Millicom International Cellular SA Q1 2009 Earnings Call Transcript

Apr.21.09 | About: Millicom International (MIICF)

Millicom International Cellular SA (MICC) Q1 2009 Earnings Call April 21, 2009 9:00 AM ET

Executives

Mikael Grahne – President & Chief Executive Officer

François-Xavier Roger – Chief Financial Officer

Analysts

Sven Skold – Swedbank

Stefan Pettersson – Nordia

William Miller – J.M. Hartwell

Kevin M. Roe – Roe Equity Research

Richard Prentiss – Raymond James

Anders Wennberg – RAM

Louis Sarkes – Chesapeake Partners

Lena Osterberg – SEB Enskilda

David Kestenbaum – Morgan Joseph

Christopher King – Stifel Nicolaus & Company, Inc.

Soomit Datta – New Street Research

Jason Willey – Standard & Poor’s Equity Research

Jan Dworsky – Handelsbanken Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Millicom Q1 2009 Results Conference Call. For your information this conference is being recorded. May I also remind you that this call is being audiostreamed over the web and is accessible at www.millicom.com, together with a presentation summarizing the key features of the results.

I would now like to hand you over to the hosts of today’s conference, Mr. Mikael Grahne, President and CEO; and François-Xavier Roger, CFO. Please go ahead gentlemen.

Mikael Grahne

Thank you, operator, and welcome to everyone who has joined us today. You can find the slides for this call on our website. Now, please turn to slide number two. The first quarter results demonstrate our strong management control, through the positive outputs of two financial and three operational drivers. The financial areas we have highlighted were, firstly, a strong margin of 44.5%, as a result of cost controls and favorable product mix. And secondly, we were cash flow positive in Q1.

In operational terms, the growth in VAS was up 45% in local currency. Our prepaid churn was down by 0.6 percentage points, which reflects a greater focus on our better customers, and our market share was stable on a weighted basis, and up by 1% in both Central America and Africa. These are all very positive indicator showing that we are reasonably well equipped to weather the economic crisis in spite of significant headwinds.

Indeed the slowing global economy means lower remittances, decreasing raw material prices and less tourist, all being key drivers in our local economies which affect our customers. We continue to be confident in the medium and long-term prospects for Millicom despite the adverse economic environment. Revenues grew by 9% in local currency although the overall results have been impacted by foreign exchange movements. There have been some changes in consumer behaviors in our local markets, and we will continue to innovate to provide our customers with best service that is targeted towards their specific needs by greater market segmentation among other initiatives.

Turning to the financial highlights for the quarter on slide three, you will see that the year-on-year subscriber growth in the first quarter was 29%, and we ended the quarter with 33.6 million customers. Revenues grew by 6% year-on-year to $846 million, and EBITDA increased by 11% to $376 million for the quarter producing an EBITDA margin on 44.5%, which was up by 219 basis points. Net profit for the quarter amounted to $140 million, and free cash flow reached 48 million equivalent to approximately 6% of revenues.

On slide four, you can see that the revenues were up 9% in local currency for mobile operations and 15 in total. Net depreciations of currencies against the dollar eroded nine percentage points of growth, equivalent to $70 million from the top line. Looking at this FOREX effect by region on slide five, you can see that the most severely affected regions are South America and Africa. The underlying growth in local currency remains strong in South America at 16%, and in Africa at 25%. In Central America, we have seen a slowdown in local currency terms primarily as a result of slower economic growth with declining remittances from the U.S. minus 8% at the end of February versus year ago.

On slide six, you can see that in terms of EBITDA underlying growth was 14% leading to an improvement in EBITDA margin. Looking at the foreign exchange effect on EBITDA by region on slide seven, you can see that South America recorded a 42% increase in EBITDA in local currency and Africa recorded a 36% increase in local currency demonstrating that our efforts to bring these two regions to the average company margin are starting to payoff.

Slide eight, shows our revenue split by category and the elements I would like to highlight is VAS/SMS and 3G which has grown by 45% in local currencies in Q1 ’08 and accounted for 15% of cellular revenues in Q1 ’09. VAS/SMS/3G is a highly profitable business for us and an important driver of revenue and margin. VAS also offers the advantages of being more difficult to copy, and we expect to see VAS growing strongly in the coming years.

On slide nine, you can see that the total subscribers for the quarter increased by 29% year-on-year and we ended the quarter with 33.6 million subscribers. Tanzania, DRC, Chad and Laos all recorded subscriber growth in excess of 75%. In Latin America, Bolivia increased its subscriber base by 43% and Paraguay recorded an increase of more than 20%. With average mobile penetration of some 41% there remains a substantial growth opportunity across our markets.

In the first quarter we’ve seen a decrease in churn in the three clusters as you can see on slide 10. For the group as a whole, churn decreased by 0.6 percentage points in the quarter. This improvement in churn is a reflection on our renewed focus on the higher revenue generating and more loyal customers.

Slide 11, emerging market economies have been affected by strong headwinds. In Central America we have seen remittances down by some 8% in the first two months of the year, and this has led to a slowing of these economies. We have also seen a drop in raw material prices such as oil, mining commodities, and soya beans, especially in Chad, DRC and Paraguay, and a decline in tourists in Senegal, Mauritius and Asia. These factors are now producing some changes in consumer behavior such as more on-net, but less cross-net calling, less roaming, and fewer incoming international calls, more buying on promotions and more multiple SIM users. These changes are reflected in ARPU, which was 3.2% lower in local currency in Q1 compared to Q4 ‘08.

Slide 12, Millicom is responding to changes in our markets by seeking ways of increasing proximity to the consumer and developing cross customer segmentations with tailored service offerings. We continue to support affordability by selling in lower denomination reloads and by developing loyalty programs, which helps to reduce churn and reload promotions that it retain existing users. Overall our objective is to enhance the Tigo brand as the value proposition in our markets without resorting to tariff cuts.

Now let's look at the clusters in more detail. Turning to slide 14, on Central America you can see that subscribers grew 18% year-on-year, with 353,000 subscribers added in the quarter. With the average penetration in our Central America markets of around 80%, it is understandable that subscriber growth slows down as with voice traffic growth. That is why we are increasing our focus on VAS based on broadband services in these more matured markets. Revenues for Q1 were $327 million down 4% year-on-year as a reflection of economic conditions, including lower remittances from the U.S.

EBITDA reached $183 million down 2% year-on-year. Tigo’s strong number one position means that Central America continues to have an excellent EBITDA margin of 56%. CapEx in Central America was $27 million in Q1, 59% lower than in Q1 ‘08. The cost saving initiatives that have been introduced in light of current trading conditions will allow us to keep the margins in the low to mid 50s.

Slide 15, on South America, shows that the subscriber increased by 20% and revenues increased by 16% in local currency, although they have been impacted by the strong dollar. EBITDA for the quarter one was $94 million, and EBITDA margin was 40% up 8 percentage points from the same period last year. The main factor driving the improved profitability is cost reduction coupled with favorable product mixes across the businesses, including Colombia, which produced an EBITDA margin of 20%.

Quarterly highlights for Africa are shown on slide 16. 764,000 subscribers were added across the region in the first quarter, which represents a year-on-year increase in total subscribers of 52%, helped in part by a resumption of subscriber growth in Senegal. The highest net additions were in DRC, Chad and Tanzania as a reflection of the considerable investment in these markets.

Revenue growth at 25% in local currency remains strong taking into consideration the economic environment. EBITDA for Q1 reached $59 million up 12% year-on-year and EBITDA margin was 34, an increase of more than 2 percentage points year-on-year. CapEx for the region as a whole was $107 million up 23% year-on-year and representing 62% of revenues. The rollout of our network in Rwanda is going well and we are on track to launch services there before the end of the year.

We will continue to invest heavily in CapEx and marketing and promotion activities in order to capitalize on the future growth in mobile development across Africa, as penetration is still very low and we expect the slowdown to be temporary due to the economic situation. However, in Africa it has been important to refocus our investment into the most attractive areas in order to maintain our hurdle rates of return on new investments.

Finally slide 17, shows that in Q1 Asia recorded subscriber growth of 34%, revenue growth of 7%, and a decrease in EBITDA of 7%. The EBITDA margin softened to 36% as a result of increased competitive activity. We have taken the decision to carryout a strategic review of our Asian assets, which could lead to a full or partial divestment of our business in the region, but decisions about the future of the cluster will be made following this review.

On slide 18, you can see Amnet’s performance in Q1. Revenues were $43 million and EBITDA was $60 million producing an EBITDA margin of 37%. Without the restructuring cost of $2 million as a result of outsourcing to increase efficiencies, the EBITDA margin would have been 42%. CapEx in Q1 excluding installation CapEx was $14 million and we anticipate CapEx for Amnet of approximately 20% of revenues in 2009 excluding installation costs.

Slide 19, the opportunity for Millicom is to use its marketing skills to sell Broadband services to existing cable customers and we are pleased with our progress to-date. On this, the slide you can see that we have achieved 22% year-on-year growth in broadband subscribers. We already have a market share in broadband of 49% in Honduras, and we aim to increase our market share in the other Amnet markets.

And now I’d like to hand over to Francois-Xavier, who will take you briefly through the financials.

Francois-Xavier Roger

Thank you, Mikael. Please turn to slide 21 where you can see that CapEx for the first quarter was $210 million, down 20% year-on-year, so that the CapEx-to-sales ratio has fallen to 25% for the quarter. We have adjusted our expectations for CapEx for the year to $850 million compared to the $1.4 billion in 2008. Last year was a peak year for CapEx as we were rolling out 3G in Latin America and building coverage both in Latin America and in Africa, but following these rollouts in Latin America the need for CapEx is less.

The current economic climate has in addition made us reassess our needs in 2009. Millicom has tight control on CapEx and is very focused on returns on new investments. We are determined that we shall continue to achieve the targeted internal rate of returns on new investments in excess of 20%. We are now closely monitoring CapEx levels in relation to both EBITDA levels and to the growth potential on a territory-by-territory basis.

Please move to slide 22. Our depreciation in the first quarter was lower than in Q4 at $147 million as a result of the combination of currency depreciation and CapEx slowdown. On slide 23, you will see that net debt-to-EBITDA remains just below one times. In the first quarter of 2009 we managed to secure close to $200 million of additional debt financing for Cambodia with IFC and in Guatemala with local banks.

Please move to slide 24. At the end of the first quarter Millicom had $548 million of short-term debt set against $729 million in cash giving us flexibility in terms of financing. Our objective is to keep extending maturities and today the average maturity is above three years as shown on slide 24. The $229 million short-term debt related to the Amnet acquisition will be refinanced in the coming months. The remaining $319 million of short-term debt is mainly composed of overdraft facilities that are rolled over on an ongoing basis.

On slide 25 you can see that the effective interest rate in Q1 was down to 8% for the quarter as we’re benefiting from decreasing interest rate and the portion of our debt that is structured with variable interest rates. Please move to slide 26, you can that our overall tax rates continues to be below 30% and in Q1 the effective tax rate was 25%. Taxes amounted to $43 million. We continue to benefit from a favorable country mix and from effective tax planning. We expect the effective tax rate for 2009 to remain below 30%.

On slide 27 you can see that EPS is up from Q4 2008 to Q1 2009. Excluding discontinued operation and the effect of the deferred tax effect in Colombia in Q4 2008, Millicom reached a normalized EPS of $1.33 in Q1 up 19% from the last quarter. The benefit of increased EBITDA on controlled CapEx contributed to a positive free cash flow, which we expect to deliver as well for the whole of 2009 for the first time and that you can see on slide 28. In Q1, free cash flow amounted to 5.7% of revenues.

On slide 29, you can see that most of our cash generation in Q1 is coming from Latin America, while we’re still in investment position in Africa. Cash flow has improved in Central and South America in 2009. As last year we’re building out 3G and we still have some coverage CapEx to complete. Cash flow in Africa has temporarily decreased in Q1 as a consequence of working capital movement mainly linked to suppliers payment in Q1 2009.

Please turn to the summary cash flow statement on slide 30. Our closing cash balance at the end of the quarter was $729 million. We will be generating free cash flows each year and we expect to see cash flow growing in subsequent years.

I would now like to hand over to Mikael for his final comments.

Mikael Grahne

Thank you, François. As I said in our press release there are some strong indicators in this results, which demonstrates how through tight management control we can continue to grow the business in a difficult environment. With a margin of 44.5%, and a good free cash flow generation of $48 million, both our profitability and cash position are strong. VAS/SMS/3G are growing rapidly up by 45% year-on-year and now account for 15% on mobile revenues. This segment will be an important driver of growth going forward. Churn was down, and market share was stable on a weighted basis although we achieved market share increases in Central America and Africa, which shows that we are outperforming our competitors in these key markets.

So, despite the adverse economic environment, we continue to be confident in our medium and long-term prospects for Millicom. We are on target to maintain our current EBITDA margin for 2009. We are on track to be free cash flow positive for the first time in 2009 and we have revised our CapEx forecast of approximately $850 million for the full year. That concludes my comments and we’ll now be happy to take your questions.

Operator, may we have the first question, please?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from Sven Skold with Swedbank. Please go ahead.

Sven Skold – Swedbank

Thank you. First question on the churn rates that you showed on one of the pages. How has churn developed year-on-year, and not compared to the fourth quarter of 2008? And the reason for my question is of course, the much higher churn figures that you showed in the 20-F filing in the U.S.. My second question is, regarding Colombia. What has improved in Colombia this quarter compared to the previous quarters? Thanks.

Mikael Grahne

Okay, thank you. Let me first address the churn question. I don't have the pre-data, but I think normally with deeper penetration you get some increase in churn, because you basically put on subscribers from the lower economic rata. But I have to look at the data and come back for the past. In terms of Colombia it’s a combination of cost control as well as a product mix. We had a very strong growth of VAS revenues. We were up 51% in Q1 in ‘09 versus Q1 ‘08. We also had strong growth in postpaid revenues, strong growth on cross-net revenues, as well as, on-net revenues. So, it was a combination of all of this, basically the product mix and cost control that drove the margin.

Sven Skold – Swedbank

Have you refocused the Colombian business, so that you only focus on a few areas in Colombia now or?

Mikael Grahne

I think we continued what we were already doing. We have a very strong focus on the value-added services, because this way we can attract the higher end, the more active user base. So, that's core for us. Second, we have also reactivated the postpaid segment, which will offer attractive growth in the short and medium term.

Sven Skold – Swedbank

Okay, thanks.

Operator

Thank you. Your next question today will come from Stefan Pettersson with Nordia. Please go ahead.

Stefan Pettersson – Nordia

Yes. Hello.

Mikael Grahne

Hi.

Stefan Pettersson – Nordia

I am curious about the strategic review that you are about to make in the Asian markets. Last time you initiated a strategic review, this was based on external interest in your assets. Is it the same this time that you have received interest for a particular asset and in that case which asset? Secondly, given the depressed markets, we’ve seen market values coming down, do you believe you can maximize the value by selling during this economic crisis? Thank you.

Mikael Grahne

Okay. The strategic review on Asia is internally generated. We have very good positions in Asia, I mean we are either number two or one in the markets we are in, and with relatively low penetration rate, so, we have a lot of growth ahead of us. However, we lack scale in Asia, so we are going to review that relevance of our presence in this market. And at this stage I just want to emphasize that no decision has been made and this review could lead to potential disposal of this asset. But we don’t want to comment at this stage any more of that. The market will set surprise if we get that. But at this stage we have no active sales plans.

Stefan Petersen – Nordia

Okay. Thank you.

Operator

We will take our next question from William Miller with J.M. Hartwell. Please go ahead.

William Miller – J.M. Hartwell

Good morning. I am curious.

Mikael Grahne

Good morning.

William Miller – J.M. Hartwell

The cash you’re going to generate and the Amnet financing which seems to be going well. What are you going to do with your cash, particularly if you decide you will do something in the way of sale or whatever in Asia, you are going to be really overburdened to some ways of thinking with cash and I’m just wondering how with CapEx coming down, margins going up, Amnet financing seemingly going well. What your plans are for the cash?

François-Xavier Roger

First of all I mean no decision has been made regarding the outcome of the strategic review, but let’s say, should a sale happen, Millicom will have several opportunities to use the sales proceed, such as external gross, dividend distribution, debt repayment or share buybacks. As a Board we review these options in due time and I have not reviewed them yet. The outcome could potentially a combination of several of these options. However, we believe that it is unlikely that any proceeds will be fully distributed as dividends, and that the cash retention option is not ideally there, as cash returns are historically low. So, we won’t keep the cash, but we won’t distribute all of it in dividends either. Should a sale up in there once again.

William Miller – J.M. Hartwell

François that’s terrific, but would you put a priority then on what you will do with the cash if you could list four or five things in the order of what you feel your priority is here, whether you sell any in Asia or not, you can have a hell of a lot of cash on the balance sheet, which as you pointed out as earning 1% to 2% or something like that, if you get debt, which is costing you 10%, you’ve got stock which is selling, looks like at a reasonably low valuation. And I just wonder what the other opportunities are? So, could you therefore prioritize what you think you will be doing with whatever excess cash you feel you have.

François-Xavier Roger

Bill I think we are very early on this process and it would be premature to put any emphasis, I mean we’ve just begin this process with this announcement. So, I think it’s simply too early to come up with a statement in this area.

William Miller – J.M. Hartwell

Okay, well I’m suggesting that even if you do nothing with Asia, you’re still going to have a hell of a lot of cash running around and I’m just curious what you will be doing with it.

François-Xavier Roger

Okay.

Operator

Thank you. We’ll move now to a question from Kevin Roe with Roe Equity Research. Please go ahead.

Kevin M. Roe – Roe Equity Research

Thank you, gentlemen. A few questions. First, on the strategic review in Asia. What’s the timely expectation there? Is this something you hope to move quickly on, the review or could this take till year-end? Any color there would be great. And, François-Xavier could you give us a sense of what the proportion of net debt is in Asia for your three properties? And turning to Africa, the Senegal license you mentioned in your release, no real updates there, but when are you hoping to have resolution of this? Is this also a 2009 event? If you could share any of your expectations there that would be terrific. Thank you.

Mikael Grahne

Okay, Kevin. I will deal with the Asia, review time and the Senegal license, and François will come back on the debt situation. I think any strategic review, call it a three to six months process, I think that will be a normal time. Second, on the Senegal license, we have an active dialog with the government, we are each pursuing our cases in respective accords and I think this will take sometime to sort out. So, I would sort of look at more towards the end of ’09 for resolution on this issue.

François-Xavier Roger

As far as the debt in Asia, we are fairly highly leveraged in Asia actually and as you could see in the press release, I mean we’ve just arranged apart from financing namely $100 million in Cambodia with IFC and we’ve a fairly high level of leverage as well in Sri Lanka. So, we have more leverage in the average of Millicom.

Kevin M. Roe – Roe Equity Research

And lastly in Central America, could you give us an update on the competitive landscape specifically Digicel in the past few quarters, they have been very aggressive on promotional activity. Have they pulled back at all on that aggressive stance.

Mikael Grahne

I think we have seen some signs of relative rational behaviors by our competitors, in Central America broadly, I mean, in this situation with slowing growth. We have pulled down on the subsidy levels we’ve given to new subscribers. In general our competitors have followed that. In Honduras we’ve seen some sign of Digicel pulling back, I mean they used to sell prepaid phones at about $10 on a subsidized basis and reportedly now they are doing it at $20. So, some signs of more rational behaviors also from Digicel.

Kevin M. Roe – Roe Equity Research

Thank you. That’s helpful.

Mikael Grahne

Okay.

Operator

Thank you. Our next question today will come from Rick Prentiss with Raymond James. Please go ahead.

Richard Prentiss – Raymond James

Yeah. First on the balance sheet, you mentioned the refinancing in the coming months on Amnet. Can you talk a little bit about what your options there are as far as refinancing? What markets you’re looking at and what kind of rates just as we watch the credit markets start to open up a little bit just curious what you’re seeing?

François-Xavier Roger

Okay. We have basically two options. One is to go for the high yield bond route, which is not operator adoption, absorbing the market has eased a little bit lately, but this is not operator adoption. Operator adoption is to go for an extension of banking facility for a couple of years, which is our main option that we’re working upon. On the top of it, I mean we would deal in that case with flexible rates, which is more favorable as well in terms of cost. So, this is still work in progress, but we expect to finalize that in the next coming months.

Richard Prentiss – Raymond James

Okay. And then, I think you talked a little bit about how you look at your CapEx spending and related to your IRR thoughts. Can you walk us through maybe a little more detail about the hurdle rates and how you're looking at the economy, and adjusting the CapEx to make sure you get free cash flow positive. Are you quarterly or how far are you looking at the CapEx program to kind of refresh your thoughts.

François-Xavier Roger

Yes, we are looking at it quarterly obviously and so we are targeting at all times at least a 20% internal rate of return, for each and every single project, and we carry out as well postmortem analysis for all project that we carryout in order to check that we get that return, which is absolutely critical to us.

Mikael Grahne

We also do a simplified payback by site on a monthly basis, which allows us to take fast actions if we have underperforming sites.

Richard Prentiss – Raymond James

Okay. And then a final question for you, you mentioned the remittances, how they’ve dropped off in the Central American region. Have you seen anything in Africa or not just familiar with how the remittances flow to there, but you mentioned some of those have been impacted, but I wonder if remittances are having any effect in Africa also?

Mikael Grahne

We don't have the same level of data for Africa, as we would have for Central America. We are still looking for that, but one would assume logically that they would be down too.

Richard Prentiss – Raymond James

Okay. Very good. Thanks guys.

Operator

Thank you. We'll take our next question today from Anders Wennberg with RAM. Please go ahead.

Anders Wennberg – RAM

Hello, Anders Wennberg from RAM. Congratulations for fantastic cash flow.

François-Xavier Roger

Thank you.

Anders Wennberg – RAM

Particularly in Central America and South America, I guess Latin America is $154 million in the quarter. And if you would give, if you exclude Colombia, which was cash flow negative I would assume, it's probably $170 million to $180 million or $700 million in annual run rate. But that cash flow is clouding to losses in Colombia, what kind of patience to have in Colombia regarding the losses there? And secondly it’s going into Africa we have 62% CapEx-to-sales. So, how much can CapEx-to-sales come down there and how much can actually the cash for the total group come up?

Mikael Grahne

Okay. Let me start by Colombia. We are encouraged by the quarter results in Colombia. We know it’s a step-by-step building here, and as we said before we think in the next three years time we would get up to the average margins in Colombia similar to what we have today. So, it’s basically a question of blocking and tackling to get there in Colombia. In terms of the Africa investments, in 2007 and 2008 we built significant coverage in the African markets, we were behind competition, that’s now behind us. The new CapEx is going in more on capacity, but in terms of cash flow now we have some payment stemming from that period that is coming due and that’s impacting the cash flow in Africa. Overtime of course the CapEx-to-sales is going to come down also for Africa, but 2009 is still going to be a heavy investment year for Africa for us.

François-Xavier Roger

And in Central America for example, the minimum level in CapEx is probably around 10% which is maintenance CapEx, so I mean the amount in Q1 was probably a little bit lower than that, but it’s probably exceptional and we are rather targeting a maintenance CapEx around 10%.

Anders Wennberg – RAM

And followup question first on Colombia, are you getting any support from the regulatory in terms of help against the very aggressive on-net pricing the constant using. And on Africa a followup question. Could we get CapEx-to-sales down in the kind of mid-20s range or something like that in one or two years time? What kind of long-term CapEx-to-sales target well you have in there?

Mikael Grahne

Okay, let's talk about Colombia first. About four weeks ago the regulatory body in Colombia pronounced América Móvil having a significant market power. And as such the regulatory said that they would set the across-net call rate. This is a private agreement between América Móvil and the regulatory, we are not private to the details of it. But it's fair to say that overtime we expect some help from the regulatory side to drive our business forward, but we think we have a lot to do also on our own to improve our operating performance. So, we think overtime the regulatory environment will be more fair, than it’s compared to where it is today. CapEx, I think to sales in Africa, I think we still will have in 2009-2010 relatively high investments. These are large territories and lots of opportunities to find business and we’re going to invest to capture those.

Anders Wennberg – RAM

A final follow-on question on Colombia. Can you do anything with your geographical regional exposure there to focus even harder on the Cartagena/Barranquilla coastal area, where we have a strong position on the kind of not give up, but focus less on the less populated area for Greenland or?

Mikael Grahne

Well, we are really treating Colombia as basically five different markets. So, we have a territory management structure. Each market led by, roughly we’ll call a Mini General Manager and what we're trying to do is optimize the opportunities in each market areas, and naturally it's easier sometimes to build on strength rather than turnaround the weakness. So we have quite strong plans to accelerate our presence also in the Barranquilla territory.

Anders Wennberg – RAM

Thanks.

Operator

We will move now to a question from Louis Sarkes with Chesapeake Partners. Please go ahead.

Louis Sarkes – Chesapeake Partners

Hi. Thank you. I had just a couple of quick questions. One, the $33 million gain, and the write-up that you are taking into the JVs. Did that flow through the income statement or not?

François-Xavier Roger

Yes, it does. Yes. In the other income line.

Louis Sarkes – Chesapeake Partners

Okay. So that should be really backed out of, booking into external EBITDA.

François-Xavier Roger

You don’t really see, because it’s offset by a similar amount, which corresponds to the foreign exchange losses. And both amounts are fairly similar one to each other, I think one is $32 million, the other one is $33 million. So…

Louis Sarkes – Chesapeake Partners

Okay.

François-Xavier Roger

One to each other.

Louis Sarkes – Chesapeake Partners

Okay. The second question is I think it was on slide 16 where you show the one-to-one debt-over-EBITDA. The EBITDA is annualized on that slide I assume.

François-Xavier Roger

We think the EBITDA of the last quarter that we annualized indeed.

Louis Sarkes – Chesapeake Partners

Okay. So that’s not really, I mean, do have any sense in terms of what you think it will be in Q4 looking ahead?

François-Xavier Roger

Well, I mean I can’t give you, because we don’t give any guidance in terms of EBITDA.

Louis Sarkes – Chesapeake Partners

Yeah.

François-Xavier Roger

So, I can’t give you. You have to do the math.

Louis Sarkes – Chesapeake Partners

Okay. Thank you very much.

François-Xavier Roger

Usually I mean it will be a little bit lower, because we are still lower growing in our own terms.

Louis Sarkes – Chesapeake Partners

Thank you.

François-Xavier Roger

Okay.

Operator

Thank you. Our next question today comes from Lena Osterberg with SEB. Please go ahead.

Lena Osterberg – SEB Enskilda

Yes. Hello, Michael. Welcome.

Mikael Grahne

Hi.

Lena Osterberg – SEB Enskilda

I guess I shouldn’t say welcome, you’ve been there for a while, but this is the first time we get to speak to you. As the new CEO, I have just a few questions on your view of the company and strategy, because in a very short time there’s been several assets put up for sales Sierra Leone is one and now Asia. So, how do you view Millicom going forward, because it’s rapidly transforming from a growth stock into more cash flow focused stock? And the proceeds that you get, will you invest, I assume there are few licenses coming up I think in Nicaragua, Costa Rica, there are some assets for sale in Africa. Is that where you’re looking into or is it more that we should see it as a smaller, more regionally focused company, which focusses on cash flows. How do you view the company going forward? And that’s my first question? And then also previous guidance on Africa was that you would continue to expand margins by roughly one percentage point quarter-on-quarter, this quarter you actually contracted margins by one percentage point. Do you still feel committed to the old guidance on Africa or how should we view it going forward? And then also I was wondering, if you could shed some light on the rates that you refinanced on the recently financing of the $200 million?

Mikael Grahne

Okay. Let me start by Africa maybe first there, I mean I think, we are confident that we can expand the margin I think quarter-to-quarter we might have some volatility. But I think we said that over a three-year period we would expect to be at Millicom average and we still have that target. In terms of vision, I think at this stage it’s just simply too early to say what we would do with any proceeds from the Asia strategic review that may or may not lead to asset sales, but I think in this environment it is very important to focus on what I would call operational excellence and that you drive by continued innovation both around revenue generation, as well as cost efficiency and cost out and we are going to focus heavily on that one. If there are growth opportunities that fit our return requirements of both in Africa and in Latin America we would naturally look at those when they come up.

Lena Osterberg – SEB Enskilda

So, I should view it, that you would not change your strategy? You will still look to be a growth company because I guess when the macro environment turns there is an opportunity to grow still.

Mikael Grahne

Yes, absolutely, I mean and as you saw for the results and we still had good growth in local currency, and naturally our objective is to continue to do that.

Lena Osterberg – SEB Enskilda

Can you just maybe let us know why you decided to exit Sierra Leone, because I don’t think that that was properly explained last quarter?

Mikael Grahne

Well, Sierra Leone is a quite small market with a large number of operators and quite complex regulatory environment. So, basically we had two choices either to basically consolidate and maybe takeover some of our competitors to create economies of scale or exit. And given the fact that as the market is quite small and it would have been work intense to do, we decided to exit.

Lena Osterberg – SEB Enskilda

Okay.

François-Xavier Roger

In terms of refinancing rate and the new financing that we just secured, they are very much in line with the average interest rate that we have globally for Millicom. I would say it’s slightly lower as well, due to the fact that they’re on variable rates as well.

Lena Osterberg – SEB Enskilda

Okay. Thank you.

Mikael Grahne

Welcome.

Operator

We will take our next question from David Kestenbaum with Morgan Joseph. Please go ahead.

David Kestenbaum – Morgan Joseph

Okay. Thanks. As far as the company know in the past you’ve been conditioned to think if CapEx is rising, growth expectations are rising. So, now you’re cutting CapEx, do you expect your long-term growth to decline? Or are you just a reaction in the short-term to the slowing market in the short-term, but we’ll see CapEx rise in the future as your growth expectations increase.

Mikael Grahne

I think there are two elements of this reducing CapEx. 2007 and 2008 we had a very strong investment in primarily geographic growth, in Africa, but as well as some opportunities in Latin America. In 2009, our CapEx plan call for more capacity investment and coverage. And capacities is significantly less investment than quicker returns, because you have radio equipment normally on an existing tower already, so that was the plan. In this economic environment we live we further refined that plan and put on hold some geographic developments primarily in Africa and shifted that CapEx to build out capacity where we’re already present. If and when the economic environment improves we probably go back to some coverage built-up primarily in Africa, but we haven’t seen that yet.

François-Xavier Roger

And let’s not forget that we’re still investing 25% of revenues, which is still high especially taking into consideration the fact that the rate is much lower in Central America due to the fact that we don’t invest anymore in 3G, because we did it last year and we don’t invest anymore as Mikael just said on coverage.

David Kestenbaum – Morgan Joseph

Okay. Now as far as ARPU, are you seeing any signs of stabilization, I mean obviously you’ve had massive declines in the last few quarters.

Mikael Grahne

Well, I think a 3 point something decline in ARPU in this economic environment is a quite a low decline, and I think we’ve been hit on ARPU primarily in Central America, where we have a clear decline in international incoming calls, it’s a reflection of the recession in U.S., where you have a lot of Central American migrant workers and also reflection of the decreased interconnect we get on those calls, as well as some extra taxes put on by the government, in two of the three countries at the end of ’08. So, you have a clear sign of that. Difficult to forecast, but I mean when we look at the decline in Q1, we find it, actually it’s quite small given the circumstances. And as I said we are focusing, increasing our emphasis with our value services to attract the more active customer. So, we hope that that could be a complement against increased subscriber growth we get from increased penetration.

David Kestenbaum – Morgan Joseph

Okay. And then finally on the sale of Asia, how do we read your commitment to Sri Lanka, I mean is that necessarily going to go, if you sell Laos and Cambodia, which makes a sense geographically, or you think that it will be sold in one fell swoop.

Mikael Grahne

As I said we just announced the beginning of the strategic review. So it’s still pretty much early to comment on that at this stage.

David Kestenbaum – Morgan Joseph

Thanks.

Operator

Thank you. We’ll move now to Chris King with Stifel Nicolaus. Please go ahead.

Christopher King – Stifel Nicolaus & Company, Inc.

Good morning. Just a quick question regarding Minutes of Use trends throughout your various regions. It looks to us at least that your South American MoUs held up probably a little bit better than we had expected. Just I was wondering with your ARPU down a little over 3% sequentially, are there widening disparities between the various regions on your MoU trends particularly on the prepaid side, is there any one region doing materially better than the rest from an MoU standpoint?

Mikael Grahne

There are no big variation. Actually the MoU per user is also a little bit dependent on promotions that we run. So, if we have a lot of promotions around double balance or whatever when you reload, that drives higher use. If I said as a trend we’ve seen is less incoming international, less cross-net calls, and more on-net calls. Those are the trends we see.

Christopher King – Stifel Nicolaus & Company, Inc.

And those are trends really being seen across all four regions?

Mikael Grahne

Yes. But the international income is more pronounced in Central America where we have a larger portion of the minutes in international incoming.

Christopher King – Stifel Nicolaus & Company, Inc.

Understood. Thank you.

Mikael Grahne

Welcome.

Operator

We’ll move now to a question from Soomit Datta with New Street Research. Please go ahead.

Soomit Datta – New Street Research

Hi there.

Mikael Grahne

Hi.

Soomit Datta – New Street Research

Yes, Soomit with New Street. Couple of things, first of all please, Honduras. Are you able to quantify the revenue and EBITDA level, the impact of the interconnect cup please in Q1? And then secondly could you talk a little bit about Ghana. There is a bit of reference in the text, but I noticed MTN had a good couple of first months in terms of subscriber net adds I suspect, and the new entrant also have done quite well. I have also heard you’re cutting back your CapEx in Ghana and whether that’s true or not, I am not sure. But if it is, is it a good time to be cutting back CapEx given your market share is under pressure. Thanks very much.

Mikael Grahne

Let me start by Ghana. In Q1, there has been a significant slowdown in the total gross new in the market as a reflection of deteriorated economic situation. So, we believe on average, we perhaps lost one point of market share in that environment. We believe our competitors are also going to report reduced sub-intake in Q1. In terms of CapEx, we have ample of capacity in Ghana. In all of our markets, we measure our peak of capacity and we have lots of capacity in Ghana to react to when the markets return or run promotions to try to drive revenues. In terms of the Honduras, in fact, I think the impacts are in terms of million of dollars probably versus the 2008 numbers.

François-Xavier Roger

In revenues, the impact in EBITDA is more limited, because we serve on the interconnect that we players went on first, I mean we have entered into cost-saving initiatives, so the impact in EBITDA is limited.

Soomit Datta – New Street Research

Okay, so it’s on a quarter basis, the revenue level is at perhaps low sort of single-digit million of dollars or?

Francois-Xavier Roger

$4 million or $5 million something versus 2008 revenue generation.

Soomit Datta – New Street Research

Okay, thanks.

Francois-Xavier Roger

Welcome.

Operator

Thank you. Our next question today comes from Jason Willey of Standard & Poor’s. Please go ahead.

Jason Willey – Standard & Poor’s Equity Research

Yeah, good afternoon. Jason Willey, Standard & Poor’s Equity Research. Just a quick strategic question. I was wondering kind of how you are thinking about the broadband or the fixed assets in Latin America and opportunity to potentially expand your presence there, I guess it goes back to some of the original questions on the amount of cash that you currently have and then maybe some potential proceeds in the future, wondering about what’s your interest is in potentially building out that footprint. Thank you.

Mikael Grahne

Yeah. I think in terms of broadband, we are pursuing the mobile broadband via our 3G investments and that’s doing well. In terms of fixed broadband via the cable network as we have in Amnet. We have no further plans for the moment, we are busy and just trying to improve the performance of Amnet infusing the Millicom type of sales and marketing and customer service focus on this business. So, we have no further plan on expansion on broadband at this moment.

Jason Willey – Standard & Poor’s Equity Research

Thank you.

Mikael Grahne

Welcome.

Operator

We now have a follow up question from Stefan Pettersson with Nordia. Please go ahead.

Stefan Petersen – Nordia

Yes, hello. Two questions. The first one relates to depreciation. You invested quite heavily in the fourth quarter and despite this we did not see an increase in depreciation in the first quarter compared to the fourth quarter. Do you expect the depreciation to sales level to remain at this level throughout the year? And hence we shouldn't expect the depreciation to increase at much during this year. Secondly, it relates to the financial myth, would you say that the financial cost for debt is approximate debt is at the level we should expect throughout the year at around 8%?

Mikael Grahne

Okay. Regarding the depreciation, indeed I mean the depreciation has declined in absolute value in Q1 versus Q4 of last year. This is mainly the consequence of currency depreciation indeed, because we have invested massively last year $1.4 billion. So, as a consequent we should see and especially in Q4 as well. So, we should see our depreciation increase in absolute terms and I don't expect that, I mean, if currency and foreign exchange rates remain where they are today, I don’t expect that the depreciation will decrease, but probably marginally increase in the coming months, given that we continue investing around $200 million to $250 million every quarter. Regarding the financial cost, much depends on the evaluation of the interest rate in the market. We need to understand that outside of the high yield bond, which is at the fixed rate of 10%, 90% to 95% of our debt is at variable rate. So, much dependent on what the variable rates will be, either remain at current level, it could probably remain at this level or probably decrease a little bit further.

Stefan Petersen – Nordia

Okay. Thank you.

Operator

Thank you. Jan Dworsky of Handelsbanken has our next question. Please go ahead.

Jan Dworsky – Handelsbanken Capital Markets

Thank you. Sorry for coming back to the strategic review in Asia, in relation to the minority shareholders in two of those countries, have they been sort of asked how they see the situation or?

Mikael Grahne

Well, they are aware of our announcement.

Jan Dworsky – Handelsbanken Capital Markets

And then secondly, you had strong subscriber intake in Bolivia and Guatemala in the quarter, is there anything special with highlighting in relation to that?

Mikael Grahne

No, I think that’s good sales and marketing efforts basically and I think in Bolivia we have been expanding the network and entering into new smaller cities, and that has also been driving the subscriber growth. In Guatemala it’s continuation of the marketing efforts we have in place.

Jan Dworsky – Handelsbanken Capital Markets

And then in Central America, can you comment anything in relation to, of course, the markets are affected by the weaker economy, if sort of when you look at the situation in March-April, is that worse than the beginning of the quarter or is there any signs of stabilization in that really?

Mikael Grahne

Well, I can’t really comment about the new quarter, but we are waiting for the remittance data for March, which we expect to continue to be down versus year ago. So, I don't see anything short-term changing in the economic environment in Central America.

Jan Dworsky – Handelsbanken Capital Markets

But when you look at your own business in March compared to the beginning of the quarter, it’s probably sort of a stable performance within the quarter.

Mikael Grahne

Within the quarter it was quite stable.

Jan Dworsky – Handelsbanken Capital Markets

Okay. Thank you.

Operator

Thank you. Sven Skold with Swedbank has our next follow-up question. Please go ahead.

Sven Skold – Swedbank

Yes. Hi, again.

Mikael Grahne

Hi.

Sven Skold – Swedbank

I was just wondering about, is it possible to bring cash out of every country that you are in or do you see any changes there? And second is the taxes changes now over the countries, I mean telecom specific taxes?

François-Xavier Roger

Okay. As far as cash repatriation is concerned, I mean we didn’t see any change in spite of the deteriorating economic environment. So, we didn’t face any issue regarding cash repatriation and we have been able to repatriate whatever funds we needed to repatriate, be it in the form of dividends or technical service fees or repayment of shareholder loans if any. As far as taxes are concerned, no major changes apart from what we said in Honduras. In terms of interconnection rates and the new tax has been introduced in DRC, that which hit the tax and revenue, so it will not impact our P&L directly, but it will slowdown the growth of market because the consumer is going to pay for it. It’s kind of a VAT tax, which is going to increase overtime. I think it has been introduced with 4% rate for the time being and it will go up to 10% over the last year or so.

Sven Skold – Swedbank

Okay, great. Thanks.

Operator

Thank you. And our final question today will come from William Miller with J.M. Hartwell. Please go ahead.

William Miller – J.M. Hartwell

Is there any macro variable, I know in Central America you did said you were looking remittances, is there anything anywhere else that you can look at and say, geez that should do us a lot of good or that should us some harmony. Could you share that with us either by region or on a country-by-country basis or you’re just going to wait and see what happens?

Mikael Grahne

Well, we haven’t followed really a single other economic indicator as powerful as basically the remittances is, because there is also this sort of natural behavior that the money you make yourself, you might not spend as easily, but the money that somebody sends to you more easily goes to consumption. So, we believe that the reduction of this remittances really have a quite significant impact on people’s spending behavior.

William Miller – J.M. Hartwell

Great. Thanks very much.

Mikael Grahne

Yeah. Okay.

Operator

Ladies and gentlemen, that will conclude today's question-and-answer session. And I would now like to turn the conference back over to your hosts for any additional or closing remarks.

Mikael Grahne

Well, I'd just like to thank you for joining the call today. And we look forward to seeing some of you in our upcoming road show. So, thank you very much and good-bye.

Operator

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.

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