Earnings Call Transcript
MILLICOM INTERNATIONAL CELLULAR SA (TIGO)
Earnings Call Transcript - TIGO Q1 2023
Operator, Operator
Hello, everyone. Thanks for taking the time to connect to our First Quarter 2023 Results Conference Call. This event is being recorded. Our speakers today will be our CEO, Mauricio Ramos; and our CFO, Sheldon Bruha. 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. 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 non-IFRS metrics throughout this presentation. We define these metrics on slide 3, and you can find a reconciliation of these 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.
Mauricio Ramos, CEO
Good morning, and good afternoon, everyone. Thank you for joining us. Today is the International Day for Girls in Communications and Technology. As a member of the ITU, UNESCO Broadband Commission for Sustainable Development, I would like to celebrate this day and highlight the importance of empowering young women to pursue careers in ICT. In that spirit, we're also celebrating today the anniversary of our own Conectadas digital platform. As we just saw in the short video, this program offers free training for women who want to acquire digital skills and apply those skills to their lives, their businesses and in their communities. To-date more than 745,000 women have been trained since the launch of this program back in 2017. And as you know, we're a purpose-driven company. So we also measure our success by how well we lead that to our purpose of building digital highways that connect people, develop communities and improve lives in the countries where we operate. With that, let's focus on the highlights for the quarter on slide 5. Let's start with the obvious; we're navigating through a challenging macro and political environment in the countries we operate in, particularly Bolivia and Colombia. But we continue to execute very well during the quarter. Service revenue grew 2.2% during the quarter with a number of bright spots that position us for faster growth as economic and competitive conditions will improve. Two of those bright spots are B2B, which continues to accelerate and postpaid mobile, which continues to show strong momentum. I will talk about both of these businesses later. And finally, during the quarter, we made important strides in improving our operational efficiency as we began implementing Project Everest, our new cost savings and operational efficiency program. As you know, Project Everest is an important pillar of our financial plan for the next two years. And it is also one important reason why we remain confident that we will achieve our medium-term financial targets. Please turn to slide 6 for a look at service revenue in Q1. Service revenue grew 2.2% during the first quarter, driven by growth across all business units. As I've mentioned before, there are some shifts in how we were achieving our growth, and this is consistent with the general trends we see in our markets. Home business is indeed seeing slower growth, but mobile, particularly in postpaid and B2B, continues to see very strong growth. Our B2B business has once again been our top performer, which I will discuss in more detail shortly. Sheldon will talk later about our performance by country, but the key point on this slide is that we continue to see positive growth across the vast majority of our countries demonstrating the strength and resiliency of our business. Let's go in detail on B2B on slide 7. Service revenue for B2B accelerated to 6% in Q1, up from 5% in 2022. Our revamped Tigo Business strategy continues to pay off handsomely with digital service revenue growing by 28% in Q1. Our digital services include cybersecurity, managed multi-cloud and secure SD-WAN. These services now make up 19% of our total B2B revenue, and they continue to grow in importance. The key to our success in B2B is our holistic strategy with clear customer segmentation, well-trained sales teams and key partnerships with global leaders, including Microsoft, Amazon and VMware. These partnerships, in addition to the quality of our infrastructure, allow us to deliver high-end B2B solutions to all our clients. In line with this, we recently launched Cloud360. This is our new flexible offer for private and public clouds powered by our partner VMware. As a result of these efforts, today, we serve well over 340,000 SME clients around the region, along with thousands of mid and large-size corporations as well. Our B2B revenues are now well over $800 million per year, and yet they make up only 16% of our total service revenue. We have a strong pipeline of projects to sustain solid B2B revenue growth going forward. So I have challenged the team to soon make this a $1 billion B2B revenue business. Now, let's look at our postpaid mobile business on slide 8. Our postpaid subscriber base increased by 168,000 net adds during the quarter. We have added almost 2 million new postpaid customers over the last two years. As a result, postpaid customers now make up 16% of our total customer base, that's up significantly from 12% two years ago. And we think we still have a long way to go to migrate customers into plans that drive higher ARPU. This strong subscriber growth has translated into sustained postpaid service revenue growth over the last two years. In Q1, service revenue from postpaid grew almost 9%, and the business remains one of our most important growth drivers. Now let's talk a bit more about Home on slide 9. As I've mentioned in previous quarters, we have seen a slowdown in Home Business over the past year, and this quarter saw a continuation of these trends. This slowdown is largely focused on Colombia and Bolivia as the Central America Home business continues to grow. The slowdown is a result of the natural ebb of demand after the pandemic, the more difficult macroeconomic conditions, particularly in Colombia and Bolivia, and continued competitive pressures in those two markets. We have also taken a very measured and long-term approach, maintaining strong price discipline and sustaining installation costs to make sure that new customers are profitable. We have also rationalized our investments in those markets to adjust for the slowdown. We continue to believe this slowdown is temporary and there is significant untapped potential to fix broadband in our markets. And thus, we stand ready to renew investment pace once conditions do improve. Now let's turn our attention to Tigo Money on slide 10. I am excited as ever about the prospects for mobile money and for Tigo Money, in particular, in our region. Our Tigo Money team is energized and driving its entrepreneurial spirit into the new hub-based Tigo Money products that we're launching. The app is live now in our five existing Tigo Money markets and is driving digital adoption. Our digital or app-based user base has doubled over the past year. We have also launched a new digital merchant platform to which we're adding merchants across all countries on a daily basis. We have relaunched in Guatemala, where we just signed our first and crucial banking interoperability agreement. We're getting ready to launch in Panama later this year, where the merchant platform already includes Uber, Starbucks, the largest chain of gas stations, and various large retail chains. We have also started micro-lending pilots in Paraguay and Guatemala and are pleased with the early results. So we're excited about Tigo Money, so stay tuned for more news and positive developments as we go forward. Now please turn to slide 11 to talk about Lati, our developing tower business. We continue to make strong progress on Lati as well. The next important step will be the transfer of towers to new legal entities in each country. Simply said, this step will now keep us on track for a transaction later this year. We expect to launch the formal sale process in the second half of this year as planned. And as we have said often, we remain open-minded about the financial structure that we would ultimately choose, although we continue to have a slight preference for the option of selling a majority stake to financial investors. Let's move to slide 12 to review some country highlights, beginning with Guatemala. Growth for our business in Guatemala this quarter was flat. Home, B2B, and postpaid, however, all continued to grow very well, well into the mid-single-digit area with the competitive challenge concentrated in prepaid. As you recall, roughly one year ago, we responded to our competitors' aggressive commercial strategy, and this had an immediate impact on reload activity. Since then, we've been very successful in stabilizing customer activity levels and in protecting our market leadership. Our customer base and market share positions have been preserved, no further price erosion has ensued, and we're now seeing reload activity picking up again. So our investments, both in the networks and in our commercial distribution channels have paid off, even if they have been costly to EBITDA as you see this quarter. The prepaid segment remains competitive, but pricing is now stable, and we expect our performance to gradually improve from here because reloads are picking up and because comparisons will get easier in the second half of the year. We're also benefiting from having recently paired the 700 megahertz spectrum that we acquired three years ago. This will allow us to maintain our edge in terms of network coverage and our consumers are already benefiting from that. Finally, I should point out that S&P recently upgraded its rating for Guatemala, very much in line with our expectations as the country remains stable. Now please turn to slide 13 to discuss Colombia. As you can see on the left, our postpaid customer base in Colombia continues to grow rapidly and now represents almost a third of our total customer base. Our strong postpaid performance is driving our mobile service revenue growth, which grew by 8% during the quarter, as you can see on the right. This is now largely coming from higher ARPU. As we have said in prior quarters, ARPU is slowly recomposing in Colombia. This simply means that our recent investments in spectrum, network and commercial distribution are all paying off. Meanwhile, B2B in Colombia had a very strong quarter, growing in the high single digits, by far our best performance since the pandemic. This more than offsets the challenges we face in our business in Colombia, which I discussed earlier. Finally, we're in the last stages of negotiating the renewal of our spectrum in the 1,900 megahertz band, which we think is key to maintaining our strong momentum in mobile in Colombia. The outcome of this renegotiation we expect will be as we have planned. Finally, let's move to slide 14 on Panama. In 2018, we entered Panama with the acquisition of Cable Onda, the leading cable operator in the country. We added mobile in 2019. We then rebranded everything to Tigo in 2020, and subsequently introduced Tigo Business, and launched Tigo Sports last year. Today, our brand is well established and we're the leading telecom provider in the market, and Tigo Money is coming later this year. This was our playbook, the Tigo playbook for Panama. As per acquisition plan, postpaid mobile has been the main driver of our growth in Panama as evidenced by the chart on the left. We have sustained consistent customer growth every quarter for the past three years as we migrate customers from prepaid to postpaid and as the market consolidates around the two market leaders. Today, our Panama business generates over $650 million in revenue, almost $300 million in EBITDA, and it has become a very important contributor to our cash flow in dollars. With that, let me turn it over to Sheldon.
Sheldon Bruha, CFO
Thank you, Mauricio. Before we review the financials, let me recap the macro context on slide 16. We continue to monitor the macroeconomic situation in our countries. On the left, you can see how inflation has been tracking over the past quarter, falling to 6.9% in March from 8% in December. All countries are declining, except for Colombia, where inflation increased slightly to over 13% at the end of March. On the right, you can see the GDP growth expectations, which compare the IMF April GDP forecasts to the April 2022 estimates. Overall, GDP growth expectations remain broadly stable, and on average, our markets are expected to grow about 3%. The IMF is expecting a decline in growth in Colombia and Bolivia. And we are monitoring the macroeconomic situation in these countries closely and are calibrating our CapEx spend accordingly, which I will touch on shortly. Now let's look at our Q1 performance, beginning on slide 17. Our service revenue was negatively impacted by adverse FX trends this quarter, primarily due to the Colombian peso, which depreciated 17% on average during the quarter compared to a year ago, as well as the Paraguayan Guarani, which depreciated about 4%. Excluding the impact of FX, organic growth was 2.2%. Our mobile business grew 2.4% and contributed about two-thirds of the overall growth in the quarter. For the third consecutive quarter, all of this mobile growth came from postpaid, which grew at 8.8%. The investments we made in some of our mobile businesses and the networks in recent years, especially in Colombia, continued to yield positive results for us. Drilling down further on slide 18 to the service revenue by country, Mauricio has already talked about Guatemala, Colombia, and Panama, so I won't cover those again. Elsewhere, our performance in most of the other markets was solid. Paraguay had one of the best quarters in recent history, growing 6%. This growth was driven by robust performance across all business units. Nicaragua maintained their strong momentum with growth of over 6%. Similarly, El Salvador continued its momentum and was up 3% in the quarter when every business line contributed. Bolivia was down 1.5% as we again felt the impact of a change in regulation on mobile data overage rates that went into effect last August. We will lap these effects in Q3 of this year. Finally, Honduras, which we don't consolidate, had a strong start to the year, growing almost 6%, continuing the strong performance seen in the second half of last year. Okay, turning to EBITDA on slide 19; EBITDA of $507 million was down from $564 million from a year earlier. ForEx impacts, particularly in Colombia and Paraguay were a big driver of this and represented about half of the reported dollar base decline. But there were a number of unusual items I want to unpack that affected the results this quarter, in addition to investments that we are making in the business. Firstly, as I mentioned last quarter, we kicked off the implementation of our cost efficiency program, which we call Project Everest. During the quarter, we spent about $15 million related to restructuring costs, primarily employee severance costs across our headquarters function as well as several of our operations. I will go into more detail on this project later in the presentation. But this was a significant onetime hit that will lead to savings further on. Secondly, related to the private discussions that we are ongoing, we incurred costs during the quarter in the low single-digit million dollars on legal, advisory and other third-party fees. Finally, our share price increased more than 50% in the quarter, impacting the booking of our share-based compensation, which is a noncash item, resulting in an incremental impact to EBITDA in the mid-single-digit million dollar range. This is an unusual item affecting 2023 where the impact is spread evenly in each quarter of the year. We have also continued to actively invest in our businesses to support our growth and strategic vision. During the quarter, we had additional investments in content, including Vix, which we launched in the second half of last year. Additionally, we continue to support Tigo Money and our tower business, Lati. During the quarter, we had additional investments of mid-single-digit million dollars in these items in excess of the spend incurred in Q1 2022. Excluding FX, unusual items and investments, our EBITDA would have declined around 1% during the quarter, reflecting declines in Guatemala and Bolivia, partially offset by growth in our other countries, which I'll review on the next slide. So looking more closely at EBITDA performance by country on slide 20; as I mentioned on the previous slide, restructuring costs impacted our margins this quarter not only on a consolidated basis but also at a country level. Colombia, Panama and Paraguay all saw restructurings during the quarter, and excluding the impacts of the severance, each of these countries would have grown. Paraguay was also impacted by the timing of our credit note payments, which negatively impacted the margins in the quarter. El Salvador grew 1.6%, and Nicaragua saw very strong growth of almost 9% with margins increasing over 200 basis points to almost 45%. Guatemala declined 6%, reflecting increased commercial intensity to strengthen our prepaid offering. This spending is having the desired effect with prepaid reloads returning to levels from last summer. Additionally, as Mauricio explained earlier, in Guatemala, our subscription businesses, including B2B, have continued to perform well, but the margins associated with these businesses are lower than the high margins of the prepaid and incoming international revenues they were replacing, which impacts our margins. We are confident that the efforts that we are taking in Guatemala are solidifying our market-leading position and will provide the foundation for the operation to return to EBITDA growth. Bolivia EBITDA declined over 5% as we saw the full quarter impact of the regulatory change from August 2022, which dropped straight to our EBITDA line. Finally, Honduras, which we do not consolidate, had strong growth of 4%, reflecting the improved revenue trends during the quarter. I want to spend a moment reviewing our efficiency program Project Everest, where I'm pleased to report we made significant progress this quarter. Our team has been hard at work on several key projects that will drive greater efficiency and agility across the organization. As I mentioned last quarter, this is not simply a cost-cutting exercise, but an improvement in the way in which we operate. Important accomplishments this quarter included organizational restructuring across our headquarters function and several of our operations, prioritization, and rationalization of our IT spend, fixed mobile conversion efforts to reduce commercial OpEx, several optimizations to reduce spend, and finally, power saving initiatives such as improved data and analytics and alternative cooling methods. These initiatives will enable us to achieve our goal of over $100 million in annual run rate savings by the end of 2024, with more than $50 million of these run rate savings expected by the end of 2023. I mentioned previously that we incurred implementation costs in Q1 of approximately $15 million. We will continue to incur some implementation costs into Q2, but we anticipate this will be a much smaller amount, after which the bulk of the restructuring and implementation costs will be behind us. As a result of all of this, we anticipate we will have material net savings within the year 2023. Moving to slide 22, I want to touch a bit on our CapEx investment. The main points I want to make here are: first, we continue to invest in the business by modernizing and improving our mobile business and expanding our footprint and connecting new customers on the home side. Our investment in the business is ongoing, and we remain committed to ensuring that we provide the best possible service to our customers on the best network in the region. Second, we have the ability to adjust our CapEx as needed. As we saw during the pandemic in 2020, our CapEx spend declined to below-average levels. We were able to pick back up the rate of build and connections and quickly return to above-average CapEx spend. We're able to be flexible because much of our CapEx is variable and dependent on demand, which allows us to adjust our spending based on market conditions. As Mauricio discussed earlier, we are seeing a slowdown in home demand and are experiencing some macro challenges in Colombia and Bolivia in particular. We are ordering our build as a result and are also experiencing lower connection CapEx as well. Additionally, as we are focused on efficiencies, we have been able to secure multiyear agreements with our key mobile vendors, which will lower our CapEx spend while still allowing us to expand capacity and coverage of our networks as we planned. This combination of factors means that our 2023 capital intensity is expected to continue to trend lower towards our long-term target of around 15% CapEx to sales. In dollar terms, this means that our total 2023 CapEx spend will be about $100 million lower compared to 2022. Now let's take a look at equity free cash flow on slide 23. You'll recall from last year that we have a lot of seasonality in our cash flows with Q1 being a big negative quarter for us. This is the quarter we have a high level of prepayments for items such as annual IT licenses, regulatory fees, sports soccer content, sponsorships, and insurance. We also spend working capital to replenish inventories that become depleted during the high selling of the Q4 holiday season. This quarter is even a little bit more pronounced with the negative equity free cash flow of $133 million compared to outflow of $63 million in the prior year. A few additional cash flow items hit us in Q1 this year. A similar annual coupon paid in the quarter on the Guatemala bond issued in January of last year. The outflow of $20 million from working capital related to a tax amnesty in Q4 of last year, the first half had this payment flowed out in Q4 last year, timing of spectrum purchases. Q1 had higher spectrum costs this year primarily related to the acquisition of AWS spectrum in Panama for $20 million. It's important to note that all of these items were accounted for in our budget and are related to timing. As a result, these do not affect our confidence in achieving our three-year equity free cash flow targets of $800 million to $1 billion. Now please turn to slide 24 for our usual net debt bridge. Net debt or so caused by derivatives is up $184 million, mostly due to seasonal cash flows during the quarter. We also had a ForEx impact from the translation of local currency debt as the Colombian peso at March 31 strengthened from the level at December 31. As I said earlier, EBITDA this quarter was impacted from one-off costs from among other things, implementation costs from Project Everest and non-cash share-based compensation from a higher share price, all of which are having short-term impacts on our debt-to-EBITDA leverage ratio. We ended Q1 at almost $6 billion of net debt and a net debt-to-EBITDA after leases of 3.18 times. If we include lease obligations of just over $1 billion, our leverage was 3.23 times at the end of Q1, which was up from 3.06 times at year-end from the reasons I just discussed and is down from 3.46 times a year ago. Let me hand the call back over to Mauricio to do a wrap-up.
Mauricio Ramos, CEO
Thank you, Sheldon. At our Investor Day just over a year ago, we outlined the value creation strategy centered around our clear purpose to build digital highways. The two key financial targets of that strategy are: one, to drive organic operating cash flow growth of around 10% on average between 2022 and 2024; and two, to generate cumulative equity free cash flow all-in, in dollars of $800 million to $1 billion during that same period. Macro conditions should remain challenging today, but one, we're harnessing the benefits of investments that we've made in recent years to strengthen our networks and our brand. Two, we're implementing Project Everest to increase operational efficiency; three, we're putting through price increases to mitigate the effects of higher-than-expected inflation; and four, we're adjusting investments to a slower short-term demand for our home products. As a result, we remain on track and reconfirm those midterm financial targets. We also remain focused on unlocking shareholder value from our valuable infrastructure and fintech assets. As you heard earlier today, we're seeing strong operational and financial momentum in Tigo Money, while our TowerCo is on track for a potential transaction later this year. Finally, we're also on track to meet the important external ESG commitments that we have made. Today, we're pleased to report that we have maintained our MSCI ESG rating of AA. This rating continues to place us above the industry average. With that, we're ready for your questions.
Operator, Operator
Thank you, Mauricio and Sheldon for your remarks. We will now begin the Q&A session. As you are aware, we published a press release on January 25, in which we confirmed that we are having discussions with Apollo Global Management and the Claure Group about a potential acquisition of all outstanding shares in Millicom and that there is no certainty that a transaction will materialize nor as to the terms, timing or form of any potential transaction. We have no new updates on this topic and for legal reasons we cannot and will not take any questions on this topic today. As a reminder, if you would like to ask a question, please let us know by emailing us at investors@millicom.com, and we will add you to the queue. Our first question today will come from Andres Coello at Scotiabank. Andres, the floor is yours.
Andres Coello, Analyst
Thank you. Good morning everyone. Thank you for letting me make the first question. It is clearly my opinion that the one market where you are facing most challenges is Colombia, right? You have a macro challenge. Your competition is difficult. You face a very dominant incumbent, which is America Movil. I'm wondering if it's not a good time to start thinking about possible strategic alternatives for Colombia, perhaps including market consolidation in Colombia. And so I'm just wondering if this is something that the company is currently reviewing if there are ongoing possible discussions with Telefonica or other players or any other possibilities for improving profitability in Colombia and also for making it a more rational market where you can actually earn free cash flow. Thank you very much.
Mauricio Ramos, CEO
Well Andres, thank you for the question. Good seeing you. Before I address the inorganic part of it, Colombia is a market in which we think organically we've made all the right moves. You're very well aware of those: the spectrum, building the network, increasing the commercial distribution, putting in place a postpaid strategy, gaining a lot of traction, and it is the one market where we're clearly making headway organically, particularly on mobile, while fixed is a little slower than it had been in the past. Normally, we wouldn't comment on any specific M&A transaction; I won't do that. So my comments are going to be very generic and more about the market. We've often said that the Colombia mobile market particularly requires not just the organic wins we'll be having but inorganic solutions where networks come together and become more efficient, whether that be mobile or fixed or whether it be actual industry consolidation with players coming together. Today, effectively, the market is a market of one and all the other smaller operators, including ourselves, are starting to make a return, to be very clear on that. As a result, there is indeed a need for reconstruction of the industry, whether it be the consolidation or whether it be the super consolidation of fixed or mobile networks. And you're right. I read your report, by the way, that the time is about now because in the next year or two, the entire industry is renewing spectrum licenses. So there's a lot of pressure on the cash flows from those renewal of the spectrum licenses, and that is applicable to everyone. So something's got to change, and it's got to change soon because it doesn't work for all the players but one. So if your question is, is the market ready now for inorganic solutions, whatever the spectrum of those are, the answer is yes. Not only yes, but it is now. Part of your question was whether we're actively working on all such possible improvements and solutions, yes. Not only now, we've been working on that for a little while. Do we think something may happen? Possibly. It should; it needs to. Can we handicap or suggest exactly which one of the options or guarantee that any of them will come about? No. But quite clearly, if there was a market in which the opportunity exists, the opportunity is now. How about that for not answering an M&A question.
Andres Coello, Analyst
That was very useful. Thank you very much, Mauricio. That’s good guidance.
Operator, Operator
Great. Thanks, Andres. We'll take the next question now from Marcelo Santos at JPMorgan.
Marcelo Santos, Analyst
Hi, good morning. Thanks for taking the question. I wanted to understand a bit better, which of the unusual items and the investments that you discussed such as Project Everest, which of them should persist in the coming quarters? Like how should we see these items affecting? Is this more related to only the first or should we expect some spillovers? This is my first question.
Mauricio Ramos, CEO
Do you want to have a crack at that one, Sheldon?
Sheldon Bruha, CFO
Thanks, and good morning. In my prepared remarks, I addressed a few of these points. There were some one-off or unusual items related to the Project Everest implementation this quarter, which was particularly heavy for us. I expect some additional implementation costs in Q2, but those should largely be behind us after that. There may still be some lingering costs, but they will be minimal. I also mentioned the impact of share-based compensation, which is higher for us due to our stock price fluctuations in Q1 when we were awarding employees. This will be accrued throughout the quarter, so we expect to see a similar impact in the upcoming quarters. Additionally, we are making investments, especially in content for Vix and elsewhere, which will be more significant in the first half of this year. Once our activities ramp up, the negative effects of those start-up costs should be mostly behind us. Therefore, the impact will primarily be felt in the first half, with some drag expected in the second half. Lastly, how costs related to discussions about the take-private situation will evolve is somewhat unpredictable, and depending on that outcome, there could be some ongoing costs.
Marcelo Santos, Analyst
Good, perfect thank you. If there's time just for a new question. Could you please comment on the fixed market in Panama, like the home is a bit tough? So any comment would be good.
Mauricio Ramos, CEO
Yes, sure, for sure. So as I alluded to in the prepared remarks, our strategy in Panama, if you were to look at our acquisition plan Marcelo, it is one of those cases in which everything other than the pandemic, of course, that was not in the acquisition plan has happened as we expected and very much as a playbook or the acquisition plan indicated. And that largely was in summary, sustain and hold on the home part of the business because when we bought the asset, we had 70% mobile, sorry, home market share, which we still do. So that was never for us to be the source of growth. But that was the basis upon which we could sell a lot of mobile by cross-selling to that home base. And that's exactly what you have seen we've been selling basically mobile to that home base. Today, our mobile market share is in the high 40s. When we started out, it was in the mid-30s, so that was the acquisition plan. My point being that the fixed market in Panama for us was always meant to be simply a steady cash producer, which is what it has been. You're not supposed to see a lot of net gains coming from Panama. You're not supposed to see a lot of ARPU pick up coming from Panama because it's meant to be just basically the steady cash flow producer that it has been. Interestingly, I was in Panama just last week, and I walked the fixed networks, both the fiber that we're deploying in some areas in Panama and the lowest economic areas where we still have a lot of MDS. And I was surprised at the demand for our products still on home in Panama, particularly in the areas where we are upgrading all the MDS network to fiber. I was surprised for the pull of the product, and I was also surprised by the impact of the content that we've been buying and its relevance to the subscriber base there. All of that simply to say pretty steady. There's some room there for improvement as we build a little bit more footprint, but it's not meant to be the source of our growth. The source of our growth in Panama is to continue to be mobile pickup. Tigo Business in Panama while we're on Panama is really making what it should be doing. It's a new brand, but it's beginning to really pick up speed in Panama and obviously, Tigo Money, which we will be launching later this year in Panama. So those are the things in the playbook that are still coming in Panama, B2B, much more and the Tigo Business part and Tigo Money.
Marcelo Santos, Analyst
Thank you. Thank you very much.
Operator, Operator
Great. Thank you, Marcelo. Our next question today will be coming from Soomit Datta at New Street Research.
Soomit Datta, Analyst
Hi, thanks for the opportunity to ask a couple of questions. First, regarding capital expenditures, you've mentioned that investments will decrease this year, with CapEx potentially $100 million lower. Should we consider this a new baseline going forward, assuming other factors remain constant, or is this situation likely temporary due to softer conditions in some other markets? Specifically, as we look at the equity free cash flow guidance through the end of 2024, will that $100 million in savings actually amount to $200 million? That would be interesting to know. Next, on Guatemala, could you, Mauricio, provide us with an update on how things are progressing? It seems that pricing has stabilized, but additional commercial efforts are underway. Should we expect steady revenues, and are we operating at a lower margin level? Any insights on this and what AMX is currently doing would be appreciated. Thank you.
Mauricio Ramos, CEO
Let me begin by discussing Guatemala. The home segment of our business is performing well and shows significant growth potential. Tigo Business in Guatemala has improved since we now fully own it, making it easier to implement our strategy effectively given its importance in Central America. This segment is experiencing good growth, along with our postpaid offerings. We have also relaunched Tigo Money in Guatemala. The primary challenge has been in the prepaid segment, with other subscription businesses continuing to grow. About a year ago, there was increased competition in prepaid as competitors significantly reduced prices. We responded by strengthening our network and were able to pay for the 700 megahertz spectrum earlier this year, which has positively impacted consumers. We focused on enhancing our commercial distribution channels, which has reflected positively in EBITDA. This strategy has successfully protected the long-term health of our business by maintaining pricing and sustaining our market share in terms of subscribers. While the prepaid top line has remained stable, we're not experiencing further price erosion, indicating that our strategy is working. Investments in commercial distribution have proven to be worthwhile. Although our Q1 EBITDA for Guatemala looks poor, we see this as a strategic investment in maintaining our leadership position. With reloads increasing and subscriber numbers steady, we are optimistic about recovering prepaid revenue in the latter half of this year. Additionally, we expect a favorable mathematical effect as we move past the initial competition phase, which will also support our financial outlook.
Sheldon Bruha, CFO
Good morning or good afternoon, Soomit. Regarding CapEx, we have the flexibility to adjust it as necessary for the business, which we've historically demonstrated. To clarify the $100 million reduction I mentioned earlier, it's divided into three main areas. First, we are recalibrating our home builds, particularly in Bolivia and Colombia, driven by macroeconomic factors and competitive conditions. This is discretionary and will be evaluated in the coming years. If circumstances change, we may reinvest in this area. The second area, accounting for about a third of the total reduction, is due to lower activity in home connections. This is largely influenced by the market but also somewhat self-imposed as we're being more selective in our additions due to the current environment. We're focused on maintaining connectivity costs for our customers to better manage our incoming customer base. This will be somewhat variable and dependent on market trends going forward. Lastly, the final third of the reduction relates to pricing that we have successfully negotiated through multiyear agreements with our largest mobile vendors, which will benefit us in the future. This breakdown should help you understand how these elements could evolve in upcoming periods.
Mauricio Ramos, CEO
I'm going to add a couple of things to those. One is a reiteration of the last point that Sheldon made, which is not small. Earlier this year, we went to all of our vendors with three-year plans and three-year capacity needs. We renegotiated deals for the long term, allowing us then to get pretty decent pricing, which is part of the savings that you're seeing in CapEx. The second point is simply to highlight the notion that we've consistently talked about our long-term CapEx intensity ratios to be around 15%. So it shouldn't surprise anybody that although there may be some ups and downs in the quarters and even years, that's where we think the business will trend towards.
Soomit Datta, Analyst
Great.
Operator, Operator
Thanks Soomit. Our next question will come from Lucas Chaves at UBS.
Lucas Chaves, Analyst
Thank you for taking my question. Building on the previous one, I have two questions. First, I would like to inquire about the free cash flow to equity for the remainder of the year and what you expect to achieve regarding the cumulative target for the next three years in 2023. Additionally, I would like to know how we should view leverage at the end of the year given the new calculation you’ve been applying. Should we still compare it to the long-term target of 2.0? Thank you.
Mauricio Ramos, CEO
So I'll start a little bit on the equity free cash flow and then hand over to Sheldon for those. The two financial targets that we've set out for this three-year period are quite interrelated. Our operating cash flow growth, which is also related to the CapEx question, is on track for an average of around 10% organic per year for this multi-period and that's the driver behind getting to that equity free cash flow number, which, as we've said repeatedly, it's back-ended. So you can expect that next year, there's going to be an increased pickup on our equity free cash flow. Our long-term targets for leverage remain the same, 2.5% by 2025. So I'm basically reiterating what we have consistently said, reiterating the notion we're on our way there. Any color, Sheldon, do you want to add to any of that?
Sheldon Bruha, CFO
Sure. Let me just add a little bit. Just on the leverage point, I mean, we don't - we're not giving guidance sort of on that from a specific year. But if I could take a little bit of what happens for this quarter. I mean our leverage increased a bit here, but it's a combination of a number of factors. One is kind of the seasonality of our cash flows, which I think we've been pretty clear about that. I think and what you've probably seen in the way we report it. So there's a bit of a cash outflow here in Q1, which has led to what led to the uptick in leverage. We had some FX translation issues this quarter. The Colombian peso appreciated about 5% from year-end levels, which negatively impacted sort of the lot of debt we booked on a dollar basis. But at the same time, the average rate depreciated year-over-year about 17%, which meant it inevitably impacted our LTM EBITDA, kind of an unusual combination for, I think, that you normally see the movements kind of move in similar directions here that kind of moved in opposite directions. Also, I think there are some unusual items, as I talked about hitting EBITDA. The average implementation costs and some of the higher share-based comp, we will eventually lap those in our LTM EBITDA calculation. Several of the factors I've been highlighting here are kind of short term in nature and already part of our planning, but I remain sort of confident in terms of where we can get leverage in the medium term, but there will be some items here that we're going to have to sort of work our way through in the short term from our overall leverage ratio.
Mauricio Ramos, CEO
I want to add a few thoughts. I understand that the Q1 EBITDA might be causing some concern. However, we view these as positive investments for the short, medium, and long term, regardless of accounting geography. While there may be an immediate impact from Everest, the return on that investment is expected well within the year and into the future. For us, investments in content, Tigo Money, and Lati are all valuable, even if they affect EBITDA geographically. Additionally, as I mentioned earlier in response to Soomit, our investment in the commercial distribution network in Guatemala is aimed at ensuring the long-term sustainability and profitability of that business. I wanted to add this perspective so you can understand how we perceive Q1 as an investment in the long-term health of the company.
Lucas Chaves, Analyst
That was very clear. Thank you. Thank you very much.
Operator, Operator
Thank you, Lucas. Our next question today will come from Fredrik Lithell at Handelsbanken.
Fredrik Lithell, Analyst
Thank you very much for answering my questions. I have a couple more regarding Colombia. In 2022, you collaborated with a third party to reach more homes. I'm curious about your progress with that initiative—are you making connections, or is it still in the early stages? Also, regarding your broader geographical efforts, could you discuss your approach to connected homes? I've noticed a decline in homes passed, and I’d like to understand how you manage homes connected and where you see that heading in general. Additionally, staying with Colombia, there’s an upcoming spectrum auction. It would be helpful to hear the timeline for that. Would you use the previous auction in Colombia as a model, and how might the payment structure for the upcoming auction compare? Are the rules already established? Thank you.
Mauricio Ramos, CEO
Thank you for the insightful questions. To start, I want to address the situation in Colombia alongside our overall Home business. As mentioned earlier, we're experiencing weaker demand compared to previous periods. This can be attributed to the natural decline following the pandemic, where there had been a surge in demand. With people returning to offices, the demand for residential broadband is diminishing, resulting in this decline. While this does not alter our long-term outlook for the business, we recognize that current demand is lower. Additionally, macroeconomic factors are impacting demand, particularly in Colombia and Bolivia, where we are observing this softer demand. In contrast, other regions are faring well, with Central America continuing to grow and Paraguay returning to growth in both mobile and fixed services. We expect improvements in fixed services as the year progresses. The challenges we see chiefly relate to Colombia and Bolivia, driven by softer demand and macroeconomic instability. Regarding Colombia specifically, there is currently no spectrum auction taking place. We are in the process of renewing our 1,900 megahertz license, which is nearing completion. The terms are almost finalized and are aligning with our expectations. However, it's important to note that while the renewal process is underway, the cost of spectrum in Colombia remains high. Given that all governmental ministers were changed recently, we need to be mindful that this process might take longer than we initially predicted. The renewal is progressing as planned, and we will soon begin discussions around renewing our AWS spectrum in Colombia. There are no other options currently available in the region, aside from the ongoing conversations about 5G. This is expected to evolve slowly in many markets. Notably, in Guatemala, we've already launched some 5G spectrum, and the government is working towards auctioning the 2,600-megahertz spectrum, which could significantly benefit the industry in Guatemala. However, this process is ongoing, so there are no specific updates at this time.
Sheldon Bruha, CFO
If I could add a bit more about the Colombia spectrum, you may have noticed in our results that we recorded the renewal on our balance sheet this quarter, totaling approximately $250 million. What Mauricio pointed out is that we are still uncertain about the payment terms related to that, including how much will be cash, how much might fall under coverage commitments, the timing of those payments, and any associated interest charges. These aspects are still under discussion and not yet finalized.
Mauricio Ramos, CEO
That's for a 20-year license.
Fredrik Lithell, Analyst
Alright. That’s very clear. Thank you very much.
Operator, Operator
Great. Thank you very much, Fredrik. We will hand over the last question to Phani Kanumuri from HSBC.
Phani Kanumuri, Analyst
Thank you for taking my question. My first inquiry relates to Project Everest. You mentioned that there would be approximately $100 million in annual cost savings by the end of 2024. Can you specify where we can expect these savings to come from geographically? Is it similar to the restructuring costs we've experienced, with most savings originating from Colombia? My second question is about B2B. You've reported strong growth in this area; which markets are you seeing the highest growth in? Also, what segments are driving this growth, for instance, in terms of connectivity versus cloud? Lastly, I need clarification on your CapEx statement. When you said it would be 100% lower, does that refer to an annual basis, implying an average run rate of $900 million per year? Is that correct? Thank you.
Mauricio Ramos, CEO
Alright. I'll take the easy one, the B2B and then let Sheldon crunch the math there and all the math questions. So if you recall from my prepared remarks, we have revamped our Tigo Business or B2B strategy just before the pandemic; during the pandemic, the business was basically on ice. But all that strategy is paying off as we come out of the pandemic. It's, as I said in my prepared remarks, a very holistic strategy that includes partnerships, very well-trained forces, careful selection of a streamlined product suite, very, very clear distribution channels and a lot of work with our partners. Not surprisingly then on either the areas that are having the most growth are what we call digital services, cloud services, service security, SD-WANs, right, that basically give perfect connection to our connectivity products. We provide the digital services, the connectivity, and we have great partners. That coupled with good distribution, well-trained sales forces, is giving basically what we call digital services the ability to become the engine of growth. That's why we see very sustained growth for that B2B business. In terms of geographies, it's very broad-based. You can imagine that the countries in which our B2B businesses were bigger in relative terms, like Colombia and Panama, are where we're seeing quite a bit of traction as well. But also, given our size, Guatemala, and I also believe that Paraguay is right in line to start showing some growth there in B2B. So those are the answers on B2B. It's paying off. Our strategy is now paying off, and we're very, very happy to see. As I said often on B2B, as a telco, we were underweight on B2B. And in our markets, there was a clear opportunity to put connectivity, partnerships, product segmentation, digital services, and the data centers that we have been building all together into a product that caters to the business community. That's the long and short of Tigo Business.
Sheldon Bruha, CFO
I'll address some of the other questions you raised as well. First, regarding Everest, I'm very pleased with the progress we've made this quarter in launching and implementing it across the business. As I mentioned in my previous remarks, this is a comprehensive program spanning our operations, including our headquarters. It's not just about cost cutting; it's about changing our approach to managing the business, centralizing activities where it makes sense, and improving local business management. This will affect all countries. What you've seen so far is primarily the organizational impacts, which likely account for higher initial costs. You might notice the effects by country. However, I won’t specify how the $100 million will be distributed among the countries, as it will be widespread. I want to emphasize that we are seeing good progress in several projects that have rolled out in Q1 to scale this up. Therefore, I feel confident in these developments. Regarding your CapEx question, we've largely addressed that in my comments to Soomit just earlier; we're anticipating about a $100 million reduction in CapEx this year compared to last year, which is across three main categories.
Phani Kanumuri, Analyst
Perfect. Very clear. Thank you.
Operator, Operator
Great. Thanks, Phani. I'll hand the call back over to Mauricio for some closing remarks.
Mauricio Ramos, CEO
Thank you all for joining today and for the great session and questions. To conclude, I want to reiterate that we understand Q1 might raise some concerns regarding EBITDA. However, please don't worry. These figures primarily reflect investments we've chosen to make, which we are very pleased with, such as severance for Everest, operational efficiency initiatives, and investments in Lati and Tigo Money, as well as maintaining our growth in Guatemala. All these decisions are deliberate and have a clear payback, which is why I encourage you to focus on the key value drivers we are monitoring. First, these investments are helping us achieve our equity free cash flow commitment of $800 million to $1 billion for the 2022 to 2024 period, which we remain on track for, as confirmed again today. As you know, this is expected to ramp up significantly towards the end of this period, particularly in 2024. Second, by year-end, we will be unlocking the value of our tower infrastructure, which is substantial and will enhance shareholder value and focus our business. Third, there is hidden value in our data center portfolios and beyond our fintech operations. I'm very satisfied with how Tigo Money is performing; it’s meeting my expectations and has great potential for future value. Lastly, as a new point in response to a prior question, there is potential for inorganic growth improvements in Colombia, whichever form that may take. I hope this gives you a clearer understanding of our focus and where we see potential growth for the business. Thank you for being here today.