Millicom International Cellula [TIGO] Conference call transcript for 2023 q1
2023-04-29 04:43:02
Fiscal: 2023 q1
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: 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 make sure our success by how well we'll 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 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 very 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 implemented 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 that we were achieving our growth, and this is consistent with the general trends we see in our markets. Home business indeed seen slower growth, but mobile, particularly in postpaid and B2B continued 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 or B2B accelerated to 6% in Q1, up from 5% in 2022. Our revamped Tigo Business strategy continues to handsomely payoff 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 added 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 have 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 macro-economic conditions, particularly in Colombia and Bolivia and continued competitive pressures in those two markets. We have also taken ourselves a very measured and long-term approach, maintaining strong price discipline and sustaining installation costs to make sure that new customers are profitable. And 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 investments pace once conditions do improve. Now let's turn our attention to Tigo Money on slide 10. I am excited as ever on the prospects for mobile money and for Tigo Money, in particular, in our region. Our Tigo Money team is pumped and driving its entrepreneurial spirit into the new hub-based Tigo Money products that we're laughing. The app is live now in our five existing Tigo Money markets, and it is driving digital adoption. Our digital or app-based user base has doubled over the past year. We have also launched a new and 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 interpretability agreement. And we're getting ready to launch in Panama later this year, where the merchant platform already includes Uber, Starbucks books, 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 pumped 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 for 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 costed [Ph] 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 would 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 as ever very 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 post performance is driving our mobile service revenue growth, which grew by 8% during the quarter, as you can see on the right. And 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 high single digits, by far our best performance since the pandemic. And this more than offsets the challenges we face in our own 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 we subsequently introduced Tigo Business, and we 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: 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 compares to 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 there 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. And for the third consecutive quarter, all of this mobile road 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 unpick 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 on-going, 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 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, in usual 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 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 a 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 span 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 drops straight to our EBIDA light [Ph]. Finally, Honduras, which we do not consolidate, had a 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 improving the way in which we operate. Important accomplishments this quarter included organizational restructuring across our headquarter function and several of our operations, prioritization and rationalization of our IT spend, fixed mobile conversion efforts to reduce commercial OpEx, several optimizations in order 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 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 seeing some macro challenges at Colombia and Bolivia in particular. We are ordering [Ph] 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 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. And 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 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: Thank you, Sheldon. At our Investor Day, just over one 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 strengthening our networks and our brand. Two, we're implementing project efforts 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 operation on the financial momentum on 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: 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 e-mailing 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.
Operator: Great. Thanks Andres. We'll take the next question now from Marcelo Santos at JPMorgan.
A - Mauricio Ramos: Do you want to have a crack at that one Sheldon?
Operator: Great. Thank you Marcelo. Our next question today will be coming from Soomit Datta at New Street Research.
Operator: Thanks Soomit. Our next question will come from Lucas Chaves at UBS.
Operator: Thank you Lucas. Our next question today will come from Fredrik Lithell at Handelsbanken.
Operator: Great. Thank you so much Fredrik. We will hand over the last question to Phani Kanumuri from HSBC.
Operator: Great. Thanks Phani. I'll hand the call back over to Mauricio for some closing remarks.
Mauricio Ramos: Well, thanks, everybody, for joining today and for the great session and questions. Just to finish off, I'll repeat, number one, we realized that Q1 may spook a little bit on the EBITDA. But don't be. Those are all largely, if not all of them, investments that we've decided to make and that we're very happy to make, whether they are severance for Everest and operational efficiency or investments in Lati or investments in Tigo Money or investments in maintaining the growth that we've seen in Guatemala before. Those are all conscious decisions that we've been very, very happy to make, and they all have payback which is why I urge you keep the focus on what we think are the value drivers, the things that you should keep your eye out on as we do, which are number one. These are all helping us drive that equity free cash flow commitment of $800 million to $1 billion for the 2022 to 2024 period, which we remain on track for and have just reconfirmed here. As you all know, it's back ended. We've always said that. So look out for 2022 -- sorry, for 2024 to be the year when that really takes off. Number two, in terms of value drivers and things to keep an eye out on. By year-end, we will be unlocking the value of our tower infrastructure. That is meaningful at all levels. You know the math on that and how that will help create shareholder value and make the business a more focused business. Number three, there's also hidden value in our data center portfolios and outside of our fintech business. As I said earlier, we're very happy with the way Tigo Money is playing out. It's delivering on all of my expectations and the possibility of future value. And number four, which I have just added, given the question earlier on, there is upside here in some inorganic improvement to Colombia, whatever the flavor of that may turn out to be. So hopefully with that you get a clear picture of what we're focused on and where we see the value levers for the business coming from. Thank you for joining today.
