Megacable Holdings, S. A. B. de C. V. (MEGACPO) Earnings Call Transcript & Summary

Good morning. Welcome to Megacable Second Quarter 2024 Earnings Conference Call. This morning, we have Mr. Enrique Yamuni, CEO; Mr. Raymundo Fernandez, Deputy CEO; and Mr. Luis Zetter, CFO. Let me remind you that the information discussed in today's earnings call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Megacable undertakes no obligation to update or revise any forward-looking statements. I will now turn the call over to Mr. Enrique Yamuni. Sir, you may begin.

Good morning, everyone, and thank you for joining us today. I want to start by commenting on the 3 strategic verticals of the company, which have determined the actions we have been taking to meet our objectives over the last few quarters. First, consolidating the legacy territories strengthened our presence through state-of-the-art technology, including the evolution of the HFC footprint to remain the operator with the largest market share. In this regard, during the quarter, we migrated an additional 1,700 kilometers of network for 37,700 kilometers since we announced this initiative. This effort, along with the entrance into new territories, has allowed us to reach 72% of fiber footprint in our network, allowing us to meet the current and future bandwidth demands of the market. It is important to note that in these territories, our penetration remains above 40%, thank you -- thanks to our efficient strategy of shielding and retaining our subscribers. Second, the expansion of the company towards duplicating its size in terms of infrastructure, revenues and EBITDA generation. I am pleased to announce that after 24 months of execution following the approval of this project in late 2021, we're ahead of our initial expectations with nearly 7.2 million additional homes passed as of quarter end, meaning more than 80% more footprint with penetration levels according to our plan. These efficient investments have represented more than 770,000 additional broadband subscribers, still with the possibility of adding many more in the coming periods. There is no doubt that we are on our way to becoming a national leader of the industry. Now that we have a slowdown in our construction phase, we are focused on increasing the penetration in these new territories supported by the best infrastructure, dedicated customer service, a truly innovative video service and attractive rates. And third, a healthy financial profile, maintaining a solid bank balance with a reasonable leverage ratio. In that regard, I would like to emphasize that we anticipate an investment reduction as we approach the completion of our ongoing projects. As of this moment, we are dedicated to completing our current initiatives in capturing the value of the investments we have carried out over the last periods. The company does not foresee any other relevant projects for the coming years and will be focused on maximizing cash flow generation in the short term. Even with the execution of the aforementioned projects, the company is paving its way to sustain cash generation in the coming periods. In addition, as of this moment, we are already improving significantly in that direction since the EBITDA minus CapEx figure for the first 6 months of the year is very encouraging, sitting at MXN 2.2 billion or 14% of the revenues for the period. On the debt side, it is noteworthy that on this quarter, the leverage ratio increased as we had anticipated. It remains one of the lowest in the industry. This figure reflects our much balanced position despite investments carried out and is expected to decrease following the slowdown in the investment level. In addition, as we committed to value generation and value distribution, I would like to point out that last May, we paid dividends of MXN 2.7 billion, maintaining our position as 1 of the top 5 companies with the highest dividend yield in the country. Moving into results. The period was marked by a challenging macroeconomic environment, including high interest rates, persistent inflationary pressures and FX rate volatility, which in turn has led to greater caution among consumers in addition to a highly competitive market. Despite this challenging context, we managed to continue adding subscribers, highlighting that the broadband and unique subscribers figures for the period, it is important to mention that the slower pace of net adds on a sequential basis is mainly due to a weak start of the quarter due to the price increase we carried out in March, which, coupled with the vacation period, reflected in a higher churn rate for April, thus decreasing the amount of net adds. We have already seen a significant improvement in May and June. Therefore, we can certain that this one-off is behind us and expect a normalized performance for the next coming periods. I would like to mention that regarding our ESG commitment, earlier this month, we published our first integrated annual report, which covers our environmental, social, governance and economic progress during 2022 -- '23 on the GRI and SASB frameworks. Thank you once again for your continued trust and support. I look forward to seeing you and sharing further progress next quarter. Rest assured, we are proactively managing all factors under our control to remain well positioned to face temporary setbacks and sales opportunities to accelerate growth. Now I will pass the call to Raymundo, who will discuss our operational performance in more detail.

Thanks, Enrique. Good morning, everyone. I'm glad to provide an update on our progress this quarter, which have seen advances driven by our expansion strategy while recording consistent results across our legacy territories. In this regard, we have achieved significant milestones in network expansion. At the end of this quarter, the number of home passed surpassed the 16.5 million mark, marking a year-over-year growth of 23% with 557,000 homes added this period alone, putting us closer to our goal of duplicating the size of the company in terms of infrastructure. Our distribution network now extends over 98,000 kilometers, close to the 100,000-kilometer mark, showing our commitment and scalability to reach more and more Mexican homes and SMEs. This performance was achieved despite a more moderate pace of construction, in line with our expectations, which contributed to a reduction in the CapEx-to-revenue ratio as we have anticipated for 2024. This, coupled with the EBITDA growth, positions Mega to drive sustained cash generation during the following years. On the technological front, during the first half of the year, we have upgraded 2,800 kilometers of our network from HFC to FTTH, which translates into a fiber footprint now covering 71% of our network, up from 55% last year, reinforcing our transition to a predominantly fiber-based cap. Moving into results. Our unique subscriber base, which surpassed the 5 million mark in the first quarter of the year, rose to 5.2 million at the end of this quarter, growing 10% year-over-year. Over the last 12 months, we added 487,000 net subscribers, 88,000 of which from this quarter alone. In a competitive landscape, our subscriber growth had some short-term headwinds, including the rate increase carried out in March and an economic slowdown. The Internet segment posted a 12% growth year-over-year, adding 515,000 net subscribers, 91,000 this reported period. Also, and as a result of the investments we are deploying to improve our service through state-of-the-art technologies, during the quarter, we were recognized as the first Latin America operator to reach speeds of 1.1 terabits per second on a fiber link through WDM technology. In addition, Ookla, a recognized company that offers a speed test, recognized Mega for offering the best speeds and consistency in several states of our country. Even with a subscriber base with a lower average speed demand, we're certain that we're moving in the right direction in terms of technology deployment. Our Video subscriber reached 3.9 million, recording a slight increase of 1% year-over-year with 23,000 net additions on an annual basis despite recording a net loss this quarter. It is important to mention that this is expected behavior since this is a more mature market when compared to broadband. Nevertheless, 167,000 net additions were recorded on our XView platform this quarter, which remains as the cornerstone of our Video value proposition. On a year-over-year basis, the subscribers of this platform continued to grow at a rate of 22%, reaching 3.2 million. Telephony subscribers grew by 16% year-over-year to 4.4 million, adding 603,000 net subscribers, 110,000 this quarter. Our MVNO services now total 469,000 subscribers, up 20% year-over-year, with 78,000 net additions this year, including 8,000 over this quarter. Churn rate experienced an increase particularly in the Video segment, which rose from 2% in the second quarter of 2023 to 2.6%. In the case of Internet, the churn rate slightly grew from 1.9% to 2.1%. The increased churn rates were also influenced by the effect of the March tariff adjustment and the vacation period, coupled with a less favorable economic performance. In this regard, despite a competitive environment and the slowdown in subscriber growth, ARPU per unique subscriber increased to MXN 421.9. ARPU performance varied across the segments, with the Internet and Video segments growing by 5% and 3%, respectively, while Telephony and MVNO services saw decreases of 5% and 6%, respectively. Let's move into the Corporate segment. We recorded a 7% growth this quarter. Notably, ho1a increased 27%, significantly outpacing its performance from last quarter. MetroCarrier also showed growth at a 10% rate, both of them mainly as a result of better performance in the Corporate segment. MCM saw a decline of 11% mainly in the Corporate messaging service, consistent with last quarter's performance, and PCTV remained stable without any significant changes. In conclusion, this reported period reflects our commitment to strategic growth and technological update before a challenging landscape. All in all, we have expanded our network, increased our subscriber base and are poised to complete our expansion plan with a smaller figure of homes passed to add towards year-end. Moving forward, we will focus on reducing churn rates, enhancing customer satisfaction and broaden our service offering to sustain traction and deliver exceptional value. Thank you for your attention. I will now hand over the call to Luis, who will provide a detailed analysis of our financial performance.

Thank you, Raymundo. Good morning, everyone. In the second quarter, our consolidated revenues increased by 10% year-over-year, reaching MXN 8.1 billion. This growth is primarily attributed to the solid performance of our Mass segment, coupled with a higher growth base in the Corporate segment when compared to the previous quarter. The Mass segment expanded by 11% to MXN 6.7 billion. This growth was driven by the successful efforts to expand our subscriber base and enhance network capabilities. By segment, Internet grew 18%; Video, 4%; Fixed Telephony, 11%; and MVNO by 13%. The Corporate segment also performed well this quarter, as mentioned by Raymundo, showing a 7% growth year-over-year. MetroCarrier revenues increased by 10%. While ho1a revenues surged 27%, MCM faced a decrease consistent with the previous quarter, and PCTV remained flat. The Mass segment represents 82% of our consolidated revenues, with the Corporate segment accounting for the remaining 18%, the same mix when compared to the second quarter of last year. Cost of services rose MXN 2.3 billion, up 6% year-over-year, below the growth of the top line. While SG&A expenses obtained MXN 2.2 billion, a 16% increase, in line with our business escalation, given an ongoing expansion projects and due to a normalization of costs and SG&A in ho1a. EBITDA for the quarter stood at MXN 3.6 billion, up 10% year-over-year. However, on a sequential basis, EBITDA declined a bit due to temporary slowdown in revenues due to slightly lower subscriber growth, and as a result, the company was slightly less efficient in offsetting SG&A. EBITDA margin slightly declined to 44.3% from 44.6% in the second quarter of 2023, primarily due to increased costs on a percentage of revenues in April, which has started to see a margin recovery in May and June. The change in EBITDA margin from the previous quarter was due to inherent seasonal effects. Net income this quarter closed at MXN 571.3 million compared to MXN 867.8 million in the same period last year. This figure was impacted by the combination of currency exchange losses, higher interest payments related to the issuance of sustainable local notes and increased depreciation costs associated with our expansion efforts. Turning to the balance sheet. The company's net debt increased by 14% sequentially to MXN 22.01 billion, largely due to lower cash availability, following the MXN 2.7 billion dividend paid during the quarter. Our current CapEx was MXN 2.7 billion, consistent with the previous quarters to reach MXN 5.1 billion for the first half of the year, about 31.6% of revenues year-to-date. In this sense, we are on track to reduce this ratio below the forecasted 32% to 34% for the full year 2024, which implies a figure around MXN 11 billion. As we do pass the intensive phase of our expansion and network evolution projects, expecting to bring it down to around 22% over the next few years. As CapEx demands lessen, we also anticipate a gradual reduction of the net debt-to-EBITDA ratio from the current peak of 1.57x, a level that is in line or below what we anticipated. Furthermore, the enhanced profitability and cash flows achieved through our mature investment stage will directly support improvements in both metrics through the long term. As we continue to navigate the dynamic market, our disciplined financial execution and strategic investments set us well for sustainable growth. In this regard, we are optimistic about the second half of the year to further enhance profitability and strengthen our financial position. Thank you for your attention. Let's move to the Q&A session.

[Operator Instructions] Our first question comes from Marcelo Santos from JPMorgan.

I have 2. The first question, I just wanted to double check the CapEx you just mentioned. So you said it should be below the 32% to 34%, around MXN 11 billion. I just want to make sure I got it right. That's the first. The second question, I wanted to deep dive a bit on the sequential weakness in Mass segment EBITDA margin. So is this more related to lower adds that you have. Did I understand correctly, you said margins improved during the quarter? I just wanted to get a bit of a deeper dive over there.

Luis, you want to go with the CapEx?

Yes. To clarify, Marcelo, yes. And maybe I said it wrong. But our objective remains between 32% and 34% for the remaining of the year or the total of the year, which results in more or less MXN 11 billion.

And then the sequential on the EBITDA margin that he's talking about.

Yes. The EBITDA margin, as you mentioned on Mass segment, that was related to some additional SG&A costs related to maintenance, and we expect that to decline a bit, but will be a little bit higher than the first quarter for sure.

Yes. It is like Luis was telling you. We did some accelerated migration of existing subscribers for the CPE equipment that make us incur in some of the general expenses that we have. That's the pressure that we have. As you can see, the revenue was in line with what we were forecasting on that part pretty much, but the pressure was on the expenses because of that migration I was telling you about.

Although we expect to have the EBITDA margin at the end of the year at around 45% and keep climbing in next years, pretty much.

45% is for, just to be sure, the consolidated or the cable?

For consolidated.

Consolidated.

The next question comes from [ Douglas Works ] from TBC Capital. [Technical Difficulty]

That's an easy question.

Doug, are you there?

Doug, you're muted.

Yes, he's muted.

We'll go from the next one and come back to Doug. Lucca Brendim from Bank of America.

So I have 2 on my side here. The first one, if you can comment a little bit on the competitive environment for cable. How have you seen it, if there are any changes on pricing? ARPU has been growing pretty consistently for the past few quarters. Is that something you believe should continue going forward? And then the second question, if you could expand a little bit on the growth and the margin for the Corporate business. We saw some fluctuations there for the past few quarters. So just wondering if what we can expect for the next quarters.

Thank you, Lucca. Yes, regarding the competitive environment, we see a very clear study from all our competitors who are very much -- everybody raised prices at the end of last quarter, beginning of this quarter. I can tell you that in the organic segment that Megacable has, we have managed to increase subscriber base. We're very, very proud of that part. The majority of the growth that we have is coming from the expansion of territories. We maintain our product quality, technology, as I said in my opening remarks, a price on the promotion to increase that. And we carry on the largest market share in the markets where we are, even though we have 3 competitors in some of the markets. So we are very proud of that part. We don't see a price war on that. Everybody are very similar in terms of what we offer to the market in that part. We'll see how it's going on. We're focusing everything in our XView, our technology platform, quality of service and pricing altogether. And my message is, we have a growth in subscribers in our existing territories, but the majority comes from expansion, which is understandable according to what we have. Regarding the ARPU, ARPU pressure comps as well as the -- it's a market condition, the slowdown in Video. That's -- we have the largest penetration of Video over Broadband still. And it's normal that as we raise prices, some of those people don't need Video and disconnect. That's why we have the increase in the churn on the Video part. We expect we are going to have pressure going forward. We expect to carry on with the same level, but pressuring on the level of percentage of Video over Broadband in that part -- regarding that. And since I'm telling you that the ARPU will pretty much remain and will have a slight increase going forward in the future because of the pressure of the double play package. Now regarding the growth of the margin for business, well, we have pressure on business on the Corporate segment. You want to say it, Luis?

Right. So for the longer term, the Corporate segment by business unit, MetroCarrier will remain between 40% to 45%. MCM will be around the same, 40% to 45%. ho1a will be between 16% and 20%. It will be quarters where we will have higher or lower, but that will be pretty much the overall long-term expectation in margins. And PCTV, well, it's more a cost center than a business unit, and it brings benefits to the company through reducing cost more than really a margin in products. So I'm not sure if that answers your question.

And as a complement, Luis, Lucca, the margin of the business segment was normalized in the second segment since we have a...

Second quarter.

Second quarter, sorry, over the second quarter coming mostly from ho1a on that part that has an extraordinary first quarter and recognize some of the expenses in the second quarter of that part. So we normalized the margin to the levels that Luis was telling you. So that's why it looks like a peak, but it was an extraordinary first quarter that we have on that front.

The next question comes from the line of Vitor Tomita from Goldman Sachs.

So we have 2 questions from our side. The first one is on that increased churn in April following price up, was there in Broadband, a specific profile of subscribers that churned out the most? For example, were those mostly subscribers that were previously in promotions or mostly subscribers in cheaper plans or any plans without pay-TV? And my second question would be that -- would be on shareholder remuneration. Your leverage is still low and you are a big dividend payer. So now that there has been some setting up, some volatility on the stock, have you considered potentially doing share buybacks at some point?

Thank you, Vitor. It's Raymundo. You ask regarding the churn, whether it's fiber, HFC or what is the profile. I can tell you that the churn was coming mostly from the organic segment with the subscribers. And that's because of the large penetration that we have in those markets. We did have an increase in churn in the expansion segment with subscribers that has more than 6 months to a year with us, but was a slight decrease. The majority of the churn came from the organic for the highest penetration that we have and a higher ARPU than in the organic. It is a key message. It was at March that sort get the effect on April. So we have the churn in April on that. We have a very good May and June that make us recover and tell us, I'm being confident that the trend and the goals that we have are really going to be achieved. So that's a part of the churn. Regarding the share buy, as Enrique said in the opening remarks, we're very clear right now in the 3 axes of our strategy. Getting the evolution, maintaining and getting the best of our organic market, that's number one. Number two is the expansion to the new territories that we're very proud that we've got all the infrastructure and we're gaining subscribers, as Enrique said, 750,000 subscribers are now coming from those territories, and get a very healthy financial company. That's where we are right now. We're not announcing or thinking about any share buyback as of this month. I don't know, Enrique, if you want to say something on that?

You're right. Your answer was right.

The next question comes from the line of Phani Kanumuri.