Liberty Latin America Ltd

NASDAQ:LILA

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Today's call is being recorded. I'll now turn the call over to John Winter, Chief Legal Officer of Liberty Latin America.

[John Winter, executive]

Good morning, and welcome to Liberty Latin America's First Quarter 2021 Investor Call. [Operator Instructions] Today's formal presentation materials can be found under the Investor Relations section of Liberty Latin America's website at www.lla.com. [Operator Instructions] As a reminder, this call is being recorded. Today's remarks may include forward-looking statements, including the company's expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. Actual results may differ materially from those expressed or implied by these statements. Additional information on factors or risks that could cause results to differ is available in Liberty Latin America's most recently filed Form 10-K and Form 10-Q. Liberty Latin America disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based. In addition, on this call, we will refer to certain non-GAAP financial measures, which are reconciled to the most comparable GAAP financial measures, which can be found in the appendices to this presentation and on our Investor Relations website. I would now like to turn the call over to our CEO, Mr. Balan Nair.

[Balan Nair, executive]

Thank you, John. And welcome, everybody, to Liberty Latin America's first quarter results presentation. I'll begin by taking you through our group highlights and operating results before handing over to Chris Noyes, our CFO, who will follow with a review of the company's financial performance. After that, we will get straight to your questions. As always, I'm joined by my executive team from across the region, and I will get them involved as needed during the Q&A following our prepared remarks. As a point of housekeeping, we will both be working from slides, which you can find on our website at www.lla.com. Well, let's start at Slide 4 and our highlights for the quarter. Overall, all markets are steadily recovering from the worst impact of the pandemic. However, our operating environment remains quite challenging in the first quarter with reduced tourism in general, and restrictions still in place across a number of our markets. Against this backdrop, though, we had a strong start to the year with a record Q1 RGU additions of 76,000. The group's performance was led by Cable & Wireless and Puerto Rico, and we were pleased to deliver growth across all of our operating segments in the quarter. Our financial performance was also solid with a 3% rebase of adjusted OIBDA growth. This was driven by another strong quarter for Liberty Puerto Rico, and we continue to be excited about the value we plan to create there as we integrate our fixed and mobile operations. We previously outlined our plans to bill or upgrade approximately 600,000 homes in 2021, a 50% increase on 2020, and we delivered 130,000 homes in the first quarter, 98% of which were fiber-to-the-home. Bringing high-speed connectivity to more households in the region continues to be a core focus of our company. Finally, I am happy to say that we also reported a very strong first quarter free cash flow results, positioning us well for our full year guidance of approximately $200 million. Moving to Slide 5. I wanted to cover the first quarter highlights across our key markets before running through our performance by product category in the following slides. Starting with Jamaica, which was the largest contributor of fixed and mobile adds in Cable & Wireless. We are continuing to invest with momentum here and added or upgraded over 10,000 fiber-to-the-home homes in the quarter. We have also successfully launched converged customer value propositions, driving our strong mobile performance. Moving to the Bahamas. Tourism is starting to return with major hotels now open, and a more meaningful rebound is anticipated in the second half of this year. We've invested in our fixed network, the fiber upgrades and launched converged propositions to drive broadband adds and postpaid mobile games. Taking Costa Rica next, this continues to be a strong fixed market for us, and we are constantly looking to innovate and refresh our customer propositions, focusing on increasing speeds and value to gain and retain subscribers. The upcoming acquisition of Telefónica's mobile assets should provide an opportunity to develop attractive converged propositions for our customers and reinforce our strong position. I've moved one of my best managers, Guillermo Ponce, to have oversight of Costa Rica and the integration of these businesses. Turning to Puerto Rico. Our focus is on integrating the acquired AT&T operations effectively and quickly. To that end, in addition to our initial welcome offer, we have now launched our co-branded "Juntos, más" campaign as a first step towards creating a single brand in the market. Next to Panama, on the lower left of the slide, where we saw strict lockdowns last year and some in the beginning of the year. However, this market is going to be strong for us as we start our recovery in growth for the year. I recently moved one of my most trusted executives, Betzalel Kenigsztein, to personally run the business, and he is already making progress. We grew both our fixed and mobile subscriber bases in the first quarter and expect to have a good year there. The launch of our unlimited Todo Todito plan for strong mobile additions in March. Finally, to VTR in Chile, where there continued to be lockdowns during the first quarter despite the country being one of the global leaders in vaccination efforts. Our recent operating and financial performance have been challenged, driven by the intense competition environment in Chile. We are committed to improving performance at VTR, and I would highlight the following. First, we need to start growing our subscriber base again. We turned the corner here in Q1, recording 7,000 net adds following 116,000 losses in the second half last year. Through our sales efforts, the rollout of Hub TV, significant fiber footprint expansion plans and improved customer service objectives, we are aiming to build momentum in the business and drive meaningful subscriber growth over time. Second, we are focused on managing price to retain customers and recalibrating our cost structure through targeted efficiency initiatives. Third, we have added a new perspective to VTR's management team with Vivek Khemka, our former CEO, taking on the General Manager's role. Vivek has extensive experience across the industry and a deep knowledge of technology, which will be valuable in a market where our infrastructure expansion plans are key aspects of our strategy. It will take time, but we believe the business can get back to growth and that the steps we are taking today will also position us well as the market evolves. Turning to Slide 6 and our operating performance by product, starting with fixed subscriber additions. As mentioned, all our operating segments recorded net adds this quarter. Taking each in turn, first Cable & Wireless Caribbean & Networks, shown in the upper left, reported 12% higher Q1 additions year-over-year, driven by continued momentum in Jamaica, where we added 22,000 RGUs. In Panama, we added 10,000 RGUs and expect to continue our growth throughout the year. Liberty Puerto Rico in the upper corner carried over its momentum from 2020 by adding 25,000 RGUs in Q1, which was more than double the prior year period. In Chile, as mentioned, we retained subscriber growth. This is an improvement. However, the market remains very competitive with additional uncertainty related to the pandemic and elections in the near term. Our last segment, Costa Rica, shown in the upper right, continued its steady progression with Q1 net adds 9% higher than the prior year, led by broadband demand. Rolling these results up for the group, we delivered record Q1 performance and year-over-year improvements in net adds driven by Puerto Rico. Our group ARPU per customer at $50 was up 1% year-over-year on an FX-neutral basis in Q1, led by Puerto Rico and Costa Rica. Moving to Slide 7, and a record Q1 mobile performance in what is typically a seasonally weak quarter. Starting again with Cable & Wireless Caribbean & Networks in the upper left, where we added 2,000 subscribers in the quarter, which was 30,000 more than the prior year period. Across Cable & Wireless's market, Jamaica added 10,000 subscribers, including 3,000 postpaid additions, which was higher than Jamaica's postpaid adds for the whole of 2020. Next to Panama, which generated the most adds in the quarter, growing its base by 61,000 net RGUs. This was driven by the launch of our unlimited data, Todo Todito plan. Liberty Mobile maintained a relatively flat subscriber base of just over 1 million subscribers. Although a small net loss was recorded in Q1, it is worth noting that within the mix, we saw growth in postpaid subscribers, offset by prepaid losses. Finally, VTR lost 6,000 mobile subscribers in the quarter. We operate as an MVNO in Chile, predominantly providing postpaid services to existing fixed subscribers and are a small player in the market with just over 270,000 subscribers. Taking this altogether, we added 55,000 mobile subscribers in the quarter, with a blended ARPU of $20 across the group. The increase of 55% year-over-year is driven by the inclusion of Liberty Mobile in Q1 2021. Next to Slide 8 in our B2B and subsea operations, starting with performance on the left side. The upper graph shows the stability in our Lat Am B2B and subsea businesses over the past year. This is driven by our competitive positions in Lat Am B2B markets and the resilience of the subsea business, which I'll come on to. In contrast, our incumbent Caribbean and Panamanian B2B operations have faced challenges related to reduced tourism and the associated impact on local economies where we operate. As a result, performance has steadily improved since the trough last year. However, we are yet to return to pre-COVID levels. On the right of the slide, we wanted to highlight some of the key attributes of our subsea business. Firstly, at over 50,000 kilometers of cable, our network is the most extensive in the region. We've also included a map here to depict our routes, including terrestrial fiber in Colombia and part of Central America. Secondly, we have a unique mesh network with 4 trunk submarine cable systems. This extensive network differentiates our ability to provide more resilient solutions and improves our economics. Thirdly, we utilized approximately 10% of potential capacity across our network. So there is ample room to grow. And lastly, our cables provide an important route to the United States with over 90% of our traffic going from the Caribbean and Central America to the U.S. Demand for this connectivity is expected to continue. Finally, to Slide 9 and an overview of what we've achieved since the pandemic began and why we remain optimistic about the future. Starting with last year. We were quick to assess the potential impacts on our business from COVID-19, and we took decisive action, primarily to reduce costs so that we could manage the business through a potentially for a long period of financial headwinds. As a result, the actions we took, our operational flexibility and some better market conditions, we achieved improving operating and financial performance from Q2 2020, including generating positive free cash flow in 2020, a clear focus. We also closed the acquisition of AT&T's operations Puerto Rico and U.S. Virgin Islands, and that business is performing ahead of our expectations. Chris will take you through the strong financial performance this operation is delivering. Moving to the center of the slide and where we are today. We created operating momentum in the first quarter and our focus on maintaining and building upon it. Related to this, we will continue to lean into our thesis, expanding our footprint and launching new products. We focus on delighting our customers with zero touch and frictionless experience. And as announced earlier this week, Rocío Lorenzo will join us as our Chief Customer Officer. But we are still cautious, noting that Chile and part of the Caribbean experienced lockdown in the first quarter. Finally, as we look further ahead, we are very optimistic. We expect vaccinations will aid in the global recovery and facilitate more tourism to our region, in turn improving the economic backdrop in many of our countries. We've adopted our ways of working, recognizing new normal created by COVID-19, and our workforce remains engaged and committed. We remain focused on product innovation and are rolling out our new products as we expand our networks. And inorganically, we have a tremendous converged opportunity in Puerto Rico, and we're working hard to integrate the operations we acquired from AT&T quickly and effectively. And we are looking to close the acquisition of Telefónica's Puerto Rico assets in the summer. With that, I'll pass you over to Chris Noyes, our Chief Financial Officer, who will talk you through our financial performance before we take your questions. Chris?

[Christopher Noyes, executive]

Thanks, Balan. Beginning on Slide 11, 2 housekeeping items. Our Q1 2021 results include Liberty Mobile for the entire quarter. And given our recent executive management changes, we are now presenting Cabletica as a separate segment. For Q1, we delivered $1.16 billion in revenue, with the year-over-year increase fueled primarily by the contribution from Liberty Mobile. We achieved flat rebased growth year-over-year, which is a solid result given many of our markets are still experiencing COVID-related restrictions and suffering from compressed economic activity. In terms of products, we achieved rebased growth in both fixed and mobile residential revenue, which was offset entirely by continued softness in B2B, which has not fully recovered to pre-COVID levels. Moving to adjusted OIBDA. We posted $449 million for the quarter, reporting rebased growth of 3%, our best result in the last 4 quarters. P&E additions totaled $152 million in Q1 or 13% of revenue, reflecting a modest dollar increase as compared to the respective prior year period. Recall, our target is for 18% of revenue in 2021. Hence, our spend will increase significantly in the following quarters as we accelerate our fiber builds and integration of Liberty Mobile in Puerto Rico. In terms of FCF, we reported $58 million of adjusted free cash flow for the quarter. This was LLA's strongest first quarter in free cash flow and was fueled by Puerto Rico and improved results in Cable & Wireless Caribbean & Networks. For the next 3 quarters, we expect our adjusted FCF to be primarily concentrated in Q4. Moving to Slide 12. Our Q1 result reflects our highest reported quarterly revenue and adjusted OIBDA for LLA to date, and that chart depicts our continued recovery from Q2 2020. As highlighted on our 2020 year-end call, we would generally have a step-down from Q4 to Q1 due to seasonality factors. However, we were able to effectively manage through those factors and obviously benefited from a full quarter of Liberty Mobile, which continues to outperform our expectations. Importantly, excluding the impact of Liberty Mobile, our Q1 adjusted OIBDA of $363 million was comparable to results in the prior year pre-COVID Q1 period. Turning to Slide 13. We present our Q1 results by segment and include a year-over-year comparison of revenue for each segment in the bottom half of the slide. Starting on the left with C&W Caribbean & Networks. We posted $430 million of revenue and $181 million of adjusted OIBDA, which was in line with our seasonally strong Q4 results. Compared to pre-COVID Q1 2020, rebased revenue declined by 4% and adjusted OIBDA decreased by 2%. On the rebased revenue side, we experienced an 8% decline in residential mobile and a 4% decline in B2B, the 2 areas most impacted by the pandemic. However, we achieved roughly flat rebased growth in residential fixed, helped by underlying strength in our broadband product. One market to call out is Jamaica. Our Jamaican business accounts for more than 20% of this segment's revenue and is continuing to post year-over-year rebased gains, growing 6% this quarter. Helped by lower direct and operating costs year-over-year, we were able to achieve an adjusted OIBDA margin of 42% this quarter and gain incremental operating leverage. P&E additions were $50 million or 12% of revenue, including over 20,000 homes built or upgraded in the quarter. Moving to Cable & Wireless Panama. Q1 revenue of $122 million and adjusted OIBDA of $44 million were 11% and 3% lower on a rebased basis, respectively. And P&E additions were $11 million or 9% of revenue, including over 20,000 homes built or upgraded. Two key points to highlight. First, CWP has mitigated much of the COVID-impacted revenue decline to reducing both its direct and operating costs year-over-year; and second, as the year continues, we are poised to deliver much improved performance. Turning to the middle of the slide. Liberty Puerto Rico is once again our strongest segment. We generated $361 million of revenue or 14% rebased growth as compared to Q1 2020. Our historical cable business delivered rebased revenue growth of roughly 20% year-over-year as we have increased our total RGU base by an impressive 17% over the last 12 months. Turning to our newly acquired business from AT&T. This business contributed $240 million of revenue in Q1, delivering rebased revenue growth of 11%. This growth was fueled in large part by strong equipment sales and, to a lesser extent, improved service revenue. For Q1, our adjusted OIBDA was $150 million, an increase of about $100 million over what we reported in last year's Q1. Our Q1 result reflects rebased adjusted OIBDA growth of 26%. Importantly, as we flagged on the Q4 call, we expect to incur sizable integration costs in 2021 that will adversely impact our adjusted OIBDA. These costs were minimal in Q1 and are expected to ramp substantially in the next 3 quarters. In terms of P&E additions, we reported $34 million or 9% of revenue in Q1. We expect that our spend will significantly increase throughout the rest of 2021 due in large part to timing of our integration projects and new builds.

VTR is highlighted in the fourth column. We reported Q1 revenue of $210 million in adjusted OIBDA of $71 million, reflecting rebased declines of 8% and 20%, respectively. A key driver is the full year carryover impact from the subscriber losses we experienced, particularly in the second half of last year, which will impact our comparables in 2021. Additionally, the intense competitive landscape is negatively impacting ARPU level. Besides the flow-through impact of revenue declines, certain of our costs remain elevated due to high levels of customer activity. However, we continue to work on reducing our fixed costs and address the labor component through a restructuring late in Q1. P&E additions were $47 million or 22% of revenue, including over 75,000 new homes, an increase of 160% over last year's Q1. Finishing with Cabletica in Costa Rica. Obviously, post completion of the Telefónica acquisition, this business will be much larger. But on a stand-alone basis, Cabletica reported revenue of $36 million and adjusted OIBDA of $14 million, with both metrics reflecting year-over-year rebased growth in the mid-teens. Our P&E additions were 20% of revenue and included over 5,000 new fiber homes constructed. This next slide will discuss the current status of our balance sheet and liquidity. At Q1, we reported $8.9 billion of total debt, $1.3 billion of cash and $1.2 billion of availability under our revolving credit line. We anticipate using approximately $200 million of our cash to fund our share of the equity component of the Telefónica Costa Rica purchase later this summer. In terms of leverage, we had consolidated gross leverage of 5x and net leverage of 4.3x. We were extremely active during March and successfully tapped the capital markets in 2 transactions, which further strengthened our balance sheet and reduced our borrowing costs. First, we issued $410 million of 8-year 4.375% senior secured notes at VTR. The proceeds were primarily used to repay VTR's 2023 term loans and repay a portion of VTR's 5.125% notes. Second, we raised $1.3 billion of debt in Puerto Rico, and we paid our existing $1 billion term loan. We issued $820 million of 8-year senior secured notes at 5.125%, over 150 basis points better than our funding for the acquisition 18 months ago. And we issued a new $500 million term loan at LIBOR plus 3.75%, which was 125 basis points tighter than our repay term loan. As part of this refinancing, we raised $250 million of incremental capital. Furthermore, as a result of these 2 opportunistic refis, our average debt tenor improved with over 80% of our debt now due in 2027 or later as the bottom right chart highlights. Wrapping up on Slide 15. Our consolidated LLA results were ahead of our own expectations for the quarter. No doubt, Chile will remain challenging for us for the foreseeable future, as Balan discussed. But our other markets, especially Puerto Rico, are picking up the slack. As seen by our remarks today, the region in which we operate will continue to be adversely impacted by the global pandemic, and we expect economic recovery across many of our markets to take well beyond 2021. However, our strategy remains clear. We are investing now in our businesses, especially in fiber technology and capacity, driving fixed and mobile subscriber growth, focusing on digital transformation, cost control and business process efficiencies and working methodically on the Liberty Mobile integration. All of these actions will position us to capitalize on improving market conditions, and we remain confident in our ability to deliver positive year-over-year revenue and adjusted OIBDA rebased growth and meet our CapEx and free cash flow guidance targets. With that, operator, we are ready to take questions.

[Operator]

[Operator Instructions] We'll take our first question from Soomit Datta, New Street Research.

[Soomit Datta, analyst]

Two or three quick questions, please. Just on subsea cable, first of all. Is there an update at all on a monetization process? You suggested you were still beginning to look into that. But the full year, I just wondered if there was any kind of update there, please. Secondly, could you just refresh thinking on the potential buyback? Obviously, you're still looking to do $200 million of equity free cash flow this year. I just wanted to get a quick update on your thinking about cash returns, please. And then just finally, and I guess this might take a little bit longer, but just on Chile. I was just having a look at some of the price points in the market and, obviously, some of the peers are kind of quite cheap, and I think you mentioned that in the remarks. I just wondered really what really can you do when you have some very kind of aggressive cheap competition coming in? How can you differentiate yourself? It's difficult as the kind of incumbent operator to defend against that. But I'd love to hear a little bit more about what you can do against some of those very aggressive price points.

[Balan Nair, executive]

So let me address your 3 questions. Subsea cable, we've been doing a lot of work in the last couple of months -- couple, 3 months, in separating that business out throughout both legally, financially, the accounts and trying to reallocate the cost and make sure that we have a clear line of sight into that as a stand-alone business. And my sense is that we'll be going through a bunch of different deliberations internally in our company on that. But clearly, from a sum-of-the-parts perspective, this asset is actually quite an amazing asset. And we'll come back to you and the larger investment community over the next few months on any strategic direction that's different than what we've kind of hinted at in the past. On the buybacks, as you know, the Board has approved our buyback process. And we did do some buybacks back in 2020, and we'll be kind of opportunistic in this matter if -- when we see -- if the equity trades off, we'll certainly jump in. But we remain opportunistic on that front. And on Chile, I think you read it right that this is a highly competitive market. I mean we've been in this market for a long time. And we've always had it very competitive. We used to be up against Claro, Movistar, Entel. And I think I've said it before many years ago -- a couple of years ago that we compete very fiercely against these other 3 folks. Now in the last 6 to 9 months, we've got more entrants coming into the market, and you saw that they will set even a wholesale regime, and pricing has been disrupted in that marketplace. And the way we look at this is, you look at your front book and your acquisition pricing, and then you look at what you have in your back book. And Vivek, who's our General Manager there, has been very actively looking at both and trying to normalize the front book and back book. Because clearly, when you look at the front book and you look at your gross adds, I mean our pricing is working. Now we do have some parts of our base that's still on some legacy pricing that we would eventually have to adjust, and we're not afraid to do that. So there's a lot of analysis that's going into pricing right now. I think we have a very competitive product. Like I said, our front book is working really well. Now since you asked the question on Chile, I'm going to ask our new General Manager in Chile, Vivek, who's been on the job here for the last few months now. And maybe he can share some of his perspective on that.

[Vivek Khemka, executive]

Yes. Thanks, Balan. Thanks, Soomit, for the question. Yes. I would say, as Balan pointed out, from a pricing standpoint, our Q1 of 2021 has been a really good gross add. So there's clear demand for our product. There's -- definitely market continues to grow, and that pricing is working. I think we just need to adjust some of the back book pricing and manage churn. I think you also asked how do we expect to compete in a market where pricing is so low. And I think the focus will be on product. Whether it is our network, our customer experience, our video product, our speed, that's basically the focus on how we're going to continue to compete in this market. And we do believe we have a very compelling product and an offering, a great footprint, and we passed more homes than any of our competitors do. So I think combined -- we combine all of that to continue to compete in this market in a really good way.

[Soomit Datta, analyst]

Sorry, and a quick -- that's super helpful. A very quick follow-up. May be sensitive, but can you give any sense as to the back book, front book differential? Is it kind of somewhat extreme? Or is it just need a bit of tweaking?

[Balan Nair, executive]

It's not extreme at all. As a matter of fact, I'd say, just around one number, but more than 60% of back book is already close to our front book. And then the remaining one is the gap that's actually not that wide.

[Operator]

[Operator Instructions] We'll take our next question from James Ratcliffe with Evercore ISI.

[James Ratcliffe, analyst]

Two, if I could. First of all, to follow up on Chile. Can you just talk about the status of the VTR brand at this point? And to what degree the COVID experience has impacted that in your relative brand position versus other providers and how you rebuild that advantage? And secondly, any thoughts regarding the restructuring at Televisa and the potential appeal of the Mexican market, knowing that your Chairman sits in the Televisa Board? So I'm just curious how that could -- that market could potentially fit into your thinking about footprint expansion.

[Balan Nair, executive]

Sure. Let me answer the Televisa one first, and then I'll pass it on to Vivek on the VTR brand. Really on Televisa, apparently, we're close, of course, to the Group Televisa and Alfonso, who's the CEO there, sits on our Board. And -- but they did a really amazing transformational deal themselves. And then what's in the future? I think there's lots of speculation. But right now, our focus is running our business. And that's how we're looking at it. So Vivek, you want to answer the VTR brand?

[Vivek Khemka, executive]

Yes. First, VTR had a very good brand in Chile over the years. We did have a little bit of a brand impairment last year given our network issues. But when I look at relative brand impairment compared to all of the other providers, I think we are roughly still in the same boat as an industry, and we all have work to do to improve our brand. So we have to reposition our brand, and I think we'll do that with our product and our service. And I don't think it's insurmountable to get back to our brand position that we had before.

[Operator]

That will conclude today's question-and-answer session. I'd like to hand back to Balan Nair for any additional or closing remarks.

[Balan Nair, executive]

Well, let me end by saying this. One, we feel really good about this year. We realized the challenge in Chile, and -- but we're not afraid of it, and we're going to take it on straight on. And if I look at the rest of our business, I feel really optimistic about the rest of the business and even more optimistic about the combination of mobile and fixed in Costa Rica. So it is going to be a very good year. And I do thank all of you for your support.

[Operator]

Ladies and gentlemen, this concludes Liberty Latin America's First Quarter 2021 Investor Call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Latin America's website at www.lla.com. There you can also find a copy of today's presentation.