Millicom International Cellular S.A.

Hello, everyone. Thanks for taking the time to connect to our second quarter 2023 results conference call. This event is being recorded. Our speakers today will be our CEO, Mauricio Ramos, and our CFO, Sheldon Ruja. Following their prepared remarks, we will have a Q&A session. By now, you should have received a copy of our earnings release, which is available on our website, along with the slides that we will be referencing during today's presentation. Now, please turn to slide two where you can see our safe harbor disclosure. We will be making forward-looking statements which involve risks and uncertainties and could have a material impact on our results. We will also be referring to many non-IFRS metrics throughout this presentation, and we define these metrics on slide four. And you can find reconciliation tables in the back of our earnings release as well as on our website. With those disclaimers out of the way, let me turn the call over to our CEO, Mauricio Ramos.

Good morning and good afternoon, everyone. Thanks for joining us today. Let's start right away with the highlights of the quarter on slide five. During the quarter, we saw both continued challenges and positive progress. On the challenging side, we saw continued political and macro challenges in Bolivia and the impact of competition and continued double-digit inflation in Colombia. These trends are impacting primarily our home business in these two countries. In response to these challenges, we have been adjusting our investment plans and commercial activity accordingly in those markets. On the positive side, our B2B and post-bid businesses continue to perform strongly across the majority of our markets. And most of our markets continue to show positive revenue growth, with Paraguay, Panama, Honduras, Nicaragua, and El Salvador all performing well. All in, service revenue grew 1.9 organically in the quarter. This is down a bit from 2.2 growth in the first quarter. The main reason for this is our decision to take additional steps to defend our prepaid mobile market leadership in Guatemala. This defense is taking a bit longer than I had anticipated, but this is the correct long-term strategy. We believe it is already working, and we already see emerging signs of a healthier industry structure in Guatemala. We also continue to make very good progress on executing Project Everest, our efficiency program. We're strongly focused on an increasingly efficient way of operating all our business and on driving those efficiencies into stronger cash flow. So we continue to invest in Everest during Q2 with some additional one-off costs to the one we had seen in Q1. The savings are becoming visible in the second half of this year and more so into 2024. And more importantly, we're emboldened by the progress we're seeing on Everest, and we believe there's meaningful further room for us to deepen those efficiency efforts. Our focus on cash flow efficiency is indeed relentless. So Sheldon will talk about that more in a minute. Now let's turn to slide six. Service revenue grew 1.9% during the first quarter, driven by growth across all business units. We're seeing slower growth in home, which was flat in the quarter, but mobile was solid, especially post-paid, and B2B remained our top performer. As you can see on this slide, we continue to see positive growth across the vast majority of our markets. Let's look at B2B in more detail on slide seven. B2B service revenue grew 6.1% in Q2. This is the sixth consecutive quarter of growth in the 5% to 6% range. As we have said before, this is the result of the renewed B2B strategy we put in place just before the pandemic and which is now paying off. The growth is fueled by our strategic push into selling digital services. As you will recall, this includes cybersecurity, managed multi-cloud, and secure SD-WAN. Revenue from these digital services grew 29% in the quarter and now represents nearly 20% of our overall B2B service revenue. This is exactly what we were aiming for when we revamped our B2B strategy a few years back. We are also quickly reconfiguring our top line growth on B2B by focusing on these scalable digital services while we're retiring all legacy contracts with limited future growth. Kudos again to the team. particularly because we now have a strong pipeline of projects and new clients to sustain growth. For example, we recently signed a large multi-year engagement with Panama's Social Security Administration for connectivity and remote communication services for over 170 health points across the country. You will see the positive impact of this relationship in our Panama results beginning in the second half of this year. We have also signed important new contracts recently with Coca-Cola, FEMSA, Banco General, Alpina, and Diaco Giordano. Now, let's look at our continued positive postpaid mobile results on slide eight. Our postpaid subscriber base increased by almost 190,000 net additions during this quarter. We have now added more than 500,000 postpaid customers over the past year. Postpaid customers now make up 17% of our total customer base, and we believe there is a long runway ahead to continue to migrate more of our customers into postpaid plans that drive hierarchical. Postpaid service revenue has been growing at a 7% CAGR over the past several years, and it grew almost 9% in Q2. Obviously, some of this growth is fueled from our own prepaid business. But our prepaid business itself is actually performing very well and growing in almost every country, with the exception of Bolivia, which is driven by regulatory changes last year, and Guatemala, which I will talk about in a moment. So our postpaid business has accelerated, and practically every country in our footprint is contributing to this strong performance. Postpaid now accounts for more than 20% of our total service revenue, and it has become a very important growth driver, as we expected it would. Needless to say, we're very focused on the higher customer lifetime value of these post-priced customers and the stronger path to convergence that they bring to the business. Now let's talk about our home business on slide nine. As I have mentioned before, our home business has experienced softer growth over the past year, and it was essentially flat in Q2. And as we told you at Q1, this slowdown is largely focused on cost. In Colombia, increased competition has driven home output lower and industry churn higher over the past year. As a result, we have shifted our focus to prize and investment discipline and away from what would be lesser or unprofitable customer growth. For example, we have maintained and even increased installation fees. This is impacting customer and revenue growth, but it helps protect profitability and cash flow by keeping a lead on churn. In Bolivia, the challenges we face in home are more micro-related. Political and macro instability, including empty strikes, loss of customer confidence, and reduced middle class income and growth are all taking a toll. As a result, in Bolivia, we're holding the line on installation fees and on pricing. This is costing us in terms of net customer losses in the first half of the year, but it is paying off in terms of cash flow, with Bolivia actually showing operating cash flow up double digits in the first half of the year. Panama is also seeing somewhat lower growth on home, but this reflects both our sustained very high market share on ARPUs and our own strategic focus on the mobile market via convergence. We're very pleased indeed with our performance in mobile in Panama. Panama performance as a whole is strong with overall service revenue growth of over 4% for the business. We also think that our study to hold the line on pricing on fixed and actually take some rate increases recently will pay off. Indeed, we have seen some of our competitors recently announce price increases in home in Panama, suggesting good price discipline and healthy industry behavior pays off in the long term. As for all the markets, you can see from the chart that our home business continues to grow throughout the rest of our footprint. Paraguay, in particular, has seen a strong recovery, with growth of nearly 7% in home in Q2. This is the result of investment we've been making in recent years to push fiber deeper into our network, and we have seen a significant improvement in every performance in our NPS course. We're also seeing improved trends in pay TV, partly thanks in large to our collaborative effort with the government to crack down on piracy over the past year. Piracy is still an issue for us in other markets, but the progress in Paraguay shows a path forward, and therefore we applaud the Paraguayan authorities for taking valuable action. Let's now focus on a couple of our larger markets, starting with Guatemala on slide 10. As I said at the beginning of these prepared remarks, reaping the benefits from our strategy to defend and strengthen our leadership in Guatemala is taking a bit longer than I expected. But one, we're convinced this is the right strategy to preserve and grow the long-term value of the business. And two, we see positive signs of a healthier industry behavior in the making. The chart on the left is the first indication that we are on the right track. It shows the evolution of our mobile customer base in Guatemala over the last four years. You can make two observations. One, we grew significantly and added a million new customers during the pandemic. And two, we have successfully held on to our subscriber base since then. And this is key. Second indication is that we have leveled the playing field on spectrum and network position. You see this on the right-hand chart on this slide. So you'll likely recall the acquisition of the Telefonica asset in Guatemala. Our main competitor obtained a ton of spectrum and deployed an upgraded network last year. This gave them a temporary network advantage that they put to use by offering popular apps like Facebook and TikTok for free on a zero rated basis to the prepaid customers. We initially resisted matching their offer because we think that providing apps on zero rated basis is a terrible idea for our industry in the long term. Instead, we focused on shielding our customer base with a more narrow and target pricing approach, successfully migrating our best customers to postpaid, stepping up our commercial activity to address our competitors additional strength and investing to add network capacity to protect our long-term standing brand attribute as the best network in the country with this additional network capacity during this second quarter we changed our offer to further align it with our competitors this impacted our going output on our q2 numbers as you have seen but it has further bullet proved our customer base and market share protected the value and profitability of our business over the long term. And indeed, as you can see on this slide, our customer base has remained stable. Finally, and most importantly, we have just acquired a significant amount of spectrum in the 2.6 gigahertz band that was very important to us for three reasons. First, you can see from the chart that we have nearly doubled our total amount of spectrum. Our band allocation itself has also significantly improved. This will allow us to add capacity in a cost-effective manner and also preserve our strong network brand attribute. Second, we have successfully leveled the playing field on spectrum and networking in Guatemala, and we have achieved now spectrum parity. I cannot overemphasize how important this is. And third, this 2.6 gigahertz auction process was well-organized, well-managed, and very transparent. And just as important, the industry as a whole behave in a healthy and rational manner. And this is why we see a more stable, value-enhancing and healthy industry structure in Guatemala now in the making. Now please turn to slide 10 to focus on Colombia. As most of you know, we have invested heavily in this country in recent years. In 2020, we acquired Critical Spectrum in the 700 megahertz band, and since then, we have expanded our network and our commercial distribution. And we have steadily gained shared and increased the size of our mobile business since acquiring that spectrum. Our mobile business has been driving our service revenue growth over the past two years, and this was true again in Q2, as you can see on the left. Columbia shows continued mobile subscriber growth and sustained revenue, EBITDA, and OCF growth. But, as I have said often, this is not enough. Margins have been moving gradually and consistently higher, but they are still below the 34% level we had achieved just prior to the nuclear entering the market. And our Colombia business remains a single and a large retractor to our group equity-free cash flow. That's largely because the cost spectrum in Colombia is many times higher than in our other countries. So we're taking additional important and immediate steps to improve our investment returns in the country. One, we will continue to, and with increased emphasis and urgency, drive operational efficiencies, margin improvement, and product and overall operational signification. The operational cash flow in Colombia simply needs to be stronger. And two, we will continue to pursue inorganic solutions that we expect will help reduce the amount of capital needed to compete effectively in the country. To that end, we recently announced that we have signed an agreement with Telefonica to create a combined mobile network with access to an optimized Spectrum portfolio. Efficiencies unlocked by this initiative are very meaningful in the long term, and so is its strategic rationale. This agreement is subject to various regulatory approvals, and we're working diligently with Telefonica and our partners in Colombia to secure that approval. As we have said often, a combination of improved operational performance and inorganic solutions is required to make Colombia work in the long term. These organic and inorganic initiatives are now well underway and making progress. Finally, before I turn the call to Sheldon, let me update you on some of our ESG initiatives, which are deeply relevant to our long-term success in the region. First, we signed a pledge recommitting to strengthen the rule of law in Central America. The pledge is promoted by the Partnership for International America and includes nine key other companies operating in the region, like MasterCard, Microsoft, and PepsiCo. As you know, we believe that fostering a culture of transparency, integrity, and ethical practices in the region will give us a long-term sustainable business environment to operate in. Second, we released our first report on eligibility and alignment with the EU ESG taxonomy regulation. And we launched our group-wide human rights policy, which highlights our commitment to protecting the rights of our customers, our workforce, and all of our stakeholders. And third, our digital education program for teachers in the region, which we call Maestros Conectados, has now reached over 420,000 trained teachers since 2020. We're very proud of all of this positive progress. With that, I will hand over to Sheldon to discuss the financials for the quarter.

Thank you, Mauricio. Before we review the financials, let me recap the macro context on slide 14. This quarter, I'll focus my commentary on inflation. As you can see on this slide, inflation across most of our markets peaked around September and began to decline rapidly during Q2. This is very encouraging and is similar to what we have seen in the US market. Unfortunately, though, inflation has remained elevated in Colombia, where it's still around 12% at the end of June, as you can see on the slide. This is impacting margins in one of our biggest country operations, and this also explains why our interest expense is higher than we had expected this year because the vast majority of our Columbia debt is in local currency and at variable rates linked to inflation. We also see the impact of interest rates on our lease expenses because most of our contracts include annual price adjustments that are linked to inflation as well. So in summary, recent inflationary developments are positive, but we still have a way to go to get back to more normal inflation levels, particularly in the large markets of Colombia. Now let's look at our Q2 performance beginning on slide 15. Service revenue is $1.29 billion in the quarter, which is down from $1.3 billion a year ago due to exchange rate movements. Our service revenues are once again negatively impacted by adverse FX trends this quarter. primarily due to currencies in Colombia, which depreciated 12% on average during the quarter compared to a year ago, and in Paraguay, which depreciated about 5%. Excluding the impact of FX, organic growth was 1.9% in the second quarter. This compares to 2.2% growth reported in Q1, and the slight slowdown mostly reflects the actions we took in Guatemala, as Mauricio discussed earlier. Both our mobile and fixed businesses grew approximately 2% during the quarter, with postpaid mobile and B2B being standout performers. Drilling down further on slide 16 to the service revenue by country, Mauricio already discussed Colombia, so I won't cover that again. Guatemala was down 1.6%, and that reflects the actions we took to strengthen our prepaid offerings, and this partially was offset by continued growth in our subscription businesses in the country. Bolivia was down nearly 3%. Mauricio already touched on the home business challenges in that market. But another key driver of this decline is the prepaid mobile business. You will recall that there was a change in prepaid regulation implemented in August of last year. We will begin to lap that impact in Q3, and that should contribute to see improvements in our year-on-year comparisons going forward, although the macro backdrop remains very challenging here. In contrast to Bolivia, Paraguay has had a very strong quarter. with growth accelerating almost 10%. That's up from 6% in Q1. All business units contributed to this very strong performance, and this came from both ARPU and customer growth. Finally, our other Central American markets are performing reasonably well, with all of them showing mid-single-digit revenue organic growth. Okay, turning to EBITDA on slide 17. EBITDA of $515 million was down 10.8% from $577 million from a year earlier. There are a number of items to unpick here to provide a fuller picture of the performance. This is not meant to be an excuse, as I am not pleased with the EBITDA outturn, and we need to and will do better, but I want to explain and provide transparency. First, Forex impacts, primarily from Colombia and Paraguay, accounted for about $18 million, or three percentage points of the decline. Second, we incurred severance and other restructuring costs for about $6 million related to our cost-efficiency program, Project Everest. I'll come back to talk more about Everest later in the presentation. Third, as you saw also in Q1, share-based compensation is higher this year because of our stock price increased meaningfully between the time when the shares were granted in December and when the cost of these grants were booked during Q1. This is a non-cash item and has had a $5 million impact on EBITDA in Q2, similar to Q1, and this impact is expected to continue in Q3 and Q4. Fourth, we incurred some costs for legal, advisory, and other third-party services related to the buyout discussions that took place and have now concluded. This was about $3 million, which disappear next quarter. Finally, After the end of the quarter, we received an adverse legal ruling in Colombia, which impacted EBITDA by about $10 million. We've already filed an appeal, but we had to book an additional provision for this in our Q2. This was partially offset by a much smaller $2 million benefit in Bolivia. In addition, I also want to mention some legal fees that we have been incurring over the past year as we respond to questions from the US Department of Justice in regard to the subpoena that we received on April of 2022. There are no new developments in the case, and we continue to cooperate fully with the DOJ, but there is a cost to this. Over the past year, we have spent $15 million on legal fees, including $5 million in the most recent quarter and a similar amount in Q1. We cannot easily predict whether these legal fees will continue and how they will evolve, but at least we will begin to lap these expenses in the second half of this year, which will help our year-on-year comparisons going forward. Excluding FX and all these unusual items, our EBITDA would have declined about 2.5% during the quarter, driven by the underlying country performances, which I will now cover on slide 18. As we discussed previously, the commercial decisions we've made in Guatemala to defend our leadership position has had negative impacts this quarter, and EBITDA declined 7.7% to $199 million. This is flat compared to Q1. Columbia EBITDA grew 5% after adjusted for reported one-offs in both periods. And as Mauricio mentioned already, our margins have been gradually expanding over the past two years, and we are taking steps to continue to drive these higher over time. Panama grew 1.5%, excluding the one-off of last year, as service revenue growth of 4.1% was partially offset by increased content spend and expenses related to Tego Sports Channel, as well as increased bad debt. Paraguay had impressive EBITDA growth of 12.4%, consistent with the very strong service revenue we already discussed. Bolivia was down 10%. As we discussed previously, we continue to face macro and competitive challenges there, and we have not yet lapped the regulatory change that went into effect in August of last year. EBITDA growth in the remaining countries of Central America was just over 3% in El Salvador and almost 5% in Nicaragua. Finally, Honduras, which we do not consolidate, had strong growth of 6.8%, reflecting the improved revenue trends during the quarter. I want to spend a moment reviewing our efficiency program, Project Everest, where we continue to make significant progress this quarter. As you know, we've been hard at work on several initiatives that will drive great efficiency and agility across the organization. These initiatives range from organizational restructuring to truck roll optimization and power savings initiatives. During the quarter, we incurred $6 million on implementation costs, bringing the total for the year to approximately $21 million. In the second half of this year, we will continue to incur some small implementation costs, but the savings will start to become visible. In fact, the savings in 2023 will be materially greater than these implementation costs, making the project net positive for the year. We expect the momentum of our savings to start in the second half of this year and continue through 2024. As a result, we are making great strides for achieving our goal of over $100 million in annual run rate savings by the end of 2024, with more than 50% of those run rate savings expected by the end of 2023. We are encouraged by the progress we've made so far, But we also continue to see additional opportunities, and we believe there is still more we can and need to do to streamline our operations and simplify and improve the way we operate and drive better financial performance from this business. We're already developing the second phase of efficiency opportunities, and we'll provide updates to you on this as our plans solidify. Now please turn to slide 20 for our usual net debt bridge. Net debt is up $100 million. This is due to equity-free cash outflows during the quarter. as increased spectrum and interest costs outpaced organic OCF growth of almost 10% in the quarter, as lower CapEx made up for this decline in EBITDA. We also had a Forex impact from the translation of local currency debt, as the Colombian peso at June 30th strengthened from its level at March 31st, as well as the appreciation of the Swedish kronor during the quarter, which affected a cash payment related to a hedge we had in our SEC bond, which we redeemed in the quarter. And as I reviewed earlier, EBITDA in the first half of this year is impacted by a number of one-off and unusual items, all of which are having short-term impacts on our debt to EBITDA leverage ratio. We entered Q2 at just over $6 billion in net debt and net debt to EBITDA after leases of 3.34 times. If we include lease obligations of just over $1 billion, our leverage was 3.37 times at the end of Q2, which is up from 3.23 times at the end of Q1. Let me hand the call back over to Mauricio now for a wrap-up.