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spk01: Good day, ladies and gentlemen, and welcome to the Trilogy International Partners Q3 2021 earnings call. At this time, all participants have been placed on listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Dustin Greer, Senior Director of FP&A and Business Insight at Trilogy. Sir, the floor is yours.
spk00: Thank you, Paul. Hello everyone and welcome to our conference call to discuss our results for the third quarter of 2021. This call is also being broadcast live over the web and can be accessed in the investor section of the Trilogy International Partners website. Joining me today are Trilogy's President and CEO Brad Horwitz and Trilogy's Senior Vice President and CFO Eric Nichols. This call includes forward-looking information from which our actual results may differ materially. For further information regarding the various factors, assumptions, and risks that could cause our actual results to differ, please review the cautionary language in the about forward-looking information section of yesterday's press release, as well as the cautionary note regarding forward-looking statements and the risk factors in our 2020 annual report on Form 20F, available on both CDAR and EGGR. This forward-looking information represents our expectations as of today and accordingly is subject to change we disclaim any obligation to update forward-looking information except as required by law please also refer to yesterday's press release for definitions and reconciliations of any non-gap measure that we use during today's call the press release is posted on our website at trilogy-international.com under the investor tab lastly Management disclosed in its press release dated October 7 that Trilogy had entered into discussions with Macquarie Asset Management and Aware Super to assess whether a merger of Two Degrees Group Limited and Orcon Group Limited can be agreed on satisfactory terms. As discussions are ongoing, management is precluded from providing an update with respect to the potential merger of its New Zealand subsidiary. We look forward to providing an update when appropriate. I will now turn the call over to Brad Horwitz, President and CEO of Trilogy International Partners.
spk04: Thanks, Dustin, and hello, everyone. Thank you for joining us for our call. Today, I'll provide you with an update on our business and the operating environments, and then Eric will take you through our third quarter performance and outlook. We're very pleased with our performance in New Zealand, where our local team delivered another quarter of solid results. This was in spite of a COVID-19 lockdown for almost half of the third quarter due to an outbreak of the Delta variant. We have sustained post-paid subscriber growth due to our success in penetrating the B2B space, ending the quarter with 25% more business customers than a year ago. This increase more than compensated for the lower growth in our consumer business, largely due to retail store closures. We also grew our fixed broadband base more than we expected, ending the quarter with 13% more customers year over year. Though movement restrictions in the third quarter impacted our results, we have grown service revenue and segment-adjusted EBITDA in New Zealand since the pandemic began, proving the resilience of our business. In Bolivia, COVID continues to be a factor, and our business has experienced prolonged negative impacts. While subscriber mobility in the country has increased over the last few months, resulting in a modest sequential improvement in some of our operating metrics, we have not seen the rebound we were looking for as a result. As a result of that, we have determined that recording an impairment charge to our long-lived assets in Bolivia was appropriate at this time. Moving on to specifics by market, starting with New Zealand, in mid-August, The country moved to its most stringent lockdown, Level 4, for the first time since March of 2020. Retail stores, offices, and schools once again closed as folks self-isolated. With the exception of Auckland, restrictions began to ease in early September. Auckland is currently at Level 3, thus our retail locations and offices remain closed and staff are still working from home. To date, there have been more than 3,000 infections related to this outbreak, which makes up almost half of all the cases in New Zealand since the pandemic began. Given the challenges in containing this outbreak, the New Zealand government has adjusted its original elimination strategy, loosening some restrictions while also accelerating its vaccination program. It has made a lot of headway, and now approximately 90% of the eligible population has had their first COVID vaccine and about 75% have had two doses versus 17% in August. Despite the lockdown, our results in the third quarter were solid, largely driven by our continued strength and deal flow in the B2B space. Though our consumer growth additions were impacted by the retail closures during the quarter, Both our postpaid gross additions and net additions increased on a sequential basis, and our postpaid churn of 0.81% in the quarter was the lowest in our history. More than 37% of our mobile customer base is postpaid versus 34% a year ago, as we continue to make progress in our long-term strategy of shifting our customer base to postpaid. Our fixed broadband base also continues to grow steadily due in large part to our success in bundling with our mobile service. About half of our broadband activations have been bundles over the last several quarters. We are particularly pleased with our broadband growth in the third quarter as the lockdown prevented residential installations by the local fiber companies, meaning that all of our net additions during this period switched to us from other providers. The impacts of the lockdown in the third quarter are most visible on our prepaid business, with store closures affecting additions and behavior as isolating at home and thus offloading to Wi-Fi reduces the need to top up. Despite these muting factors, we maintained prepaid service revenues in ARPU year over year. Notwithstanding the disruptions related to COVID, Our third quarter financial results reflect the stability and resilience of our business. Our subscriber revenues increased compared to the same period last year, as well as last quarter. Our postpaid ARPU in the third quarter was at its highest in a year on a growing base. And our wireless DARPU of 18 and a half New Zealand dollars reached the highest level in our history. We continue to strengthen our market position in New Zealand. According to IDC's latest report, we were the only network operator to increase subscriber market share in the second quarter versus the prior year, and we did so across both mobile and fixed products. We also gained revenue share across all products, and we received a number of local awards during the quarter. These include being the top telco brand in Comar Brunton's corporate reputation top 20 list, and CanStar's Blue Winner for the Most Satisfied Small Business Telecom Customers Award for 2021, where we were recognized for our network performance, value for money, customer service, and overall satisfaction. In October, Ookla named Two Degrees 4G Network to be the most reliable, consistent, and best available in New Zealand for the second quarter. These awards reflect the terrific job that our local team has done in improving our network over the last few years, including along key transport routes in recent years. Nationally, 2 degrees 4G state highway coverage increased by 20% between the second quarter of 2019 and the second quarter of 2021, extending 4G coverage to more than 2,000 kilometers of state highway. The Level 4 lockdown in August has impacted our 5G build-out. With the movement to Level 3, construction and related industries are now allowed to operate again, so we have been able to resume deploying 5G, though we have adjusted our official launch of 5G into early next year. We believe, while not optimal, the resulting impact of this will be limited only to the delayed acquisition of fixed wireless customers using the 5G spectrum. We still expect the allocation for long-term 3.5 gig rights to take place in the first half of next year, with usage to begin late in 2022. Turning now to Bolivia, vaccination rates have improved across the country. Within our local workforce, almost 100% have had their first dose and about 75% have received their second vaccine. COVID cases have declined significantly and mobility restrictions have largely been eased. Economic activity in the country continues to be muted, however, and we have seen an increase in protests, blockades, and general unrest in recent months. The increased mobility has driven a modest sequential improvement in some of our operating metrics, including increased subscriber activations across our portfolio of products as well as sequential growth in our prepaid and fixed broadband service revenues. Our yields on data are now flat after an extended period of decline, and data usage has also stabilized. While these trends are positive, they are not to the degree that we had envisioned, and our adjusted EBITDA has remained negative for the second quarter in a row. In light of these factors, we determined that recording an impairment charge to our long-lived assets in Bolivia was appropriate at this time. Our priorities remain unchanged with respect to Bolivia, and our focus is on cash management and extending our operating runway. Given the impact of our financial results, liquidity has become more of a challenge, and management is working with partners and our local suppliers to facilitate a transition of the business. We continue to be actively engaged with several parties, both local as well as international. And with that, I'll turn the call over to Eric for the numbers.
spk02: Eric? Thanks, Brad, and hello, everyone. Before providing specifics on financial results, Note that our reported results may be impacted by changes in U.S. GAAP as well as foreign exchange fluctuations. Specifically, we implemented the new lease accounting standard in the first quarter of 2020 and the new revenue accounting standard, or NRS, in the first quarter of 2019. Please note that prior periods were not recast for the new standards. For context, the impact of NRS in the consolidated adjusted EBITDA was a headwind of approximately 1.7 million in the third quarter of 2021 as compared to the same quarter of last year. Further, the strength of the New Zealand dollar relative to the U.S. dollar also impacted our reported results in the third quarter, providing a 6% year-over-year benefit on New Zealand results. As such, where noted, we refer to results on an organic, like-for-like basis. which is excluding the impact of accounting changes as well as foreign currency. We believe an organic perspective enhances comparability between periods. Our consolidated business ended the third quarter with approximately 3.1 million wireless subscribers. Our postpaid wireless customer base as a percent of total wireless subscribers was 24.8%. Our consolidated service revenues in the third quarter of 134.4 million increased 2% year-over-year on an organic basis as the growth in our New Zealand subscriber revenues more than offset reduced service revenues in Bolivia. Our consolidated operating expenses in Q3, excluding cost of equipment sales, were $249.8 million, inclusive of $114 million impairment charge that we recorded on our Bolivian long-lived assets during the quarter. Excluding this impairment charge, our consolidated operating expenses, excluding cost of equipment sales, were $136 million. This was an increase of 9% versus the same period last year on an organic basis due to an increase in operating expenses in New Zealand, partially offset by continued cost discipline in Bolivia. Our third quarter consolidated adjusted EBITDA was $25.8 million, a 7% decrease on an organic basis versus last year, as growth in the New Zealand business was more than offset by declines in the Bolivia operation. Our consolidated capital expenditures for Q3 were 24.7 million versus 15.4 million a year ago, with the increase due to timing of spend in both markets. At the end of September, we had a total of 2,669 sites on air. This is a 4% increase compared to Q3 2020. Turning now to our results by market, in New Zealand, our post-paid mobile base grew 8% versus prior year and now makes up 37.1% of our wireless customer base compared to 34% a year ago. At the end of Q3, we had 540.8 thousand post-paid mobile customers, more than 125,000 of which are B2B customers. Our prepaid subscriber count at the end of the third quarter decreased 5% compared to prior year due to mobility restrictions and closed borders. Our fixed broadband base grew 13% year-over-year to 145.7 thousand subscribers. Q3 service revenue in New Zealand increased 8% versus prior year on an organic basis, which again excludes the impact of foreign exchange and new accounting standards. driven primarily by our continued postpaid and fixed broadband customer growth. At the product level, our postpaid revenues in the third quarter were $50.4 million, an increase of 8% versus Q3 2020 on an organic basis, driven by growth in our B2B and consumer postpaid customer bases of 25% and 4% respectively. Postpaid ARPU was largely flat year over year, on an organic basis. Our Q3 prepaid revenues of $24.9 million were flat versus Q3 2020 on an organic basis as a 5% organic increase in prepaid ARPU due to improved data monetization offset a 5% COVID-related decline in our prepaid base resulting from the mobility restrictions and Wi-Fi offload. Our New Zealand broadband revenues in the third quarter of 26.8 million grew 15% versus the same period last year on an organic basis due to our 13% larger base and organic ARPU growth of 4%. Equipment revenue in New Zealand decreased 17% on an organic basis due to retail store closures during the quarter. However, as a reminder, Fluctuations in equipment revenue have not historically had a significant margin impact in the period. Cost of service increased by 6.5 million, or 21%. Excluding the impact of foreign currency exchange, cost of service increased 4.6 million, or 14%, primarily due to an increase in the transmission expense associated with the growth in fixed broadband subscribers. Additionally, There was also an increase in interconnection costs associated with a higher volume of postpaid mobile traffic terminating outside of Two Degrees Network due to COVID-related mobility restrictions in the third quarter of 2021. Sales and marketing increased by 2.9 million, or 22%. Excluding the impact of foreign currency exchange, sales and marketing costs increased 2.2 million, or 16%, primarily due to an increase in commission expense as a result of higher amortization costs relating to incremental contract acquisition expense capitalized subsequent to September 30, 2020. General and administrative expenses increased by 2.8 million, or 18%. Excluding the impact of foreign currency exchange, the increase was 1.9 million, or 12%, primarily due to higher legal, audit, and consulting costs, with approximately $1 million of the increase primarily due to professional service costs which were associated with the strategic transactions currently under consideration. Cost of equipment sales decreased by $3.5 million, or 13%. Excluding the impact of foreign currency, the decrease was $5.2 million, or 17%. primarily due to societal restrictions in effect during the third quarter of 2021 relating to the COVID-19 pandemic, which resulted in a decline in retail activity and lower equipment sales. Our segment adjusted EBITDA for Q3 in New Zealand was $30.6 million, which was a 3% year-over-year increase on an organic basis. Our reported segment adjusted EBITDA margin in the third quarter was 29.4%, versus 32.3% in Q3 of 2020. As referenced throughout the discussion of expenses earlier, segment adjusted EBITDA was impacted in the quarter by approximately 3 million New Zealand dollars due to certain transitory or elevated costs primarily related to strategic initiatives and impacts of the pandemic. Our Q3 capital expenditures in New Zealand were 21.7 million versus $13.4 million a year ago. Excluding the impact of foreign currency, our capital expenditures increased by $7.5 million, or 53%, primarily attributable to 5G network-related investments. Our capital intensity for the third quarter was 21% compared to 15% a year ago. Shifting to Bolivia, we ended Q3 with 1.7 million wireless subscribers, The ongoing COVID-related challenges in Bolivia resulted in a contraction of our postpaid customer base versus the third quarter of 2020. We ended the quarter with 229.1 thousand postpaid mobile customers and 1.4 million prepaid customers. Our fixed LTE product continues to gain traction and our 26.5 thousand fixed LTE customers increased 63% compared to the same period last year. Our Q3 service revenues in Bolivia of 30.4 million declined 13% on an organic basis versus the third quarter of 2020 due to decreased postpaid and prepaid service revenues. Our fixed LTE service revenues, which increased by 80% to 1.3 million for the quarter, partially offset these declines. Our Q3 adjusted EBITDA loss of 1.5 million in Bolivia deteriorated compared to last year as our reduced revenues were only partially offset by our cost reduction measures. Capital expenditures in Bolivia increased year over year to $3 million in the third quarter due to timing. Our year-to-date CapEx spend through September of $10.3 million reflects ongoing focus on cash management. As we disclosed in prior filings, continued declines in financial results would be evaluated with regards to our monitoring and assessment of long-lived assets in Bolivia. In Q3, the ongoing impacts of COVID-19 on our business changed on our expectations and resulted in a $114 million impairment charge in the quarter recorded against the Bolivian long-lived assets. Moving to our consolidated cash and liquidity position, At the end of Q3, our consolidated cash balance was $77.6 million in cash and cash equivalents and restricted cash, up from $63.5 million in Q2. $41.4 million of cash was held by Two Degrees, $16.7 million was held by NuevaTel, and the remaining balance held at corporate. With respect to our capital structure, consolidated debt at the end of Q3 including $408 million of Trilogy's holdco notes, plus local debt and other, was $667.8 million. At the end of Q3, $285 million New Zealand dollars was outstanding on the senior finance facility in New Zealand. In Bolivia, our debt outstanding totaled $34.3 million, which includes $4.2 million related to prior tranches of the tower sale leaseback, which was closed in 2019. From a consolidated gearing standpoint, net debt to consolidated LTM adjusted EBITDA was 5.1 times at September 30 versus 4.5 times a year ago. Before moving to Q&A, a few comments on our 2021 outlook. Last quarter, we increased our 2021 growth outlook for New Zealand to 6% to 8% for both service revenue and segment adjusted EBITDA, which excludes any impact of accounting changes and foreign currency fluctuations. While COVID-related risks and impacts remain, our performance in Q3 and the continued resilience of our business has led us to reaffirm this guidance. With that, let's go to questions. Paul?
spk01: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask while posing your question, you please pick up your handset, if listening on speakerphone, to provide optimum sound quality. Once again, if you have a question, please press star one on your phone at this time to enter the queue. And we did have a question come in. Once again, ladies and gentlemen, if you wish to enter the queue, press star one. And the first question is coming from Jeff Fan from Scotiabank. Jeff, your line is live.
spk03: Thank you. Good morning, gentlemen. To start with New Zealand, Eric, you mentioned a few operating costs related to the quarter due to the lockdown. Wondering if you can help just quantify that for us and whether we should expect these to moderate as we start to see some easing. And then staying with New Zealand, the spectrum you talked about for 2022, what's a good number for us to think about regarding the cost of those licenses? Thanks.
spk02: Thanks, Jeff. It's Eric. I'll take your first question and talk about margins more broadly. As we referenced, strong service revenue growth of 8% in the quarter, though did have some noise in the OpEx, as you mentioned. In terms of quantification, roughly $3 million New Zealand dollars of costs, which impacted EBITDA, that are considered more transitory in nature. There's about a million of professional service fees associated with the ongoing strategic initiatives. And then pandemic-related costs, such as elevated vacation accruals. You think about indirect effects of having closed borders and the impact on the P&L and then some miscellaneous other items. So net net, about a 200 basis point impact on margin in the quarter. More broadly, we continue to guide towards low 30s as a percent of service revenue as a baseline margin profile. This is up from, say, 25% margin just a few years ago. And key drivers as we look forward Growth in broadband typically has a lower margin, lower CapEx profile, but does enable more of the cross-selling and bundling, which is accretive to the margins overall. And again, to the question on looking forward, the results are still missing the roughly $1 million per month of roaming revenue, where the bulk of that was margin pre-COVID.
spk03: Great, and any thoughts on the spectrum?
spk02: Yeah, on the spectrum, Jeff, we don't have firm guidance at this point in terms of the 5G spectrum. You know, we know they're seeking up to 100 megahertz, but, you know, waiting on clarity in terms of, you know, overall quantum.
spk04: Yeah, Jeff, this is Brad. You know, I think what I would add to that And it's premature for speculation and everything else. But historically, the government of New Zealand has put more value on investment into the ground rather than into the treasury when it comes to spectrum purchases. So we're cautiously optimistic that that view that existed before will continue going forward.
spk03: No, that's good perspective, Brad. And just shifting over to Bolivia, understand the focus is on cash management. Can you just remind us what your obligations are related to any upcoming amounts in 2022? and also remind us of the current obligations that you have on your balance sheet that there's no recourse back to the holding company?
spk02: Sure, Jeff. It's Eric. I'll start and just provide some context. Clearly, the business has been navigating a difficult environment for an extended period of time, the heightened competitive activity with the government competitor. the political turmoil and unrest, and now the sustained impacts of COVID. NuevaTel has maintained its sufficient liquidity up to this point in large part due to the effective cash management efforts since the onset of the pandemic due to the great work by the team. As we've disclosed previously, additional measures may be required. and carrying amount of assets may need to be reviewed, you know, should trends not improve. You know, given the consistent double-digit revenue declines, you know, have been tough to mitigate, you know, that prompted the disclosure that we put out there. You know, more specifically, you know, cash balance at September, $16.7 million in cash at Bolivia. You know, as you think about, you know, burn rate, negative impact for the quarter, you know, some amount of, you know, minimum required CapEx as we meter things. And then looking ahead to January, there are significant payments primarily related to the annual prepaid spectrum use fees and some taxes, you know, in order of magnitude, say 10 to 12 million. So, you know, playing that out necessitates, you know, prudent actions now As we look ahead over the near term, Brad can provide some additional comment on those specific actions to enable a constructive solution.
spk04: Yeah, Jeff, I think what I would add. is that we're taking a very proactive approach to all of our suppliers and creditors, and we include the government in that, either the government as it relates to taxes or more specifically to the regulatory payments. And so what we're anticipating is an agreement with them to allow us to really extend the operational runway Not an unintentional nuance when I mentioned the transitioning of our business as opposed to our previous efforts to look at a sale of our business. We have taken the view that effectively finding strategics or an expansion of the local investment community to assume the responsibilities we have is more valuable to us than previous attempts. And as that has been known and communicated, it has actually generated very recently additional interest from others who are now looking at a scenario where investment into Bolivia would actually go into the ground, into expanding the network. rather than going out to the shareholders.
spk03: Got it. And the existing obligations that's on your balance sheet, Eric, there's no recourse of any of those back to the holding company, is there?
spk02: Correct. No recourse. Okay.
spk03: Thank you very much.
spk04: Thanks, Jeff. You bet. Thanks, Jeff.
spk01: Thank you. And there were no other questions in queue at this time. ladies and gentlemen that does conclude today's conference call thank you for your participation you may disconnect at this time
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