Millicom International Cellular S.A. (TIGO) Q4 2012 Earnings Report, Transcript and Summary

Good morning and good afternoon ladies and gentlemen. And welcome to the Millicom full-year financial results conference call. Today's call will be hosted by Hans-Holger Albrecht, President and CEO for Millicom and Francois-Xavier Roger, CFO. Following the formal presentation by Millicom's management, an interactive Q&A session will be available. I'll now turn the cal over to Justine Dimovic, Head of Investor Relations. Please go ahead.

Thank you, welcome everyone to the Millicom fourth quarter results presentation. My name is Justine Dimovic and I'm the Head of Investor Relations. I hope you all located the slides for today's presentation on our website, www.millicom.com. Before we start, I would like to remind everybody that the Safe Harbor statements 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 CFO, Mr. Francois-Xavier Roger. Without further delay, I will hand over to Hans-Holger who will present our Q4 results and update on our development of business category.

Thank you, Justine and good morning and good afternoon to everyone and thank you for listening in. Since it is my first conference call for Millicom, I want to take the opportunity to give a short overview of the impressions I have after being CEO now for a bit more than three months, a short description of the kind of challenges we see, and the kind of great opportunities we see as a management team going forward as well. I think we start with the challenges of the kind of things we have to look close and work on in the next coming months. Obviously, it is a kind of crossroad the company is in right now in terms of moving from an old business to a kind of new business. And you have seen probably when reading the announcement and the data and the statement that for the first time for example, our revenues on voice has been declining, which is due to price pressure, and the competitive landscape we're in, and the regulatory impact. It's nothing new, but it's a kind of underlying trend. I think the old management has been hired I think. And we can see as well it is accelerating a bit more relative going forward. The second challenge over the year is the kind of move the company started very successful. But it's in the middle of it moving from pre-pay to post-pay and from voice to data, which of course recur as high investments, higher subsidies, and as well a kind of different skill set in the company, which then results in investments in people and overhead as well. I think the third impression as a new CEO, which is more Millicom specific, there's obviously a kind of catch-up effect when it comes…

Thank you very much, Hans-Holger. I propose that you move to slide 22 and 23. In Q4 we recalled these local currency underlying revenue growth of 6.4%, excluding the external growth resulting from Cablevision in Paraguay. For the full year of 2012, revenue growth reached 8% in local currency excluding Cablevision consolidation. Restating as well for regulatory impact on reclassification that impacted us in the year 2012. Revenue growth and local currency was 8.5% for the full year. In Q4, our consolidated EBITDA margin as 41.7%, were 3.8% hedge points lower than Q4 2011. Excluding Online, EBITDA in Q4 reached $535 million dollars, the margin of 42.6%. Overall for the full year 2012, our consolidated EBITDA margin of 42.9% was down 3.2 percentage points versus 2011, in line with our guidance. The declining EBITDA margin in 2012 was primarily the result of investments in building scale in our most promising business areas outside Voice, such as MFS, Mobile Data, Online [inaudible]. We invested $388 million in CapEx during the year, making a total of $922 million, invested in 2012, equivalent to 19% of revenues, excluding investments made in Spectrum and license rights. Our operating free cash flow for 2012 reach $1 billion, 127 million, or 23% of revenues, which is above our 2012 outlook excluding Spectrum investments. Now let’s move to slide 24, and look at the performance in each of the three regions starting with Central America. Revenues from Mobile and Cable Operations in Central America reached $481 million in Q4 2012, up 2.4% in local currency. In Q4, markets continued to be very competitive. Central America reported a 6% year-on-year local currency decline in Mobile ARPU. Many attributable to ongoing pricing pressure on Voice, in El Salvador, and intensifying competitive pressures in Guatemala. In the Information category, Mobile…

(Operator instructions). Your first question comes from the line of Laurie Fitzjohn. Please ask your question.

Thank you. I have three questions, if I may. Firstly, on organic growth, we obviously saw quite a slowdown from 8.4 to 5.5. Given that when the [inaudible] when [TR] cuts continue through 2013, should we expect the slow growth to remain for '13 for organic, or are there reasons such as [Latin price cuts] [inaudible] that growth recover? Secondly, on margins - in the presentation you show a breakdown of the margin drivers in Q4. I was just wondering, could you provide us some more color around '13 for what you expect to be the margin headwinds of the increased subsidies investments or investments in MFS. Lastly, [inaudible] in any comments around the rising competition in Guatemala, given that previously it seemed to be quite a stable market, [while you have been increasing your share]. Thanks.

I will take the first one, as it comes to the organic growth. No, we do not give details for [inaudible] the profile. The main driver for the [Dominican] will be [inaudible], where the regulatory can impact too much [inaudible] and then other things, depending on the type of [inaudible] we have. I think we demonstrated in the fourth quarter and we should demonstrate in the course of this year as well, that the new services, VAS services and the data communication information area is delivering growth, and therefore, the underlying continual growth profile should not change, but the we do not give a more detailed forecast at this stage. [inaudible] we are going to elaborate at the capital market stage. I will hand over to Hans Holger to answer the margins.

Yes, on the margin question, we are providing a guidance of about 40% for 2013, which includes [inaudible] the investment we need to do to drive growth that you were referring to MFS, so this is included in that figure. There is no plan at this stage to accelerate this further as we may have done in the past. This is, we need the right flavor of investments, it is the right investment as we need to continue to deliver effective growth as Justin mentioned earlier.

As it comes to Guatemala?

As of today, the situation has not changed from the [inaudible]. In the first quarter, it is pretty competitive, but no fundamental change, really.

Thank you.

Your next question comes from the line of Mark Walker, from Goldman Sachs. Please ask your question.

Hi, guys. I have a couple of questions, and then I would like to just follow-up on one of Laurie's questions, there. Firstly, are you confirming the €250 million of losses, associated with online over the next three years? If so, how do we expect the phasing to pan out over the next few years, or does the comment you made on [Fly 37] imply that there is a risk to the overall number increases? Secondly, during your presentation, you stressed importance in delivering high returns in invested capital but did not really talk about any release. I was just wondering if you could give us an idea of how returns are trending and how you expect them to increase in the future, especially in light of lower EBITDA margin forecast. Then, following up on Laurie's question, in your FY '13 margin guidance, we are over 40%, I was just wondering if you could outline how much of the year [inaudible], and how much is due to price pressure. [inaudible] you outline how the gross margin improvements in information and the VAS categories offset the African and [inaudible] pressure. I was wondering if we can expect these efficiencies to continue, giving your ongoing increasing skill in [inaudible] services. Thank you.

I am going to start with the online case, and yes, you can confirm the 250 million losses. We have been - previous management has been communicating. The reason we have this range in the current presentation, is not to [increase our losses], it is an acceleration of the [inaudible]. You can see and take opportunities. It is very important that when we talk about this kind of business not to think it is losses, which are outside the normal business plan we have, it is a deliberate decision to accelerate things because we see opportunity growing and becoming bigger, so therefore it is something we should be able to control ourselves, and decide on business opportunity and not on whatever different market and [expectants] for example. As it comes to the margins side, the assumption at this stage is [inaudible] can be offset by efficiency and cost savings like it has been more less during the fourth quarter, so the majority of decline in EBITDA is due to investment [inaudible] as we are doing. The middle question, I am going to hand over to Francois to answer. François - Xavier Roger : The ROIC, we have in the [inaudible] department, this is a priority for us. The ROIC, as you know is more of a long term to KTI and as we have shared with the market for some time already, given the margin is something - the decline is something that we control, that we are driving, which is really supporting the transition that we do with new categories. We continue to look very carefully [inaudible], which is in the guidance [inaudible] of 2013, but we have shared regularly as well. We need to look more and more at both EBITDA [inaudible] the capital, because [inaudible] of growth is actually coming from non-CapEx categories, which is the reason why we have said as well that in 2013 there would be the peak of CapEx and when we come back to you during our capital market day on it, so as long as we [inaudible], the CapEx instead of ratio in [inaudible], this is something that will have a [inaudible], which is a clear focus for us.

Thanks very much.

Your next question comes from the line of Luigi Minerva from HSBC. Please ask your question.

Yes, good morning, everyone. My first question is on Columbia. I was wondering if you could give us an update on the next steps and also, let me clarify the position with regards to Spectrum, should an agreement be reached. The second question is on your guidance language. I noticed you dropped the operative because you margin guidance language from 2012 into '13. Should we assume that this piece of guidance is [inaudible], if not more under your monitor? Thank you. François - Xavier Roger : Let me start with approaching for cash flow guidance. No, the fact that we do not give a guidance for approaching [inaudible] has nothing to do with the importance that we can put on the [inaudible]. What we try to do is to align our guidance to market practice, which is more to talk about EBITDA as well as CapEx. After that, what makes a difference with what we had before in terms of operating [inaudible] is a text line. You may have seen, by the way, that we have successfully reduced our EBITDA [inaudible] last year, so this is a key priority that we have, but we realize as well that the rest of the components, which were the working capital movements is something that was actually recently complicated to control. To understand [inaudible] to share with market, because it is now being driven by the payables and receivables so forth, so we saw that it makes more sense at the end to focus on EBITDA and the CapEx. The reason why I am saying that we are disclosing [inaudible], one which is corporate cost, which is [inaudible], we disclose that into transparency and we keep on doing it. The [document] on the operating for cash flow, it remains exactly the same.

Thanks. François - Xavier Roger : Regarding the spectrum in Columbia, you need to consider that the two topics, the [inaudible] that we are working upon with the ETM on the spectrum on two different topics that are running [inaudible]. So, there is no direct conflict with it. Should there be the possibility for us or for our partners to be there for the spectrum, we would have to do it, regardless the announcement regarding the possible alliance we made with another partner.

Okay. Thank you.

Your next question comes from the line of Barry Zeitoune. Please ask your question.

Hi. Good afternoon. Barry Zeitoune from Berenberg. I just got three quick questions. Last quarter, you mentioned that in South America we might see some weakened margins going in to Q4, as you expected Columbian Margins to stay below 25%, given that you have actually delivered a stronger margin in Q4 in South America, can you tell us what is happening with the Columbian margins, specifically - has that stayed below 25%, or would you say that was too conservative an estimate looking back? Then, also, can you give us some kind of indication whether you expect further margin dilution beyond 2013? Should the mix impacting 2013 also continue to impact in 2014 and beyond? Then, the final question, it is quite telling that at the moment, all of your acquisitions seem to be mainly fixed line businesses or even online businesses rather than mobile businesses, which historically has been your call. Do you see less of an opportunity in mobile today, and do you see it as more of a precious business in long term?

If I may start with the first one. Columbia, we cannot give a more detailed other than what is out there, so I have to decline an answer on that one. As it comes to the margin development beyond to [inaudible], again, this the idea for the capital markets day to show you the mid-term and long term kind of projections we are doing, but keep in mind what François said earlier, that the mix is changed by definition of the business we are in the future, so the kind of picture of the combination of how the margins are coming together are different, but more detail at the capital markets day. Then, the last point as it comes to the opportunity, the acquisition on the MMA side, it is of course uncertain - MMA is always an optimistic approach as well, [inaudible]. The second part, of course, is we prefer always in market [consultation] and new market opportunities, which for example [inaudible]. Thirdly, yes, we are strong believers in the combination of fixed and mobile. We can see a lot of synergies in terms of cross marketing, computational networks, triple play, quadruple play and those kinds of things, and so the combination of fixed and mobile is something we are putting a focus on. It seems it works in those markets. We have been [inaudible] a cable operator and a mobile operator and therefore we are going to look for other opportunities in those pockets as well, which will be one of the key growth pillars for the company represented together [inaudible].

Can I just ask a quick follow-up? Have you actually looked at any other mobile opportunities outside of [inaudible]? Have you looked at any mobile in other South American or Central American markets.

We screen, obviously, all those kind of opportunities but we never talk about them too much because either the price goes up or something goes wrong. Barry Zeitoune – Berenberg Bank: Okay. Thank you very much.

Your next question comes from the line of Chris Grundberg from UBS. Please ask your question.

Thanks very much. Just a couple of quick ones. I wonder if you could give a little bit more color on these investments. First of all, I understand that obviously you’re expecting losses to increase as you point out due to the high revenue profile, but I wondered if you can give a bit more color or detail on how you actually go about making those investments and how quickly you can switch them on and off. I suppose what I wonder is, you know, are these investments that you can scale back if a specific business is not doing as well as you expected or how should we think about that? And then as a second one, just a follow up from the earlier question, my apologies if I misunderstood the response, but on the Columbian-proposed transaction, I’ve seen some commentary that under the proposed consolidation, the new entity would not actually qualify for the new spectrum process. Can you just explain that? Just give any color there at all? Thanks.

If I start to give a little light on the online business, the kind of model we look at in order to measure if you’re on the right track and if you’re going to be successful has kind of three components. The first one is we only invest in business models which have kind of a proven track record in other markets. So we’re not going to kind of a new venture kind of model where new ideas and new business models are tested for the first time. It’s proven, it has been successful in other places and it’s more execution issue than an innovation issue. The second point, which is [inaudible] to be successful in this kind of business is to be the number one in the market, in the segment. So the whole ambition is what will it take to be the number one and what kind of investments you have to do. And the third part, which is the kind of internet kind of situation, the number one takes us substantially higher on the market share than the number two. And therefore, what kind of speed and time you have to put behind an investment in order to take key additions to the number two in those kinds of projects. And along those three lines, you want to look at the kind of business on how you invest. If you see a business doesn’t perform in one of those areas, you can scale back. For example, if you’re too early in the cycle timing wise, you cut back on marketing costs or other kinds of sales costs. If you see the model is not working because you’re just too late, you move on. And that’s the important part when we give [inaudible] to a particular market. The range, in terms of losses is purely depending on we put more money in businesses we see doing much better than expected and therefore we want to accelerate things. It’s not only about the business arm, which has nothing for sale.

Regarding the spectrum in Columbia, just to clarify, given the timing of our transaction with EPM and the signing of Spectrum Motion, we will be independent. That being said, we combine business as we said, we can always reach on Spectrum if required by the regulator, which is too early to say.

That’s really helpful. Thanks.

Thank you.

Your next question comes from the line of Kevin Roe from Roe Equity Research. Please ask your question.

Thank you. Two questions on Rocket. What is your expectation for CapEx for that business for ’13? And on the EPM transaction, obviously they have significant fixed-line exposure. What do you think that does to your pro forma growth rate in Columbia? Should we assume that it declines when you layer on that business and how quickly is that segment eroding?

As it comes to the first point, the Rocket business itself is not very CapEx intensive. So 2013, it’s minor so therefore it doesn’t add the kind of big endpoint – impact, so nothing to worry about. If it comes to the Columbian side, did you mean the eroding of the fixed business or the [inaudible] business?

When you consolidate on a pro forma basis, their fixed lined business. I’m just curious what that does to your pro forma revenue growth relative to a standalone mobile business today?

It should not change too much without being too specific at this time. It should not change too much because the fixed broadband cable business still has a growth potential going forward, plus in Columbia, we have a pretty strong growth profile when it comes to data because of the successful rollout of data so far. So that is not a concern and it should not change as we think.

Great. Thank you.

Thank you.

Your next question comes from the line of Rick (Prentis). Please ask your question.

Thanks. My question is on 4G LTE. When do you expect 4G LTE in your regions? Is it short term, a couple years, medium term, long term? And maybe specifically, Spectrum device prices, when they’ll be low enough to make it attractive and service adoption really take off?

If it comes to Latin America – let’s put it this way, Latin American will come earlier than Africa. Africa is still far out and we are not even reaching these kinds of places. In Latin America, it’s the mid-term. Some have started already, like Columbia, other ones will follow so it’s more kind of mid-term timeframe we expect LTE to come. The biggest hurdle for us is handsets and cost of handsets and therefore it will be driven by the market opportunities.

In the meantime, we grab as much from Spectrum as we can. There is an option from Spectrum, which is currently happening in Columbia, for example, then obviously we [inaudible] as early as we can trying to get additional Spectrum on board. And the third thing, the transition from 3G to 4G is not very capital intensive like an LTE.

Very good. Thank you.

Thank you.

Your next question comes from the line of Bill Miller. Please ask your question. Bill Miller – J.M. Hartwell: Good afternoon. The ideas that you’ve expressed in the past about consolidation in Africa in the second, third or fourth players in any given market, does the perspective bond offering or existing bond offering actually help you with this or are you still thinking you can make this kind of acquisition and expand, not by building a Greenfield, but by taking on a second tier player and adding your management to that, that you could make it more profitable, et cetera?

Of the African, also, we were on the verge of planting an African bond to finance the five corporations in Africa. We actually – we did not cancel the bonds, we just postponed it by a few weeks due to the fact that we didn’t want to issue that bond in the middle of Price and Citi’s announcements, which was the [inaudible] or combination of our operations in Columbia with EPM Corporations. So we are just postponing it. It makes sense for us to [inaudible] in Africa rather than renting money in small bits and pieces in each and every single – individual country, which is what we were thinking of doing, so we’ll see when we work again on that one. Given the metrics of our cable businesses in Africa is a little bit lower than what we have seen in America in terms of P&L and balance sheet, we saw that it was appropriate to provide between the [inaudible] to provide the corporate guarantee. But let’s see exactly when we can go back on work again on this initiative.

And the other point that you mentioned, it doesn’t [inaudible] us to do any kinds of things we want to do, it’s nothing which is going to have an impact on your strategy going forward. Bill Miller – J.M. Hartwell: Great. Thanks.

Your next question comes from the line of Anders Wennberg. Please ask your question. Anders Wennberg (Hans)– Brummer: Hello. This is Hans from Brummer. I have a high-flank question. We’ve been following this company for many years and you’ve always had great organic growth. Looking at the quarter, you’re posting about 5.5% organic growth excluding acquisitions and I know there was some regulatory things going against you but there’s always some regulatory things happening in this business. I think this is the lowest I’ve seen since you listed on Stock Exchange. Is this the kid of growth rate we’re going to see going forward or can we actually expect the fairly quick reacceleration or is it the online accesses in 2014 we’re going to see that reacceleration? If you could elaborate a little bit more on that. I know you’ve had your long-term organic growth targets before. Thanks.

Well, I think the, again, just the subject on the capital market state, the point is said, if you look at the kind of growth profile going forward, then you’re going to get more details in favor for the long-term outlook in a couple of weeks. But the point becomes that the decline on the [inaudible] by growth in the other categories. The growth profile won’t change fundamentally, we can see that today as well. The [inaudible] swings and it kind of appears that you have different kinds of levels, but the underlying growth story is still intact and so it’s not a one single shot growth story in the future that we put all the eggs in the basket when it comes to online. That’s the growth story. The good thing, I think, was looking at the new kid in the block when it comes to Millicom. The growth story with Millicom is that you have sort of pillows of growth, which you can work on the data, the cable, the MFS and the other services and then if you want to you can take on a [inaudible]. But it doesn’t – the [inaudible] growth is not a make-or-break case for Millicom. So fundamentally what we’re going to present at the Capital Market’s Day is still – it’s going to be growth company and the growth profile won’t change fundamentally. Anders Wennberg (Hans)– Brummer: The second question, if I may, on cash flow. I understand the licenses is not included in the 20% CapEx to save the number. If I try to do the calculations, I get cash flow that is more or less the same size of the dividend for this year. Is that kind of the right way to think about it and what kind of implications for potential for buybacks or extra dividends should we think about?

We have not made any communication this year for any share buyback or additional dividend. Regarding the Spectrum, we do not include that in our guidance because we don’t have always the right level of visibility on the Spectrum option so we give the guidance on what we can control, CapEx, that’s the classical CapEx, it’s securing our growth and [inaudible]. Anders Wennberg (Hans)– Brummer: Can you help us in any way quantify how big this licenses could be this year? Is it 100 million or 200 million?

No, as far as licenses is concerned, there is nothing planned this year. The next [inaudible] in terms of licenses is in Chad in 2014 where we are – where we see [inaudible] but our main competitors licenses have been renewed not such a long time ago so it’s probably a reasonable benchmark to start with. But this year in 2013, there is no plan renewal of licenses. Spectrum could be [inaudible] also. Anders Wennberg (Hans)– Brummer: Okay, thanks.

Operator, can we take the last question, please?

Of course. Your final question comes from Lena Osterberg from Carnegie. Please ask your question. Lena Osterberg – Carnegie: Yes, hello. I was wondering also in line with the question from Hans, if you could say anything more about what you expect from this tribune in terms of the licensing and additional costs, plus how much you expect to pay for the Spectrum in Columbia. If you could give any more detail, I mean, are we talking another 50 or another 100 million? It makes quite a big difference. And also, you’re saying that this year will be your peak CapEx year, so I was just wondering how much should we expect the CapEx to decrease year over year in 2014? And then also [inaudible] has announced be MTR cuts. Do you expect that this will go through and what will we expect as an effect of this? Do you see any other regulatory changes coming up near term?

For the Columbian case, there is a Arbitration Court looking at the final variation and as of now, we assume that there will not be any additional consideration to the site, but it’s up to the arbitration court to decide. On the CapEx going forward, what we can concern now and what we have said for some time already is that the CapEx ratio will decline from 2014 [inaudible] even for one year of it. We probably say, well, yeah, but who needs more [inaudible] in the capital market there. [Inaudible], will happen. I think it’s going to be key from April 1 and there will be additional regulatory items, there might be some, you know, last year we did another [inaudible] with what happened with Columbia and Paraguay and we [inaudible] at the end of the year. Usually regulators do not always pre-warn the operators of what can happen. As of now, we are not aware of any additional risk exposure but that doesn’t mean that it will not happen. Lena Osterberg – Carnegie: Can you maybe quantify the effect in [inaudible]?

We are working on it for the time being. I can’t give you [inaudible]. Lena Osterberg – Carnegie: And I was going to ask you, on CapEx, because you have these accelerated IT investments that you expect will complete this year, so assuming that you don’t have those next year, how much will your CapEx go down?

We have said maybe more than two years ago that we [inaudible] 100 million IT program of a three year; 2011, ’12, and ’13 and we just checked, we are perfectly in line with what they’re communicating to the market. The total amount of IT that we plan to spend this year is in line with what we have said, which is around $150 million. I’m not sure it was [inaudible] and the year before you made the difference. Lena Osterberg – Carnegie: So can we assume that CapEx will decline by this amount year over year?

No, that’s not what I said, but there will be still a little bit of it. It will not be zero in the following years but that will be less, for sure, from IT but the decline that we expect to see from 2014 is not only coming from IT. This is one part of it. You need to [inaudible] that we are doing the initial investments in 3G in Africa this year as well because we just got a new license in [inaudible]. So that’s part of the initial CapEx and [inaudible] that we are doing today in Africa [inaudible] in 2008, we did it for the six countries in the initial investment in 2008 for a total consideration of the [inaudible] of 17 million at this stage. So Africa, part of it is coming in 2013 and there will be obviously less of it part from CapEx [inaudible] usually on 3G next year. Lena Osterberg – Carnegie: Okay. Thank you.

If we have no further questions, I would like to thank you all for your participation today in the call and we look forward to the, often-mentioned today, Capital Market’s Day on the 6th to follow up on all this kind of discussions. If there’s any kind of questions in between, obviously, Justine and once in a while myself are happy to be available. Thanks, and good bye for today.

That does conclude our conference for today. You may now disconnect. Thank you.