Millicom International Cellular S.A. (NASDAQ:TIGO) Q1 2024 Earnings Call Transcript

Millicom International Cellular S.A. (NASDAQ:TIGO) Q1 2024 Earnings Call Transcript May 8, 2024

Millicom International Cellular S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Michel Morin: Hello, everyone and welcome to our First Quarter 2024 Results Call. This event is being recorded. Our speakers today will be our CEO, Mauricio Ramos, our President and COO, Maxime Lombardini and our CFO, Bart Vanhaeren. 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. 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.

Mauricio Ramos: 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. 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 nearly two years. Two specific elements have contributed to this performance. First, during the quarter, we implemented another round of pricing increases in a majority of our markets.

As a result, mobile ARPU increased 5% on average in local currency terms and it was up in every single country. Second, we continued to generate revenue from two 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 two contracts. Going forward, we will continue to bid for more of these contracts that help accelerate Panama’s digital transformation. Having said that, I want to caution you that these two large projects are expected to generate less revenue in the quarters going forward. So we don’t expect to sustain this level of service revenue growth in Q2, not really for the rest of this year.

EBITDA increased 20% 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. But please do note that Q1 CapEx benefited from some phasing. As a result of all of these efforts, OCF was $519 million 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. And given the strong start for the year, we remain confident that we will achieve our target equity free cash flow of about $550 million 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 two blocks of spectrum in the 700 megahertz band to strengthen our competitive position in the mobile business. 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.

See also 20 States with the Highest Fertility Rates in the US and 10 Best Cookies and Crackers Stocks to Buy.

Q&A Session

We remained 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. As a result, we’re now seeing our actions translating to high 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% 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.

Please note that one of the consequences of our price discipline in 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 premises 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 strongly, 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. All along this journey, we have also continued to look for ways to make the business even more efficient in it’s use of capital. And with that in mind, as you know, we recently finalized an agreement to combine our mobile network with Telefonicas in Colombia.

This project was over two 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 5G spectrum jointly in the most recent auction and to deploy a 5G network together, thus enhancing our savings. 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. 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 it’s 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. 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, closely as it was, we successfully protected our market share and defended our strong leadership. And now, after two successful spectrum options, we have spectrum parity in the Guatemala mobile industry. And this has created the conditions for the return to a more rational competitive environment. We’re now seeing signs of this in Q1 with our mobile ARPU have 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 Everest, you can see low single-digit revenue growth translating to high single-digit EBITDA growth. So our investments and our patience for the past two 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. 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. Five years ago, we made a highly strategic decision to enter the Panama market. That important capital allocation is also coming to fruition now. As you will recall, we made two back-to-back acquisitions, first in fixed and then in mobile. A year after the merger, we rebranded everything to our own flagship TIGO 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 three 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 Cable Onda. Indeed, when we subsequently bought the Telefonica mobile asset, it’s mobile market share was in the mid-30s.

Today, we had about 50% mobile market share in Panama and we are now driving postpaid penetration to that base. Second, we thought that the Panama mobile market was right for consolidation with too many players and too little cash flow. Since then, the market has indeed consolidated from four players when we entered, down to two today. When you consider that many of the largest countries in the world have only three players, there was no reason for any country in Latin America for more than two mobile players perhaps, with the exception of Brazil, which is much larger, of course. And finally, the third pillar of our investment thesis was the opportunity to bid and win our fair share of large government contracts or B2B. After years of work, this is just now starting to happen as you can see in our results in the last six months.

With all of this put together, we are now the number one telecom operator in Panama. And as a result, Panama, with it’s stable and dollarized economy, is now becoming the second 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.

Maxime Lombardini: Thank you, Mauricio. As many of you know, I joined the company less than nine 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 Project Everest. As we told you on the third quarter 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 when beyond the initial scope of Project Everest. 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.

We constructed our 2024 budget on this basis and nine 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 million 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. 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 ’24 at level well above what was achieved in ’22 and ’23. 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. It is possible to be more flexible and more efficient. We are downsizing the volume of shared services throughout the countries fully responsible and we restructured TIGO 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.

Mauricio Ramos: 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 nine 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. No major news for you there, I hope.