Liberty Latin America Ltd - Earnings Call - Q2 2020

Transcript

Speaker 0

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 Najee Corey, Chief Executive Officer of Liberty Puerto Rico.

Speaker 1

Good morning and welcome to Liberty Latin America's Second Quarter twenty twenty Investors Call. At this time, all participants are in a listen only mode. Today's formal presentation materials can be found on the Investor Relations section of Liberty Latin America's website at www.lla.com. Following today's formal presentation, instruction 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 facts. 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 ks and Form 10 Q. Liberty Latin America disclaims any obligation to update any of these forward looking statements to reflect any changes in its expectation or in the conditions on which any 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 this call over to our CEO, Mr. Balanair.

Speaker 2

Thank you, Naji, and welcome everybody to our second quarter results presentation. Well, firstly, I hope you and your families are safe and in good health. Well, for today, our running order is, I'll begin by providing an update on the impact of COVID-nineteen across our market and how we have been managing through it during this period using the framework I laid out in the last earnings call. Chris Noyes, our CFO, will then follow-up with a review of our financial performance and provide an overview of our capital structure, including the right to offer we announced yesterday. After that, we'll get straight to your questions.

As always, I'm joined by my executive team from across the region, and I'll get them involved as needed during the q and 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. I'll start on Slide four with our key highlights. Following a strong first quarter, as anticipated, our performance in Q2 was negatively impacted by the pandemic. April was a low month.

On a positive note, we started seeing improvements in May. And then in June, we had a clear plan on how to react to the challenges and how to be proactive as well in many areas. That is why even if the situation remains challenging in most markets, we have seen our business improve month over month. As a matter of fact, July is also better than June. Despite this difficult backdrop, we added 47,000 broadband subscribers and recorded net RGU growth ads in q two.

Across our markets, Puerto Rico performed particularly well recording its best ever quarter for RGU additions. To put this into context, normalizing for Puerto Rico site, this would have put us ahead of all U. Peers in terms of ad. Financially, our focus has been on cash generation and we reported adjusted free cash flow of $130,000,000 in the quarter. This is based on seasonality through the year as Chris will talk to, but this is undoubtedly a positive result.

I want to also note that this includes continued investment to expand and upgrade our networks. We are leaning into our thesis. And finally, last week, were excited to announce the acquisition of Telefonica's fast growing Costa Rica mobile business. Together with Cabletica, which itself has been a great growth business for us, this combination will create a fantastic opportunity to deliver a leading converged offering in one of the region's best market. Moving to Slide five, and an update regarding the eight focus areas I outlined last quarter.

Overall, I'm very proud of what our team has achieved in a relatively short amount of time. Our primary focus throughout has been on the safety and well-being of our employees. We've been agile as an organization and adopted our work practices to enable working from home where possible, while also doing as much as we can to protect our colleagues who need to be in the field as they help to deliver the connectivity services, which are vital to the communities we serve. We have lost one employee due to COVID, and the whole company mourns for that. It is not lost upon us the gravity of what we are facing.

In the next two areas, our network and commercial activities are key drivers for our future success. And I'll take you through some of our initiatives in the coming slides. Moving on to government affairs, we continue to work as partners with government stakeholders at all levels, making sure that they know we are here to provide critical services to their countries. This includes investments we continue to make in our network, people, and communities. I'll cover factors such as moratorium loss where applicable in our key markets on the next slide.

We are also seeking regulatory approval as we work towards closing the agreed AT and T and Telefonica Costa Rica acquisitions. We expect the AT and T deal to close in Q4 of this year. Turning to our COVID-nineteen planning activities, early in the onset of the pandemic, we established a task force that carried out extensive scenario planning. I'm pleased to tell you that we are outperforming most of the scenarios the team had anticipated. This team also worked on some exciting initiatives that will drive efficiencies and improve customer experience in the future, such as zero touch and digital interactions.

I'll talk to these in more detail later in my presentation. Next, to finance and treasury. We continue to be active and successfully refinance our VTR notes, taking our average maturity to approximately seven years. We are committed to maintaining the right balance in our capital structure. And as we look to the Telefonica Costa Rica acquisition, we took the decision to launch a 350,000,000 rights offering yesterday.

Chris will cover the rationale in more detail, but it is important to note that our board and leadership team have confirmed the intention to subscribe to the offer. And we are on track with 150,000,000 fixed cost reduction plan across operating costs and CapEx. As we said previously, in most cases, this accelerates plans we already have and should stand us in good stead as we emerge from the current crisis. Lastly, we are focused on free cash flow generation and Q2 showed that we can achieve it in a challenging environment. In terms of M and A, we are focused on closing our agreed acquisitions.

We remain agile and see an attractive pipeline of opportunities in the region. We continue to look for accretive levered free cash flow per share opportunities. Finally, our board continues

Speaker 3

to be

Speaker 2

engaged, provide valuable advice and support to me and my team. And as mentioned, are fully supportive of the rights to offer. On Slide six, I wanted to provide more color on some of the challenges of COVID-nineteen in our key markets. We operate across a range of geographies with varying impacts experienced in each. Overall, we are seeing markets ease restrictions.

However, this virus is unpredictable. We position on this slide the markets moving from where we have seen the most stringent restrictions on the left to those less impacted by lockdowns on the right side of the slide. As more markets move to the right of this slide, this should provide a tailwind for the remainder of the year. Starting on the left with Panama, which has been the strictest lockdown measures across all of our markets. Since late March, movement outside the home has been severely restricted and this has impacted all of our business lines.

In addition, there is a moratorium law on bill collection. Both are easing up, and we should see this fall to be better than this summer. Moving to Chile, where again quarantine measures continue. Here, things are not getting that much better. Chile is in the winter season.

Now sales have been impacted by the shutdown. We still have positive net adds, but this is one we are watching closely. In the C And W Islands group, economies are typically tourism dependent, and although it varies, the impact of the pandemic has tended to be significant. As a marker for recovery, we are seeing stores now largely reopen, and there haven't been moratorium laws such as in Panama. But in The Bahamas, they went into a lockdown again this week.

Like I said, this virus is unpredictable. In Puerto Rico, restrictions were relaxed, but that was reversed and the curfew is in place until mid August. Operationally, all of our stores have been back to regular hours. We opted into the FCC pledge to keep America connected. However, at the June, less than 5,000 subscribers were on our essential services plan, and we did not count them as RGUs.

Lastly, to the right of the slide, in the markets where lockdown measures have been less stringent. In Jamaica, tourism industry is slowly getting back up and running. We paused our sales teams during the first couple of months, but we are now back on the streets. We have also continued investing in network expansion. Costa Rica is the final market I wanted to cover.

This has been a good market for us, and there has been limited impact from the pandemic thus far. The government has done a great job, has launched stimulus measures and have been proactive in dealing with the virus. Turning to slide seven, where we've highlighted some of the network investments, innovative products and operational initiatives we are delivering for our customers. Starting with our network investments on the left hand side. Our industry has seen significant increases in bandwidth demand following the onset of the COVID-nineteen pandemic, particularly where lockdown measures have been enforced.

As a result, we have responded to ensure our customers continue to receive high speeds and good levels of service. Across our different products, we added 400 gigabits on our subsea networks. In Chile, we increased fixed network capacity by 30%. As shown in the lower chart, Chile saw the most significant spike in bandwidth consumption across our markets, partly related to the high speeds our customers enjoy. The average speed in Chile was approximately two nineteen megabits per second in Q2, which was a 36% increase over the prior year.

In total, we added 1.8 terabits per second capacity to our network. This is about a 26% increase in our total capacity, and we did it in a four week period. Lastly, we continue to invest in our mobile networks by increasing core capacity in Jamaica and Panama by 40% to 50%. We also worked with government partners to add spectrum to temporarily cover spikes in usage, for example, in Panama. Moving to the center of the slide, we have continued to innovate throughout this period, In some cases, even more so given the evolving market conditions.

Examples I would highlight here are assisted self installs, providing a platform to enable customers in The Caribbean to continue their education with flow study, Wi Fi optimization products, and our Google Android platform, Hub TV, which we've launched in Puerto Rico and being rolled out in other markets. Finally, on the right side of the slide to the operational improvements, we should support our business both in the near term and as we look to the future. Examples here include adapting to the lockdowns in our Caribbean markets with mobile and virtual stores, promoting digital payments in our markets such as in VTR and Liberty, Puerto Rico, where digital payment collections were approximately 7585% respectively in June. And for the longer term, we are working hard to make zero touch installs work across our markets. This would be a game changer.

Turning to slide eight, consumers continue to demand high speed connectivity and our fixed line services, which represent just over 50% of total revenue, has been particularly resilient. Starting with our RGU additions by segment on the left of the slide, cable and wireless had a strong start to the year with a record Q1 additions, but then saw weaker performance in Q2 as the lockdowns I mentioned impacted our markets to varying degrees. In Panama, we reported 45,000 RGU losses during Q2. However, this included the removal of 76,000 RGUs who we continue to provide a service to, but that has not paid us in accordance with our recognition policy. These customers still have our equipment in their homes and use of our service.

We believe a number of them will come back into our base as conditions improve. Jamaica is worth highlighting as a market that continues to perform well with 26,000 RGU ads in q two. Like Puerto Rico, this number is amazing if you normalize the base. Turning to VTR and Carbonetica, we saw a solid performance in Chile overall. However, video subscribers declined in Q2, driven by the suspension of the Chilean soccer league, which we carry on a premium channel.

Cabletica had another strong quarter and continues to grow as it challenges the incumbent in the Costa Rica market. Finally, to Puerto Rico, where Q2 was our business best ever quarter, adding 34,000 subscribers as consumers saw the value of our high speed proposition during times of restricted mobility. At a group level, this aggregated to 19,000 net adds in Q2 and 79,000 in the first half. As you can see in the chart, the numbers were significantly impacted by the removal of 76,000 RGUs in Panama as we discussed. On the right of this line, I wanted to call out two important drivers for our fixed business.

Firstly, broadband is a driver of growth across our group and leads our proposition. The CNW figure here would have been 28,000 higher had we included the Panama RGUs that were excluded from a subscriber count. And secondly, we are continuing to expand our footprint with over 150,000 homes passed or upgraded in the first half of the year and over 70,000 of that number coming in Q2 during periods of restricted mobility. This is quite amazing. We are continuing to invest in a thoughtful and targeted manner.

And like I said, we are leaning into our thesis. Turning to slide nine and our services most impacted by COVID nineteen, mobile and b to b. Looking first at our mobile performance on the left of the slide. At C and W, we begin to see impacts from COVID in the March, and this carried into April and May where we saw the worst of our subscriber losses. These losses were primarily due to mobility restrictions, limiting the ability of customers to access service and reduce demand for top ups generally, given the time customers spent in their homes.

As you can see in the callout chart, we saw an improvement in June as lockdown restrictions eased, and this included net adds in Panama. Our momentum has continued following the quarter end. In Chile, we saw a small impact to additions in Q2 driven by store closures related to lockdowns as well. Moving to B2B on the right, our B2B business reported a rebased revenue decline of 3% in the first half. Across our markets, this was driven by Cable and Wireless, where over 90% of our B2B revenue is generated.

In DTR, we continue to build on our small market share and reported double digit B2B rebased revenue growth. On the far right of the slide, I wanted to break out the B2B business and provide some color on the opportunities and challenges we've experienced during the pandemic. Starting with our enterprise segment, which represents approximately 50% of our revenue base. Here, we've seen opportunities to enable our clients, employees to securely work from home as well as delivering increased bandwidth and applications. We've also been quick to support governments around their digital initiatives.

Moving to SMB, which is about 25% of our revenue, we aim to be partners with our customers, helping them continue to operate through this difficult time and building on or reinforcing strong relationships for the future. Finally, we have wholesale, including our subsea business. This represents about a quarter of our B2B revenue and has been the most resilient through the first half as we've responded to increased bandwidth demands from our customers. Finally, for my section to Slide 10 and our inorganic strategy. Last week, we announced the acquisition of Telefonica's Costa Rica Mobile operations for an enterprise value of $500,000,000 or six times twenty nineteen adjusted OIBDA, including run rate synergies.

Telefonica's Costa Rica business provides a great opportunity for us in a good market, where our Cable Tica fixed line cable business has grown revenue and adjusted OIBDA by 1220% respectively on a CAGR basis from 2017 through 2019. Through this acquisition, we will create a leading integrated player with capabilities across both fixed and mobile products and combined revenue of approximately 400,000,000 Being able to deliver a full suite of products is something that we value strategically. And following this and the AT and T acquisition, all but one of our markets will have fixed and mobile capabilities. Telefonica Costa Rica is the number two mobile player in a three player market and like Cabletica, it is a challenger. From 2017 to 2019, the business delivered high single digit top line and strong double digit OIBDA growth.

Importantly, 60% of revenues are postpaid revenues. And this business has had a successful strategy of migrating prepaid to postpaid. The business comes with a good mobile network and 90% LTE coverage by population with three quarters of towers carrying LTE. Finally, as with more consolidation opportunities, we anticipate generating synergies from the transaction, which together with the growth in the business make the acquisition highly cash generative and accretive to us. Touching on AT and T briefly, we remain very confident of completing the transaction and now expect this to take place in Q4.

Through both AT and T and Telefonica Costa Rica, we are consolidating markets and generating synergies. Both also have a majority of postpaid revenues. That is why IRRs and future cash flows are good. With that, I'll now pass you over to Chris Noyes, our Chief Financial Officer, who will take you through our financial performance. Chris?

Speaker 4

Thank you, Balan. I will begin on slide 12 and will touch upon both our q two and half year results. For the quarter, we delivered $849,000,000 in revenue, reflecting a $134,000,000 decline over q two twenty nineteen. Roughly $60,000,000 of the reported decrease in revenue is due to foreign currency translation, primarily the 20% average appreciation of the US dollar against the Chilean peso and the impact from the 2019 disposal of our Seychelles asset. The rebate decline of 8% principally relates to b two b and mobile.

Year to date, our $1,800,000,000 in revenue reflects a rebased decline of 3%, given we did not experience the full impact from COVID until the start of q two. Moving to the top right, we have renamed OCF to adjusted OIBDA, albeit with no change to their definition. For q two, OIBDA was lower as a result of an organic decrease and about a $23,000,000 decline from a combination of foreign currency translation and the Seychelles disposal. Our $333,000,000 in Q2 adjusted OIBDA reflects an 8% or $30,000,000 rebased decline year over year. For the full six months, our year over year rebased decline was only 2%.

On P and E additions, highlighted in the bottom left, we reported a $153,000,000 or 18% of revenue in q two and two hundred and eighty six million dollars or 16% of revenue year to date. In dollar terms, each period is lower year over year. But notably, we continue to invest in our footprint in both new build and network capacity. Finally, turning to the bottom right, we produced our best quarter ever in adjusted free cash flow with $130,000,000 in q two, benefiting in part from positive trade working capital and reduced cash taxes. Q two's result brings our half year total to $81,000,000 which is ahead of last year's first half results.

After adjusting for $67,000,000 in insurance proceeds that we received in q one two thousand and nineteen. From a phasing perspective, we would expect to generate negative free cash flow in q three, like we did in q one, due to the concentration of our semiannual interest payments, while q four tends to be seasonally strong for us with respect to cash flow. Importantly, we are well on track to deliver positive free cash flow in 2020, which we had flagged on our Q1 call as a key target for the LLA management team. On Slide 13, we present our segment results. I will focus just on Q2, which is the upper half of the slide.

Starting with C and W, we generated $515,000,000 of revenue, reflecting a 12% rebased decline. This decline was driven by a 22% rebased reduction in mobile revenue, reflecting reduced recharge activity, fewer subscribers during the lockdown period, and less roaming. Similarly, the lockdowns across our markets have impacted B2B, which had a rebased decline of 12%, although our subsea business was able to modestly grow year over year. Fixed residential was largely resilient in q two, as it was relatively flat in terms of rebased growth year over year, with broadband the star performer. Q2 adjusted OIBDA fell by 10% in rebased terms as we generated $2.00 $4,000,000 Compensating for the revenue decline, C and W significantly reduced both direct and operating costs on a year over year basis.

C and W's P and E additions were $82,000,000 or 16% of revenue and included over 50,000 new or upgraded homes during the quarter. Moving to VTR in Chile and Cabletica in Costa Rica, we posted revenue of $228,000,000 in q two, a 3% rebased decline. A key driver of this year over year decline relates to the suspension of the Chilean soccer league due to COVID, which led to discounts for our premium video customers. We experienced a 10% rebased decrease in adjusted OIBDA due primarily to two cost drivers. First, we have certain costs at VTR, including about 50% of our programming costs, which are denominated in U.

S. Dollars. We hedge a large portion of these costs on a near term forward basis. The impact of the strong U. S.

Dollar, combined with the FX rates at which we are hedged, resulted in about an $8,000,000 adverse impact of ETR's adjusted OIBDA on a year over year basis. Second, significant bandwidth demand related to COVID resulted in much higher network and call center costs to handle the unprecedented spike in Chile. Our costs in these two areas were roughly $5,000,000 higher over q two twenty nineteen levels, and we expect them to improve in coming quarters. Our P and E additions were $50,000,000 or 22% of revenue, which was slightly lower when compared to 23% of revenue in q two twenty nineteen. Ending on the right hand side, Liberty Puerto Rico delivered $109,000,000 of revenue in Q2 or 5% rebased growth.

This result was a modest improvement over Q1's growth levels. We realized adjusted OIBDA of $52,000,000 reflecting growth of 2% over q two twenty nineteen. Our growth was modestly hampered by acquisition integration costs. Finally, we reported $20,000,000 of P and E additions or 18% of revenue as we added over 5,000 new homes to our footprint and invested in both CPE and capacity to address consumer demand and usage of our network. Turning to Slide 14, I thought it was helpful to look at how our OIBDA margin has changed since q one.

We have mitigated the impact of our sequential revenue decline by reducing costs. Both C and W and Liberty Puerto Rico maintained their margins, while the decline in the VTR Cabletica margin was directly attributable to higher network and call center operating costs, together with an incremental $3,000,000 sequential impact related to contracts denominated in nonfunctional currency. Overall, LLA's OIBDA margin held steady at 39% in the quarter, as our direct and operating costs sequentially declined by over $50,000,000 helping to mitigate our revenue drop. On slide 15, I wanted to cover our balance sheet and liquidity situation in some detail, and we'll refer to the six sections on the slide. In section one, we have been very active on the financing front.

Firstly, we completed an additional $90,000,000 cap of our Puerto Rico bonds at 102.5 of par, with proceeds earmarked for the AT and T acquisition, further reducing our LLA equity investment. Secondly, we monetized VTR's in the money debt derivative at the end of q two, and we helped lead the way in opening the LatAm high yield market during COVID by refinancing VTR's $1,260,000,000 of high yield debt in July at very attractive levels. This transaction improved our tenure, lowered our cost of capital, and added efficiency and flexibility to our structure. And thirdly, we extended near term debt at Panama to 2025. In section two, our maturity schedule showcases the impact of our completed financing work, as now 85% of our total debt is due in 2026 or later, providing stable financial footing for the long term.

In section three, I thought it was important to walk through our cash position, excluding the 1,350,000,000 in restricted cash that will be used to help fund the AT and T acquisition. We finished q two with $1,750,000,000 in consolidated cash. Post q two, we used a $187,000,000 of cash from the debt derivative as part of our uses in the July BTR refinancing. And we repaid $275,000,000 borrowed under our RCS at C and W and Liberty Puerto Rico. The final column of the walk shows the $660,000,000 of our cash that is allocated for the AT and T acquisition.

After considering these items, that leaves us with $630,000,000 of consolidated cash, which is a level that provides us with a prudent buffer given COVID uncertainty and a number of geographies in which we operate. Our RCF availability is to the right of the cash chart. We finished q two with $765,000,000 available. And after the RCF pay down, it moves to over $1,000,000,000 available. In section four, as the chart depicts, we have ample cushion under our maintenance covenant in each of our three primary credit hours.

Additionally, on an aggregate basis at LOA, we finished q two with net consolidated leverage of 4.2 times and net proportionate leverage of 4.5 times. Our longer term target is to drive our leverage towards four times. In sections five and six, we highlight several financings that we expect to complete in the near term. We intend to finance the acquisition of Telefonica's Costa Rica business with four times leverage, which equates to roughly $300,000,000 of debt to be borrowed either locally in Costa Rica and or at VTR Finance Holdings. With respect to the rights offering just announced, we intend to utilize this capital for acquisition, including the equity portion of the Telefonica transaction and for general corporate purposes.

As I outlined earlier, we are comfortable with our existing leverage levels and would like to bring them down modestly over time. And the rights offering provides us an additional opportunity to raise capital while not increasing our overall LLA leverage. The key terms of the rights offering include the following. Size is targeted for $350,000,000. The offering will commence in September.

Rights will be distributed to all shareholders as of the record date. Each right will provide the opportunity to purchase a class b share at a 25% discount to VWAP, which will be set at a later date. Rights will be transferrable and publicly listed. And most importantly, we have full support from LLA's executive team and board, including John Malone and Searchlight Capital, and the collective group intend to subscribe to their right. This support equates to approximately $50,000,000 of the $350,000,000 that we are looking to raise from shareholder.

Turning to slide 16, I will close our prepared remarks. We know across our markets, will take time before consumers and businesses get back to full throttle. However, our operations have stood up well so far in the face of COVID. Connectivity and entertainment through our fixed residential services and backhaul through our subsea business provide us with a degree of consistency and resiliency in our results. I think we can all attest to our own experiences during this crisis.

It is essential to have a high speed robust Internet connection. Controlling our costs and CapEx is critical. We are sticking to our plan from a quarter ago and are on track to achieve our cost and CapEx reduction target, while still investing in future growth through new build and through product and operational transformation touched upon by Valen. We have more levers in our back pocket to reduce spending if needed. However, as you can see today, we remain focused on investing in our business.

These efforts support our company wide focus on free cash flow generation and our Q2 result was a quarterly record for us in this metric, a good accomplishment given the top line challenges presented by COVID. Besides investing internally, in Q4, we expect to close the AT and T acquisition and we'll be working on closing the just announced purchase of Telefonica's Costa Rica business in H1 twenty twenty one. We expect the two acquisitions will add over $1,000,000,000 of annual revenue to LLA, further increasing our scale and underpinning future growth and free cash flow generation. As we look to the rest of the year and more importantly to 2021, we are taking steps within our business that we believe will enable us to accelerate out of the recovery. And the just announced rights offering will provide us with incremental flexibility and agility should additional opportunistic situations arise.

With that operator, we are ready to take questions.

Speaker 0

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question regarding the company's operations, please do so by pressing the star or asterisk key followed by the digit one on your touch tone telephone. In order to accommodate everyone, we request that you ask only one question with one follow-up if needed. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We'll pause for just a moment to give everyone an opportunity to signal for questions. We'll take our first question from James Radcliffe with Evercore ISI.

Speaker 4

Good morning. Thanks for taking the question. Two if I could. First of all, regarding the rights offering, why raise equity particularly now, given you're still in the throes of of COVID and just seeing the impact from that, and I think your stock price has affected that. And it doesn't sound like you will need cash for the Costa Rican transaction until next year.

So I'm thinking about a question on the timing of that. And secondly, a lot of cost reduction year on year and quarter. Can you talk about how much of that was just lower activity instead of an offset to the lower revenue numbers and how much of was more structural? Thanks.

Speaker 2

Sure. Hi, James. Let me address the cost reduction part first, and then we'll get the right offering, and I'll ask Chris to also jump in here on that. Know, on the cost reduction part, of course, we have a bunch of direct costs that goes down proportionally to the revenue. In the number we quoted, the 150,000,000, we did not include that direct cost.

These are mostly indirect costs. And you can imagine that's a part of that, that's activity related, of course. But for the most part, they are costs that we plan on taking out, that we have taken out, and we intend on keeping it out permanently. And that's part of what we've been we've been working on over the last couple of years as we improve our margins as well. On the rights offering, I'll I'll make one couple of comments and then I'll pass it on to Chris.

You know, we we think it's it's a prudent, you know, capital structure that we want to get to where there's more equity raised, you know, for some of the things that we, you know, that that we've been looking at in our pipeline as well as the Telefonica transaction. And with the Telefonica Costa Rica transaction, we thought this was a really good transaction and that all of our shareholders ought to be able to participate in it. And the rights offering is a great way for everybody to participate in what we think is a highly accretive transaction for it. I'll pass it on to Chris and comment around the timing of it.

Speaker 4

Yeah, mean, you know, obviously a rights offering is an efficient mechanism in which to raise capital. In terms of timing and if you look back at all of our transactions, we do like to de risk the purchase price and speak for the capital on the earlier side instead of waiting until close to closing. So that's and it's also additionally, it's a good window for us in terms of raising our securities offering over the next, call it sixty days.

Speaker 2

Thanks, Chris.

Speaker 4

Thank you.

Speaker 0

We'll take our next question from Sumit Vata with New Street Research.

Speaker 5

Hi there, guys. Couple of questions, please. Just one on Puerto Rico. I wondered whether at all you could give a sense as to how the AT and T wireless business has traded over the first half of the year. I mean, probably difficult to be specific, but I just wondered, is that a market where, as we've seen around the world, there's been a sort of very severe impact on mobile?

Or is it one which has held its ground quite well? And then just also on Puerto Rico, the subscriber numbers look great. I think I'm right in saying you're back up to levels ahead of where you were pre hurricane. I just wondered, where can this business go in terms of penetration of homes passed? Obviously, it seems to be performing well.

And then if I could just jump in with the second question on Chile, please. I think the numbers, both the revenue and EBITDA, are a bit sort of spotty from from one off bits and pieces which you've highlighted. But but I think just to to to sort of focus on on the cost side of things, you did call out some network, and call center issues, and the business, you know, has been impacted to some degree by the volumes coming from COVID. And then I noticed at the same time, the the customer consumer protection agency, Cermak, is bringing a class action suit against you for quality of service issues. So is that all sounding a bit worse than it is?

If you could give a bit of clarity on what's happening there would be great. Thank you.

Speaker 2

Alright. Well, I'll answer both your questions and I'll ask both Guillermo and Najee to be on standby as well. I'll call on you. Let me start with the Chile side. You know, our our cost did go up slightly, mostly because call volumes were really high, as well as we accelerated a lot of our network upgrade.

Now, our network upgrade in Chile, as I indicated earlier, was pretty significant, and we did it over a one month period. But during that one month period, we already had one of the highest broadband speeds of all of our properties in Chile. And it really accelerated that. And so during that one month period, during our upgrades, we did run into some network issues, and we've been very transparent about that. And we are working with the government and the regulator right now, and helping them understand as well that this one time event, this COVID period, you know, this is really a force majeure, it's not something that's just natural.

And, but if we look at Chile going forward, Chile is coming into the winter period. It is in the winter period right now. The COVID condition that is not improving and it's under strict lockdown, but we are powering through it. But we also realize that this is one that, we are gonna watch very closely over the next month or so. On Puerto Rico, you hit it right on.

I mean, we're not only where we were at pre hurricane, we are way beyond that already. And we think the opportunities and the runway in Puerto Rico is pretty good. That's why we're investing in new builds there, investing in upgrades. And as we've indicated before, we also participating in the CBRS auction in Puerto Rico. So we are in Puerto Rico and we are very bullish on it.

And that's why we did the AT and T transaction, which

Speaker 3

by

Speaker 2

the way, it's mostly postpaid. And that's why we feel confident about this, that business as we get into it. Now, having said all that, I'm gonna ask Guillermo to give maybe a little bit of color on Chile. And then Najee, if you can give a little bit more color on the situation on the ground in Puerto Rico as well. So Guillermo.

Speaker 6

Yeah. Thank you, Balan. I believe you said it well on the network side. Of course, we were under a challenging situation, particularly in the month of May as people entered into lockdowns and traffic peaked and jumped 40%, and we were diligently in adding more capacity to the network at that time. Simultaneously, we also had challenges in serving calls as our call center sites.

Needed to move them we needed to move all the people into a work from home mode. So that was also a challenge a sense that our ability to answer to the increased volume calls was challenged during that period. That created a lot of noise in the market, of course. We are the number one broadband provider in the country and also the one that serves, let me say, people that are more noticeable and influential in the country. That together with the number of complaints that the National Petition Agency received during that period created this loss of situation, which, of course, we regret.

But as Balan said, we are very sure that it's a force majeure situation, and we will present our discharges you know, we have

Speaker 7

the chance to see the details for

Speaker 6

the loss loss at which we have not seen yet.

Speaker 2

Thanks, Guillermo. Naji? Yes,

Speaker 3

Balan. Good morning, everyone. Yeah. I mean, the situation on the ground in Puerto Rico, I think, you know, the island has been doing actually very well despite some lockdown that you can see still activity. You had asked about the AT and T situation.

I I cannot give you very specific, but I can tell you that as a consumer, you drive by, all the shops are open, the network has been able to take on a lot more traffic. So you see a lot of activity. So we assume that they're doing fairly well. And as Balan has mentioned, it is a postpaid environment. On the fixed side, yes, you asked the question whether there is more runway ahead of us.

And I think there is, and I think there's two elements that we can look at that will definitely work in our favor. One is the broadband penetration. The Island broadband penetration is likely approaching somewhere between 6070%. So there's room to grow beside the new build program that is in full swing that has not stopped. So those two will definitely contribute in adding broadband.

And sometimes we don't talk about video, but video as well is growing for us. And if you look at our strategy and, you know, the correct pricing, the correct cost structure, and we saw what happened, for example, with Charter, we're adding video subscriber while others are are are losing some. So we feel that we have the right formula, we have the right ingredients, and the right cost structure to be able to continue growing the RGU base in Puerto Rico. Fairly optimistic about the future.

Speaker 2

Thanks, Naji.

Speaker 3

Thank you. Thank you.

Speaker 0

Our next question comes from Matthew Robilliard with Barclays.

Speaker 8

Yes. Good morning. Can you hear me well?

Speaker 2

Very well.

Speaker 8

Thank Thank you for taking the questions. The first question I had was actually on the synergy that you mentioned with regards to the building in Costa Rica. I don't know if my math are right, but it seems to me that you're probably aiming for a cut in the CapEx and OpEx at the target that represents maybe 20% of the current base, something like that. And I wanted to have a little bit of color on where you see the synergies, is it content cost, is it backbone costs, is it network integration, etcetera, etcetera. And if I may sneak another one, just in terms of the capital increase.

So you mentioned in the press release that it's expected to use the balance acquisitions, including the Costa Rica one. And I was just wondering this is just, you know, a statement that leaves the door open without the moment any precise ideas of what acquisitions in addition to Costa Rica you could be doing or are you guys looking at different things and some of them could be interesting and therefore you have flexibility to act if you want to materialize other transactions? Thank you.

Speaker 2

Well, thanks, Matthew. Firstly, on the synergies, we kind of indicated about a 10 of synergies in that transaction that's on our math. And you hit it pretty much close to where we would look at and it's quite traditional. But in the case of Costa Rica, we are in country synergies between the cable company and the mobile company. So you can imagine, you don't need two marketing groups, you don't need a lot of things that are duplicated between the two organizations.

In addition to that, we also have our submarine cable coming into Costa Rica, which you can imagine that we'll be moving a lot of traffic as well back into our network. So there's a number of things that, this where we always get excited about synergies, in country synergies, because those you can really nail it. Now, you had a second question around the rights offering and the money through raising and future M and A. Let's just say that there's

Speaker 6

a lot

Speaker 2

of opportunities out there and our pipeline is quite active, but we are going to be very disciplined. It's like the Costa Rica deal as well, where we look at very specific metrics and where we are really confident about the business that we're acquiring as well as the synergy numbers, as well as the opportunity for us. That's when we really strike. And as we look at the rest of the region, there are a few of that, but like I've said many times before, our goal is to not get bigger. Our goal is to create value.

We wanted to get bigger. We would have actually announced some other deals in the first quarter or the second quarter of this year. And but that's not our plan. Our plan is to create value here. And if we see valuable transactions, we see things that work for it, and as well works for the seller, it's got to work for both of us, then you'll see us doing some announcements.

And the Telefonica one is a good example of something that worked well for us. And what I think worked really well for Telefonica as well. So that's how we kind of think about our pipeline.

Speaker 8

Thank you.

Speaker 0

Our next question comes from Kevin Rowe with Rowe Equity Research.

Speaker 9

Thank you. Good morning. Balan, if we could turn to The Jamaica to The Caribbean and broadband RGU trends, I know different markets are moving in different directions and net net this quarter for Q2, it was negative. What's your outlook for the third quarter for The Caribbean as a whole for broadband net adds? Will we turn positive?

And if we drill down into specific markets, you highlighted Jamaica as a standout and that positive trend continues. What's the profile of those ads and their ARPU? Are these remote workers primarily, remote learning? And if you could give us an update on The Caribbean in general on the health of the SMB segment in terms of non pay and potential bad debt trends changing? Thanks.

Speaker 2

Sure. I'll ask Ingo to also jump in here in a bit and put some of the thoughts. I feel really good about the broadband business in The Caribbean. You saw our numbers in Jamaica, which was, I'll tell you if you normalize for it, I mean, essentially we grew close to about 10% of our base on broadband. And that is pretty significant.

I mean, there isn't too many cable companies, telephone companies, anybody that goes 10% of their base. And so if you follow Charter Kevin, and so that am quite involved there and this numbers are very comparable, if not better, If you normalize them. Now, the reason I feel bullish about it as well is in the second quarter, we took a lot of broadband customers that we that are actually receiving services from us off of RGU count. And so they appear as disconnects, but they were not really disconnects. And you will see them naturally come back.

They still have modems in their home, they're getting service from us. And I think the team, we collectively as a team and as a company have built a lot of goodwill with a lot of customers where we've chosen to do the right thing. And we've always said in our company, we want to be a different kind of telecommunications company. So we didn't, our first instinct was not just to look at customers and say, how can we disconnect them? We were looking for ways to find to make sure that they still have service, even though that they can't afford to pay at this point.

And I feel that will pay back in many ways. And if I look at the third quarter, actually feel bullish about our broadband numbers. I'm not gonna give you a preview, but July was looking a lot better than June. Let's just put it that way. In general, in The Caribbean, it really goes with the tourism industry.

And eventually it will come back. Really don't have a crystal ball on that, but we've seen some hotels open up. We've also seen hotels open up and then close down. This will take many months. And then when the tourism industry comes back, I think all will be good because we have a great product there.

And I think we've built a lot of goodwill during this COVID period. Ingo, do you wanna add some more color to my comments?

Speaker 10

Thank you, Valen. Well, it's really The Caribbean today on fixed is a clear focus area. And as Valen said, we are focused on the penetration like in Puerto Rico, we can still penetrate much deeper. We have our new build that is working for us. We are upgrading our customers across The Caribbean in our fixed networks, and we kept them connected.

So we will be focused on really making sure that we deliver the services we have to deliver to them. So very, very, very positive on, let's say, the fixed side of the business. SMB, see two things happening. I think in Q2, we were SMB customers, we kept them connected. We are there to help them through this pandemic.

At the same time, we will also see new businesses coming up, and we will also be there for the new businesses that are starting to arrive in The Caribbean to be their partners in life as they start to really shape up a new business in a digital world. So both on the fixed side and the customer side, as well as on the B2B SMB side, we see good signs.

Speaker 2

Thank you, Inge. Thank you.

Speaker 0

Our next question comes from Matthew Harrigan.

Speaker 11

Thank you. There seems to be a consensus on the street that when you get into 'twenty one, whether it's vaccines or therapeutics, you can see some light on COVID. But you're certainly still having a rough interregnum in the interim with Chile and winter and all that. I guess one of the risks specific to your markets is some of the governments have very limited fiscal latitude to subsidize the consumer for a while, as has been done in The U. S.

Is there a possibility we could get a more violent dip off that over the next couple of quarters even if longer term your business looks great? And then secondly, when you look at the M and A opportunities, and you've got some large multinational telcos, some of whom you've done deals with, are looking to exit the region, and you've got a very thin equity layer, you need to finance just a multiple point or so with the synergies. Is there an imperative to try to get some of those deals done over the next year? Mean, you said you don't want to grow just for the sake of growing and that Chris certainly enunciated a 4x leverage goal ultimately. But do you feel like this is kind of a historic opportunity over the next twelve months where there's a lot of dislocations to get more M and A done before the market bumps up?

Or are you more inclined to bide your time given that you've got two nice deals already in the hopper?

Speaker 2

Start with the second one. And then maybe I'll ask Chris also maybe think about his thoughts on this. There are many opportunities, but we are patient. We don't have to do any deals. And when we look at a transaction, we, of course, look at our balance sheet and how we want to capitalize ourselves to take advantage of any dislocation.

But it's also got to work from the sense that it's got to be priced right. It's got to be a business that generates cash, or has the potential to generate lots of cash. And it's got to have a path where we can clearly see how the business grows and how savings come out of it. So once you put all those filters on it, you're down to really a small handful of assets that you really get excited about. And then you got to work with the seller and make sure that the seller also sees the excitement of wanting to part with those assets, right?

At the valuation we think makes sense for us. That's quite a few deals where we say to the seller for it to make sense for us, it'll never make sense for you. And let's not waste too much time talking to each other. And we are gonna be disciplined that way. Now on the government front, almost all the governments that we work with in the countries that we operate have been actually quite prudent have been making more right decisions than not.

Many of them have gotten help from the IMF. Some of the government they have really strong balance sheets and they will get power through this. And we've been working very closely with them. My GC, John Winter and his regulatory team are very close with the governments. We keep track of their balance sheet and the actions they've been taking.

And we are here to support them as well. I don't see that as a cloud first. I think if you look, if I look at the cloud first, it would just be mostly the macro around tourism in some areas. And then if you look at Chile, it's commodities and currencies. And that's how we look at it.

Chris? I think you hit it on the head. Thank you, Matthew.

Speaker 6

Thanks Paul. Thanks Chris.

Speaker 0

Our last question comes from Michael Rollins with Citi.

Speaker 4

Hi, good morning. I was wondering if you just take a step back with the strategy as you're going to have in more markets both fixed and wireless operations. Is there a holistic way that you think about the growth rate of that presence in the country by having all of those services differently than if you had one or the other?

Speaker 2

I think yes, we would look at it differently and maybe I'll ask Beth Salal, my Chief Operating Officer to make some comments here as well. But certainly, the way we look at it when you have a portfolio of products like this is what are the attach rates between them and you use one to drive the other. So when we buy the, like the Telefonica Costa Rica asset, you look at it and you say, okay, X amount of the mobile customers postpaid customers has a fixed net product and X amount or Y amount of our fixed customers have that, the mobile product and you just take one minus Y and one minus X, and then you do the math that then you say, okay, I can get to X percentage of attach rate. And that's your revenue synergies. And so we think that's huge opportunities in many of our markets.

We've been very successful in some and in some, we are just in the early stages of testing out different fixed mobile type plans. Same thing applies by the way to AT and T asset in Puerto Rico, Naji and Betelal are already cooking up a whole bunch of offerings that we think as soon as we take ownership of that asset, we can launch some things that are really compelling for the mobile subscriber and the fixed subscriber. But Salaz, do you have anything you want to add to that?

Speaker 7

Thank you, Valen. I think that you are spot on, but one thing to mention, especially on the two acquisitions that we are discussing is the fact that most of our mobile customers in those two operations are postpaid. That is the best base to create that synergy or that offering of FMC. So that's why we believe those two acquisitions will give us a great opportunity for FMC offering and create a revenue synergy. As Balan said, we are trialing it in different markets and really the the attach rate when we are talking about postpaid with fixed is start showing some very good times.

Speaker 2

Thanks, Petzella. And FMC is big mobile convergence for some of you. Yep.

Speaker 4

Thank you.

Speaker 2

I think that's is that our last question, operator?

Speaker 0

Yes. That will conclude today's question and answer session. I'd like to hand back to Balin Mair for any closing or additional remarks.

Speaker 2

Thank you, operator. And, you know, I should have made a few comments. One, you know, our business is good. We we have products that everybody wants. I think we have a unique value that customers really appreciate.

And we have employees that are really motivated. Our goal is to create value for our shareholders. Certainly, we want to create value for our employees and for sure. Absolutely. There's going to be value creation for our customers as well.

And we plan on doing that. And we think we have a good strategy in place. We have a good team in place and we will execute on it. And I wanna thank all of you for your support. Have a great day.

Speaker 0

Ladies and gentlemen, this concludes Liberty Latin America's second quarter twenty twenty 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 materials.