Yahoo Finance Liberty Latin America Ltd. (NASDAQ:LILA) Q1 2024 Earnings Call Transcript
Liberty Latin America Ltd. (NASDAQ:LILA) Q1 2024 Earnings Call Transcript May 8, 2024
Liberty Latin America Ltd. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 Daniel Neiva, VP, Chief Commercial Officer of Liberty Networks.
Daniel Neiva: Good morning, and welcome to Liberty Latin America's First Quarter 2024 Investor Call. At this time, all participants are in listen-only mode. Today's formal presentation materials can be found under the Investor Relations section of Liberty Latin America's website at www.lla.com. Following today's formal presentation, instructions will be given for a question and answer session. 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 this statement.
For more information, please refer to the risk factors discussed in Liberty Latin America's most recent filed annual report on Form 10-K and quarterly report on Form 10-Q along with associated press release. Liberty Latin America disclaims any obligation to update any forward-looking statements or information to reflect any change in its expectations or in the conditions on which such statements or information 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, which is accessible under the Investors section of our website. I would like now to turn the call over to our CEO, Mr. Balan Nair.
Balan Nair: Thank you, Daniel, and welcome everyone to Liberty Latin America's first quarter results presentation. I'll begin with our Group highlights and an overview of our operating results by reporting segment. Chris Noyes, our CFO, will then 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 invite them to contribute 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. Starting on Slide 4 and our highlights. We grew our high-speed Internet and postpaid mobile basis in the quarter, adding 45,000 subscribers in total.
Once again, we added broadband subscribers across all our reporting segments with particularly strong performance in Jamaica and Panama. In mobile, there was some impact from migration and ECF subscriber losses in Puerto Rico, which I will cover later, but this was more than offset by growth in Costa Rica where we recorded our best net adds for 2 years as well as strong performances in Panama and Jamaica. We reported adjusted OIBDA of $374 million in the quarter. This included double-digit growth in Panama and Costa Rica and high-single-digit growth in Cable & Wireless Caribbean, positioning us well to drive improved good growth in the second half of the year. In addition, performance in Puerto Rico is poised to improve both sequentially and year-over-year in the second half as well.
This reflects our comments of 2024 as a tale of 2 halves. We are seeing growth in nearly all our operations in the first half and in all operations in the second half. We continue to aggressively buyback our stock as we repurchases about 5% of our outstanding shares and a significant part of our outstanding 2024 convert. We intend to take advantage of any dislocation in trading levels in the future. To that end, our Board has authorized an additional $200 million of capacity for our buyback to the end of 2026. Finally, we passed a major milestone in Puerto Rico in early April as we completed the migration of mobile customers to our new mobile core and IT platform ahead of the timeline set out on our last earnings call. We are excited that we can now move forward with our plans to create a leading converged player in that market.
We will cover the impacts of the migration activities on Q1 performance and the factors that we anticipate will now drive improved performance in more detail during today's presentation. Turning to Slide 5. I'll begin our operating review with Cable & Wireless Caribbean. On the left of the slide, we present our Internet and mobile postpaid additions. In the first quarter, we delivered consistent performance across both product categories led by Jamaica, which is our largest market in this segment. In addition to our FMC commercial strategy, which we have previously highlighted, we have also increased fixed pricing across the majority of our markets by an average of 3.5% so far this year. Moving to the center of the slide. This commercial momentum combined with a solid start to the year for B2B, helped drive 3% rebased revenue growth for Cable & Wireless Caribbean in the quarter.
Overall, we delivered a strong start to the year. Looking forward, we intend to take further price increases consistent with inflation and continue to see an opportunity to reduce our cost base through additional operating efficiencies related to, for example, the shutdown of our copper network, further vendor consolidation and digitalization of our business. Moving to Slide 6 in our C&W Panama segment. Starting on the left of the slide. We delivered a solid quarter of Internet subscriber additions, supporting healthy growth in our fixed product revenue. We continue to have an underweight market share position, but having a strong network with 95% of our footprint having high-speed and predominantly FTTH, which should support further growth in coming quarters.
In mobile, we reported a return to postpaid gains and subscriber momentum should be bouyed in Q2 with the addition of customers from Digicel whose concession ended on April 20. Moving to the center of the slide. We saw our top-line increased by 2% in the quarter. Growth was driven by B2B and fixed products, which were up by 10% and 6% respectively. In mobile, revenue declined by 5% driven by prepaid subscriber losses over the past 12 months, partly offset by improved ARPU. We expect performance to improve through the year driven by subscriber adds. We also anticipate price increases in both fixed and mobile, consistent with inflation and the value of our product offerings. The prepaid business here has one of the lowest ARPUs in the region and we expect to climb the value ladder in the second part of this year.
Finally, the integration of Claro's operations in Panama is now complete. And we will see the year-over-year benefits continue to drive adjusted OIBDA growth through 2024. Turning to Slide 7 and Liberty Puerto Rico. Starting on the left of the slide. We delivered another quarter of Internet and total RGU additions driven by dual-play and triple-play in digital offers. Our momentum in fixed remains robust. In mobile, our subscriber performance was impacted by the final stages of migration and withdrawal of ECF funding for schools in Puerto Rico. We saw lower gross adds as our sales force focused on migration activities rather than new sales. This is now turning and we are starting to see some commercial green shoots and improved additions sequentially through March and April.
As we flagged in our previous earnings announcement, we were also impacted by the withdrawal of ECF funding for schools in Puerto Rico. This drove 22,000 subscriber losses in Q1 and we anticipate a further headwind of approximately 40,000 subscribers in Q2. ARPU for these customers is less than half our average across the base. In the center of the slide, we show the revenue mix by product in Puerto Rico. We reported a 10% decline year-over-year, driven primarily by lower mobile equipment sales due to the impact of migration activities and gross adds. We plan to drive equipment sales in the second half. Chris will cover the financial puts and takes in greater detail within his section. In Puerto Rico, while we are incurring increased costs related to the final stages of customer migration and transitioning to new IT systems and a wireless core network, we believe we have the right strategic assets and team to be successful.
We expect adjusted OIBDA expansion in the second quarter, but the full effect of synergies and cost savings should show up in the third and fourth quarter this year. We expect that synergies, operating cost improvements and top-line sequential growth with FMC will drive adjusted OIBDA to more than $45 million per month at some point in the second half and sets us up for significant expansion in adjusted OIBDA for 2025. Turning to Slide 8 and Liberty Costa Rica. Starting on the left of the slide. We delivered a robust fixed subscriber performance in the quarter against what continues to be a challenging competitive backdrop in Costa Rica. In mobile, we reported our strongest quarter in 2 years with more than double the prior year's quarter's postpaid additions and showing continued momentum in postpaid.
As previously mentioned, we have conducted 5G trials and are prepared to be at the forefront of this development. Moving to the center of the slide. We reported 8% rebased revenue growth in the quarter led by growth in mobile. We continue to grow our B2B operations from a small base in the market. On a reported basis, revenue was 18% higher in the quarter. Adjusted OIBDA grew by double-digits as we are improving cost efficiencies and taking price increases, while still remaining one of the lowest cost providers in the country. Finally, to Slide 9 and our Liberty Networks segment. This is a great business with exceptional cash flow generation. However, there's some volatility from quarter-to-quarter driven by non-recurring and often non-cash factors.
On the left side of the slide, we present revenue for current and prior year quarters. We have shown the impact of IRU amortization to highlight that this non-cash revenue is decreasing and our underlying business is growing. We expect the IRU aspect to continue falling over time, and therefore, create a headwind for near-term reported revenue. Enterprise has been the faster area of growth, up 9% on a rebased basis, driven by increased volume market share as we draw sales of our value-added services in cloud and cybersecurity solutions focused on mission-critical operations for our customers. In other words, customers are trusting their most valuable operations to Liberty Networks. Wholesale revenue also grew steadily, excluding the impact of additional non-cash IRU amortization in the prior year period.
We continue to build our network capabilities. And as highlighted in the lower right of the slide, we have expanded our presence in Central America with the opening of 2 new point of presence this year. These strategic locations mark another step forward in our company's growth strategy. This new point of presence will surface vital hubs for our services, providing IP transit, connectivity and MPLS capabilities to our customers in the region, reinforcing our commitment to delivering high-quality, reliable network services, while extending our reach. Finally, in the center of the slide, we show our usual revenue graphic. However, we also wanted to highlight the strong financial performance of the business. Our Liberty Networks segment has an adjusted OIBDA margin above 50%.
And given its relatively low capital intensity, a mid-40s operating free cash flow drops. To summarize my presentation, with the completion of the Puerto Rico migration, we finally have our last major integration behind us and our operations are headed in the right direction with improved commercial offerings and strong and secure networks. We are positioned for meaningful expansion in our financial results, which when combined with our share repurchases, should deliver stakeholder value. 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?
Chris Noyes: Thanks, Balan. I'll now take you through our financial performance in greater detail, starting on Slide 11. Revenue was 1% lower on a rebased basis at $1.1 billion in the first quarter. We saw positive momentum in Costa Rica, C&W Caribbean and Panama, which was more than offset by the aforementioned declines in Puerto Rico. Turning to adjusted OIBDA. We reported a rebased decline of 7% to $374 million. Our operating segments of C&W Panama and Liberty Costa Rica were our strongest performers with double-digit rebased growth. C&W Caribbean also had a good quarter, posting high-single-digit rebased growth. Similar to revenue, the positive performance of these segments was more than offset by declines in Liberty Puerto Rico where migration and other integration-related costs heavily impacted Q1 numbers.
In the third section, our P&E additions were $135 million in Q1 or 12% of revenue. About 65% of our quarterly spend was across CPE capacity and new build and upgrade activities. In fixed, we added or upgraded 73,000 homes in Q1. And in mobile, we continue to invest in capacity and have kicked off some 5G trials. In the last section, we posted negative $150 million of adjusted FCF in the quarter, $100 million lower compared to the prior year quarter. This was driven by a combination of factors, including higher interest and tax payments year-over-year, including $34 million in one-time VAT and income tax impacts of the tower transaction that was completed at the end of last year, as highlighted in our Q4 materials and an adverse vendor financing impact, including incremental paydowns in Panama.
Slide 12 recaps our segment results for Q1. Starting with C&W Caribbean. We reported $364 million of revenue in Q1, reflecting 3% rebased growth. Specifically, we achieved growth in all 3 business categories posting 2% in fixed, 5% in mobile and 2% B2B on a rebased basis. The main drivers of higher residential revenue were year-over-year subscriber growth and increased ARPUs following price increases across a number of markets. We posted adjusted OIBDA of $151 million, representing 8% rebased growth, largely fueled by revenue growth along with reductions in direct costs, especially with respect to interconnect and programming expenses. As a result, adjusted OIBDA margin improved by over 150 basis points year-over-year to 41%. Next, moving to Cable & Wireless Panama.
CWP generated $169 million of revenue and $57 million of adjusted OIBDA in Q1, reflecting 2% rebased revenue growth and 31% rebased adjusted OIBDA growth. Rebased top-line growth was driven by 10% growth in B2B on the back of new project wins and a 6% increase in residential fixed as a result of RGU base expansion over the last year. Offsetting in part was a 5% decline in residential mobile, primarily due to the decrease in prepaid RGUs, partly offset by higher ARPU and postpaid additions driven by FMC. Our adjusted OIBDA performance year-over-year was helped by value capture from the 2022 Claro acquisition. This led to adjusted OIBDA margin expansion of over 7 percentage points to 34%. Turning to Liberty Networks. We generated $109 million in revenue and $59 million in adjusted OIBDA, resulting in rebased declines of 3% to 8% respectively.
As Balan highlighted, wholesale revenue declined due to a roughly $7 million decrease in non-cash IRU amortization and accelerations year-over-year, which was partially offset by high-single-digit growth in Enterprise, driven by growth in connectivity and IT as a service, mostly in Colombia, Dominican Republic and Honduras. Our year-over-year decline in adjusted OIBDA was due in large part to the aforementioned lower IRU revenue. Second from the right, Liberty Puerto Rico. Q1 revenue was $327 million, reflecting a 10% rebased decline year-over-year. Residential fixed revenue was up 2% on the back of volume gains in the past 12 months. Mobile, however, declined by 20% on a rebased basis, driven by a $26 million reduction in equipment sales, due in part to migration impacting commercial activities, as Balan highlighted.
Subscription revenue was also lower, driven by a decrease in mobile subscribers. Adjusted OIBDA decreased substantially from Q4 as we reported $69 million in Q1, which reflected a rebased decline of 46% as compared to Q1 2023. As anticipated, the negative performance was impacted by lower revenue and higher costs related to the migration and other integration activities. Concluding with Costa Rica on the far right, we delivered Q1 revenue of $152 million and adjusted OIBDA of $58 million, reflecting 8% rebased revenue growth and rebased adjusted OIBDA growth of 18%. All 3 business lines contributed to the positive top-line performance with the main driver of organic growth being mobile revenue, which was 10% higher year-over-year on a rebased basis.
Supported in part by our revenue growth, adjusted OIBDA expanded significantly year-over-year. Rebased growth was also helped by certain costs being denominated in U.S. dollars and the U.S. dollar has continued to weaken against the Costa Rican colon. Moving to Slide 13. I will present a detailed review of our financial performance in Puerto Rico. First, on the prior slide, we went through our revenue of $327 million. Importantly, our mobile subscriber base and revenue suffered during the course of the migration and this was amplified in Q1 when the bulk of the migration occurred. Sales were reduced as our frontline was focused on assisting our customers with the migration and churn was much higher as expected during this transition. With that being said, we now have the flexibility and customer level information to drive targeted offers and capitalize on our FMC cross-sell advantage.
Post migration, we have already begun to see NPS improve. We will be strategic on timing and expect key campaigns to launch in the near-term, setting this up for expanded second half top-line performance. Turning to costs in the quarter. We reported $258 million in direct and operating costs. Of these costs, the TSA, integration-specific costs and inventory-related adjustments totaled roughly $40 million. We incurred $18 million in TSA costs with AT&T in Q1. This is on track to fall by more than half in Q2 and then should be less than $1 million in Q3 and then fairly insignificant thereafter. We reported $14 million of integration-related costs in Q1, reflecting our most intense quarter-to-date. Into Q2, these costs should decline substantially, although we do have residual customer support and systems improvements to make during the quarter.
After Q2, our expectation is that these costs will continue to run down. In terms of the $9 million in inventory-related items, these were costs associated with replacing handsets for customers that had incompatible devices and specific inventory that we ultimately were not able to use on our network along with other aged inventory write-offs. These inventory costs were related primarily to the migration and we don't expect them to recur. Additionally, we recently announced a major labor restructuring in Puerto Rico, which should be completed during Q2 and thus realize the savings beginning in Q3. Together with other cost improvement initiatives that are in flight, our revamped commercial plans, we are well on our way to deliver our target adjusted OIBDA in H2.
Turning to Slide 14. At the end of Q1, on a consolidated basis, we had $8.1 billion of total debt, $700 million of cash and $900 million of availability under our revolving credit lines. We had gross leverage of 5x and net leverage of 4.6x, which was up modestly from Q4. We expected the quarterly leverage ratio to increase for Q1 given Puerto Rico performance and lower cash on hand, which was impacted by our large stock repurchase activity. As adjusted OIBDA recovers and cash generation improves for the Group, we are positioned to see leverage decrease in the second half. As mentioned earlier, we repurchased $81 million of our convertible bond at a slight discount. This leaves just under $140 million outstanding, which we intend to fully redeem this July.
In terms of our stock repurchase program, we bought back $60 million in Q1, our second highest quarter in terms of activity. March also represented our highest ever monthly total. Since Q1, we have continued repurchasing equity. And as seen yesterday in our earnings release, our Board approved an additional $200 million repurchase authorization. To recap, we maintained solid broadband and postpaid subscriber volumes in Q1. We recorded broadband additions in all our segments and our postpaid base grew in all segments except for Puerto Rico. This is a testament to the attractiveness of our FMC bundles and enhanced customer value propositions as well as favorable market penetration opportunities. As highlighted on previous calls, the completion of the customer migration in Puerto Rico has been a primary focus for both our corporate and local operating teams and we are excited to move on to the next phase of recovery and growth.
There is still work for us to do in our customer experience, systems environment and back office stemming from the migration, but the largest obstacle is now behind us. This milestone allows us to move off the AT&T systems, dramatically improving our operating flexibility. Our team is motivated to deliver its H2 adjusted OIBDA target and the plans are geared to methodically reach this goal. Finally, to capital allocation. We channeled $141 million into our equity and convert buyback in Q1. As seen by our recent activity, it is safe to assume we'll be disciplined, but opportunistic in our approach to deploying excess capital. With that, operator, please open it up for questions.
Operator: [Operator Instructions] The first question comes from the line of Michael Rollins with Citigroup.
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