Millicom International Cellular S.A. (TIGO) Q4 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. This conference will last for approximately 1 hour. I would now like to hand the call over to Justine Dimovic Head of Investor Relations. Please go ahead.

Welcome, everyone, to the Millicom's fourth quarter results presentation. My name is Justine Dimovic, and I'm the head of Investor Relations. Today's presentation material can be found on our website, www.millicom.com. Before we start, I'd like to remind everyone that the Safe Harbor statement apply to this presentation and the subsequent Q&A session. With me today on this 1-hour call are our President and CEO, Mr. Hans-Holger Albrecht, and Mr. Marc Zagar, our Interim CFO. Some of you know we have planned to have Arthur Bastings, our EVP for Africa, but unfortunately, he's been held back in Africa so he won't be with us today. We will be covering his parts. I will now hand over to Hans-Holger to give you an overview of our Q4 and full year 2013 results and operational performance. After which, Marc will take you through the financials and we will finish with a Q&A session.

Thank you, Justine, and hello, everybody, and welcome to our conference call. I am pleased to be with you again here and this time as well with my colleague, Marc Zagar. Before we get into the presentation and the slides, let me give you some highlights of the results. As you see, today we published a set results showing progresses in the execution of the strategy we outlined last March as we surged past the 50 million customer milestone in the last quarter and achieved over 7% growth during the year. 2013 was the first year of our transformation into a digital lifestyle company, and this shift has been accelerating in recent months with initiatives such as the unique partnership with Facebook in Paraguay. That means that the users can use the social media service free on their mobiles. Our music service, for example, has hit new highs too, with 9 out of 10 tracks streamed in Colombia now coming from Tigo Music. Such initiatives have driven the extraordinary growth of data pickup with over 100,000 new users a week and more than 1 in 5 now taking data. This is up by 50% compared to 2012. The pace of changes is continuing this year. This month, we launched the 24-hour Tigo Sports channel in Latin America. It's another big step for us in the constant play that provides live and exclusive local sports, and it will be rolled in a number of other markets where we have the Tigo operations in the coming months. And in a few days, we also launch Tigo Star in LatAm. This is a new brand and a quality branded service that exploits the investments we have in the past in Cablevision and Multivisión in Paraguay and Bolivia, and will also become part of…

Thank you, Hans-Holger. So please turn to Slide 20 for the financial highlights. Firstly, let's look at the developments and the revenue drivers and our progress in subscriber acquisition across the 3 business areas, mobile, cable and digital media and Mobile Financial Services. Our mobile customers passed the 50 million mark in the fourth quarter. Homes passed by our cable business grew to over 2.5 million in the last quarter or so. And we gained nearly 800,000 new MFS customers, ending the year with 6.3 million customers or a 59% year-on-year increase. Our mobile business continued to deliver solid growth on the back of good customer intake and mobile data growth, with revenues totaling close to $1.1 billion in Q4 or 5.5% local currency growth. Revenues in cable in Q4 were $116 million, up 10% year-on-year in local currency. MFS revenue continued steady quarter-on-quarter growth with revenues of $23 million for the last quarter of the year. On Slide 21, looking at the revenues in local currency, we have growth of 9.7% in Q4 or 7.3% for the full year. Excluding the contribution from the Online business, in Q4, we grew 8.4% and 5.8% for the full year 2013, still in local currency, making Q4 yet another quarter of accelerated growth. Regulatory headwinds impacted revenues a bit less this quarter, trimming 1.7 percentage points compared to 1.9% in Q3 and 3.2 points in Q2 2013. EBITDA margin continued to evolve in line with our changing revenue mix and totaled $465 million in the fourth quarter, including Online and before corporate costs. EBITDA losses from Online amounted to $23 million in the quarter. Excluding Online, underlying EBITDA margin in Q4 was 38.2%. We will look more closely the EBITDA margin evolution a bit further in the presentation. As expected and as…

Thank you, Marc. Maybe just a short final summary. Let me highlight, again, that our growth, as we have seen in the fourth quarter, is accelerating, and we expect this to continue during 2014. We will continue to invest to build the foundation, to pursue our digital strategy and additional opportunities from Millicom. And all of this with the kind of underlying idea to take the customer a more holistic view and allow him to live his Digital Lifestyle in both the markets. With these investments, we are holding on tight to the opportunity to double our revenues by 2017, as we have mentioned in the Capital Markets Day last year. We're now looking for your questions. So moderator, could we have our first question, please?

[Operator Instructions] And the first question comes from Sven Skold from Swedbank.

A question on the strong numbers from South America. Colombia, how is the margin performing in that market? I was also wondering about revenue, but I think you said 20% up something in Colombia, in particular. Second, can you also update us on the UNE acquisition, how is it going? And if you could give us some numbers on UNE. I know it's not included in your numbers yet, but it's of interest, of course.

Yes. Sven, the Colombian market, obviously, is one of the strong performers we have seen in the fourth quarter and throughout the year. So the growth is over 20%, as I mentioned in the presentation. If it comes to the margins, despite this kind of strong growth, they are more or less stable in the region as they have been before, so no change in that respect. When it comes to the UNE acquisition, we're awaiting final approval, which we said will be probably during -- in the second quarter. It's not in our control, it's completely in the hands of the authorities. But we don't expect any kind of major issues or major delays going forward, so the kind of previous state still stays. And when it comes to the numbers of UNE, we don't have any and we can't reveal any therefore because, as I said, we are in the process of getting the approval. Until then, they're completely separated companies.

Your next question comes from J.P. Davids from Barclays.

I just got some question on Africa, which I hope you can answer in Arthur's absence. And then one on group strategy. Firstly, on Africa, you mentioned you're rebuilding a mass market brand. Two questions there. Firstly, how are you going to change distribution to become more mass market, particularly in big markets like Ghana and Senegal, where you're relatively sub-scale? And then secondly on that, how will you position your tariffs? Will you be aggressive on voice to become that mass market or is the focus really on bundling? And then moving away from Africa to the group strategy and more specifically Online, can you talk about the importance you put on controlling these assets. Given that's one of your strategic pillars, I would have thought you would like to accelerate the control of these assets rather than push it out. And I'm specifically talking about LatAm here.

Yes. Let me try, even in the absence of Arthur, to answer those questions, which as you know, normally. If it comes to rebuilding the product and becoming kind of mass market product -- I mean, there are several levels, of course, we are working on. I think the most fundamental point is that we have stopped the urban fortress strategy we had in the past and accept the kind of role of other network more aggressively into the region of each of the country, i.e., not just trying to stay in the centers and be more active on a countrywide basis. Because if you look at the kind of centers we're in operating normally, we have pretty strong market share. So it's -- quite often, it's not the kind of issue of the brand or the distribution, it's an issue of the penetration and the kind of market we are trying to tap in. And that is the kind of key point we do in all markets. In Ghana for example, we're doing the same. We are not as active outside Accra, where we have a higher market share than our national market share. Or in Senegal, it's interesting. Senegal is a special case because, as you know, during the dispute of the license, the level of investment was very limited. So it's a kind of catch-up situation. But even in those 2 markets I mentioned, we have a decent #3 position in Ghana. We have a good #2 position in Senegal. So it's a good platform to start from. But the end of the kind of urban fortress strategy is the one of the kind of the key changes we have amongst smaller ones. When it comes to tariffs, there are 3 factors. A, we do tariffs more…

Yes. Sorry, just follow-up on that point again. It's really -- this a strategic pillar for the company, Online. And I just wanted to see how comfortable you were that you didn't necessarily control these assets, whether it be Africa or Latin America. And you're comfortable that you don't control these assets and yet make that one of your strategic pillars.

Yes. It's a fair question. I think we see MTN here in Africa and assuming it gets the necessary approvals, obviously, we're going to have a complete different governance structure in place with the board and kind of a number partnership levels. So the control level should improve, clearly, on that front. And secondly, even in the past and until now and until then, if you don't control phone, it's a business we have been working very closely with the founders and as the people from Rocket and those kinds of things. So you had a kind of certain element of the control in that respect. But there's one other point as well which you always try to highlight is that those are not the only Online ventures we are doing. As I said, we're doing more on the Online, on the MFS side, we're doing more in terms doing more in terms of own products we are launching on maybe on the music side, the cooperation with Facebook, like we have done. So we try to diversify any of the portfolio of digital activities and online activities in the company, so not depending on just one pillar of potential growth.

The next question comes from Nick Brown for Goldman Sachs.

Two questions please. Firstly, if I could follow-up on your Rocket investment. Are you interested in exploring similar partnership deals in Latin America as you've signed with MTN in Africa. And secondly, if the UNE transaction proves successful and cash generation improves, would you like to make further acquisitions in the future or are you happy with the current set of assets that you have?

Yes. Again, the situation with -- when it comes to Online -- and we have to settle probably a bit more the debates, which products we are talking on the side. There's e-commerce. They have the financial products. They have the service products and the classified products, for example. But in general, the basic idea was, as we always said, is some of the kind of products has a very close link to our business. And some ones are kind of extension of our business. But at the very end of day, it's all about scale and how fast you can penetrate the market. In Africa, we still believe the opportunity is very, very big. Nothing has changed in their respect. And it was a simply calculation, if you have MTN in as a partner, the potential going forward is significantly bigger than if you do it alone. They kind of bring a very good complementary footprint to the party. You're going to bring the same synergies in those markets like we can bring. And with the models we have been launching, which have been very good, I think we should see an acceleration of those ones. In Latin America, situation hasn't changed for us. So we are still very committed to Latin America as well. But in both markets, and that's the only thing we'd share, it's not that new, we have been always saying is we want to have other investments when it comes to Online than just Rocket. And so we're doing investment, as I said, in our own staff and in other partnership models as well. And it remains a very important part of our business and strategy going forward. When it comes to UNE and the acquisition, is there anything more afterwards? At this stage, we are very happy with the kind of footprint we have and the assets we work on. There will be a lot of management time and capital as well, allocated to the UNE deal in order to execute it and get the benefits out of there, but I don't foresee any kind of other major transaction in the near term when it comes for the company.

The next question comes from Lena Österberg from Carnegie.

I was wondering a little bit about the Online partnership agreement in Latin America, because you said that you changed that now and I think you've changed the timing from 2015 to 2016 for the pass of control. I'm just wondering what has changed and why did you decide to do this? Also, if you can maybe give some indication of where you expect the 2014 sales and EBITDA for the Online business to go? I understand you don't -- will not report them separately anymore, but interesting to see if you still expect the business to trend the same way as you did for your longer-term guidance you issued before. And then also one question on Mobile Financial Services. Net adds accelerated significantly in the fourth quarter, which is very good. And I was wondering, is this sustainable or is there some sort of seasonality in the fourth quarter?

Okay. If I work through those kind of 3 points, on the Rocket deal and LIH, the only change we have made is that we don't see in the kind of near-term consolidation of the business and integration of the business, and we want to give it some time to see it performing. And as I said, we want we see what kind of opportunities we have in that market as well. It doesn't change our view on the opportunity as such, it just reconfirms what I said earlier and in other calls that we take this kind of investments from the vested perspective, and we need to be pretty flexible in adjusting to other opportunities or the new opportunities which are coming up. In terms of the sales and the EBITDA. It's correct, we don't give any guidance, any forecast anymore. However, the underlying trend we anticipate will continue. So we're going to see probably strong growth momentum in both operations there during 2014 as we have been seeing in 2013. We anticipate as well that the kind of correlation between growth and cash burn will stay more or less exactly the same. And in terms of the financial numbers, nothing has changed, really, compared to what we guided earlier, for example, in the Capital Markets Day last year. And one thing that's always hard to predict, of course, is how many new products do we launch and how fast those are going to -- the products are going to be rolled in other markets. So for example, the impact of MTN could be an acceleration of rollout of existing products, but it won't happen too much during this year, probably rather into next year when the deal is approved. When it comes to MFS in the fourth quarter, there is no special -- I mean, there is no special impacts or effects when it comes to penetration growth and revenue growth. The only thing which we have to keep in mind is that the fourth quarter seasonally, obviously, because the festive season and all those kind of commitments is a bit stronger than, for example, the first quarter in 2014. But there may be -- on a quarter-for-quarter basis, there may be some slight changes. But I think on the underlying side and their kind of rolling view, it should be actually the same.

I have a follow-up question then on Online.

Sure.

Do you expect to reach a similar partnership in Latin America with another company as you did in Africa with MTN? Is that the reason why you've changed your accounting view?

No. At this stage, as I said, the MTN was a perfect match. And in Latin America, we -- as I said, we are very happy right now on how it goes. If there's an opportunity with a similar partner, we will evaluate it and see if there's a bit of an equation for us or not and then decide based on those things. But at this stage, it's business as usual in Latin America.

The next question comes from Barry Zeitoune from Berenberg.

I've just got a few questions, please. First of all, in Bolivia, I saw some news flow recently that the government was wanting Intel to cut prices and be more aggressive in the market. I was wondering maybe you can just give us some color on what the political situation is like in Bolivia and whether that's likely to have any influence on your business over the course of 2014. My second question is on the changing consolidation for Guatemala. It was interesting that you've raised a new $800 million bond in Guatemala that I'm assuming will partly be refinancing the current debt and partly be upstreamed to the shareholders of which you are one. Now given that you're going to be fully consolidating it now, I'm assuming that those are going to be free cash flow leakage. Can you give us an idea what that dividend leakage to minorities will be from your cash flow in 2014, given that it's likely to be larger than it was in 2013? And then my third question is really on CapEx and on some of the comments that you made to J.P. about not just focusing on urban rollout now in Africa but a more general rollout. Is that likely to impact your medium-term CapEx expectations that you've provided in your last Capital Markets Day? And then final question is just on Rocket Internet, just as a follow-up. You're talking about wanting flexibility to invest in other Internet ventures outside of the Rocket portfolio. Is this something you've always been allowed to do or does not controlling LIH effectively give you more flexibility to make other investments?

Good. I'm going to take 3 of the questions. The consolidation question can then be answered by Marc later on. When it comes to Bolivia, it is like all of the markets we operate in, of course, a market where you have to observe the current political situation with great interest and finesse. However, overall, I would say -- I have to careful, I'm afraid. Overall, I think it is a pretty stable situation, it is pretty stable market. There's sometimes, some noise coming up, but it never turns into too much real trouble. And we had, last year, we had some regulatory impacts which have been negatively affecting us, but we don't see anything at this stage. So right now, we believe the situation is more stable, and things are not concerning us that much as it was previously. But it's obviously, it is a market where you have changes once in a while, which we then have to manage through. When it comes to the second question, I can answer. If it comes to the CapEx and the medium-term targets or the long-term targets or 15% in particular, I think, CapEx ratio to revenues, the rollout of the African network and the kind of investment into the regions of the African countries is not changing the kind of mid-term, long-term CapEx target at all. We see a kind of reallocation of more efficiency we are seeing in some markets like in Latin America, which we redeploy capital into Africa. And we see substantially more efficiency as well in the handling of our CapEx in Africa in itself by tighter control of the procurement by kind of one network design and by synergies we create between the countries. So it doesn't change fundamentally the picture in terms of CapEx and the ratio to revenues. When it comes to the Rocket investment and if we are -- never have been able to do those kind of offset investments. We have been doing those investments in the past as well, it happens sometimes maybe in the shadow of the Rocket point. But clearly, we see, as I said, if you look at the partnership we have with these on the music side, it has been very, very successful for us. If you look at the Tigo Sports launch in Colombia, that's been very positive for us. If you look at the currency exchange system, we have now with MFS in Africa. It's a strong product as well. So we allocate capital in the kind of fashion that we see that best benefits us, which is partly in Rocket. But if you free up capital, like we've done in Africa and see other opportunities, we may redeploy it into those kind of operations which are close to our core business. So those are 3 ones I can answer, and then I hand over to Marc for consolidation in Guatemala.

Yes. So yes, to answer your question about the bond, we did raise the -- the local operation raised the bond in January for $800 million. The first purpose of that is going to be to refinance the debt and CapEx. There will be some upstreaming opportunity but in terms of details, we don't really disclose the dividends when it comes to our partners.

Can I just ask one quick follow-up on Rocket. Does the agreement with Rocket restrict you from making certain kinds of investments in Latin America or are you free to pretty much invest in what you want to independently?

Well, we're not going to give any details of the arrangement we have with Rocket. But obviously, as you have seen and I'll give some examples, we're investing into other products and projects which are close to our business. So there is business as usual for us in that front.

The next question comes from Stefan Gauffin from Nordea.

I have a couple of questions. First of all, you maintain a stable dividend, but still have the ambition to grow the dividend. But how should we look upon this going forward? You seem to be focused on paying down debt going forward. So should we expect the stable dividend now until you're down at close to 1 or even below 1x net debt to EBITDA? Secondly, relating to the cable operation, there seems to be a lumpy build out of homes passed, so it's hardly been any geographical build out within the cable division over the past couple of quarters. How should we look at that going forward? And then -- yes, actually, that's the main questions.

Okay. Let's start with the dividend. Obviously, this is nothing management has to decide or can decide. It's completely up to the board and the shareholders. Clearly, the ambition of the company is to get ourselves back on growth. And in order to get growth, obviously, we have to invest into the opportunities, which is the current point which we're in. And therefore, the dividend stays stable during or for 2013 (sic) [2014]. Going forward, obviously, as well there is the UNE transaction, which is pretty transformational deal for the company and will increase our debt ratio as well, which you have to take into consideration. And then when it's time for the next round to decide on the dividend, I think the board will take a decision on that one. But clearly, debt profile will change, keep that in mind. And the growth or the investments we have to do in order to get the growth back into the company will take place as well, at least on the short-term side. When it comes to the cable operation, I'm 100% although I'm not sure [ph] exactly what you're referring to, but the kind of rollout is depending on the kind of, a, of course, the business opportunities. And most likely, what you are referring to is a kind of replacement of a kind of wireless connection we have towards the end consumer with the kind of fixed cable solution. And there, of course, you rollout and when you see the kind of customer profile and customer revenues, which make it feasible. And this is the kind of way you approach a cable rollout in the market.

Thank you. We have time for one more question. And final question comes from Bill Miller from J.M. Harwell.

Is there anything in the growth rate in Colombia, your mid-20s growth rate, whatever it is, that would be applied to UNE that you can goose their your growth rate as well? And how long, if there is, will it take to apply those same growth principles to UNE?

Yes. Everything I'm saying about is speculative because, again, we are in the approval process, so we can't speak [indiscernible] about UNE to a large degree. Clearly, the starting point we have seen was a strong mobile growth -- once again, data, that's good platform for us to further business once it is approved with UNE in terms of cross-selling and the bundling products. And equally, I think, it will be beneficial for UNE of course in terms of growth rates going forward. But to be very concrete on the figures, obviously, we need to get the deal approved and then get to final figures, and then we can be more precise when it comes to UNE. But the good thing is that we're merging strong mobile business right now with the second-largest cable company, which in itself should be a good starting point do to further business in Colombia.

I have another question. With the MTN affiliation in Africa, can you take MFS and put it over their mobile platforms as well?

It's one of these -- I mean, the MFS business today is very linked into the kind of mobile business and needs a close cooperation with the mobile business. Obviously, this will evolve over time and the more financial products we're going to offer, of course, the less mobile platform operator it is depending. And then there may be room for opportunities in various fields. But at this stage, I think the most important point for us is to focus on they're getting the penetration and the customers in and then see all the kind of opportunities as a second phase.

Okay. Thank you. That concludes the question-and-answer session. I would now like to hand the call back to Hans-Holger Albrecht. Please go ahead.

Yes. Thank you very much, everyone, for listening in. As usual, if there are more questions or you want to have a kind of follow-up discussion, Justine, myself and Marc are happy to take them. Otherwise, we'll see you at the first quarter call or latest I guess in the Capital Markets Day during the course of this year. Thanks a lot, and goodbye.

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