Millicom International Cellular S.A. (NASDAQ:TIGO) Q3 2023 Earnings Call Transcript

Millicom International Cellular S.A. (NASDAQ:TIGO) Q3 2023 Earnings Call Transcript October 26, 2023

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. And 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.

And 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.

Aerial view of high-rise buildings with a telecom tower in the background emphasizing the importance of communications infrastructure.

Mauricio Ramos: 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. And 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, the beginning of the year, we set out to dramatically improve the profitability of our operation in Colombia. By simplifying the business by bringing increased discipline on capital allocation, and around pricing for our services. You can see the results of these efforts starting to pay off in this third quarter.

Our quarter in Colombia had very strongly 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. So, we can focus now on executing on the rest of the plan, which includes continued mobile growth, further cost discipline and as you know, some much needed in organic solution. Second in Guatemala, we are creating the conditions for a healthy and very sustainable long-term industry structure. In the last six months, we took part in two transparent and successful spectrum auctions in, which both players were able to acquire all of the spectrum that was offered by the government. These were the country’s two first auctions in more than 15 years. As a result, both competitor’s now similar and much larger amounts of spectrum within the conditions are now set to return to a more rational pricing environment.

Third, we continue to improve our operational efficiency across the business more than ever before. Or simplifying product offerings and operations where digitalizing processes, we are reducing headcount, and we are automating platforms, and across the board, we’re driving new opportunities to further reduce costs and increase cash flow. During Q3, we began to implement phase two of our project Everest, which we spoke about last quarter. We expect this phase two to significantly increase the overall savings we can expect from project Everest overall. Both and finally we have continued to make great progress towards carving out Lati our tower portfolio. Earlier this month, we began transferring assets to the new legal entities, we’re now preparing to launch the monetization process.

So let’s review each of these points in more detail beginning with Colombia on Slide 6. Most of you know by now, our mobile business has been growing rapidly since we acquired critical spectrum in the 700 megahertz band in 2020. Back then, we embarked on a multiyear plan to expand our mobile network and to extend the reach of our commercial distribution. Since then, we have steadily gained market share, especially in the postpaid segment, but we have doubled our customer base since acquiring the spectrum. The shift in mixed was postpaid has been lifting ARPU and driving mobile service revenues, which increased 8% this Q3, the scale we’re gaining in our mobile business combined with efficiencies from project Everest drove EBITDA margin to a record this quarter as you can see on the middle chart.

EBITDA grew almost 10% in the quarter, and by close to 20% if we exclude the one-offs. We expect the phase 2 of Everest will drive further margin expansion going forward. And 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 own business. This is largely, because we’re choosing to remain disciplined on price. We’re charging installation fees and implementing price increases and staying the course even when competitors don’t follow. And even if this means sacrificing subscriber volume for gaining profitability. As I’ve told you many times a significant portion of our CapEx is variable in nature is directly linked to the number of new customers we signed up, given the high costs of equipment that we installed in their homes.

So with higher prices, we’re selling less, but we’re also investing less and [attaining] a better return on capital. Going forward, we expect that our Colombia operation can continue to sustain lower levels of capital intensity than in the past for two reasons. One because our 700 megahertz network deployment is now largely complete, until this is a very material synergies we expect from the combination of our mobile network and spectrum with those of Telefonica. As you may have seen, this transaction has now 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 of equity into our Colombia operation. Despite all the noise that you may have heard on this topic, this equity injection had been planned for quite some time.

And its key purpose is to provide long-term funding for all the long-term investments that we have made in the business over the past several years. There’s tons and tons of work to still do in Colombia, no doubt, but we made real good, 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 in Guatemala. As you also know, we took a variety of important strategic steps to shield our customer base and strengthen our market leadership, that remains convinced that this is the right strategy to preserve and grow the long-term value of our business. And we see signs already that this strategy is beginning to payoff. The chart on the left shows evolution of our mobile customer base and market share in Guatemala over the last four years.

As you can see, we’ve picked up quite a bit of market share, during the pandemic. We’ve been able to hold on to these gains and to our customer base, even as our competitor began offering access to the most popular social media apps for free to prepaid customers. No doubt defending our customer base, which is definitely the right thing to do for the long run has had an impact on ARPU, service revenue and overall profitability of the business. You can see these on the chart on the right showing the evolution of our total service revenue growth in Guatemala over the last several quarters. Yet, 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 been increased and stabilized.

We no longer have a spectrum deficiency, or a spectrum disadvantage in Guatemala. This has an important positive effect on our network efficiency and costs, as well as on our service and product offerings. And two, we took some price increases in prepaid in mid-September. As a result the revenue growth remained negative in Q3, there were clear signs of stabilization, compared to Q2, and we’re encouraged by the trends we saw during the quarter. It’s too early to tell whether this price increase will stick for the long run. But we are encouraged by the response at our points of sales and we’re optimistic. And we do see the makings of a healthier industry structure in the making in Guatemala as we had anticipated earlier. We want to remain cautious on the commercial outlook, and also flagged that there have been some mass protests on the streets of Guatemala, since the presidential elections a couple of months ago.

And this may carry on until, the new President, takes office in January. So we remain cautiously optimistic in Guatemala. Now, let’s go to Slide 8 to discuss project Everest. Because many of you will recall, we began implementing our efficiency program earlier this year, and we communicated an ambition of achieving run rate savings for more than $100 million by year end 2024. We are on track to achieve those savings. In addition, early in the summer, we began working on phase 2 of the program, as we mentioned on our Q2 call. Indeed in September, we began implementing important 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 on top of the initial $100 million target.

We also expect to finalize the scoping for the full phase 2, along with our annual budget plan. So our ambition is actually much broader that we have already identified very meaningful opportunities that we expect to implement mostly before year end. Sheldon will give you additional details about the cost in the program in a minute. On Slide 9, that should be your progress on Lati. Lati is already a separate company and a separate brand. New legal entities have now been created in every country. Earlier this month, we started transferring our assets from Tigo to Lati, and we expect to complete this process in November. This means that we’re ready now to launch process to monetize this important infrastructure asset in Q4. Yes, some time is coming up soon.

As we have said in the past, we have certain preferences on the transaction that we envision with best maximize value. But as we have also said, we kind of keep all our options open until we can evaluate and compare the options that are brought to the table. So stay tuned opening date is indeed coming soon. With that, I will hand over to Sheldon to discuss the financials for the quarter.

Sheldon Bruha: 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 followed closely the trend we’ve seen in the U.S. with inflation back to a more reasonable level of around 4%, with the exception of Colombia, where inflation is still in the double-digits. The good news though, is that the Colombian peso was strengthened significantly this year. And in fact, you will see that FX with a small tailwind for us during Q3. And in terms of economic activity, our markets are generally proving quite resilient with some 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, which is up 3.2% on a reported basis from $1.28 billion a year ago. For the first time more than a year, our service revenue has benefited from favorable FX trends this quarter, primarily due to the Colombian peso, as I just mentioned, excluded the impact of FX organic growth was 1.8% in the third quarter, very similar to the growth we reported in Q2. Our mobile business continues to perform well and accounted for nearly all of the growth in the quarter. Meanwhile, our fixed businesses were flat and this is consistent with our broader capital allocation strategy over the past year, as I’ll discuss later. Drilling down further on Slide 13, to the service revenue by country.

As you can see, most of the countries experienced positive service revenue growth in the quarter. The two exceptions were Guatemala, which Mauricio already discussed, and Bolivia, which was down less than 1% in Q3. This is a significant improvement for Bolivia compared to last quarter. And we’ve begun to lap the regulatory changes that have impacted results since August of 2022. Our mobile business had positive growth in the quarter and the declines coming from our home business where we are choosing to be very disciplined on price, to drive better cash flow from this market, given the more volatile macro backdrop in this country. Colombia and Panama had low single-digit growth. And this is largely the result of our commercial capital allocation decisions to focus on mobile in these countries.

On the positive side, we had solid mid-single-digit growth in the four countries on the bottom part of this page, but all three business units contributing to growth in these countries. Okay, turning to Slide 14, EBITDA of $533 million was down 1.2% from $539 million from a year earlier. This is a cleaner quarter than first half of the year. But there are still a few items to unpick here to provide a fuller picture of the performance. First ForEx, from nation Colombia provided a small tailwind of about $4 million this quarter. Second, we had two large one-offs. The first was $22 million for severance related to project Everest, which I’ll talk about later. The second one was for $11 million, and was the result of an adverse legal ruling in Colombia.

Excluding effects and these one-offs in this quarter as well as another in Q3 of last year. EBITDA would have grown 2.6% during the quarter with positive growth in most countries as you can see on Slide 15. On this page, you can see that EBITDA tells a similar story as our service revenue growth with positive growth everywhere except Guatemala and Bolivia. As Mauricio discussed previously, we are seeing some signs of stabilization in Guatemala. EBITDA declined 3% year-over-year, but it has been stable at $199 million for the third consecutive quarter. Bolivia was down 2.2%. This is a big improvement from the last three quarters as we’ve begun to lap the regulatory change that went into effect in August of last year. And we’ve seen improvement in our mobile business there.

On the positive side, Colombia stood out with EBITDA growth of 9.1% and almost 20%, excluding the legal one-offs. As Mauricio mentioned already, our margins have been expanding over the past few years. And we think there is still more upside here. Thanks to project Everest and other initiatives that we have been implementing in order to drive better profitability and cash flow from our business in this country. Panama grew 2% which is consistent with the 1.4% service revenue growth we saw in the quarter. Remember also that we have made investments in our sports content offering that hurt our EBITDA growth this year. But that investment strengthens our home business and help us maintain our leading market share in this business. You will also notice a lower margin in the quarter and this is due to higher equipment sales related to the large B2B contract that we expect will start generating service revenue beginning in Q4.

Paraguay had impressive EBITDA growth of 8.1% and it was 11.6% excluding the Everest related severance. The strong performance is consistent with the strong service revenue growth we’re seeing. In El Salvador, EBITDA growth of 16.1% benefited from a lower than usual level of bad debt that flattered performance this quarter. On a year-to-date basis, EBITDA is up just under 7%, which is more consistent with the mid-single-digit service revenue growth in that country. Nicaragua, EBITDA grew 3.6% as our business and the broader economy continued to grow despite the volatile political environment, and that is largely thanks to remittances to the United States, which continue to grow very rapidly. Finally, Honduras, which we do not consolidate had another strong quarter with growth of 7.9%, reflecting the improved revenue trends during the quarter.

Now, please turn to Slide 16, to review our efficiency program project Everest. Mauricio already gave you the highlights, but I want to help unpack the various puts and takes. In terms of savings, we’re accelerating our plans. For phase 1, we remain on track to deliver more than $100 million by year end 2024 and are in fact accelerating our plans. On a run rate basis, we now expect to achieve more than 75% of the savings by end of 2023. This is up from our previous estimate of more than 50%. As Mauricio told you, we have decided to significantly expand the scope of the project, which we refer to as phase 2. During the quarter, we incurred $22 million of implementation costs $90 million of this was related to new actions and initiatives we took that were concentrated in our headquarters and other centrally managed and shared service activities, including approximately 30% of our Miami-based population.

This will result in additional run rate savings of approximately $35 million above and beyond the phase 1 savings of $100 million. In total, since the beginning of this year, we will have reduced our Miami-based population by approximately 40% through a number of separate restructuring decisions. Over the next several weeks, we will be finalizing our 2024 budget, and we expect to take additional measures across all our geographies as part of that process, where we expect additional service charges to drive additional savings for the business. We’ll provide a further information at our full year results in February. Now please turn to Slide 17. In addition to organizational savings, we’ve also had significant savings and capital expenditures this year.

Through the first nine months, our CapEx spend is about $150 million lower than prior year. I mentioned in prior calls the source of these savings, which is a combination of three key components of roughly equal size. Firstly, earlier this year, we conducted three-year renewals with our largest mobile vendors, where we received multiyear discounts. As you can see on the left hand side of this chart, our level of mobile build activity has remained constant, while we are also able to absorb the impact of activating the new 700 and 2600 megahertz spectrum we obtained in Guatemala. Secondly, we’ve reduced our home footprint expansion in light of tougher competitive and macro environments in Colombia and Bolivia in particular. And lastly, home installations are down again, primarily in Colombia and Bolivia as we are being more disciplined in pricing and promotions, given the more challenging environments there.

On top of this, we continue to scrutinize all other CapEx spending and are finding other opportunities to lower spend and contribute to this year on your savings. Now please turn to Slide 18, for our usual net debt bridge. Net debt declined $74 million in the quarter to just over $6 billion. Net debt to EBITDA after leases was 3.32 times that’s down from 3.34 times at Q2, if we include lease obligations of just over $1 billion. Our leverage was 3.34 times. The decline of net debt during the quarter was primarily due to strong equity free cash flow of $100 million, which was partially offset by the ForEx impact from the translation of local currency debt as the Colombian peso strengthened this quarter. Regarding our equity free cash flow, I remind you there is a lot of seasonality here.

Q1 is usually negative, and then we see improving trends throughout the year. The strong cash flow in Q3 reflects typical seasonal patterns, as well as some of the benefits of project Everest, and of our capital allocation decisions over the past year. Looking ahead to Q4, which is usually the strongest quarter of the year for equity free cash flow, I want to caution you that this year should be a bit different. This is, because we’re expecting more than $100 million of spectrum payments in Q4. This is for the renewal of the 1900 megahertz spectrum in Colombia, and the acquisition of the new spectrum of 700 megahertz band in Guatemala. Items that we flagged for you when we revised our equity free cash flow targets in June. Also in Q4, we have to pay a lot of the severance that we booked in Q3 and that we expect to book in Q4.

Let me hand the call over to Maxime, who’s joining us for the first time on this earnings call.

Maxime Lombardini: 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 little less than two months ago. And this time of year, the company begins planning the budget for next year. And this has given me the perfect opportunity to interact with each of the country teams and with the leadership teams in Miami and Luxembourg. I have also had the opportunity to travel in our three biggest country of operations, Guatemala, Colombia and Panama, and I have more visits than before year end. As you can imagine, I’m still learning about the company. But today, 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, run by a talented team, a team with a strong culture, and can do attitude, ready to take on any challenge when the target is clear.

But we do business in countries with volatile macroeconomic and political environments, but we do not generate enough cash. This means that we must derisk the company by operating efficiently and with lower leverage. And we must ensure that the business can generate much higher equity free cash flow every year. With that in mind, one of my first priorities has been to significantly expand the push on costs. We started immediately in September by decreasing drastically, [HQ] costs in Miami. And currently, as part of the budget process, I am challenging each country team on the costs and CapEx. On a day-to-day basis, I am personally reviewing each purchase order and every dollar that we spend. So short-term, a strong focused on cost control is the clear priority.

And as we strive to deliver on the free cash flow target that we are iterating today. I will be equally focused on making sure that we capture the long-term revenue growth opportunity with the right investments that are necessary to provide the excellent experience that your customers have come to expect. And we’ll report back to you next quarter on our progress with more details.

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Q&A Session

Operator: Thank you Maxime. With that we’re going to now go into the Q&A session. As a reminder, if you’d like to ask a question, please email us at investors@millicom.com. We’ll take the first question from Oscar Ronnkvist from ABG. Oscar, the line is yours.

Oscar Ronnkvist: Thank you. And good morning, even though it’s in the middle of the day for me in Stockholm so just two questions. That’s okay, please, just first one on Guatemala, you say that the signs of improvement, or an improving market is visible? So how should we think about timing? Your main at around 1% to 2% decline in service revenue like last few quarters? So just wanted to get a sense of if you should see that delta improving already in Q4 or if you expect us to take a bit longer. My second question is just on CapEx. I think you have been around $180 million each quarter for the last three months. And you say that, I mean, you’re holding back a bit on home, right? And then also you’re looking at efficiency. So just the $180 million figure over the last three quarters. I guess that that’s a bit low maybe on the sort of run rate on an annualized basis. Just if you could elaborate on the timing or any quantification of the new run rate please? Thank you.

Mauricio Ramos: All right. Hello, Oscar and welcome. Thanks for joining us today. I’ll take the first one on Guate, timing et cetera and the market and I’ll give Sheldon a little bit of time to prepare some numbers for you on the CapEx question. On Guate I think we’ve played it really, really well. And the timing, which is the core of your question is happening, pretty much than we expected it would happen. And with that I’ll give you some color. As you’ll recall, over the last year or so, we’ve faced a tremendous amount of competitive pressure on prepaid. We set out to basically hold our market share position, a very strong market share position, and we’ve been able to do that not without some pain on the revenue for sure, but certainly holding on to our market share and our subscriber base.

And we did that knowing that we could and we would revamp – re-stabilize both the spectrum position and the network position. And we have done that that was the long game. That was the long strategy that we were playing. And over the course of the quarters this year, we have seen that play out two consecutive spectrum auctions, we no longer have any network disadvantage. We no longer have any services advantage, we no longer have any spectrum disadvantage. So quite frankly, we’re playing the long game. And it has worked out as we expected it would. Subsequently to that, we took a price increase on prepaid to a percentage of the prepaid base in need to [learn] September, so you actually see it in the quarterly numbers yet. But as we move forward, this was a timing that we were expecting strong network positions, strong spectrum position, so that we could now focus on the commercial actions.

So far as I said, we are cautiously optimistic, cannot guarantee ever and ever guarantee that price increases will stick. But we’re certainly playing a cautious well played in game here. So the answer to your question is this, things have been playing out as we expected, it would and we wanted to play them out. We’re also just mathematically laughing pretty much the initial effects of the push on competition. But we are playing the long game here, Oscar. And that’s why we use the team cautiously optimistic, things are better in the market or rational in the market, as they are compared to what they were before. But we’re playing the long game. And we’re playing a very strategic game here. So, we’re cautiously optimistic. Going into Q4, just to manage your expectations.

Remember, we had a very good Q4 last year, because of the World Cup that we had. So, we’re not going to have that this year. So again, long-term mean you know, Q4 will have some difficult comps vis-à-vis the World Cup. Did I miss anything guys?

Sheldon Bruha: I think Oscar, we should also just flag that there’s been some significant protests in the street in Guatemala these last several weeks since the presidential election. So that has created a little bit of a disruption in terms of economic activity. But new President takes office in early January. So that could continue for some time. But it’s still a little too early to know what kind of impacts that might have.

Mauricio Ramos: Yes, Guatemala has a very lengthy timeframe in between elections and actual handover is over six months. So that’s created a little bit of political turmoil there. So come January, hopefully, that things will be on the quiet side politically.

Oscar Ronnkvist: That’s it.

Sheldon Bruha: Okay. On the CapEx question you had, look, I mentioned a lot and in the presentation around what was driving some of the reductions in CapEx this year, I mean, really, around really around, basically, you know, majority of CapEx decline really related to markets, Colombia and Bolivia, where we I think it’s absolutely appropriate some steps were taken in terms of discipline around our home spend, given the situations in both those countries. But look and – going forward. I would say, you would have heard kind of in Maxime’s comments. In addition to the things that’s been happening this year, we are being very disciplined, and since scrutinizing sort of CapEx spend across the business. I would not expect CapEx spends to be higher than what you’re seeing, right now, as we go into 2024.

I would expect us to be – you’d be [suddenly] lower than those levels on a going forward basis. So that’s how dressing sort of where we see the trending is going it’s, levels lower than what you’re seeing currently.

Oscar Ronnkvist: Understood. Thank you very much.

Mauricio Ramos: Thank you, Oscar.

Operator: Okay. Next, we’re going to go to Phani Kanumuri from HSBC. Phani, the line is yours.

Phani Kanumuri: Yes. Thanks, everyone, for taking my questions. My first question is on Colombia. I seem to have had a good margin [exhibition] this quarter. How sustainable is the margin equation? And once you complete project Everest, they do expect the margins to print in Colombia. And again, the second question is again, Colombia. You had a recent equity infusion into Colombia. Do you see any potential equity infusions in 2024, or 2025 in Colombia?

Mauricio Ramos: I’ll take the first one and perhaps a little bit of the second one and as always give Sheldon a little bit of time to get the numbers right. So the things Phani that have been driving our record margins in Colombia this quarter are a combination of activities. First, as you recall, was a ton of network investment and commercial expansion. That happened in the years prior. Right after we had bought 700 megahertz spectrum that’s behind us. So, now we are more on the efficiency phase of those network investments or commercial expansions. The second element is, as you know, mobile is a game of scale, and we have been gaining scale particularly postpaid in Colombia. So obviously, that helps the margin on a fixed cost base business.

The third element in Colombia is project Everest, phase 1 of project Everest, which we started early on this year. And as which we’ll be talking, there’s a phase 2 that will help contain sustainability on that margin expansion going forward. The fourth element is that there’s been I’ll use these words with a degree of cautiousness more price rationality in the market in the last few quarters. And particularly, we’ve been able to sustain or drive, our service revenue and postpaid both on the volume and on our phones as well. And also, we’ve been very, very disciplined on the home businesses. We are not [playing] during the call, keeping prices up, [charging] installation and if need be sacrificing volume over profitability. And that’s what you’ll see in the results.

Going forward, profitability will also be enhanced by mobile network, and then spectrum contribution agreement that we talked about in the prior quarter, and this quarter. And all of this combined, lead to the one single focus that we have in Colombia, which is to make Colombia equity free cash flow policy. As you recall, me saying a number of times, it’s the only operation in the portfolio, that has not been equity, free cash flow, and our drive has been to make up this as equity free cash flow. And I’ll tell you – the risk of not giving you specifics, that we’re really focused on making that happen as soon as possible. And that gives you an idea as to why we’re driving hard with the expectation of not having any additional equity contribution going forward.

And with that, I’ll hand it over to Sheldon.