Millicom International Cellular SA Q3 2009 Earnings Call Transcript

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Millicom International Cellular SA (MICC) Q3 2009 Earnings Call October 20, 2009 9:00 AM ET

Executives

Mikael Grahne - President and CEO

François-Xavier Roger - CFO

Analysts

Michel Morin - Barclays Capital

Chris King - Stifel Nicolaus

Stefan Pettersson - Nordea

Ric Prentiss - Raymond James

Sven Skold - Swedbank

Jan Dworsky - Handelsbanken

Kevin Roe - Roe Equity Research

Peter Nielsen - Cheuvreux

Andreas Joelsson - SEB Enskilda

Bill Miller - J.M. Hartwell

David Kestenbaum - Morgan Joseph

Alexander Vassiouk - Morgan Stanley

Soomit Datta - New Street Research

Operator

Welcome to the Millicom Q3 2009 results conference call. For your information this conference is being recorded. May I also remind you that this call is being audio streamed over the web and is accessible at www.millicom.com, together with the presentation summarizing the key features of the result.

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

Mikael Grahne

Thank you operator and welcome to everyone who has joined us today. You can find the slides for this call on our website. Please turn to slide number three; it has been an encouraging quarter for Millicom, despite the tough operating environment.

We have maintained a similar rate of [underlining] revenue growth as in the first half with VAS again being a key driver. The effect of currency movements on reported revenues is now set to reduce. EBITDA margins have continued to improved, particularly in Africa. Cash flow is strong and we are progressing with our Asian divestment program.

Although we are still not seeing any signs of improvement in the economic environment, our focus on higher quality customers, innovation and tight operational control is proving successful

Slide 4; our year-on-year performance shows a continued combination of underlying top line growth with improving margins and strong cash flow. Customer numbers were up 20%, revenues increased by 9% in the local currency, and our EBITDA margin continues to improve thanks to strong growth in VAS, improving market share, and tight cost control. Operating free cash flow reached $140 million, equivalent to 16% of revenues

Slide 5; in terms of sequential growth, some 1.1 million customers were added in the quarter, representing growth of 4% over Q2. Revenues were up by 5%, helped by stabilizing currencies. EBITDA was up by 6%, and we recorded a small increase in the EBITDA margin. CapEx in Q3 at $141 million was 16% lower than in Q2.

Slide 6; the rest of customer intake has slowed from Q2, when we recorded $1.7 million in net adds.

However revenue growth has continued at similar underlying rate as in the first half. This reflects an increase in focus on higher quality customers, retention and protecting ARPU.

As markets mature, especially in Central America, we believe there is less to be gained from chasing every last low [ARPU] customer and much more value in stimulating our significant installed base to use more services, and ultimately spend more.

In local currency, the quarter decline in ARPU was just over 1%, compared to 9% in Q1 of this year. The proportion of our base, with very low ARPU has fallen reflecting our strategy of not investing in retention across the entire customer base.

On the other hand, our high ARPU base is going strongly perhaps a [new] sign that our efforts to stimulate spending through VAS and customization are working. Our plan is to maintain a similar level of customer intake as in Q3 going forward, and to work further on ARPU stabilization.

Slide 7; FOREX continued to have an impact on our reported numbers. Revenues were up 9% in local currency for Mobile Operations and 16% in total including AMNET and NAVEGA. Net depreciation of currencies against the dollar eroded 9 percentage points of growth from the top line, equivalent to $71 million.

We expect the impact of FOREX to be much lower in Q4 given the timing of currency movements last year. At today’s rates, the impact of currencies on Q4 would be immaterial.

Slide 8; the most severely affected regions are Africa and South America. The underlying growth in local currency remains strong in Africa, 21% and in South America, 13%. There was no local currency revenue growth in Central America, primary as a result of slower economic growth with declining remittances from the US, 12% down in Q3 ’09 versus 3 ’08. The low tax on inbound international traffic in Honduras also had a negative effect.

Slide 9; looking at revenues by category, I would again like to highlight VAS, which have grown by 46% in local currency since Q3 ’08 and accounted for 19% of recurring Mobile revenues in Q3 ’09. Innovation will increasingly be differentiating factor between Mobile operators and we are committed to being leaders in this area.

Slide 10; Revenues from SMS traffic continues to track 10% of service revenues, while other VAS revenues including non-voice services based on content are increasing their contribution to the group quarter-on-quarter. 3G in particular is gaining real traction from a low base and we could see the data card business become a mass market over time. CAPEX planning for next year, will be increasing weighted towards and 3G and VAS/SMS in Latin America.

Slide 11; At the end of September 2009, Millicom’s total market on a weighted basis stood at 28.7%, up almost a percentage point over the last three months. We are clearly outperforming our competitors in a very tough market environment and should be well placed when economies begin to improve. Our market share growth conforms that our strategy to focus on value addition is paying off.

Slide 12; Churn has been deteriorating over the quarter. This is a result of focusing our retention activity on higher volume customers as previously mentioned. In addition we see a rising churn as a consequence of the difficult economic conditions endured by many of our lower end customers.

Slide 14; Now let’s look at the cluster in more detail. In Central America customer grew 14% year-on-year The slow down in customer growth during the quarter reflects the ongoing economic problems in these markets. There will not be maturity and our own strategy of focusing on higher quality customers and stimulating spending. That is why we are increasing our focus on VAS data and broadband services. Revenues for Q3 were $326 million and continue to be heavily affected by lower remittances from the USA

EBTDA margins and cash generation continue to be very strong, reflecting our excellent market positions. We are very pleased to grow market share again in Honduras after a few quarters of decline.

Slide 15; In South America customers increased by 17% and revenues increased by 13% in local currency. Although the strong dollar continued to impact the top line, resulting in just 1% increase in reported revenue numbers.

EBITDA for Q3 was up 35% in local currency and EBITDA margin was 41%. South America too is becoming cash generative with operating free cash flow of $83 million in the quarter.

Slide 16; In Africa 502,000 customers were added across the region in the third quarter, which presents a year-on-year increase in total customers of 31%.

The highest net additions were in Tanzania, Chad and DRC reflecting our growing strength in this market and relatively low penetration.

Revenue growth at 21% in low currency remained strong given the economic backlog. EBITDA for Q3 was $75 million, up 48% year-on-year in local currency. This very strong performance was driven by good top line growth and a big step up in EBITDA margin reflecting our increasing critical mass in a number of markets and good cost control.

We continue to make significant investment in Africa with CapEx of 41% of revenues reflecting our confidence in the market opportunity there. Finally, we are on track to launch Rwanda our seventh Africa market by the end of the year.

Slide 17; Revenues for Amnet and Navega were $52 million and EBITDA was $24 million, producing an EBITDA margin of 43%. We saw encouraging sequential revenue growth at Amnet and broadband continues to be key focus of growth with revenues up 21% year-on-year.

CapEx in Q3 fell sharply as overall CapEx for Amnet this year was heavily weighted towards the first half. Increasingly we are leasing new capacity rather than installing infrastructure, which thus increase operating costs, but reduce its CapEx and improves cash flow.

We are now aiming to increase our penetration of homes already passed by our network and to offer broadband to cable TV customers.

Now, I would like to handover to François-Xavier, who will talk you briefly through the financials.

François-Xavier Roger

On slide 19, you can see the CapEx of Q3 was $141 million slightly down from Q2 and less than half of what we spent in Q3 last year.

Our lower CapEx spend is not affecting our growth potential and reflects spare capacity from prior years and lower activities on budgeted for in 2009. We now expect total CapEx of $700 million this year, with $50 million slipping into 2010 as a result of timing issues.

Growth in depreciation is slowing, reflecting the lower level of CapEx in recent quarters. Management of items below the EBITDA line is becoming an increasing focus, as we see to reflect our EBITDA performance in earning growth going forward.

Turning to our finance cost on slide 21, our effective interest rates fell with the falling rates on the variable portion. We managed our interest rates very carefully. Over time we are looking to have around half of that at fixed rates compared with near around [shown] today.

As you would see on slide 21, our effective tax rate is around 28% year-to-date and it were 28% in the third quarter. We expect our annual effective tax rate to remain below 30%, although it can vary from quarter-to-quarter as it is strongly affected by withholding tax on dividends.

As you can see on slide 22, quarterly EPS is beginning to improve, as a result of rising EBITDA, a slowdown in CapEx and depreciation, the end of FOREX losses and lower interest rates, said early on.

Slide 23; Our debt profile did not change over the quarter, but just after closing, we completed the refinancing of the AMNET bridge loan. We have contracted a two-year $250 million facility from a syndicate of five banks at a cost below the currents average for the group. We now have some $873 million of cash, plus the proceeds from the Sri Lanka transaction, which closed last Friday, which means that today we have more than $1 billion in cash.

On slide 24; We have set out our debt by region and currency. I know this is information that many of you have been asking for. We tried to maximize debt in local currency to mitigate the effect of foreign currency movements and to hedge our asset base effectively. We are pleased to report that we now have over 60% of the debt at operational level in local currency.

Slide 25; The benefits of increased EBITDA on lower CapEx requirements contributed to a positive free cash flow, which we expect to deliver for the whole of 2009 for the first time. In Q3, free cash flow amounted to $108 million or 12.6% of revenues and progress over previous quarter has been strong.

Free cash flow is not always regular although, as we pay interest on the high yield bond in Q2 and Q4, and taxes zone here at different times, in different geographies and are heavily impacted by withholding taxes. CapEx payments vary overtime too. However we are confident of achieving a sustainable level of operating free cash flow in the mid-teens as a percentage of revenues.

Slide 26; Cash flow generation has been improving in all regions. We are very satisfied with rate of distribution of our cash flow generation at Central America, which accounted for over 200% of the group’s cash flow generation, now accounts for little more than half. We even expect that share to decline to below 50% in 2010.

Slide 27, nine months throughout the year, we are confident of achieving our EBITDA margin target; maintaining it around the current level for the balance of the year; and the cash flow measure introduced last year also looks set to be met. We are reducing slightly our expected CapEx figure, but this reflects a phasing issue into next year, rather than a set back on planned projects. We are currently reviewing our 2010 budgets and we expect to communicate some guidance for the coming year at the occasion of our full year 2009 results.

At this stage we don’t anticipate any significant change in our performance over the next year in the absence of any change in the economic environments.

Slide 28, as you would have seen we have progressed of this sort of program in Asia with agreement signed for all three territories at multiples above our group average. We closed the Sri Lanka deal soon after signing and anticipate completing the other deal, subject to certain condition in the next few months. We can now better forecast management time and financial resources by growing our businesses in Africa and in Latin America.

Slide 29, before handing back to Mikael, I would like to make a few comments on our plans for the use of our growing cash balance sheet since I know this is one of your main areas of interest.

We have been looking at and we are still reviewing various possible targets for external growth in Africa and in Latin America either for acquisition on new licensees as we believe in our proven business model.

In the external growth opportunity we will have to offer both attractive returns and potential leading position of our time. Getting the right opportunity is more important than making the deal. We are aware of the risk of external growth and such deal take time.

We have nothing well advanced at this stage, but we have few opportunities that we continue to discuss with the parties. There is no immediate opportunity, we will either or redeem the high yield bond, which is not tax efficient in Luxemburg, our return funds to shareholders. However, this options need not to be mutually exclusive and we intend to communicate our plans by February 2010 at the time of our Q4 results.

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

Mikael Grahne

Thank you, Francois-Xavier. Overall the Q3 results continued encouraging trends of the two previous quarters, good underlying revenue growth, market share gains, improving margins and strong cash flow.

We believe this is a good performance given there is no sign of any economic recovery in our markets. As you know next week we are hosting a Capital Markets Day in Miami. Since we are not taking into one of our markets this year, we intended to bring our markets to you and the main aims of the day are to introduce you to avoid number of senior managers give some in the previews of our markets and explain how we have developed some strongly differentiated approaches in key areas such as distribution and innovation.

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

Questions-and-Answer Session

Operator

(Operator Instructions). We will take our first question today from Michel Morin from Barclays Capital.

Michel Morin - Barclays Capital

A question on Columbia if I may, I was wondering if you are still seeing any effect from the reductions that we have seen in mobile termination rates over the past year, and then I believe that there was a change in the regulation of the dominant carrier in that country precluding them from charging differentiated tariff on net traffic. So, I was wondering if you had seen any benefit from that at all.

Mikael Grahne

Yes, let me answer that question. The dominant operators need to change the basically tariff plan will only be valid as of December 06. So, as of today, we haven’t seen anything. Then there has been a small change in the interconnect calculation, but it doesn’t have had any material impact on our performance.

As we have said before, we believe progress in Columbia will be done based on our own efforts and any impact going to change hopefully will accelerate those, but at the end of the basis will success for us in that market.

Michel Morin - Barclays Capital

Okay. Just to clarify you said December 06, you mean?

Mikael Grahne

December 06 of ’09.

Michel Morin - Barclays Capital

Okay, that’s great. Then also related to South America, your CapEx has come down significantly and your operating cash flow has increased significantly. How should we think about your capital intensity, I think you mentioned that you had some CapEx plans and brought CapEx in absolute numbers might increase, but should we expect that it would continue to remain at around current levels on a percentage of sales basis?

Mikael Grahne

We haven’t at this stage given no guidance for 2010, because we want to lock in our budgets as late as possible, so that we have maximum visibility. I think in general in ‘09 because the planning for ‘09 was done in September based on July ‘08 data, we entered the year with slightly higher capacity required. So the kind of a CapEx numbers you’ll see primarily in Latin America is a little bit reflection of that. So we’re totally rebuilding the CapEx plan for 2010, based on more tighter capacity.

Operator

We now move to our next question today, which comes from Chris King from Stifel Nicolaus.

Chris King - Stifel Nicolaus

Good morning, just wanted to ask a quick question about Senegal. I know that you noted that there was an MVNO that recently came into the market this past quarter. Just was wondering how we should think about our strategic plan in terms of dealing with that MVNO, whether you had plan on becoming more aggressive or sticking to your plan of really focusing on the more higher value subscribers there, and whether you are comfortable with a mild subscriber loss over the course of the next several quarters there as a result?

Mikael Grahne

Yes, I think you have to remember that we are in conflict with the Senegalese government about the license situation in Senegal. So for the moment we are not investing substantial amount in any CapEx. So our focus clearly in Senegal is the same as in the rest of our markets, on the high value customers. We lost some market share to the new MVNO operator, but these are all over end. So we are not concerned about that for the long-term.

I think in general any new operator in this environment, who comes in, tends to have very low value offers and attracts quite rapidly a large numbers of subscribers but they tend to be of the lower ARPU nature and there are big questions of the stickiness of that over the long-term

Operator

We will now move to our next question today, which comes from Stefan Pettersson from Nordea.

Stefan Pettersson - Nordea

This sort of in lines of the Senegal issue but this quarter you had very solid EBITDA margin in Africa 37%, and you have stated earlier that your expect improvement in the EBITDA margin over time, but now you made drastical jump, which could come from lower subscriber intake but from this level should we expect a continued improvement in EBITDA margin.

Mikael Grahne

Yes, we are restricting the guidance we given before in previous time. Our aim is to be up by the Millicom average, which is mid 40's .You might have some variation quarter-from-quarter but the trend should be upwards given that we are now starting hit critical scale or critical mass in a number of key markets and also in combination with very tight cost control.

Stefan Pettersson - Nordea

Okay thank you for that. Could you also clarify a little bit on what you mean with that margins in Central America should edge downwards over the medium term. What is new in this statement?

François-Xavier Roger

In Central America we have reached such a high level of margin that we believe its somewhat difficult to sustain that level due to the fact or rather combination of competitive pressure to start with and even more probably new taxes on the, I mean, decreasing in interconnection rates that are forced by the regulator. I mean with 56% EBITDA margin where can you go to moving, either we can maintain that level, but I am not sure we will in that position or this may erode slightly over time, but we don’t see any threat for the Millicom margin [after all] due to the fact that the free cash picking up and we expect that in the short to medium term. We can maintain EBITDA margin overall at current level.

Stefan Pettersson - Nordea

So, the overall margin should be maintained at the 45%.

Mikael Grahne

Of course result is, yes.

Operator

We will now move to our next question, which comes from Ric Prentiss from Raymond James.

Ric Prentiss - Raymond James

I want to focus on this data comments that you put out there and talk a little bit about the datacards as far as where you see the cost that and how efficiently that can deploy into [match] market scheme over time. Then also when you mentioned you would be spending some more 3G in the past it given the success you have seen with aircards. What exactly is involved physically, when you increase capacity is it antennas, is it radios, just trying to understand what might be involved?

Mikael Grahne

Yes, it’s basically two things here. The datacard costs itself have come down from about $200 card two years ago to now below $50. So, that of course has helped us to put more of these in to the marketplace. I think what we are waiting for on the compute side its some kind of an inflection point, where more customers could access the computer. In the mobile world, when we really do the penetration is when the good handset came down to $25. So we believe that maybe $150 to $200 could reflect a similar point on the broadband side.

So, if the cost of the computer really would come down, a laptop to the $200, we think that would drive increased penetration because there is a massive strength of demand. Second, the investment is the famous we would do from voice base with similar radio and antenna and whatever equipment required in all different in that respect.

Ric Prentiss - Raymond James

Okay. Then in Africa, you mentioned that you’d be interested in still, but growing that business in the medium and long-term. I’m just wondering how you look at that and make the decision on when to push the gas as far as spending more money in Africa?

Mikael Grahne

Well, we take the same approach in Africa we take across all Millicom markets. We don’t from a planning point of view, build any expectation of an improved economic environment. For example in the budget, we are opposing to get for 2010. So, we basically have to therefore make plans on which we can get the right returns in this environment and continue to drive the market share as we done in the quarters in 2009. So, continue with the same strategy as we have for the moment.

Operator

We will now move to our next question, which comes from Sven Skold from Swedbank.

Sven Skold - Swedbank

I was just wondering having seen the subscriber intake figures for the whole group in the quarter, I would actually have assumed that margins should be slightly higher for the group as a whole. My module might not be correct, of course, but I would have assumed more than 400 maybe in EBITDA in the quarter. My question is, is that the growth of the higher churn that you mentioned? Is it highest acquisition cost because you go for high-value customers or can you describe the general terms in the group?

Mikael Grahne

Yes. I think it’s also the combination of what we called gross new, the amount of gross new and the sale to the market. So, short-term we will have, because our focus on the higher end we will have basically more initial churn, but long-term also, the gross new is going to go down for us, which will reduce our sales and marketing cost, which by the way is quite low for our prepaid customers.

Operator

We now move to our next question today, which comes from Jan Dworsky from Handelsbanken.

Jan Dworsky - Handelsbanken

Thank you. I just want to check your comments in relation to 2010 there are no improvement in economy. So as you say do you expect that environment to remain the same or the groups to remain the same in the next year, is that implying that you expect to see the same of kind of organic growth that you are seeing next year?

Mikael Grahne

Yes, pretty similar performance trends. We are looking at similar performance trends.

Jan Dworsky - Handelsbanken

Then also another question in relation to Senegal, in fact the subscribers shrank and we have fewer subscribers ending September compared to end June. Did that have for the African group, a positive or a negative impact on margins in Africa? Senegal.

Mikael Grahne

That basically was a result of a significant churn that in itself did not have any impact on the margins, just basically customers disappearing, so no margin impact on that.

Jan Dworsky - Handelsbanken

Then you said that you expect the customer intake to remain at the one point

Mikael Grahne

Yes. On this level. Because of our focus on the higher quality as you can see from, even if you look at our ARPUs in local currencies, we were down only slightly less than, slightly more than 1% between Q2 and Q3. Then in Q1, we were down 9% in local currencies versus Q4 and in Q2, I think we were 2.4%. So, that’s clear signs of our focus on the higher value customer driven by our value-added service strategy is working and we intend to continue on that trend.

Jan Dworsky - Handelsbanken

Also detail on Rwanda, should we assume that they will adding customers this year or it’s the customer intake in Rwanda is going to start next year?

Mikael Grahne

No, there should be some customers coming in this side of the year.

Operator

We move to our next question, which comes from Kevin Roe from Roe Equity Research.

Kevin Roe - Roe Equity Research

A couple of questions. Shifting to Central America, in El Salvador you posted a slight subscriber decline. How much you attribute to the economy versus the competition and should we expect that a resumption of growth in this quarter.

Mikael Grahne

I wont comment on this quarter but also in El Salvador we tightened up a little bit, our the subsidies we give to our new subscribers, which also led to a lesser subscriber intake. So basically what we are doing is, progressively tightening up the basic subsidies that we give in order to again put the focus on the higher end customers.

Kevin Roe - Roe Equity Research

Did the market overall grow in the quarter?

Mikael Grahne

Well I think there was a slight decline for the market overall in the quarter.

Kevin Roe - Roe Equity Research

Incurred for subscribers.

Mikael Grahne

Yes.

Kevin Roe - Roe Equity Research

Okay, on Senegal, you mentioned you haven’t, again you mentioned that you haven’t been spending on CapEx in that market until there is, un till you know what’s going on with the license and an update there on the license and the arbitration. Sort of calendar would be helpful. Since the license disputes in Senegal have you reduced your marketing spend in Senegal, also?

Mikael Grahne

I think its been broadly intact, because our objective is to maintain our market position in this environment and still be able to basically communicate with our customers. We have slowed down although, we had a quite aggressive CapEx plan but naturally we haven’t implemented in this environment and we are trying to shift, when we run into capacity bottlenecks we still on short-term able to manage by pricing. So, basically we price up that area and then you reduce pricing somewhere where you have more capacity. So, we think we can keep it going for some time on that principle.

Kevin Roe - Roe Equity Research

So not since the beginning of the year, we didn’t lose any market share in Senegal and it’s important to understand as I wonder however last two months, when we saw the market that shrunk by about 8% in over the months of August and September.

Mikael Grahne

What we have in general across the market is that we see lower end customers disappearing. So, there is a trend of people at the lower end not being able to anymore afford the mobile services and they disappear or if its multi-SIM user of at the lower end they basically won’t stay with one operator. So, that has a quite big impact on the churn.

Kevin Roe - Roe Equity Research

That’s helpful and on the license negotiations with the government in general and update would be great.

Mikael Grahne

Progress is slow. Don’t expect the quicker solution. Latest update is that the Arbitration Court in Washington asked the local court in Senegal to cease progressing the local case there and the Senegalese Court basically agreed to that. So, they said they would postpone pursuing any local court issues until December. So, that’s the latest news.

Kevin Roe - Roe Equity Research

When is the next arbitration hearing in the US then?

Mikael Grahne

I think it’s in the next two months.

Operator

We will now move to our next question today, which comes from Peter Nielsen from Cheuvreux.

Peter Nielsen - Cheuvreux

Just one question related to Amnet, please. It was seem to me that throughout this year margins at Amnet have been somewhat below what they were at the time of purchase or leased, but they were indicated to be at the time of purchase. Is that correct and why is that?

Mikael Grahne

Yes, that is correct. Firstly, we had restructuring charge. That had an impact on the margin in Q1 and some of it in Q2, and then we have also reinvested a little bit more in sales and marketing efforts and customer service effort so, in order to drive more revenue growth. We think over time we will be able to improve gross margins.

François-Xavier Roger

Likely what we have done as well especially in Q3 is instead of investing in CapEx in order to improve the operating free cash flow, we have favored the leasing of the network rather than the investment for a new and extended network, which puts a little bit of pressure on the EBITDA margin, but which is reducing CapEx and improving operating free cash as a consequence.

Operator

We will now move to our next question, which comes from Andreas Joelsson from SEB Enskilda.

Andreas Joelsson - SEB Enskilda

Two questions from me. First, given the strategy of aiming for loyal and high revenue generating subscribers lost growth in VAS and 3G revenues, do you believe in local currencies that we have reached trough on the ARPU?

Mikael Grahne

Well, you can clearly see that we have improved or arrested the decline towards 1.4% in the last quarter versus Q2. Our ambition would be and this is not the guidance, but our ambition would be to be able to stop that decline and over time build on the ARPU by new services and the shifting customer mix. That’s what we are working for.

Andreas Joelsson - SEB Enskilda

Perfect thanks and then just on our comment on the multi SIM card. Was that only valid for Senegal or is that valid for the group?

Mikael Grahne

No, that’s valid for the group in most countries you have penetration between I would say 15% to 30% of the lower end might be a multi SIM users.

Operator

We now move to our next question which comes from Bill Miller from J.M. Hartwell.

Bill Miller - J.M. Hartwell

Couple of -- three questions actually. Can you give us come idea of how deeper penetration you could achieve with VAS some 30% to 50% or more of your total revenues?

Then secondly, can you talk little bit when you talk about 2010 and talk about the continuation of the current environment and growth rate etcetera, but are you counting in there any impact from Rwanda, you have to getting a license in Costa Rica. Could you update us on that and would that be included in your calculations, either of those two being included in your calculations will throw some upsides to the equation. Finally your thoughts and say or comment on it, but at least you could define us for it when you say return to the shareholders some of the excess capital.

I know you have said exactly it would be at a one to one , you are now at 0.9 to 1 before you even achieved the results or we get the cash from sales or the other entities from Southeast Asia. So if you could update us on that will be very helpful. Thank you

Mikael Grahne

Okay, thank you for that. Bill will address two first questions and François-Xavier will address the last one. Value-added services is the best performing market we have it in Paraguay, which basically by skilled marketing and great consumer insight we are running at about 30% of recurring revenues. Our mid-term target for the group as hole is to get to 25% within long-term we should be able to in most markets of this Latin America to be in similar 30% levels as we have in Paraguay.

Second comment about 2010 as we said we are still building the plan. We are not anticipating any economic improvement in our planning and what our aspiration at this stage would be to basically hit similar kind of a performance growth numbers in 2010 as we have basically encountered in 2009 excluding any new markets or excluding our Rwanda.

François-Xavier Roger

So the return to shareholders, so even with $1billion of cash today we have excess cash because we believe that in order to secure our liquidity we don’t need more than $500 million of cash. Regarding the net debt to EBITDA ratio we have been for sometime at ratio of one we are now below at 0.9 and indeed we are going to go below 0.9, once we will get the proceeds from Cambodia or Laos, plus the cash flow generation.

To be very clear though, we don't have any objective and we didn't set any objective internally to be below one. So we are quite comfortable with one we don’t want to be above two either. So I mean the net debt to EBITDA ratio is been an objective in itself. What we have to decide first is what do we do with the cash proceeds then first to puts things in order we are looking at the opportunities in terms of external growths, which is a process, which take some time that we are currently carrying out. If we don't find any new opportunity as I said earlier then we will look the returning the cash to shareholders either in the form of dividend or share buyback and decision will be shared with everybody at by February 2010 at the occasion 2009 full year results.

Bill Miller - J.M. Hartwell

One follow-up the VAS situation, are you seeing any competition from any of your other competitors in the markets, where you currently have that. What is the response in to your operators?

Mikael Grahne

Sorry Bill, Could you repeat that question. I didn’t get it clear.

Bill Miller - J.M. Hartwell

I’m sorry. I wonder whether you can give me some idea, give all of the some idea, what the competitive response to that has been in the market were you currently offer?

Mikael Grahne

So far we haven’t seen any massive response to that, but every thing we do can easily get copied over time. So, our challenge is to just keep on staying ahead and in fact we are basically creating two innovation teams one based in Africa and one based in Latin America, really to ensure that we stay ahead in the whole VAS arena or any other growth opportunities that this industry could offer.

Bill Miller - J.M. Hartwell

Do you think you’re going to be able have similar result in Africa over time or more immediately can you get to market penetration of even 10% or 15% given the economic dynamics there?

Mikael Grahne

I think it’s going to be slower over time in Africa. It’s going to take a longer time to do that. It will be linked to the return of good economic times for that to accelerate.

François-Xavier Roger

So there is lot to be done in voice in the mean time.

Bill Miller - J.M. Hartwell

Right, okay, and margin improvement coming from voice.

Mikael Grahne

Right

Operator

(Operator Instructions). We will now move to our next question today, which comes from David Kestenbaum from Morgan Joseph.

David Kestenbaum - Morgan Joseph

Can you just update on Ghana, I see the performance it came a little bit better nowhere near, where it once was, but just again talk about the competitive dynamics there?

Mikael Grahne

Yes, we are doing relatively okay, as you can see there in the earnings release, in local currency we are holding onto our ARPU. We are losing subscribers at the bottom end. That’s okay, because again same strategy is to focus on the high end.

I think that in still continued strong investments by Vodafone and trying to increase their market position as well as from Zain. So, it’s a highly competitive market. The CD basically had deteriorated very rapidly. It got one stage it was down 60% versus year ago. In the last month there would be some stabilization on the CD to the dollar exchange that hopefully can provide a little bit stabilization to the market over time, but with that of course, we have also now got stronger inflationary environment that we as an industry we have to learn, how to operate in. So, highly competitive, and no sign yet of an economic turnaround.

David Kestenbaum - Morgan Joseph

Okay and then could you just give us a little bit of color, when you say that you focused on the higher value customer. Is that all related to promotion dollars that you’re spending or the other things that you’re doing?

Mikael Grahne

No. We primarily get that from our focus on value-added services, but typically are things that heavy users aspire to. So, basically what we have to do is to continue to invent programs and basically services that people, who use the mobile phone a lot, appreciate. So, it’s basically by service delivery that we get this advantage.

David Kestenbaum - Morgan Joseph

Okay. So, on the 3G service side that you’re offering functionality, your competitors aren’t at this point?

Mikael Grahne

There have to be similar offerings, I think we are probably working the market better. We spent a lot of time educating our people. We tend to have sort of in our customer service offices some young kids with ponytails, who can help the young customers, who get familiar with how to use the services. So, I think it’s also how you work the markets, where we work.

Operator

Thank you, our next question today comes from Alexander Vassiouk from Morgan Stanley.

Alexander Vassiouk - Morgan Stanley

Just first of all on African margins. Can you just elaborate on what particular country in Africa is driving margin improvements or is it a trend across the board?

Mikael Grahne

It’s general assumption across the board but we had a quite strong improvement in DRC. As you may recall this month, many radio based stations in the east, wherever the economic activity primarily collapsed with the mining industry there and have now been focused in really strengthening our position is what we call that KBC area which is Kinshasa, Bas-Congo, where we are building market share and by doing that we basically have increased our scale in that market area that was down cost and we also had savings on fuel cost in the east as well as transmission cost from the east. So, DRC has been a key contributor to that margin growth.

Alexander Vassiouk - Morgan Stanley

Okay, but the, have there been any businesses where you have seen some meaningful deterioration in the margins or are they overall stable?

Mikael Grahne

They are overall stable. Overall stable or improving.

Alexander Vassiouk - Morgan Stanley

Okay, good. Then also, I was wondering about the margins in Colombia. If you can give us any update, because historically you mentioned in your press release, is where you running in terms of profitability. So, may be you can just give us a broad idea where the direction is, its improving or stable or deteriorating?

Mikael Grahne

In Q3, there was a marginal improvement, but as we said in the previous conference call, we are for the moment trying to invest a little bit more in sales and marketing to see if we can accelerate the revenue growth. So our expectation for the Q4 margin, it could be at either similar level or slightly down. We going to find to see if we can accelerate revenue growth by slightly, short- term more investment in sales and marketing.

François-Xavier Roger

The main driver of the improvement in EBITDA margin in Columbia will come from the revenue growth and marketing growth, but we have been stabilizing the margin in Columbia for probably more than six months now at the level, which is north of 20%.

Operator

Our next question today comes from Soomit Datta from New Street Research.

Soomit Datta - New Street Research

Just couples of thing please. In Honduras can you tell me what exactly the tax cut was, I think you sort of quantified the revenue impact, but I just wanted to know what exactly that tax change, I think its increased tax or rather what that tax change was? Then that’s the first thing and secondly in Central America are there any to the best of your knowledge, are there any new taxes sort of pending or are there any perspective changes to the termination rate regimes which your aware of in the next 12 months say?

Mikael Grahne

Okay, to comment on the Honduras its $0.03 per incoming minute and the tax was applied as of July 27. We believe its probably about a $1 million, of monthly revenues away that’s probably the impact. Second there are no active dialogues for the moment except in El Salvador there is possibly of a interconnect change, but this stage we don’t know exactly what it could be and what the impact of that would be to our business.

Soomit Datta - New Street Research

When that might be of interest please?

Mikael Grahne

Possibly in the next few months or then as of January 1st.

Soomit Datta - New Street Research

Okay. But there is no nothing major horizon that you will--

Mikael Grahne

But that’s no guarantee that tax wouldn’t come. I mean that there is no active discussions.

Operator

(Operator Instructions). We will now take a follow-up question from Jan Dworsky from Handelsbanken. Please go ahead.

Jan Dworsky - Handelsbanken

Yes, I just want to come back to the performance in Congo are so close to 50% sequential growth from Q2 to Q3, revenue-wise of course there you have the function of all this moving the base station and then attracting more high APRU customers or?

Mikael Grahne

Yes, relatively there are much more economic wealth in the Kinshasa Bas-Congo territory than in the East. So, moving the same radio equipment into the Kinshasa territory automatically gave us an uplift on the revenues as well as an improvement of the margins as I outlined before.

Operator

Our next follow-up question comes from Stefan Pettersson from Nordea. Please go ahead.

Stefan Pettersson - Nordea

Yes, it relates to you said that there is a potential interconnect changing El Salvador due to states, how your traffic is in El Salvador? In Colombia we saw major impact in the EBITDA margin due to that we had more incoming than outgoing calls?

Mikael Grahne

El Salvador because we are market leaders, we have the vast majority of course are on that. But the current interconnect rate is very high in El Salvador, I think its approximate $0.18 and given the high value of that any sort of change we will have some impact or could have some impact on our revenues.

Stefan Pettersson - Nordea

So it shouldn’t have a direct impact on the EBITDA margin?

Mikael Grahne

Not directly. I mean today when somebody makes a call out from our network, we have an $0.18 cost and somebody makes a call in. We have an $0.18 gain, so they should not perhaps be an EBITDA impact, but possibly a revenue impact.

Operator

Thank you, as we have no further questions, I would now turn the call back over to our Host today Mr. Mikael Grahne for any additional or closing remarks.

Mikael Grahne

Thank you, operator. I would just like to thank you for joining the call today. We look forward to seeing many of you in Miami. So, thank you and good-bye.

Operator

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

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