U.S. Markets close in 6 hrs 24 mins

Edited Transcript of NIHD earnings conference call or presentation 18-Mar-19 12:30pm GMT

Full Year 2018 NII Holdings Inc Earnings Call

RESTON Mar 21, 2019 (Thomson StreetEvents) -- Edited Transcript of NII Holdings Inc earnings conference call or presentation Monday, March 18, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daniel E. Freiman

NII Holdings, Inc. - VP & CFO

* Roberto Rittes

NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil

================================================================================

Conference Call Participants

================================================================================

* Adrian Keevil

* Lance William Vitanza

Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst

* Peter Fisher

PointState Capital LP - VP

* Pierre Safa

* Sergey Dluzhevskiy

GAMCO Investors, Inc. - Associate Portfolio Manager

* Thomas J. Hill

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, everyone, and welcome to the NII Holdings Fourth Quarter and Year End 2018 Results Conference Call. (Operator Instructions) The conference call will be available for playback in the U.S. through March 21 by calling 1 (800) 633-8625. Callers outside of the U.S. will need to dial 1 (402) 977-9141. The pass code for both calls is 21916103.

And it's now my pleasure to turn the call over to Dan Freeman, Chief Financial Officer of NII Holdings. Please go ahead, sir.

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone, and thank you for joining NII Holdings' Fourth Quarter and Full Year 2018 Results Conference Call. With me on the call today is Roberto Rittes, Chief Executive Officer of Nextel Brazil.

As a preliminary matter, let me inform you that some of the issues discussed today that are not historical will be forward-looking and, as such, should be taken in the context of the risks and uncertainties that are outlined in the SEC filings of NII Holdings, including our 2018 Form 10-K and other documents we have filed with the SEC.

In addition, during this call, we will be discussing certain financial metrics that do not conform to generally accepted accounting principles in the U.S., otherwise known as GAAP. For a reconciliation of these financial metrics to GAAP, please access NII's Investor Relations link at nii.com.

We have also posted a presentation on our website summarizing our results for the fourth quarter. Please refer to this presentation for additional details on our progress for the year. In addition, we have posted a separate presentation on our website summarizing the agreement we announced this morning to sell Nextel Brazil. I will refer to these slides later on the call.

I would now like to turn the call over to Roberto.

--------------------------------------------------------------------------------

Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [3]

--------------------------------------------------------------------------------

Thank you, Dan. Good morning, and thank you for joining us today.

As you saw from our news release this morning, we announced that our Board of Directors approved the sale of Nextel Brazil to America Movil. While we are pleased with the continuing improvement in our operations, the sale of Nextel Brazil provides the best opportunity to monetize our asset and avoid the need to make significant additional investment to fund the business and, potentially, to fund 5G. We plan to spend the majority of the time on this call reviewing the details of the proposed transaction. However, we'd like to first provide a brief review of our fourth quarter results.

We reported another solid quarter as we continued to grow our subscriber base while maintaining a healthy level of churn. At the same time, we generated positive consolidated adjusted OIBDA for the second consecutive quarter. In terms of subscribers, we reported 355,000 gross adds in Q4, up 15,000 from last quarter, due to the expansion of our national retail sales channel.

At the same time, churn decreased slightly to 2.62% for Q4, bringing churn for the second half of the year to 2.65%, leading our guidance of 2.75%. As a result, we gained 99,000 3G net adds in Q4, bringing our total for the year to 344,000. This was significantly higher than our guidance of 300,000 net adds. For the full year, we grew our 3G subscriber base by 14% to 3.3 million subscribers, making us the fastest-growing mobile operator in Brazil in 2018.

Most of our other KPIs were similar or better compared to last quarter. Our port-in ratio in Q4 was 3.6:1, slightly higher than Q3. This enabled us to continue gaining market share in both São Paulo and Rio. Complaints from our clients to Anatel decreased 10% compared to Q3. Our Net Promoter Score, or NPS, was 33 points in December, the same level as September. This is still the highest level among all competitors.

In fact, we were thrilled with our performance in Anatel's 2018 customer satisfaction survey published last week. Our main postpaid product had an overall satisfaction score of 7.71, the highest score of any active provider. In addition, we're happy our digital offer achieved as the highest ranking in prepaids.

Our success in driving these results stems from our focus on providing a high standard of customer service, what we call customer-centricity, to create a differentiating factor in Brazil's competitive telecom market.

Now I would like to call -- to turn the call back to Dan to discuss our financial results.

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Roberto. We ended a successful 2018 with solid fourth quarter financial results. We generated positive consolidated adjusted OIBDA for the second straight quarter and met our expectations for positive consolidated adjusted OIBDA for the second half of the year.

On the top line, our total revenue was $142 million in the quarter, flat compared to last quarter, as the higher revenue generated from a larger subscriber base was offset by lower ARPU. This primarily resulted from adjustments to revenue that we recognized during the quarter.

On the cost front, our total operating expenses increased by $6 million or 5% from the third quarter. Our cost of revenues was flat with the third quarter, as we recognized a reduction of cost related to operating tax credits and an offsetting loss for customer fraud we identified during the quarter. Our general and administrative expenses increased by $4 million from the third quarter, accounting for most of the increase in our operating expenses.

For the fourth quarter of 2018, our CCPU was $12, the same level we reported in the third quarter. As a result of the $6 million increase in operating expenses from the third quarter, our consolidated adjusted OIBDA for the fourth quarter decreased to $2 million.

We invested $24 million in CapEx this quarter. Total CapEx for the year was $64 million, higher than our expectations that it would be at a similar level in 2017. This was, in part, due to our previously announced decision to accelerate some CapEx planned for the first quarter of 2019.

In terms of cash burn before debt service, for the fourth quarter, we spent $26 million, an $11 million increase from last quarter. We also spent $17 million on debt service, primarily for interest payments. For the second half of 2018, we spent $41 million on cash burn before debt service and $32 million on principal and interest. This resulted in $73 million of cash burn, which was better than our guidance of $100 million.

During the fourth quarter, we received a $15.9 million minority investment from AI Media related to our joint investment in Nextel Holdings. We contributed our portion of $37.1 million in connection with this investment.

In terms of liquidity, we ended the year with $175 million of cash and short-term investments as well as $106 million of cash held in escrow.

To fund our business plan in 2019, we expect to use a significant portion of our remaining available cash and expect to receive additional investments from AI Media to maintain their 30% minority ownership. While we expect the sale of Nextel Brazil to close this year, if we were to fund our business plan in 2020, we would need to recover and start using proceeds from the Mexico escrow while also relying on additional investments from AI Media.

While we wait for the proposed transaction to sell Nextel Brazil to close, we will operate our business in the ordinary course, remaining focused on the continued improvement in our operations, profitably growing our subscriber base and efficiently managing our liquidity.

Now I would like to review the proposed transaction using the slides we posted on our website. We will start with Slide 5 of the presentation.

Slide 5 summarizes the key economic and legal terms of the transaction. The transaction value is 100% of Nextel Brazil at $905 million on a debt-free and cash-free basis, which we believe is a fair and reasonable value. The purchase price for the equity of the disposed entity comprises seller-friendly features. There is a customary net debt adjustment at closing. To our benefit, that financial debt will exclude capital leases and tower financing that America Movil will assume. The reported value of these liabilities was $69 million as of December 31, 2018.

Also, the purchase price will increase for the reimbursement by America Movil with cumulative CapEx spending and investment in working capital between March 1, 2019, and the earlier of closing in December 31, 2019. Both these adjustments are subject to a reimbursement cap.

In connection with the transaction, AI Brazil, our minority partner, will also sell its 30% equity stake in Nextel Brazil. The proceeds will be split according to the current 70%-30% ownership split after Access has received $2 million of our dividends per our current shareholders agreement.

The proposed transaction has been unanimously approved by our Board of Directors. The transaction is subject to customary closing conditions, the key ones being NII stockholder approval, CADE approval and Anatel approval. Note, there is a break fee of $25 million that will be payable to America Movil if NII decides to pursue a superior proposal. In addition, there is a $30 million indemnity cap fully secured by an escrow. We expect to close the transaction in 2019, and then subsequently start to wind down process of NII Holdings in the distribution of a portion of the proceeds received.

Slide 6 shows the simplified organizational structure of our group as well as the transaction perimeter. The entity being sold is NII Brazil Holdings, a Luxembourg-based holding company that indirectly owns 70% of Nextel Brazil. This structure allows us to utilize our tax basis to avoid U.S. tax leakage for NII. As discussed a few moments ago, Access Industries will participate in the proposed transaction and sell its stake in Nextel Brazil.

Following the sale of its last remaining operating company and repayment of the convertible notes, NII Holdings will essentially be left with cash and the remaining escrow from the sale of Nextel Mexico to AT&T in 2015. As I just mentioned in my remarks, we are continuing to aggressively pursue the recovery of the Nextel Mexico escrow.

In connection with the agreement to sell Nextel Brazil, we have reached an agreement with AI Brazil to solve our outstanding disagreement relating to the escrow. If the proposed transaction is consummated, AI Brazil will be entitled to the first $10 million and 6% of additional amounts recovered from the Mexico escrow.

Slide 7 provides a bridge from the enterprise value to our current best estimate of distributable proceeds to NII stockholders. As discussed earlier, America Movil will pay a reimbursement for CapEx and working capital incurred between March 1, 2019, and December 31, 2019, which we estimate to be $49 million assuming an August 31, 2019 closing. We will then deduct net debt excluding capital leases within the entities being sold at closing, which we currently estimate to be $535 million, resulting in a $420 million estimated purchase price for LuxCo.

As we have material amounts for reimbursement in debt denominated in local currency, there may be some fluctuation of the amounts I noted due to the closing FX rate. Our 70% share of the net proceeds after deducting $2 million of preferred dividends due to AI Brazil is estimated to be $292 million. After considering transaction costs and wind down costs, we estimate that NII's net debt will be minus $106 million at closing, which reduces the net proceeds to NII to $186 million. Factoring in an assumed $75 million recovery of the escrow after incorporating the settlement with AI Media, the estimated value to NII stockholders is $262 million or $2.58 per share.

It's important to note that at closing, $30 million of the net proceeds to NII will be placed into an 18-month escrow to satisfy any indemnification claims made by América Móvil, and losses against the Nextel Brazil escrow may reduce the final distributable value to stockholders.

Turning to Slide 8. I want to emphasize that proceeds distributable to NII stockholders and the figures discussed on the previous page are dependent on several factors, some of which are outside of NII's control. They include: timing of the closing; the FX rate at closing; performance of Nextel Brazil to closing, impacting net debt at closing and, therefore, purchase price; the recovery of a $30 million indemnity escrow related to the proposed transaction; and the overall recovery of the Nextel Mexico escrow.

In our decision to sell Nextel Brazil, we considered the risks of running Nextel Brazil as a stand-alone entity. Slide 9 highlights some of the challenges the company has faced in the long run should it remain stand-alone. First, Nextel Brazil competes in Brazil's 2 most competitive markets with a subscale position. Other players are larger with a broader product offering and, more importantly, have more assets and resources to ensure medium- and long-term development.

Second, despite strong EBITDA and cash flow recovery, Nextel Brazil is still not yet cash flow positive. Finally, and more important, our current liquidity is only enough to fund the business for 2 years. Assuming we recover the Mexico escrow, we will still need a significant amount of additional capital to fund current operations, to continue investing, service financial debt and competitively participate in the 5G spectrum option expected in 2020.

Turning to Slide 10. The contemplated transaction is a result of an exhausted -- exhaustive sales process. Nextel Brazil has been marketed off and on since NII Holdings filed for Chapter 11 reorganization in 2014 in 3 different sales processes. We conducted a broad search in terms of potential deal structures and counterparts, a significant number of local and global strategic players as well as financial investors were contacted. The sale of the business and other forms of structures were evaluated. We negotiated an increase in the value between the initial indication and today's price.

The company was assisted by leading global financial and legal advisors throughout the process. At the end of the day, that extensive process led to only 1 reasonable and actionable offer.

Finally, I would like to conclude on Slide 11 with a summary of the reasons we believe stockholders should support the transaction. First, based on the competitive backdrop and Nextel Brazil's financial position, we believe it is a fair and a reasonable proposal from an economic standpoint. Second, it is a result of a multi-year exhaustive sales process, and there is no indication that another offer will materialize in the future. Third, it represents an opportunity to monetize our investments in Nextel Brazil. Finally, if we were to continue stand-alone, we would need to raise a significant amount of capital to fund the business with the risk that it may not provide us with any reasonable return.

Now, I would like to turn the call back to Roberto for a few closing remarks.

--------------------------------------------------------------------------------

Roberto Rittes, NII Holdings, Inc. - Principle Executive Officer & CEO of Nextel Brazil [5]

--------------------------------------------------------------------------------

Thanks, Dan.

Our accomplishments in 2018 makes selling our Brazilian operation bittersweet. But as you have heard from Dan, we believe it is in the best interest of our stockholders in light of the significant additional capital we need to invest in the future, including potential investment in 5G. Despite the proposed sale, we will continue with our same approach to running the business, and we will keep you updated on our progress.

Now I would like to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Lance Vitanza with Cowen.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [2]

--------------------------------------------------------------------------------

A couple of housekeeping items here. So could you sort of review the cash position, both in Brazil and out of Brazil? Unrestricted cash as of the end of the year?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [3]

--------------------------------------------------------------------------------

Yes, Lance, it's Dan. So at the end of the year, our total cash consolidated was $175 million. And the breakdown of that cash is as follows. We had $94 million at NII and related entities. We had $46 million at the Nextel Holdings level, and then $35 million in Nextel Brazil.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [4]

--------------------------------------------------------------------------------

And refresh my memory, so the -- when we think about the 70-30 split, is that only refer to the Brazil entity? Or is Nextel Holdings a part of that as well?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [5]

--------------------------------------------------------------------------------

Yes, Nextel Holdings is a part of the entities being sold. So that includes the $46 million and the $35 million.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [6]

--------------------------------------------------------------------------------

Got you. Okay. And then I think you said that you've made a distribution -- or a contribution rather, down into the JV in the quarter. Is that right? Of $35-ish million? I couldn't quite hear the amount.

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [7]

--------------------------------------------------------------------------------

Yes, that's right. So we, during the quarter, we had put in about $35 million into Nextel Holdings. So the $46 million figure -- yes, between the $46 million and the $35 million it includes whatever's remaining of that contribution, and then AI Brazil also put in their amount of shares in.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [8]

--------------------------------------------------------------------------------

Okay. And then how do you get the $106 million of net financial debt at NII at closing? Could you give me the component parts there? I mean, obviously, you had to convert, but then is it just as simple as -- well, I'll let you do it.

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [9]

--------------------------------------------------------------------------------

Yes. No, that's right. It's the convert, obviously. The $115 million is the big liability, and then it was offset by what we believe will be cash remaining after continuing to fund headquarters costs and transaction costs. You need to leave some cash behind for wind down of the company. We have to make sure that in order to wind down, you have to leave enough cash behind to cover any potential indemnification claims or other claims made by third parties. So we have to leave enough in the business so that once that process is complete, whatever cash is left over at that time will be in theory distributed. But that number contemplates all of those items.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [10]

--------------------------------------------------------------------------------

So then -- okay, so then you have $94 million of cash at NII today. And essentially, this projects that you'll have about $9 million left at closing. And closing, we think, is going to be sometime later this year. Is that right?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [11]

--------------------------------------------------------------------------------

Yes. We expect closing will be sometime during 2019.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [12]

--------------------------------------------------------------------------------

Okay. So then you'd go through about 80 -- what is that -- $85 million, $86 million of cash over the course of the year. And then could you sort of give me the buckets? I know you've mentioned some items there, wind down, escrows and so forth. But how much of that $85 million burn -- is that contributed down into the JV going forward? Or is that just wind down costs going forward?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [13]

--------------------------------------------------------------------------------

No, you're right. So we'll have to continue to fund Nextel Brazil up until the closing. So some of the reasons for the reduction in cash from the amount I told you at the end of 12/31/18 to when we close is related to the investment in Brazil. And then in theory, we're getting reimbursed for a majority of those investments through CapEx and working capital reimbursements from América Móvil. So that's the big piece of the cash burn. And then there's just the continued net cost to run headquarters. That's about $4 million a quarter. That's been pretty steady. Then we'll have transaction costs, lawyers, bankers, other types of costs like that. And then, like I said, we'll need to leave some cash behind at closing to make sure we can wind down, pay off any remaining liabilities.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [14]

--------------------------------------------------------------------------------

Okay. And then how and when do you intend to deal with the converts? Do they get taken out at the wind down or before the wind down, when the sale closes, or some other time?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [15]

--------------------------------------------------------------------------------

Yes. So when the sale closes, the -- a portion of the cash will go to pay down the converts at that time.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [16]

--------------------------------------------------------------------------------

Okay. And then just on the business, I mean, it looks like the business is actually doing very well. I hear you regarding the need to fund the business and whatnot and the competitive factor and so forth. But it does occur to me, I mean, the $905 million of enterprise value, I believe if I've got the number, that's less than the company paid for its spectrum holdings several years ago. I think I totaled those numbers up to closer to $950 million. So I'm wondering if there were -- I know you ran a very thorough process. This is the best that you could do. I'm wondering if there were specific issues that dissuaded other people from coming in and participating more aggressively in the process. Or is there any sort of additional color that you can provide there to give us some sense for how we wound up at this price?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [17]

--------------------------------------------------------------------------------

Yes, sure. No, I mean, we -- as we mentioned, we ran a pretty competitive process. We contacted probably 40, 50 different interested parties over the last couple of years. At the end of the day, there was a handful of interested parties that engaged with us in diligence and other ways. We ended up with only 1 credible, reasonable offer. It's the one that we acted on and announced, which is América Móvil. We did have 1 other unsigned, unbinding offer that was worse than the one we got from América Móvil. So our -- we ran the process. We got the feedback from the market that suggested this is what the company is worth in their view. I think there's puts and takes. We don't obviously know exactly how everybody thinks internally about the value. But clearly, there's value in the spectrum and in the subscribers. We think there's some offsets and negatives that people saw. In particular, the network is -- there's a lot of potential overlap with other network operators. So there's the cost of having to take down the network. There's the continuing obligations we have under all the leases, both operating and capital, for many, many years that are expectedly a liability, but not necessarily completely on the balance sheet. There's a significant amount of contingency exposure that's out there as most other operators have as well, the operators in Brazil. It's kind of part of doing business there. The significant amount of potential exposure for tax and other types of contingencies, we've disclosed that, I believe, in the 10-K. The latest amount was over $800 million of possible contingencies. So I think that as market participants view the opportunity, they weighed both the pros in terms of the assets as well as the cons, and that's where it came out.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [18]

--------------------------------------------------------------------------------

Got it. One last question if I could. I want to go back to the conversion. There was some language in the press release that I didn't quite follow regarding a possible amendment to eliminate obligations contemplated under or an escrow agreement providing for a deposit in accordance with the indenture. Could you clarify what that is? I apologize if I missed it earlier.

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [19]

--------------------------------------------------------------------------------

Yes, sure. I mean, in the convertible notes documents, we have a requirement under a change of control that we have to set aside the amount under the converts as an escrow. So that's what's contemplated by the agreement. It's that we would do that. So unless we otherwise amend, there's a requirement that once the transaction closes, we'll take $115 million of the proceeds and place it into escrow to pay the convertible note holders.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

(Operator Instructions) We do have a question from Sergey Dluzhevskiy with GAMCO Investments.

--------------------------------------------------------------------------------

Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [21]

--------------------------------------------------------------------------------

Just a clarification question on Slide 7.

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [22]

--------------------------------------------------------------------------------

I'm sorry. I can't hear you.

--------------------------------------------------------------------------------

Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [23]

--------------------------------------------------------------------------------

Can you hear me now?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [24]

--------------------------------------------------------------------------------

Yes, that's better. Thanks.

--------------------------------------------------------------------------------

Sergey Dluzhevskiy, GAMCO Investors, Inc. - Associate Portfolio Manager [25]

--------------------------------------------------------------------------------

A clarification question on Mexico escrow recovery. You put it that $75 million net of settlement was AI Brazil. Does it assume that -- is your starting point the $106 million? Or do you assume a lower Mexico escrow recovery amount net of that settlement? So I guess, the question is whether the delta between $106 million and $75 million is just a settlement or some other items as well?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [26]

--------------------------------------------------------------------------------

Yes. It's a combination of both. We're expecting that both as we've had it with other settlements with the Mexican tax authorities. We've had to -- a sum amount for each of the tax years we've settled. So we expect that will continue until we've assumed some continued leakage to be conservative. So that accounts for part of the difference between the $106 million and the $75 million, and then the other part is the settlement with AI Brazil that we mentioned, the $10 million upfront plus 6% of any incremental proceeds. So the combination of those 2 factors reduces the estimated escrow proceeds from the current balance of $106 million to the $75 million.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

The next question comes from the line of Peter Fisher with PointState Capital.

--------------------------------------------------------------------------------

Peter Fisher, PointState Capital LP - VP [28]

--------------------------------------------------------------------------------

Guys, can you just remind me of the tax assets that the company's Brazilian operations have? And whether those transfer in the sale?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [29]

--------------------------------------------------------------------------------

Yes. I don't have the numbers in front of me. But I think it's pretty significant. I want to say it's a couple of billion dollars of NOLs. We understand from América Móvil that those have little value to them, and there weren't other operators that suggested that this had a lot of value. I believe they do transfer in the sale, but I'm not sure that there's a plan necessarily for those to be utilized.

--------------------------------------------------------------------------------

Peter Fisher, PointState Capital LP - VP [30]

--------------------------------------------------------------------------------

Sorry. Did you say there were other operators who did value them or did not?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [31]

--------------------------------------------------------------------------------

Did not. No, no. Most of these operators already have NOLs adding more to the bucket. It didn't seem to be adding much value for them.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from the line of Tom Hill with PlusTick.

--------------------------------------------------------------------------------

Thomas J. Hill, [33]

--------------------------------------------------------------------------------

My question was answered.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from the line of Pierre Safa with Silver River.

--------------------------------------------------------------------------------

Pierre Safa, [35]

--------------------------------------------------------------------------------

So I guess, just going back to the NOLs. I have 2 -- I mean, I understand your comment about what AMX believes, but you have $2.1 billion in NOLs in Brazil. So I'm surprised to hear that some of these third parties believe that there's no value to that. That's, I guess, the first, I guess, question, comment. And then the second one is the NIHD, the holding in Luxembourg has very significant billions of dollars of NOLs, additional NOLs. So I'd like to understand what happens to these post the transaction?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [36]

--------------------------------------------------------------------------------

Yes, a couple of comments. So I don't have the numbers in front of me. I'd suggest just go check the filings of the other operators. We believe they already have a lot of NOLs themselves. And so in Brazil, you can only use NOLs up to 30% of your income every year. So imagine that for years and years and years they have their own NOLs they would use up to 30%. By the time they got to our NOLs, it's potentially so far out there, it really has very little entity. Again, but that's -- that's neither here nor there. We ran a process. We got an offer in at a value for the whole company that takes into account all assets and liabilities, and it kind of is what it is. In Luxembourg, we do have NOLs as well, and those would only be potentially valuable to someone that actually had operations in Luxembourg, who had gains or income that they needed to offset. So it's kind of same response. There really weren't many parties even interested in buying in Luxembourg because a lot of parties don't have business there. And so for us, it was a preferred structure by being able to sell our Luxembourg entities simplified for us. It allowed us to avoid tax leakage on the transaction. We are not expecting to have any tax leakage. So that was a plus for us, and the NOLs will go with the companies that are being sold.

--------------------------------------------------------------------------------

Pierre Safa, [37]

--------------------------------------------------------------------------------

Understood. And then just quickly, you said you expect to consume $85 million in cash between December 31, 2018, and the transaction closing. How much of that is CapEx that you believe will be reimbursed?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [38]

--------------------------------------------------------------------------------

Well, the -- so to be clear, that's the cash that's sitting at NII, not -- that does not include cash being spent in Luxembourg or in Brazil. So we'll invest a portion of that cash in both of those entities and then get reimbursed to the extent that that cash is used to fund CapEx and to fund working capital. We have put into the investor presentation on our website an estimate of the amount of reimbursement that we would have assuming an August 31 close, it's an arbitrary close. And it's $49 million of reimbursement for the period between March 1 and August 31 for those reimbursements.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

The next question comes from the line of Adrian Keevil with PlusTick.

--------------------------------------------------------------------------------

Adrian Keevil, [40]

--------------------------------------------------------------------------------

Guys, I have a quick question. How much cash would it cost to operate the company from 2020 and beyond? And the reason why I ask is it feels to me like the Brazilian telecom market is on the cusp of consolidation. You have an excellent management team. The results have been great. There are ways to run the business more efficiently, like there's a like a roaming agreement announced last week. And so my question is, what do you think it would cost to run the business as a stand-alone? And are you selling -- do you feel like you're selling the company too early on the cusp of what could be a major transformation, both in the economy in Brazil and the industry itself?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [41]

--------------------------------------------------------------------------------

Sure. Yes. So I think we said in our remarks that we expected to use a significant portion of the $175 million of cash we had at December 31 to fund the business for 2019 and that we would need to be able to access the remaining funds in the Mexico escrow to be able to fund us through 2020. If we're not able to access those funds, then by the end of this year, we would be in a pretty significant liquidity crunch. We do continue to expect to recover most of that escrow as one of the previous people asked. We are estimating $75 million, but the timing of the release is not in our control. It's something we've been working on and continue to work on, and we're making progress, but it's a risk. Beyond 2021 -- 2020, sorry, in 2021, we need to continue to fund the business. I would say we would need $100 million plus to continue to fund the business until we got to free cash flow or breakeven. So we would need to basically use all of our existing cash, use all of our recover and use all of the cash held in escrow and raise probably another $100 million, and that doesn't even include any potential investments we'd have to make in 5G. The Anatel, the regulator in Brazil, recently announced that they're planning to have an auction next year, early next year for 5G. They haven't given any details. We do expect that the cost of acquiring the spectrum and building out 5G is going to be in the hundreds of millions of dollars. So we're at a point now where we've run a pretty thorough strategic process. The market's kind of told us, indicated what the company is worth continuing on in a stand-alone way. While the operations are obviously continuing to improve and heading in the right direction, it requires a significant amount of capital, and there's a lot of risks in operating in Brazil. And then a question about what role, if any, we could play in 5G development. And if we don't, then it's going to be difficult for us to compete in the long run. So we kind of added all those factors up and looked at the offer on the table and decided that this was reasonable value. We've gotten advice from advisors on valuation, and we believe this is reasonable for the company. And we decided this is probably the best path for stockholders at this point in time.

--------------------------------------------------------------------------------

Adrian Keevil, [42]

--------------------------------------------------------------------------------

So to summarize, you have existing cash. You would have to raise maybe a couple of hundred million to get through to the point of the 5G auction and continue operations? Is that fair to say?

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [43]

--------------------------------------------------------------------------------

Well, just to clean that up a little bit. So the 5G auction has -- we expect to be early next year. So we have enough cash to get to the 5G auction. But then the direction is, could we participate? Where is the capital going to come from? If we don't participate in 5G, what does it mean for us in the medium to long term? If everybody else has 5G and we don't, if there's no other future offers on the table and we don't take this one, and then we invest all of our cash and then need to raise more, and we don't know whether that capital is going to become available for us, there's a lot of risks in rolling the dice and continuing to move forward. So our view is we have a reasonable offer. This is -- and we've run a competitive process. We could run it again, but I don't -- we don't expect we're going to get a different outcome. So it just felt like, "Okay, this is the right thing to do."

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

And there appear to be no further questions. I'll turn the call back over to you for your closing remarks.

--------------------------------------------------------------------------------

Daniel E. Freiman, NII Holdings, Inc. - VP & CFO [45]

--------------------------------------------------------------------------------

Thank you. Thanks, everyone, for joining today, and we're happy to take additional questions off-line today and tomorrow.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.