Earnings Call Transcript - TIGO Q3 2023

Operator, Operator

Hello, everyone. Thanks for taking the time to connect to our Third Quarter 2023 Results Conference Call. This event is being recorded. Our speakers today will be our CEO, Mauricio Ramos; and our CFO, Sheldon Bruha; and our President and COO, Maxime Lombardini. Following their prepared remarks, we will have a Q&A session. By now, you should have received a copy of our earnings release, which is available on our website, along with the slides that we will be referencing during today's presentation. Now if you please turn to Slide 2, you can see our Safe Harbor disclosure. We will be making forward-looking statements, which involve risks and uncertainties and could have a material impact on our results. We will also be referring to many non-IFRS metrics throughout this presentation. We define these metrics on Slide 3, where you can also find reconciliation tables in 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, Mauricio Ramos.

Mauricio Ramos, CEO

Good morning, and good afternoon, everyone. Thank you for joining us today. As usual, I will go over the highlights of the quarter and Sheldon will discuss the financials. Finally, Maxime, our new President and COO will say a few words before we take your questions. Let's start on Slide 5 with a recap of our four key priorities for 2023 and our progress to-date. We'll go into more detail on each of these points in the next several slides. But here are the key highlights. First, at the beginning of the year, we set out to dramatically improve the profitability of our operations in Colombia by simplifying the business, bringing increased discipline on capital allocation, and optimizing pricing for our services. You can see the results of these efforts starting to pay off in this third quarter. Our operations in Colombia experienced very strong EBITDA and OCF growth, and we're not done yet. We have now agreed with our partner to inject additional equity capital into the business in Colombia, allowing us to focus on executing the rest of the plan, which includes continued mobile growth, further cost discipline, and some much-needed inorganic solutions. Second in Guatemala, we are creating the conditions for a healthy and sustainable long-term industry structure. In the last six months, we participated in two transparent and successful spectrum auctions, in which both players were able to acquire all of the spectrum offered by the government. These were the country's two first auctions in over 15 years. As a result, competitors now have similar and larger amounts of spectrum, paving the way for a more rational pricing environment. Third, we continue to improve our operational efficiency across the business like never before. By simplifying product offerings and operations, digitalizing processes, reducing headcount, and automating platforms, we are driving new opportunities to further reduce costs and increase cash flow. During Q3, we began implementing phase two of our project Everest, which we discussed last quarter. We expect this phase to significantly increase the overall savings expected from project Everest. Finally, we've made great progress towards carving out our tower portfolio, Lati. Earlier this month, we began transferring assets to the new legal entities, and we're preparing to launch the monetization process. So, let's review each of these points in more detail, beginning with Colombia on Slide 6. Many of you know by now that our mobile business has been growing rapidly since we acquired crucial spectrum in the 700 megahertz band in 2020. At that time, we began a multiyear plan to expand our mobile network and extend the reach of our commercial distribution. Since then, we have steadily gained market share, especially in the postpaid segment, and we have doubled our customer base since acquiring that spectrum. The shift to postpaid has been lifting ARPU and driving mobile service revenues, which increased 8% in Q3. The scale we're gaining in our mobile business, combined with efficiencies from project Everest, drove EBITDA margin to a record this quarter. EBITDA grew almost 10% in the quarter and by close to 20% if we exclude the one-offs. We expect phase two of Everest to drive further margin expansion going forward. We are converting that EBITDA growth into operating cash flow growth, as you can see on the chart on the right. OCF in Colombia is also benefiting from lower levels of capital investment in our operations. This is largely because we're choosing to remain disciplined on price, charging installation fees, implementing price increases, and staying the course even when competitors don't follow. Even if this means sacrificing subscriber volume to gain profitability. A significant portion of our CapEx is variable in nature, directly linked to the number of new customers we sign up, given the high costs of equipment installed in their homes. So, with higher prices, we're selling less, but we're also investing less and achieving a better return on capital. Going forward, we expect our Colombian operations to sustain lower levels of capital intensity than in the past for two reasons. One, our 700 megahertz network deployment is mostly complete; and two, we anticipate significant synergies from the combination of our mobile network and spectrum with those of Telefonica. As you may have seen, this transaction received regulatory approval just a couple of weeks ago. Finally, as you may have heard, we recently agreed with a partner to each invest approximately $75 million in equity into our Colombian operation. Despite all the noise you may have heard on this topic, this equity injection has been planned for quite some time, and its key purpose is to provide long-term funding for all the investments made in the business over the past several years. There's still plenty of work to do in Colombia, but we're making good progress this quarter. Now, please turn to Slide 7 to look at Guatemala. As you know, competition has been intense in the prepaid mobile market since the end of the pandemic. We took various important strategic steps to shield our customer base and strengthen our market leadership. We remain convinced that this is the right strategy for preserving and growing the long-term value of our business, and we see early signs that this strategy is beginning to pay off. The chart on the left shows the evolution of our mobile customer base and market share in Guatemala over the last four years. As you can see, we've acquired quite a bit of market share during the pandemic. We've managed to hold onto these gains in our customer base, even as competitors began offering access to the most popular social media apps for free to prepaid customers. Defending our customer base, while being the right thing to do in the long run, has impacted our ARPU, service revenue, and overall profitability. You can see this on the chart on the right, showing the evolution of our total service revenue growth in Guatemala over the last several quarters. However, two important and positive events are relevant in the last few months in Guatemala. One, after two consecutive spectrum auctions, spectrum positions in the marketplace have increased and stabilized, meaning we no longer have a spectrum deficiency or disadvantage. This has positively affected our network efficiency and costs, as well as our service and product offerings. Two, we took some price increases in prepaid in mid-September. As a result, revenue growth remained negative in Q3, but there were clear signs of stabilization compared to Q2, and we're encouraged by the trends seen during the quarter. While it's too early to tell if this price increase will stick for the long run, we are optimistic about the response at our points of sale. We see signs of a healthier industry structure emerging in Guatemala as we had anticipated earlier. We wish to remain cautious on the commercial outlook and also flag that there have been mass protests on the streets of Guatemala since the presidential elections a couple of months ago, which may continue until the new president takes office in January. So, we remain cautiously optimistic in Guatemala. Now let's turn to Slide 8 to discuss project Everest. Many of you will recall that we started implementing our efficiency program earlier this year, aiming for run rate savings of over $100 million by the end of 2024. We are on track to achieve those savings. Additionally, early this summer, we began working on phase 2 of the program, which we mentioned during our Q2 call. In September, we began implementing significant headcount reductions and new cost-saving initiatives, starting with our centralized functions. We expect this first phase of phase 2 to produce approximately $35 million in additional savings above the initial $100 million target. We also expect to finalize the scoping for the full phase 2 alongside our annual budget plan. Our ambition is actually much broader than initially indicated, and we have already identified very meaningful opportunities that we expect to implement mostly before the year ends. Sheldon will provide you with additional details about the costs and the program in a minute. On Slide 9, let's review our progress on Lati. Lati is already a separate company and brand, with new legal entities created in every country. Earlier this month, we began transferring our assets from Tigo to Lati, and we expect to complete this process in November. This readiness allows us to launch the process to monetize this important infrastructure asset in Q4. The timing is forthcoming. As we've mentioned previously, we have certain preferences for the transaction that we envision will maximize value, but we will keep all our options open until we can evaluate and compare those presented to us. So stay tuned; the opening date is indeed coming soon. With that, I will hand over to Sheldon to discuss the financials for the quarter.

Sheldon Bruha, CFO

Thank you, Mauricio. Before we review the financials, let me quickly recap the macro context on Slide 11. As you can see on the slide, inflation across most of our markets has closely followed the trend seen in the U.S., with inflation returning to a more reasonable level of around 4%, except for Colombia, where inflation remains in double digits. The good news, however, is that the Colombian peso has strengthened significantly this year, and in fact, you will see that FX provided a small tailwind for us during Q3. Regarding economic activity, our markets are generally proving quite resilient, with countries like Panama and Paraguay expected to grow real GDP in the range of 4% to 5% this year. Now, let's look at our Q3 performance, beginning on Slide 12. Service revenue was $1.32 billion in the quarter, reflecting a 3.2% increase on a reported basis from $1.28 billion a year ago. For the first time in over a year, our service revenue benefited from favorable FX trends this quarter, primarily due to the Colombian peso. Excluding the impact of FX, organic growth was 1.8% in the third quarter, similar to the growth we reported in Q2. Our mobile business continues to perform well, accounting for nearly all growth in the quarter. Meanwhile, our fixed businesses were flat, consistent with our broader capital allocation strategy over the past year, which I will discuss later. Delving deeper on Slide 13, to the service revenue by country, most countries experienced positive service revenue growth in the quarter. The exceptions were Guatemala, as Mauricio already mentioned, and Bolivia, which saw a decline of less than 1% in Q3. This is a significant improvement for Bolivia compared to last quarter, as we've begun to lap the regulatory changes impacting results since August of 2022. Our mobile business had positive growth in the quarter, and declines were primarily from our home business, where we are very disciplined on price to drive better cash flow in a volatile macro backdrop. Colombia and Panama had low single-digit growth, largely due to our commercial capital allocation decisions focusing on mobile in these countries. The positive side featured solid mid-single-digit growth in the four countries at the bottom of this page, with all three business units contributing to growth. Now, turning to Slide 14, EBITDA of $533 million was down 1.2% from $539 million a year earlier. This quarter is cleaner than the first half of the year, but a few items need further clarification to provide a holistic picture of our performance. First, foreign exchange in Colombia contributed a small tailwind of about $4 million this quarter. Secondly, we had two substantial one-offs: the first was $22 million for severance related to project Everest, which I will discuss later; the second was an $11 million expense resulting from an adverse legal ruling in Colombia. Excluding these one-offs and FX effects in this quarter, as well as another in Q3 of the prior year, EBITDA would have grown 2.6% this quarter with positive growth in most countries. As you can see on Slide 15, EBITDA tells a similar story to our service revenue growth, with positive growth everywhere except Guatemala and Bolivia. As Mauricio discussed earlier, we are seeing signs of stabilization in Guatemala, with EBITDA declining 3% year-over-year, but remaining stable at $199 million for the third consecutive quarter. Bolivia declined 2.2%, a notable improvement from the past three quarters as we began to lap regulatory changes enforced since August of last year and improvements were seen in our mobile business there. On the brighter side, Colombia saw EBITDA grow 9.1% and almost 20% exclusing one-offs. As Mauricio mentioned, margins have been expanding over the past few years, and we believe there is further upside due to project Everest and other initiatives aiming for enhanced profitability and cash flow. Panama saw growth of 2%, consistent with the 1.4% service revenue growth seen in the quarter. Remember that we have also made investments in our sports content offering, which affected our EBITDA growth this year but strengthened our home business and helped maintain leading market share. You will also notice a lower margin in the quarter, due to heightened equipment sales related to a significant B2B contract, which is expected to generate service revenue beginning in Q4. Paraguay saw impressive EBITDA growth of 8.1%, expanding to 11.6% when excluding Everest-related severance. This strong performance aligns with solid service revenue growth in that area. El Salvador reported EBITDA growth of 16.1%, contributing to lower than usual bad debt that flattered performance for the quarter. On a year-to-date basis, EBITDA is up just under 7%, which aligns with the mid-single-digit service revenue growth in that country. Nicaragua experienced EBITDA growth of 3.6%, as our business and overall economy continue to grow despite the unstable political environment, primarily due to remittances to the United States. Finally, while not consolidated, Honduras had another strong quarter with growth of 7.9%, reflecting improved revenue trends throughout the quarter. Now, please move to Slide 16 to review our efficiency program project Everest. Mauricio already provided highlights, but I want to unpack various aspects. Regarding savings, we are accelerating our plans. For phase 1, we remain on track to deliver over $100 million by year-end 2024 and are indeed ramping up our efforts. On a run rate basis, we now expect to achieve over 75% of the savings by the end of 2023, up from our previous estimate of over 50%. As Mauricio mentioned, we have significantly expanded the scope of the project, which we are now referring to as phase 2. During the quarter, we incurred $22 million in implementation costs, of which $90 million was tied to new initiatives concentrated in our headquarters and other centrally managed and shared service operations, affecting about 30% of our Miami-based workforce. We expect this to yield additional run rate savings of approximately $35 million over and above the phase 1 savings of $100 million. Altogether, since the beginning of this year, we have reduced our Miami-based workforce by approximately 40% through a series of restructuring decisions. Over the coming weeks, we will finalize our 2024 budget and anticipate additional measures across all geographies as part of the process, which we expect will lead to further savings for the business. We will provide more information during our full year results in February. Please move to Slide 17 to view our typical net debt bridge. Net debt decreased by $74 million in the quarter to just over $6 billion. Net debt to EBITDA after leases was 3.32 times, down from 3.34 times in Q2, including lease obligations of just over $1 billion. Our leverage stood at 3.34 times. The reduction in net debt during the quarter stemmed from strong equity-free cash flow of $100 million, partially offset by the foreign exchange impact from the translation of local currency debt as the Colombian peso strengthened this quarter. Regarding our equity-free cash flow, please note that there is significant seasonality here. Q1 typically shows negative cash flow, improving throughout the year. The robust cash flow in Q3 reflects standard seasonal patterns, alongside some benefits from project Everest and our capital allocation decisions over the past year. Looking ahead to Q4, which usually represents our strongest quarter for equity-free cash flow, I'd like to caution that this year may differ due to expected spectrum payments exceeding $100 million in Q4. These are for the renewal of the 1900-megahertz spectrum in Colombia and the acquisition of the new spectrum in the 700-megahertz band in Guatemala. We also flagged these items when we revised our equity-free cash flow targets in June. Additionally, in Q4, we will need to account for many of the severance costs we recognized in Q3 as well as those we expect to book in Q4. Now, I'll turn the call over to Maxime, who is joining us for the first time on this earnings call.

Maxime Lombardini, President and COO

Thank you, Sheldon. It is my pleasure to be here today. As you may know, I joined the company on the 1st of September, so a little less than two months ago. At this time of year, the company begins planning its budget for the next year, which has allowed me to interact with each of the country teams and with the leadership teams in Miami and Luxembourg. I've also had the opportunity to travel to our three biggest countries of operations, Guatemala, Colombia, and Panama, and aim to visit even more before the year ends. As you can imagine, I'm still learning about the company, but I can share some of my first impressions on my priorities. Firstly, TIGO is an incredible company with a strong brand and market leadership position, operated by a talented team with a strong culture and a can-do attitude, ready to tackle any challenges when the target is clear. We do, however, conduct business in countries with volatile macroeconomic and political environments, which means we must operate efficiently and with lower leverage. This is critical for ensuring that the business can generate higher equity-free cash flow each year. With this in mind, one of my first priorities has been to significantly expand efforts on cost control. We initiated this push in September by drastically decreasing headquarters costs in Miami. As part of the budgeting process, I am currently challenging each country team on costs and CapEx. On a daily basis, I personally review each purchase order and every dollar spent. In conclusion, short-term cost control is a clear priority, while also ensuring we capture long-term revenue growth opportunities with necessary investments to maintain the excellent customer experiences your customers have come to expect. I will report back to you next quarter on our progress with more details.

Operator, Operator

Thank you, Maxime. We're now moving into the Q&A session. As a reminder, if you'd like to ask a question, please email us at investors@millicom.com. Our first question will come from Oscar Ronnkvist from ABG. Oscar, the line is yours.

Oscar Ronnkvist, Analyst

Thank you. And good morning, even though it's in the middle of the day for me in Stockholm. So just two questions, if that's okay? First one on Guatemala. You say that signs of improvement are visible, so how should we think about timing? You mentioned around 1% to 2% decline in service revenue in the last few quarters, and I wanted to get a sense of whether you foresee that delta improving already in Q4 or if it might take a bit longer. My second question is just on CapEx. I think you've been around $180 million each quarter for the last three months, and while you mentioned holding back on home, I'm also keen to know more about your efficiency efforts. Just if you could elaborate on the timing or any quantification of the new run rate, please? Thank you.

Mauricio Ramos, CEO

Hello, Oscar and thank you for joining us today. I'll take the first question on Guatemala, timing, etc., and then give Sheldon a moment to prepare some numbers for you on the CapEx question. On Guatemala, we've played it really well, and the timing, which is the core of your question, is occurring pretty much as we expected. As you'll recall, over the last year or so, we've faced intense competitive pressure in the prepaid market. We set out to hold our strong market share position, and we've been able to do that, not without some pain in the revenue, but certainly holding onto our market share and subscriber base. We did this knowing we could revamp and stabilize both our spectrum and network positions, which has played out over the course of the quarters this year. We have seen results from two consecutive spectrum auctions where we no longer face a network or spectrum disadvantage. We're cautiously optimistic, now focusing on commercial actions as we move forward. However, we must manage expectations as last year’s Q4 benefited from a good performance due to the World Cup, which we won’t have this year. So, again, long-term, we're playing a strategic game here. Sheldon, do you have any color on CapEx?

Sheldon Bruha, CFO

Oscar, you flagged that we've observed CapEx levels around $180 million in recent quarters. We've made decisions about discipline in spending, particularly in Colombia and Bolivia, where we've focused on maintaining our capital allocation strategy. Going forward, I wouldn't expect CapEx spends to exceed current levels as we enter 2024. Instead, you could expect CapEx to be at lower levels.

Oscar Ronnkvist, Analyst

Understood. Thank you very much.

Phani Kanumuri, Analyst

Yes. Thanks everyone for taking my questions. My first question is on Colombia. I see that your margin expansion was strong this quarter. How sustainable is this margin expansion? And once you complete project Everest, where do you expect the margins to settle in Colombia? And again, my second question is also about Colombia. You had a recent equity infusion there. Do you foresee any further equity infusions in 2024 or 2025?

Mauricio Ramos, CEO

I'll take the first question and perhaps a bit of the second, giving Sheldon time to prepare the numbers. The factors driving our record margins in Colombia this quarter are multifaceted. First, we've heavily invested in our network and commercial expansion, particularly post the acquisition of our 700 megahertz spectrum. Now, we are in an efficiency phase regarding these investments and expansions. Additionally, mobile is a scale game, and we have been gaining scale, particularly in the postpaid segment of Colombia. This helps increase margins on a fixed cost base. Project Everest has also contributed, especially phase 1, which we initiated at the beginning of the year. Also, there is a degree of cautiousness regarding pricing rationality in the market for the last few quarters. Going forward, we expect to keep driving efficiencies towards enhancing our operational margin. Now handing over to Sheldon.

Sheldon Bruha, CFO

Mauricio, you hit the key points. I think EBITDA and margins are primary metrics to track. However, we focus heavily on equity free cash flow performance to drive our business toward breakeven, and ultimately into positive equity free cash flow territory. Once we reach that phase, we anticipate there will be more capital needed from shareholders, but that will not be required once we achieve equity free cash flow positivity. Progress is expected next year for achieving that target.

Phani Kanumuri, Analyst

So would you envision a timeline for Colombia to reach breakeven?

Mauricio Ramos, CEO

There’s this annual duty of business performance known as the budget. That's all I'll say. But we are very focused on this timeline.

Marcelo Santos, Analyst

Hi. Good morning. Thank you for taking my questions. First, do you have any updates on Tigo Money since it was mentioned during the Investor Day? We would like to know how that's progressing. The second question is for Maxime. You mentioned wanting to make the right investments for capturing long-term revenue growth opportunities. Can you elaborate on your vision for this?

Mauricio Ramos, CEO

On Tigo Money, we continue to grow its business positively by expanding geographically. We're already strong in Paraguay and Bolivia, and we launched in Guatemala this year with a full suite of products. We’ve also gained licenses and launched in Panama. Progress has been happy overall, and we are also focusing on completing the delivery of the complete service offering, including the Wallet application. We believe this integration with the telecom business benefits both sectors significantly. We are past our investment phase and now focused on achieving breakeven in Tigo Money. Maxime, your turn.

Maxime Lombardini, President and COO

Good morning. Thank you, Marcelo, for your question. As I joined the company around seven weeks ago, it's a bit early to define a complete strategy for the future. One immediate area of focus is ensuring that cost-cutting measures are balanced with long-term revenue growth opportunities. We aim to invest prudently in mobile densification coverage while optimizing our investments in fixed services. I'd prefer to provide more concrete details in future updates once I gather better insights about our operations.

Stefan Gauffin, Analyst

Can you quantify the expected savings from the network joint venture with Telefonica in Colombia, specifically for OpEx and CapEx, and when can those savings materialize? As a follow-up, Maxime, you expressed concerns about high leverage and mentioned strategic initiatives like the sale of Lati. What level of leverage do you see as comfortable, and are you prioritizing debt repayment over shareholder returns from this?

Mauricio Ramos, CEO

To address the network joint venture, while I cannot provide specific details, the opportunity lies in reducing both OpEx and CapEx by combining our resources while also maximizing spectrum utilization. Regarding leverage, I agree that we must ensure we maintain reasonable levels, and I’ll hand it over to Sheldon for a more comprehensive perspective.

Sheldon Bruha, CFO

In terms of leverage, our intermediate target remains at 2.5 times EBITDA. We've not made as much progress toward that goal this year due to several factors, some within our control. However, we're anticipating next year to be a significant year for cash flow generation, primarily from equity free cash flow performance and minimizing unusual one-off charges impacting our results this year.

Eduardo Nieto, Analyst

Thank you, everyone. I want to follow up on the capital allocation strategies and the recent negative watch by Moody's. What's your plan to address those concerns? Additionally, regarding the 5G spectrum in Colombia, how do you plan to translate EBITDA performance into cash flows in the coming quarters? Are there other opportunities for inorganic solutions?

Mauricio Ramos, CEO

On our capital allocation plans, while there was noise surrounding Colombia, we exited this process with a strong capitalized and well-performing business, with expanding margins. Our primary focus is targeting equity free cash flow positivity as soon as possible. I can assure you the business in Colombia is moving positively in that direction. I'll let Sheldon add more details.

Sheldon Bruha, CFO

To summarize Eduardo's contributions. We're addressing cash flow and leverage concerns, which are also priorities raised by Moody’s. As we enhance cash flow performance next year, we expect notably better results, by clearly presenting actions that mitigate elevated costs as well as improved leverage.

Fredrik Lithell, Analyst

First, regarding severance costs mentioned for Q4, was that correctly understood, indicating a peak in Q3? My second inquiry involves project Everest and its various phases. How do you plan to balance cost cuts for maintaining growth, while avoiding negative impacts on customer care or critical investments?

Mauricio Ramos, CEO

We are very careful with our approach towards cutting costs, ensuring we do not sacrifice long-term revenue-generating capabilities in the process. Our approach requires surgical precision, increasing efficiency while optimizing our revenues along the way, grounded by the support from our new large shareholders.

Sheldon Bruha, CFO

Yes, in addition, we are eliminating complexity across the business, which should also enhance customer interactions. We will continue to review our CapEx across the board, ensuring we provide the necessary services to maintain growth. To clarify regarding Q4, yes, we will be seeing further severance costs as we finalize our budgeting, anticipating sizable charges in the tens of millions.

Mauricio Ramos, CEO

In summary, our key takeaways today include that Colombia is on a positive trajectory with improving profitability and capitalization. We've gained regulatory approval to merge our mobile network and spectrum positions in Colombia. We’ve made notable progress this quarter in executing our strategies in Colombia and Guatemala. We continue pushing on cost savings through a broadened phase 2 of project Everest, and our collective efforts are aimed at achieving strong performance in 2024.

Sheldon Bruha, CFO

Thank you.