Millicom International Cellular S.A. (TIGO) Earnings Call Transcript & Summary

Good morning and good afternoon, everyone, and thanks for joining us to discuss the Guatemala Transaction that we announced last night. I'm Michel Morin, VP, Investor Relations at Millicom, and this event is being recorded. Our speakers today will be our CEO, Mauricio Ramos and our CFO, Tim Pennington. And following their remarks, we will have a Q&A session. By now, you should have received a copy of our press release, which is available on our website along with the slides that we will be referencing during today's presentation. Now if you'll please turn to Slide 2, 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 performance. We will also be referring to many non-IFRS metrics throughout the presentation, and we define these metrics on Slide 3, and you can find reconciliation tables on our website. Now let me turn the call over to our CEO, Mauricio Ramos.

Thank you, Michel. Good morning and good afternoon, everyone. Thank you for joining us today on short notice to discuss the very exciting news we put out today. Today, we announced that we are taking full control of our Guatemala business, the deal was signed today, and we expect we will close shortly. The highlights are on Slide 4. First, we paid $2.2 billion. As you will see in a moment, this transaction immediately unlocks a tremendous amount of shareholder value and owning 100% the Guatemala business transforms Millicom's financial profile. Second, the transaction is immediately accretive to equity free cash flow and to net income. The investment adds about $200 million to Millicom's equity free cash flow, which implies a free cash flow yield of around 9% in year 1, well above our cost to fund this transaction. As I said, it's immediately greatly accretive. Third, we plan to take out the acquisition bridge loan with a combination of long-term debt and equity rights offering for existing shareholders, which for clarity is also known as a preferential rights offering issuance. We're targeting 2/3 debt and 1/3 equity, implying $1.5 billion in new debt and about $750 million in new equity issuance. Fourth, leverage is expected to be 2.1x pro forma for the transaction and the equity issuance I just mentioned. We expect to complete the rights offering in Q1 2022, and we expect to get leverage back below 2x by the end of that year and then continue on towards our deleveraging target of 2x. Finally, the valuation is compelling as you will see in a few minutes. Now please turn to Slide 5 for details. I will go into each of these points in more detail on the following slides, but the simple and key message is that this transaction will significantly enhance our cash flow and simplify our structure. As I said earlier, the DMD is immediately accretive. We're buying more of our great business, which we already know and operate with a strong record of performance and solid cash flow generation, and which operates in a healthy 2-player market. In addition, the transaction will allow us to simplify our structure and give us more exposure to an extremely stable currency and a growing economy. Let's go over each point one by one beginning on Slide 6. We're all familiar with our strategy, which we have communicated several times. This transaction is perfectly aligned with that. We want to allocate capital to our Latin American markets. Our first priority is to invest in the business to drive organic growth. Acquiring minorities, as we have said often is something that we want to allocate capital to when we can do these transactions in an accretive way. We kept buying more of the same opportunity we like and of the business we already know and operate. Call it safe M&A or if you will, our proprietary opportunity. This investment is consistent with that. And as you will see, we have structured the financing in a way that is shareholder friendly, will allow us to maintain a healthy balance sheet and continue on our deleveraging path. Let's move to Slide 7, which shows how accretive deal is on day 1. Let's start with the underlying cash flow. Our Guatemala operation is highly cash generative. In 2021, we expect Tigo Guatemala to generate equity free cash flow of around $450 million and net income of around $350 million, and we will now own 100% of this. Effectively, we have bought just a little over $200 million of incremental free cash flow. And that's the key number on this transaction, a little over $200 million of incremental free cash flow. We will, of course, have to pay interest on the additional debt incurred from the transaction, and you can make your own estimates on that. The point is that in which where you cut it, this is a highly and immediately accretive deal to our shareholders. On the next slide, Slide 8 is Tigo Guatemala impressive track record of growth in dollars. Our mobile business is #1 in Guatemala, and we have sustained solid customer growth since 2016. In the home part of the business, we have almost doubled the number of customers over the past 5 years and earlier this year, we became the largest provider of broadband in the country. You can see on the top right chart that these strong customer gains have driven healthy revenue growth every year since 2016 and you can see a similar cut with the EBITDA on the bottom left of the page, with margins expanding every year to more than 50% now. And here's the punch line. We're constantly taking that EBITDA growth and convert it into operating cash flow [indiscernible] These numbers on this stage are all shown in dollars, by the way. Slide 9 is a slide from our Q3 presentation, where you can see that we sustained strong growth in Guatemala throughout the pandemic. In fact, our growth in Q3 was well above the 5-year CAGR that I just showed you on the previous slide. So growth in Guatemala has accelerated this year even when Guatemala had a very solid year in 2020. On Slide 10, I simply want to make a point that this transaction will transform the financial profile of Millicom. Recall pleased that under IFRS rules, we take the account for Guatemala in our statutory financials. This will change beginning in Q4, and we will start to fully consolidate the results of Guatemala in the group results. This slide simply shows you the pro forma impact of that when I start 2020 results. This transaction will greatly simplify the understanding of our operational and financial numbers to everyone. On Slide 11, you can see our strong leadership position in the Guatemala telecom market. We're #1 in mobile, #1 in fixed broadband and #2 in Pay TV, and we continue to gain steady share in the peak side of the business. Additionally, on the bottom of the page, you see the low broadband penetration rates in the country, which gives us a significant growth runway going forward in what is today a very healthy mark. Now please turn to Slide 12 to get a better sense of why we are so confident about doubling down Guatemala. Simply said, we know this market extremely well, and we like it. So we thought we would share some historical macro data to underpin a point. On the left, you can see that real GDP declined only 1.5% in 2020, the year of the pandemic. Some of the best performances in country globally. And now in 2021, we're seeing a very strong recovery back to continued GDP growth of Guatemala. On the right, you can see that remittances from the U.S. continue to grow strongly and consistently, we underpins both GDP growth and the stability of the currency that gets out, which is what you see on the bottom of this page. This is an amazing chart perhaps even surprising to me. So please take a look at it carefully and look at the dark blue line, that is not the X axis, that is the Quetzal versus the U.S. dollar over the past 20 years. Not only has the Quetzal appreciated 4%, what is more impressive is how incredibly stable that Quetzal has been throughout good times and bad times, including events like the U.S. financial crisis of 2008 and 2009 or COVID in 2020 or the currency shocks in Mexico, Brazil and Argentina over the past decades. It is this track record of sustained business performance over the years, which we've talked about already, and the solid cash flow generation of the business with a stable and healthy industry structure, which is now in place in Guatemala with a remarkable stable macroeconomic backroom over the decades in the country, all of which drive us to be very solidly behind the investment decision. And simply increasing our ownership in Tigo Guatemala will significantly increase not only the amount of our cash flow, but also its predictability. I'll now hand the call over to Tim to discuss the next few points.

Thank you, Mauricio. Now let's look at the valuation on Slide 13. Tigo Guatemala has a very high cash conversion rate and a low effective tax rate. So we believe that the best way to look at valuation is on a cash flow basis. Using EBITDA less CapEx for our definition of OCF, this transaction is on an EV to OCF multiple of 8.2x and that's based on forecast '21 numbers. We think that is very compelling. But if we look at it on a yield basis, based on our expected equity free cash flow, we're getting a yield over 9%, again, compelling in any circumstance, and we see this as accretive to both earnings and cash flow from day 1. Now turning to financing on Slide 14. We plan to refinance the bridge with a mixture of long-term debt and equity. We expect to raise approximately $1.5 billion in debt and up to $750 million in equity via rights offering with preferential rights to our existing shareholders, probably in Q1 2022. We have designed this capital structure to ensure we broadly replicate the group capital structure and to give our existing shareholders the opportunity to benefit from this transaction, whilst being able to bring leverage back down quickly and to remain on track to meet our leverage targets. So with this mix of debt and equity, pro forma leverage will be around 3.1x and with the cash generation and track record of growing EBITDA, I expect we will be back below 3x by the end of next year, and we'll remain on track to continue to reduce our leverage. Finally, and although no decision has been made yet, I also draw your attention to the rich portfolio of infrastructure that Tigo Guatemala brings with it, 4,400 towers, 3 data centers, 21,000 kilometers of fiber. This is something we will consider further in the context of the comments Mauricio made on infrastructure in the Q3 call. So wrapping up on Slide 15. I want to make sure our thought process for this transaction is clear. On the left, you can see why we're so pleased we're making this investment. We're taking full control of a growing and cash-generative business in a 2-player market, with a stable macro and FX backdrop. As with our other minorities, this was proprietary EBITDA opportunity available only to us which is why we're able to execute the transaction at a compelling valuation. This deal is immediately and significantly accretive to our earnings and our equity free cash flow, and we think it makes for a very compelling investment case. With that, back to Mauricio.

Thank you, Tim. Before we finish, please allow me a minute to thank and recognize our team of more than 3,000 employees in Guatemala who have been doing a tremendous job and given us the confidence to double down our investment in Guatemala. Indeed, with this investment, we renew our confidence in our team in Tigo Guatemala itself and in the country of Guatemala as well. And with that, we're now ready for your questions.

[Operator Instructions] And our first question will come from the Andres Coello Ituarte of Scotiabank.

Sorry, can you hear me?

[Foreign Language]

Sorry, was on mute, excuse me. Mauricio, Tim. Obviously, Guatemala being 1 of the world's most profitable operations. This is a very interesting transaction. I was wondering regarding the infrastructure assets, you just mentioned Tim, 4,400 towers and also the data centers if you could eventually explore monetizing these infrastructure assets in the future? I understand you already towers in Central America. So just wondering in fact that you had a minority in Guatemala, what's stopping you from monetizing these assets? And also, I understand that Mario Lopez built his own company, some infrastructure assets in Guatemala. So I was wondering if after this transaction, Mario Lopez will continue to own any of the assets of Tigo Guatemala or in all of the assets used for operations in Guatemala will now be owned by Millicom? And I have another question, if I may.

Sure. So as I said on our call in Q3, and I think Tim also referenced it earlier today, we are doing all the leg work around creating a separate infrastructure vehicle. And what I said on Q3 was that we're doing the work to carve out our infrastructure assets. And we went through those, which as you recall, about 170,000 kilometers of fiber north of 10,000 towers and 13 data centers all Tier 3 across the region. But this transaction does for that is it simply makes it easier and facilitates it. I don't think there was any blockade or any significant hurdle that we need to overcome, but it just simply makes it easier when you own 100% of the assets and a sizable chunk of those infrastructure assets indeed sit in Guatemala. The local business Tigo Guatemala owns straight out all the assets that we mentioned, the towers, the data centers and the facilities that Tim alluded to in his presentation. And our local partner owns of the land under which some of those towers sits. So he is the landlord, if you will, to some of the tower infrastructure. But as you can imagine, we secure long-term deals on those straight forward. I have a feeling I missed a little bit of your questions. So Tim, if you -- if I need any bail out on your question, Andres, let me know. Did I miss a little bit of it?

Yes. Just a little bit of instability here. But I've nothing much to add on that. I mean we're sort of agnostic running infrastructure we can do a good NPV ]. And we just know that we're now a lot freer to consider options. I think quickly, I don't know if you want to cover this there, but on the related part of transactions that you have, Andres, Mario Lopez will continue to own the assets that they own. We are buying everything inside Comcel, the Tigo Guatemala business. But there were -- continue to be relations with the family enterprises. For instance, they own [indiscernible] our towers are on that 1 of the major distributors. Those relationships will continue into the future. But they've always been on an announcement basis, and they will continue to be on an announcement basis.

Understood. And one final question, if I may. Obviously, in Guatemala, brings to the table that have a minority shareholder in Colombia and Honduras. So just wondering in terms of timing, [indiscernible]

Sure. There's a good old saying in Colombia called [Foreign Language] So for those on the rest of the call, tomorrow, it will be a new day basically. This positions that we called and we've alluded to them for a long, long time. This is EBITDA that we run, we operate, we know, but we don't yet own. So by definition, like on this transaction, these are transactions that if we were to do them, they would be accretive. I would draw some distinction, and I don't want to talk too much about transactions that are hypothetical. Honduras is hypothetical, Colombia is also hypothetical but of course, I want to draw some differences to particularly Colombia, where we control and operate the asset, where as in Guatemala, we shared control. So now we're taking full control. That's a meaningful difference, I think, between Colombia and Guatemala. In Colombia, we fully control, we fully consolidate the asset. There's also a meaningful difference Andres in terms of cash flows. Guatemala is a very customer generative business. Colombia, on the other hand, is basically that we're investing in for the long term. So the risk profile is very different. I think the last thing I would simply mention is that the Colombia transaction, as much is in the press has not yet received approval from the concerned to go forward. So it's a process that has been announced by our local partner, but has not yet received a go forward from the for the sale to begin. So we will deal with that. As I said earlier, when the dawn arrives tomorrow in Colombia.

Next up, we have Stefan Gauffin from DNB.

Yes. A couple of questions just to understand a little bit more on why this is happening right now. And I know you have been working on buying out minorities for a very long time. And I know it's -- I mean, it's a really good deal. But why are you successful right now? And then just secondly the local partner, how have having a local partner in Guatemala impacted the business, I mean, has that been beneficial for you in any way? And are there any risks not having a local partner.

I'm sure. So on the timing. There's a timing for everything. And sometimes, the moment is just right. Of course, there's a lot of things about considerations around our partners that we don't have insight into. But I do think that the timing for them has a lot to do with their state planning. It's come to a point where they needed to mature and monetize and crystallize our investment for state line purposes, and we were sensitive to that. We were friendly to that. We engaged proactively with them to find a solution at work for both. And as you very well said, for us, which I can speak more clearly about, it's certainly a great deal. It's a great economy that we know very well, stable with a tremendous broadband opportunity and a very, very several currency, it's great business, or the better businesses around the world. And it's a very cash-accretive transaction. Very few times do you come across a transaction that you know you can do the math right on with lot of safety and know that it's accretive day 1 and anyone around the call can do the math. And the last thing I'll say on this is Stefan to address your question is the relationship has been great. It has helped create a good business in Guatemala. But our business is managed by 1 of the greatest stock-lending teams in the world. And they are the ones that are carrying the water every day and getting things done in Guatemala and have done so for many, many years. So it is on them and our global expertise that we rely to manage this business and have done so for the last few years. So it is really them that will carry the ball going forward with our support at all levels. So I don't think there's going to be a blip miss going forward in Guatemala. We got everything we need as we have for the last few years to continue to execute in Guatemala. And our team in Guatemala is hyped and exciting, we confirmed that they're going to continue to go forward. So no changes. We won't be the hard bid there.

So we have a question in the chat here that I think is for you, Mauricio, it's from Johan Sunden at Carnegie. And the question is, how will this transaction impact day-to-day operations in Guatemala, referring specifically to how involved our partner was and will be in the company. So I think part of that, you've answered already, but maybe in terms of the day-to-day operations.

Just there's going to be no change in the day-to-day operations and the way we run the business, in the way we set the strategy for the business. We've been running the business for the last few years. We've been extremely involved. We've set the strategy. We oversee the execution. We have the regulatory conversations with the government. So there won't be a change in the way the business is run. We'll continue to run the successful way in which we have been running it together with the Guatemala team over the last few years.

Thanks, Mauricio. So next up, we have Froylan Mendez from JPMorgan.

Congrats on the transaction. So maybe another way to ask the same question, Mauricio, what was the contribution from the partner to the Guatemala operations that we will not longer be having? And secondly, could you speak a little bit more about the potential for increased broadband penetration in Guatemala?

Yes, you bet. Listen, I think I've answered a little bit about how we run the business, and I can simply continue to say that we've run the business. Our teams have been working together. The Guatemala team is reporting a matrix form to my team in Miami, we've been running the business. So none of that will change. I mean, I think there'll be -- these are not poor changes, but you can imagine that will likely put a little bit more debt in the local balance. We've already implicitly said that. And I think the second change that will facilitate things a little bit will be we won't be negotiating around the infrastructure, right? We will facilitate the infrastructure. And the same with Tigo Money. We will be able, going forward, to push Tigo Money quite a lot more without having to negotiate the economics with our partner, right? And Guatemala is a big market. recognize market of $80 billion GDP, 20 million in population. So it's a market where Tigo Money has a lot of potential. So this will facilitate exact because we don't have to negotiate those things. But that's the extent of the changes, whether it's around Tigo Money infrastructure and the local balance sheet. The rest will be the same strategy. And broadband penetration, it's got a lot of runway to go in Guatemala. Mobile broadband penetration, as measured 4G is only 40%. So there's a lot of runway compared against some of other countries that we operate in and you still see that there's a lot of runway there. And significantly so in fixed broadband, where you've seen in our business just grow high double digits over the last couple of years. We expect that we will continue to do that. And as you heard me say, we believe Guatemala has strong macro behind it. And with strong macro behind it and stable currencies, home broadband penetration because the population in Guatemala is 1 of the youngest in the world, which is adopting digitally the fastest in the world. So that's all the reason for us to do this, we think the timing is right for us to do it.

So we have another question that just came in by e-mail from Peter Kurt at ABG. So Mauricio, Peters, first of all, saying congrats on the transaction. We've highlighted the attractive cash flow yield exceeding the cost of capital. So if this is for you, Tim, what is Millicom's cost of equity capital in Guatemala, please?

I guess, Tim, everyone's doing the math. That's a good thing.

Yes, yes. So the cost of equity capital in Guatemala is the last numbers we had were somewhere between 11% and 12%. Now that is the cost of equity. So if you have to look at it on the 9% that I talked about, you need to do an equity free cash flow calculation to compare that 11% to 12%. And whatever assumptions you make, Peter, on that, you will find that this is hugely accretive still.

Okay. So it looks like we have a call. This is a dial-in from Simon Duff at M&G. Simon, I think you just need to unmute your line, and the floor is yours. Maybe we'll try to come back to Simon in a second. We also have a question on the chat from Nick Ivanov. So Nick is asking about the leverage at Comcel, which is only about half a turn. And what would be the optimal net leverage target for Comcel? And also, is it going to be local currency or U.S. dollar debt? So I guess that's for you, Tim.

Yes. And thanks, Nick. I mean, look, kind of I think we've spent a lot of time talking about the cash generation of this business. We've talked about the stability of the FX, the market positioning, et cetera. So in short, the balance sheet is very leverageable. Now having said that, there will be a fully consolidated subsidiary going forward. Tax is based off revenues rather than pretax profits. So actually, from a tax point of view, we're relatively neutral between where debt sits, whether it is the good level on Guatemala level. As a target, I would be targeting to get all of our sort of subsidiaries and operations to roughly the same leverage level as the group leverage level. So that will be somewhere between 2% to 3%. But I do think on the stand-alone basis Comcel is very, very adaptable to take debt on the balance sheet. We aim to put local currency debt on, but we're talking $1.5 billion here. So the only capital pool that can sustain that was really the dollar market. So that will be our primary funding source for the acquisition financing here.

Okay. Thanks, Tim. I don't know, Simon, maybe you want to try and see if you're able to unmute line because I see you're still here with us as a penalist, Simon? Otherwise, we'll send you some instructions on how to do that. In the meantime, we've got another question that just came in via e-mail. And I guess the first one is, this is from Daniel Auza at Bank Chile. So Daniel is asking if we expect significant changes in our investment plan and our CapEx in Guatemala and any kind of guidance that we can give on capital intensity? And then I think the other question was probably just answered. But if we can expand further on the debt to be raised, would it be HoldCo or OpCo and also the currency mix, banks versus bonds, et cetera. That's probably for you Tim the second one.

So on the first part, and I will hand over to you, Tim, on the second part. Daniel, if it ain't broken, don't fix it. My friend, businesses runs very well. So we're not going to -- we're not going to tweak things that we've been putting in place ourselves. As I said earlier, we've been managing and running this business with the local team on an operating basis. So we're not going to change anything. We're not going to tweak anything and the investment plan doesn't change as a result of this transaction. Over to you, Tim.

Yes. And I mean, fully . And look, to give you guys a bit of a sense of this. I mean we've spent around about 11% to 12% of revenues in CapEx. And for the last few years, and I can probably go back further at that level. And our CapEx is devoted to ensuring network superiority on the mobile side and building up cable on the home side. And we certainly -- we have a really great building cable business in Guatemala. And as Mauricio said, it's why change a winning formula, and we'll continue to do it at the same level. In terms of the debt, I think I'm more or less covered it before. We've got fairly clear goals in terms of our treasury and our capital markets guidelines in terms of local debt to OpCo debt. In this circumstance, we will look to see the best option and probably we'll be putting debt at both the HoldCo and the operating business. But it will just depend a little bit in terms of maturities and pricing and availability.

Okay. Thank you, Tim. Thanks, Mauricio. So Simon ended up sending us his questions via e-mail. So this is from Simon Duff at M&G. Number one, have you discussed the risk around increased structural subordination of the group's HoldCo bonds with the rating agencies? And do you have any concerns about matching downgrades as a result of the $1.5 billion incremental OpCo debt? And what is the time line for achieving -- that's question number two, what is the time line for getting to 2x leverage?

Well, Simon, as you're aware, we have constant and sort of detailed discussions with rating agencies. I don't know if they've come out yet, but I'm not expecting any impact on our ratings as the consequence of this transaction. And I think that plays into the fact that, broadly speaking, we've aimed to have a sort of capital structure neutral approach to the financing of this, i.e., the capital structure mirrors the capital structure for the group as a whole. So I don't -- I'm not anticipating any impact there. And kind of in terms of the target, it's not the economics. I think the important target to talk about today is the fact that we expect this business because it is so cash accretive and because the earnings growth has been so strong. We will take our leverage up a little bit. We'll watch it up about 20 basis points to 3.1x pro forma of the equity. But -- and this is a big, we expect to be back below 3x by the end of the year and therefore, back on track to the deleveraging targets that we previously had.

Okay. Thanks, Tim. I don't see any additional questions either in the queue or via e-mail or via chat. I guess we can give people a couple of seconds here if they want to signal raising their hands. I think we've probably addressed all of the questions then. Mauricio back to you.

Thank you, Michel. No questions, it seems to indicate that we've done a job, a good job on explaining things. So listen, thanks, everybody, for joining today. We're very happy with this transaction. We are buying into what we believe have evidence is a strong and very stable economy with very stable FX. We're buying more of a high-performing asset that we know and operate very, very well with tons of cash flow. And we're doing a transaction because of that cash flow is highly accretive. And because it's a transaction that's highly accretive, we're putting in place a financing structure -- long-term financial structure that has a very shareholder-friendly approach, sharing that accretion with our existing shareholders. So we're overall extremely, extremely happy with the transaction today, and we hope you all are as well. I want to thank the execution team for putting this deal together and carrying it through today. I also want to thank our Board for their support and guidance and challenge that have given us in executing this transaction. And thank you for everybody for joining us today.