Millicom International Cellular S.A. (TIGO) Q3 2013 Earnings Report, Transcript and Summary

Good morning and good afternoon, ladies and gentlemen, and welcome to the Millicom Financial Results Conference Call. Today’s call will be hosted by Hans-Holger Albrecht, President and CEO; and Marc Zagar Interim CFO. Following the formal presentation by Millicom’s management an interactive Q&A session will be available. I would now like to hand the call to Justine Dimovic, Head of Investor Relations. Please go ahead.

Thank you. And good morning. Welcome everyone to the Millicom third quarter results presentation. My name is Justine Dimovic and I am the Head of the Investor Relations. Today’s presentation slides can be found on our website, www.milicom.com. Before we start I would like to remind everybody that the Safe Harbor statements will apply to this presentation and the subsequent Q&A session. With me today on the call are our President and CEO, Mr. Hans-Holger Albrecht; and our Acting CFO, Mr. Marc Zagar. I will now hand over to Hans-Holger to give an overview of our Q3 results and operational performance, after which Marc will take you through the financials, and we will conclude with a Q&A session. Let me now pass over to Hans-Holger.

Thank you, Justine and hello everybody and thanks for joining to our call today. I hope you had all the time to read the results we have issued earlier this morning. And as you can see it has been an encouraging quarter for us with revenue accelerating now into double-digit, each of the four pillars of growth strategy have contributed to this as our investments are beginning to show some results. In Mobile we added over 1.5 million customers in three months. In Africa we have begun to turn things around. As an example of our determination in this continent in DRC you can see we added 250,000 customers in just three months as we returned to the country's troubled Kivu region. So this was a strong point and a good effort from us for the future. We see as well the strong shift to data continues with another million users added in the quarter. Now 50% more of our customers are using data than in September last year. This trend has been boosted by the doubling of smartphone sales in just six months as customers demand more from our services. Many of you I am pretty sure have smartphones which cost normally over $500. Those are of most of our customers nowadays cost under $60 and perform equally well. So clearly those kind of handsets become attractive to our market as well. Overall I think the pace is fast and in a few weeks time we will be launching free mobile access to a leading social media network in one of our markets as another test case to transform our offering to the kind of digital lifestyle. And obviously there's much to come. In Cable & Digital we now have the post back up of full line of cable…

Thank you, Hans-Holger. So please turn to slide 15 for the financial highlights. Firstly if we look at the developments in the revenue drivers in the quarter we can say we made very good progress in all business units. Turning to Mobile first of all, as Hans-Holger mentioned, we gained 1.5 million new mobile customers in the quarter, of which 1.1 million came from Africa and 0.4 from South America, a very good acceleration from the first half of the year, taking us now to a now to a number, mobile active customers around 49 million. In the Cable and Digital Media area we had year-on-year growth of 34% in our homes connected to 850,000 approximately. The MFS active customers ended at 5.5 million a year-on-year growth of 65% taking the MFS penetration over 11% at the end of quarter three and up from 10% in Q2. The Mobile ARPU continued to show some decline year-on-year albeit at a slower pace than in Q2. The decline was 2.7% versus 4.7% in Q2 and if we exclude the regulatory impact than the ARPU was only down 0.6% year-on-year. The Cable ARPU was up year-on-year in local currency and despite heavier completion in Costa Rica we still made good gains in customer numbers as I mentioned. MFS showed a double digit growth in the ARPU reaching $1.4 in the quarter and obviously accompanied by a strong growth in the customers active and the penetration. Revenue numbers showed a growth of $7.6% on a reported basis, and on a local currency and same perimeter basis we had 8.1% growth in the quarter, which if we adjust for the negative impact of regulatory in the quarter would have shown an underlying growth of 10%. EBITDA this quarter of $459 million after online and one-off…

Thank you Marc and let me maybe conclude by confirming what I said last time. As you all have seen we are in a very strong investment phase. And this kind of phase will continue. This is what underpins the transformation of a company into a all round provider of diversified digital services. It is done prudently with great discipline and clearly within all previous guidance. The important transactions such as in Bolivia and Columbia are so necessary to make the leap from a slow lane voice service to the fast track digital lifestyle service provider. So with this closing remark we hand over now to the moderator to get the first question for the Q&A session.

Thank you, sir. (Operator Instructions). The first question comes from Laurie Fitzjohn from Citigroup. Please proceed with your question. Laurie Fitzjohn-Sykes – Citigroup Thank you. I have three questions, if I may. Firstly as the regulatory headwinds reduce in Q4 and Q1 should we expect growth to accelerate further or are there headwinds that we also should be aware of affecting that? And secondly on the negative working capital you said this is due to smartphone but I thought your present handset cost that you just explained how the smartphone subsidies are leading to a negative working capital? And then the thirdly I mean MFS revenue is growing very strongly but I think you previously said you expected a $100 million revenue for this year. And you stated $56 million making it a bit of a stretch. I am just wondering what will be the net effect of that on the MFS revenue? Thanks.

If I may be take the first question and the third question and Marc can answer the second question. And I mean as you know when it comes to regulatory impacts and taxes it's a bit of a guessing. We don’t anticipate going to the fourth quarter next year that we have such big impact like we had this year, particularly at the beginning of the year. And so we’ll kind of more normal kind of pressure like we had before. And remember it's about the kind of impact we have when it comes to regulatory pressure it's coming down the more we have the kind of reduction in those kind of charges. So overall I think the regulatory situation should be more fine but again you can never 100% prophesy obviously what’s happening there. When it comes to MFS I don’t think we have changed any kind of guidance, we have never been very specific when it comes to regulatory target for this year. I think we see the kind of key driver for us are on the product side which is the kind of penetration level that we have in the markets we have been operating for a while and we see the kind of acceleration particularly when it comes to markets like Chad and Tanzania and Rwanda. So I think everything when it comes to MFS that is inline. We can see that Western Africa takes a bit more time than Eastern Africa and we have also not overseen Senegal during the fourth quarter which would then accelerate growth as well. And in Latin America the picture is bit different where you can see good traction when it comes to Paraguay, the other markets still have to pick up. So in terms of guide and forecast when it comes to the MFS revenue it is major difference.

I think the second question was about the handsets? Laurie Fitzjohn-Sykes – Citigroup Yes, that's right.

Yeah so hi, Marc here. Yes, you are right the subsidies and therefore the impact of the handset is booked through OpEx. When we referred to the working capital impact of this we were talking about the build-up of inventories because obviously as we significantly increase our, continuously increase our data penetration and mobile data users over time we need to build inventories in particular in preparation for the end of the year. So that was one of the key drivers that we mentioned. Laurie Fitzjohn-Sykes – Citigroup: Okay, thank you.

Thank you.

Thank you. The next question comes from JP Davids from Barclays. Please proceed with your question. JP Davids – Barclays Capital: Hi, good afternoon everyone. Firstly on South America, a much stronger performance there. Specifically can you touch on how things are progressing in Columbia and whether you starting to repeat some of the subsidies that you’ve been pushing into that market? And then the second question is on Africa. You clearly got a more positive turn on this division. And is that really more around the longer term prospects for Africa? Or is it that within the next 12 to 18 months you can see these assets return to inflation type growth? Thank you.

When it comes to South America, yes it's a kind of fast moving segment in the Group and Columbia has been a big part of it. I think we see the same momentum more or less like we had in the previous quarters whereas the data pick-up has been very strong. And it has been of course supported by the campaigns we have been doing in terms of bundling with other services like music for example, the Tigo music service is very strong. And one of the other key drivers obviously has been the push of lower cost handsets into the market which then fuels the growth as well. Thus we have been seeing the kind of [re-resurgence] when it comes to prepaid data sales in Colombia and Latin America which had been positive and so this kinds of plays as well. So overall I think it's the continuous performance we have accelerated a bit by as I said headset and the marketing push which we believe fundamentally should continue since the Tigo brand is very strong. And once the UNE transaction would be approved hopefully than we can even accelerate those kinds of double sales like cable and mobile stronger. So I think it's nothing extraordinary it's just you see the fruits of all the kind of changes in investment we did in the last couple of quarters. When it comes to Africa I think the African performance indicates one fundamental point which we have been saying before. That is called potential and once you start to invest in Africa we see kind of correlation between investments and growth. So the statement we have made earlier that, earlier this year that it’s not only a market issue it’s as well the kind of execution, operational issue or investment or level of investments you do is proven to be correct and hence growth is accelerating. To what extent we never give a kind of forecast but it should be a growth story. We always can reiterate the kind of three dynamics we have when it comes to Africa that the overall penetration of our phones is around 50%. Over 40% of the population is younger than 18 years in the markets we operate in. And therefore the growth compared with the macro growth as well should be very positive going forward. So we are positive when it comes to Africa, it's good results but we still have a long way to go as well because there are longer term issues we have to fix like brand and other items. But it confirms that we have a positive outlook when it comes to Africa as such. JP Davids – Barclays Capital: Okay. And just a quick follow-up on the investment related to Africa so do you this continuing to weigh on margins into 2014 or do you think you are at a sustainable level of investment currently? Thank you.

We are at a sustainable level of investments currently. The basic question in the five-year ride we have basic question of how fast you want to accelerate those investments. And that has to be more tactical driven than time driven on how our side which we are looking to now in the budget process. But on the fundamentals we are at the right level it's more you want to accelerate or not accelerate that we have to decide ourselves. JP Davids – Barclays Capital: Thank you.

Thank you. The next question comes from Chris Grundberg from UBS. Please proceed with your question. Chris Grundberg – UBS: Thanks very much. I just had a couple of quick ones actually. First was you can just confirm the longer term guidance on the online business hasn’t changed just in terms of three year picture? And then secondly also on online in terms of the business mix, you obviously described that the classified segment has come through stronger. I just wondered if you could give a bit of color around that shift in the portfolio or indications was that something you were expecting or aiming for, I just wondered what’s actually changed that to whether it’s deliberate or not? Thanks.

Yeah we can confirm the guidance we have been giving on the online side. There is no change in respect of that. And let me may be just draw the picture a bit wider so to get a kind of on the same, this is a business we haven't been operating more than eight months now or nine months at the latest, so it’s pretty young business, we are not through the first cycle hence forecasts are always changing slightly off course and you have to adjust the guidance to you as well. The underlying trends and you look to the kind of three KPI in terms of customer acquisition, tracking all this kind of element is positive and because the overall picture hasn’t changed. And the other good news is that we keep a very disciplined correlation between growth in terms of revenues and cash flow. While that’s changed a bit indeed, this is one of the things this is what happens with young business it’s a kind of revenue mix we have seen during the third quarter and may be going forward we’ll see as well whereas classified is picking up and become one of the kind of revenue drivers. But even more important as well as is on the e-commerce side we’re shifting a bit more away from pure e-commerce to a kind of combination of e-commerce and marketplace. So it’s a kind of very successful model we have seen in China with Alibaba, we’re trying to implement in our market as well, which of course will mean you have lower revenues on items you sell when it comes to marketplace but you have obviously much better margins when it comes to those kind of businesses. So the mixture of those kind of elements is changing gradually sometimes forecast, it doesn’t change the kind of underlying business model and it’s nothing that's concern for us really. Chris Grundberg – UBS: If I could just, I have a follow-up on that.

Sure. Chris Grundberg – UBS: Then implicitly if your medium term guidance hasn’t changed but your revenue models have maybe altered fractionally in terms of the sort of portfolio shift, does that actually imply more confidence on these classified business if you’re looking at the same revenues, you are saying these are inherently lower revenue businesses?

No, I mean it’s just we are too early to make a kind of clear breakup exactly where you are going. I think the biggest concern we have been always hearing from the market which is right is what is the kind of cash burn, what is the kind of risk you’re facing? And in that respect I would say the correlation is not -- hasn't changed. Where the revenues are coming in detail is to be seen I think after couple of months as well. And secondly when do you have the kind of peak of the investment, that maybe doesn't count as well as now, because it looks like the cash need is not as high as it has been so far. So those are things which are kind of moving target, but if you take it on a three to five year horizon, as we have always mentioned, it hasn’t changed. Chris Grundberg – UBS: That’s helpful. Thank you very much.

Thank you.

Thank you. The next question comes from Stefan Gauffin from Nordea Bank. Please proceed with your question. Stefan Gauffin – Nordea : Yes, hello. I was also looking into this online classified business but that was just response to. I will follow up on data subscriber development. You have been pushing for data subscriber intake in Latin America, but this quarter the data subscriber intake was primarily coming from Africa. Do you see that, that kind of intake could be ongoing or is this a little bit too early for data growth in Africa? Thank you.

We hope of course it’s going to be ongoing. I mean it’s actually underlying you will have a kind of intake of data subscribers when it comes to Africa. To what extent you can push it, what extent you open your regions and to what extent you can get a kind of pipeline for customers up and running is a bit too early to say. But structurally obviously just to remind you, data will grow in Africa as well over time, absolutely. Stefan Gauffin – Nordea : Okay. Thank you.

Thank you.

Thank you. The next question comes from Barry Zeitoune from Berenberg. Please proceed with your question. Barry Zeitoune – Berenberg Bank : Hi. I’ve just got a few questions. First of all on the DRC expansion, can you give us some color in terms of the how much EBITDA that cost you this quarter, how much EBITDA you expect it to cost you in coming quarters and where do you see further expansion opportunities in the coming quarters or years ahead within DRC? And my second question is on subsidies. I was just wondering whether you can give us some color on where you expect subsidies to peak. Is there kind of a number or guidance number you could give us of where you would expect that number to peak going forward? And then my third question is just on cost cutting, it was something that you talked about last quarter, you’ve been quite quiet on it this quarter. Are we likely to see some benefit of cost cutting coming through in Q4, and is there any benefit that is evidenced in Q3? And then my last question is just really on voice revenue trends. It looked to be a lot better this quarter than it had in recent quarters. You gave obviously quite a negative picture you have of the market there as a minus 3% to minus 5% CAGR going into 2017. Do you think that you can better that minus 3% to minus 5%, are you getting more positive than you did in the past. Thank you.

Okay. If I start with the first one which was the DRC expansion, I don’t think we’re going to breakup individual -- on individual country levels what the impact will be on EBITDA but obviously it will cost. At the same time, the good thing is in and you have seen particularly when you kind of reach an expansion you see the impact on the revenue side immediately as well and you see the pickup in terms of customer. And therefore we do -- we treat DRC like we would treat any other African country that we should have the kind of balanced expansion investments into new regions and new customer intake going forward. DRC as you all know is probably the most interesting and the most challenging market it can be in the Africa simply because of the size of the market. So there you are going to see for a long time the opportunities to invest and you will see the growth at the same time. And that is the kind of game we want to capture. But we don’t break it down into individual markets. I think the second question was about subsidies and the kind of level we have been integrated peak or is it going to change going forward? It’s depends a bit on the consumer obviously, it's not fully in our control and what kind of competitive level you have in each market and what kind of subsidies you have to give. Long-term as I say we believe in the positive trend that handset prices in our markets are coming down to bill prices below $60 now even which will change fundamentally, I think the way we can treat handsets, combined with the impact that most of our markets, strong or brands are not…

Yes basically the idea there is that revenues are going up and the kind of absolute amount you spent stays the same. And secondly we still believe there is lot of efficiency which we are pulling in right now into the system particularly when it comes to network design, procurement and network rollout. And so if you remember I told that we have a peak of initiatives during this year when it comes to billing systems and CRM systems, those kind of things. So long term I think the 15% target we have is fine in absolute terms it should be pretty similar amount. Barry Zeitoune – Berenberg Bank : Okay. Thank you.

Thank you.

And I please ask everyone to limit to one question and one follow-up as we are running out of time. Thank you.

Thank you. The next question comes from Sven Sköld from Swedbank. Please proceed with your question. Sven Sköld - Swedbank: Thank you. I’ll stick to one question then and I would like to focus on Online. You lowered the guidance for EBITDA losses for this year but you still as I understand keep the U.S.$340 million in operating losses for the three year period, is that correct? So losses should increase next year or 2013, is that right?

Yes. As of the knowledge we have today we keep it exactly as it is, so there is no change in that. Sven Sköld - Swedbank: Okay, great. And a follow up question then. Can you give us the Colombia margin, please?

The Colombia what, excuse me? Sven Sköld - Swedbank: The margin in Colombia.

We think very similar to what we’ve had in the past quarters. Sven Sköld - Swedbank: Around 75%, 76% is that….?

Yes, exactly. Sven Sköld - Swedbank: Right, thanks.

Thank you.

Thank you. The next question comes from Torsten Achtmann from JPMorgan. Please proceed with your question. Torsten Achtmann – JPMorgan : Good afternoon. You are pushing the growth button now for few quarters and so far you're taking lots of new customers. Are you seeing any reactions from competitors in the markets where you take share and if not why do you think that is so, seems [to be a case of] sitting there and you are taking all the growth out of the market? Thank you.

Yes it depends of course which market you are talking and where you are. I think if you make it very simplistic in order to save a bit of time I think in Africa it's more that we are coming back to keeping market share, to taking little bit market share but it's not a major shift. It's more that we participate in the kind of overall growth in those markets, if we can trust figures from the places here. So I don’t think that’s a key issue and therefore we haven’t seen any kind of major reaction from competition on that sense. Actually it seemed to become a bit less competitive or less fierce competition when it comes to Africa for the time being. And in Latin America the picture depends a bit where you are but in Columbia, yes but if you now recall that we have a regulatory support right now so it's a bit doubtful[ph] and Paraguay for their overall market which is positive so no major changes there at this stage. In Central America we feel the competition is stronger so there you can see it's a tough environment for us. Torsten Achtmann – JPMorgan : Okay and any indication if that is increasing or is it getting soft enough as broad as we can speak now?

If you take it for the full group I think it stays as it is. I mean there is no major changes they are individual markets but perform from a group level I don’t think there is any major changes. Torsten Achtmann – JPMorgan : Great, thank you.

Thank you. The next question comes from Erik Pers from Danske Market.

I have a question regarding cable business in Central America. You have acquired impressive growth in the number of households passed. And then I was wondering -- I mean first of all how much of this year's CapEx is associated with that growth in households past in Central America? And also if there is a little bit of a lag then I suppose in connecting these households, the number of households connected isn't growing as fast. Can you help us understand the timing here, will these new households be connected in the near future or how does it work?

Yes, as it comes to the CapEx on the cables then we don’t break it individually what the roll out is costing but it's then -- it's not (inaudible), it's not huge but you remember that in those markets in contrary to [them of course now] we do the cable pole to pole so we don’t dig the cable into it, so it's not that high. What you have seen now is the exactly the home passed have increased and now we have to turn those houses into customers which is simply the kind to sales effort we have to do. So that’s the kind of task for the next couple of quarters to convert passed homes into customers homes.

Okay and then that’s going to take you think a few quarters before you can get converted, yes?

Yes, it will take a few quarters or couple of quarters, depends on again it depends on the markets, it's always tough to talk so general but it depend on the market and the competitive landscape you are into. In some markets it will come faster in very competitive markets you may have to work a little bit hard.

All right, thanks.

Thank you.

Thank you. The next question comes from Sergey Dluzhevskiy from Gabelli and Company. Please proceed with your question. Thank you Sergey, please go ahead with your question.

I think he found the answer.

I do apologize there is no response from his line. The next question, which is the final question which comes from Bill Miller from Hartwell. Please proceed with your question. I do apologize, he has [de-polled] from the question. Go ahead please.

Okay so thank you I think we will stop here. If there are some more outstanding questions and some technical issues please do contact investor relations after the call. Thank you everyone.

This concludes Millicom’s financial results conference call. Thank you for your participation. You may now disconnect.