Millicom International Cellular S.A. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under IFRS as issued by the IASB. Amounts are U.S. dollars unless stated otherwise.
Business context and financial performance
Millicom provides mobile, cable, broadband, pay-TV and business services in emerging markets. It reported Latin America and Africa as segments; Latin America segment figures include Guatemala and Honduras joint ventures on a management-reporting basis, while consolidated statements account for those ventures using the equity method.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $4.074 billion | $4.076 billion |
| Service revenue | $3.861 billion | $3.876 billion |
| Gross profit / margin | $2.928 billion / 71.9% | $2.871 billion / 70.4% |
| Operating profit / margin | $655 million / 16.1% | $645 million / 15.8% |
| Profit from continuing operations | $13 million | $18 million |
| Net profit (loss) | $(26) million | $69 million |
| Net loss attributable to Millicom owners | $(10) million; $(0.10) per share | $86 million; $0.86 per share |
| Operating cash flow | $792 million | $820 million |
| Cash and cash equivalents | $528 million | $619 million |
| Total debt and financing | $4.580 billion | $3.785 billion |
| Net debt | $4.051 billion | $3.164 billion |
Management-reported segment EBITDA was $1.254 billion for 2018, versus $1.278 billion in 2017; this measure includes unallocated and consolidation adjustments. Operating free cash flow, a company-defined measure, was $383 million, compared with $459 million. Interest and other financial expenses were $371 million, down from $396 million. Current assets were $1.529 billion against current liabilities of $2.684 billion. Restricted cash of $158 million is largely associated with mobile financial services and is not included in the company’s net-debt calculation.
Material changes versus the prior year
- Revenue was essentially flat. Growth in mobile and fixed data and B2B was offset by continuing declines in voice and SMS. IFRS 15 reduced reported 2018 revenue by $77 million versus the previous accounting standard, largely from presenting wholesale international traffic net; the adoption did not affect cash flows.
- Gross profit increased 2.0%, while operating expenses rose 5.1% to $1.674 billion. Management cited about $50 million of one-off charges, net of gains, mainly related to the Cable Onda acquisition, U.S. listing, Africa restructuring and relocation of certain functions.
- Net income moved from profit to loss, principally reflecting a $54 million larger loss from other joint ventures and associates (loss of $136 million) and a $90 million adverse swing in discontinued operations, which reported a $39 million loss. The latter included a $32 million foreign-currency translation loss on the Rwanda disposal.
- Operating cash flow declined by $28 million. Investing cash outflow increased to $1.199 billion, including $953 million for acquisitions, principally Cable Onda, and $632 million of cash purchases of property and equipment. Financing activities provided $341 million, versus $464 million used in 2017.
- Debt rose by $795 million and net debt by $887 million. The 2018 net-debt-to-EBITDA ratio was 3.23x on the reported IFRS basis, compared with 2.48x; the filing says covenant calculations use proportionate debt and EBITDA including the Guatemala and Honduras ventures and were below 3x.
Operations, transactions and outlook
- Millicom acquired 80% of Panama’s Cable Onda on December 13, 2018 for $956 million in cash and assumed its debt, including approximately $185 million of outstanding bonds. Cable Onda added $17 million of revenue and a $7 million net loss in the brief period consolidated. Purchase accounting was provisional; the filing estimated that a full-year contribution would have added $403 million in revenue and a $59 million net loss.
- On February 20, 2019, Millicom agreed to buy Telefónica’s mobile operations in Panama, Costa Rica and Nicaragua for an aggregate $1.65 billion, subject to regulatory approvals and other closing conditions. The company arranged a $1.65 billion bridge facility and expected to refinance it predominantly with new debt. Closing was expected in the second half of 2019; completion and anticipated synergies were not assured.
- Management’s stated priorities include monetizing mobile data through 4G expansion and smartphone adoption, extending HFC cable networks, growing B2B and digital services, and improving customer experience and efficiency. No numerical FY2019 operating guidance is provided in the supplied filing text.
- The board proposed a $2.64-per-share dividend for 2018, payable in two installments in May and November 2019, subject to shareholder approval at the May 2, 2019 AGM. The company paid $2.64 per share in 2018. Management said available liquidity and expected operating cash flows were sufficient for projected operating and capital needs for at least 12 months.
- IFRS 16 was to take effect in 2019; management preliminarily expected approximately $600 million of additional lease liabilities, with corresponding effects on reported debt, leverage, depreciation and cash-flow presentation.
Risks, contingencies and unusual items
- Key exposures include emerging-market political and economic instability, currency depreciation and restrictions on cash repatriation, inflation, intense price competition, regulatory changes, spectrum access and license renewals, network investment needs, cyber and operational disruptions, and dependence on prepaid customers. Foreign-exchange losses were $41 million in 2018, versus a gain of $18 million in 2017.
- Claims and litigation risks totaled $687 million at year-end; $26 million was provided. Potential tax risks were estimated at $254 million, with $47 million provided. Management did not anticipate the disclosed litigation claims having a material effect, but outcomes remain uncertain.
- A Guatemalan investigation into alleged illegal campaign financing involving the Comcel joint venture remained ongoing; no provision was recorded because management could not assess the potential impact. Separately, Tanzania’s requirement for telecom operators to list and offer 25% of shares could expose Millicom to penalties or license consequences if not met; the company was preparing for a 2019 listing and had recorded no provision.
- The group received $243 million in dividends from its Guatemala and Honduras joint ventures in 2018. The filing highlights dependence on these distributions to support parent-level debt service and dividends. Kinnevik held 37.2% of voting shares at year-end.
- Millicom’s disclosure controls were assessed as effective at a reasonable-assurance level. The annual report did not include management’s assessment or auditor attestation on internal control over financial reporting because of the transition period for newly public companies; management stated it would be required to comply with Section 404 by the end of fiscal 2019.
Most important facts for investors to verify
- Reconcile the reported $4.580 billion debt, $4.051 billion net debt and 3.23x IFRS net leverage with covenant-defined leverage, including the treatment of joint-venture debt and cash.
- Review the final Cable Onda purchase-price adjustment, finalized purchase accounting and the effect of the acquisition on recurring earnings and cash generation.
- Track regulatory approvals, funding and refinancing, leverage impact, and integration risks for the proposed $1.65 billion Telefónica CAM acquisitions.
- Assess the sustainability of operating cash flow, capital expenditure, joint-venture dividends and the proposed $2.64-per-share dividend amid negative working capital and higher debt.
- Monitor the Guatemalan investigation, Tanzania listing requirement, tax disputes, license renewals and foreign-exchange exposure; verify any subsequent developments or provisions.