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Executives

Nicolas Didio - IR

Hans-Holger - President & CEO

Tim Pennington - CFO

Analysts

Nick Brown - Goldman Sachs

Bill Miller - JM Hartwell

Barry Zeitoune - Berenberg

Georgios Ierodiaconou - Citi Bank

Erik Pers - Danske Markets

JP Davids - Barclays

Lena Osterberg - Carnegie

Andreas Joelsson - SEB

Millicom International Cellular S.A (OTCPK:MIICF) Q2 2014 Earnings Conference Call July 16, 2014 8:00 AM ET

Operator

Good morning and good afternoon ladies and gentlemen and welcome to the Millicom Financial Results Conference Call. Today’s call will be hosted by Hans-Holger Albrecht, President and CEO; and Tim Pennington, CFO. Following the formal presentation by Millicom’s management an interactive Q&A session will be available.

I would now like to turn the conference over to Nicolas Didio, Head of Investor Relations. Please go ahead.

Nicolas Didio

Thank you and welcome everyone to the Millicom second quarter results presentation. And today’s presentation materials can be found on our website, www.milicom.com.

Before we start I would like to remind everyone that the Safe Harbor statements will apply to this presentation and the subsequent Q&A session. With me today on the call are our President and CEO, Mr. Hans-Holger Albrecht; and Mr. Tim Pennington, our CFO.

I will now hand over to Hans-Holger to give an overview of our Q2 results and operational performance, after which Tim will take you through the financials, and we will finish with a Q&A session.

Hans-Holger

Thank you Nicolas and good morning and good afternoon from Stockholm and thank you for joining us today. Joining me here for the first time as well on this call is our new CFO Tim Pennington so welcome to him too. As Nicolas said we will take you through the highlights of the first six months and our priorities for the rest of the year and we will then take any questions you may have. But before going through the slides I would like to provide some highlights from the quarter.

First I think we’re pleased with the continued delivery on our growth plan across all regions. Millicom has had a good first six months, we continue to focus on investments in our growth strategy and so organic growth of over 9% in the second quarter. We continue to see strong potential in the markets in which we operate and focus on our transformation plans for the group.

I think our performance in Africa has been particularly pleasing with close to 16% organic growth year-on-year.

Looking ahead we expect to continue to take market shares in Africa. Equally South America has also driven the growth across the group up 14% year-on-year, Columbia continues to grow strongly in the quarter thanks to market share gains.

Our shifting focus on mobile data consumption is paying off and we are seeing increased take up of data and increased penetration of data product. Our cable and digital media business grew by 16% in the quarter, we have now completed the roll-out of our Tigo Star brand in five countries and we see a strong appetite in those market for our digital services.

The mobile financial services also took a further stride forward with another 100,000 users. Our commitment to innovation continued with Africa’s first ever interoperability agreement between rival operators in Tanzania and I think this will be a catalyst for millions more people to join the online financial community.

In terms of new services we launched our first satellite Pay-TV service in Bolivia in April and this service is now available in most of our markets in Latin America.

On the whole I think we’re seeing the benefits of our strategy coming through and aim to continue to deliver a digital lifestyle for our customers in our markets. We also secured the second of the three file regulatory approvals required for the merger with UNE in Colombia and let me remind you that Colombia is Latin America’s fourth largest economy with a renewed sense of purpose and stability following last month’s elections. So I’m very confident that once we have completed with final two stages we can get on with the business of integrating the best of Tigo’s and UNE’s people and operations to create a stunning new challenger for this market.

And as we look forward to updating you on this over the coming weeks and especially obviously at our Capital Market’s Day in Miami on the 24th of September. The pace of change will continue with more product and services launch across our footprint in this and the next quarter. It is a time of investments and transition during which we’re putting resources into creating services and platforms to deliver the digital lifestyle strategy. The market and customer choices are moving very fast we can see and we need to stay ahead of the game. But it is rigidly controlled investment program which is backed by a fresh and detailed focus on cost optimization across the organization which Tim and I will highlight later during the presentation.

So let me confirm that with margins within previously stated guidance we will continue our drive to maintain growth while balancing sharp focus on growing EBITDA and improve margins.

We will then turn to the slides and starting with slide number 4, looking at our key business drivers, we have performed well on a number of fronts I think. Group revenues are up 9% in the quarter better than Q1 which was at 8.5%. Mobile data penetration has increased significantly at an average of 22.7% across our market and an increase of 1.8 percentage points over the last three months. Penetration of MFS was diluted in the quarter by the addition of the new market in Senegal excluding which it stays flat at 18%. And I would like to talk about EBITDA margin which is down 0.9 percentage points from the last quarter at 33.1%. We’re still in investment stage and obviously seeing the results in terms of the record revenue growth.

A significant part of the EBITDA margin decline comes from the revenue mix but again Tim will come back on this later during the presentation. If you move to slide 5, you can see that we’re delivering results across each of the pillars of our long term growth strategy which is very important for it's not just a one single product or one single market even and I guess you’re pretty familiar now with the slide so I won't spend too much time on it. Maybe just one comment on the online and e-commerce. Our four pillar growth story remains the same despite the deconsolidation of online.

In Africa the deal with MTN has been approved finally and we have now 32% of AIH, The African Internet Holding. There is a big opportunity for us as the market takes off in Africa and in Latam. AIH and LIH have launched new products in exciting countries and entered new markets. So we believe these investments support the strategy of our core business.

And costs and CapEx control are few one of the key to maintaining our margins and we have a highly disciplined approach to both. Our CapEx is currently geared to the record revenue growth which we’re achieving. On costs, we’re implementing a greater centralization across our business with two hubs, one in London and one in Miami and we expect to see some positive impacts from this centralization in coming quarters.

And on slide 6, as already mentioned during this investment phase we remain focus on increasing market share and penetration in pursuit of revenue growth. And we’re seeing this phase across our business divisions, group revenues up 9% year-on-year reflecting 5.9% revenue growth in mobile, 16% growth in cable and 41% in mobile financial services.

We’re continuing to exploit the significant business opportunities which exists across our divisions, our mobile customer base is now over 52 million. We have slight declines of market shares in some or most mature markets but offset by gains others where the potential is big such as Colombia and Africa although we increased the mobile data customers by over 1.1 million in the quarter to reach 22.7% of our mobile customer base. More and more money is being transacted by our mobile financial services, $2.2 billion this quarter up from just under $1.6 billion in the second quarter last year and we’re driving up our RGUs by increasing the number of double and triple play customers by 47,000 in the quarter.

The launch of the DTH services so far in five countries and it's more to come in coming months will extend that opportunity even further.

If you turn to slide 8 and the mobile business in mobile which accounts just to remind you for 72% of group recurring revenue, the evolution of our business reflects the macro trend towards data and away from voice.

Mobile data usage was up 10% in June, 5% for the quarter and average data consumption per data user was above 700 megabits per month. Our FIFA World Cup app which we launched during the World Cup obviously based on the exclusive mobile device got more than 600,000 downloads in few weeks which we see is a very strong results for this kind of services. The record take up of mobile data services contributed to revenue growth of 32% in the quarter. We continue to take advantage of attractively priced, high quality smartphones to ensure the continuation of this trend. We have sold more than 1 million smartphones over the last three months compared to 350,000 in Q2 last year and it was all sold below the $80 price tag, volume has been multiplied by almost nine times.

Moving to slide 9 in the cable and media business, the usage on cable continues to grow on our HFC network, both regions are seeing an increase of the take-up rates of our products especially we can see it in South America. This is driven by our investments in Pay-TV with Tigo Star and our Sport’s Channel called Tigo Sports. Our cable and digital media footprint continues to grow excluding DTH we now have 3.1 million customers representing 28% increase year-on-year. The addition of the Multivision assets in Bolivia gave us 0.4 million customers while investments in our HFC enable us to reach 2.3 million homes passed.

Our size in cable will grow significantly obviously after the completion of the UNE merger. We now have obtained two out of the three final regulatory approvals for UNE and the process has been a bit slower than we anticipated but the outcome is as we expected. So patience is required.

Talking four minute about MFS on slide number 10. As you can see there the penetration of MFS is growing in each country compared to the same period last year, although comparing to Q1 and if we exclude Senegal which just launched the platform which stayed flat. The volume of net adds was clearly lower than in Q1 at 114,000. This shows that this business is still at the very beginning of it's lifecycle but what we’re implementing will drive, we believe the long term growth which is particularly the case with the interoperability. I mentioned already we signed in Tanzania. It is too early to see the benefits of this agreement but we believe it to be the game changer for the business in that market and later on for other markets as well.

Despite the increased usage we are facing some headwinds in some countries. There is a price competition on mobile financial products on competition in Tanzania and Rwanda. Competition on mobile market share in Paraguay and in addition the floods in the countries has strongly impacted the local economy in the second quarter. In other countries such as El Salvador or Chad, customers are very rapidly adopting to the product and the volume of transaction which is growing by more than 50%. So the pattern is different country by country but generally speaking we see a confirmation of our long term strategy when it comes to MFS.

If we move to slide 11 and towards the cost optimization, as mentioned before we’re in a high investment phase of our transformation program now but we realized that the game is only won if we can deliver profitable growth overtime so we run a pretty tight ship but I always believe that there is room for improvement obviously on every cost item.

In the second quarter we saw an increase in our corporate cost, this is an investment in our future just to explain a bit more detailed. We have through the corporate cost invested our technical area because the factory where we have bought specialty functions back to the center to increase specialist expertise and avoid duplication. We have seen the benefits from the improvement in our net performance statistic in Africa or we have also built additional team for example here in Stockholm which records Digital Ventures Group who are developing new products for us such as the video-on-demand platform for our Latin markets and there is an entertainment team based in Miami those are guys for example who secured exclusive mobile rights to the World Cup which is driving further revenues in the future. We’re working very closely with a very successful launch of Tigo Music which made us for example the largest music company in Colombia.

These are just few examples of things we’re developing, however as we see our organization moving we’re looking to the future and starting today to reshape our business to be as efficient in the future as we have been in the past. With excellent advisors we have started the review of our levels of efficiency, the results have been encouraging so far their 27 OpEx efficiency opportunities identified in Guatemala from network maintenance cost to our commercial strategy. This program is about positioning us for the future. It's not about short term margin boast but I’m confident this will help us to return to EBITDA growth in line with revenue growth as well.

However just to be very clear as well, as we have always mentioned from the very beginning, this year is the year where we had to demonstrate that the company can grow again which we have been doing efficiency thing and the kind of margin boast and it's something which has a bigger impact for us during 2015. So overall it is nothing out of on assumptions and their forecast.

Before I now hand over to my new CFO Tim for the financial review I would like to invite you to come to our Capital Markets Day in Miami on the 24th of September, 18 months will have passed since the last Capital Markets Day in London and we aim to demonstrate that we can achieve our long term targets and that we can grow our revenue line as well as our EBITDA line.

In particularly we will discuss obviously in more details our growth prospects for Colombia, our cost savings that I just mentioned and how our digital lifestyle [ph] strategy is increasing growth prospect of our mobile and cable business. So you’re welcomed to this event in Miami in the fall.

With this I hand over now to Tim for the financial review.

Tim Pennington

Thank you and I will take you through the financials and then Hans-Holger will summarize and then we will go to Q&A. So let me start slide 14 by echoing Hans-Holger saying that it's been pretty decent quarter. We’re seeing increased penetration in smartphones, increased penetration in data products, cable is growing strongly, our other digital services since it's a World Cup promotion and drawing customers to the network. A bit also as Hans-Holger said it's having an impact on our margins.

So we had revenues accelerating 9% organically, 6.6% on a recorded basis taking our revenues to the quarter to $1.45 billion. And that partially reflects very strong revenue growth in Colombia, Africa and the cable media business. EBITDA ended the quarter of $471 million again inline with Q1 and a margin of 33.1% in the quarter and a 33.5% year-to-date. It's a little bit light on our internal forecast but that’s partially reflecting the higher volume of gross additions we have seen in Colombia and the increase in business development.

Incidentally we’re focusing on EBITDA after corporate costs and unless I state otherwise please assume that we’re talking about EBITDA. It's the Group EBITDA after all of the operating cost of the business. And we’re on track on our investments CapEx is rolling out, it came in at 367 million on a balance sheet basis, that increased to $80 million for license renewals in Chad and the Honduras and finally adjusted earnings per share was $0.27.

Now adjusted earnings per share is figure we will use going forward, it's basically taking basic EPS and adjusting it into non-cash, non-operating items like the change in the volume and the put option and currency movements including derivatives. There is a reconciliation listed in the back of the press release but these adjustments reduced our EPS in this quarter by $1.59 per share.

Okay let me look at the revenue picture now in a bit more detail and we saw some exceptional levels of revenue growth in Colombia driven by volume, driven by high data and entertainment revenues but there was also pretty impressive revenue growth in Guatemala, Bolivia and Rwanda and also Chad. The charts on the slide shows we have 40% revenue growth in our South America region, Colombia drove 26% growth there, Bolivia 10% revenue growth. Africa again posted a strong quarter, Chad, Ghana and Rwanda are also in double digit revenue growth there and that drove 48.6% organic growth for the region as a whole and as with the last quarter we also saw some significant currency headwinds there coming out of Ghana, Paraguay, Colombia and Costa Rica and this reduced our revenues by $37 million. So the U.S. dollar revenue growth was 6.6% but that’s still 2.6 percentage points increase on our Q1 U.S. dollar growth.

The lower chart again confirms most of the growth is coming out of mobile but as Hans-Holger said we’re pretty pleased with the double digit growth of the cable business in Q2.

In terms of the EBITDA contribution we are seeing good progress in South America and it's 5% up on Q2 last year again driven by Colombia, which is 20% higher. Central America showed solid progress overall, Guatemala continues to show excellent EBITDA reflecting both revenue growth and cost management and as did our business in Costa Rica. More challenging environments we’re seeing in Honduras where amongst other things, we have got certain restrictions on cellsites which led to slightly weaker revenues in the quarter.

Now in Africa we saw some sequential EBITDA growth up 12.9% from Q1. The losses are still down in absolute terms from last year it's because of that continued investments in expanding our networks to improve our market positioning across the entire African business.

Essential cost in the quarter increased $72 million that’s up from $59 million in Q1 largely due to high levels of activity on new business development as well as some reclassification of costs. When it comes to corporate cost I think we need to distinguish between those costs that are truly sort of head office cost and those that are related to activity in respect to the regional businesses and which frankly could be booked centrally or locally.

So I turn to the margins now as I said earlier, little bit light on where we were on Q1 just in the 1 percentage point lower. Of that 488 percentage points reflecting the increase in the cost allocation to the center and just picking an earlier point, roughly a third of that was from increases in head office cost, the other two thirds has come from new business development just from reclassifications. And these are costs in respect to the business that Hans-Holger sort of touched on in his earlier presentation.

So at the operating level we saw some ups and downs, Colombia, phone [ph] subsidizes were nearly 20% in Q1 as we accelerated the rate of postpaid acquisition in the face of changes and regulations that is renewing enforceability of term contracts. So we saw over a million gross additions in the second quarter and that has sort of had an impact on our EBITDA margins which is 1.9 percentage points lower in Q2 compared to Q1 but we would expect some level of reversal at that in the second half of this year. Elsewhere there was some margin attrition in Bolivia and El Salvador and again reflecting higher subsidies and in Paraguay it was slightly more difficult operating environment but elsewhere we saw some good, decent margin improvement in Guatemala and in most of the African business. So I will just take a look at the margin bridge on the slide which compares to Q2 last year to Q2 this year and you can see that sort of higher handset sales in Q2 compared to last year reflecting our pushing smartphones that’s reflecting the cost of sales and growth. The investments in growth to the commercial and business development diluted our margin by 31.3% and the corporate cost diluted the margin by 1.8% but as I said lot of this is business development and some reclassification.

So moving to slide 18, I just want to spend a few minutes going below EBITDA just walking down the P&L and D&A at $254 million, the reason we go to benchmark for our run-rates for and the rest of the year. With our financial charges of $89 million again it's a reasonably pure version of our quarterly charge, no significant one offs this quarter. So again it should be a reasonably good proxy for the full year.

The movement on non-operating items largely reflects the mark to market movements on the put and call options we have inspected in Guatemala and Honduras and moving further down for associates, this now is just contributions from online and remaining tower investments. In the quarter we did book $29 million in credit benefiting as it did from one off dilution gain from Towers transaction in Colombia. Now this isn't the disposal we announced today, this was an earlier transaction. So if you just strip out the one offs from that line item we would have booked to $30 million loss.

Taxes are fairly consistent with the run-rate this quarter and that left us as I said earlier with reported EPS $1.86 and adjusted EPS of $0.27. So just want to touch briefly on cash flow now and we have sorted of -- we’re trialing a sort of new format trying to explain what’s going on in our cash flow. EBITDA as you recognize CapEx is driven to the $67 million in the quarter but adjusting to the non-cash element which is largely the Chad license which was booked but not funded in the quarter, the cash CapEx which is shown here in the table was $321 million and we expect to meet our guidance 19% on our CapEx overall for the year.

Working capital really just reflects a partial unwind of the working capital movement in Q1, tax payments $150 million slight catch up in cash terms from the P&L charge. This reflects with an operating free cash flow which is our after tax OCF inline with Q1 and a little bit about Q2 last year.

Interest at $90 million inline with P&L, dividends to minorities $56 million which left us with a negative equity free cash flow of $40 million. And again, reasonably consistent in the second quarter in history.

So just now turning to how that translated to our balance sheet, the net debt reconciliation you see -- from the slide we ended the quarter with net debt of 2.6 billion. In this quarter we paid our dividend plus there have been some one-off items, a bit of M&A small items and FX movements. So our net debt has increased by $425 million to just over $2 billion. As you heard Hans-Holger say we’re expecting the UNE merger to close shortly and this will increase our debt to around 4.3 billion to 4.4 billion giving us pro forma leverage of about two times.

That is at the outer edge of our leverage target range and from my initial assessment I think we’re one to two times consolidated net debt to EBITDA for the group, it's about right which means that we will be focusing on actions to delever the balance sheet over the next three quarters back to the middle of the range. You can see today that we have started that process, we have announced a the disposal of our stake in our business in Mauritius and the Colombia Towers investment that we have that realizes round about a $175 million we will reduce that leverage by one times and therefore restating pro forma leverage as of the end of June, we will be at 1.48 instead of 1.57 reported.

From that I will hand back to Hans-Holger for our Q&A.

Hans-Holger

Thanks Tim. And maybe just to briefly to summarize although second quarter was a good quarter confirming our choices we took strategically and operationally. The growth potential in our markets remain strong especially in Colombia and Africa and you can see it was our digital lifestyle strategy is starting to work and obviously a key factor to achieve a kind of long term profitable growth for the company going forward.

Looking ahead we reiterate our guidance for the remainder of 2014 and remain optimistic about the future growth opportunity for the group and just to highlight one more time remember where we have been coming from, this company is undergoing substantial transformation from a pure voice cash and carry business model to a very complex data digital lifestyle and multi-products level. So overall I think it's been quite a journey but we’ve seen the first positive signs continuing in this year.

Thank you for listening and Tim and I will now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will now take our first question from Mr. Nick Brown of Goldman Sachs. Please go ahead.

Nick Brown - Goldman Sachs

Just got a couple of questions, please. Firstly, in which region or countries do you see the most cost-cutting opportunities? And when do you think you'll be in a position to outline to us some kind of restructuring plan? And secondly, following the sale of Mauritius and Towers in Columbia, should we expect any further potential disposals to delever more?

Hans-Holger

I think it's a combination, let me take the first question when it cost optimization. It depends of course on the size of the business and the kind of market position we have. If you go to the marketplace is where we have more mature markets and have a very strong market share, there is probably a bigger potential than those markets which has investment phase and need to change the business model. So in some regions in Central America and in some regions in South America as well. And the whole approach is -- as I said to see what kind of efficiency we have and other big efficiency game we are going to look into more detail into as well is the factory, the technical size which will have an impact on operation cost but as well going forward should deliver as the target which we have set when it comes to the CapEx to revenue ratio. So it's those kind of elements we’re working on.

And just to remind you again, this is an important point, this company has to add new kind of service function than it had in the past. So the history in terms of margin of the Company is always a good benchmark but the business model we’re in today driven by data obviously is substantially different. When it comes to the sales of Mauritius and our Tower deals as Tim said there is a key focus for us on the balance sheet and we want to make sure that we stay close to the kind of target we have when it comes to net debt to leverage or a sales situation to 1.5 times is kind of a level we want to achieve and non-core assets or assets which we don’t see fit into our strategy, we're always going to review. So there maybe few other ones but nothing in the kind of core business we’re running currently.

Tim Pennington

I think our assets have to earn their place on the bench and to the extent we can’t do anything strategically with them and they are not helping our return on capital then we will find ways of monetizing and the passage into structured assets were a good case in point on that, and hence now I think is a good deal.

Operator

We will now take our next question from Mr. Bill Miller of JM Hartwell. Please go ahead.

Bill Miller - JM Hartwell

As you look out over the next six months, is Colombia the most obvious transformational event for you? And can you take -- and would you give us now your margins on your existing Colombian operations and the growth rate? And can you apply any of those techniques or ability to increase margin to Colombia? And is that the most transformational aspect over the next 6 to 12 months?

Hans-Holger

Colombia is a transformation deal and the most important piece for us in the next 6 to 12 months and that’s the reason we make it a kind of a focus point on our Capital Markets Day in Miami to run in more detail through the business model. Obviously we can’t speak -- because with the merger -- we can’t speak about UNE and it's business at this stage but we believe that in UNE itself and the cable business, it's upsell potential in terms of margins which if I know in the midrange of the 20% margin, around 25% margin and equally our mobile business in Colombia is in the mid-20 margin range as well on the back a very strong growth and very heavy investments in data but going forward it should be margin opportunities on the upside as well.

And if you combine both business successfully you have the double effect. So if you get Colombia right, we will have a deep impact on the company going forward.

Bill Miller - JM Hartwell

And can you talk for half a second about where you are with Facebook and what's going on there, and how you plan to capitalize on that alliance?

Hans-Holger

Interestingly, the results have been pretty different between Latin America and Africa, whereas in Paraguay, it has been not so much in upselling tool so far but rather be a kind of loyalty tool and brand enhancement tool. In Africa we can see it has worked much better in terms of upselling people to new data plans and going forward, it was kind of a test run and we’re very pleased. I think the key feature which is very successful that we have been able for the first time ever as an operator to integrate our sales function, upgrading functions into the Facebook mobile page. So it's a kind of a seamless experience for the people to use it which clearly is a model we can use probably in other places as well.

So, we are happy, we’re fine, we see it as a good test case and we will continue to elaborate with similar kind of project in the future.

Operator

We will now take our next question from Barry Zeitoune of Berenberg. Please go ahead.

Barry Zeitoune - Berenberg

I've just got two questions, actually. The first is for Tim, and I was hoping you can give a bit more color on how you expect the effective tax rate to evolve over time, and also the cash taxes. It's been quite volatile in recent years, and any guidance you can give us on the kind of rate we can expect going forward would be very useful. And the second question is on Colombia. I know that you pushed very hard in the quarter ahead of a change in regulation that was going to impact the way in which you are able to subsidize handsets. I'm assuming that that change has now taken effect. How is it changing the way that you're marketing your product in Colombia given the restrictions on handset subsidies? And how is it impacting the market dynamics as well? Thank you.

Tim Pennington

On tax I think clearly, we’re a complex group operating on many jurisdictions. I think you know the (indiscernible) given you on the tax is that the charge that we incurred in Q2 is sort of pretty close to our expected run-rate for the full year. In terms of effective tax rate that is going to be hugely sort of influenced by some -- the non-operating non-cash items for instance the put and call revaluation, which we have to do each quarter. So I need to look at how best to give guidance on tax whether we -- through an effective tax rate or whether it's through another model but I think just to where we’re in the present time using the current quarters P&L charges, not a bad proxy of where we will probably get to for the full year.

Hans-Holger

And maybe I can answer the question when it comes to Colombia which is correct. We have been very more aggressive during the second quarter ahead of the changes when it comes to the rate of regulatory side in terms of contract durations and probably the kind of stop of handset subsidies. Going forward obviously then we will see an impact on the margins equally also on the growth of the overall market so there will be data potential that there will be lower growth in the markets but it's well then of course a better margin for us in the business. However we believe at this stage that most competition we will reinvest chunk of the money they are going to save in terms of subsidies in other pieces of the value chain, one is obviously advertising and promotion. Some is in sales and marketing channel and some maybe in the direct sales force. So it's not that the model will change completely but as of today we can anticipate maybe a bit less growth and widely improvement on the margin.

Saying that, we’re close to be the number two now in this market on the data side but of course we have to observe the market dynamics and what competition is doing. So we may have to adjust a bit during the first quarter.

Barry Zeitoune - Berenberg

Just on the tax point, should we expect cash taxes and P&L taxes to be relatively close to one another, or is there going to be some divergence?

Tim Pennington

They should be close to one another. I mean obviously there will be timing differences through this period but I think there will be give or take close to each other.

Operator

We will now take our next question from Mr. Georgios Ierodiaconou of Citi Bank. Please go ahead.

Georgios Ierodiaconou - Citi Bank

My first question is a follow-up on the earlier question on Colombia. You mentioned that some of the handset savings will be reinvested in other purposes. Do you expect to see potentially any pricing pressure or any competition focusing more on price instead? And when you talk about a slowdown, do you think it will be a wider slowdown of the market, or will there be a slowdown in the market share gains which you have achieved over the last couple of years? My second question is on Paraguay and whether there's been any update with regards to any potential asymmetric [ph] regulation, or something I believe you mentioned in the past; and whether the market share declines that we've seen in the last couple of quarters may ease the pressure for there to be any asymmetric regulation imposed on you. And then a final question, which is more of a clarification. When I look at Central American revenue growth, a lot of that is coming out of other revenues which were up around 17 million versus the same quarter last year or roughly 50% up on that base. Can you give us an idea of what is driving this growth and whether it's a recurring item that we should assume continues in the coming quarters? Thank you.

Hans-Holger

I will take the first two questions and then Tim can answer the third question. Coming back to Colombia, we don’t believe at this stage the new regulation will have an impact on pricing and will initiate a price war. As I said there will be rather kind of diversion of investments into a sales marketing distribution and other kind of sales activities. So it's not a pricing issue, it's more that resources will be reallocated, but maybe on a bit lower scale than previously.

This will have an impact as we mentioned maybe on the total market growth, not on our market share growth. So on the total market growth which obviously can reflect us but it's not a Millicom specific problem that we would slow down all our growth going forward. So just to be very clear, it's maybe the market which doesn’t grow as fast but not us.

When it comes to Paraguay the -- as I mentioned regulation is not an issue at this stage, I mean the discussion is going on but it is nothing which is concrete or an issue. So we don’t have any kind of new insight would change this picture. Right now it's business as usual. Obviously there has been discussion about the kind of position Tigo has in this market but just to be very clear it's not about the position we have if we could use or misuse the position we would have been it would create an issue which we obviously are not doing. And yes of course this slight decline may help in the market share but it's not a big issue in that respect either. So we’re in constant talk with the regulatory and with the government and as I said we’re working on this front. For us the key issue in Paraguay really is more at this stage to make sure our brand revamps and our own network coverage, which – or network quality which has been a big issue in the last 12 months is becoming better as well. So business is as usual in Paraguay for the time being. Tim do you want to take the last one?

Tim Pennington

Yes predominantly the revenue that's under other in Central America relates to handsets and clearly that growth reflects the pushing of smartphones, the increasing data penetration that we have got there. Clearly Central America is probably our most penetrated market where we put our largest market position. So you would expect us to be pushing hard on maintaining that through the delivery of smartphones to customers.

Operator

We will now take our next question from Erik Pers of Danske Markets. Please go ahead.

Erik Pers - Danske Markets

On the Group margin, I understand it came a bit under pressure this quarter from the subsidies in Columbia. Is those probably coming down? Is that what you see will take the margin up in this second half to meet your full-year guidance? Or are there also other factors that contribute to this? And then secondly, I have a question regarding the dividends to minorities which you now disclose for the recent period. Are these what would see representative or what we should see going forward? Can you clarify the dividend policy and what we should expect when it comes to dividends to minorities? Thank you.

Tim Pennington

I think, Colombia is one aspect of it, I mean clearly it's a big part of our business and we pushed it very hard in Q2 to build our market share. We can see that easing off in Q3 and Q4 but that said, if we see the opportunity to continue to press hard to gain market share and gain subscribers and we definitely will do. Now we haven't changed our margin guidance because it's quite a lot moving in the group in the second half but I think we said that this is our year of investments and we see the opportunity to invest to achieve our goals then and frankly we’re going to do that in the second half. But that said there are lots of initiatives going around in the group but we’re looking at Hans-Holger mentioned the optimization projects that we have got in hand.

I think we’re in a relatively good position for the future and to some extent if our margins rise significantly in the second half that isn't necessarily a great thing because that’s probably slowed down some of the growth that we’re able to pick up in the second half.

On the second question, the dividends to minorities, we got sort of a full payout ratio policy on our businesses. Our principal minorities sit in Guatemala and in Honduras and Columbia. And to the extent there is cash in those businesses that is available to be distributed and we distribute them. To the extent that the cash is needed to investments in the business then we leave it in the business to be invested. So I can’t give you a percentage sort of growth rate on minorities and I think what we are showing you this quarter is probably a good proxy going forward but clearly it will change with the profitability underlying operations.

Erik Pers - Danske Markets

As a quick follow-up to that, has Columbia been distributing dividends to shareholders, the Columbian mobile business, over the recent period?

Tim Pennington

No we’re in an investment phase in Colombia, so we’re reinvesting everything that we’re making there back into the business.

Operator

We will now take our next question from JP Davids of Barclays. Please go ahead.

JP Davids - Barclays

Two questions, please, the first one on Africa. To what extent do you believe that the investment you've made in this region has resulted in sustainable market share gains? And what level of margin do you think is needed going forward to defend and attract further top-line momentum? The second question may be more for Tim on the costs. You talked a little bit about corporate costs in your presentation. Can you provide a little bit more color about if there has been some costs shifted from the OpCos to the head office, the quantum of those costs; and also, a little bit of an outlook for the corporate costs line through the rest of 2014. Thank you.

Hans-Holger

Yes. If you look at the -- if we take the African question, if you look at the performance in Africa with close to 15% growth I think it's a very strong performance in terms of this market there we take in market share as we believe but in all markets which is a positive side. So the investment we have done in the network, in the brand and in the skill set are starting to payoff. Just to remind you when we started 18 months ago we were declining in terms of revenues and the margin was declining at the same time. So it shows that we can still turn the business around. The brand is intact and the customers are coming back.

Africa as a whole will be -- its an investment case, it's a turnaround case but the idea we have with Africa is to get it's own funding, i.e., we're trying to come out of the investment phase pretty fast and next year already I think there should be in terms of cash performance and cash flow performance should be a kind of significant improvement which doesn’t mean that we scale back on our investment when it comes to network or information to 3G in some of the countries or even LTE. It's more that a lot of investments in infrastructure has been done. We have the skill set buildup we needed in this market and we should see a kind of continuous return of the investments we did in the last 1.5 year. So I think you will see the peak this year and then it will be much more balanced going forward. The gross profile should remain the same. The human [ph] penetration in Africa is still -- mobile phone is still pretty low maybe just between 60%.

The transformation from 2G to 3G is in fully swing and there are many other opportunities like mobile banking like mobile entertainment which we just started to initiate in those markets. So in terms of growth I think it should be much better and going forward as well. And last but not least what we can see as well is that the competitive pressure has eased and has become a bit more structured in terms of how everyone is handling the market is terms of pricing and so forth and so forth. So it's a different picture than a year ago. Tim do you want to take the other part?

Tim Pennington

Yes on the corporate cost. You know sort of coming into the business just thinking and look at what sort of sat under the umbrella of corporate costs, a lot of this is activities undertaken on behalf of business which frankly could quite easily sit in the businesses or sit in the center. I’m not sure the allocation is of that, it doesn’t help too much. I mean to say that we’re spending too much on corporate cost but our EBITDA margin in the region is doing well misses point a bit. So I’m keen that we focus on the group EBITDA margin and where the cost actually land isn't a big driver of decision making or discussion, it's more about have we got the most asset in this business in terms of the margin that we’re able to generate from it. So I think sort of coming back to more specific question JP, where do I see it in the next couple of quarters and I think – the $70 million we booked in this quarter I think probably I would expect to see it at around at about that level in Q2 and Q3 provided we don’t sort of change the way we account for it but I think that is probably a decent sort of level to look at for now given the visibility that I have currently got in it.

Operator

We will now take the next question from Lena Osterberg of Carnegie. Please go ahead.

Lena Osterberg - Carnegie

Lena Osterberg - Carnegie

Sorry to come back to the corporate costs line. Just trying to understand if any of the EBITDA improvement seen in Africa is related to reclassification of corporate costs being moved from Africa to the corporate level. And then also I'm wondering why you decided to exit Mauritius. So what was the strategic rationale? And how should we then view other markets in Africa? What are your core criteria for keeping assets or divesting them? And then finally also on dividends, you clearly now state that you will take your leverage down. You've said that before once you consolidate UNE. But will you still expect to pay progressive dividends or is the primary focus to take the leverage down?

Hans-Holger

I will take the Mauritius question and the dividend question and Tim can answer very shortly the first question or I can do it. There is reallocation of costs on Africa to the headquarters. So no trend there.

Lena Osterberg - Carnegie

What is actually driving the increase then? I'm just trying to understand why is it going up so much. Because last quarter, you said that the level we've seen was the normal run rate. So why is it going up?

Tim Pennington

It's a couple of things one of thing is sort of the reverse, it's the cost that we have taken on the center to help and drive our business in Africa and probably the biggest example is the people we have hired into our factory team, into our technical team, who are working on improving the network performance in Africa and frankly that is a hygiene factor for us because we can’t achieve our goals unless we -- we have got networks that do the job and I think it's probably not been a huge secret but we have had to do quite a lot of work on our network performance in order to drive the strategy. So in some ways it's been the reverse of the issue rather than reclassifying cost out of Africa.

Lena Osterberg - Carnegie

So it is actually -- but it is costs from Africa going up to corporate costs then?

Tim Pennington

No that’s over simplifying it. Our technical team is looking at options across the whole of our business. Our business development team is developing the World Cup or the video-on-demand apps on behalf of all of our businesses. I don’t think it will help you by trying to sort of suballocate that corporate cost line into one part of the world or another part of the world because it's just not fungible in that way.

Lena Osterberg - Carnegie

I'm just trying to understand the [bizarre] improvement in Africa. Will it continue to climb the second half of the year, or --? That's what I'm trying to understand by knowing where the costs are going.

Tim Pennington

Well the improvements in Africa reflects the growth in the revenue for Africa. We have a strong quarter, we have seen momentum there. We’re also pretty low base in Africa anyway and I’m not sure we’re satisfied with where we’re in the present time but we’re heading in the right direction for it. It isn't for the -- for the avoidance doubt it isn't that we have taken a whole load of cost out of Africa and stuck them in the center to make Africa look better. I mean that isn't our game plan, that’s not something --

Hans-Holger

Let me add one point, I think which in a sense a lot of this is comparable to the first quarter in terms of operation improvement as well if you talk about markets like Senegal, for example Ghana where we have much more efficiency. So it's an apple to apple comparison and the margin improvement is done by the business and not by the reallocation of cost.

The thing about when it comes to Mauritius we see ourselves as a company operating business and not owning business. So the situation in Mauritius was a bit opposite, we had a 50% stake but we didn’t have any kind of management influence or Board influence, we didn’t have our own brand and if you can operate and manage a transformation, which is needed in that market as well from a kind of pure mobile play to a integrated digital lifestyle company then it's a kind of financial holding which we then have better resources to allocate cash and management time to. And that’s the reason why we decide to do exit and as a company in terms of those kind of portfolio review we want to focus on the operations we have, we want to focus on those business to transform them as I mentioned and if you can do this we stay in the market and we want to only be engaged in the kind of core activity of the business and if there is optimization potential when it comes to Tower deals or infrastructure obviously we would look at those ones in the coming months.

Mauritius, was a very different case and was standing out a bit for us and that’s the reason why we exited it. And then I think the last point in terms of dividend, there is no reason to change any kind of dividend policy and dividend outlook. The company is very strong, the company is very healthy in terms of the business and there is nothing to discuss in the middle of the year after we just paid our dividend it's something for the Board I guess in the beginning of next year.

Operator

We will now take our final question from Andreas Joelsson of SEB. Please go ahead.

Andreas Joelsson - SEB

A question on mobile. You have a very strong growth in cable and MFS, of course, but what kind of trends do you see in mobile in terms of competition, subscriber intake and ARPU levels? We have seen a deteriorating voice ARPU going forward. Do you see an end to that basically, given less regulatory effects, or how should we see this?

Hans-Holger

I think we have to face with reality and we said this as well at Capital Markets 18 months ago that the voice ARPU is actually under decline and will decline over the next coming years, the question is how do we manage the decline so it's not going to come too fast but it's actually of course we will all move over to data and that’s a key change we had as a company 18 months ago that our core business which was standing for 90%, which was a very simple mobile cash and carry more or less disappears in the next coming years and we had to invent new model which is data with a lot of complexity and new services, hence the need as we discussed in length today as well the need to invest and the need of (indiscernible) cost.

Equally on the data side we see very positive uptake, we see a good pricing structure, we see that data consumption is inline with data revenue more or less so, we charge data correctly, we can see a very positive sign when we bundle all services like Tigo Music in Colombia. When it comes to ARPU and churn we see positive impact on ARPU and churn on data when we bundle with financial services for example in El Salvador. So they are kind of new business we’re entering is positive, it's a good momentum and we don’t have too many concerns at this stage but again one of the key things we want to demonstrate in the Capital Markets Day to you is to show that if you do the transformation to data and if you do the investments we have been doing in entertainment, financial services and other services it has a positive impact long term on churn and a positive impact on ARPU. So the kind of future business model looks good. The old business model, we just have to manage the decline and migration correctly. More you will get at the Capital Markets Day in Miami.

Operator

As we have no further time available for question I would like to hand the call back to Hans-Holger Albrecht. Please go ahead.

Hans-Holger

Yes. Thank you very much all of you for listening in. If any more questions please do not hesitate to call Tim, myself or Nicolas, otherwise we hope we see you all at the Capital Markets Day in Miami or latest for the Q3 results in the fall. Thanks and good bye.

Operator

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

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Source: Millicom International Cellular's (MIICF) CEO Hans-Holger on Q2 2014 Results - Earnings Call
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