Millicom International Cellular's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.18.11 | About: Millicom International (MIICF)

Millicom International Cellular SA (OTCPK:MIICF) Q3 2011 Earnings Call October 18, 2011 8:00 AM ET

Executives

Mikael Grahne – President and CEO

Francois-Xavier Roger – CFO

Analysts

Miguel Garcia – Deutsche Bank

David Kestenbaum – Morgan Joseph

François-Xavier Roger

Ric Prentiss – Raymond James

Stefan Gauffin – Nordea

Sven Sköld – Swedbank

Soomit Datta – New Street Research

Lena Österberg – Carnegie

Matthew Robilla – Exxon

Andreas Joelsson – SEB

Kevin Roe – Roe Equity Research

Thomas Heath – Handelsbanken Capital Markets

Luigi Minerva – HSBC

William Miller – JM Hartwell

Mark Walker – Goldman Sachs

Barry Zeitoune – Berenberg

Operator

Good day, ladies and gentlemen, and welcome to the Millicom Quarter Three 2011 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 the hosts of today’s conference, Mr. Mikael Grahne, President and CEO; and François-Xavier Roger, CFO. Please go ahead.

Mikael Grahne

Thank you, operator, and welcome to you all. As usual, you can find the slides for this call on our website. Please go to slide number 3.

In Q3, we recorded underlying local currency revenue growth of 9.1%. We have seen the stabilization of ARPU in Latin America with a loss of some international traffic in Central America being offset by the attractive development of data. In Africa, there has been a further decline in ARPU as we focus on affordability of our product and services.

We are seeing the continued development of us across the group, and our non-voice services now contribute to over one third of our recurring revenue, most specifically in Latin America, half of our growth in recurring revenue is coming from mobile data services.

Despite an acceleration of investment in 3G and other services, we produce an EBITDA margin of 46% for the quarter. Normalized EPS increased by 30% year-on-year due to our EBITDA growth in combination with the reduction of our effective tax rate and despite ForEx losses this quarter following the strengthening of the dollar.

We are committed to delivering our previously communicated shareholder returns for the year but with a more even distribution within dividends and share buybacks. The Board did propose 2.5 AGM to be convened in due course on extraordinary dividend of $3 per share to be paid in December. This combined with our ordinary dividend and the ongoing share buyback program which will continue in Q4 would bring total shareholder return for the year close to the 1 billion.

Now let’s look at the financial highlights for the quarter in more detail as shown on slide 4. Revenues for the quarter was 1.150 billion, up 13% year-on-year or 9% below currency. The EBITDA margin was 46%, 1.5 percentage points lower than for the prior year reflecting greater investment in 3G and services. We ended the quarter with 42.2 million customers, up 13% year-on-year.

CapEx for the quarter was 270 million or 19% of revenues. Our CapEx in the year to the end of September has been low due to phasing issues and we expected to increase considerably in Q4. We are revising our CapEx guidance somewhat downward to around 820 million for the full year due to some delays in the delivery of equipment. Our operating free cash flow generation in the quarter was strong, up 327 million or close to 34% of revenues.

On slide 5, you can see how our focus on higher value of customers is being reflected in our subsidy costs which are almost 18% higher than in Q3 ‘10 in absolute term as we aim – as we supported the development. As we increase subsidies, the composition of our customer base is evolving with a growing proportion of postpaid customers. We see this as a positive development as ARPU, revenues and EBITDA all increase in absolute value watch our decreases.

Sales and marketing cost excluding subsidies were 8% higher year-on-year bringing the total investment in data and services to 250 million in the quarter.

On slide 6, we have set out our local currency revenue growth by quarters in the beginning of 2009. This chart shows there is volatility and revenue growth quarter-on-quarter due to our commercial activity in various markets at different times of the year. For example, the third quarter of 2010 produced the highest growth of all quarters last year. For 2011, we are on track to produce revenue growth of around 10% in local currency.

Slide 7 illustrates that it is the quality of our customers rather than their absolute number that is driving our top line performance. Over the last year, the rate of ARPU erosion has slowed by three percentage points as we have been focusing on attracting and retaining higher value customers. This strategy has enabled us to achieve ARPU stabilization in Latin America and will over time slow the rates of ARPU decline in Africa.

Looking at the ARPU development by region on slide 8, you can see that in Central and South America, ARPU was essentially stable year-on-year with the marginal decline in Central America due to the loss of some international traffic. In Africa, mobile ARPU was 9.7% lower reflect the decline – declining revenue in Ghana, Senegal which we’ll talk a little bit more about in a few moments. ARPU in Africa will continue to decline for some time as we pose to penetration gains and greater traffic volumes and minutes of use through affordability initiatives.

On slide 9, you can see our distribution of customers via ARPU level in Latin America where our focus on higher value customers is most applicable. At the end of the third quarter, 35.5% of our customers generated an ARPU of more than $10, up one point year-on-year. We expect a greater proportion of our customers in Latin America to fall into this category over time that we accelerate investment in 3G and other value-added services.

Looking at the breakdown of our revenues by service on slide 10, you can see that voice revenues increased by 1% for the group as a whole in local currency. The resilience of voice is due to strong branding, sophisticated distribution methods and our innovative product packages designed for specific customer segments.

The 6% growth reported in SMS combined with 46% growth in our growth for non-SMS VAS produced a year-on-year growth of just under 29% in all non-voice services combined. Our value-added services are on track to generate over 1.1 billion of revenues in 2011.

Slide 11, we have seen a 5.1-percentage-point increase in the contribution of VAS to group revenues over the past year. Although 28.4 contribution reported in Q3, over 18 points are coming from non-SMS VAS. In Latin America, the contribution from non-SMS VAS is even higher at almost 22 points. Today, more than one-third of our revenues in the region are generated by VAS and by 2015 we expect that contribution to reach 50% in Latin America.

In Africa, VAS now represent the 11.4% of revenues and in Latin America, the non-SMS VAS segment is growing faster, up 1.1 percentage points quarter-on-quarter to 7.3% of revenues. The split of revenue by our core categories is set out on slide 12.

Communication defined as voice, peer-to-peer SMS and outbound roaming accounted for 77% of recurring revenues. Information or Data Services generated revenues of 131 million in the third quarter and accounted for 12% of recurring revenues. We have seeked out mobile data from the category at the bottom of the slide to show that it generated revenues of 95 million in the quarter and grew at 94% in local currency. Entertainment or access to music and video content generated 84 million in Q3 accounting for 8% of recurring revenues. And Solutions including Mobile Financial Services generated 34 million or 3% of recurring revenues. The Information or Solutions categories are growing the fastest at 48% and 34% respectively and combined are contributing more than 15% of recurring revenues. We expect this strong growth to continue as we expand our 3G capacity and coverage further and as we develop Tigo Cash and other mobile financial services.

On slide 13 you can see the penetration levels of the VAS products in each of our four categories. As you can see from looking at the delta between the highest and lowest penetration figures, there is still room for further growth through increased penetration of all these products and services.

Slide 14, today 2G and 3G data revenues combined represent 11.3% of all recurring revenues in Latin America. We have revised our definition of a data user, as someone who uses more than 250 kb of data in a 30-day period. We think this chance gives a more meaningful representation of our data customer base by excluding very occasional users. On this basis, data users total 3.7 million at the end of the quarter, up 12% quarter-on-quarter and 1.6 million of this were 3G data users.

Of the $89 million of mobile data revenues generated in Latin America in Q3, slightly more than half comes from usage on handsets which is a preferable as the data usage on handset produces the best ROIC than data card usage.

On slide 15, you can see how data revenues have grown since the beginning of 2009. There has been an acceleration in the last four quarters as we have increased our promotion investment. And today 48% of the recurring revenue growth in joint Latin America comes from data. Given the pent-up demand for affordable data services, we see this as the largest growth opportunity for Millicom in the medium term.

Our Tigo Cash Service was first launched in Paraguay in Q3 2010, and we are steadily gaining traction, as you can see on slide 16. By the end of September, the service have reached a penetration level of 19% of our customer base. In Tanzania where Tigo Cash was launched in Q4 2010, penetration has reached almost 13%.Tigo Cash is now present in seven of our operations which collectively contribute over 60% of growth revenues.

Slide 17. Our market share across all regions was broadly stable in the quarter at 30.4% with increases recorded in Rwanda, El Salvador, Guatemala, Colombia and Tanzania, and slight declines in our other markets. In the short term we expect continued volatility in market share in Africa, driven by promotional activity.

Light customer intake, market share is becoming less element indicator of performance as we are putting more emphasize on growing our share of higher value customers. We can only measure customer market data due to lack of information on various share which would be a more relevant indicator given our strategy.

Now, I would like to hand over to Francois Xavier who will talk to you briefly through the results for each cluster and the financials.

Francois-Xavier Roger

Thank you, Mikael. We come now to the regional cluster starting with Central America on slide 19. We have seen an acceleration of growth in Central America during the quarter with revenues from mobile and cable operation up by 4.9% year-on-year in local currency. This performance is due to strong growth in data services on record despite the decline in revenue contribution from incoming international traffic from 16% to 12% over an 18-month period. This international business has a 100% gross margin.

El Salvador produced positive growth for the second quarter in a row, and is expected to improve further in Q4. Costa Rica recorded growth of more than 24% in local currency, illustrating the growth potential of our Broadband Internet business. We recorded a marginal year-on-year decline in ARPU as local currency revenues from international incoming traffic were lower.

The decline in international traffic, coupled with more 3G handset subsidies, debited the EBITDA margin by 4.2 percentage points to 51%. Central America generated $168 million of operating free cash flow, up 36.5% of revenues in the quarter.

Slide 20. In South America, revenues increased by 15.2% in local currency with all three markets reporting a strong performance. Mobile ARPU was up by 0.4% in local currency as a consequence of our ongoing support of mobile data on Cordova. EBITDA for Q3 was up 13.4% in local currency and EBITDA margin was 42.9%, up slightly year-on-year. Operating free cash flow generation for South America was 139 million, representing 31.3% of revenues.

Slide 21. Revenues for Africa were 247 million, up 7.8% in local currency year-on-year, and the ARPU for the quarter declined by 10%. Our growth in the quarter was impacted by negative local currency growth in both Ghana and Senegal. In Ghana, we have maintained a price premium and preserved our margins in the first half of the year.

In the third quarter, however, we said it was necessary to eliminate this price premium in order to maintain our affordability and market position for the longer-term as both were starting to be impacted by the introduction of flatter rates and specific promotions by our competitors. In Senegal, our CapEx level are constrained by the ongoing litigation of – our license with the Senegalese government.

Our revenues for impacted by some capacity constraints, and by the reason of power shortages during the quarter. Our other African markets performed well, growing on average by 16%. EBITDA for Q3 was 104 million, up 11% year on year, and the EBITDA margin was 42.1%, benefiting from October transactions including the transfer of towers to domestic subsidiaries of Helios Towers Africa, in Ghana and Tanzania.

CapEx in Africa in the quarter amounted to 76 million or around 31% of revenues. And the region generated 116 million of operating free cash flow of 47.2% of revenues.

Slide 23. Now, let’s look in more details on the financials. Our effective tax rate for the quarter was 26% as we benefit from a tax rate initiative and the push down of debt from the corporate to the operating level. Directly that’s a lower due to the fact that two additional operation and the holding companies are now profit-making. The effective tax rate is expected to increase, one remaining below 30% as we amortize the deferred tax assets that we have recognized this quarter in Colombia.

Slide 24. We have been able to recognize the deferred tax assets of $231 million in Colombia and the operation is now in a sustainable net profit situation. This is a one-off non-cash item which is expected to be amortized from 2012 to 2015, at which point income taxes will stop to be paid.

Slide 25. We are pleased to see a 30% increase in the normalized EPS for Q3 to $1.74. Some months ago, we highlighted our increased focus on EPS now that we are paying dividends and we now see the initial results of our capital restructuring. This EPS growth is even more pleasing when taking into consideration the fact that we suffer from foreign exchange losses of $29 million following the strengthening of the U.S. dollar against the Colombian peso, the Tanzanian shilling and the euro link currencies which affected our dollar-denominated debt.

Slide 26. Our operating free cash flow for the quarter was exceptionally high at $387 million or 34% of revenues boosted by the favorable timing of CapEx payments untoward forces in Africa. Slide 27 show the free cash flow for the quarter of 328 million, up 28.5% of revenues. This level was also exceptionally high, again due to the favorable timing of CapEx payment and to our proceeds in Africa.

Slide 28. We completed the first tower closing in Tanzania at the beginning of the quarter receiving 45 million in cash for the transfer of 518 size representing 56% of the total number of towers committed. We also completed further closings in Ghana. And by the end of the quarter, for the fourth quarter we had – third quarter, sorry, we had transferred 92% of the committed towers. The first closing for DRC in Columbia are expected to occur in Q4. And we expect total cash proceeds for tower deals in 2001 to be 205 million, of which 65 million has already been cashed in year-to-date, essentially in Q3.

As we have previously discussed, the five deals that we have done to date, three in Africa and two in Latin America. We generated net present value in excess of $600 million estimated on a conservative DCF basis. We will continue to pursue other opportunities to share passive infrastructure, which could include 3G or 4G networks and spectrum, enabling us to focus on our core activities.

Slide 29. At the end of Q3, our cash position was a little bit higher than $1 billion, and our leverage ratio stood at 0.6 times net debt-to-EBITDA. At the end of the year, our net debt-to-EBITDA ratio is likely to be around 0.7 times.

Slide 30. Turning to our debt maturity, we see the average maturity of our gross debt at three years and two months. 45% of the debt is at fixed rates, meaning that we are less exposed to interest by volatility to debt without having an increase of total cost of debts.

Slide 31. We are committed to delivering a previously communicated shareholder return for the year of $1 billion but with a more even distribution between dividends and share buyback. In the year to date, we have bought $368 million of shares unpaid and an ordinary dividend announcing to $189 million. The Board is proposing an exceptional dividend of $3 per share to be paid in December of 2011, subject to approval at an EGM, which will be convened in the coming weeks.

The balance of our shareholder remuneration for the year will be executed in the form of additional share buyback in Q4, predominantly in Stockholm. In addition, we will also carry out a limited share buyback on the OTC market in the U.S up to a maximum of 5,000 shares a day. We expect the share buyback to amount to around $130 million in Q4, bringing a total shareholder remuneration package for the year to close to $1 billion.

Slide 32. We reiterate our EBITDA margin guidance of over 45% for 2011. Our CapEx guidance for the full year is now around $820 million as we have experienced some delays in the delivery of equipment in recent months. This figure exclude any potential new spectrum, investments in green-field cable assets and the capitalization of leasing costs for towers, which is a non-cash item. We are raising our operating free cash flow margin guidance for 2011 from around 20% to close to 25% excluding any payment for spectrum.

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

Mikael Grahne

Thank you, Francois-Xavier. I would just like to close with a quick summary. We have performed in line with our expectations in the third quarter with continued momentum in top line growth and ARPU stabilization in Latin America, driven by strong growth in data and other value-added services.

Our growth in Africa was negatively impacted by Ghana and Senegal which both experienced market specific challenges during the quarter. Our other African markets performed well growing on average by 16%. We are on track to achieve top line growth of around 10% in local currency for the full year. Going forward, we aim to find the right balance between profitable revenue growth, sustainable cash generation and return on invested capital.

We would now be happy to take your questions. Operator, may we have the first question please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Miguel Garcia from Deutsche Bank. Please go ahead.

Miguel Garcia – Deutsche Bank

Thank you. Good morning and good afternoon, Europe. CapEx, it looks like is going to be around between 16%, 17%, 18% of revenue this year. Is this a sustainable level? Do you expect a decline in this percentage going forward? What do you think is a sustainable level in the long term? And the second question is regarding your cable strategy, you’ve been very successful and growing very well in Central America. Where are your plans to expand this type of cable operations outside this region? Thank you.

Mikael Grahne

Okay. I’ll take the first question on CapEx and Francois-Xavier will take the cable question. We don’t expect a decline in the CapEx level for 2012, although at this stage, I will point out that we are still in the process of building our 2012 plan.

Francois-Xavier Roger

Regarding the cable operations – so first of all, we are very happy with the – what we have achieved with Amnet in Central America, which by the way we have rebranded to TIGO in two out of these three countries. We are very happy in terms of retail and in terms of growth opportunities. This is a business that is growing at about 15% today on the top line with an attractive margin. So that being said, we’d be quite happy to do the (inaudible) in other geographies. Ideally, income freeze where we’re already present in mobile, in Latin America or in Africa. In Africa, there are not so many opportunities. There might be some in South America, so we keep on looking to different options.

Miguel Garcia – Deutsche Bank

So you don’t have any imminent plans to launch cable in other part of Latin America?

Francois-Xavier Roger

In Paraguay actually, we have announced a few months ago that we are starting operations on a greenfield basis which we expect to start probably in Q4 in Asuncion. (inaudible).

Miguel Garcia – Deutsche Bank

Okay. Great. Thanks a lot.

Mikael Grahne

Welcome.

Operator

We’ll take our next question from David Kestenbaum from Morgan Joseph. Please go ahead.

David Kestenbaum – Morgan Joseph

Okay, thanks. Can you talk about the outlook? I think at the Analyst Day, you guided towards revenue growth of north to 10%, now you’re kind of saying 8% to 11%? So what’s changed and specifically, has anything changed in Africa?

Mikael Grahne

I think in the Capital Markets Day, we were very clear that we were looking at the range between 8% to 11% for the upcoming year so we’ll expect some variation. I think – I would look at it like this, we are very confident that the growth initiatives in general we have in place, segmentation on voice, the data plans for Latin America and perhaps includes for Africa as well as services are going to generate strong revenue growth for us because they’re being value for the customers.

In Africa, we had somewhat mixed quarter because we had two specific situations in Ghana and Senegal that produced negative growth in the sort of mid-single levels but the rest of Africa was still growing at 16%. So we are still confident that we are pushing the right growth levers going forward.

David Kestenbaum – Morgan Joseph

Okay. And then can you talk – can you just give us your thought process on the dividend for seeing buying the 300 million of stock on the share buyback which one, at least in the U.S. would use more tax a session? Thanks.

Francois-Xavier Roger

So we announced earlier in the year that we intended to return $1 billion to our shareholder with – there was more of these amount that’s queued towards share buyback because we had announced that $800 million program for the full year, out of which, we have already completed $368 million.

We could have gone probably close to the amount that we had said initially even in Q4 but we thought it was probably more appropriate to have a better balance between dividend and share buyback. So what we are focusing now is to do an exceptional dividend of $3 per share which means that net, we will meet the commitment of the $1 billion of shareholder return with about 50% of fees in dividend both ordinary and exceptional and 50% of share buybacks. So we will continue the share buyback program in Q4 for consideration of about $130 million in Q4 that we can start from this project until the end of the year, which means that the total share buyback for the year 2011 will be around $500 million. And we are not, because I’m expecting to have some questions, we are not communicating for any shareholder remuneration plans for 2012. We’ll come back to the market in the occasional for Q4 result and full year results before the middle of February.

David Kestenbaum – Morgan Joseph

Okay. Thank you.

Francois-Xavier Roger

Welcome.

Operator

We’ll take our next question from Ric Prentiss from Raymond James. Please go ahead.

François-Xavier Roger

Hello.

Ric Prentiss – Raymond James

(inaudible), Hello.

François-Xavier Roger

Yes. Hi. Go ahead.

Ric Prentiss – Raymond James

Yes. Thanks. Couple of questions, if I could, François you mentioned the tower deals but that also you’re looking at possible passive network sharing 3G, 4G spectrum. Can you talk a little bit about how that process plays out? How do you find the right partner and then once you do find the right partner, how do you differentiate your product in the marketplace after you – if you do share networks in spectrum?

François-Xavier Roger

I will comment on that one. I mean there could be a market-specific solution on that one depending on competitive strength and our strength and so on. I – anyhow in the marketplace, the key differentiation should come from the branding, the distribution, the marketing, the package and services you offer. So basically, you would have a network company in its simplicity that would be owned by two competitors and which would produce data capacity and voice minutes at set prices for both operators and then each of them can decide how to market their bands and how to price them. So that’s how the model would look like.

Ric Prentiss – Raymond James

Okay. And then in Colombia where you’re not number one or number two, you’ve done a good job at grabbing share. Can you update us as far as how share and the data world is going in Colombia and how do you get the distribution channels and the margins if you’re not the market leader there?

Mikael Grahne

Two things there, I mean we have a higher share of data – the Data business than we have of Voice and that’s been part of our strategy. A lot of that really comes from us having about 500 people out there on the streets selling the data services and explaining how they work.

And we find it very important that you demonstrate to customers how to use data services because – unless you have any financials at home, you can’t figure it out if you just to buy a data phone and go home. So it’s all about hands on being in the market and demonstrate how to do it, and naturally the margin should increase over time with increased scale.

Ric Prentiss – Raymond James

Great. Thanks, guys.

Mikael Grahne

Welcome.

Operator

We’ll take our next question from Stefan Gauffin from Nordea. Please go ahead.

Stefan Gauffin – Nordea

Yes, hello. A couple of questions please. First of all, you state in the report that you expect introduction of several new taxes in Honduras next year. Can you give some more light on this issue and what the potential impact might be from these taxes?

The second question relates to the equipment delays. Are these related to one provider or is it general for the industry and what impact did you have from this in the quarter compared to your original plans? Thank you.

Mikael Grahne

Okay, let me start with the equipment, I would rather not do anything according on that issue, but there’s been some delays from certain equipment makers that has impacted it. It’s difficult to quantify the impact, because there’s an issue about, you recall, we’re trying to have the technical capacity ahead of the commercial capacity, so that we have the time to react and because of these delays, the technical capacity dealt at the commercial capacity has shrunk somewhat, but still at acceptable levels. In Honduras, we’d rather – do not want to go into any specifics, because there are a lot of discussions and plans put forward by the government, so at this stage, it’s still a little bit of an open picture, how that will turn out, but – so we would not want to comment any specifics on that one.

Stefan Gauffin – Nordea

Okay. Can I follow up on Colombia, then? You stated that they would be an interconnect that, I believe it’s the 50% cut over a three-year period, you state that you will not have the same impact as you had in 2007, 2008, but can you give some more light on the impact on margins?

François-Xavier Roger

We don’t expect to have a significant decrease in the margin in Colombia. As we often say, (inaudible) any very significant introduction of taxes, we have always been able to absorb new taxes through productivity improvement in our business and through growth as well. In the case of Colombia, we were very exposed to interconnection rates in 2007 when the last decrease happened with the decrease in MTRs. Today it’s a much, much smaller portion of our revenues. So we are not really exposed. So we believe that in the case of Colombia we should be able to absorb this new MTR cut which is by the way phased over three-year with a normal cause of business on the productivity gains and the – I mean the scale that we are getting into a significant growth in Colombia.

Stefan Gauffin – Nordea

Okay, thank you.

Mikael Grahne

Welcome.

Operator

We’ll take our next question from Sven Sköld from Swedbank. Please go ahead.

Sven Sköld – Swedbank

Yes, hello. I have a question on Central America. Francois, you mentioned some figures regarding international traffic in Central America. And I am wondering, you also mentioned something about its impact on the margin in Central America. Can you specify that and I happened to have seen that the gross margin for the total group was down a little bit more than 2% year-on-year, is that also impacted by international calls or is it some other issues impacting the growth?

François-Xavier Roger

Besides on traffic, we use to be very dependent in Central America from international traffic. We are highly dependent in international traffic. So if you look at the incoming international traffic in Central America, at the end of 2009 it was contributing to 16% of our total revenues. Today it’s 12%, so there is probably a little bit of room to go down a little bit further. We’d probably lose some of it to the Skype and other similar services. But we don’t believe that it’s going to go to zero either. So we believe that the bulk of the issue is behind us.

In spite of this decline, because we have lost four percentage points off total revenues, in spite of that, you could see that we managed to grow by 5.3% in Central America in the quarter. And we expect that possibly – could possibly even increase in Q4 because we expect El Salvador to move a little bit further into positive grounds.

The decline of the margin is partly due to that because indeed international incoming traffic has a 100% gross margin. But this is one factor of putting some pressure on the EBITDA margin in Central America combined with the level of subsidies that we are doing in Central America. So plus – the valuation of the margin is also due to the fact that we are investing heavily in new categories and especially on TIGO Cash which as we said in – during the Investor Day in London, has a dilutive impact on our margin. But we are not especially concerned about it because as we explained, there is no CapEx for this new category.

So we can accept a lower EBITDA margin as long as we have a better return on invested capital. So you can see what is the impact of this globally for Millicom and in the three regions as well. There is a little bit of a dilution as I said earlier as well on the data categories especially so that we are investing heavily in subsidies. But we believe it is the right way to do it, the right thing to do especially so that we see that the gross margin on data is better than the gross margin of voice, so which long-term is really positive.

Sven Sköld – Swedbank

Great. That’s very helpful. When we look at the quarter-on-quarter trends, it was still very low in the first – sorry, in the third quarter. Could you give some hints for the fourth quarter level or – and possibly 2012 for the margin in Central America?

Mikael Grahne

I don’t think we want to comment on 2012 at this stage. And we reiterated our guidance for around 10% revenue growth for the full year so you can do the math, what would have to happen in Q4 for that to materialize.

Sven Sköld – Swedbank

Okay great, thanks.

Operator

We’ll take our next question from Soomit Datta from New Street Research. Please go ahead.

Soomit Datta – New Street Research

Yes, hi there. Question on South America please. There’s been quite a marked slowdown in the local currency growth rates in the region, I’m guessing that’s partly driven by Paraguay where there was, I think it was mentioned in the release, and there were some regulations introduced among that versus on-net rate. Could you maybe sort of just confirm that is the case or has there been a general slowdown across the region? And on Paraguay specifically, can you provide a bit more detail as to the impact that any slowdown has had, and the timing and maybe the prospects for that market over the next couple of quarters? Thanks.

Mikael Grahne

Yes, let me start with Paraguay. There is a new regulation that basically asked the operators to have the say-in rate on-net and cross-net, and since typically in the emerging markets we have a relatively low on-net and a higher cross-net, that is some kind of equalization that has to take place. We have been given a certain lead time for that implementation. So it’s a gradual implementation.

But that implementation has slowed down our revenue growth because it’s basically has pushed up our on-net tariffs. But in parallel we have reduced the across-net, and typically you have a higher elasticity on on-net rates movement than you have cross-net, so that has contributed. And I think in Colombia we were somewhat slower in Q3 than in Q2 but I don’t think there is anything specific to read into that.

François-Xavier Roger

We’d say, there is one (inaudible) impact which is a fact that having grown by 20% over the last two years for each year. We have a larger base. So even if we continue growing by the same (inaudible) I mean the percentage of loss is a little bit lower. But I mean the growth rate remains several practice.

Soomit Datta – New Street Research

Just as a quick follow up. In Paraguay, does that mean we’ve had a full quarter’s effect of the regulatory changes or is that sort of happened over the course of Q3?

Mikael Grahne

We haven’t had a full – it happened over the course of Q3 and it will continue to happen in Q4.

Soomit Datta – New Street Research

Okay. Thanks.

Operator

We’ll take our next question from Lena Österberg from Carnegie. Please go ahead.

Lena Österberg – Carnegie

Yes. I have a few if I may. First of all, I was wondering, there are several issues both from the regulatory side and then on the tax side that have hooked up in this quarter. I was wondering are you still comfortable for your medium-term local currency growth rates of around, say, 8% to 11% going forward if you look into 2012, 2013 knowing these regulatory changes?

And then second, I was going to ask you also on Paraguay license if there is any news on that. And then also minorities, I assume it’s Colombia that’s doing very well and that’s the reason that you have such a large negative contribution or money out to minorities in the P&L. So I was wondering if this the level we should expect going forward and then increasing or is there anything in particular that happened in this quarter that made it go up so much?

And then also just so I understand on the cash transfers in Africa on the towers, did you say that some of that impacted EBITDA in the quarter? In that case, how much was it?

François-Xavier Roger

Let me start with the growth expected some fall back. So first of all, I’d like to point out that the 8% to 11% is our stated ambition, not the formal guidance or the growth going forward.

We are though, very comfortable in the amounts we have generated by our key growth driver. If you look at something like mobile data, up 94% in Latin America in the quarter, 48% (inaudible). If you look at solutions going at 34% and even voice has 2%. So we think we have all the growth components in place and we are supported and with the right activities and we continue to make headway on these. So we are very comfortable that we have the right growth prospects in place.

We haven’t done the – our plan for 2012 yet. We are in the budgeting session. It comes with guidance for 2012 where at the point of time, we’ll release our Q4. And that’s where we stand.

On the Paraguay, there is no specific news on the license which is an automatic renewal every five years. So there is no – regarding the...

Lena Österberg – Carnegie

Sorry, that is to really renew this year, right?

Mikael Grahne

Having automatically renewal. So there is no specific issue in Paraguay for the license.

Lena Österberg – Carnegie

But do you know how much you’ll have to pay for that?

Mikael Grahne

Formula which is contemplative in the license agreement which is leading to future CapEx. So no...

Lena Österberg – Carnegie

Okay.

Mikael Grahne

And regarding the tower transaction in Africa, we had indeed an improvement of EBITDA in Africa of our Q3 linked to the tower deal which is around two to three points of EBITDA margin.

Lena Österberg – Carnegie

Okay.

Operator

We’ll take our next question from Matthew Robilla from Exxon. Please go ahead.

Matthew Robilla – Exxon

Yes. Good afternoon. Two questions, first with regard to Africa where you pointed two specific factors explaining a slowdown in growth Senegal, power outages that actually exacerbate the capacity constraints and price cuts in Ghana. My question is, when we look into the next two quarters with regard to Senegal, are we going to see independently of – for the power outage or not continued constraint on revenue growth? Is that becoming more and more of a problem as I imagine traffic grow?

And with regards to Ghana and more generally to the region, do you feel that your prices are where they should be, or should we expect further cuts either in Ghana or in other market and maybe because of recent competitive activity? And second, with regards to your operating free cash flow guidance, we have increased the guidance from 20% to 25% since you haven’t changed your revenue and EBITDA guidance, obviously, I’d assume improvement is coming from things below the EBITDA, one of them is CapEx, you highlighted that, but the others have to be either tax or working capital? And I was wondering where does it come from, essentially the tax or working capital of those? And if it’s working capital, is that something that is a one-off and not reverse in 2012 for some reason or it’s a structural improvement? Thank you.

François-Xavier Roger

Okay. Let me first off with Ghana and general pricing. We are not publicly commenting on any pricing actions we are planning to take or not. I would like to emphasize that we are tracking the affordability perception among our customers and that’s really how we judge when and if a pricing adjustment has to be done.

In terms of Senegal, we are investing somewhat more in power generation in our sides given the lack of commercial power in Senegal for the moment. That will however take probably three to six months to put in place. So I would – we would expect continued – somewhat subdued growth levels from Senegal in the next two quarters.

Regarding the operating free cash flow, so indeed we raised the guidance from around 20% to be – to close to 25%. And this is driven by a certain number of factors. So first of all, it’s driven by the increase of EBITDA. But you are right that it comes as well from below the license tax being one of them.

Our effective tax rate which works around 29% has actually decreased by about three to four points over the last quarter which is a consequence of a certain number of actions that we have taken for shared capital restructuring, pushing down the debt at operating level, we took a certain number of tax initiative, contract pricing and so forth.

So the – plus, we got as well some cash from October deals, meaning the third quarter we almost got close to $60 million of cash inflow coming from October in Africa only. And we expect to have about 140 million coming in Q4 again from tower monetization both in Africa and in Latin America. There we flagged the fact that in Q3, the cash flow was exceptionally high because we had a positive input from working capital because we have not paid a lot of CapEx.

We expect to get substantially more CapEx in Q4. So it is difficult for us to say exactly it will be negative impact in 2012 because it depends on the timing of CapEx delivery and CapEx payment but what we are sure of is that the level that we have in terms of operating free cash flow today is abnormally higher. We said in Q3 the level of 25% or close to 25% that we have for 2011 is really on the high side as well, probably, I would say because of the tower, for example, deal that we have I would say later on but we will come back to 2012 next year but the level around 20% is probably a better proxy but once again we will come with the guidance of 2012 in February 2012.

Matthew Robilla – Exxon

Thank you. Just a point of clarification, so one of the reasons why the guidance was increased, if I understand correctly, is because in – previously, you were not including some of the proceeds on the tower deal in Africa and you’re now including it, is that correct?

François-Xavier Roger

That’s part of this, perhaps the signing of – for CapEx payments but that’s really neither one of the items because we expect to get more than $1,200 million of cash flow as the consequence of this tower deal in 2011, there will be some in 2012 also.

Matthew Robilla – Exxon

Thank you very much.

Operator

We’ll take our next question from Andreas Joelsson from SEB. Please go ahead.

Andreas Joelsson – SEB

Good afternoon, it’s Andreas Joelsson from SEB Enskilda. How much of – do you know from the tower deals that you already made will be sort of affecting cash flow in 2012 if it’s 205 million in 2011, how much is in 2012? And then also, is there any news on the dispute with the government in Senegal? Thanks.

François-Xavier Roger

For the tower deal, there will be some cash, I can’t give you the exact value because it depends when we can do the closing. We do closing in different timing. It depends a lot on the capacity that we have to transfer the tower to the new tower operator. So I can’t give you an amount.

I don’t think it will be $200 million again. It would be a lower result but there will be – it will certainly be north of 100 million but maybe not up to 200 million. But I don’t know the exact timing. Some of it may fall potentially to 2013, a smaller portion.

Mikael Grahne

In terms of Senegal, there will be a final hearing in November in front of the arbitration panel which works under the auspices of the WTO and a decision is expected in the subsequent three to six-month period.

Andreas Joelsson – SEB

Thanks.

Mikael Grahne

Welcome.

Operator

We’ll take our next question from Kevin Roe from Roe Equity Research. Please go ahead.

Kevin Roe – Roe Equity Research

Thank you. Hi, guys. In Central America, the regulator in El Salvador has, I think, officially stated 20 megahertz must be returned for the DigiCell deal to close. Is that your understanding? Do you think you’ll have access to that spectrum or is this for a new entrance to potentially bid on?

Mikael Grahne Really have no visibility on that one. I would expect that they are not going to hand it to us.

Kevin Roe – Roe Equity Research

Yeah. Okay. Have you seen the change in the competitive landscape during this uncertain approval process in El Salvador, in Honduras specifically from DigiCell?

Mikael Grahne

Not really.

Kevin Roe – Roe Equity Research

Okay. In Rwanda, any change in the competitive landscape ahead of AirTel’s launch?

Mikael Grahne

No. I – we expect AirTel to be in a position probably to launch end of Q4 or early Q1, so we are just focused on the strategies we are pursuing, I mean, offering affordable rates and focusing on driving up our TIGO Cash, as well as generating data revenues.

Kevin Roe – Roe Equity Research

And lastly, in Ghana, do you expect to – with these pricing changes, do you expect to return to that growth in the fourth quarter?

Mikael Grahne

Difficult to comment on that one. Some of the pricing changes were a cross-net, and we know from experience that cross-net changes take somewhat longer to penetrate into a change in consumer behavior.

Kevin Roe – Roe Equity Research

Very good. Thank you.

Mikael Grahne

Welcome.

Operator

We’ll take our next question from Thomas Heath from Handelsbanken Capital Markets. Please go ahead.

Thomas Heath – Handelsbanken Capital Markets

Thank you. Thomas here with Handelsbanken. A few questions, if I may. Firstly on Paraguay, you mentioned the revenue impact of harmonizing on-net and off-net traffic tariffs. I’m curious if you have any view on churn levels and margins also from that change?

Secondly, on Senegal, you previously chose a nod to CapEx very much in Senegal with the uncertainty there is, with a bit more CapEx on power solutions, is there any change in your sort of willingness to CapEx in Senegal? Thanks.

Mikael Grahne

Let me start with the Senegal question. I think the unexpected element here was the increase in lack of power in the country. So basically, we had a good CapEx plan that would have worked if they wouldn’t have the significant power outages that we see today. So the wildcard was the in-grid outage which meant that we would have had to invest more in power generation with generators and batteries in the – on the sites. In Paraguay, if you basically reduce your across-net rate since there is a interconnect right, that might lead to a lower gross margin. But that could be on the other hand compensated with higher rates on-net so at this stage it’s very difficult to fully balance how that would play out.

François-Xavier Roger

Just one question of – on Senegal, we keep on investing but we make up CapEx to the cash roll that we generate locally which caps to an open extender a month of CapEx that we can do, and which obviously put a cap on the capacity that we have available in the market.

Thomas Heath – Handelsbanken Capital Markets

Okay thank you very much. To follow up with the last question if possible, on external growth opportunities, there’s been some buzz around Marley and there’s also been some buzz around VinpulComs telecell globe assets in Sub-Saharan Africa. I’m just wondering what your views on these? Thanks.

Mikael Grahne

Okay I don’t want to comment on any specific countries but just a reminder, we only believe in being number one or two in the markets we compete in which we are now in 12 out of the 13 markets where we are present. So any opportunity to expand to new markets would have to be where we can see that either, we can buy into those positions or if the start as number three we can see ourself how we get to number one or number two position.

Thomas Heath – Handelsbanken Capital Markets

Okay, thanks.

Mikael Grahne

Welcome.

Operator

We’ll take our next question from Luigi Minerva from HSBC. Please go ahead.

Luigi Minerva – HSBC

Yes, good afternoon. One question is on Ghana so I was wondering what sort of response are you putting in place, the new pricing introduced by your competition and whether we should expect an inversion trends in the next quarter or in the next two quarters? And then secondly on Central America, you made comments at the capital markets day that you were seeing some elements of decoupling from the U.S. economy for example, I was wondering whether you have now more evidence in that direction or whether we’d should be a bit more concerned? Thank you.

Mikael Grahne

I’ll start with Ghana and Francois will follow up on Central America. What happened in Ghana it was more of us reacting to a competitive price position that we hadn’t react for the first six months of the year. So it’s basically us reacting to a pricing strategy executed by two of our four competitors in the market.

Francois-Xavier Roger

In Central America, we have no clear evidence of real slowdown of the Central American economies. We have no clear evidence either of a dramatic decrease of remittances over the time being. We are monitoring the situation closely every month. We need to take data with caution though because there is a lot of volatility from one month to the other in terms of remittances for each of the three countries so we are rather looking at trends but there is no evidence of any clear slowdown at this stage.

Luigi Minerva – HSBC

Okay, thank you. So on Ghana, just a follow up, but then we – for the next quarter, or for the next two quarters, we should not expect any difference?

Mikael Grahne

Well, you can never – we don’t know how our competitors react, that’s out of our control. But I’ve said earlier to a question that part of the changes we’ve made we’re reducing our cross rate and when you do that, the elasticity takes months and months to materialize. So we don’t expect a immediate reversal on our performance in Ghana in the next few quarters.

Luigi Minerva – HSBC

Okay, thank you very much.

Operator

We’ll take our next question from Bill Miller from JM Hartwell. Please go ahead.

William Miller – JM Hartwell

Good evening.

Mikael Grahne

Good evening.

William Miller – JM Hartwell

A couple of questions. One, if you have the opportunity to buy more than $130 million worth of stock in the fourth quarter given the volume and other constraints that you are operating under, would you go ahead and buy the stock or you’re just saying no more than $130 million, we’ll cut it off there? That’s the first question.

The second question is do you see any lessening in the churn or is there any way of measuring the lessening in the churn because as you stated before, the value-added services are going to create more customer loyalty and I’m wondering if you’re seeing tangible evidence of that?

Third question is do you have – because you are number one in your markets and you are rolling out these value-added services, are you seeing chances to buy out your minority partners or seeing any other possibilities of making deals which are now better deals than you would have made because you are the market leader and because you have these value added services which should have to be the envy of everybody else.

François-Xavier Roger

Okay. Additional buyback so our commitment is to the $1 billion for shareholders for the full year 2011, taking into consideration the plan to have an exceptional dividend of $3. Then we – it means that by deferring the share buyback for Q4 would be $130 million, not more, not less, I would say.

In terms of minority acquisition, there is no plan to make any acquisition of our minority. The main minority partners that we have are in Guatemala, in Honduras and in Colombia, we are very happy with the relationship that we have with them and with our respective contributions. So there is no plan as we speak to make any acquisition of the aspect.

In terms of churn, yes. We are seeing an improvement in churn wherever a customer is a heavier user of value-added services being it TIGO Cash or other solution products or other data product. So to us, the total churn is not an important number. It’s basically churned by higher ARPU segment is that we are focused on. And these are details that we have this stage are not disclosed into the market. A quick reminder also on our customer base composition, 30% of our customers have an ARPU less than $1 and contribute less than 1% to our revenues. So if we lose hypothetically half of these customers, that would be a massive churn, but that would only impact the revenues by 5%. So yes, there are clear evidence that when you provide value to customers, churn drastically goes down.

William Miller – JM Hartwell

Thank you.

Mikael Grahne

Welcome.

Operator

We’ll take our next question from Mark Walker from Goldman Sachs. Please go ahead.

Mark Walker – Goldman Sachs

Hi there. I just have a follow-up question on Central America please. You mentioned that as well as the decline in international voice traffic in Central America. The year-on-year lower EBITDA was also because of higher data in the mix and higher marketing promotion of 3G services including handset subsidies. Yet, the local currency or pre-growth sell again and actually started to decline this quarter. Just wondering if you could give us some color on when we could expect the higher investment to translate into better ARPU trends there. Thank you.

Mikael Grahne

The ARPU has actually been increasing over the last two quarters in Central America, before it was basically flat in Q3, mainly pulled down by the loss of international traffic which we don’t see as I’ve indicated earlier, as something that is going to weigh as much in the future. So our objective is to maintain or increase the ARPU in Central America, as well as in South America, as we have been successful in delivering over the last couple of quarters.

In Africa, it will be a different story. We believe that given the low penetration levels, there is still room for the further decline in ARPU in order to include both – to increase both MOUs and penetration. But we are already reasonably confident that with the development of value-added services, in Latin America, we should be able to maintain or increase the ARPU.

Mark Walker – Goldman Sachs

Thanks, François. Can I just ask and if you would say that the derived from the international traffic was bigger this quarter than in Q2?

François-Xavier Roger

Yes, yes it has been, yes.

Mark Walker – Goldman Sachs

Okay, that’s great. Thanks very much.

François-Xavier Roger

Welcome.

Operator

(Operator Instructions) We will take our next question from Barry Zeitoune from Berenberg. Please go ahead.

Barry Zeitoune – Berenberg

Hi, it’s Barry Zeitoune from Berenberg here. I’ve got three questions. The first question on revenue growth, the 8% to 11% ambition, I was just curious as to how you expect that to phase over the next two years, given the Colombian MTR cuts and some other MTR cuts in some of the other regions. Would you expect that’s a start of higher closer to 11%, and fade down to 8% at an exit rate for the end of 2013?

And then also thinking about the number, at the Capital Markets Day, when you mentioned a three percentage point contribution from communications. Now obviously in Q3, we’ve just seen two percentage points of contribution, 2% growth in revenues from communication. Do you still think that three percentage point contribution from communication is achievable or given the Columbian MTR cuts, would you take that estimate down? And then I’ve got a question on EBITDA which I can ask after if that’s (inaudible).

Mikael Grahne

Regarding in the ambition in terms of growth that we have for the next two years, what we shared with you in London remains under (inaudible) what we see in terms of trend. For Q3 perfectly in line with that so no change there. The 3% in terms of growth in communication, okay. It was a little bit lower in Q3 for some specific events. As I just said because of international traffic decrease in Central America as well as issues that we are facing in Ghana and Senegal. But if we look at the medium terms, we are conserving what we said in London.

Barry Zeitoune – Berenberg

So just to be clear, the Columbian MTR cuts doesn’t impact that number in any way?

Mikael Grahne

No. As I said earlier, we see that as a fairly minor event in the total – for the total of Millicom. So I think that we can really handle without any significant impact for Millicom in total.

Barry Zeitoune – Berenberg

Okay. And if I can just follow up with a question on margins, current margin ambition of mid-40 longer term, the consensus for next year is at about 46%. Now when I look at a different regions, in the release, you mentioned you’re expecting African margins to decline going forward. And at the same time, the reasons for margin decline in Central America seems structural. And then you’ve got things like the 2% revenue share that you’re going to have in Bolivia. So would you see that 46%, I mean 46% makes sense in terms of mid 40s, but it seems ambitious when I take those individual region by region issues into account?

François-Xavier Roger

We are not providing any guidance for 2012 at this moment because we are still working on our budget for next year. What we have said at the gross in the mid-40s remains, and we are confident about that. There is a trend towards some dilution of the margin which is linked to the structure of the business because the new business line that we are developing, especially mobile financial services are diluted by net share.

But as we explain in the Capital Market Day in London, we are not especially concerned by it because we can accept dilution with this category of the EBITDA margin due to the fact that there is no CapEx attached to this category. So this is the reason why we are focusing more and more with some of invested capital.

We believe that ROIC is better indicator for retail and performance for the future than EBITDA. It doesn’t mean that we are totally forgetting or abandoning EBITDA for the time being. But we believe that the development of new categories whether it’s less CapEx require more focus on retail needed than invested capital.

Barry Zeitoune – Berenberg

Excellent. Thank you very much.

François-Xavier Roger

Welcome.

Operator

As there are no further questions in the queue, that will conclude today’s question-and-answer session. I would now like to turn the call back over to Mr. Mikael Grahne for any additional or closing remarks.

Mikael Grahne

I would just like to thank you for joining the call today. And we look forward to seeing you soon. Thank you.

Operator

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

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