Earnings Call Transcript - TIGO Q3 2022

Operator, Operator

Hello, everyone. Thanks for connecting to our video conference to discuss our Third Quarter 2022 Results. Before we begin, please take a moment to review the Safe-Harbor disclosure on slide two of the presentation, which is available on our website along with the earnings release. During the presentation, we will be referencing non-IFRS measures, and we define these on slide three. And we provide reconciliation tables to the nearest IFRS metric in the earnings release, as well as on our website. I will now turn the call over to our CEO Mauricio Ramos for his prepared remarks. Mauricio?

Mauricio Ramos, CEO

Good morning and good afternoon, everyone. Thank you for joining us today. We are on track to achieve our organic OCF growth target of around 10% this year, which will help generate solid equity free cash flow in 2022, consistent with our budget. We plan to invest about $1 billion in CapEx this year, aligning with our long-term goals. We are also advancing on key projects to enhance the value of our infrastructure and fintech divisions, and we are successfully reducing our net debt, with a decrease observed this quarter despite the challenging macroeconomic conditions. We are also making progress on our social and ESG initiatives, receiving meaningful external recognitions that I will discuss later. The macro environment is indeed more challenging, yet we remain broadly on track due to several factors: first, we entered this period of increased volatility from a position of substantial strength. Our networks have been modernized and expanded, increasing our customer base and sustaining or growing our market shares. Our SangreTigo culture is at its strongest, and our brand positioning has improved across nearly all our markets. Second, our business, particularly its cash flow, is extremely resilient, as evidenced during the pandemic. Despite the weaker macro conditions, the long-term demand for our products remains strong, and broadband penetration rates are still low. Third, we manage volatility and challenging environments effectively, continuing to invest wisely and seeking opportunities for increased efficiency. Earlier this year, we initiated a long-term efficiency project called Everest to safeguard our targets, which is already in progress and Sheldon will elaborate on later. Additionally, currency stability in Central America and Bolivia, where a significant portion of our cash flow originates, has been beneficial despite a stronger dollar. Now, please turn to slide five for the financial highlights of the third quarter and more details on our progress. Service revenue grew 2.7% in Q3, a strong performance given the tougher macro environment. The operating cash flow for Q3 showed organic growth of 4.5% on an adjusted basis, in line with our year-to-date budget and long-term plans communicated earlier this year. Trends in how we achieve growth have shifted, reflecting general market trends. As students returned to in-person learning and parents went back to the office, mobility increased, leading consumers to upgrade their mobile plans or get prepaid phones for their families. This trend is evident in the strong performance of our mobile business this year. Conversely, spending on pay-TV and residential services has slowed down due to the global economic slowdown and rising inflation. We believe this re-accommodating demand post-pandemic is the primary reason for the temporary slowdown in our home business. However, we expect this demand to stabilize, with growth in our home business driven by long-term factors such as low broadband penetration, population growth, middle-class development, and increased digital adoption among the younger population. Our B2B segment continues to perform impressively, and we will detail that shortly. Let's examine our mobile business on slide seven. Our prepaid base keeps growing and serves as a foundation for migrating our best prepaid customers to postpaid. We segment these upgrades based on consumption, reloads, and payment history, resulting in nearly 1 million new postpaid customers across our footprint over the past year, more than half of whom were upgraded from prepaid. Although postpaid accounts for only 15% of our overall mobile customer base, they contribute 35% of mobile revenue and are growing about 10% organically. By converting prepaid customers to postpaid, we achieve lower churn, improved ARPU, increased customer lifetime value, and better network consumption patterns. Postpaid is now becoming a significant growth driver for us. In the short term, we implemented price increases in many of our markets during the quarter. While this impact may not yet be reflected in the financial numbers due to the inherent lag, it enhances our pricing strategy and positions us for stronger momentum in mobile heading into 2023. Moving on to the home segment on slide eight, as previously mentioned, we are experiencing some fluctuations in our net add numbers this year due to several factors: the pandemic demand, a tougher macro environment with inflation, and our own disciplined pricing strategy. We implemented price increases in most markets for home services, and we continue to charge installation fees despite some competitors not doing so. This may temporarily dampen net adds but sets a stronger foundation for the future. The long-term demand drivers such as low broadband penetration, digital adoption among the youth, and household formation driven by economic growth will sustain the business. Once the pandemic-related fluctuations stabilize, we anticipate reaching a long-term run rate of about 300,000 net adds per year, consistent with our prior averages. Consequently, we have ramped up our build efforts. Our cable business has grown to almost $2 billion in revenue with long-term growth potential. This quarter, we built a quarter-million homes and initiated greenfield fiber deployments. We have also signed key content agreements, including a deal with Televisa to distribute Pix+ over-the-top platinum, providing our customers in certain areas with access to popular content, including the Spanish soccer league LaLiga, which drives demand. This agreement is part of our strategy to position our Tigo sports television channel as the go-to destination for soccer in most of our markets, reinforced by our exclusive rights to numerous local soccer leagues. This strategic content offering enhances our brand and fosters customer loyalty, available across both home and mobile platforms. We are leveraging our sports content to support our ESG commitments and community initiatives through a partnership with Fundación Real Madrid. Now, let's highlight our strong performance in B2B on slide 10. Despite economic challenges, our B2B growth continues to accelerate, reaching nearly 6% organically this quarter, driven by robust demand for digital services, which have grown 35%, now accounting for almost 20% of our overall B2B revenue. As noted previously, we revamped our long-term strategy for Tigo Business before the pandemic, and it is now bearing fruit. This strategy includes clear customer segmentation, the integration of digital, cloud, and cybersecurity services into our connectivity offerings, strategic partnerships with global players, and an emphasis on developing our commercial distribution team. Execution has been solid, and I want to congratulate the Tigo Business team for their performance while encouraging them to continue striving for more. Next, we will focus on two of our largest markets, starting with Guatemala. In Guatemala, both service revenue and EBITDA saw a slight year-on-year decline in Q3. We gained significant mobile market share prior to and during the pandemic while our competitor focused on M&A integration. It’s not unexpected that they are now attempting to reclaim some of that market share. As you may know, we take a long-term perspective and thus have been investing to maintain our gains by enhancing product competitiveness, increasing sales and marketing efforts, and further investing in our network. While this approach might cause short-term setbacks, it is conducive to long-term sustainability. We are also seeing positive growth in home and B2B and are relaunching our Tigo Money business in Guatemala. These developments align closely with our expectations and budget for the year, with our year-to-date results in Guatemala only about 1% below budget. In Colombia, we continue to achieve strong performance with mid-single digit growth in service revenue and EBITDA, primarily driven by mobile, which experienced a 40% increase in service revenue this quarter. This growth is driven by both volume and ARPU, which remains flat in pesos. The growth in Colombia offsets the softer trends in our home segment, reflecting overall progress and contributing to OCF growth. Lastly, in Panama, our mobile business continues to show strength, with a 9% increase. The market is consolidating from four players to three and potentially to two. We still see significant opportunities to scale our mobile presence in Panama while maintaining solid growth of 4% to 5% in B2B and protecting our market leadership in home services. We are focusing on expanding scale and maintaining margins in Panama, which is already a strong cash flow contributor. We previously indicated that we expect CapEx for this year to be around $1 billion, and we remain on target. More importantly, we’ve rolled out about 1,500 new sites and over 3,500 new radio base stations this year, an 18% increase compared to last year. Consequently, our population coverage in 4G is set to reach 79% by year’s end, up from 76% last year. This year, we have completed mobile network modernization in Paraguay and Colombia with 5G-compatible radios, and by year-end, all our mobile core networks will be ready for 5G NSA. We also launched 5G in Guatemala and planned site commissioning for early next year. By the end of the year, we will have connected about 850,000 new homes, whether through HFC or FTTH, including in Honduras, thereby passing a total of approximately 30.3 million homes, with around 800,000 equipped with fiber to the home, as we now have fiber deployments in all our countries. We will finalize the fiber connectivity project from Bolivia to Paraguay this year, uniquely positioning us with the only fiber connection between two oceans through existing terrestrial routes, leading to significant cost savings. Furthermore, we aim to complete our Tigo Cloud project this year, which will connect our 13 Tier 3 data centers across all countries using our own cloud solutions. This will enable us to efficiently host necessary IT services for Tigo Business while accommodating the ongoing traffic growth on our network. We look forward to finalizing this project this year. For those interested in financial ratios, we anticipate a healthy 17% CapEx to sales ratio for the year. Now, please turn to slide 13 for an update on our plans for our towers and Tigo Money fintech business. We have been actively working with our financial and tax advisors on tower operations, making significant progress in prepaying master lease agreements, which we expect to finalize in Q4. This will enable us to start transferring assets to legal entities in the first half of 2023, consistent with our plans. Regarding Tigo Money, we are expanding and executing our development plan, with our new app now live in Honduras and Bolivia, set to roll out in additional countries in Q4. We have been piloting nano-lending in Paraguay, and early results are promising. Our new merchant platform is in progress, and we are signing on retailers of all sizes, including a major food delivery company that has begun accepting Tigo Money in four of our markets. This extensive update underlines our progress on both strategic projects and their alignment with our goals. Before handing over to Sheldon for the financial overview, I want to recognize all 20,000 Tigo employees. Together, we have undergone a major transformation over the past few years, redefining our footprint with over $6 billion in M&A, establishing a $2 billion cable business, modernizing our networks, and expanding our customer base. Central to this transformation are two key initiatives: our commitment to building digital highways that connect our customers and enhance our communities, and our effort to cultivate our distinct SangreTigo culture. These foundational pillars are driving the continued success of our ESG strategy, which you can see illustrated on this page. This year, we were honored with recognition as the second-best workplace in Latin America and as the best workplace worldwide. It is this dedicated team that will deliver on our commitments to stakeholders. With that, let me turn the call over to Sheldon.

Sheldon Bruha, CFO

Thank you, Mauricio. Before we review the financials, let me recap the macro context on slide 16. As you would expect, inflation in our markets has increased over the last 12 months, in line with global trends reaching an average of about 8% in September of 2022. On the right, you can see that the GDP growth expectations have been coming down, with growth of 4% now presented for our markets in 2022, slightly faster than the 3.2% that the IMF is projecting for the global economy. The IMF also projects that 2023 will be another year of slower growth and it's interesting to see that our margins are expected to grow faster on average than the rest of the world, which I think is a testament to the resilience of the countries where we operate. Now let's look at our Q2 performance beginning on slide 17. Service revenue was $1.3 billion for the quarter, that's up 35% year-on-year, given the Guatemala acquisition. Excluding the acquisition and the impact of FX, organic growth was 2.7%. Our mobile business grew slightly more than 3% and contributed more than two-thirds of the overall growth in the quarter, and all of the mobile growth came from postpaid, which continues to perform strongly and grew just shy of 9% year-on-year. We continue to reap the benefits from the additional investments we've made in some of our mobile businesses over the last couple of years, especially in Colombia. FX detracted from our revenue growth this quarter, largely due to the Colombian peso, which depreciated 12% on average during the quarter compared to a year ago. Like many currencies globally, the Colombian peso has continued to weaken compared to the US dollar since the end of the quarter, but many of our other currencies like the Guatemalan quetzal have remained relatively stable. Drilling down further on slide 18 for the service revenue by country, Mauricio has already talked about Colombia, Panama, and Guatemala, so I won’t cover those again here. Elsewhere, our performance in most of our other markets was solid. El Salvador and Nicaragua maintained their strong momentum with growth of about 6%. Paraguay grew for the sixth consecutive quarter and was up 2% with solid performance in mobile and B2B. Honduras, which we don't consolidate, showed steady improvement and was up 2% this quarter. Bolivia was down 0.6% as we felt the impact of a change in regulation on our mobile overage rates, which impacted August. This affected our mobile business, while our home and B2B businesses continued to grow both year-on-year and sequentially. Okay, turning to EBITDA on slide 19. EBITDA of $539 million was up 53% year-on-year due to the consolidation of Guatemala. Organically, EBITDA was down 1.9%, but this was impacted by a one-off of about $7 million this quarter related to an early termination of a software contract. Excluding this effect, EBITDA declined 0.6%. Other factors impacting EBITDA this quarter included about $6 million of incremental investments related to the carve-outs of our Tigo Money and Tower businesses. Looking at EBITDA margins on slide 20, adjusting for this one-off, margins are broadly stable despite the investments in our carve-outs and the tougher macro situation. Energy costs were up about 17% on average during the quarter, and we have also seen an increase in employee wages, which we have largely been able to offset with efficiencies. On the flip side, we have been able to implement some price increases across our markets, especially in our postpaid and home subscription businesses, but also in prepaid in some markets. We're very encouraged by the competitive response to our pricing action and we are hopeful that the full benefit of these price increases will be more visible in our Q4 results when we will see a full-quarter effect of these actions and as we take additional steps to offset the impact of high inflation in our markets. In addition, I want to share with you that we are putting the final touches on a very broad-based efficiency program called Project Everest that we've been working on for the past several months. We expect the program will be a key pillar of our EBITDA and OCF growth next year and over the next several years as targeted savings ramp up. I plan to share more detail on this project when we report our Q4 results. Now looking more closely at the EBITDA performance by country on slide 21, aside from Colombia, Panama, and Guatemala that Mauricio already talked about. Nicaragua led the group with EBITDA growth of more than 13%, as they had an easy comparison due to the catch-up of municipal tax payments in Q3 of last year. El Salvador grew just shy of 4%, maintaining the solid performance that we have come to expect in the last couple of years. Paraguay EBITDA was down 2.7%, mostly due to some phasing of OpEx related to our soccer rights and our marketing campaigns. This is expected to normalize in Q4. Bolivia EBITDA declined 3.7% as the revenue impact from the regulatory change dropped straight to the EBITDA line. Finally, Honduras, which is not consolidated, grew 3.5% as the business is starting to show signs of improvement. Moving to slide 22, you can see our operating cash flow, that is EBITDA less CapEx compared to the previous year. OCF more than doubled to $286 million in Q3 due to the consolidation of Guatemala. Adjusting for this M&A and also for the one-off charges this quarter, organic growth would have been 4.5%. As expected, this was an acceleration compared to the growth we reported in both Q1 and Q2 of this year. On slide 23, you can see our usual net debt bridge. Net debt is down almost $830 million year-to-date, including about $100 million during the third quarter. This came from equity free cash flow contribution during the quarter and from the benefit of the effect of the weaker currencies on our local currency debt. We ended Q3 just shy of $6 billion net debt, down almost $833 million since the start of the year, reflecting the rights offering and net debt to EBITDA after leases was 3.3 times. If we include lease obligations of just over $1 billion, our leverage was at 3.12 times at the end of Q3, down slightly from 3.14 times at Q2. Finally, on slide 24, I want to close out by highlighting that we have a very well-positioned debt profile during this rising interest rate environment. We have very few maturities in the next 24 months, so we do not have to be active in this current market repricing our debt. Our $600 million revolving credit facility is undrawn, thereby providing significant liquidity. Additionally, 82% of our debt is at fixed rates or swapped for fixed. Now please turn to slide 26 to talk about the outlook. As we've outlined today, the business continued to perform well in Q3, and even though conditions have gotten tougher, our results year-to-date are broadly in line with expectations we had when we prepared our budget almost one year ago. This is why we are reaffirming our targets today. First, as you can see on slide 26, we remain on track to deliver organic operating cash flow growth of about 10% in 2022. As Mauricio mentioned earlier, we are maintaining healthy levels of investments through the business in 2022, but the phasing of our investments is different this year compared to 2021. Given our target CapEx of about $1 billion for the year, this means that CapEx in Q4 should be much lower than the record level of CapEx that was spent in Q4 of last year. On slide 27, we want to remind you that our equity free cash flow is seasonal in nature, with most of it usually coming in Q4. That is also our expectation for this year. We now expect full-year 2022 equity free cash flow to land between $150 million to $200 million. This is right in line with our budget and is consistent with our target of generating between $800 million to $1 billion during the 2022 to 2024 period. With that, we are now ready to take your questions.

Operator, Operator

Thanks, Sheldon. Thanks, Mauricio. So we'll now go to the Q&A portion of the call. If you'd like to ask a question, please email us at investors@millicom.com. And we'll take the first question now from Stefan Gauffin at DNB. Stefan?

Stefan Gauffin, Analyst

Yes. Hello.

Mauricio Ramos, CEO

Hi, Stefan. How are you?

Stefan Gauffin, Analyst

Yeah, I'm fine. So a couple of questions. Let's see if I can stop my video as well. So first of all, can you talk about which markets and products you have implemented price increases for? When was this done, and what is the magnitude of the price increases? Perhaps more importantly, what was the market reaction and how has your competitors responded? Have they followed you or any flavor of this would be really helpful.

Mauricio Ramos, CEO

And you said you had two questions.

Stefan Gauffin, Analyst

Yeah. I can take the second one directly here. You are indicating some $200 million to $250 million in equity free cash flow in Q4 in order to reach your targets. Looking at the seasonality, Q4 is usually a strong quarter in terms of net working capital, and last year you had $100 million net working capital release. But it's clearly more needed in order to reach your target. So any flavor on what you see for cash-flow generation for Q4?

Mauricio Ramos, CEO

So why don't we go backwards, because I think the second one is super mathematical under the history of this in all of our prior years in which we've actually done more in the fourth quarter than if we look into during this year. So, I'll ask Sheldon to walk you through that one. And then I'll take on the pricing one in a second.

Sheldon Bruha, CFO

Sure. Hi, Stefan. Yes, as I've talked about in the past and you picked up just on your comments there, there is a large seasonality into our cash flows as a company, a lot of it's working capital related. As I mentioned before, we spend a lot sort of in Q1 on working capital and we've got a big outflow related to amounts prepayments through the year for software and regulatory fees and the like. We built up inventories kind of in the years for handsets and the like which in Q4 is probably one of our biggest sales quarters for the year, so those inventories are kind of depleted at that point in time. So you see a big swing and you've seen it historically, there’s a big outflow in our working capital which basically comes back in Q4. I think what's also a bit more pronounced this year is the phasing of our CapEx, in Q4 last year was a very large CapEx quarter for us. You can see, as I highlighted in our slides, this year's Q4 CapEx can be upwards about $100 million less than the prior year. So there is just a phasing of kind of our CapEx spend that’s got to actually just benefit us from a cash flow timing perspective as we move through the year. So that's all going to essentially come to fruition here in Q4 and that's where we see large cash inflows coming in to achieve sort of $150 million to $200 million range that you talked about.

Mauricio Ramos, CEO

It's the nature of the business, as you very well know. We tend to book our CapEx in Q4 and paid in Q1. Taxes are paid in Q1. Most of the payments are prepaid during the first half of the year. So that's the nature of the business, it happens every year and this year is consistent with prior years. I think the difference this year has become a little bit more obvious to you, because we're not consolidating Guatemala and because we are giving new equity free cash flow guidance. So just you're seeing what we see every year, and it’s just done in a positive manner. So that’s pretty mathematical. On the price increases and what we're seeing in the market and how much of that impacts. I'm going to try to keep it somewhat summary because it's nine markets, basically three lines of businesses, prepaid, postpaid and not including B2B. I will talk to that. So the matrix of that is quite big, so we can give you some more color offline. I think the big market where things are moving towards price reconstruction is Colombia. And that's true, both in prepaid and in postpaid where you've seen ARPU actually grow up in Colombia around 6%, if I'm not mistaken. So that has given us in Colombia both volume gains and also price increases and ARPU pickup in Colombia. Therefore, the overall ARPU in Colombia is reconstructing significantly, as you know, we expect that it would eventually happen. The situation today is one in which Colombian mobile is growing about 40% to 50% because there are both volume and ARPU changes. We're also seeing prepaid price reconstruction in Paraguay; those are the two markets where we're seeing price increases take the most. Everywhere else is still to be determined whether there is a price increase that we will stick to or not. As you know, the nature of prepaid is that we do this pretty much on a daily and weekly basis and we also play with commissions and other ways, and we try to get the ARPU up. We have, on postpaid, taken over the year price increases in just about every market with the exception of Panama. In Bolivia, we did a postpaid very early in the year, and we may do something later this year or early next year. But that's still to be determined based on how the market plays out. In Colombia, we did something in the middle of Q3 and that's sticking on postpaid in Colombia. Everyone seems to be following, including now the other three competitors in postpaid in Colombia. In Panama, we haven't done it; it's one market we haven’t done an increase in postpaid. That’s largely because our largest competitor is not allowed to do any price increases until early next year. So we don’t want to create too much of price cap to ensure they can’t before that until early next year. On home, we've taken price increases in most of our markets, perhaps we can give you some detail on these. And those I have to say are sticking less than the postpaid price increases. Because we've been ourselves more price disciplined than our competitors. And by that, I mean we have kept installation costs in the market, whereas others may have not followed that regard. We think as we said in our prepared remarks, that's definitely the right and correct thing to do for the long term. As I said on the prepared remarks, we do think all these volumes are experiencing a bit of an ebb because of the economic situation, but we want to preserve a very healthy scenario for long-term installation costs. That's the long and short of that.

Stefan Gauffin, Analyst

That's perfect. Thank you.

Operator, Operator

All right. Our next question is going to come from Marcelo Santos at JPMorgan. Marcelo?

Marcelo Santos, Analyst

Hi, good morning. Thanks for taking my questions. The first question is on the line of the price increase of the first. I mean, Tigo operates in markets where it has a very good market structure. Tigo is usually number one or two and there are few competitors, but when we see inflation is running at eight, and you are growing your organic revenues service revenues at 2.7%, what's the main gap here? Is this only macro, or could you just try to break down this gap and how this should follow going forward? That's the first question. The second question is, if you could dig a little bit deeper on Bolivia, this regulatory change that happened and how should this progress going forward? Thank you.

Mauricio Ramos, CEO

You make an excellent point, Marcelo. It highlights that price increases resulting from inflation don't immediately show up in our profit and loss statement. The first reason for this delay is timing; many of these changes are currently being implemented or will be in the fourth quarter, but we approach this process in groups rather than all at once, leading to a lag. Secondly, there's price elasticity of demand – in an inflationary context, passing on any price increase might lead to some customers downgrading their purchases or a decrease in demand, which reflects the reality we're facing. Though the long-term value will eventually come through, short-term adjustments may take longer due to this elasticity. Lastly, in a duopoly, competitors might choose to wait before responding to price increases, potentially leading to better outcomes for them in the meantime. This tendency doesn't alter the long-term outlook, just causes some short-term disruptions in the value that tends to stabilize over a few quarters. Those are the three reasons for the delay in reflecting price increases in our profit and loss statement.

Marcelo Santos, Analyst

Bolivia.

Mauricio Ramos, CEO

Yes, the situation in Bolivia was driven by demand, but let me provide some context about the macroeconomic factors. The regulatory changes in Bolivia involve a prepaid model. Bolivia is among the last countries where consumers are actively using their prepaid balance on promotions. However, if they use the app and still have a balance, it gets consumed at higher rates. This practice continued in the industry until a couple of months ago when regulators intervened and prohibited charging when someone is outside a specific prepaid plan. The state-owned company was following the same practice as us, so we were aligned. But the regulators said to stop. This change removes some of the higher pricing we were able to maintain for prepaid users who were off their plans but still had a balance. Consequently, we've observed a significant drop in our revenue. This will eventually stabilize, and we'll return to normal rates, but it represents a temporary loss of revenue since we can no longer maintain that structure.

Marcelo Santos, Analyst

When was that implemented?

Mauricio Ramos, CEO

In the middle of the quarter. In the middle of the quarter. So this quarter, you'll see sort of a partial impact. I mean, I think on a going-forward basis, of course, we're reconfiguring our offerings to help mitigate as much of that as possible. And look, there'll be a period of time as for elasticity of the customers sort of moderate to the new environment. So we expect over time to mitigate a lot of the loss. But I think we'll have some impact here, in a bit more pronounced, probably in Q4 in Bolivia because of the full quarter's impact of that until that mitigation happens more towards the course of 2023.

Sheldon Bruha, CFO

We don't miss opportunities in Bolivia, and we're enhancing our storytelling there. Mobile in Bolivia is currently experiencing some short-term fluctuations due to regulatory changes, and our competitor is maintaining aggressive pricing. However, we don't think our competitor can sustain their pricing strategy long-term, and we anticipate they will eventually face challenges. Meanwhile, our home business continues to grow, and we remain optimistic about its future. Over the past seven years, we've developed a substantial cable business in Bolivia, which now generates more revenue than our overall operations there. We see significant potential for growth, as we've restarted our build in Bolivia this year and believe there are still around 500,000 homes that can be connected with fiber. Notably, our customer base in Bolivia has increased by 7% year over year. We've integrated our Tigo business and increased the capacity of our Tier 3 data center, which is now supporting our expanding operations in Bolivia. We are confident that Tigo will increasingly contribute to our revenue in the region, alongside other areas that are already generating more than half of our business. This provides a comprehensive understanding of the situation in Bolivia, despite the challenges posed by regulatory changes and competitive pricing strategies.

Marcelo Santos, Analyst

Thank you, fair enough. Thanks a lot.

Operator, Operator

Thanks, Marcelo. All right, we're going to go now to Soomit Datta at New Street Research.

Soomit Datta, Analyst

Yes. Hi, guys. Two or three questions, if that's okay, please. Firstly, on the mid-term equity free cash flow outlook, $800 million to $1 billion. Obviously, the macro environment is getting tougher, and you've talked about inflation as a factor. So the broader context is a tricky one for you guys, but you're reiterating the guidance. How much is Project Everest, I think you called it? How much is that a relevant factor in making sure you hit the outlook going forward? And as a related question, the spectrum in the first nine months, I think, has been running at about $160 million. So would there be an expectation that that would be slightly above the normal run rate and it would reset, particularly thinking about some Colombian spectrum need to be reissued into 2022? So yes, I mean, equity free cash flow just hitting the guide in the tougher environment and specifically maybe anything on spectrum? That's kind of one question. Secondly then just on inflation as well.

Mauricio Ramos, CEO

In the first nine months, the spectrum has been around $160 million. Is it expected to be slightly above the normal run rate and reset, especially considering the need to reissue some Colombian spectrum into 2022? Additionally, how is equity free cash flow tracking against guidance in this challenging environment, specifically regarding spectrum? Also, I have a question about inflation.

Soomit Datta, Analyst

One question with seven parts. Why don't I let you answer that and then maybe we run out of time.

Mauricio Ramos, CEO

We'll set aside the second and third parts of your question. There are several ways to respond, and I believe I've addressed most aspects. The best way to approach this is to note that the two elements in your question were already considered when we prepared for Investor Day. Although we currently lack full visibility on the final spectrum negotiations in Colombia, we have factored in the assumption that the Colombian spectrum will be renewed at higher prices than before. This will affect our performance in 2022 and 2023, but after 2024, we won't face those larger payments anymore. I hope that clarifies things. I wanted to provide visibility that 2022 and 2023 would be affected by the Colombian spectrum situation, but from 2024 onward, that issue will be resolved. So, while we don't have the final outcomes, our assumptions are reflected in the $800 million figure we discussed. As I mentioned in my prepared remarks, our projected equity free cash flow for this year remains between $150 million and $200 million, which aligns with our budget. There's no adjustment needed there; we’ve effectively budgeted towards the middle of that range. It’s true that circumstances can change after Investor Day, such as inflation or rising rates, but most of our core markets have remained stable. This situation differs from past crises, which is a critical point. Yes, Colombia has seen significant changes, and there were some minor shifts in Paraguay, but the equity free cash flow from Colombia doesn't substantially affect your inquiry. Consequently, we still feel confident that we’re within the expected range and we believe we will meet our targets despite these changes. Regarding Project Everest, we initiated it earlier this year for a couple of reasons. I’ve mentioned before that I believe we should undertake efficiency projects every few years to ensure we’re maintaining discipline and not overlooking anything. This time, we recognized that the macro environment was going to become more challenging, so we decided to kick off Project Everest early. We hadn’t planned for it at Investor Day, but we implemented it shortly afterward to assure you that we are committed to our goals. While we won’t provide specific numbers at this moment, we expect to share them in Q4. The project is already yielding significant efficiencies that will support us during these tougher times. In terms of equity free cash flow, we are on track.

Soomit Datta, Analyst

Okay. That's super helpful. Maybe just a very quick follow-up then, if that's okay. On Guatemala, I'm just interested in the phasing of the competitive environment. So you've explained the context for what's happening, but are we at the beginning of a process of escalating competition? Or do you think they are midway through or coming to the end of it?

Mauricio Ramos, CEO

I'm not going to revisit the history and context since we covered that in the prepared remarks. I think you understand it well. We have gained significant market share over the past two years, and it appears our competitor wants to reclaim some of that. We're comfortable with our current position and market share. The bigger question is whether this is just a temporary skirmish or if it indicates a longer-term competitive challenge. I want to highlight three key differences in Guatemala that may impact the long-term outlook. First, it's a two-player market with two strategic investors focused on the mid-term. The market is relatively balanced, so there are no long-term incentives for either party to make significant gains. We don’t disclose our own revenue, and that applies to our competitor as well. I believe this situation is a short-term disruption, akin to facing some storms, but it is not expected to lead to a prolonged downturn since the incentives for major shifts simply don't exist. While this review may create short-term challenges, other markets are more focused on immediate results. Although they may be quicker and bolder, we aim to defend our 60% market share, and once this storm passes, we are well-positioned. As mentioned in our prepared remarks, our focus is on the long term, and we aim to reach a sustainable long-term equilibrium as quickly as possible. That summarizes my thoughts.

Soomit Datta, Analyst

Great. Very helpful. Thanks.

Operator, Operator

Thanks, Soomit. Now we'll go to Sunny at HSBC.

Unidentified Participant, Analyst

Thanks for taking my question. So my question is on Colombia. It seems that your revenues quarter on quarter have been rather flattish. What is driving this? And how did the competitors react to your price increases in Colombia? So that's the first question from my side. The second question that I have is on a more consolidated level. How much is the broader pricing business that you have on a consolidated level? How much is it impacting your ARPUs? And how is it going to impact inflation? And how is that going to take the guidance for Q4 EBITDA growth?

Mauricio Ramos, CEO

Colombia's revenues have been relatively flat, and you're indicating that ARPUs there are also stable.

Unidentified Participant, Analyst

I'm referring to the service revenue growth in Colombia. When you look at it quarter-over-quarter, it appears to be flat, but the growth in mobile is quite rapid. What factors are contributing to the flat quarter-over-quarter growth in Colombia?

Mauricio Ramos, CEO

Okay. The second one was just basically ARPU price increase.

Unidentified Participant, Analyst

What are the overall price increases? What do you expect for EBITDA growth in Q4? How are these currently counteracting your inflationary costs?

Mauricio Ramos, CEO

On Colombia, again, it's better to answer with the big context. Our service revenue growth in Colombia is about 6%, largely coming from mobile. In mobile, it is a combination of increased intake in customers—we got about 20,000 again this quarter in Colombia—and we continue to inch up our position there every quarter now for six or more quarters. So there's an element of that which is volume. Postpaid in Colombia is up 25% to 30% on volume on a year-on-year basis. Then a chunk of this which is volume is the result, Sunny, as you may recall, from us getting spectrum, building a network, and increasing commercial distribution, etcetera, etcetera. What is new in Colombia on mobile, which we had anticipated, but is happening now for a couple of quarters, is that ARPU in mobile is being reconstructed and growing right around 6% in pesos. The reason for that is that I think we sensed quite well that the market was ready for reconstruction, and this is one of pricing penetration which we did. I was followed by now pretty much all the competitors in Colombia. That's leading to the 6% ARPU reconstruction going forward. Now your question, I think has a little bit more to do only with Colombia, which indeed is a little more sluggish. As I addressed in the remarks and in my earlier questions, indeed inflation is high in Colombia, about 10%, and consumers are feeling that. Colombia was one of the countries where people were mostly constrained during the pandemic. It's actually one of the highest home or lack of mobility ratios, so that we're seeing a lot of what I referred to as the app in Colombia happen. The third element in Colombia is that you're seeing B2B kick in quite significantly and growing quite significantly. As a result of that, we have 6% service revenue growth in Colombia. I don't want to draw— you can do the comparison, it's pretty good compared to a lot of our competitors. You can do the math. The second thing that I think is key in Colombia is that we invested quite a bit and knowingly used our margin to do that. We're on the other side of that now and we see most importantly meaningful OCF growth, double digit this year and into the new year in Colombia because service revenue is recomposing, our investment is behind us, and most of the network and other CapEx investment is behind us. As a result of that, Colombia is becoming a significant OCF core for us, which wasn't the case three years ago, because that's the way we want to play the market. All of this to simply say that Colombia is doing what we deemed it would do, say, in becoming a significant OCF core for us. Yes. Go on with the second part.

Sheldon Bruha, CFO

In the second part, you are asking about price increases and how they will play out for the rest of the year. We implemented many changes during the quarter and expect to see the benefits of those in Q4. We haven't provided guidance on our Q4 service revenue results, but we have discussed our expectations for operating cash flow, which is expected to be heavily loaded towards the end of the year. I want to clarify that our operating cash flow objectives for the year do not depend on an increase in service revenue for the remainder of the year. Therefore, we are not counting on that to improve. However, I do anticipate some growth in EBITDA for the rest of the year, primarily because we are beginning to compare against the investments we made in Tigo Money and other projects, which ramped up in Q4 last year. This gives us a more comparable situation in Q4, leading to some EBITDA benefits that will also support our operating cash flow target of around 10% for the year.

Mauricio Ramos, CEO

I think we kind of went through that pretty quick and we are on target to be right around that 10% OCF growth this year, which is consistent with our three-year 10% OCF growth organically on average. We're kind of focused on the cash flow, but the OCF, which is the only thing we've been providing long-term guidance and actually on average on a yearly basis, it is on track.

Unidentified Participant, Analyst

Yes. Thank you.

Operator, Operator

Thanks, Sunny. Next, I think we have Lucas Chavez from UBS. Lucas, are you on?

Lucas Chavez, Analyst

Thank you for taking my question. I can't use my camera right now since it's not working on Zoom, but I have two questions. The first is about Panama, and the second is about El Salvador. Could you provide more details on the current operations in Panama? I know you've discussed it extensively, but I would like to understand the mobile situation and consolidation there, as well as why it differs from other countries. Also, regarding El Salvador, could you clarify the service revenue growth you observed this quarter? Thank you.

Mauricio Ramos, CEO

In Panama, we are seeing strong performance, aligning perfectly with our acquisition business plan. Despite challenges like the pandemic and inflation, our strategy focused on establishing a significant market presence, aiming for 60% to 70% market share, defending our position, and acquiring a mobile player to enhance cross-selling opportunities. This investment thesis has indeed played out as we expected. Currently, Panama operates as a two-player mobile market due to recent industry changes, with competitors consolidating. This transition is leading to a more favorable industry structure, which we believe is setting a new standard for Central America. Our revenue in Panama is dollar-denominated, with us holding the top position in mobile market share, allowing us not only to maintain our fixed service but also to expand as demand grows in new areas of Panama. We anticipate service revenue growth of about 5% to 6%, with EBITDA margins reaching 45%. We're also observing a 20% to 22% growth in operating cash flow, which highlights Panama as a key cash flow contributor for us. Turning to El Salvador, we're pleased with the recent quarter where service revenue increased by 6%. Our strategic shift implemented three years ago, including management overhaul and new spectrum acquisitions, is now bearing fruit as we witness robust service revenue growth, expanding margins, and a growing postpaid customer base. All business lines in El Salvador are performing well, and we see potential for further growth in mobile and B2B segments, with Tigo Business becoming increasingly vital. Similar to Panama, El Salvador operates in a dollar economy, which is beneficial for our performance. That's a summary of our progress in both Panama and El Salvador.

Lucas Chavez, Analyst

Okay. That's very clear. Thank you.

Operator, Operator

All right. Thanks, Lucas. So we're right on the hour and that was our last question. So back to you, Mauricio.

Mauricio Ramos, CEO

All right. So I guess I got to wrap it up some here. You're not going to hear from me any last-minute remarks that are different from what we're saying. We are on track to deliver that right around 10% cash flow growth this year. If that is consistent, we are averaging 10% growth for the three-year period. We've had to adjust, as I said, in order to get there, and we're making it. We're going to get to $150 million to $200 million of equity cash flow this year, which is consistent with the way we have budgeted for the year and consistent with our three-year plan, targeting $800 million to $1 billion of equity cash flow. We also continue to invest $1 billion, and we have to do the investments we have made in the past, and we're happy with the ones we're making; we'll see a ton of upside opportunity in both home and in mobile where every time we deploy new networks, we see a pickup. We're also making progress on the strategic initiatives that we are aware of, Tigo Money and the Tower business. We continue to be the better gold standard in terms of ESG in the region. Our great place to work recognition demonstrates that. So we're pretty much on track despite a much harder macro environment. Thanks for joining today.