Millicom International Cellular SA
NASDAQ:TIGO
Earnings Call Analysis
Q3-2023 Analysis
Millicom International Cellular SA
In the third quarter, we've seen general economic resilience in our markets, with inflation leveling off to about 4% in most areas but persisting in the double digits in places like Colombia. Positive economic growth is projected in several countries. Our service revenue increased to $1.32 billion, a 3.2% rise on a reported basis, with favorable foreign exchange trends contributing to this growth for the first time in over a year, largely thanks to the Colombian peso. Excluding FX, organic growth was 1.8%. Mobile business drove nearly all of the growth, while fixed businesses remained flat, aligning with our strategic focus on mobile. Most countries showed positive service revenue growth, with Colombia and Panama both displaying low single-digit growth.
EBITDA came in at $533 million, a slight decrease of 1.2% compared to last year's $539 million. However, after adjusting for FX and various one-time items, we would have seen a 2.6% growth in EBITDA. This quarter saw a $22 million severance for project Everest and an $11 million adverse legal ruling in Colombia. Without these and other one-offs, EBITDA showed growth, particularly notable in Colombia, with an outstanding 9.1% increase. Our margins have been expanding, and project Everest is expected to play a significant role in further margin improvement. We also anticipate that Phase 1 of project Everest will deliver $100 million in savings by the end of 2024, with an expectation to achieve more than 75% of the savings by the end of 2023. Phase 2 is aimed to bring about $35 million in additional savings.
Our capital expenditure (CapEx) has been reduced by about $150 million from last year as we moved from expansion to efficiency. However, upcoming investments in our networks to leverage new spectrum rights and other enhancements may lead to some increase in CapEx. Net debt fell by $74 million to just over $6 billion, and we're making strides to improve equity free cash flow, including working capital benefits and other operational efficiencies that contributed to solid performance this quarter. Equity free cash flow in particular saw a robust quarter, but we caution that Q4 will differ due to spectrum costs, with higher expenses expected.
We're strategically cutting costs with project Everest, ensuring that we do not impact areas critical for long-term revenue. Our severance costs were around $22 million this quarter, and we project that Q4 will also see several tens of millions in severance costs as we streamline our operations. Nevertheless, we remain focused on maintaining quality customer service and sustaining growth. Our efforts are surgical and include a thorough payback analysis to ensure we're investing efficiently towards future gains.
Looking ahead, we are preparing for commercial activities that capitalize on our improved network and spectrum capabilities. In Guatemala, we've successfully established market leadership and equalized spectrum positions, setting the stage for optimistic projections. Finally, all our efforts are directed towards a singular goal: making 2024 our year of strongest natural delivery, underpinning our focus on long-term, sustainable growth.
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Hello, everyone. Thanks for taking the time to connect to our third quarter 2023 Results Conference Call. This event is being recorded. Our speakers today will be our CEO, Mauricio Ramos; our CFO, Sheldon Bruha, and our President and COO, Maxime Lombardini. And following their prepared remarks, we'll have a Q&A session. By now, you should have received a copy of our earnings release, which is available on our website, along with the slides that we will be referencing during today's presentation. Now if you 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 results. We will also be referring to many non-IFRS metrics throughout this presentation, and we define these metrics on Slide 3, where you can also find reconciliation tables in the back of our earnings release and on our website. With those disclaimers out of the way, let me turn the call over to our CEO, Mauricio Ramos.
Good morning and good afternoon, everyone. Thanks for joining us today. As usual, I will go over the highlights of the quarter, and share and we will discuss the financials. And finally, Maxime, our new President and CEO, will say a few words before we take your questions. Let's start on Slide 5 with a recap of our 4 key priorities for 2023 and our progress to date. I will go into more detail on each of these points in the next several slides, but here are the key highlights. First, at the beginning of the year, we set out to dramatically improve the profitability of our operation in Colombia by simplifying the business by bringing increased discipline on capital allocation and around pricing for our services. You can see the results of these efforts starting to pay off in this third quarter. Our quarter in Colombia had very strong EBITDA and OCF growth.And we're not done yet. We have now agreed with our partner to inject additional equity capital into the business in Colombia, so we can focus now on executing on the rest of the plan, which includes continued mobile growth, further cost discipline and as you know, some much needed inorganic solutions. Second, in Guatemala, we are creating the conditions for a healthy and very sustainable long-term industry structure. In the last 6 months, we took part in 2 transparent and successful spectrum auctions in which both players were able to acquire all of the spectrum that was offered by the government. These were the country's 2 first auctions in more than 15 years. As a result, both competitors now have similar and much larger amounts of spectrum. We think the conditions are now set to return to a more rational pricing environment. Third, we continue to improve our operational efficiency across the business more than ever before. We're simplifying product offerings and operations. We are digitalizing processes. We are reducing headcount, and we are automating platforms. And across the board, we're driving new opportunities to further reduce costs and increase cash flow. During Q3, we began to implement Phase II of project average, which we spoke about last quarter. We expect this Phase II to significantly increase the overall savings we can expect from project Everest overall. Fourth and finally, we have continued to make great progress towards carving out Lat our tower portfolio. Earlier this month, we began transferring assets to the new legal entities. We're now preparing to launch the monetization process. So, let's review each of these points in more detail beginning with Colombia on Slide 6. As most of you know by now, our mobile business has been growing rapidly since we acquired critical spectrum in the 700-megahertz band in 2020. Back then, we embarked on a multiyear plan to expand our mobile network and to extend the reach of our commercial distribution. Since then, we have steadily gained market share, especially in the postpaid segment, where we have doubled our customer base since acquiring the spectrum. A shift in mix towards postpaid has been lifting ARPU and driving mobile service revenues, which increased 8% this Q3. The scale we're gaining in our mobile business, combined with efficiencies from Project Everest, drove EBITDA margin to a record this quarter, as you can see on the middle chart. EBITDA grew almost 10% in the quarter and by close to 20% if we exclude the one-offs. We expect that Phase II of Everest will got further margin expansion going forward. And we are converting that EBITDA growth into operating cash flow growth, as you can see on the chart on the right.OCF in Colombia is also benefiting from lower levels of capital investment in our own business. This is largely because we're choosing to remain disciplined on price. We're charging installation fees and implementing price increases and stay in the course even when competitors don't follow. And even if this means sacrificing subscriber volume but gaining profitability. So, we have told you many times, a significant portion of our CapEx is variable in nature is directly linked to the number of new customers we signed up, given the high cost of equipment that we installed in their homes. So, with higher prices, we're selling, yes, but we're also investing less and attaining a better return on capital. Going forward, we expect that our Colombia operation can continue to sustain lower levels of capital intensity than in the past for 2 reasons.One, because our 700-megahertz network deployment is now largely complete. And two, because of the very material synergies we expect from the combination of our mobile network and spectrum with those of Telefonica. As you may have seen, this transaction has now receivable to approval just a couple of weeks ago. Finally, as you may have heard, we recently agreed with a partner to be invest approximately $75 million of equity into our Colombia operation. Despite all the noise that you may have heard on this topic, this equity injection had been planned for quite some time. And its key purpose is to provide long-term funding for all the long-term investments that we have made in the business over the past several years. There's tons and tons of work to still do in Colombia, no doubt, but we made real good, good progress this quarter. Now please turn to Slide 7 to look at Guatemala. As you know, competition has been intense in the prepaid mobile market since the end of the pandemic in Guatemala. As you also know, we took a variety of important strategic steps to shield our customer base and strengthen our market leadership. It remains convinced that this is the right strategy to preserve and grow the long-term value of our business. And we see signs already that this strategy is beginning to pay off. The chart on the left shows the evolution of our male customer base and market share in Guatemala over the last 4 years. As you can see, we picked up quite a bit of market share during the pandemic. We've been able to hold on to these gains and to our customer base even as our competitor began offering access to the most popular social media apps for free to prepaid customers. No doubt, defending our customer base, which is definitely the right thing to do for the long run, has had an impact on ARPU, service revenue and the all profitability of the business. You can see this on the chart on the right, showing the evolution of our total service revenue growth in Guatemala over the last several quarters, yet 2 important and positive events are relevant in the last few months in Guatemala. One after consecutive spectrum auctions, spectrum positions in the marketplace have been increased and stabilized. We no longer have a spectrum deficiency or a spectrum disadvantage in Guatemala. This has an important positive effect on our network efficiency and costs as well as in our service and product offerings.And two, we took some price increases in prepaid in mid-September. As a result, the revenue growth remained negative in Q3, there were clear signs of stabilization compared to Q2, and we're encouraged by the trends we saw during the quarter. It's too early to tell whether this price increase will stick for the long run, but we are encouraged by the response at our point of sales, and we're optimistic. And we do see the makings of a healthier industry structure in the making in Guatemala as we had anticipated earlier. We want to remain cautious on the commercial outlook and also flag that there have been some mass protests on the street to Guatemala in the presidential elections a couple of months ago. And this may carry on until the new President takes office in January. So, we remain cautiously optimistic in Guatemala.Now let's go to Slide 8 to discuss product efforts. As many of you will recall, we began implementing our efficiency program earlier this year, and we communicated an ambition of achieving run rate savings of more than $100 million by year-end 2024. We are on track to achieve those savings. In addition, early in the summer, we began working on Phase II of the program, as we mentioned on our Q2 call. Indeed, in September, we began implementing important headcount reductions and new cost-saving initiatives, starting with our centralized functions. We expect this first phase for Phase II to produce approximately $35 million in additional savings on top of the initial $100 million target. We also expect to finalize the scoping for the full Phase II, along with our annual budget plan. So, our ambition is actually much broader, and we have already identified very meaningful opportunities that we expect to implement mostly before year-end. Sheldon will give you additional details about the cost of the program in a minute. On Slide 9, let's review our progress on Latin. Latin is already a separate company and a separate brand. New legal entities have now been created in every country. Earlier this month, we started transferring to our assets from Tigo to Latin, and we expect to complete this process in November. This means that we're ready now to launch a process to monetize this important infrastructure asset in Q4. Yes, some time is coming up soon. As we have said in the past, we have certain preferences on the transaction that we envision will best maximize value. But as we have also said, we keep other options open until we can evaluate and compare the options that are brought to the table. So, stay tuned, opening date is indeed coming soon. With that, I will hand over to Sheldon to discuss the financials for the quarter.
Thank you, Mauricio. Before I review the financials, let me quickly recap the macro context on Slide 11. As you can see on the slide, inflation across most of our markets has followed closely the trend we have seen in the U.S. with inflation back to a more reasonable level of around 4%, with the exception of Colombia, where inflation is still in the double digits. The good news, though, is that the Colombian pace was strengthened significantly this year. And in fact, you will see that FX was a smoke tailwind for us during Q3. And in terms of economic activity, our markets are generally proving quite resilient with some countries like Panama and Paraguay expected to grow real GDP in the range of 4% to 5% this year. Now let's look at our Q3 performance, beginning on Slide 12. Service revenue was $1.32 billion in the quarter, which is up 3.2% on a reported basis from $1.28 billion a year ago. For the first time more than a year, our service revenues benefited from favorable FX trends this quarter, primarily due to the Colombian peso, as I just mentioned. Excluding the impact of FX, organic growth was 1.8% in the third quarter, very similar growth in Q2. Our mobile business continues to perform well and accounted for nearly all of the growth in the quarter. Meanwhile, our fixed businesses were flat, and this is consistent with our broader capital allocation strategy over the past year, as I'll discuss later. Going down further on Slide 13 to the service revenue by country. As you can see, most of the countries experienced positive service revenue growth in the quarter, with 2 exceptions for Guatemala, which Mauricio already discussed and Bolivia, which was down less than 1% in Q3. This is a significant improvement for Bolivia compared to last quarter as we began to lap the regulatory changes that have impacted results since August of 2022. Our mobile business had positive growth in the quarter, and the decline is coming from our home business, where we are choosing to be very disciplined on price to drive better cash flow from this market given the more volatile macro backdrop in this country. Colombia and Panama had low single-digit growth, and this is largely the result of our commercial and capital allocation decisions to focus on mobile lease entries. On the positive side, we've had solid mid-single-digit growth in the 4 countries on the bottom part of this page with all 3 business units contributing to growth in these countries. Turning to Slide 14. EBITDA of $533 million was down 1.2% from $539 million from a year earlier. This is a cleaner quarter than first half of the year, but there are still a few items to unpick here to provide a fuller picture of the performance. First, 4x, primarily from Colombia, provided a small tailwind of about $4 million this quarter. Second, we had 2 large one-offs. The first was $22 million for severance related to Project Everest, which I'll talk about later. The second one was for $11 million and was the result of an adverse legal ruling in Colombia. Excluding FX and these one-offs in this quarter as well as another in Q3 of last year, EBITDA would have grown 2.6% during the quarter with positive growth in most countries, as you can see on Slide 15. On this page, you can see that EBITDA has a similar story as our service revenue growth with positive growth everywhere except Guatemala and Bolivia. As Mauricio discussed previously, we are seeing some signs of stabilization in Guatemala. EBITDA declined 3% year-over-year, but it has been stable at $199 million for the third consecutive quarter. Bolivia was down 2.2%. This is a big improvement from the last 3 quarters as we began to lap the regulatory change that went into effect in August of last year, and we've seen improvement in our mobile business there. On the positive side, Colombia stood out with EBITDA growth of 9.1% and almost 20%, excluding the legal one-offs. As Marico mentioned already, our margins have been expanding over the past few years, and we think there is still more upside here, thanks to Project Everest and other initiatives that we have been implementing in order to drive better profitability and cash flow from our business in this country. Panama grew 2%, which is consistent with the 1.4% service revenue growth we saw in the quarter. Remember also that we have made investments in our sports content offering that hurt our EBITDA growth this year, but that investment strengthens our home business and help us maintain our leading market share in this business. You will also notice a lower margin in the quarter, and this is due to higher equipment sales related to the large B2B contract that we expect will start generating service revenue beginning in Q4. Paraguay had impressed EBITDA growth of 8.1% and it was 11.6%, excluding the Everest related severance. The strong performance is consistent with the strong service determine growth we are seeing. In El Salvador, EBITDA growth of 16.1% benefited from a lower than usual level of bad debt that flatted performance this quarter. On a year-to-date basis, EBITDA is up just under 7%, which is more consistent with the single-digit service revenue growth in that country. [indiscernible] EBITDA grew 2.6% as our business and the broader economy continued to grow despite the volatile plica environment, and that is largely thanks to remittances for the United States, which continue to grow very rapidly. Finally, Honduras, which we do not consolidate, had another strong quarter with growth of 7.9%, reflecting the improved revenue trends during the quarter.Now please turn to Slide 16 to review our efficiency program project Everest. Mauricio already gave you the highlights, but I want to help unpack the various puts and takes. In terms of savings, we are accelerating our plans. For Phase I, we remain on track to deliver more than $100 million by year-end 2024 and are, in fact, accelerating our plans. On a run rate basis, we now expect to achieve more than 75% of these savings by end of 2023. This is up from our previous estimate of more than 50%. As Mauricio told you, we have decided to significantly expand the scope of the project, which we refer to as Phase II.During the quarter, we incurred $22 million of implementation costs. $19 million of this was related to new actions and initiatives we took that were concentrated in our headquarters and other centrally managed and shared service activities, including approximately 30% of our Miami-based population. This will result in additional run rate savings of approximately $35 million above and beyond the Phase I savings of $100 million. In total, since the beginning of this year, we will have reduced our Miami-based population by approximately 40% through a number of separate restructuring decisions. Over the next several weeks, we'll be finalizing our 2024 budget, and we expect to take additional measures across all our geographies as part of that process, where we expect additional severance charges to drive additional savings for the business. We will provide further information at our full year results in February. Now please turn to Slide 17. In addition to organizational savings, we've also had significant savings in capital expenditures this year. Through the first 9 months, our CapEx spend is about $150 million lower than prior year. I've mentioned in prior calls, a source of these savings, which is a combination of 3 key components of roughly equal size. Firstly, earlier this year, we conducted 3-year renewals with our largest mobile vendors, where we received multiyear discounts. As you can see on the left-hand side of this chart, our level of mobile build activity has remained constant, while we are also able to absorb the impact of activating the new 700 and 2,600-megahertz spectrum we obtained in Guatemala. Secondly, we've reduced our home footprint expansion in light of tougher competitive and macro environment in Colombia and Bolivia in particular. And lastly, home installations are down, again, primarily in Colombia and Bolivia as we are being more disciplined in pricing and promotions given the more challenging environments there. On top of this, we continue to scrutinize all other CapEx spending and are finding other opportunities to lower spend and contribute to this year-on-year savings. Now please turn to Slide 18 for our usual net debt bridge. Net debt declined $74 million in the quarter to just over $6 billion. Net debt to EBITDA after leases was 3.32x. That's down from 3.34x at Q2. If we include lease obligations of just over $1 billion, our leverage was 3.34x. The decline of net debt during the quarter was primarily due to strong equity free cash flow of $100 million, which was partially up by the ForEx impact from the translation of local currency debt as the Colombian peso strengthen this quarter. Regarding our equity free cash flow, I want to remind you that there is a lot of seasonality here. Q1 is usually negative, and then we see improving cans throughout the year. The strong cash flow in Q3 reflects typical seasonal patterns as well as some of the benefits of Project Everest and of our capital allocation decisions over the past year. Looking ahead to Q4, which is usually the strongest quarter of the year for equity free cash flow, I want to caution you that this year should be a bit different. This is because we're expecting more than $100 million of spectrum payments in Q4. This is for the renewal of the 1,900-megahertz spectrum in Colombia and the acquisition of the new spectrum of 700-megahertz band in Guatemala, items that we flagged for you when we revised our equity free cash flow targets in June. Also, in Q4, we have to pay a lot of the severance that we booked in Q3 and that we expect to book in Q4.Let me hand the call over to Maxime, who is joining us for the first time on this earnings call.
Thank you, Sheldon. It is my pleasure to be here today. As you may know, I joined the company on the 1st of September, so a little less than 2 months ago. At this time of year, the company begins planning the budget for next year, and this has given me the perfect opportunity to interact with each of the country teams and with the leadership teams in Miami and Luxembourg. I've also had the opportunity to travel in our 3 biggest countries of operations, Guatemala, Colombia and Panama. And I have more visits planned before year-end. As you can imagine, I am still learning about the company. But today, I can share some of my first impressions on my priorities. Firstly, Tigo is an incredible company with a strong brand and market leadership position, run by a talented team, a team with strong culture and help attitude [indiscernible] retake on any challenge when the target is clear. But we do business in countries with volatile macroeconomic and political environments, we do not generate enough cash. This means that we must derisk the company by operating efficiently and with lower leverage. And we must ensure that the business can generate much higher equity free cash flow every year. With that in mind, one of my first priorities has been to significantly expand the Push on costs. We started immediately in September by decreasing drastically HQ costs in Miami. And currently, as part of the budget process, I am challenging each country team on their costs and CapEx.On a day-to-day basis, I am personally reviewing each purchase order and every dollar that we spend. So short term, a strong focus on cost control is the clear priority. And as we strive to deliver on the free cash flow target that we are reiterating today, I will be equally focused on making sure that we capture the long-term revenue growth opportunity with the right investments that are necessary to provide the excellent experience that Tigo customers have come to expect. I will report back to you next quarter on our progress with more details.
Thank you, Maxime. With that, we're going to now go to the Q&A session. [Operator Instructions]. We'll take the first question from Oscar Rundqvuist from ABG.
Just 2 questions, if that's okay, please. Just first one on Guatemala. You say that signs of improvement or an improvement market is visible. So how should we think about timing? Your main net at around 1% to 2% decline in service revenue last few quarters. So just wanted to get a sense of if you should set that improving already in Q4 or if you expect that to take a bit longer. My second question is just CapEx. I think you have been around $180 million each quarter for the last 3 ones. So, you say that you're holding back a bit on home and also you are looking at efficiencies. So, just the 180 figure over the last 3 quarters, I guess that's a bit low maybe on the run rate on an annualized basis. Just if you could elaborate on the timing or any quantification on the new run rate, please?
I'll take the first one on Guate timing, et cetera, in the market, and I'll give showed a little bit of time to prepare some numbers for you on the CapEx question. On what I think we've pleaded really, really well. And the timing, which is the core of your question, is happening pretty much as we expected it would happen. And with that, I'll give you some color. As you recall, over the last year or so, we faced a tremendous amount of competitive pressure on prepaid. We set out to basically hold our market share position, a very strong market share position, and we've been able to do that not without some pain on the revenue, for sure, but certainly holding on to our market share and our subscriber base.And we did that knowing that we could and we would revamp, re-stabilize both the spectrum position and the network position. And we have done that. That was the long game. That was the long strategy that we were playing. And over the course of the quarters this year, we have seen that play out to consecutive spectrum auctions. We no longer have any network disadvantage. We no longer have any service disadvantage. We no longer have any spectrum disadvantage. So quite frankly, we were playing the long it has worked out as we expected it would. Subsequently to that, we took a price increase on prepaid to a percentage of the prepaid base in mid-to late September. So, you actually see it in the quarterly numbers yet. But as we look forward, this was a timing that we were expecting strong network position, strong spectrum position so that we could now focus on the commercial actions. So far, as I said, we are cautiously optimistic cannot guarantee the price increases were stick, but we're certainly playing a cautious, well-played game here. So, the answer to your question is things have been laying out as we expected it would, that we wanted to play them out. We're also just mathematically lapping pretty much the initial effects of the push on competition. But we are playing the long game Oscar. And that's what we use the term cautiously optimistic. Things are better in the market, or rushing the market as compared to what they were before. But we're playing the lead, and we're paying a very strategic game here. So, we're cautiously optimistic.Going into Q4, just to manage your expectations. Remember, we had a very good Q4 last year because of the World Cup that we had. So, we're not going to have that this year. So again, long term means Q4 will have some difficult comps vis-a-vis the world company. [indiscernible] anything you guys?
I think, Oscar, we should also just -- that there's been some significant protests in the street in Guatemala, these last several weeks since the presidential election. So that has created a little bit of a disruption in terms of economic activity, but new President takes office in early January. So that could continue for some time, but still a little too early to know what kind of impact that might have. Yes. Guatemala has a very lengthy time frame between elections and actual handover is over 6 months. So that's created a little bit of turmoil there. So, come January, I hope I think will be only quite side economically. On the CapEx question you had, look, I mentioned a lot in the presentation around what was driving some of the reductions in CapEx this year.Really around basically majority of CapEx decline really related to 2 markets, Colombia and Bolivia where I think it's absolutely appropriate to some of the steps were taken in terms of discipline around our home spend given the situations in both those countries. But look, going forward, I would just say, if you would have on that team's comments, in addition to the things that's been happening this year, we are being very disciplined in scrutinizing CapEx spend across the business. I would not expect CapEx spend to be higher than what you're seeing right now as we go into 2024. I would expect us to be slightly lower than those levels on a going-forward basis. So that's how you're asking where we see the trending is going. It's levels lower than what you're seeing currently.
Next, we're going to go to Phani Kanumuri from HSBC.
My first question is on Colombia. You seem to have had a good margin accretion this quarter. How sustainable is the margin accretion? And once you complete the project Everest, where do we expect the margins to trend in Colombia? And in the second question is again, Colombia. You had a recent infusion into Colombia. And do you see any potential equity infusions in 2024 or 2025 into Colombia?
I'll take the first one and a little bit of the second one and has always shown a little bit of time to get the numbers right. So, the things funny that have been driving our record margins in Colombia this quarter are a combination of activities. First, as you recall, there was a ton of network investment and commercial expansion that happened in the years prior right after we had bought the 700-megahertz spectrum. That's behind us. So now we are more on the efficiency phase of those network investments and commercial expansions. The second element is, as you know, mobile is again more scale, and we have been gaining scale, particularly in postpaid in Colombia. So obviously, that helps the margin on a fixed power base business.The third element in Colombia is project average, Phase I of Project Everest we started early on this year. And as we've been talking, there's a Phase II that will help contain sustainability of that margin expansion going forward. The fourth element is that there's been -- and I use these words with a degree of cautiousness, more price rationality in the market in the last few quarters. And particularly, we've been able to sustain or will drive service revenue in postpaid, both on volume and ARPU as well. And also, we've been very, very disciplined on the businesses we are doing during the call, keeping prices are charging insulation and it need to be sacrificed involving more profitability. And that's what you see in results.Going forward, profitability will also be enhanced by the mobile network and the spectrum contribution agreement that we talked about in the prior quarter and this quarter. And all of this combined lead to the one single focus that we have in Colombia, which is to make Colombia equity free cash flow positive. As you recall me saying a number of times, is the only operation in the portfolio that has not been equity free cash flow, and our drive has been to make up business equity free cash flow and I'll tell you the risk of not giving you the specifics that we're really focused on making that happen as soon as possible. And that gives you an idea as to why we're driving hard the expectation of not having any additional equity contribution going forward. And with that, I'll hand it over to Sheldon.
Yes, no Mauricio you really hit the key points. I think EBITDA margins are important metrics to be tracking. But mostly more importantly is it's the equity free cash flow performance we're trying to drive out of that business and getting that business to equity free cash flow breakeven first initially and ultimately free cash flow positive. And of course, once that's achieved, that's going to start to address your second question about what capital we needed from the shareholders. The answer would be no, once we get to that business to be equity free cash flow positive. So that's where the focus is. Look, I think we're going to make a lot of progress on that in 2028 in terms of been effective, and that's where the focus is right now for that business.
So, in the base case scenario, when do you expect to achieve a breakeven at least a broad time line for Colombia?
There's this thing that happens on a yearly basis called the budget. And that's all I'll say. That's a non-answer, Phani. As soon as we possibly can. There's nothing -- you can just imagine how focus on this finding. As soon as we can everything in Colombia, again, back to the Guatemala question [indiscernible]. This again came with a simple objective, which is to get Colombia equity positive as soon as possible. And just about every action has been driven in that direction. We put average Phase I in Colombia early this year. We're obviously focused on Colombia for Phase II of Everest. And all you can take away from without forcing us into specifics on guidance is that we're very focused on [indiscernible] the equity free cash flow.
Next, we're going to go to Marcelo Santos from JPMorgan & Marcelo.
The first question is just if you had any update on Tigo Money strategic alternatives. So, you disclosed that in the Investor Day. So, I just want to know how this is going. And the second question is actually Maxime mentioned that you're renting the right investments to capture the long-term revenue growth opportunities. Could you expand a bit on what do you see as the main long-term revenue growth opportunities? If you could give some color would be great.
I'll take the first one and give Maxim a little bit of time into prepare a couple brilliant ideas there for sure. So, listen, on TiVo money, we continue to grow the business quite positively. Geographically, as you may recall, we're very strong in Paraguay, very strong in Bolivia. We've relaunched this year in Guatemala. Tigo money existed in Guatemala but it didn't have the full of products in there. So, we launched in Guatemala. We've also attained licenses and launched in Panama, and we're happy with the progress that we made in that operationally. Our second area of focus is making sure that we complete the delivery and implementation of the full suite of the service offering. So, the wallet app, but also continue to increase the merchant community and also begin piloting which successfully delivering in Bolivia and also in Guatemala. And we continue to find very important ways of making the telecom business work really closely the fintech business in the eyes of the consumer, which we think is a win-win for everybody. And we're also now beyond this investment phase that we put for the last couple of years, very focused, again, going back to our cash flow entities for 2024 when making sure Tigo money is with all of these investments and launches behind it, OCF breakeven, and we're very happy with that result, which leaves us then with plenty of flexibility to then figure out in these very difficult fintech market, Marcelo, when is the best time to maximize and how is the best time to maximize the value of data and that is the punchline to your question. And Maxim, shorthand for you.
I joined the company something like 7 weeks ago, so it's a bit early to describe the full strategy for the future. What I wanted to say with a few words about the future is that the future of the company cannot be only on cost cutting. Cost continues today a clear need to be back to cash generation, but that's not the whole project for the company. So, we are working a lot also on CapEx optimization, meaning where to invest properly in mobile, densification, coverage and more evenly probably where to invest and what to do on home where you know the margins are a bit stretched. So those, I would say, will probably comment a bit more in the next quarter, but today, it's a bit too early. And then there are many, many other options within each one of the geography where the home business, as you can see, there are many networks over building and probably intelligent solution that could be worked on.
So next, we're going to go to Stefan Gauffin of DNB.
So a couple of questions. First, on the network JV with Telefonica in Colombia, if you can somehow quantify what kind of savings you could get from that on both OpEx and CapEx and when those can materialize? And secondly, a question for Maxime, you mentioned in your remarks that given volatility in these markets, you believe the leverage is a bit high, which I think all of us agree to. But now given the strategic initiatives with the sale of Latin, et cetera. So, my question is, where would you see the bridge to go to be comfortable? And if it's totally preferred to pay down debt rather than have some shareholder remuneration from sale of Latin, et cetera.
I’ll take the first one on the network JV briefly, and then I'll hand over the second one if it’s okay with you to our CFO, Sheldon, so that we provide you with the full institutional. I got to do this in my role as I can see your smile. As interim care so that we provide you with the full institutional view on leverage from the Board. On the network JV, I think the 2 key areas without our ability to give you specific details. Obviously, there is the OpEx and CapEx savings of running a single net. That's the nature of a network JV on bomb mobile. In addition to that, there is the synergies of branding a single pool of spectrum. And this is important, particularly in Colombia because the cost of spectrum in Colombia is significantly higher than in most of regions. So, the ability to run not only a single network from the CapEx and OpEx side but also fully your network is an important part of the savings from that JV. And on the question of leverage, you will be happily reassured that we have coincidence on our targets institutionally.Sheldon.
Look, on leverage, I think it’s very consistent with what we said before, Stefan on this point in our intermediate target remains 2.5x EBITDA. We haven't made the progress towards that objective this year for a rival reason. Some of them were in our control, some that they weren't, but we've got several one-offs this period, things that were unusualized but also things that we're doing in driving the business around the severance costs. We see us making a lot of progress next year on this leverage reduction. next year is going to be a big year for us for cash flow generation. As we said, it's going to be the highest of the 3 years in our 3-year targets in terms of what we're going to be delivering. It's also going to be cleaner of a lot of the one-off charges we've been taking particularly this year with regard to the severance charges. I will point out, we're expecting as you've heard in my prepared remarks, more severance charges in Q4 as we complete the budgeting processes and go to the country. So, there will be sizable charges again, which the benefits will be accruing in 2024. And currently, this year, there's kind of a lot of unusualness a little bit around FX, that's also ticked our leverage up a bit higher. In particular, Colombia has appreciated from a currency standpoint. Now a lot of that appreciation has happened more recently. And so, in terms of the benefit on EBITDA, that hasn't really flowed through our LTM EBITDA last 12 months of a day, but it has hit us pretty quickly on marking to market the Colombian debt on a higher basis on the debt situation. So that should roll off assuming that trends remain constant on the currency, that should also benefit us into 2024. So, I think we're going to be making progress on the deleveraging certainly in 2024. We told you on a previous call that we expect to get to that 2.5x level by 2026, 1 year later than previous given some of the adjustments we've made on our equity free cash flow outlook. But look, we're going to make a lot of process on that and we’re seeing meaningful progress in 2024. As it pertains Latin I think we're going to pull it off and talking about proceeds of Latin until we have proceeds from Latin. So, but we're launching a process and we have to see how that process evolves in terms of what we have in part achieve and then we'll assess the situation at that point in time, I think, in terms of what's the best way to allocate those proceeds.
Yes, agree. Better to wait until the bears shot before we sell the skin.
That sound like the standee way of saying it's Stefan. The priority remains to reduce leverage. That's the short answer.
So next, we'll go to Eduardo [indiscernible] from JPMorgan.
Part of my question was if I want to follow up on the capital location strategies. Moody's recently put you on a negative watch basically because of Chinese in Colombia, but also because of high leverage and governance concerns potentially having more aggressive financial policies. You partly addressed that, but just on what your plans is to, to address those concerns about the downgrade and would be in Colombia in terms of the 5G auction. Obviously, I'm just curious about how you will translate the EBITDA performance in cash flow and how you expect spectrum costs and all those items to behave going forward? If you see any opportunities, you talked about inorganic solutions. So curious if you can give any more color on that.
Listen, on the part of a lot of that has a little bit of the noise on Colombia, as you very well know, there was just a lot of noise there. But the reality is we came out of that process with a well-capitalized business, a business that has expanding margins, revenue growth, OCF growth and has, as we discuss earlier, a significant focus on driving the business towards being equity free flow positive as we can. So, I think there was a lot of noise there, but the reality is the business in Colombia is improving significantly at all that was including a strategic optionality going forward. And as that relates to the group that we just discussed, and I hand it over to Sheldon for additional, our focus remains on cash flow generation next year. As we have said a number of times, we'll repeat that today. We think 2024 is a year of our cash flow. And with that, I think we reiterate our focus on reducing leverage as we have done this a number of times. 5G in Colombia, we're reviewing the terms. They just came out last night. Obviously, we've been very involved in the process. We understand a lot of it. But I'd rather answer that question once we have full information on exactly what the details of that. It's an ongoing postseason. Those processes do tend to move around and shift around as they are being finalized with the authorities. Sheldon anything.
Not too much more to add, I think, in terms of the Moody's concerns that they're highlighted. I think are the exact items that we probably have as our 4 priorities in terms of what we're addressing as a company. So, look, we need to deliver stronger cash flow. And stronger deleveraging, we believe next year is going to be a big year for us on that front. And I think go a long way to testing a lot of things that you -- you guys have been highlighting good pieces when highlighting to us. So, I think we've highlighted exactly what we expect from a cash flow perspective and a deleveraging perspective. And I think now we just need to deliver on that and to address those issues.
Next up, I think we have Andre Tallis from UBS line.
Actually, I have 2 mains. The first one is more like on a cash flow basis, we saw positive contribution here of working capital to free cash flow in this quarter. Could you please give us a little more color on that? What has driven this positive impact and if we should expect the same trend to go in the following quarters? And the second question is regarding product time line here in the Guatemala business. So, when do you expect that to the spectrum capabilities that you now have will translate into better efficiency? And it could mean investments here in the country in the upcoming course no documents, I think.
I'll be brief on number two, and I'll give Sheldon a little bit of time to look at the numbers in detail. We've been working, as I said, for the long run, long game, as I described on the vapor question in Guatemala. So, we were reading out the network and getting ready for the use of the new spectrum pretty quickly. So, a lot of that has been done. And as a result of that, we have started to sequent commercial activities, as I said, on September 18. So now really, it comes down to the marketplace and stabilization of the commercial activities in the marketplace. And as I alluded also some of the political last few weeks, issue is also stabilized. So, it's less on the head work and is spectrum is and more about commercial stabilization going forward. And as I said earlier, we took prepaid price increase. We're optimistic about it, and we were confidently optimistic. That's the plan for that one. Sheldon.
Sure. On the epi free cash flow performance for this quarter. Look, you highlighted working and on the other side I think store performance across the board. OCF was a big contributor to us this quarter in terms of driving equity free cash flow. Taxes, I think, was a contributor for us in terms of driving free cash flow this quarter. Interest costs actually was not as we've been talking about just some of the higher interest rate environment in some of our countries. Working capital contributed as well. But to some degree, a couple of items I would highlight there for you though we took our severance provisions here about $22 million this quarter. That's going to be paid in future quarters. So that's probably -- that's one of the contributors to working capital benefit. The same on the goal of a provision we took in Colombia that was cash out at least this period. So that was also a contributor to working capital. We did have a large B2B project in Panama that benefited us a bit on working capital the timing of payments received versus payments going out to subcontractors and in some of the equipment providers who are providing some of the information or some the aspects of the project. So that benefited us a little bit as well on working capital. Those are probably the key items I would highlight. But look at because it was a good quarter overall from equity free cash flow. I was cautious in terms of making sure you have in terms of forward-looking, I did pull out and highlight a few items on a forward-looking basis on equity free cash flow, particularly spectrum in Q4, which is going to be a big uptick for us. We highlighted in June in terms of a full year perspective of higher spectrum costs this year, but particularly, it's going to be pronounced in Q4 for us this year on the spectrum cost as well as then just paying for some of the items that we booked here from a severance perspective this quarter as well as what we expect to be booking next quarter.
So next, we'll take our last question from Fredrik Lithell from Handelsbanken.
Maybe just a little bit of a housekeeping shot on you. I think you mentioned earlier about severance costs also in Q4. Was that correctly understood? Or did we see a peak here in Q3 on severance costs? That's the first one, really. The second is on the Everest 1, 2 optable #3 enlargement of that project as well. I'm just curious to get an elaboration on how deep you can cut in cost before it starts to hamper your ability to push growth at the same time. So, I'm just curious how you balance that going forward. So, you don't get poor scores on customer care or you're not setting up the next base station, whatever it might be. I'm just curious to have a reasoning around that balance would be interesting to hear.
I'll start with the second one. Obviously, Frederik we will be very, very careful, very, very pretentious. And obviously, we start with the areas that are less revenue generating and protect those definitely as part of the process. So, you can rest assured that we are surgical in our approach, but everything gets reviewed with a payback analysis and that we certainly protect the areas that are long-term revenue generating as part of the process. But there is room to be more and more efficient. The ambition on Everest was always significantly high, we're emboldened and supported by our new largest shareholder to take that opportunity. And as we've been discussing some of the markets that are part of your question, we should also highlight that part of the reason why we see a path to a better cash flow in many of those markets. It’s because we see significant efficiencies there at all levels really well. So that's the full answer to your question.
I would just add. I think in addition to that. I think that's cost savings, we're trying complexity out of the business and add [ hello ] which, I think, quite frankly, can be beneficial from a customer perspective as well as fewer product offerings, fewer couple of patients in terms of how you interact with us, et cetera. So, some of the savings actually, hopefully, will be -- I would expect be beneficial as well to the top line, not to cut -- if you're trying to purchase or are we cutting back in muscle out of the business, quite frankly, I think we're trying to improve the way we operate as a company. In terms of additional severance costs, yes, as I alluded to, we're going through our budgeting process right now.And as we've taken the actions on the headquarters this quarter in terms of the Phase II, vitalizing our plans for the countries here as we finalize budgeting and there will be charges here in Q4 related to that. We're not going to precise and guidance at this point in time, but it will be tens of millions of dollars of severance costs, I would expect in Q4. And we'll be giving you much more color on that once we kick our budging process here and at the full year results in February. And consistent with that project, you should assume that the $135 million number will also increase commensurately. I think that wraps up the Q&A session. Mauricio back to you.
I just want to give you a 30-second wrap-up to make sure that the big copies are clear, and they should be pretty obvious on our call today. Colombia is growing well and it's improving its profitability very quickly. It is now better capitalized, and we have received approval for merging our mobile network and our spectrum positions in Colombia. Armies of work in Colombia and that work is in progress. But we made a lot of progress this quarter, and we're heading in the right direction. As we alluded during the call, we had a clear objective ahead of us. In Guatemala, I was going to assume have heard us for a number of quarters.Our market leadership has been sustained. Spectrum positions have now been equalized. So, we not only have a spectrum or a network disadvantage and we're putting that to use. And there are initial signs of a healthy environment after we took some price increases in prepaid in mid-September. So, as I said, we're cautiously optimistic in Guatemala. And as you've heard, our cost savings and our ambitions on efficiency have been increased with the product Phase II of Project Everest. And most importantly, all of these efforts are aimed at a single thing which we have alluded to before, and that is to make 2024 for the year of our strongest cash flow delivery. So hopefully, you'll find your clear, and thank you for joining us today.