. On our end, we are discussing our involvement in that auction and the administrative details of execution. However, it is an auction, so other participants may also be involved. We will make an announcement as soon as we reach an agreement, but discussions are ongoing.

Marcelo Benitez, CEO

And the last question was now about 5G. The way we look at it is 5G networks need to follow 5G devices penetration. In many of our countries, the penetration of 5G over the total base are very, very low. I was managing the Panama operation when you walk the streets, you don't see any 5G phones on the counter because of the affordability issue, right? These are expensive handsets. Having said that, we do see that 5G devices are devices base are increasing in Colombia, in El Salvador and new operations like Uruguay. So when the demand is there because the handset has a capability, we will invest in 5G on a granular basis, right? Because these people are mainly in urban cities, and then we will expand following the device trend.

Bart Vanhaeren, CFO

The next question comes from Andres Coello from Scotiabank. Can you provide more details about acquisitions in the pipeline? Are you considering Telefonica subsidiaries in Chile, Mexico, or Puerto Rico? Which company plans to separate? Our primary focus is to finalize the deals we've already announced. We're concentrating on integrating Colombia, which will require significant attention but also presents a major opportunity for synergy. A lot of our efforts will be directed there in 2026. Additionally, we will consider Ecuador and Uruguay, expanding our portfolio from 9 to 11 countries. I appreciate having such a diverse portfolio that helps balance the risks associated with each market.

Marcelo Benitez, CEO

This year, we experienced a substantial and exceptional impact from Bolivia, which significantly affected our equity free cash flow. We are still able to stay well within our guidance despite current conditions. We are also adding a dollarized economy and an investment-grade country, which will enhance the diversity of our portfolio. As for other opportunities, we will remain open to interesting deals, but it is not our main focus at the moment. For instance, Mexico might be too large and complex for us at this stage, so we should concentrate on our previously announced plans.

Bart Vanhaeren, CFO

I think with this, we have no more questions in the queue. So with that, I would like to thank everyone and Marcelo for the quarterly results, and congratulations to all the teams who helped us deliver on these results. Thank you very much, everyone.

Marcelo Benitez, CEO

Thank you. See you soon.