Millicom International Cellular Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 10 speakers on the call.

Operator

Hello, everyone, and welcome to our Q1 2024 Results Call. This event is being recorded. Our speakers today will be our CEO, Mauricio Ramos our President and COO, Maximo Lombardini and our CFO, Ben Van Herren. The slides for today's presentation are available on our website, along with the earnings release and our financial statements. Now please turn to Slide 2 for the Safe Harbor disclosure.

Operator

We will be making forward looking statements, which involve risks and uncertainties, and these could have a material impact on our results. And on Slide 3, we define the non IFRS metrics that we will reference throughout today's presentation, and you can 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.

Speaker 1

Thank you, Michel. Good morning and good afternoon, everyone. The key highlight this quarter is our financial performance and you can see that on this page. After years of carefully building the strategic platform that we now have in Tigo today, we have spent the last few quarters making our platform a more profitable one. And this has led to a strong start of the year this quarter.

Speaker 1

We're pleased with that and we remain very focused on navigating the significant challenges that still lie ahead. Service revenue this quarter accelerated to 3.8. That's our strongest performance in the early 2 years. 2 specific elements have contributed to this performance. First, during the quarter, we implemented another round of price increases in a majority of our markets.

Speaker 1

As a result, mobile ARPU increased 5% on average in local currency terms and it was up in every single country. 2nd, we continue to generate revenue from 2 large government contracts in Panama. Please note that these contracts added a bit more than 2 percentage points to our organic service revenue growth in the quarter. We're extremely pleased with the successful work our B2B and Panama teams have undertaken to win these 2 contracts. Going forward, we will continue to bid for more of these contracts that help accelerate Panama's digital transformation.

Speaker 1

Having said that, I want to caution you that these 2 large projects are expected to generate less revenue in the quarter going forward. So we don't expect to sustain this level of service revenue growth in Q2 nor really for the rest of this year. EBITDA increased 20 percent year on year organically and this reflects both the service revenue growth that we just talked about and the effect of our efficiency program. The cost savings from Project Everest are now very visible. This EBITDA growth is going straight to operating cash flow as we continue to streamline our CapEx in line with our plans.

Speaker 1

But please do note that Q1 CapEx benefited from some phasing. As a result of all of these efforts, OCF was €519,000,000 in the quarter. That's up more than 50% organically compared to last year. As I have indicated very often before, over the past few years, we have assembled a strong platform across the region. We're now making that platform more and more profitable.

Speaker 1

And given the strong start to the year, we remain confident that we would achieve our target equity free cash flow of about $550,000,000 in 2024. Let's look at Colombia first. Last quarter, we made excellent progress on our plan to make our Colombian business profitable and cash generative. Execution of the long term strategic roadmap that we laid out for Colombia a few years ago is now showing strong results. In 2019, we made the bold decision to buy 2 blocks of spectrum in the 700 megahertz band to strengthen our competitive position in the mobile business.

Speaker 1

And as you know, we immediately put that spectrum to work by deploying network infrastructure and by expanding our commercial footprint. Since then, we have more than doubled our postpaid customer base and our mobile service revenue have grown very strongly and steadily as you can see on this page. We have achieved this despite the arrival of a new entrant who brought disrupting pricing to the market over the past few years. We remain focused on driving increased scale in mobile, aiming to drive better financial performance for the entire Colombia operation. We have now been able to take steps aimed at bringing back price discipline to that market, both in mobile and in the residential broadband business.

Speaker 1

As a result, we're now seeing our actions translate into higher ARPUs. Mobile ARPU is up about 7% and home ARPU is up almost 10% in local currency terms. As a result of this long term strategy, our sustained pricing discipline and the savings from Project Everest were driving margins higher in Colombia. The very strong 36.5 percent EBITDA margin in Q1 would have actually reached 41.4% if you were to exclude the severance we booked in Colombia during the quarter. Years of work and the cost discipline of Project Everest are bringing combined profitability to our Colombia operation.

Speaker 1

Please note that one of the consequences of our price discipline in the home is that we have been sacrificing some customer growth. As a result, we're currently spending a lot less than we used to on customer premise equipment and this has historically been a very large component of our CapEx spend. The net effect of all of this is that OCF is up strong, roughly doubling over the past year. Good news. But please note that this may not be sustainable if we decide to step up our commercial intensity to return to positive volume growth in our Home business.

Speaker 1

All along this journey, we have also continued to look for ways to make the business even more efficient in its use of capital. And with that in mind, as you know, we recently finalized an agreement to combine our mobile network with Telefonica's in Colombia. This project was over 2 years in the making and is now well in place. This combined network will produce very meaningful synergies in the form of lower spectrum and shared network costs. And it has already given us the ability to buy 5 gs spectrum jointly in the most recent auction and to deploy a 5 gs network together, thus enhancing our savings.

Speaker 1

In addition, earlier this year, we also monetized our remaining towers in Colombia as part of our larger asset monetization strategy. And with that, we have further improved our capital efficiency in Colombia. As a result of these strategic and operational initiatives combined, we're performing much better in Colombia and we are on track to deliver positive equity free cash flow in 2024. Despite these meaningful improvements, we still face significant industry challenges in Colombia. There are still too many players and too many networks in both mobile and fixed.

Speaker 1

ARPUs are still the lowest in the region and yet spectrum costs remain the highest. And in Colombia, today only the largest player is able to generate profitable free cash flow. Said differently, there's still a lot of work to make the Colombia industry structure a really healthy one for the long run. Now please turn to Slide 7, where you can see that Guatemala is back on its game with both service revenue and EBITDA up year on year in the quarter. As you will surely recall, we made the bold decision to increase our ownership to 100% towards the end of the pandemic and to allocate an important amount of our capital to Guatemala.

Speaker 1

This was a tremendous opportunity to own more of the asset with the highest return on capital and the most cash generation in our portfolio. Shortly after that investment, we began to face a strong challenge from our competitor and we responded by investing heavily in new spectrum and infrastructure to boost capacity in our networks. We also invested confidently to maintain our strong position in the distribution channels in Guatemala. And as a result of that strategy, mostly as it was, we successfully protected our market share and defended our strong leadership. And now, after 2 successful spectrum auctions, we have spectrum parity in the Guatemala mobile industry and this has created the conditions for the return to a more rational competitive environment.

Speaker 1

We are now seeing signs of this in Q1 with our mobile ARPU up year on year for the first time since early 2021. And this was the main driver of revenue growth this quarter. When you add this to the meaningful savings from Project Peppers, you can see low single digit revenue growth translate into high single digit EBITDA growth. So our investments and our patience for the past 2 years are now beginning to pay off with our largest market now back to strong positive growth. As we sit here today, indeed, it feels good to now own 100% of this strong and growing cash flow.

Speaker 1

With that said, we're not out of the woods and we're not dropping our guard. Our competitor remains aggressive and it's still too early to tell how the market will react to our most recent price increase in February. So while the strategy is in place and it is working and we're feeling good about Q1 in Guatemala, we know we still have a lot of work ahead. Now please turn to Slide 8 to talk about Panama. 5 years ago, we made the highly strategic decision to enter the Panama market.

Speaker 1

That important capital allocation is also coming to fruition now. As you will recall, we made 2 back to back acquisitions, first in fixed and then in mobile. A year after the merger, we rebranded everything to our own flagship Kiko brand, which is now one of the most recognizable brands in the country, as is also the case everywhere you go in Central America. At the time of our initial investment, we saw 3 critical opportunities that have become a reality by now. First, we saw a tremendous opportunity to cross sell mobile services to the fixed customer base we have acquired when we bought Cableanda.

Speaker 1

Indeed, when we subsequently bought the Telefonica Mobile asset, its mobile market share was in the mid-30s. Today, we're at about 50% mobile market share in Panama and we are now driving postpaid penetration to that base. 2nd, we thought that the Panama mobile market was ripe for consolidation with too many players and too little cash flow. Since then, the market has indeed consolidated from 4 players when we entered down to 2 per day. When you consider that many of the largest countries in the world have only 3 players, there was no reason for any country in Latin America to have more than 2 mobile players, perhaps with the exception of Brazil, which is much larger of course.

Speaker 1

And finally, the 3rd pillar of our investment thesis was the opportunity to bid and win our fair share of large government contracts for B2B. After years of work, this is just now starting to happen, as you can see in our results in the last 6 months. With all of this put together, we are now the number one telecom operator in Panama. And as a result, Panama, with its stable and dollarized economy, is now becoming the 2nd largest contributor to Millicom's equity free cash flow in 2024. Now, let me turn the call over to Maxime to say a few words.

Speaker 2

Thank you, Mauricio. As many of you know, I joined the company less than 9 months ago and my first priority was to simplify the way Millicom operates to empower the countries, optimize capex and accelerate and expand the scope of projective rest. As we told you on the Q3 earnings call, Millicom has tremendous assets and a very strong team, but we saw an opportunity to significantly enhance the cash flow generation of the business by bringing more focus on cost control well beyond the initial scope of project Abrast. We've also decided to upgrade the HFC cable network for it to provide more bandwidth. For a limited cost, we now have the capacity to deliver high bandwidth and be competitive again.

Speaker 2

We constructed our 2024 budget on this basis, and 9 months later the results are very tangible. EBITDA is up more than 20%. OCF is up more than 50%. Equity free cash flow is always seasonally weaker in Q1, but this year was $134,000,000 better than Q1 of last year. And all of these actions are helping to bring our leverage down very rapidly, which was also one of the key priorities when I joined.

Speaker 2

Every country is contributing to our improved financial performance, and we expect that all of our countries will generate strong equity free cash flow in 2024 at level well above what was achieved in 2022 and 2023. And while we have been driving this important effort, this is the result of the tremendous effort of many people throughout the company. And we want to take a moment to thank everyone for their dedication over the last several months. It has been painful, but Millicom is already in a much stronger position, thanks to you. Of course, there is still much more that we can and will do in the future continuing cost control, CapEx optimization and implementing simplification everywhere.

Speaker 2

It is possible to be more flexible and more efficient. We are downsizing the volume of shared services to other countries fully responsible. And we have restructured TIO money to keep only countries and use cases that make sense. We can probably do better with organic service revenue growth and we will continue to focus more of our time on identifying opportunities we may have to accelerate our profitable growth. With that, back to you, Mauricio.

Speaker 1

Thank you, Maxime. It has been a true pleasure to partner with you over the last several months. Thank you for your incredible support and your friendship and for helping Millicom to tap into the experience and expertise of the broader Atlas team. Before turning the call over to Bart to go over the financials, I will wrap up by discussing the various leadership challenges that have been announced over the past several months. First, as part of the CEO succession plan that we had announced 9 months ago, I will be stepping down as CEO shortly after the shareholder meeting later this month and I will remain as Chair of the Board subject of course to shareholder approval at the AGM.

Speaker 1

No major news for you there, I hope. As we recently announced, the Board has appointed Marcelo Inites to be Millicom's next CEO starting June 1st. Marcelo's journey at Millicom has been nothing short of incredible. Marcelo joined the company about 30 years ago, starting in one of our call centers in Paraguay. Since then, he has held leadership roles in multiple countries touching just about every part of the organization.

Speaker 1

He is currently the General Manager of our Panama operation, where he successfully integrated the acquisitions and has executed our investment plan, which I alluded to just a few seconds ago. A very well welcome to Marcelo, an team hub leader with so, so much Sangre people. I also want to publicly thank our Board for the time and the effort that every member devoted to the discussions, analysis and interviews with many internal and external candidates. Our decision to appoint Marcelo was indeed thoughtful and inanimus and that could have not been achieved without the months of work that the Board put into this very important task. And we also recently announced that Maxim will remain our President and COO until year end and he will join our Board as of this May.

Speaker 1

Maxim's contribution has already been very positively impactful to the company and I personally immensely look forward to continuing to partner with Maxim now in the Board room. As you can see, Maxime and I will stick around to help Marcelo whenever and for whatever he needs us. Marcelo will have our full support, that of the full Board and that of all his TIGO colleagues who know him so well and have enjoyed his strong leadership for decades. And also subject to shareholder approval, we will be joined by Justine Demubic as our new Board member. Justine is with L'Oreal now, but she was our very own former Treasurer and Head of IR some years ago at Millicom.

Speaker 1

So she will bring back tremendous knowledge of the company along with her experience and financial acumen. Welcome back, Justine. Thanks to Michael Golan for sitting on our Board for the last year with meaningful insights and contributions. And also thank you to Pernille Larenberg for her many, many important contributions to the Board of the last 5 years and also for her insightful challenge and continuous support to the team. A few weeks ago, we also announced the appointment of Bart Van Heeren as our new Chief Financial Officer.

Speaker 1

Like Marcelo, Bart is a Millican veteran who has held several leadership roles during his 14 years with the company, most recently overseeing corporate finance, which encompasses the company's treasury, tax, mergers and acquisitions and corporate administration activities. As you know, I've worked closely with Bart over the years and think highly of him. Before I turn the call over to Bart to go over the financials, I want to reconfirm that we continue work on monetizing our regional to our portfolio. We launched the monetization process externally in Q4 and we're now very actively in the middle of the M and A process. Of course, precisely because of that, that's all that we can say at this time.

Speaker 1

With that introduction, let me turn the call over to Bart for his debut moment.

Speaker 3

Thank you, Mauricio, and hi, everyone. Many of you know me already from my various roles in the past or from investor conferences. For those who don't, I encourage you to reach out to me through Michel, as I definitely want to engage with our broader investor base to hear what is top of your mind. This being said, let's now have a look at our financial performance beginning on Slide 12. Mauricio indicated this already.

Speaker 3

A lot of work has been done over the last few months, and now results start to show. At the same time, we still have significant challenges ahead. Service revenue was $1,380,000,000 in the quarter. This is up 8.8% year on year from $1,260,000,000 a year ago. Excluding the impact of exchange rates, organic growth was 3.8% in the 4th quarter, driven by: 1, our mobile business, which is up mid single digits, thanks to ARPU growth from recent price increases and pre to postpaid migrations.

Speaker 3

2, mid teen growth in B2B coming from large contracts in Panama that Mauricio already talked about. These contracts should continue to generate revenue and EBITDA for several more quarters, but we anticipate a much smaller contribution from these contracts going forward and beginning in Q2. 3, this revenue growth is offset a bit by decline in the home business, where we focus on return on profitability in a competitive environment. Our EBITDA, which we will discuss in more detail later, was up 24.5% year on year to $632,000,000 despite $30,000,000 of restructuring costs incurred in the period. The very strong growth reflects the combined effect of the service revenue growth that I just discussed, as well as the cost savings for Project Everest that are now visible and recurring.

Speaker 3

Then the operating cash flow rose 61 percent to $519,000,000 reflecting both the robust EBITDA growth and the 38.9% reduction in CapEx. This CapEx reduction is in part due to the efficiency measures taken during 2023 and not materializing in the run rate, but a bigger portion is due to the slower phasing of investments in this quarter of 2024. So please don't annualize Q1 CapEx as an indication for full year investment. Drilling down further to the service revenue by country on Slide 13, Guatemala increased by 2%. This was the first positive quarterly growth in 5 quarters and is fueled by mobile growth, where recent price increases are driving ARPU growth.

Speaker 3

As Mauricio mentioned, we are happy with the improved performance in Q1, but competition remains very intense here. Colombian service revenue was flat in local currency. Here, our mobile business continues to grow very nicely and was up high single digits, but this was offset by a decline in our Home business, where we continue to prioritize price discipline and profitability over growth in a market that remains very competitive. As Mauricio already discussed, we'd be willing to sacrifice some customer growth, but the good news here is that home ARPU is up strongly, and we have also seen a significant improvement in churn and net adds in the last couple of months. In Panama, service revenue grew 17.8%, fueled by the 2 large B2B contracts, as well as a strong growth in mobile.

Speaker 3

Excluding these large contracts, service revenue would have been flat. Bolivia service revenue was flat as well, with growth in mobile and B2B offset by a decline in home, where we continue to prioritize price discipline, especially given a more challenging macroeconomic outlook and the longer payback terms in this side of the business. Paraguay service revenue grew 4.3% in local currency, with every business unit continuing to perform well. Service revenue in our other segments increased 5.4%. As a reminder, the other segments is comprised of our operations in El Salvador, Nicaragua, and Costa Rica, which in aggregate account for just over 15% of our service revenue and EBITDA.

Speaker 3

Now turning to EBITDA on Slide 14. As I mentioned before, EBITDA in Q1 was $632,000,000 That's up 24.5 percent year on year from $507,000,000 As you can see, foreign exchange was a tailwind this quarter and contributed about $21,000,000 of growth to the quarter. This doesn't happen very often, so we're happy to take it. Excluding this FX benefit, EBITDA increased 20% organically year on year. Noteworthy is that about $30,000,000 of further severance costs are included in our Q1 EBITDA.

Speaker 3

On Slide 15, you can see our EBITDA by country. It's quite clear that the cost savings initiatives we've been implementing over the past year or so are having a very positive impact across all our operations, with nearly all countries up double digits. Guatemala EBITDA improved very significantly and increased 7.9% in local currency terms, largely thanks to better ARPU growth in mobile. Colombia EBITDA local currency growth was more than 24%, due to both mobile service revenue growth and continued price discipline in our home business, as well as all savings from Project Everest. The EBITDA margin of 36.5% was a new record.

Speaker 3

Noteworthy is that during Q1, our Colombia operation incurred almost $18,000,000 of restructuring costs related to the voluntary retirement plan that we implemented early in the year. Excluding this charge, the margin would have been 41.4%. That's up 10 percentage points over the past year. And this is one of the reasons why we expect equity free cash flow to be positive in 2024, as Mauricio indicated previously. Now turning to Panama, where EBITDA grew 26.1%.

Speaker 3

The B2B projects contributed more than half of this growth. And as I've just told you, we expect much smaller contributions from these projects going forward. Bolivia EBITDA increased 12.7%, and this is largely due to the savings from Project Everest and to our reduced commercial activity in home. As a reminder, the macroeconomic situation in Bolivia has become more challenging because there is a shortage of US dollars in the economy. Up until now, this hasn't had any noticeable impact on consumer demand, but it has become a lot harder for us to convert Bolivianos to dollars to pay some of our vendors and to upstream cash from the country.

Speaker 3

In other words, no impact yet on revenue or EBITDA, but our working capital was about $16,000,000 better than it should be because of these payment delays. Paraguay had another solid quarter with EBITDA up 14.1 percent organically, and the margin expanded almost 5 percentage points to 40 8.3%. EBITDA in our other segments increased 17.8%, with all three countries contributing to the growth. Now please turn to Slide 16 for our usual net debt bridge. During the quarter, net debt increased slightly by $90,000,000 to end Q1 at just under $6,000,000,000 The tax rate EBITDA growth, our leverage decreased by 19 bps in this quarter.

Speaker 3

The key factors that contributed to the increase in net debt were our equity free cash flow was $1,000,000 however, includes the proceeds of the sale of towers in Colombia for $39,000,000 We repurchased our bonds in open market for approximately 132,000,000 These purchases were made below par, leading to a $15,000,000 benefit. We also bought back shares for approximately $27,000,000 As a result of these items and considering also the strong EBITDA growth that I already talked about, our leverage ratio ended Q1 at 3.10, down from 3.29 at Q4. Now please turn to slide 17 to review our financial targets. We continue to target equity free cash flow of around $550,000,000 in 2024, and we continue to target leverage of 2.5x by 2025. These targets remain unchanged from what we communicated to you at our Q4 results last February.

Speaker 3

As you can see from our Q1, we have started the year on a relatively strong note. And we are indeed slightly ahead of our plans. But as Mauricio and I have already told you, we benefited from a number of tailwinds in Q1 that won't necessarily repeat. We also see a number of risks for the remainder of the year. These risks are contemplated and reflected in our targets.

Speaker 3

Now let me turn the call back to Mauricio to wrap up.

Speaker 1

Thank you, Bart. Pretty good for your first time. Before I take your questions for the last time, as CEO and myself, I want to recap some of the key strategic decisions we have made as a team over the past several years to help get us to where we are today. First, we invested heavily in our networks. We deployed 4 gs and bot spectrum to secure our mobile market leadership and we expanded aggressively into home and into B2B.

Speaker 1

Largest chunks of our spectrum acquisitions and renewals are now behind us as you know and B2B is beginning to show its strength. 2nd, we divested out of Africa where we had no scale. We closed offices in London and Stockholm and we sold our non core assets. 3rd, we entered Panama, Nicaragua to consolidate our leadership in Central America. Panama is now a success story and we increased also our ownership in Guatemala, the country where our return on capital is by far the highest and strong cash flow growth is back.

Speaker 1

4th, we have made great strides to improve profitability in Colombia. We still have a lot of work to do there. We're closer than we ever were to making Colombia a key contributor to Medicom's growth and to its free cash flow generation in the future. 5th, and this is perhaps the most important, we created a winning San Grettivo culture that makes all of our plans possible. In this, out of this San Grettigo and perhaps because of it, comes our next leader, Marcelo Benitez.

Speaker 1

FIGO indeed has become a magnificent and unique platform in the region, one that is now more profitable, thanks now also to the immense and positive support of our largest shareholder, Atlas. I am happy now to hand over the helm to a seasoned and highly capable company veteran like Marcelo, a great colleague and a dear friend of many years. You will get to meet Marcelo in early August for the Q2 results conference call. Today, Bart, Maxim and I will take your questions.

Operator

Perfect. Thank you very much Mauricio, Bart, Maxim. We will now move to the Q and A session. And the first question will come from the line of Sumit Datta at New Street Research. Sumit, the line is yours.

Speaker 4

Yeah. Hi, guys. Thanks very much. Mauricio, thank you for all your help over the years and good luck with the new role. Look forward to talking to you, Bart going forward.

Speaker 4

Good luck with everything. A couple of questions, please. So first of all, I mean, a really remarkable job on the cost side over the last few quarters. I've looked at the sector for many years and can't really recall anything quite as heroic in terms of margin improvement. So well done to everybody for that.

Speaker 4

It does sort of lead to the obvious question, though, as to how sustainable is that policy. And I think you've hinted at areas you would look to maybe step up investments within home, for example. Just curious if you could elaborate, sorry, as you look forward over the next few months, either on the home side or on the wireless side, where you might see opportunities to pick up investment again in order to try and pep up the top line growth? That would be the first question, please. And then secondly, just going back to something you touched on, which is cash coming out of a couple of markets, Honduras and Bolivia, just trying to get a sense as to how real that risk is, what that might mean for equity free cash flow.

Speaker 4

I think it's you've talked about it being within the guidance, but again, a bit of color there would be helpful as to what's happening on the ground.

Speaker 1

You bet. I'll take a little bit of the first one. Maybe Maxim can help out there. And I think the second one will leave our brand new CFO to cut his teeth with, not only on the question, but on actually handling the challenge. So listen, on the commercial initiatives and on the Everest project, as I've said often, Everest was something we had started quite a bit of time ago, had been properly planned for with external resources and we had started implementing.

Speaker 1

But in reality, it got deeper and faster with the support, health and challenge from our new largest investor. That external force just made Everest become not just Everest 1, but Everest 2, and it just sped up the process. And I've been vocal in saying thank you for that external support. And since Marcin is on the call, we allude often to our partnership and it has really worked well. So what you're seeing today is the combination of initiatives that are strategic in nature from a year ago now being combined with that platform, Panama, Guatemala, the work on Colombia, etcetera, etcetera, becoming more and more profitable.

Speaker 1

Now the top line, which is very, very important, we have continued as ever focused on it. So let me give you some color on that so it doesn't just remain as words. Number 1, on mobile, you've seen our continued push on postpaid and that's true in Panama. You see it coming into the results cross selling 1st and then adding postpaid to the new subscriber base. It's working like a charm.

Speaker 1

Colombia, you've seen the numbers. Postpaid is really working for us in Colombia as in other markets. But that push into postpaid comes with, as you know, lower churn, little bit more ARPU and higher or longer lifetime value cycles. And that's a long term initiative that we've continued on. We are increasingly using our fixed footprint to drive convergence.

Speaker 1

Maybe we don't speak about it in the calls because we don't have enough time, but we're raising speeds and adding more convergence into key markets where we have a long fixed network like Colombia and Bolivia, etcetera. So that's ongoing. And B2B, which today is all about Panama, but you've heard us over the years talk about the importance of driving B2B into the mix and that you begin to see that. So there are initiatives there on the revenue that have stayed on and will continue to be the focus going forward. Having said that, and as we've said publicly, we did become very price disciplined in Colombia some quarters are gone.

Speaker 1

We've actually implemented installation costs and remain very pride and disciplined. That has come at the cost of volume. It drives cash flow, but it slows our growth. And as we just highlighted earlier on, that is one avenue in which if we see an improved industry structure in Colombia, as we began to see over the last couple of months really, prices have stabilized and competition in home seems a little bit more stable. You've seen us drive ARPU a little bit.

Speaker 1

Then we may go back into all with a little bit more push on volume. And the same is true on Bolivia for macro reasons that we'll address later. That's the long way of saying we remain very, very focused not only on costs but also on revenue going forward. And I could speak at length on what it, but maybe Maxim, anything to add to that?

Speaker 2

Yes. Thank you, Mauricio. Hi, Sumit. I would say, 1st, we have not sacrificed CapEx. Much more, we have optimized CapEx, especially by aligning technical IT and sales to be more efficient.

Speaker 2

2nd, we have renegotiated a lot of contracts with the vendors, both on network and IT. So, for the same amount of money, we can get more. And there is more to come on that. And on the home business, we've made a huge HFC upgrade in term of bandwidth capacity for quite a low cost. So all that explain you that we can have a good performance commercially with relatively low CapEx.

Speaker 2

On top of that, there is more to come on costs, especially on the contents, even though each time a contract comes to its end, we can renegotiate drastically and that is big amounts. And then on subcontractors and on shared services, There are many shared services in Millicom that we started to push first to reduce and then to push to the countries just to avoid let's say HQ costs with limited leadership on them. And third aspect, we have many initiatives that are pushed on the service revenue. The first one is to lower as much as we can in the trial, especially on home because this come with a high cost both OpEx and CapEx and the HFC upgrade is quite successful on that. Then on the distribution, we are improving the distribution network and we are great believers on the FMC offers putting together the home and mobile business especially when fighting in certain countries with the small ISPs that are cheaper providing BBI only.

Speaker 2

That's the best way to fight on that.

Speaker 1

Thank you, Maxim. And part, Bolivia and Honduras?

Speaker 5

Yes. So thanks for the question, Sumit. So for once we had positive currency effects in the quarter, so we'll take that. But we operate in emerging markets and can all be positive in all countries at the same time. In Bolivia, so we're putting in the work in the sense that working with all suppliers to convert our contracts from U.

Speaker 5

S. Dollar to local currency. So to reduce our U. S. Dollar need, We are still able to buy a number of dollars and euros in the market, a lot thanks to good relationships with our banks over the years who have been issuing local bonds, who have been in the market for many years with them.

Speaker 5

But those come at commission rates in between 10% 30%. So that only makes sense to the extent that we can share that commission costs with our supplier, which in most cases is relatively straightforward for them and for us then to execute on. We also allocate some of the cash flow that we generate in the markets for debt repayments. So our net debt in Bolivia will have come down, during the quarter. But then lastly to say, I think the business itself has not suffered from this.

Speaker 5

So mobile business is up, B2B is up. And then in the home, we have a slowdown and our returns in home are a little bit longer. So to allocate the cash, it's better to go into the mobile business for even more immediate return. In Honduras, a bit of the same activities working with the suppliers. But in Honduras, the difference with Polica, we are able to convert much larger amounts in US dollar.

Speaker 5

The way it works is we have to present the invoices to the regulator. Those get reviewed and approved over time. So there is, there is a bit of a delay. DPO will go up. But it's a process that is still functioning.

Speaker 5

And so far, we're not expecting that much of an impact on the upstream at this moment in time.

Speaker 1

A couple of additional comments just to wrap it up, Sumit. Number 1, for quite some time now, you've heard us say we're cautious on our investment envelope in Bolivia. And we talk about Honduras to a lesser extent. That's precisely because we saw the dry apple foreign reserves coming up. So we've been preparing ourselves for that and managing the way Bart is describing it.

Speaker 1

In terms of the target, there are things that can go well, that are going well. There are things that can go bad and we try to put it into a bag and that basically shakes up with us confirming the envelope, for Target for this year with all the puts and takes in there.

Speaker 4

It's very helpful. Thank you very much.

Speaker 6

Thank you, Sumit. So next we're going

Operator

to go to Stephane Gauffet at DNB. Stephane?

Speaker 7

Yes. Hello, can you hear me?

Speaker 6

Perfect.

Speaker 7

Yes, okay. Well, first of all, just thanks, Mauricio, for all discussions over the years. And I have a few questions, a couple of them will likely be short. So first of all, on the restructuring charges, are we done now or will there be more charges in the coming quarters? Secondly, the Panama business was boosted by the B2B contract, so around 2 percentage point to group service revenue or around 25,000,000 to Panama service revenues.

Speaker 7

How should we think about these contracts going forward? Will they come down materially or how should we think? Then just thirdly, you mentioned reducing the MFS footprint. And just a couple of years ago, I believe, the target was to do the opposite than to build out that business materially. So could you just give a brief update on all the MFS business?

Speaker 7

Thank you.

Speaker 1

You bet. So listen, on the first part, Stefan, on the charges, I will tell you, as a matter of principle, we're going to continue driving efficiencies wherever we can find them, whenever we can find them with driven focus to make the platform more and more profitable. And I think we see eye to eye, the entire board and all of our investors. So now we've done a lot over the last few months, Everest 1 and Everest 2. So the level of that activity will certainly be slower, but we ain't going to stop looking for efficiencies.

Speaker 1

How exactly that translates into charges effectively on a quarter basis, Bart can probably give you some comment on that. Yes, do you want to go for it?

Speaker 5

Yes, thank you, Harish. I think a lot of the restructuring charges are already spent, Stefan. So on the flip side, a lot of the benefits are in the run rates or in the bank, as we call it. Now as Mauricio said, we continue to look for more efficiencies. So I would say, generally, yes, you will see more.

Speaker 5

But that's as well where we now not report adjusted anymore presentation as you have seen. So it has been ongoing for a number of quarters. And so I personally look at it and what we have as reported numbers. And as this can continue over time, I'm not going to say at the same intensity. But I would encourage to look at reported rather than adjusted for one off charges.

Speaker 1

On the B2B contract, Stefan, very quickly, these are very large, very profitable contracts that basically have us in Panama get to something that begins to look like our fair share of the B2B market in that economy given the size that Tigo Panamana currently has. We fought for those for years and we're happy to attain them. But B2B, as you know, tends to be lumpy. These are long term contracts, but we've booked the bulk of the 1st year revenue both in last quarter, so last from these contracts to the level that we had in the past 2 quarters. So now 25% to 30% per quarter, materially less.

Speaker 1

Very important that we be transparent on that. On MFS, a couple of comments and I'll hand it over to Maxime. Number 1, we've worked very hard to bring the business to OCF breakeven. I think I've said that a number of times so that we have perfect optionality with that business. We are very, very focused now on integrating it better into the operations of the business because that particular product reduces churn, it increases ARPU and has a lot of affinity with the operations, which in fact means we are learning a lot from that business, learning a lot on what countries it works better and in countries it doesn't quite work as well.

Speaker 1

What works in Paraguay may or may not work countries like Guatemala or others. So we're pretty much in the learning process. We're pretty much in the efficiency process, pretty much in the integration process. And going forward, it's all about optionality. We're no longer focused on one specific M and A outcome here.

Speaker 1

Maxime, over to you for any

Speaker 2

add ons you want to give on that? Yes, very limited additional elements. The first one, we are not a fintech. It's a market which is very complicated, very competitive with very limited margins. So, we've decided to focus on the countries where we are relatively strong such as Paraguay, Bolivia and U.

Speaker 2

S. And on specific use cases, mainly the ones that are bringing something to the telco business, meaning the reloads for prepaid and the bill payments to lower the cost of commissions. Lending will be Paraguay only because it's a risky business that is not our core business. And very important, we've made the countries fully responsible for their Gourmet business. There is not a need anymore any longer a big team to build everything and sync other countries.

Speaker 2

The countries will have to define what are the use cases they really need to be at the software development and to market the products in very close relationship with the B2C teams. So, it's a different approach, not really something where Tigo Mone is supporting the telco business and not anymore the fintech living its life.

Speaker 7

Hey, thank you very clear.

Operator

Thank you, Stefan. So next, we're going

Speaker 6

to go to Marcelo Santos at JPMorgan. Marcelo? Hi, good morning. Thanks for taking my questions. I have 2.

Speaker 6

The first is on Panama. So you mentioned that in the end, the 3rd operator kind of really left and you were left to a 2 player mobile market. Is this something that a regulator is going to accept? Should there be remedies? Is there some discussion?

Speaker 6

Usually, when the number of players goes down, regulators get a bit more nervous. So I just want to understand what's your perspective. And the second is, has there been any change in behavior in competitive behavior in Colombia due to WOM's financial issues? And we saw that WOM Colombia was included, I think, on the Chapter 11. So just wanted to see if you're perceiving something on the ground.

Speaker 6

Thank you.

Speaker 1

It's interesting that you ask one question right after the other, as if you're suggesting a parallel. And there may or may not be a parallel here, Marcelo. So let's start with Panama here. It indeed has become a 2 player market. As I said, we envisioned it would naturally eventually end up being by default.

Speaker 1

And it has been a very lengthy, organized, methodically, highly interactive process since Digicel decided to turn back the business and the licenses to the Panamanian government quite some time ago. We have worked as an industry, Millicom also, very closely with the government of Panama to assist in them handling that unexpected situation when the business was handed back to them. It has been a continuous dialogue. The government has looked for a 3rd party to maybe manage that business, take over that business and has been unsuccessful. And as a result of that and our focus and continues work as an industry to make sure that there is no customer disruption as those subscribers were looking for a new home, the process has been managed, I think, quite well.

Speaker 1

And as a result of that, although the law in Panama still says 3 players, the de facto reality is that it's a 2 player market with everyone having done its best to find a very healthy industry structure going forward. Because of this, Marcelo, this is not the result of organic M and A. This is the result of an industry adjustment that was necessary and an inorganic transition, which was well managed vis a vis the customer. As a result of that, it's a de facto to player market. And as a result of that, we're not expecting any remedies coming out of Panama.

Speaker 1

Colombia, it is a matter of public record that one filed for a Chapter 11 type proceeding not too long ago. The first thought that comes to mind is a book by a Colombian Nobel Prize winner, Apologies for the use of Spanish language. You can all look that one up. Chronicle of a Death or Cold. We always imagined that it was difficult for the Colombian industry structure to accept a new player.

Speaker 1

Having said that, it has been very painful 4 or 5 years for the industry. Crisis came down. We all had to react. ARPUs in Colombia came under a lot of pressure. But you see that we held our own in Colombia.

Speaker 1

I spoke of that at length. And as a result of that, that process, the Chapter 11 type bankruptcy of WOM in Colombia, is at the very beginning of that process. And it will be the beginning of what I believe to be an inflection point in Colombia, meaning the industry structure in Colombia that have been vocal is too damaging to those do not have their will to stand in for long term. And here's one more example of that. So I believe we're at an inflection point and at some reconstruction in the Colombia industry structure, which needs to be reconstructed so that long term healthy players can continue to invest.

Speaker 1

Things like the combination of our network with Telefonica was badly needed. The filing of bankruptcy proceedings 1 by 1 was expected because the industry needs recomposition. And this may be on the positive side an inflection point. That's what I expect will happen going forward and that we have expected would having gone through very painful last 4 to 5 years. Having said that, Marcelo, 2 comments.

Speaker 1

1, we're only at the very beginning of that, right? And bankruptcy proceedings do afford the parties that undergo it some financial protection, which means they remain commercially active. And because they remain commercially active, they are still a player in the market. So don't expect any short term upside from that. And bankruptcy proceedings are by definition uncertain and they are at the very beginning.

Speaker 1

So as much as I see a long term trend towards a better industry structure in Colombia, I caution you on the short because there's uncertainty on the outcome and it is the early

Speaker 6

days. Perfect. Thank you very much.

Operator

Thank you, Marcelo. So next we're going to go to Oscar Ronquist at ABG. Oscar? You're on mute, Oscar.

Speaker 8

So sorry for that. Thank you, Michelle. Yes. So my first question, just a detailed one on the severance base. I think you said about the $30,000,000 in severance in H1, and you had $30,000,000 in now in Q1.

Speaker 8

So was that I mean, obviously, we were to expect maybe some more restructuring costs. But just on the severance that you alluded to in the Q4 report, is that all already taken now in Q1? Or is it still some that we should expect in Q2? Then my second question would just be, you talked a little bit about Colombia and the network JV with Telefonica. And you said that you are on track to reach profit or more than breakeven in free cash flow in Colombia during 2024.

Speaker 8

So just in terms of timing, obviously, there are some positives and some negatives short term, but when do we see a positive run rate on a net effect cash flow wise in the network JV in Colombia? And just the 3rd, I was just curious to hear your thoughts about, I mean, now that you have accelerated the savings program, it was quite a steep headcount reduction that you have seen and also, I mean, cost optimization across the board. So my question would be, do you have any sort of insights to share with us how the remaining staff has handled all of the cost reductions? And if we see any sort of impact on the satisfaction from the personnel? Thanks.

Speaker 1

Well, that's a good one. Last one. So I'll take a couple of those and then maybe give you parts in time to turn on the actual map on the severance. So listen, the JV with Telefonica has been years in the making and it has required not all the important negotiations with the governments to have it approved, but also important negotiations with a partner. It is already yielding benefits, as I said on the call, because we were able to buy a 5 gs spectrum together and we are deploying that network together.

Speaker 1

The actual coming together of the JV is happening as we speak, but it is an important element along with all the other elements that yield positive cash flow targets for Colombia for this year as of full year. On the headcount reduction element and the impact it has had on the team, I want to take the opportunity to thank everyone. There's about possibly 300 or 400 people from TIGO listening to this call, Oscar. So your question is actually very welcome. We could have not undergone this important as it is, valuable to shareholders as it is.

Speaker 1

We could have not done it as fast, as deep without, a, the support, the challenge from Atlas, but b, also that immense sangritico that we have built in this company. We have done it because the teams believe in what we're doing, believe in the purpose of what we're doing, want to see the company succeed. And as a result of that, they understand that harsh and difficult as this was, it was important and better to do it fast and quick and move on going forward, which is only the result of years of building that tremendous culture that now we're putting to use. There was a politician that once said, what is the point of having capital if you don't put it to use? That's what we have done and that is thanks to all the people that have for so many years built this amazing company and they signed the table.

Speaker 1

On to numbers, severance.

Speaker 5

Yes. Now on severance, I think last year or in the quarter, we said that we would expect $30,000,000 to $35,000,000 of severance payments in the first half of this year. A very significant portion has been executed now in Q1, definitely as planned. But as I mentioned before, we continue to look for optimizations across the board, not only on headcount, but on other costs, suppliers, CapEx, name it. So there will be more.

Speaker 5

We started to report now on as reported, not adjusted. I don't think the same intensity as this quarter, but as there are maybe less severance, there might be some other restructuring charges. Definitely less, but probably some more to come. Got it. Thank

Speaker 1

you very much.

Speaker 5

On the JV, our equity free cash flow in Colombia, The performance in Colombia is doing very well, right? So we have more than 24% EBITDA growth compared to last year. So that gives us a lot of oxygen. Net of restructuring costs, our EBITDA in Colombia is north of 40%. This is now the first time that we reach those levels in Colombia.

Speaker 5

And that obviously flows down into a much more in the equity free cash flow. So we have increased revenue, improved margins, lower costs, we'll have less spectrum in the year to go. We have CapEx savings. We're focusing more on our mobile growth, which has immediate returns as opposed to the growth in the home business. So also cash flow wise and EFCF wise that gives a lot more flexibility in your equity free cash flow.

Speaker 5

And then additionally, from the JV with Telefonica, I don't expect a net EFCF saving immediately this year or of a breakeven on that level and then the benefits come in mostly next year. It's split in 2 sides, 1 on spectrum and that arrives obviously some of that is already in the bank as we start to look at 5 gs etcetera together from the JV rather than separately. And then as well in CapEx going forward where you will have a single network to manage from the JV as opposed to reach companies their own.

Operator

Good afternoon.

Speaker 8

Thank you very much.

Operator

Okay. Thank you. So we're about 1 minute to the top of the hour here. We do have a last question from Eduardo Ruby at UBS. Eduardo will make it a quick one.

Speaker 9

Hi, guys. Thanks for taking my question. Just a quick one here on my side. So, I would like to know how you're seeing the leverage going forward as you already delivered some improvements this quarter? Thank you very much.

Speaker 5

Thank you, Eduardo. So definitely a good start of the quarter rather than running behind the facts. So our leverage came down from $329,000,000 to $310,000,000 Our net debt went up a little bit, dollars 20,000,000 but then thanks to the EBITDA after leases growth $120,000,000 that's what's been driving our deleverage. We expect to continue to produce much more equity free cash flow the coming quarters in line with our targets that would work on our net debt. And then on the other side, the EBITDA after leases is off for a strong year and let's see where we can land the year.

Speaker 5

So both metrics are going to be worked on. And then indeed, we hold to our guidance to be close to 2.5 or at 2.5 by 2025. If this comes in early, great. But it's still early to tell because still a lot of challenges ahead of the year. We're just the Q1.

Speaker 5

We mentioned already some macro issues in Bolivia and Honduras. Then there are always regulations, taxation, name it, and business competition remains very, very high in our region. So but off from a good start.

Operator

The key point, Eduardo, is that it remains the priority to reduce leverage. So thank you, Eduardo. I think we'll leave it at that. Mauricio, any final words? Sure.

Speaker 1

I want to take the opportunity to thank everyone who has helped do 2 things. 1, build this platform over the years and 2, make it profitable because that is exactly where we are today, a more and more fantastic and profitable platform. So thank you to everyone who's contributed on both fronts. From here on, Marcelo, I hope you are taking notes because this is going to be over to you. I'll stick around for strategic direction, for consultation and for government relations.

Speaker 1

But I hope you took a lot of notes because the next quarters are all yours. Thank you everybody and thank you.

Operator

Thanks everyone.

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Earnings Conference Call
Millicom International Cellular Q1 2024
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