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Executives

Mikael Grahne - President & Chief Executive Officer

François-Xavier Roger - Chief Financial Officer

Analysts

Sergey Fedoseev - HSBC

Sven Skold - Swedbank Securities

William Miller - Hartwell

Rick Prentiss - Raymond James

David Kestenbaum - Morgan Joseph

Peter Nielsen - Chevron

Lena Osterberg - SEB

Soomit Datta - New Street Research

Kevin Roe - Roe Equity Research

Stephan Patterson - Northair

Sven Skold - Swedbank

Millicom International Cellular SA (MICC) Q2 2009 Earnings Call July 21, 2009 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Millicom Q2 2009 results conference call. For your information this conference is being recorded. May I also remind you that this call is being audio streamed over the web and is accessible at www.millicom.com, together with the presentation summarizing the key features of the results.

I would now like to hand you over to your host today’s for 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. Before we start, I would like to point out that all the figures we have presented today exclude our 3A Sun operations, which have been reclassified as discontinued operations from January 01, 2009 under IFRS. They also continue to exclude Sierra Leon. All historical figures have been restated to provide a comparable base.

Now, please turn to slide number three. We are very pleased that the Q2 results continue to show the benefits of management actions taken over the last 12 moths, to increase both margins and cash flow generation. Our EBITDA margin moved up to 45.6%, which is above our long term target margin for the group, as the DICEM [ph] cost controls and adopt our products offering to changing market conditions. Cash flow continues to improve strongly year-on-year with free cash flow standing at 7% of revenues in Q2.

Value added services are a clear success story, reflecting our focus on providing innovative services to customers. Constant currency VAS revenues were up 47% year-on-year in Q2, and now represent 18% of recurring revenues across the group. The longer term opportunities in data and other mobile services are significant.

Slide four. Year-on-year subscriber growth in second quarter was 25% and we ended the quarter with 30.8 million customers. Revenue grew by 5% year-on-year to $840 million and by 11% organically at constant currency. EBITDA increased by 40% to $371 million for the quarter, producing an EBITDA margin of 45.6%, which was up 340 basis points year-on-year. Net profit for the quarter amounted to $140 million with operating free cash flow reaching 120 million equivalent to 15% of revenues.

Slide five. In terms of sequential growth, some 1.7 million subscribers were added in the quarter, representing growth of 6% of Q1. Revenues were up by 5%, EBITDA was up by 6% and we recorded an increase in the margin of 39 basis points. CapEx in Q2 at $157 million was 15% lower than in Q1.

Slide six, Forex continues to have an impact, revenues were up 11% in local currencies for mobile operations and 17 in total included, [Inaudible]. Net depreciations of currencies against the dollar eroded 12 percentage point, so growth from the top line equivalent to $92million. We expect the impact of Forex to begin to stabilize in H2 as the major currencies move out of last year.

Slide seven. The most severely affected regions are Africa and South America. The underlying growth in local currency remains strong in Africa, 23% and in South America at 16%. There was no local currency revenue growth in Central America, primarily as a result of slower economic growth with declining remittances from the U.S. minus 13% for Q2 ‘09 versus Q2 ‘08. Our revenue performance was an improvement on the Q1 trend, despite an acceleration in remittance declines.

Slide eight. Looking at revenues by category, the elements I would like again to highlight is VAS/SMS 3G, which has grown 47% in local currencies since Q2 ‘08 and accounted for 18% of mobile revenues in Q2 ‘09. Based on other non-voice services will be a significant secular growth story, particular in our geographies where fixed line penetration is likely to remain low. In addition they are an important component of customer loyalty.

Slide nine. The share or revenue count by SMS traffic has remained constant over the last three months at 10%, otherwise revenues including non-voice services based on content has increased from 6% to 8% of recurring revenue quarter to quarter. This growth has resulted from our efforts to get to know our customers and understand and meet their needs. We expect to see voice, data and content for us growing strongly in the coming years.

Slide 10. Just to give you some examples on how we have been innovative in our services. In South America low PC penetration is a barrier to take up our 3G services, so we have to introduce the proposition whereby a customer can pay for a laptop over the life of the contract, when they sign up to a 3G data card service.

Slide 11. To [Inaudible] the vast revenue growth of non-configured phones and customers who don’t know how to use the services available. In Bolivia we have some trainers out to the streets to configure phones, demonstrate services to customers, and encourage take up through trade.

Slide 12. At the end of June 02, ‘09, it constituted a market share on a rated basis to 27.9%, up 0.9 percentage points from H1 ‘08, due to growing market share in Africa.

Slide 13. At the end of second quarter, average turn for the group as a whole stood at 4.7%, down 0.4% from Q1. The improvement was rated in Central America at one percentage point as a result of our focus on higher revenue generated and more loyal customers.

Slide 14. Emerging market economies continued to be affected by strong headwinds. Remittance into Central America continue to fall sharply in the second quarter, down 13% year-on-year, and this has led to a slowing of these economies. Our own revenue trend in the region; however has shown some signs of stabilization. So while the phenomenon is definitely a driving growth, our own actions in the markets are mitigating the impact to some extend.

We have also seen a return on replacement in Ghana, and a recline in tourist which have impacted the economies of Senegal, Tanzania and Mauritius. 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. These changes are reflected in ARPU, which was 2.4% lower in local currency in Q2 than in Q1 ‘09.

Slide 15. We are responding to changes in our markets by seeking ways to increase our proximity to the consumers and developing customer segmentations with tailored service offerings. We continue to support the affordability by staying lower denomination reloads and by developing loyalty programs and reload promotions, we have seen a reduction for sure. We have also focused on our cost structure and we are seeking to replicate through cross selling techniques across our markets. We have also adjusted our CapEx in light of these market conditions.

Please turn to slide 17. Now let’s look at the clusters in more detail. In Central America subscribers grew 18% year-on-year, with 588,000 subscribers added in the quarter. With average penetration in our Central American markets of around 83%, it is understandable that subscriber growth slows down as the voice traffic grows. That’s why we are increasing our focus on vast data and broadband services in these more mature markets.

Revenues for Q2 were $332 million, down 3% year-on-year as a reflection of economic conditions, including lower remittances from the US. EBITDA reached $187 million, which was flat year-on-year, but up 3% in local currency. These strong number one positions means that Central America continues to have an excellent EBITDA margin of 56% with very strong cash generation. CapEx in Central America was $20 million in Q2, 79% lower than in Q2 ‘08.

Slide 18. In South America subscribers increased by 70% and revenues increased by 16% in local currency over the strong dollar, continuously impacting top line resulting in 2% decline in reported revenue numbers. EBITDA for Q2 was $98 million and the EBITDA margin was 39%, up almost seven percentage points from the same period last year, which is a reflection of our focus on profitability through product mix and cost reduction initiatives.

Slide 19. In Africa, 762,000 subscribers were added across the region in the second quarter, which says that’s a year-on-year increase in total subscribers of 41%. The highest net additions were in Tanzania, Senegal and Chad reflecting the considerable investment we made in these markets.

Revenue growth at 23% in local currency remained strong, taking into consideration the economic environment, but continued depreciation of African currencies year-on-year has put pressure on relative dollar terms. We have however witnessed a more stable foreign exchange environment in the second quarter, and this is reflected in the sequential growth in revenue of 7%.

EBITDA market for Q2 reached $62 million, up 9% year-on-year and EBITDA margin was 34%, an increase of approximately two percentage points year-over-year. CapEx for the region was $72 million, representing 39% of revenues for the region, which is an indication of our confidence in the medium to long term growth potential of Africa, despite the current challenges.

The roll out of our network in Rwanda is going well and we are on track to launch services there before the end of the year. We were operating free cash flow neutral in Africa, an important landmark. Future cash flow performance will depend to some extend on phasing of CapEx.

Slide 20. Revenues for Amnet and Navega about $50 million and EBITDA was $25 million, producing an EBITDA margin of 47% included in the company revenues. Amnet’s accounted for $44 million of revenues and $17 million of EBITDA. CapEx in Q2 excluding installation CapEx was high at $20 million due to phase changes.

Slide 21. The opportunity for Millicom is to use its marketing skill to up-sell broadbrand services to existing cable customers and we are pleased with our progress to-date. We achieved 24% year-on-year growth in product revenues in Q2, an increase of 18% and 12% respectively in revenue generating units and hopes for the best.

Now, I would like to handover to Francois, who will brief you through the financials.

Francois-Xavier Roger

Thank you, Mikael. Please turn to slide 23, where you can see that CapEx for the second quarter was $157 million, down 54% year-on-year, so that the CapEx to revenue ratio has fallen to 19% for the quarter.

We have adjusted our expectations for CapEx for the year to $750 million, which now excludes around $100 million. Millicom have tight control on CapEx and is very focused on retail and new investments. We are now closely monitoring CapEx levels in relation to EBITDA levels and to the growth potential on a territory-by-territory basis.

Slide 24. Our depreciation in the second quarter at $145 million was higher than in Q1 due to the level of CapEx invested in previous quarters. On slide 25, you will see that our net debt to EBITDA ratio remained at one time, an appropriately for the current environment.

Slide 26. At the end of the second quarter Millicom had $537 million of short term debt set against $833 million in cash, giving us flexibility in terms of financing. Our objective is to keep extending maturities and to-date, our average maturity is above three year as shown in slide 26.

After the quarter end, four banks have committed $200 million over two years to refinance the Amnet debts at a rate which is below our current average cost of borrowing. The remaining $337 of short term debt is mainly composed of overdraft facilities that are rolled over on an ongoing basis.

On slide 27, you can see that the effective interest rate in Q2 remained at 8% as we are benefiting from decreasing interest rates on the portion of our debt that is structured with variable interest rates. Our target is to achieve a 50-50 split of variable and fixed rate debts.

Please turn to slide 28. Taxes amounted to $51 million in the quarter at an effective rate of 32%. Our tax rate was lower than Q1 ‘09, but higher than last year due to a zero tax base in Columbia on the off-sheet. Slide 29. EPS is down on Q2, 2008 as a result of foreign exchange losses this year and foreign exchange gains in the equivalent period last year. Rise in depreciation has also been a factor.

Slide 30. The benefits of increased EBITDA on control CapEx contributed to a positive free cash flow, which we expect to deliver for the whole of 2009 for the first time. In Q2, free cash flow amounted to $59 million or 7% of revenues. It declined slightly from Q1 2009 as a result of the bi-annual payment of interest and the high yield bond in the second quarter of 2009.

As you can see on slide 31 most of our cash generation comes from Latin America, while we are still in an investment position in Africa. Cash flow has improved in Latin America in 2009 as last year we were building our 3G and still has some coverage CapEx to complete. We are very pleased to see operating free cash flow being positive in all regions including Africa in Q2.

Please turn to the summary cash flow statement on slide 32. Our closing cash balance at the end of the quarter was $833 million. We will be generating free cash flow this year and we expect to see cash flow growing in subsequent years.

To summarize, for the full year, we are now expecting CapEx to be for the year 2009 around $750 million, excluding CapEx for Asia of around $100 million. Our EBITDA margin is expected to be maintained at the current level for the full year, and we will deliver operating free cash flow for the full year, which as if some type of revenue is expected to be in the mid teens.

Slides 34 and 35. Before handing back to Mikael, I would like to add that we expect to complete the sale for Asian assets by Q1, 2010 at the latest. Government Secs have been appointed to advise on the process and to that, expressions of interest have been received from a number of parties for the three assets.

As for our plans for the use of the cash proceeds of the sale, we are looking at opportunities to expand reserves for acquisition on new licenses, as we believe in our proven business model. Any external growth opportunity will have to offer both attractive returns and potential leading position of our time.

There is no rush to make acquisition; getting the right opportunity is more important than making a quick deal. If there is no immediate opportunity, we will either redeem the high yield bond which is not that sufficient in Luxemburg, our retail forms to shareholders.

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

Mikael Grahne

Thank you, Francois. Overall the two results are encouraging. We have delivered improved revenue growth from Q1, a better margin, strong cash innovation and growing market share. We are confident that our strategy will continue to deliver superior performance compared to our competitors, and we have a robust business which can adapt to changing market conditions.

That concludes our comments and we will now be happy to take your questions. Operator, we may have the first question please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sergey Fedoseev - HSBC.

Sergey Fedoseev - HSBC

Just two questions; one is a strategic one, and another one is more technical. The first one, could you please comment how you would deploy the money foundation asset; would it go to Africa or to Latin America? Which region would you see as a priority for the money?

Second question is more technical. This is on Q1 press release and the Q2 press release, you have the same comment. Exactly the same sentence saying, net profit for the period after a net charge of $55 million as a result of two one of events. Could you please comment on that? Is it accidentally a copy and fax mistake or it’s meant to be like that, and what are these two events then?

Mikael Grahne

 

Yes, thank you. I’ll take the first question of use of proceed and we’ll try to see if François will answer the second question there. Our natural growth grounds are Latin America and Africa and as Francois said, we would look for opportunities that would give us the mid-term ability to build a leading brand in the markets.

As Francois said, we are not in a hurry, we’d rather take time and find the right asset rather than rush in to anything quick. So we would look for opportunities in Latin America and in Africa and that’s in the process we are right now.

Sergey Fedoseev – HSBC

 

Just to clarify, do you have a priority, which continent will be more important?

Mikael Grahne

 

No, I think the priority is more the right opportunity. That’s the driving priority.

Francois-Xavier Roger

 

Regarding your second question for the net profit for the period we are relating, we are talking about the full year 2008, which is the reason why we have the same number in our Q1 and Q2 press release.

Sergey Fedoseev – HSBC

 

And could you please comment on the one offs on 2009, what’s the impact there?

Mikael Grahne

 

In 2009, the main one-off that we had were related to some impairment that we did on [Sera Leon]. We have decided to dispose of this asset last year. We are close to finalizing a deal. That’s one, but we have to impair somewhat the value of this asset in our books, which we did in between Q1 and Q2. It was probably between the two quarters.

Operator

 

Your next question comes from Sven Skold - Swedbank Securities.

Sven Skold – Swedbank Securities

 

Just a few questions; first, about the African margin, which actually was down in Q2, compared to Q1. Can you discuss around that development and how you look at the margin? Also going forward, when you say that the margin will be stable in the group from Q2 into Q3 and Q4, how do you see the mix there? Should we still expect a margin in Africa to improve?

Second question on depreciation, which was fairly high in this quarter, do you expect it to stay at this level now? Depreciation and CapEx is approximately; I think it is about the same compared to the net sales, which should stay at this level and that’s the question or if it will continue up.

The third question on M&A, can you provide us with the operational information for the Asian assets? I mean you still own these assets. It’s relevant to see the sales and EBITDA figures for those two businesses? That would be helpful. Just to follow-up on that, I’ve seen some discussions in media about the price for Cambodia being $500 million and $200 million for Sri Lanka. Is that a price that you consider to be fair? Thank you.

Mikael Grahne

 

Okay. I will deal with the Africa margin question and we are not commenting on about any media reports on pricing, so no comment from our side there. On the Africa margin, we are confident that we can lift those margins. We have given the guidance that we are looking; about a 3% margin growth per year. Quarter-to-quarter, there could be some stabilization depending on the allocation of expenses, but we are confident that we can reach the margin in this year in the quarters that remain.

Francois-Xavier Roger

 

As far as depreciation is concerned you need to appreciate the fact that in Q1 depreciation in estimate value went down, which was mainly the consequence of foreign exchange parities. So baring any change in foreign exchange parities, I think depreciation should not increase materially, because we are declining fairly significantly in terms of CapEx that we invest.

Sven Skold – Swedbank Securities

 

And can you provide the financial information later on for Asia.

Francois-Xavier Roger

 

As far as Asia is concerned, I mean these assets are being reclassified as assets for sales, so I mean we don’t provide any information related to the performance of these businesses, apart from what we have to do according to ISRS regulation, which is what we provided as one single line for all of these assets combined.

Operator

 

Your next question comes from William Miller - Hartwell.

William Miller – Hartwell

 

I just wondered if you could review briefly where you stand with the Senegalese situation and also in Columbia with the interconnect charges.

Mikael Grahne

 

In Senegal, as we said before we have a parallel process, each of the two parties in the dispute that is also the Senegalese government is pursuing the case in respective courts. The Senegalese government in Senegal and Millicom in arbitration process in Washington, so that’s continuing.

In parallel, we had a series of meetings and those are continuing. So, I think it’s going to be a few months until we have worked into a solution, but both parties have displaced, have expressed an interest of finding an amicable solution to this issue. 

In Columbia, there has been no more movement since the regulatory body announced the intended changes on the status of the America Mobile, labeled as a significant market operator. There has continued to be some dialogue with the regulatory body on various options around that, including asymmetric interconnect traits, which means that we as a smaller operator would pay less when we call them, and there would be more, but there is no firm decisions on implementation of this yet in the market.

William Miller – Hartwell

 

Do you expect that to be resolved this year?

Mikael Grahne

 

Yes, I would expect some movement towards the end of the year on this issue.

Operator

 

Your next question comes from Rick Prentiss - Raymond James.

Richard Prentiss – Raymond James

 

In your attachments, a very interesting slide in Central America showing churn reduced significantly from 3.5% to 2.5%. Can you talk a little bit about what you are seeing in those market places in which competition has increased and your churns come down, and also I think you mentioned that you reduced handset subsidies in of the region and your market shares stayed out. Just a little discussion on Central America please?

Mikael Grahne

 

Yes, I think in 2008 there was a quiet strong attempt by the industry to continue to drive strong subscriber growth which resulted in I would say increase in multiple SIM users. I think we and the rest of the industry players realized that the growth opportunities were less in this market environment, so there has been a little bit more of a rational behavior in terms of subsidies that have gone into the market.

We have been focusing very much on the high quality subscribers and the key driver for that is our value added services that very much appeal to the active user. So it’s a combination on industry behavior and our ability to attract a better customer compared to our competitors.

 

Richard Prentiss – Raymond James 

Okay. On value added services you are making quite a big point about that on your slide presentation as well. Pretty impressive growth in value added services; revenue and also in absolute dollar terms. Can you talk to us a little bit about what you think the opportunities are over the next several years as far as growing value added services and what you think the big applications will be?

Mikael Grahne

 

Well, we think sort of a mid target that is to get value added services up to 25% of our revenues. The key there is to continue to innovate. Our objective is to be first in the market with the right kind of products.

We are doing a lot of consumer research, improving our consumer insights to be able to really fine tailor products for various customer segments. So at this stage I wouldn’t like to reveal our hand in what we are planning there, but there are lots of activities and lots of new product coming out in that arena. As I said mid term targets 25% of revenues in value added services. 

Operator

 

Your next question comes from David Kestenbaum - Morgan Joseph.

David Kestenbaum – Morgan Joseph

 

Francois, can you talk about the taxable locations of the sale, maybe it won’t quantify what the bases, but can you talk about, are you planning on getting a price higher than the basis and exactly how would you be taxed locally?

Francois-Xavier Roger

 

We are not going to provide you with the details, but we don’t expect to suffer from the heavy tax building on the sale. Due to the legal structure that we have currently we can minimize the tax implications. 

David Kestenbaum – Morgan Joseph 

As you move, seems like your moving a lot a people to Miami how will that effect the corporate over headline on your financials?

Mikael Grahne

 

I think our objective is to try to either keep or reduce that line and we feel by moving people closer to the market we get more effective, in other words we probably need less people than we have today.

 

David Kestenbaum – Morgan Joseph 

Finally, can you talk about the Amnet acquisition? I mean 5% growth, can we get that higher you think and where is the inflection point, what do you have to do to get that growth accelerated?

Francois-Xavier Roger

 

Well first of all Amnet is a combination of several businesses, because you have broadband, you have the corporate services, you have TV services. So as far as broadband is concerned, I mean we were pleased to see that the business grew by about 25%.

The growth on the TV services was much lower, although it was still positive. So, it’s a combination of different services as far as Amnet is concerned. Our main interest is obviously on the broadband services.

Mikael Grahne

 

I mean if you look, for example, a growth potential I think in Chile is naturally more advanced than our Central American markets. The broadband, the cable operator there run about 60% of their customers and also have broadband connections. In Central America today we are at about 30%, so we are halfway there. We would like to achieve similar numbers also in Latin America. 

David Kestenbaum – Morgan Joseph 

And that operator grows at double digit growth, is that right?

Mikael Grahne

 

Yes. 

Operator

 

Your next question comes from Peter Nielsen – Chevron.

Peter Nielsen – Cheveron

 

Yes. Just a question related to customer [Inaudible] in the quarter, which is obviously quite solid and not from the past two quarters. Is this a level you would expect to be able to maintain in the second half as well, given sort of your feelings about how the economy is developing in these markets? Thank you. 

Mikael Grahne

Yes, I think Q2 for us was a quite ordinary quarter in that respect. So we don’t really do forecast, give former guidance or subscriber growth, but that looked to us as a kind of a normal quarter in terms of growth.

Operator

Your next question comes from Lena Osterberg - SEB.

Lena Osterberg – SEB Enskilda 

A few questions here if I may. Continuing on the subscriber intake, it is good to see Columbia pick up again, and I was wondering, do you expect to be able to keep up the growth rates, the higher growth rates in Columbia, while imitating margins and what’s the driver behind the growth, because previously, if I remember correctly you said you will refocus geographically. Are you expanding outside the coastal regions or is it there where your growth is.

Then also Africa, looking at the churn rates, they are still quite high. What measures can you implement to get churn rates down in the African segments? Then finally, if you were to make acquisitions, at what leverage would you feel financially comfortable? 

Mikael Grahne

Okay, I will grab the two first questions and François will take the leverage question. First, let me comment about Columbia. As I said, before our focus is on the young urban cool customer. We are driving the attraction to that segment by our very strong focus on value added services.

That growth in Columbia has been very strong and so we are basically now getting traction on our programs. We think we are also getting a stronger brand recognition out there and a lot of word of mouth about the services we are offering. So in terms of future guidance there, in terms of growth, I would say our aspiration would be to continue on that growth track, focusing on the young urban cool customer.

As far as Africa churn, that’s a basically typical phenomenon in that part of the market, where people don’t have that much disposable income and then to basically react to various offers between the operators, more of a short term basis. Again in Africa, two things that we are doing, trying to focus on value added services as we have done elsewhere, trying to attract the more higher end customer and also second, for the lower end part, we are looking at various loyalty promotions that hopefully can result over time in lower churn.

As far as the leverage is concerned, so we have low leverage with the net debt to EBITDA ratio of one, we are happy with that level. We did say in the past, as we didn’t want to exceed a net debt to EBITDA ratio of two to confirm that position and we are fully aware of use of the multi sequent environment in financial markets today. We are totally aware of the fact that it’s more difficult to raise financing today than it was let’s say a year ago and as a consequence we are very pleased with the net debt to EBITDA of one today. 

Lena Osterberg – SEB Enskilda 

But can I just ask you, if you were to make acquisitions, how much further could you go that? 

Mikael Grahne

We said, we will not go further than two. I am not saying this is what we want to do, I’m just saying we don’t want to go further than two and we are happy with one. 

Operator 

Your next question comes from Soomit Datta - New Street Research.

Soomit Datta - New Street Research 

If you could just help me understand the Navega business a bit more. It’s a small business, but the margin you reported in that business is about 80% of the EBITDA level. Is that some sort of anomaly; is that sort of right back to provisions or something. Is there anything strange happening there and if not that, that sort of $30 million annual run rate, is that what we can expect as an EBITDA contribution going forward? 

Mikael Grahne

Navega is actually a very attractive business from a margin point of view, but you need to understand that we, Millicom are significant just as much as Navega. So we have to eliminate the inter-company revenues, which means that we take only a part of the revenues, while we take 100% of the margin now, because we did not consider the business before. So which is the reason why you see a margin level which is artificially high. But that doesn’t concern me, it’s a highly profitable business. 

Soomit Datta - New Street Research. 

Have any of you sort of transferred prices between Millicom and Navega since the business was consolidated? 

Mikael Grahne

No, we did not. We could do it, but at the end of the day, its margin that we get. It’s margin that’s made the transfer prices market related. 

Operator

Your next question comes from Kevin Roe - Roe Equity Research.

Kevin Roe – Roe Equity Research 

Could you give us an update on the competitive landscape in Ghana? It seems, one of the new entrants has made some significant market share gains, maybe an update on the pricing and promotions there.

Back to Columbia, in your release you mentioned margin stabilizing at 20%. I believe last call you expected margins over the longer term to reach company average levels? Is that still your expectation? 

Mikael Grahne

Okay, let me start with Columbia; just to be very, very clear, we said that in the next three years, we think in Columbia we are looking at mid-30 margins. In terms of the sort of statement that we see, the margins stabilizing, since we have been quite successful in our marketing efforts, we are going to maybe test the next quarters a little bit higher marketing spent, to see if we can rise the growth and that’s one of the reasons why we said that we might temporarily lock the margin in 20%. 

In terms of Ghana, yes, highly competitive; I think there is a lot of activity in trying to drive subscribers on new network, which is the same network, as well as Vodafone. Again we are focusing on the higher end customer in that market. So although we lost a little bit of market share in terms of subscribers, we think it would have been more successful to hold on to our shareholder real revenues in the market place, but quarter to-date there is no sign of a let up on the competitive activity.

Kevin Roe – Roe Equity Research

 

Okay. Lastly Francois in your prepared remarks, you mentioned the possibility to return funds to shareholders. Is it still your preference for dividends in terms of returning cash or do you have a preference between dividends or share repurchases?

Francois Xavier

 

We’ll have to make a decision in due time, but as you can see I mean this is not a preferred option, but I mean if we don’t see any opportunity for external growth, then we will consider either returning the high yield bond or returning funds to shareholders, so the board will have to decide what kind of shape and form we’ll do it, if we go that route.

Operator

 

Your next question comes from Stephan Patterson – [Northair.]

Stephan Patterson - Northair

 

If we start with Central America, I’m sure that after the 1Q report American deal talked about stabilization of the Arche trend, and I think this is also visible for you. Looking at the broader picture, you increased subscriber intake quite substantially quarter-on-quarter and despite this, we saw the stabilizing and even more important the EBITDA margin is up sequentially. Can you explain to us how that is performed? 

Mikael Grahne

Yes, as we’ve said here in the beginning, and in previous earnings call, we are heavily focused on value added services that really allows us to appeal to the higher end customers, our competitors higher end customer.

So we are seeing basically lots of subscriber potential here at the lower end, but picking in subscriber at the average or to the higher end and that basically helps us to maintain our ARPU closer to the Q1 numbers, even if we are adding a substantial amount of subscribers. So it’s the mix, it’s the ARPU, it’s the mix of the subscribers in terms of ARPU generation that is helping us there. 

Stephan Patterson - Northair 

Do you see this also going forward? 

Mikael Grahne

Well, that’s our aspiration to continue to focus on value added services. We are invest leaders in Latin America in that respect. We tend to be first out with our new services and our objective is to maintain that initiative. 

Stephan Patterson - Northair 

Another question relates to the tax rates. The tax rate is high this quarter as well as in the second quarter 2008. Can you explain why it’s high in the second quarter and how should we consider the tax rates going forward during this year? 

Mikael Grahne

Last year it was exceptionally high, because there were some exceptional items related to the assets in Columbia. In the second quarter of 2009 it is indeed higher rates than over the last couple of quarters, which is mainly linked to the fact that we don’t have impacted base in DFC and in Columbia.

Looking forward, I mean, we don’t give any statements, and you need to appreciate the fact that our tax rate is a combination of tax and revenues, tax and profits. If we look at the situation, the first half of 2009, we are at about 29% average effective tax rates. Well, without looking too much into the future, we may be a little bit higher for the rest of the year, but we should be around 30%. 

Stephan Patterson - Northair 

Two more questions, that relates to the information that you have provided this quarter. The first one with revenues per country in local currency. The question is if you can provide us with that for earlier periods and also you had information on slide eight in the presentation relating to air time value added services and other respects of the revenues; and the question if you can provide us with that information on earlier periods. 

Mikael Grahne

Well this slide eight, we have been doing it in Q2 and in Q1 as well and we’ll continue doing it, and as far as the revenues by country, we will provide the information going forward? 

Stephan Patterson - Northair 

But could you provide us with historical information to make us forecast on that level? 

Mikael Grahne

I think the world changed quite a lot. I don’t know how relevant the historic data is on that one and on this sort of local currency data, probably our database is not that strong. So we feel confident; we increased our database significantly going into this economic situation. So we feel very comfortable of the accuracy of the data we are giving you right now. We would feel probably less confident about the dates going back. 

Stephan Patterson - Northair 

Okay. Then we just have to wait and look at the numbers as they come. 

Operator

 

Your next question comes from Sven Skold - Swedbank.

Sven Skold – Swedbank

 

Yes, if you could just discuss the political situation in Honduras, and if it has affected your business. I know it can sometimes gain mobile operators when there is a political crisis, but also sometimes the network can be shut down or something like that by the government. Have you seen any substines? 

Mikael Grahne

First I would like to state, all our people and all our assets are safe. When this incident escalated, we put in place business continuity and management F4s, including how to contact people, how to leave food in the office and so on. Luckily, we didn’t have to take any actions around that.

In the beginning of this incident, we actually had a significant increase in traffic, because of the confusion around that. Today, our business is more or less back to normal in terms of, either air time consumed or gross or net subscriber coming to our network. So from a business point of view, it’s steady as we go.

Operator

 

(Operator Instructions) Your next question comes form Lena Osterberg - SEB.

Lena Osterberg – SEB

 

Yes, I was wondering if you could give us a little bit more detail. You said which countries you had exposure to US dollar debt, but could you maybe give us more detail splits between the country, so that we can try to calculate the effects better on debt translation? 

Mikael Grahne

We don’t provide details of the debt by country. We give you the countries where we are exposed to currency fluctuation as far as debt is concerned, but we don’t provide you with a detail of the information by country.

Lena Osterberg – SEB

 

That makes it very difficult to try to calculate the effect. Can you say which one of the countries is the biggest? 

Mikael Grahne

Well, I think we give from memory, none of it is quiet similar in terms of size. I mean there is no dominating country. At this point we don’t provide the information because it may fluctuate on time depending on the maturities of debts and new debts that we contract. 

Operator

Your next question comes from Richard Prentiss - Raymond James.

Richard Prentiss – Raymond James 

Ta actually a follow up on that line, as you look at the Asia process, how much debt is there in maybe the region of Asia that we should think about, would be getting paid off, which would be the final disposal of assets there.

Also first of all you mentioned, as far as user proceeds prefer to look at extending your operations, but you mentioned obviously wanting to get return on invested capital over your VAC. Can you talk a little bit about what’s your expected VAC would be in the different areas of Latin America and Africa?

Mikael Grahne

 

As far as the debt is concerned for Asia, the net debt as of the end of June was $67 million. Regarding the work, I mean the existing revenue to work by country which we extract from using different works provided by different banks, in order to make sure that we have a fair work. So it depends very much from one country to the other. So, I can’t give you the details of all of the countries now. 

Operator

Thank you. As we have no further questions, I would like to turn the call back to you gentlemen for any additional or closing remarks. 

Mikael Gahne 

Yes, I would just like to thank you for joining the call today. We look forward to seeing some of you on our road shows this week. I would also like to highlight the capital markets day plan for the October 27 in Miami, which I hope will be accessible enough for many of you to get there. So, thank you very much and good-bye.

Operator

 

Thank you. That will conclude today’s conference call. Thank you for participation ladies and gentlemen. You may now disconnect.

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Source: Millicom International Cellular SA Q2 2009 Earnings Call Transcript

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