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

Hi, everybody. I'm Cesar Medina. I cover Telecom, Media and Technology for Latin America Morgan Stanley. I have the pleasure to be with here with Mauricio Ramos, CEO of Millicom. Mauricio, thank you so much for taking the time to be with us. Exciting times for your company. If it's okay with you, let's structure the conversation in two parts, like one top-down strategic, and then the second part will be much more bottom-up in terms of the specific markets.

All good with that, and thank you for having me. Delighted to be here.

Perfect. So let me start with the most recent developments. You have a new shareholder. Very much successful track record. Maybe you can give us some background in terms of how this transaction came to be? And more importantly, what does it mean for Millicom and perhaps the Board going forward?

Sure. So perhaps 3 things. Number one, there's a history. Xavier Niel was part of the consortium that bought our Senegal asset from us some years ago. In that moment, we have the opportunity to interact both with him and with Thomas Reynaud, who is the CEO of Iliad, and was the point person for the Millicom investment. So there's a history here. Number two, which I think is more important, is everything that they said publicly in the press release they put out a couple of weeks ago is consistent with what they had told me privately, which was very, very positive because, as I told my team, Xavier has made this investment and this is how they're viewing, and they told me they're going to put a press release out with this. My team was, "Okay. When do we see the press release?" So I was very happy when the press release came out that it was very consistent with what they had told me privately. And I think everyone has read the press release. I think the general gist of it, it is very supportive to the Board, the management and the strategy. But most importantly, they allude to being on the same page with the strategic plan that we put out on our Investor Day. I was very pleased to see that they make a reference to it because it means they understand our strategy quite well. And they also made specific references to being on the same page with Tigo Money and with our infrastructure play, which is part of our 3-year strategy as we laid it out on Investor Day. So very much aligned what they said privately to me, with what they said publicly and what they said publicly with what our strategy is. So that's point number two. Point number three is we're very happy. It's great for us. It's great for my management team and for me to have a savvy investor group that knows telecom, fintech and infra being part of our shareholder group. So we, as a management team, we intend to engage as proactively as we can with them. It's really welcome news for us. Beyond the validation and all of that, they see deep value, all of that, that everybody has figured out. From our point of view, it's just good to have operators, investors in telecom, fintech and infra be part of our investors.

And that investment would entail, at some point, changes in the Board or them forming a closer relationship on that front? Or is it too early to tell?

So as you very well know, we are in the process of discussing with our Nominations Committee the composition of the new Board, which will be finalized by our AGM at around usually the May time frame. If they want to participate in the Board, there would still be time within the governance structure. And as I said earlier, if they want to, they would be more than welcome.

Perfect. Now a little bit of an unfair question perhaps. Now when you reflect on the track record of Iliad and Xavier, et cetera, and you see the way that they operate, you see the way that they create value for shareholders, et cetera, like what trends or strategies that you think are applicable for Millicom? And the other extreme, you operate in a very particular footprint that is different from other jurisdictions within Europe. What are similarities and differences in terms of the way that you operate as it applicable for your business? Totally was an unfair question.

No, it's good. So I intend to ask a lot of questions, right? I'm learning a lot from savvy investors and operators. Telecom, infra and fintech across the board has a really good alignment what they've done with what we are setting out to do. Clearly, the markets that they've operated are different from the markets we operate in. Of course, we are in Latin America. They've largely been in developed countries. And as I alluded before, in South Africa, but there were early creators of the telecom plays in France. So they know what it is to be connecting the unconnected. So point -- massive point there. On infra, they've done a lot around infra. We've been paying ourselves a lot of attention to everything everyone is doing, both in Latin America, in Europe and everywhere else on infra, and there's flavors to how you can play the infra name. They have a lot of experience. So I think that's something that I think they can provide insights on and the same on fintech. There have been investors in fintech. So there is opportunity for us to learn and ask questions. It's really, as I said before, beyond the validation of deep value at Millicom, all of that good is just good news to have someone like that in our investor group.

Well, it's a very good match in terms of the way that you present your business across those 3 pillars. They bring expertise, global practices across the board on those 3.

Correct. Absolutely. And they understand also from the -- from what I've been able to gather, they also understand the nuances of long-term investing versus shorter-term time frames as a public company. And I think that's something that can be very sensitive to. So I'll also intend to engage with that on their thoughts about that.

Now moving on to the other part of the alluded, which is the infrastructure assets. In the last earnings call, you said that you are well advanced in terms of the process of completing these transactions. Can you walk us through in terms of what are the pros and cons of looking for a partnership versus an outright sale for those tower assets?

Yes. So these are the flavors that I was alluding to. So let me start by thanking all the advisers who told me straight from the very beginning, be very, very sure that you said the time frame correctly because you are going to be asked about this quarterly. So when we did our Investor Day, we said, "This is going to take us 18 to 24 months to set up properly. And we are hitting the milestones in the interim that we need to hit to hit that time frame. So we are on track for a late 2023 moment." There are basically 3 flavors, and we're also using this time not only to set up the entities, to transfer the towers, the sites, all of the mitigated work, but we're also using the time to learn and pay attention to the many transactions that are happening, whether it's Vodafone, Deutsche Telekom, CTOs in Latin America and get an idea for the flavors. There's basically 3 flavors in a simplified manner. One is a straightforward sale and leaseback. Everyone has done a little bit of that. We've done some of those ourselves. I'm not saying no to that, but I want to create more optionality than just that because that we could execute quicker, faster, almost immediately. But of course, it's basically a sale and leaseback. So if the NPV is positive, you come out ahead. If not, you don't. The other 2 flavors result from creating a TowerCo. So playing as an infra player, not an MNO who does a sale and leaseback. And that's basically setting up the TowerCo. And that's what we're doing, and that's why it takes this amount of time, and that creates optionality. It creates optionality because within that avenue, you have 2 flavors. One is you retain -- you bring in some equity, but you retain control and consolidation. And there is in Latin America, a perfect example of that, ready publicly traded. That is one flavor. The benefit of that is you retain control. The negative of that is the TowerCo is not independent. And as a result of that, it may not reach its full potential. But also you continue to consolidate the CapEx. And as a result of that, it still weighs heavily on your operating cash flow down the road. You're not able to deconsolidate that, and it's still part of your balance sheet. So it's not independent. The third flavor is, again, a TowerCo, but one in which you give out control. You retain an equity stake, but you deconsolidate. You are still playing for infra, retaining the upside of that better valuation, but you're able to access lower cost of capital, the TowerCo is, while you retain an equity upside in there. And you're deconsolidating your tower build from your CapEx, therefore, allowing yourself a lot more flexibility. Those are the puts and takes in a summary manner. We're building the optionality to do flavor A, B or C. You can already tell, and I've been public on this, that our preference, we're not making any decisions, is towards flavor C. It seems to be the one that better decouples MNO from infra. It creates more value because the TowerCo becomes independent and has more upside for our existing shareholders and maximizes the equity ownership that we would retain in TowerCo. If we were to go with option or flavor C, anyone can do the math, and I think we've actually done it, that would be assuming we keep 50, but don't consolidate, right? It's neutral to our key metrics, EBITDA positive to OCF because we're no longer spending to build those towers within the telecom business, but then we have a 50% equity in a TowerCo. So it's an easy way to imagine why we think of that as the most value creating of the 3 flavors. Again, no decisions need to be made. We're creating optionality, but I'm giving you kind of an insight into how we're thinking about this. And we have time to learn more about what everyone else is doing.

Can you...

You don't need to be first, you just need to finish strong.

When you said that option 3 is sort of neutral for your metrics, so there's no impact in terms of cost, EBITDA, like -- or how should I think about it?

So today, we're paying -- this has a 1.1 tenancy ratio. We are the tenant, right? So all the cost goes to TowerCo, and we just basically pay TowerCo. That becomes rather neutral. Then we gain flexibility on our OCF because we're no longer building the towers. We're building about 1,000 to 1,500 towers on a yearly basis today, right? So it gives us more flexibility on OCF. The metrics remain fairly neutral, but we end up, assuming everything near net EBITDA is neutral, everything is neutral, we end up with an ownership in a valuable TowerCo, which then, in terms of optionality, that's the alternative that creates more optionality as well, because that TowerCo now can merge, can be sold, it can be IPO-ed. It just has a ton of optionality on our second stage, which should create more value for our equity. That's the long and short of all of that thinking.

So far is basically the time line for the end of next year, you're keeping the 3 options open, not committed yet, but your preference is to keep the optionality for the upside on option #3?

If we do it this way, flavor A is still an option, right? So somebody kind of short cuts there and say, "Hey, guys, don't go through that. Here's a knockout value. Don't go through all that. The NPV to you is massive," then we still have that option.

And just to confirm, you said 1,000 towers per year is sort of what we can...

We're building about 1,000 to 1,500 give or take across microsites basically, towers.

Now the other interesting aspect in terms of these strategic transactions was related to the fintech Tigo Money. Can you walk us through in terms of where is the product now? Where do they want to take it? Because unlike my understanding and like the situation on the tower business in here, you're looking for specific capital to really accelerate that growth in there and the scale. Is that correct?

Yes. So we've worked very, very hard over the last 7 years to really simplify Tigo Millicom. Make it very clear that we're in the connectivity business. We sold completely out of Africa. We killed all the small projects that would never have any long-term value. But because of the nature of the business, we've grown our business and we've also grown a small fintech business with us. So what we're trying to do is keep the story very simple by saying this is a connectivity business. This is a tower business. This is a fintech business. That's the overarching strategy to make sure things are easily understood by our investors. Now towers infra, because it could be more than towers, is different from fintech. Towers is well understood. It's 10,000 towers, back of the envelope, not keep mathematics. People can say, "All right, that should have an EBITDA of these. It should have a multiple of that. And therefore, if these guys keep a 50%, it should be worth this." Straightforward. Fintech is a little different in the sense that it's -- the way I view of it is for little amounts of investment that we're doing on a yearly basis, we are creating massive option value, right? This could be a really valuable fintech play. I'm not saying it will be. I'm not guaranteeing that it will be, but we see the opportunity for it with very little investment, therefore, the option value is big. You can't really put a number of valuation on it, but it's got massive option value. And therefore, the way we're treating bringing an investor is a little different. Meaning what we want is some growth capital, but most important fintech savviness. And ideally, again, we're not committing to anything, we'd like to keep more of the upside, more of the equity. So that's a transaction. But the opportunity for Tigo Money is -- you can think of M-PESA. That's one good storyline there. We think of us becoming the digital payment system -- mobile payment system of choice in our markets. As the world is trying to dominate, whether it's Apple Pay or Google Pay, in our markets, we have everything that's required to become that digital payment of choice. Why? We already have the customer base, the mobile customer base on which we have a ton of history, credit history among other things, but also payment history. We already have 5 million Tigo Money users that historically have been transacting with us on good, old USSD technology, basically may be making over-the-counter payments or paying bills. This year, we've been bringing those on the back of our created Tigo Money 2.0 platform, the digital platform, the fintech platform, we've already brought in about 1 million of those into the Tigo Money fintech play. But we have a lot of capillary in all of the countries we operate in. Bolivia as an example. There are 5,000 points of presence Tigo Money only, this is just Bolivia, which is not one of our biggest Tigo Money markets. Tigo Money alone, not Tigo Mobile, Tigo Money, points of cash in, cash out 5,000. So think of any other bank that has that level of ATM capillarity, right? [ Irreplicable ]. Paraguay is a multiple of that. We haven't really launched in Guatemala. So with that level of capillarity, we can really become a fintech that is connected to the cash economy. So when we use the word fintech, that's because most people love fintech, but the reality is we have the ability to create mobile wallet out of cash directly. I'm going to say that again because this is key. If fintech is constrained -- a typical fintech is constrained because as much as they say they're going to go out and bank the unbanked, the reality is most of the fintech accounts are tethered to, grown from a debit card or a credit card or a banking relationship. 90% of the Tigo Money wallets are created from cash because of the capillarity that I just described. So as we create this ecosystem, we have the ability to now give all of that money that goes into the wallet, we can create them from cash, we are providing a digital product, but we will create -- also creating use cases for them, and this is where the merchant ecosystem comes in place. So by the end of this year, largely in Paraguay, but also in the markets where we launched Tigo Money, will have about 50,000 places in which people can use merchants in which Tigo Money will be used. So you start to create an ecosystem in which the payment through Tigo Money works. We have governments in all of our markets saying we want Tigo Money because that's how we can disburse subsidies or social payments in a cost-effective way because they need to reach the lower part of the population, and they need to do it digitally and in a cost-effective manner. So building the ecosystem is the first layer. Now expanding that payment ecosystem is the second layer, that is happening as we speak. So Paraguay is big. It's about 30% of the $50 million of revenue that Tigo Money has today. By the way, this is not a small already play. $50 million is already in revenue, real revenue, over 5 million subscribers, is already real. Most of it is in Paraguay. So we are launching in Guatemala as we speak. We think that's our second -- that's going to be our second largest market, and we will be launching in Panama end of this year. That's the payment ecosystem. That's the platform. That's what gives you the solid foundation, and we began trialing loans in Paraguay. By the end of this year, we will have done about $3 million worth of small loans, $20, $25 loans, 2 to 3 weeks. We're seeing bad debt really come down, the algorithm getting really, really smart and the recurrence picking up. So it's promising. It's a pilot.

And that was in Paraguay, right?

That's in Paraguay. So we want to -- so what I'm saying is we got merchants, we got the digital product, we got the subscribers coming in, so we're building the car. And next year is a year when we're going to start putting it around the laps. Do a couple of laps, start growing the revenue to prove the case and obviously continue to try lending in Guatemala and other places. And then we have something that I think would be attractive to bring in this tech savvy investor and some additional growth capital. So we've got to do a little bit of the buildup ourselves, still into 2023. That's the long and short of it. The only thing that I need to add because people keep asking me this, and I forget to mention it is, we spent the last 7 years making Tigo a very simple story. We're not in Africa. We're in the connectivity business. I said earlier, I want to keep that simplicity by saying, this is fintech and this is tower. That's why they need to be independent, right? Because otherwise, it becomes confusing and we're equity players in those. Tigo Money will not use our balance sheet. I want to be super clear on that, that there's no confusion around that. We are not going to confuse our story by becoming a little bank within the telco. If I forget that, then somebody is going to tell me, I forgot that last bit.

Now the TAM, if you will, if you are the digital payment of choice in your market is very large, of course. But to your mind, what are the challenges? What is the competitive landscape?

Yes. So I'm going to go back to -- this is high -- this is a very valuable option because it's not really costing a lot of money, it's small amounts of money. I realize that we don't want to turn this into a sinkhole, I get it, but it's a small amount of money for what is potentially massive upside. It comes down -- I think the opportunity is quite clear. the challenge is our execution, speed of execution, right, making sure your time it right. I am not in a hurry. I've never bought into fintech valuations. We want to build a solid payment system and a solid fintech-driven loan ecosystem here. So I'm not going to be challenged by the time. The money that we're investing, sure, it's hurting on operating cash flow, but it's a small amount of money. So that's not a challenge. Competition, we've stayed away from Colombia because that's more competitive. There is limited competition in the markets we operate in. We make a very strong point of saying we're really not competing with the financial sector. We really aren't. And the statistic that I just gave you a few minutes ago is the most important one. 90% of the accounts did not have a prior banking relationship. They got created out of cash. The amount of the loans that we're making is $20 for 2 weeks, 3 weeks. We're not competing against the financial system, we're completing against...

A ton of history?

We have a ton of history, of course. These are customers that have been with us. Now in order to build the algorithm, we loan for the pilot rather indiscriminately. So what we can create a smarter algorithm, right? So we have a ton of history, but we don't want -- we have the algorithm to learn. The most important thing is we're not really competing with the financial sector, we really aren't, neither in payments, nor in lending. There's no way the financial sector can do $20 loans. It's impossible. And this is why we get a lot of support from the governments, from the government of Paraguay, from the government of Guatemala, the government of Panama. We have direct relationship with the President, the Prime Minister saying, "Okay, this is really financial inclusion. This is something we -- the country has not seen in the last 30 years, we're supportive." So the regulatory challenge, although it exists, is less than you would imagine because of the nature of the animal. Remember, we are in every remote location in Guatemala, Honduras, El Salvador, Colombia, I jokingly say there's 2 things you can get in any small town in any of these countries, a beer and Tigo.

Now to the extent that you can comment because one can do the math, as in $50 million revenues, 5 million users. How does the ARPU of the fintech would, long term, compare to the ARPU of the mobile business?

So facts today, $50 million of revenue, 5 million users, that's a dollar per subscriber on a yearly basis. simple math. That's the day. I'm really focused on building the digital payment platform to begin with. That's different from the telco mentality is you really have to create the platform. And in order to do that, you need to be the choice for everybody, which means you need to be willing to take very low margins on each one transaction, very low margins in order to create the platform. This is not a top-tier cream top of the pyramid, this is a massive ecosystem. And then that allows you to have all the information that you need to go into the other products. Hopefully, I answered your question.

You did. Just to clarify, you said that today, you have 50,000 merchants accepting Tigo Money?

By year-end.

By year-end. But that's across all the markets or just one?

All the markets. All the markets. It's exponentially being driven up as we speak, right? We've only just launched -- the merchants they need a special application, right? So we have 2 apps, the one for the consumers, the one that you would use on your phone and then the merchant needs one that they can connect to their back office, even if they're a very small merchants, right? Because that's what gets the ecosystem going. And we just only recently launched that. So we're building the merchant community as we speak.

Got it. Now moving on to the second part of the conversation.

Yes, because that's all option value, right?

In terms of your bigger markets, Guatemala, very profitable. You did a transaction recently, et cetera. What are the trends that you're seeing in there? There were some change in trends in the quarter? How would you qualify in terms of outlook for growth, et cetera?

So a few things to say about Guatemala. Number one, the macro. And I realize many investors may know this already, but it's worth reiterating. This is one of the best-run economies in the region, alongside possibly Paraguay. Current account surpluses consistently for the past few years. Fiscal conservative management. They ran public debt at 30% of GDP. High level of remittances higher than exports consistently so for the last 30 years and continued growth, all of which gives you very well run, very fiscally conservative, low debt extremely stable currency. And why extremely? I mean, probably the most stable currency against the dollar that I am aware of. Even through this last pickup in the value of the dollar, certainly through the pandemic, certainly through the 2008, 2009 crisis consistently so. Why is that important? Because we put a lot of capital into Guatemala, and this is an important part of the equation. It is -- it's obviously not dollars, but it's as good as it gets in terms of picking a currency. Second point, which goes to your point, it's a 2-player market, right? But it's not only that it's a 2-player market, it is -- that it is balanced 2-player market. We have 60%. Our competitor has 40%. What that means is it's the template for long-term stability. No one really has any incentive to disrupt that balance. It's a good balance. And I'll tell you a story because I've said it publicly. When Telefonica was for sale, we participated in the process. And ultimately, we made our decision not to buy that asset, not only because we didn't want to pay what we would have had to be, but most importantly, because if we had, we would have ended with a 2-player market. But we would have ended with a market in which we would have had 80%, and our competitor would have had 20%, 15%. That's not stable. It's a 2-player market, but it's not stable. The one we're in is stable. Now that was a context for your question. So why is Q3 a little bit wobbly, right? You didn't say that, but I know in everyone's minds. I need to say zero surprise to us. We budgeted this way for this year for Guatemala because we're cognizant that over the last 3 years, we took quite a bit of market share in Guatemala. Perhaps too much, because our competitor was integrating an acquisition and because during the pandemic and the things -- the 2 things happened right after the other, we stayed in the marketplace very actively so. So we took quite a bit of market share. So as we came into the budget this year, we realized that it would be healthy that we would need to give some of it back. So as we expected, our competitor invested in its network and priced down a little bit, and we reacted to that as we had budgeted and expected to do. We invested in our network. We kind of follow them a little bit on price, but most importantly, we put a lot of money into the commercial distribution machine as a way to -- to be clear that we like the long-term healthiness of that market that we're willing to and we will defend our position, but that we're going to do it in a way in which it protects the long-term pricing and health. And the better way to do that is to put money into the commercial distribution. And it is working. I think we will be finding an equilibrium that is longer-term stable perhaps sooner than I had anticipated. Just to put it bluntly, we are within 1% of what we had budgeted for. This is what a stable long-term market should look like. There'll be a little skirmishes in any given quarter, but the long-term trajectory stability.

Noted. We're running in the last few minutes. I'll just slip one more question. Colombia, you mentioned very positive strength on the macro side on the currency side in Guatemala, you cannot say that in your own country. So any comments in there in the macro side and more importantly, the competition?

Yes. So on the macro side, most of our cash flow comes Central America and Paraguay, and that has -- I believe it, by the way, that has held very, very stable. And this is why we are able, one of the reasons despite everything that is happening at the macro level, to basically say, "We confirm our 3-year guidance. Because we have not been disrupted as much as people would think because our cash flow comes from Central America, Bolivia and Paraguay. And as I said, Paraguay, has had a pickup in FX, but long term, it's going to be investment grade. Colombia, the FX has moved up. There's a new government. We talked about that. But here's the thing, we are really growing at the unlevered level in Colombia. So our operating cash flow, which we define as EBITDA minus CapEx, is growing double digit. Really high double digit. Why? Because we've picked up volume. Because ARPUs are being reconstructed, 2 years -- 2 quarters now in a row and because we invested heavily. So with that investment behind us, our margins are growing, and our operating cash flow -- our unlevered cash flow is growing. So organically, we're actually growing in Colombia -- on an organic basis in Colombia. But because the spectrum in Colombia is so expensive, and we've been very clear on this, we actually don't take out any equity free cash flow in Colombia. Weirdly enough, the devaluation actually helps us on the spectrum because a big chunk of it is denominated in pesos. So our biggest liability in Colombia is actually being helped. So the effect on equity free cash flow from the Colombia devaluation, it's 4,800 as we speak, actually has very little impact on equity free cash flow. I don't know if this is clear, but it is important.

I don't know if anybody from the audience have questions?

[indiscernible]

Improving. Now we have -- and Sarah can correct me. We have now, I think, our sixth quarter of growth in Paraguay. And that is largely the result of the way we defend our businesses. We were challenged some years ago in Paraguay, and we took the view openly that we would buy spectrum, build mobile network, modernize that network, continue to secure our software rights and invest in preserving our cash flow. And as a result of that, we have managed to create, today, a competitive environment in which we've held our position, and we're beginning to see reconstruction in pricing on mobile. It's the way to preserve long-term value.

Any other questions from the audience? I'll take one that caught my attention, which is you said that potentially beyond the towers, there could be more of an infrastructure in your business. What do you mean by that?

Right. So yes, of course, we have a ton of fiber. Okay, we have 13 data centers, right? We're just focusing -- we have a certain amount of bandwidth, right? So we are -- and by fiber, I mean, both cable and fiber, right, just fixed assets we have. And there's neutral networks being created. We could participate in one of those. This is an asset that we need to do the math. Are we better off owning it? Are we better off not owning it? And the same with data centers. Today, they are largely something that we use and Tigo business, which is, by the way, is really working. I failed to mention Tigo business, is used -- being used by Tigo business, but data centers like fiber and like towers are more infra than anything else. That's what I meant by there's more than just towers.

But there will be like the second stage after the tower?

We'll get to it when we have a little bit of bandwidth.

Perfect, Mauricio. Thank you so much.

[Foreign Language]

It was helpful. Thank you.

Thank you so much.

Thanks, everybody.