Millicom's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Millicom International (MIICF)

Millicom International Cellular SA (OTCPK:MIICF) Q3 2012 Results Earnings Call October 17, 2012 8:00 AM ET

Executives

Justine Dimovic - Head, Investor Relations

Mikael Grahne - President and CEO

François-Xavier Roger - Chief Financial Officer

Hans-Holger Albrecht - President and CEO

Analysts

JP Davids - Barclays

Mark Walker - Goldman Sachs

Stefan Gauffin - Nordea

Anders Wennberg - Brummer

Lena Osterberg - Carnegie

Kevin Roe - Roe Equity Research

Andreas Joelsson - Enskilda

Laurie Fitzjohn - Citi

Erik Pers - Danske Markets

Sven Sköld - Swedbank

Bill Miller - J.M. Hartwell

Operator

Good day, ladies and gentlemen. Welcome to the Millicom Q3 Results Conference Call. For your information, this conference is being recorded. At this time, I would like to hand the conference over to Justine Dimovic. Please go ahead.

Justine Dimovic

Welcome everyone to the Millicom third quarter results presentation. My name is Justine Dimovic, and I’m the Head of Investor Relations. I hope you all located the slides for today’s presentation on our website at millicom.com.

Before we start, I would like to remind everybody that this call is being recorded and audio-streamed over the web. May I also remind you that the Safe Harbor statements apply to this presentation and the subsequent Q&A session.

With me today on the call are our President and CEO, Mr. Mikael Grahne; and our CFO, Mr. François-Xavier Roger. We also have the pleasure to be joined by our President and CEO as of November 1st, Mr. Hans-Holger Albrecht.

Without further delay, I will now hand over to Mikael, who will present our Q3 results and an update of the development of our category.

Mikael Grahne

Thank you, and welcome, everyone. Please turn to the agenda for the call on slide four. I will first give an overview of the quarter and an update on the development of our categories, and then François-Xavier will take you through our financial results in more detail. We will then take questions.

So let’s start by looking at the key events in the quarter. Turn to slide six. In the third quarter, our revenues grew by 8.4%, supported by strong development of our innovative services, which grew by 31% in local currency in Q3 2012.

Our EBITDA margin was 42.3% in line with our expectations, which leads us to reiterate our fiscal 2012 outlook.

Innovation has proved to be a strong enabler of churn reduction and growth. We are pleased to report a 16% reduction in the churn rate year-on-year in Q3. This in turn led to strong customer additions in this quarter.

During the quarter, we invested in external growth opportunities. Firstly, we acquired Cablevisión in Paraguay, the leading pay TV provider in the country. This acquisition will enable us to accelerate our entry into fixed broadband further building upon our convergence strategy initiated with the Amnet deal four years ago, which has delivered excellent results.

Secondly, we made our first investment in the Online category partnering with proven experts from Rocket Internet. The Online industry is nascent in emerging markets and through this partnership we are being true to our pioneering roots. We are gaining first mover advantage in the rapidly growing sector just as we did years ago in the mobile telephony.

So far this year we have returned closed to $435 million to shareholders to the payment of a $2.40 per share ordinary dividend in June and share buyback. Today, we’re announcing our intention to increase shareholder returns for the year to a total of around $735 million with a special $3 dividend to be proposed to an EGM in December. Consequently, we will not back -- buyback anymore shares in Q4.

Slide seven. Turning to the key financials, we recorded revenue growth of 8.4% for the quarter, which is in line with our expectation. This growth is excluded in the contribution from the Online category and is restated for one of events as well.

In Q3, ARPU was stable at the group level, something we have been aiming to achieve for sometime through the offering of innovative additional services to our existing customers.

Slide eight. Our focus on new categories continues to deliver solid results. In Q3, Value Added Services accounted for close to 34% of our recurring revenues, up from 28% in the prior year. We believe we are firmly on track to meet our targets of 50% and 25% of revenues respectively in the Latin America and Africa being generated by VAS by 2015.

Slide nine. Our accelerated investment in new growth categories, including staffing, network building and handset subsidies, along with the change in our revenue mix have resulted in the delusion of our EBITDA margin to 42.3%. As you can see in the chart, this investment for growth accounted for 1.7% of the decline versus Q3 ’11, while pricing pressure accounted for 0.9%.

Slide 10. This year we plan to return close to $735 million to shareholders as previously stated. This will bring the total cash return to shareholders over the past four years to $2.8 billion with two-thirds in dividends and one-third through share buyback.

After our recent acquisitions and the Senegal settlement, our pro forma net debt LTM EBITDA will be close to balance gearing of one times net debt to EBITDA.

Slide 11. Now let me give you an update on some of the categories.

Slide 12. I’d like to start by highlighting that this quarter we recorded absolute growth from innovation with recorded -- reported -- record absolute growth from innovation of $77 million year-on-year. Revenue generated outside of the communication category grew by 31% year-on-year in Q3, up 5% quarter-on-quarter.

Slide 13, the other benefit of our innovation approach, which sees us opening more services to existing customers, is a material real reduction in churn. Indeed, MFS or Mobile Financial Services or Zero Balance Products are excellent loyalty tools.

In Q3, our churn rate declined 16% versus Q3 last year. These in turn, enable us to report stronger customer additions than in the past quarter.

Slide 14, this quarter we continued to achieve revenue growth in communication on the back of strong SMS growth. Our information, entertainment, solutions and MFS categories collectively contributed 86% of the growth.

Slide 15, within these four categories, our Tigo Lends You product in the solution category has the highest penetration of all VAS at 37.2%. The penetration of this simple product has been growing rapidly quarter-on-quarter, but there is still plenty of room for further growth as you can see from the difference between the lowest and the highest penetrated markets.

Our impact on penetration has decreased in Q3, as we experienced some platform issues in one of our markets and implemented measures to make billing of these services more transparent to customers.

Slide 16. Now let’s look at some of these categories in more details, starting with information. Information is our fastest growing category and within it, mobile data is the largest single contributor to revenue growth.

The strong correlation between revenue growth in mobile data and traffic growth shown on this chart demonstrates that we have the right pricing structure in place. We have recently seen an acceleration in traffic growth, which we are supporting given the rapid decline in the production cost of internet access and our ability to monetize data.

Slide 17, our commercial investment in handsets subsidy is supporting growth in penetration and usage of mobile data. We believe that this is the right time to make this investment in order to secure a leading market position in data as we have in mobile voice in most of our markets. In Q3, our total subsidy cost increased by 22.1% year-on-year.

Slide 18, we now have 5.8 million data users in total, of which 4.4 million are in Latin America, representing 16.5% of our customer base in the region. We have seen a 12% increase in data revenues on the handsets in the quarter, thanks to our investment in subsidies.

Data revenues as a percentage of total mobile recurring revenues have increased 6% quarter-on-quarter to 14.8%.

Slide 19, our Mobile Financial Service categories continues to develop well. At the end of Q3, 11% of our customers were using MFS in the seven countries where the service has been offered for over one quarter.

In Tanzania, over one-third of our customers are now used as the Tigo Pesa service. In Paraguay, penetration on MFS has reached 21% of our customer base and we are seeing a good momentum in the growth of international money transfers, thanks to our agreement with Western Union.

In Rwanda, we have seen the rapid takeoff on MFS since launch and by the end of Q3, 16% of our customers were used as MFS. We are pleased to report our first breakthrough in Central America in this quarter. We have now close to 3% MFS penetration in El Salvador.

In July, we launched MFS services in DRC. We expect to be live with MFS in all our markets except Senegal and Colombia by the end of Q1 2013. In Q3, we also launched the foreign remittance services in El Salvador with Western Union and early signs are encouraging.

Slide 20, now let me give you a brief update on our newest category, the Online business. As I mentioned earlier and as we outlined in our conference call to discuss our investment in this sector back in August, we believe there is a great opportunity to create value in the Online sector in Latin America and Africa.

Online has been one of the fastest growing sectors in developed markets over the past 10 years with growth driven by the fact that people have gained access to the Internet. This sector is emergent in Latin America and Africa, but Internet penetration is growing rapidly.

In the same way that we brought, mobile telephony services to emerging market customers, we will now bring e-commerce and Online services to market where the fast-growing middle class is increasingly demanding access to goods and services that are not necessarily easy to find in the traditional bricks and mortar retail network.

Currently, Latin America Internet Holding, LIH and Africa Internet Holding, AIH, the two subsidiaries of Rocket Internet in which we have invested, controls seven operating businesses mostly in e-commerce.

Both holdings are required to launch a number of new businesses in Latin America and Africa over the next three years. On the slide you can see the consolidation of $2.5 million of revenue and losses of $2.3 million for both EBITDA and net income from Online from the 1st of September, 2012. The $2.3 million net loss is on a 100% basis or our 20% share of that is $0.5 million. This is reported in others this quarter, but Online will be reported as a separate category from Q4 2012.

Slide 21, the existing five businesses in LIH are in the marketplace, e-commerce and subscriptions sub sectors and have been launched within the last 12 months in Brazil. As you can see on this slide, altogether 600 people currently work in the Online operations that have already been launched in that market.

I’d like to give you a bit more color on the competitive outlook in Brazil, which is probably the most advanced market in Online in Latin America. Kanui, our concept selling sporting goods in Q3 moved to claim the number two market position, second only to a player which has been up and running for close to a decade.

Tricae and Zocprint are market leaders. Airu is rapidly gaining on the leading player through an innovative integrated payment solution. When it comes to YepDoc, the business is developing rapidly as there is a clear need for a centralized place for people to seek appointments with doctors.

The next businesses in the pipeline are in lead generation subsector and will be launched in Brazil, Colombia and Mexico. Colombia will therefore be the first market where we will be offering both Online and mobile telephone services.

Slide 22, when it becomes to the development of Online in Africa, AIH reorganized its operations in the third quarter, merging several of its brand around the two strongest brands, the Zando and Jumia.

The first, Zando offers fashion and lifestyle goods in South Africa, and the second, Jumia offers fashion and general merchandise in Morocco, Nigeria and Egypt. In Africa, there is competition in e-commerce but we are leaders in the markets where we have launched.

AIH expects to launch further e-commerce businesses as well as businesses in the lead generation and marketplace sub sectors in several new markets, including Ghana and Senegal in the coming months. So as you can see, Online is rapidly moving to our Tigo markets which will develop synergies for the partners over time.

I would like now to hand over to François-Xavier, who will give an update on our financial results.

François-Xavier Roger

Thank you, Mikael. Slide 24, in Q3, we recorded local currency underlying revenue growth of 8.4% excluding a one-off reclassification of $7 million in Colombia, impacting revenues on EBITDA.

Including the Online contribution for one month, our underlying growth in local currency was 8.6%. We produced an EBITDA margin of 42.3% for the quarter, down 3.7 percentage point from Q3 2011 due to accelerating investment in our categories as well as price declines in some markets in Africa and Central America.

In local currency and restaging for the one off in Columbia, our Q3 EBITDA grew by 2.4%. We invested $183 million or 15.3% of revenues in CapEx during the quarter. Our reported operating free cash flow declined in Q3 as a result of unfavorable Forex moves on timing for payments of taxes on CapEx.

Now, let’s look at the performance in our three origins starting with Central America on slide 25. Revenues for our mobile and cable operations in Central America were up by 3.3% year-on-year in local currency.

This quarter we still experienced pricing pressure in El Salvador. In Guatemala, the performance in Q3 was negatively impacted by the decrease in international revenues which can be somewhat volatile between quartiles. As a result, ARPU in local currency was down 5% in Q3.

Our EBITDA margin was 50.1% in Q3, declining 0.9 percentage point from the level at Q3, 2011. The reduction was essentially the result of increased investment in subsidies combined with pricing pressure. Operating free cash flow declined due to the timing of tax on CapEx payments, some of which will revert in Q4.

Slide 26, in South America, revenues increased by 14.6% in local currency on an underlying basis. We added 528,000 new customers in the quarter. Mobile ARPU was up by 3% in local currency as a consequence of our ongoing focus on mobile data and other VAS.

Increased subsidies on other investments made to further accelerate the growth of our market-sharing data contributed to a year-on-year decrease in EBITDA margin of 5.1 percentage points to 37.8%.

Excluding the one-off in Columbia, our EBITDA margin was 38.6%. With its large developed market on fast-growing economy, Columbia is currently one of the most attractive growth opportunities. In Q3, we continued to invest to offer attractively priced data bundles encouraging upgrades, encouraging upgrades from prepaid to postpaid and from voice to data.

Our subsidy cost are recorded upfront when we gain customers, EBITDA margin in Columbia were below 25% in Q3. We will accept lower level of portability in Columbia in the coming quarter i.e. an EBITDA margin below 25% as we know that payback on such investment is rapid and revenue growth is attractive.

Slide 27, now let’s turn to Africa. Revenues in Africa grew by 6.8% in local currency in the third quarter and were negatively impacted by the strengthening of the U.S. dollar against many of our operating currencies. Performance in our African footprints remain mixed with some operations performing strongly such as Tanzania and Rwanda while others reported revenue declines in an environment of continued pricing pressure and increasing competition like Ghana and Senegal.

We increased our net customer addition quarter-on-quarter, and saw a further slowdown in local currency ARPU erosion.

The EBITDA margin for the quarter was 37.3%, down 4.8 percentage points as price competition on voice leads to lower levels of profitability for the industry overall.

CapEx in Africa in the quarter was $5 million, higher than Q3 2011 and amounted to $81 million, of which $15 million was linked to the 3G license we received in DRC. In 2013, we will have 3G licenses in all our African markets with Chad for allowing the amicable resolution of our dispute in Senegal.

Slide 28, normalized EPS decreased by 19% year-on-year to $1.65. Half of the decline was a result of unfavorable foreign exchanges leading to a lower EBITDA in U.S. dollar this quarter than in Q3 last year.

The other half resulted from a combination of higher corporate cost linked with effecting of our global functions on higher cost -- higher finance cost as our gross net increase in absolute value.

Slide 29, our normalized tax rate of 23.9% for the quarter was higher than in Q3 last year due to higher corporate tax rate this year notably in Central America. We are confident that going forward, we will manage to retain an effective tax rate of less than 30% of our profit before tax despite the fact that we see increasing tax rates in a number of our markets.

Slide 30, our free cash flow for the quarter was $172 million reflecting lower operating free cash flow this quarter related to the timing of taxes and CapEx payment along with Forex pressure on EBITDA and increases in corporate cost on net interest basis.

Slide 31, at the end of Q3, our cash positions to that $1.2 billion on our net debt-to-EBITDA ratio was 0.8. By the end of the year, we expect to be close to one-time net debt-to-EBITDA following the acquisition of Cablevisión Paraguay, the 20% stake in Rocket Internet Holdings as well as the settlement in Senegal.

Slide 32, turning to our debt maturity, we have a fairly high level of short-term debt which we intent to refinance rapidly as we have several well advanced projects to do so notably through the issuance of public debt. Our objective is for the average maturity of our gross debt to exceed three years as it has been done in the past.

Slide 33, when it comes to the source of our debt financing, we are currently focused on growing the share of public debt in the mix so us to be less dependent on bond financing and so as to expand our average debt maturity.

Slide 34, at the end of Q3, 48% of the gross debt is at fixed rates and 55% is in local currency.

Slide 35, 65% of Millicom’s total debt of approximately $2.6 billion is non-recourse. We have $1.1 billion of debt in Central America, 9% of which is guaranteed and in South America, 31% of our $912 million of debt is guaranteed. In Africa, we have $601 million of debt almost fully guaranteed.

Slide 36, I would now like to comment briefly on shareholder remuneration. Firstly, we paid the $2.40 per share ordinary dividend to shareholders in June. Secondly, by the end of Q3, we had bought back $190 million worth of share. The Board will propose to an EGM to be convened in December, a special dividend of $3 per share. As a consequence, close to 100% of free cash flow will once again be paid to shareholders this year with a total return of close to $735 million. There will be no further share buyback in Q4.

Slide 37, on October 12, we signed a certification with the SEC on Form 15F which effectively ends Millicom registration with the SEC. Our shares will continue to trade over-the-counter in the U.S. as they have done since the consolidation of our listing on NASDAQ OMX in Stockholm in June last year. Our future disclosure will follow European directives on NASDAQ OMX requirements, but we intent to maintain a comparable level of disclosure as in the past.

Slide 38, on the back of Q3 results, we confirm our full year 2012 outlook, which excludes the contribution from Online on Cablevisión Paraguay. In 2012, we again aim to strike the right balance between topline growth, profitability, cash flow generation and return on invested capital.

We expect the full year EBITDA margin to be approximately 43%, the operating free cash flow margin to be approximately 20%. We expect CapEx in 2012 to increase in absolute terms compared to last year, but not to exceed 20% of sales excluding spectrum acquisition as we invest in IT and billing platform and at further data capacity.

That concludes our presentation. Before we move to Q&A session, I would like to take this opportunity to thank Mikael for his outstanding contribution about the best 11 years in making Millicom the company it is today. On behalf of all of us at Millicom, we all thank you Mikael. We wish you all the best for the future. Operator, can we have the first question.

Question-and-Answer Session

Operator

(Operator Instructions)

Justine Dimovic

Operator, can we have the first question, please.

Operator

Thank you. The first question comes from JP Davids from Barclays. Please go ahead.

JP Davids - Barclays

Hi. Good afternoon. Thank you for the opportunity. Two questions to start please. The first question is on the market reactions to your change what you increase in subsidy particularly in South America. How do you see the competitors reacting to your change and to your investment in data?

And then the second question, slightly broader question for Mikael. As you leave the business, what advice would you leave with Hans-Holger as he takes the Millicom forward? Thank you.

Mikael Grahne

Okay. Let me answer the question. I think the subsidy increase is something that we sort of worked on quarter-by-quarter. Key reason for us to increase that subsidy as we said before is the need to control the whole change. So, basically from the fact that a customer gets the phone, we need to ensure that he and she immediately uses it for a data service that it could stick.

So that’s been a continuous trend. I think our competitors have been on the similar quest. But we believe we have a stronger data growth for the moment than our competitors. In terms of advice to Hans-Holger, I don’t feel there is need to do anything. Hans-Holger is a very talented and experienced CEO and he is inheriting a very talented and experienced management team. So, I think he will be able to very quickly make up his mind about the right rules for the companies.

JP Davids - Barclays

Thank you.

Mikael Grahne

Welcome.

Operator

The next question comes from Mark Walker from Goldman Sachs. Please go ahead.

Mark Walker - Goldman Sachs

Good afternoon, everyone. I have three questions please. And firstly, in Central America, I just wonder to how you saw the -- how you see from here the situation in El Salvador relating to the AMX, Digicel consolidation playing. I know the competition authorities projected that merger. I just wanted you to comment on the likelihood that the price competition becomes more persistent as a result of that?

And secondly, still with Central America, can you just expand on the revenue trend you are seeing in Guatemala, what is really driving the decline in international traffic there and high -- and again high persistent is not likely to be?

And then, the last question is on the Online services business. I just wonder, if you could tell us a bit more about the African Online businesses, Zando and Jumia on slide 22. I don’t’ think you’ve disclose this before. My understanding is Zando is a Zappos clone in South Africa but I haven’t really come across Jumia yet. And also I was wondering if from Q4, you intend to separately disclose AIH and LIH financial performance? Thank you very much.

Mikael Grahne

Okay. Let me start with the competitive situation in El Salvador. It’s still competitive. I think last week, America Movil and Digicel announced that they will abandon the sort of takeover there. So, we would expect that the competitive situation would be perhaps somewhat more normalize going forward, since some other operators, that are subscale and probably are close to losing cash with their efforts there.

The international traffic into Guatemala, you tend to have some variation quarter-by-quarter. I wouldn’t read any specific trend to that as we said before, I think over the long-term there is a threat to the international traffic with more and more Skype like services coming into place. And that’s again it is so important for us to sort of own the last one to the home with broadband as we do in Central America.

In terms of Online identity, with only one month sort of ownership for the business, our intent is not to really go into more detail this call on the Online business. Its -- at this stage progressing us for plan and we probably will have some later point of time, a capital more market today reviewing more details around this.

François-Xavier Roger

But we -- as far as disclosure is concern, we intend to report the Online business as a separate segment from Q4 onward. We didn’t do it this quarter, because it was a new month. So, we didn’t make a lot of sense, but we will do it with additional disclosure and separate disclosure for this business for Q4 on the following quarters.

Mark Walker - Goldman Sachs

So, on this disclosure, can you clarify your separately report the African and the LATAM Online businesses?

François-Xavier Roger

We have not finalized the exact format of the reporting. So, we’ll -- we’ll see in the next quarter.

Mark Walker - Goldman Sachs

Okay. Great. Thanks very much.

François-Xavier Roger

Welcome.

Operator

The next question comes from Peter Nielsen from Cheuvreux. Please go ahead.

Mikael Grahne

Hello?

Operator

Please, go ahead your line is now open. Please make sure the mute button of your telephone is switched off. We’ll now move to a next question from Stefan Gauffin from Nordea. Please go ahead.

Stefan Gauffin - Nordea

Yeah. Hello. A couple of questions please. The first one is detailed question relating to depreciation. The reported depreciation was $206 million in the quarter and then yet, on slide 28, you show that the normalized EPS there you show depreciation level of $196 million, so can you please explain the difference there?

Then secondly, you ended the buyback program early and instead you announced an extraordinary dividend. If this started to change in shareholder remuneration and hence if it more likely that we see further shareholder remuneration in the form of extraordinary dividend brought than buyback i.e. for next year?

François-Xavier Roger

Regarding the shareholder remuneration, so we have actually done in the quarter what we said, which is to return excess cash to shareholder, which is a reason why we decided on these extraordinary dividend of $3 per share that would be paid most likely subject to the approval of the EGM in December which bring the total shareholder remuneration to $735 million for the full year, which is more or less equivalent to the free cash flows that we generate. So no specific changes there.

Stefan Gauffin - Nordea

But -- just follow-up there, I mean, you had a target on share buybacks of returning $300 million. And now, I believe, you came up to $190 million. So you could have delivered on the share buyback and delivered $2 extraordinary dividend. So is this a change in the way you distribute excess cash?

François-Xavier Roger

No, it’s a decision by the Board to go for an extraordinary dividend of $3 per share for the rest of the year. But structurally there is no change as you can see over the last four years we have return to shareholders a significant amount, out of which two-third was distributed as dividend, ordinary and extraordinary dividend under balance for share buyback.

No, there is nothing specific to reap that except that it was a final decision of the Board to distribute it that way for the end of the year, which is not so much I own. Regarding the -- your question on the depreciation, the difference between the two figures you are mentioning were actually amortization. If you look at the figure that is on slide 28, it refers to -- it relates to depreciation only and the information that we have on the press release includes depreciation as well as amortization.

Stefan Gauffin - Nordea

Okay. Thank you.

François-Xavier Roger

Welcome.

Operator

The next question comes from Anders Wennberg from Brummer. Please go ahead.

Anders Wennberg - Brummer

Hello. I’m a little bit interested in Columbia and the margin of 25% or below 25% you said for the quarter, if this including or excluding the $7 million in negative one-offs you talked about earlier and if it’s including those $7 million. Why are you guiding for the margin to stay at the same level for the next few quarters that’s right in Q3?

François-Xavier Roger

Okay. In Columbia, it does include in the third quarter, the 25%, $7 million adjustment and we confirm that we intent to be below 25% in terms of EBITDA margin in the next coming quarter as a consequence of increased investment, commercial investment, especially in subsidies.

The Columbian market, as we reflected earlier is one of the most attractive market that we have. As you know, we have a market share in data which is significantly higher, almost twice as higher as the market share that we have on voice. And we see that there is very good payback and very good positive reaction from Columbian customers whenever we invest in subsidies.

We believe this is a right time to do it. There is no point in waiting for them. This is a right time with good payback, good return, which is a reason why we decided to accelerate this investment and to as a consequence depress somewhat the EBITDA margin in the coming quarters to existing levels.

Anders Wennberg - Brummer

So basically, the $7 million is one of this quarter but going forward, you will increase your marketing investments by certain amount?

François-Xavier Roger

But we did in Q3 as well.

Anders Wennberg - Brummer

Okay. Second question if I may, there has been a bit of discussion about the ownership of the Rocket Internet assets and if Kinnevik had direct ownership in any of these assets. Can you confirm that and how much was in that case?

Mikael Grahne

You need to ask, I mean, Kinnevik, what is exact share holding. The only thing I can confirm is that they have shareholder at higher level and they have shareholder at lower level, at approaching level. But if you want to have more details about their stake in the different entities, you need to talk directly to them.

Anders Wennberg - Brummer

Okay. Thanks. Yeah. Good afternoon. A couple of questions please. First of all, on Senegal, now you’ve put the dispute with the government behind you, what sort of implications will that have further running of the business, because you, can you give us sense whether you could expect to see CapEx and your aggressive intentions step up a little bit in that market?

And secondly, just on Columbia given the margins are lower than they have been in the past year we say, returns in that market, I guess, lower than the number of other countries. What implication does that have as we approach the potential spectrum auctions in Columbia? And if there is anything you could say on timing of those auctions, will it be Q4, do you think, what’s your best guess for when that may play out? Thank you very much.

Mikael Grahne

Okay. Let me grab that. I think the new spectrum auctions in Columbia have been delayed number of times, I think the latest estimate was somewhere at the year end or probably it’s more realistic that it will go to 2013.

I think the challenge we have in Columbia is really one-off scale and we are growing very rapidly on the latest site which truly the future there. So we think it’s prudent to take this opportunity to invest and driving the revenue on the latest site. Overtime will give us the scale and improve EBITDA margin.

In terms of Senegal, we now with the restated license also have an ability to launch MFS, which we did and having the past. So we will simply accelerate our product offerings in that market and that will also come with some increase CapEx. We are still in the process of building those plants for 2013. But we clearly are looking at the opportunity to reinvigorate growth in this market.

Anders Wennberg - Brummer

Okay. Thank you.

Mikael Grahne

Welcome.

Operator

The next question comes from Lena Osterberg from Carnegie.

Lena Osterberg - Carnegie

Yeah. Hello. I was just wondering if you could give us a little bit more detail on the timing of the license payments in Senegal, you’ve said that there will be over, I think three times you will pay, roughly how much you will pay this year and what we should expect for next year as well?

And then I was also wondering, you mentioned in your presentation now that, this was your first investment into Online. I was just wondering should we expect further investments or are you just referring to the additional investments you will make into Rocket?

And then finally, I was wondering and do you feel as of today that Rocket is on track to meet the full year revenue guidance US$35 million in revenues?

François-Xavier Roger

Regarding the license payment in Senegal, there will be very minor adjustment against the initial agreement that we had with the Government of Senegal. We have actually paid the entire amount as we speak. So while we have initially planned to pay the bulk of it this year and there was a slight delay in the balance of the payment, but we have already paid everything.

Lena Osterberg - Carnegie

So the whole $103 million?

François-Xavier Roger

Yeah. Have been paid as we speak.

Lena Osterberg - Carnegie

Okay.

François-Xavier Roger

We are not working on any additional Online investment as we speak, though that could be trended into future, but as we speak there is nothing additional there.

And regarding the performance of this Rocket business, for the time being it’s too early to draw any conclusion, but we confirm what we said last time, we talked about an expectation to reach $1 billion of revenues by 2016, and there is no indication we said that we will not be able to reach.

Lena Osterberg - Carnegie

But the US$35 million for this year you’re still confident on?

François-Xavier Roger

Yeah. We have no change against what we said initially at this stage.

Mikael Grahne

$35 million was not our share. $35 million was the total business for the full 2012.

Lena Osterberg - Carnegie

Yeah. I understand that, but are you still confident that that still have your reach?

Mikael Grahne

Yeah.

François-Xavier Roger

Yeah. We will -- we have no indication that it will be different at this stage. Just a month

Lena Osterberg - Carnegie

Okay.

Mikael Grahne

Yeah.

François-Xavier Roger

An additional month again the last time we spoke about it.

Lena Osterberg - Carnegie

Thank you.

Mikael Grahne

Welcome.

Operator

The next question comes from Kevin Roe from Roe Equity Research.

Kevin Roe - Roe Equity Research

Thank you. Two questions. First, following up on El Salvador, Mikael, can you talk about your regulatory outlook for that market? Are we stuck with a five-player market?

Mikael Grahne

Well, I think there’s basically four players in the market.

Kevin Roe - Roe Equity Research

Right, right.

Mikael Grahne

So today and…

Kevin Roe - Roe Equity Research

Four real players. You have five on paper.

Mikael Grahne

Yeah. Four real players. It looks to be like that for sometime. I think not knowing the specifics I think just reading the reports that the regulatory authority has for a return of spectrum from the two parties that wanted to emerge and they didn’t feel it was appropriate. So that’s somehow locked the transaction. Let’s see what happens in the future.

Kevin Roe - Roe Equity Research

Okay. And following up on Senegal, it’s good to hear that you are going to be reinvesting for growth in that market. Can you help us understand how the market is doing overall there? Is the total market for mobile revenue growing and is your market share stable or growing or declining?

Mikael Grahne

The total market is not growing. For the moment I think without commenting on politically because I think there was - the country went through a little bit difficult times here before the elections. So, I think the new government is very keen on restarting growth. They are working with IMF quite intensively. They are trying to figure out what’s the right plan for Senegal.

So we are relatively optimistic that the country itself will start performing better and naturally we denied the customers in that market for a number of product and opportunities that we couldn’t bring into the market given the uncertainty around our license. So we’ll think the combination of a better performing Senegal and a better performing Millicom in Senegal is going to be a good combination.

Kevin Roe - Roe Equity Research

So the total market has declined a bit and your share probably declined a bit too because of the restrictions.

Mikael Grahne

Yeah. Yeah. Some marginal loss on share.

Kevin Roe - Roe Equity Research

Very good. Well, good luck, Mikael in the next chapter of your career. Thanks.

Mikael Grahne

Thank you very much. Thank you.

Operator

The next question comes from Andreas Joelsson from Enskilda.

Andreas Joelsson - Enskilda

Yeah. Good afternoon. Two questions if I may. Could you please tell us a little bit of what’s happening in Central America? You’ve lost some subscribers in Honduras and El Salvador and maybe explain a little bit more on the overall trends, especially than in Honduras?

And then, secondly on South America, if Colombia has below 25% margin, Bolivia and Paraguay is doing quite well. Do you see those margins as sustainable going into 2013?

Mikael Grahne

Well, we don’t want to give a prediction on margins going into the future and we will come with the guidance for 2013 at the time we come out with our Q4. I don’t see any sort of subscriber loss in Honduras. I mean that can happen from quarter-to-quarter.

Also remember at an average in Millicom, 30% of our subscriber base have an ARPU less than a dollar and actually it contribute less than a percent of a revenue.

So we can have some volatility at the lower end of the spectrum that really doesn’t have any impact on our revenue growth.

Andreas Joelsson - Enskilda

Just follow-up on that, do you plan to do similar investments in all of South America as you plan to do in Colombia?

Mikael Grahne

I know I think, the rest of the markets are performing, are invested as per our internal budget. In Colombia, we are accelerating versus our internal budget.

Andreas Joelsson - Enskilda

Thank you very much.

Mikael Grahne

Welcome.

Operator

The next question comes from Laurie Fitzjohn from Citi.

Laurie Fitzjohn - Citi

Hi. Thank you. Just three questions. On Ghana, you seem to have seen quite an improvement in customer numbers in spite of the quite successful entry of growth. I was just wondering whether any particular reason for that success and then just more general in terms of competition. At the start of the year, there are four markets, particularly which were a concern, are there any new markets on the radar that were a concern to you in terms of competition?

And then lastly just in terms of the cash CapEx. It looks like the cash CapEx was quiet higher than the booked CapEx this quarter. Is it just the timing difference and should we expect that to broadly clipped by the end of the year? Thank you.

Mikael Grahne

Let me start with the Ghana. Yeah, we’ve done some tariff adjustments in Ghana, some go-to market strategy changes and it’s started to deliver some results there. But it’s early days, but here there is a bit of a turnaround in the business there.

I think in terms of a competitive situation, I think there are still a number of markets in Africa that have too many operators and that’s mostly sustainable going forward, and clearly Ghana is one of these markets.

François-Xavier Roger

Regarding the CapEx, it is true that in Q3 we actually paid more CapEx than we actually booked. The best indication is what we gave as the guidance for the full year, which we conform on the regulatory which is our expectation to reach an operating free cash flow at around 20% of revenues for the full year.

And we confirm that as well as we expected CapEx to be and CapEx, this is booked CapEx to be below 20% of revenues this year. That excludes any amount that we could book for additional licensees of spectrum, which is in line with what we have communicated perviously.

Laurie Fitzjohn - Citi

Great. Thank you.

Mikael Grahne

Welcome.

Operator

The next question comes from Erik Pers from Danske Markets. Please go ahead.

Erik Pers - Danske Markets

Thank you. First, a couple of detailed questions. In Colombia, could you please explain the one-off there? As I understand that’s a reclassification of three quarters of taxes and is then sort of one third of the one-off actually sort of underlying for the third quarter and will that, so the level continue going forward. I suppose that accounting principle will prevail in coming quarters as well. So could you just clarify that, please and also how much of Paraguay’s revenues are currently interconnect as I see there is a quite sharp cut coming up?

And thirdly in Colombia, if you could shed some light on what the dynamics are on these subsidies? You say it’s a great investment for the future, but I was just wondering is this revenue opportunity that will come with the sustainably lower margin, or is there a - I mean let’s say you continue with the current level of subsidies for a few quarters, will then the margin start expand again and in that case how long does that take, please?

Mikael Grahne

Yeah. Just on the taxes in Colombia, it is a reclassification of taxes that we used to book as a corporate income tax and that we have to book as net of deduction of revenues because they are considered, actually from an accounting point of view as something similar to VATs. So we had to reclassify it. It has no implication whatsoever for the next quarter of Q4.

Regarding the subsidies in terms of margin, what is important without speaking specifically of Colombia but we see a very positive trend, which is an increase of our gross margin on debtor, which gives us a good indication of the reason why we invest in 3G and in data as well, which we see as some thing very positive that applies obviously to most of the countries.

In Paraguay, we have a leading position in the market and typically when you are the leader in the market, the majority of your calls are on net. So the impact of a change of the interconnect tend to be quite marginal.

Erik Pers - Danske Markets

Thank you.

Mikael Grahne

Welcome.

Operator

The next question comes from Sven Sköld from Swedbank.

Sven Sköld - Swedbank

Yeah. Hello, good afternoon. I have a question about slide number nine, please. And I’m just wondering if you could share with us outflows from the margins for 2013. I know it’s a bit early but if you look at slide number nine, you have presented investment for growth impacting the margin negatively in this quarter compared to last year. Do you see this percentage drop of 1.7% be as high next year as this year or do you expect that to be a lower as a percentage of that. What I want to hear is our investments are going to be higher related to sales or lower next year or in line?

François-Xavier Roger

We provide the guidance on EBITDA in February at the occasion of our Q4 and full year results. The -- so I cannot provide any comment at this stage. The only thing that I can tell you which is something that we have already communicated to the market that we expect the EBITDA margin to suffer from further erosion next year from the current level.

And one of the reason why is that the category mix isn’t favorable because we grow faster in some categories like entertainment, solution and MFS which have a lower EBITDA margin than the other category.

So this mere impact is diluting margin or really the EBITDA margin. We are not as we said over the last couple of quarters, we are not especially concerned about it because these three categories happen to be less capital intensive than voice on data. So over the medium term, we see that as a positive driver of rich ROIC improvement.

Sven Sköld - Swedbank

So, when you expect…

François-Xavier Roger

We will come with further details in February EBITDA margin.

Sven Sköld - Swedbank

Just a clarification. When you say that you expect further margin erosion, do you mean excluding Online than I assume?

François-Xavier Roger

Yeah. Yeah. Yeah. Obviously, I am talking of these.

Sven Sköld - Swedbank

But we also -- now when you start up in new service, when you push for example data services, you have I mean initial investments, subsidies are fairly high in the start. At least as a percentage of revenue, so you don’t expect that to mitigate the mix erosion?

François-Xavier Roger

The subsidies we give today, we don’t see these subsidies as just the one-off event. Once we have started to give subsidies to customers, we will have to do it. That being said we need to take into consideration the fact that the price of devices are going down. So this would impact certainly the level of subsidies.

There is something that we will need to decide is do we give more subsidies to more customers going forward. But this will be part of the communication that we will share with the market in February from our guidance for 2013.

Sven Sköld - Swedbank

Okay. Thank you.

François-Xavier Roger

Welcome.

Justine Dimovic

Operator, we are going to take the last question, please.

Operator

Our last question comes from Bill Miller from J.M. Hartwell. Please go ahead.

Bill Miller - J.M. Hartwell

Good afternoon.

Mikael Grahne

Hi.

Bill Miller - J.M. Hartwell

Hi. Could you talk a little bit further about the Western Union involvement and how you are going to get paid with Western Union and as you have now launched, can you give us any color on exactly what the potential for that will be and finally just following along on the natural services MFS, can you give us any thoughts on how if at all you are going to be able to integrate that with the Rocket financial service offering, whether you can take it elsewhere as the Western Union elsewhere that the sale will next go et cetera. And finally Mikael thank you -- thank you very much from all of us for your stewardship of the company and just to track what have you decided to do next?

Mikael Grahne

Thank you, Bill. Let me start to the Western Union. We launched it so far in Paraguay the total remittances, annual remittances to Paraguay are about $900 million and the intent here and why this make sense for Western Union is that we can tub into the market on smaller remittances at the more convenient cost and the payment is in form of revenue share that we have agreed with Western Union.

We think overtime this is going to be an attractive revenue opportunity. We can clearly see in Paraguay penetration growth week-by-week, the numbers have been small. It’s about an education process. We have gone live in El Salvador and we will lower our time to live in the other markets and just as you all recall, the total annual remittances to El Salvador is around $8 billion. So that’s a significantly larger opportunity for us to tub in overtime. So we are excited about that.

François-Xavier Roger

If I can add something, first of all on MFS, as you can see we are growing nicely because we already have the 11% of our customers in the market where we provide the service which we are using MFS, so which is really something really attractive. Regarding, Western Union, what we are doing actually is a last mile. And I think it is a partnership that makes a lot of sense because Western Union have international -- the capability to raise at an international level while we have the capability locally to carry out the last mile with our outstanding distribution platform.

We have something like 650,000 point of sales. So that is an outstanding complementarity what they do and what we can not offer. It makes a lot of sense as Mikael said we already offer the service in Paraguay and El Salvador on our intent to extend it further.

One last comment on MFS, you may have seen that as far as Africa is concerned, in most half of our revenue growth in the quarter is coming from MFS, essentially with two markets namely Tanzania and Rwanda, which gives you an idea of the powerful tool that MFS represents. So, we are as you know investing a lot in this category with attractive results.

Mikael Grahne

And naturally, we will exploit this -- our MFS services at the point of time we launched the Rocket concepts in our market and as we said for Africa, Ghana and Senegal looks to be the next opportunity. So we are excited about that because one of the challenges in the Online is this [whole payment] and with our MFS services that is very easy to fulfill.

Bill Miller - J.M. Hartwell

That’s great. Thanks for that. Just because, you know I was going to ask it -- it looks like this year, rather than two thirds of the payout coming in form of cash, it’s 75% and I think that previous question was all about why if you change that, why if you going back and they stated that duration which you are going to have $300 million which would give it more balance obviously. Stock repurchase and why did you all of a sudden change that, I mean your stock price is down and so that would presumably make it more attractive.

And since you want to get to want to one-to-one balance sheet anyway, why wouldn’t you just take this opportunity to buyback more stock not less or finance as you’ve said, you will public issue and buyback a lot more stock. So I am really confused because the signals have been so mixed. Thanks. Could you give us a little more color on that?

François-Xavier Roger

Yeah. We didn’t want to confuse anybody obviously but now what we wanted to do is to make sure that we comply with what we said which is to return the excess cash to shareholder, which is the reason why we have decided to go for this exceptional dividend since we decided the dividend, the board decided on a dividend of an extraordinary dividend for the year. They decided to do it for trade a lot of share. There is nothing specific to read that.

Once again it’s a commitment to return excess cash. We are happy as well to be able to return close to -- little bit less than $740 million to shareholders this year and to have return the significant amount as you could see $2.8 billion over the last four years, to sell the fits through dividend and one sales through share buyback. So don’t -- there is nothing to read with the small adjustment in the share buyback. Important is the amount that we return to shareholder.

Bill Miller - J.M. Hartwell

Yeah. Sounds right I gather on all that but the indication had been as you are going to do it with the little bit different mix and why have you changed that mix? That’s my question. Why did you try to do much more in the way of a cash dividend and obviously, nothing more in the way of a stock repurchase?

Mikael Grahne

Bill, at this stage that was just simply more convenient solution, so I, likely we did that.

Bill Miller - J.M. Hartwell

Okay. Thanks and good luck again gentlemen.

Mikael Grahne

Thank you very much for your support. Thank you, Bill. So I would just like to close with some concluding remarks. The third quarter of the year was very similar to the first two quarters of this year.

Sustain investment for future growth diluted our EBITDA margin, but enable us to maintain high single-digit organic revenue growth in line with our expectation and reiterated outlook for fiscal 2012. With our increase focus on innovation and sustainable investment, I’m confident that we have the right action plan to deliver ongoing profitability growth.

And as this is my last conference call before leaving Millicom at the end of the month. I would like to say a special thank you to all of you for your support and interest over the years.

I have no doubt that Millicom will continue on its path of delivering ongoing profitable growth for shareholders under Hans-Holger leadership and as per shareholder myself I look forward to following the next phases of development of this great company. Thank you very much.

Operator

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

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