Millicom's (MIICF) CEO Mauricio Ramos on Q1 2016 Results - Earnings Call Transcript

| About: Millicom International (MIICF)

Millicom International Cellular S.A. (OTCPK:MIICF) Q1 2016 Results Earnings Conference Call April 26, 2016 8:00 AM ET


Nicolas Didio - Head, IR

Mauricio Ramos - CEO

Tim Pennington - CFO


Thomas Heath - Danske Bank

Stefan Gauffin - Nordea

Sergey Dluzhevskiy - Gabelli

Michael Morin - Morgan Stanley

Chris Grundberg - UBS

Bill Miller - JM Hartwell


Good morning and good afternoon, ladies and gentlemen. And welcome to the Millicom Financial Results Conference Call. Today’s presentation will be hosted by Chief Executive Officer, Mauricio Ramos; and Tim Pennington, Chief Financial Officer. Following the formal presentation by Millicom’s management, an interactive Q&A session will be available.

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

Nicolas Didio

Thank you. And welcome everyone to the Millicom 2016 first quarter results presentation. Today’s presentation materials can be found on our website Before we start, I would like to remind everyone that the Safe Harbor Statement apply to this presentation and the subsequent Q&A session.

With me today on this one-hour call are our CEO, Mauricio Ramos and Tim Pennington, our CFO. I will now hand over to Mauricio to give an overview of our Q1 ‘16 results and operational performance and strategy, after which Tim will take you through the financials, and we will finish with a Q&A section.

With that, I hand over to Mauricio.

Mauricio Ramos

Thank you very much, Nicol. Good afternoon or morning to all, and thank you all for joining us today. I am here with Tim in Stockholm, and you all know Tim. I want to thank DNB for hosting us today here in Stockholm.

Let’s first start with a brief and probably expected update regarding the investigation into potential improper payments on behalf of our joint venture in Guatemala, which as you recall, we reported in October of last year. In short, the investigation remains ongoing and we continue to fully cooperate with the authorities. That is all there is for us to say for now. There is no additional information for us to report today.

So, let’s now focus on our Q1 results. There are three key clear messages for our call today. One, our Q1 results are on track and thus we are happy to confirm our 2016 full-year guidance; two, we continue to strategic rebalancing of our revenue mix, said differently, more and more of our revenue is not coming from the high-growth businesses where we have placed our strategic focus, mobile data, our home business and our B2B business; and three, we are focused squarely on executing this simplified strategy, and we will share some further detail with you today.

Let’s get right away to the key numbers and the punch line for Q1. In Q1, service revenue was $1.435 billion. This represents organic growth of hopefully 1%, excluding DRC, which is in line with our expectations for the first quarter, and in line with our guidance for the full year. If you recall, that guidance is for mid-single digit service revenue growth.

Adjusted EBITDA for the quarter was $550 million, this is a 7% year-on-year organic growth. It is also in line with our full year guidance, which if you recall, is mid to high-single digit EBITDA growth for the full year.

So the punch line is simply that our numbers are pretty much what we expected them to be for Q1. And thus, we are happy to reconfirm our full-year guidance. Tim will walk you through Q numbers in more details in a few minutes.

I want to first focus for a minute on the strength of these results in the area where we have placed our strategic focus, mobile data and the cable business. If you look at the top part of the chart on this slide, you clearly see that voice and SMS are becoming legacy businesses. They indeed decreased by almost 13% from a year-ago and that’s in LatAm. They are now only about 30% of our business and are down from 36% a year-ago. Over time, voice and SMS will increasingly be bundled with our mobile data offering, which is of course, and as we have told you, are future.

Indeed, what really matters strategically and what will make our revenue profile deliver continued growth in the future is our continued ability to reconfigure our revenue mix towards our area of a strategic focus. One, monetizing mobile data; and two, building a fixed home and B2B business, as you have heard we say up to now.

So, the big question for Q1 is how much progress did we effectively make on that front? That is our future businesses during Q1. The answer which you can see on this chart is like a bit. Mobile data, our key focus grew 28.6% in Latin America this quarter and 30% for the Group as a whole. Mobile data in Latin America alone now represents around 20% of our total service revenue, up from 15% a year-ago.

Our cable segment, our second strategic focus, which includes our home and fixed B2B businesses grew a very strong 11% in Q1, and it now represents nearly 26% of our total service revenue. The point we want to reinforce here is that our strategic focus is well-placed. We build and monetize in future mobile data business, we build and monetize a fixed network for the future. The legacy business of voice and SMS will no doubt become a feature of our data bundle, but we are building a high growth fixed and mobile data-centric business in parallel. So, the two key points here are one, that we are half way through that journey. In Q1, we dropped close to 50% of our revenue from mobile data and cable already. And two, that we are driving that mid-single digit service revenue growth while we are successfully undertaking this rate conversion, not a small thing.

So, let’s dig down a bit on the key elements of one of those components, our mobile data performance in Q1 and explain to you what is driving that 30% year-on-year mobile data revenue growth for the Group as a whole.

The three pillars to that should be no surprise to you. One, we are growing our base of smartphone users. This is a valuable subscriber data that drives our mobile growth. Year-on-year, we added over 6.8 million new smartphone subscribers; smartphone subscribers are up to 21 million in Q1. And in Q1 alone, we added 685,000 new smartphone subscribers, over 0.5 million of those came from Latin America. Two, we are growing data usage. We provide more digital services, channels and products to our customers. And as they connect more to the world with data, year-on-year usage has increased by 23%. Average monthly consumption per subscriber is now slightly over 1 gigabyte. And three, most importantly, we grow data ARPU. This is all about tight discipline and smart tactics from data pricing, and you will hear me talk about that more in a minute. More usage at lower price point but with a combination that increased mobile data ARPU 11% year-on-year. So, if you put all of this together, you will see how mobile data revenue grew 30% year-on-year and now represents about 21% of our revenue mix across the Group.

Secondly, and as we have said often, we continue to build our fixed network. This supports our high growth home business as well as our fixed B2B business, which effectively uses that network. I have already indicated that our home and fixed B2B business in Latin America together represent over 25% of our business and that they grew 11% on a combined basis in Q1. The home segment, however, alone grew almost 14% in Q1, and this is why we continue focus on building our fixed network for the future. During Q1, we added 131,000 new HFC homes passed and we decommission about 28,000 copper homes in Colombia. So, as we have told you before, we build new homes and we modernize the legacy ones.

Three additional key points for you to note on this page. One, our network now covers 7.7 million homes, 6.5 million of which are already state-of-the-art HFC cable networks. Indeed, year-on-year, we have added 748,000 HFC cable homes across our footprint, but of course, we continue to decommission actually some of the copper homes. The second point here is that we are on track to end the year with a network covering 8 million home passes already. And that puts us on track for our 10 million home pass mid-term target that we articulated about a year ago. And the last point here, point number three is that our build is very well-spread across our footprint. Said differently and perhaps most importantly, it means that the opportunity is the same across all our markets for our home business and for our B2B business.

Moving on, many of you have indicated to us that you would like to have a bit more color on our country operations in our portfolio. So, we thought we could use in this Q1 to do a little bit of that today. Let’s start with a quick overview of how we see and manage our portfolio. We think of it as one, a portfolio where six countries represent almost 85% of their proportionate EBITDA to us, that’s before corporate costs, of course. And two, these six countries are fairly balanced, quite well-balanced, in their proportionate EBITDA contribution to us. This is how we see our business. Of course, some countries have more revenue growth or margin expansion opportunities than others, whereas others have stronger cash flow generation today. But this is a good picture of the portfolio today as it contributes EBITDA to Millicom. And this is a good context, but we can provide to you a few highlights across the specific parts of this balanced portfolio.

In Colombia, to start with, mobile pricing competition remains strong with voice and SMS declining nearly 16%. No news here; we have highlighted this before. In Q1 though there was also the scheduled MTR cut of 42%, which took effect in January. No news either there, but it is a Q1 event to note. No doubt that weakened consumer confidence in Colombia is also affecting our mobile business there. And we’ll talk about that more in a minute. But note that our mobile data business in Colombia, like everywhere else, grew strongly during Q1 at a 12% rate and that our home business, as well, continues to grow strongly at over 80%. Lastly, note that we have now just recently launched our DTH service in Colombia with nationwide footprint coverage. The growth in the Colombia B2B business was particularly soft in Q1, and this had an impact in our overall service revenue growth for the whole Group, as Tim will explain in a few minutes. This effect however is temporary, as it was largely caused by a natural slowdown in public sector spending, which was delayed as the new elected officials came to office in January, after the regional elections of Q4 last year.

Moving on to Paraguay, we have regained strong momentum there. Service revenue grew 7.1% in the quarter and that growth was well-spread out across all business units. Mobile has indeed rebounded in Paraguay, growing now 3.5%, and as you have heard me say, this is all about smart pricing and disciplined price management. Said differently, increasing ARPU on the back of data ARPU, a repeated story of us. And as a result of that, mobile data grew 39% year-on-year in Paraguay. Note also that in Paraguay, we just launched a few weeks ago our LTE network with 40% coverage at launch, this is on the back of the 4G license that we attained at the end of last year. We believe that we now have the strongest networking in Paraguay and that we are well-positioned for mobile data monetization.

In home, we have also sustained growth in Paraguay. Here, it’s all about adding volume to the newly built network but also about driving ARPU via cross-selling and up-selling. If you recall, right after our last call in February, we announced the acquisition of Cable Parana, a cable system servicing the second largest city in Paraguay. We expect to attain regulatory approval sometime later in the year.

Now, note that Bolivia is also picking up strong momentum and it’s a key part of our portfolio as well. Service revenue growth in Q1 was strong at 5.5% with all units performing well. Home grew 39%, the B2B unit grew nearly 25%, but note that in Bolivia, in particular, these units are in their very early stages of growth. Simply put, penetration levels for pay TV and broadband in Bolivia are very, very low. On the mobile side however in Bolivia voice conversion to data was also positive. This is a result of the fact that we have simplified our product offer in Bolivia to only a few products, and we are now testing fixed-mobile convergence offers, which are testing quite well. And note as well that our LTE deployment in Bolivia is progressing quite successfully. We now have more than 0.5 million LTE subscribers there.

In other Latin American countries, mobile growth was lower in Q1 as voice and SMS eroded faster. So, the speed of our reconversion strategy there will need to be increased, even if our mobile data revenue there grew 31.6% and even as home, fixed B2B and MFS businesses all grew strongly in the year in this part of the world.

Lastly, we wanted to give you some color on our product roadmap as it drives our strategic focus on A, monetizing data; and B, building the home franchise. So, there are three key updates that we want to share with you on our product portfolio today.

One, app by app; this is one example of the smart pricing tactics that I was alluding to earlier. Monetizing data is all about driving consumption at the right price point. As we discussed in February, our time-based approach to selling data by app packages has proved very successful in driving ARPU up, in all the markets where we have tested it. If you recall, it provides users with all utility [ph] access to the app of their choice for a limited period of time. In early May, we will launch this innovation massively in El Salvador, as our first massive deployment and other markets will of course follow.

Two, an enhanced prepaid user experience. It is also strategically important to facilitate data consumption for users, particularly in a prepaid environment. If a consumer runs out of data balance and we can confront them immediately when this happens without them leaving the application, it significantly enhances their usage experience and it leads to an increase in data usage. This again is particularly important in predominantly prepaid markets, like the ones we’re operating. Therefore, we’re working in a very collaborative manner with leading players such as Google, creating innovative ways to enhance user experience and generate greater content consumption while the subscriber remains within the app. We will be deploying these innovations during the second quarter. Simple concept here is that the user purchase is a gateway to data monetization in a prepaid world.

And the third innovation that we would like to share with you in our roadmap is Tigo Play. You may have noticed that during Q1, we launched Tigo Play in Guatemala and in Colombia and other markets will of course follow shortly. Tigo Play accomplishes two strategic goals for us. One, our Tigo Star pay TV consumers can now watch the content they buy from us on an anytime, anywhere basis on any internet enabled device. This strengthens our product offer and significantly enhances consumer experience and consumer stickiness. And two, strategically, it is paving the way for our next generation TV product, which we continue to develop, as you with Tigo.

So, all in all, to wrap it all up, we hope we have been very crisp in our messages today. One, our strategy is simple, as we articulated it to you about a year ago, and we are exclusively focused on it and it is already driving meaningful results. Two, this strategy is quickly rebalancing our service revenue mix away from the voice and SMS legacy business and into the high growth mobile data and cable businesses. As we told you, we wanted to do it strategically. Three, our Q1 results put us on track to deliver our full-year guidance, while we execute on that reconversion of our revenue mix. And lastly, but just as importantly, we also continue to optimize our capital allocation. We closed last week on the DRC transaction, which we announced just before our last earning call. And this is very much in line with the capital allocation plan we have discussed with you, which is a perfect position to hand over to Tim, who will give you more details precisely on this and on the Q1 numbers.

Tim Pennington

Thank you, Mauricio, and delving into the numbers before we move on to Q&A.

There’s three key things, mainly in Q1, and underlying revenue growth was solid, we did see some top line weakness from the macro and competition in Colombia, but our core strategy in monetizing data and building cable is firmly on track and we got investment. [Ph] Secondly, the margin is improving. We’ve seen the benefits of management’s actions coming through to margin expansion, pretty much across the board. So, finally, we’ve set a course to improve the cash flow and that’s through discipline in our capital allocation, and in the next quarter we can report the progress there of the strategy after completing, plus the refinancing of our Swedish bonds on improved terms.

So, let me start with the macro environment. And in Q1, we’ve seen stability in exchange rates, which is thankful. The Colombian peso has strengthened from a peak of 3,400 to just under 3,000 today, but this weakness is feeding through to weaker growth and higher inflation. We remain convinced by the long-term outlook in Colombia, but it will continue to be tough during the remainder of this year. And this is a similar story in Paraguay. There’s been a temporary strengthening of the FX rate in this quarter, but that is masking a weaker economy, it’s impacting us on the B2B side and in postpaid market. Having said that, there’s a lesser impact in Central America, and Bolivia is positively booking regional trend, growing very strongly.

The royalty effects has been more stable in Q1, our headline reported revenue was 8.5% lower than the first quarter of 2015. This is because we strongly could flush through the FX impact that largely occurred in the second half of 2015. Relative to organic growth of 2.1% and now this excludes the DRC and revenue coming from the acquisition of Zantel. We are again very strong in Africa, it was up nearly 12%, however, with more balanced contribution this time. Most of the African businesses are now growing at a double-digit rate.

If I move on to service revenue and look at the service revenue progression, this excludes handsets, but we have now also excluded the DRC, which is why -- this is a little from the previous versions, we certainly done [ph] a good job.

As you can see, we’ve had solid service revenue growth of 4.1% year-on-year. Africa growing at 12.1% on an organic basis and LatAm growing at 2.9%. This is a little weaker than Q4. There’s a bit of seasonality in these numbers, with these following in Q2 and prior years, Q1 this year but I also think that we had a great Q4, especially in LatAm where we saw over 900,000 net adds. So, it’s perhaps a little bit unsurprising that we saw some slowdown in the sales growth in the first quarter.

As the zoom in chart shows, this explains the movement from Q4 to Q1, and you can see most of the impact came from Colombia also from Q4 to Q1. We held up pretty much on mobile and in fact, most of the impact in the quarter was in fact from the fixed side of the business and mainly from fixed B2B, as Mauricio highlighted bit earlier. Q1 is always slower for us, and this year around we have a number of contracts that weren’t signed, they make a difference. Our expectation is that this will recover in the second quarter and we’re not changing our internal view of the full year outlook for B2B in Colombia.

If I look at the LatAm mobile growth excluding Colombia, it was a little bit mix. Paraguay recovered well, posting 3.5% mobile growth against a fall of over 5% in Q4. Whilst in El Salvador, we experienced further slowdown as the impact of the security tax started to affect customer buying decisions.

As noted, Africa posted strong growth and several of the businesses in particular Ghana and Senegal showed some good recovery and strong double-digit growth. Tanzania remained strong despite the new competition there. And particularly pleasing result, MFS business growing at over 30% year-on-year.

At EBITDA, we had another strong quarter, up 7%, as Mauricio said, comfortably ahead of our revenue growth. And we saw organic absolutely EBITDA growth in all markets with the exception of Guatemala, El Salvador and Chad. And Guatemala was down mainly due to bad debt charge we took on the public contracts that we highlighted in Q4. If we excluded that, Guatemala would have been up 4.2% in the quarter. El Salvador is suffering the impacts of the securities tax that I just mentioned a bit earlier and the wider security situation we see there. Whilst Chad had actually a strong recovery, but it wasn’t quite enough to outperform the first quarter of last year. Finally, the relentless focus on corporate costs once again contributed to the improvement in underlying EBITDA. Our corporate costs were down $17 million against Q1 last year.

So, turning to the margin, pleased with this. The overall Group margin was 35.5% in Q1 that includes Zantel, which was only acquired at the end of 2015, plus $8 million of one-off costs. So, if we strip that out and exclude the DRC, our organic margin was 36%, as we show on this chart here. Strong improvement, up 180 basis points. And it’s also worth noting that our service revenue margin was also up by 110 basis points to 38.3%.

So, if I look at LatAm, they contributed 70 basis points to the margin improvement. That is seeing the benefits of the integration of Colombia starting to bear some fruit. The EBITDA margin in Colombia was 29.5% in Q1. So that’s 170 basis points up on the same quarter of 2015.

In Africa, we saw a good EBITDA performance. Margin improved to 23.1%, and that is after regional costs. If we exclude regional costs, the margin was 25.8%. Main driver here is the absence of the DRC in these figures. For us, the Ghana has improved its margin considerably during the course of the last couple of quarters. Looked at differently, and we saw 11% reduction in our OpEx compared to Q1 2015 and through a combination of lower corporate costs, currency impact, and the benefits of the efficiency programs that we put through, so our cost efficiencies added 1.2% to gross margin in Q1.

Let me turn to the P&L review now and just look at a few of the items at that slide. Depreciation and amortization a little lower, benefited from FX impact there. The movement in others is all about an FX gain in this quarter against an FX loss in Q1 ‘15. And the associate line has got a couple of one-off items in it, which we stripped out from adjusted EPS. The interest charge is lower than last year as we had the El Salvador bond redemption last year; like-for-like, it is up $7 million on a high level of debt. P&L tax charge is up on higher net profit in Colombia. And as mentioned early, DRC now in household [ph] was treated as a discontinued operation in the first three months of this year. That left us with adjusted EPS of $0.22 in the quarter.

Quick look at cash flow, now a familiar cash flow chart. The main point to note here is the big catch-up on cash CapEx. And now, this happens every year as we settle in voices on items that the operations booked into the balance sheet on the fourth quarter. You may recall that we had more than $100 million of difference between balance sheet and cash CapEx in 2015. And what you see here is largely the unwind of that. We also saw working capital, a big outflow for similar reasons; it isn’t in line [ph] with our Q1 last year and I expect it to normalize as we go through the year.

Cash taxes, much lower than the P&L chart in this quarter as to refund the other payments in Colombia that I mentioned in Q4. Just to state the obvious here, it’s very hard to draw a conclusions from the first quarter cash flow. And as Mauricio has said in his opening remarks, we feel comfortable with the guidance that we have given.

Looking at net debt, we ended the quarter at $4.4 billion but the proceeds from the sale of DRC came in after the quarter. That would take our net debt down to $4.2 billion and that represents a pro forma net debt to EBITDA ratio of just under two times. If we look at the debt profile and as I mentioned in my introduction, we’ve been working hard to rebalance our capital structure. The Swedish bonds refinancing effectively pushes about $200 million of debt to mature into 2019 that would have otherwise matured in 2017. And as you know, we’re pleased we managed to do that deal. And we did that deal, so 20 basis points tighter than we would be able to refinance. The slide shows we’ve only got $400 million of financing maturing in 2018. And with the DRC proceeds, we’re sitting on cash of around $1.1 billion, before we make our dividend payments in May. Pretty much all of the debt that is [indiscernible] maturing before 2018 is local country debt in a number of countries, no single concentration. So, we’re pretty comfortable with that profile.

So, before finishing, I want to show you another [ph] side of the Group’s financial goals as outlined in our long-term cash flow model. We said, as we improve the operating cash flow of the business to around 20% through a combination of high-single digit revenue growth; EBITDA margins trending to 35% and CapEx to sales ratio settling around 15%. The slide shows that rebates in 2016 from the sale of DRC improves our OCF margin by 60 basis point, but I think we’ve also demonstrated with today’s result, that even with a bit of softness in our operating environment, we are growing service revenues, we are improving margins and we’re delivering on capital discipline.

So, to finish, this was our financial outlook for 2016 that we gave you in February. Even taking in account the exclusion of this DRC and the operating environment, we remain committed to delivering on this guidance. We will now take Q&A.

Question-and-Answer Session

Q - Unidentified Analyst

Well, as I thought maybe a question on subscribers and ARPU. There was a little bit of a negative impact in the quarter. How do you see that going forward in terms of volume versus value? And secondly, on the cost side, how much more are left to be done; are there any low hanging fruit which for instance Colombia is below 12% in margin? And thirdly for Tim

on taxes, what is your tax base paid tax assumption?

Mauricio Ramos

Sure. So, on the subscriber intake, I think the part of your question that I think embeds the answer is the move from volume to value. And that is decisively part of our strategy. We operate in markets where voice penetration is 100%, even over 100%, after actually notable exception and in markets where we have significant market share. So in Colombia, we could try to go for volume, but with that we put further pressure into that market. As a result of that, our strategy is to go for value, and our strategy is to go for value in a data centric future environment. So by definition, we want to keep this score based on our addition of mobile data subscribers, smartphone subscribers, and that’s the key measure that I highlighted during my conversation on maximization. We’ve added close to 900,000 smartphone users. Those are the users that are driving mobile data, which is our future and our focus in terms of strategy. And roughly, half of those probably came from Latin America. On the subscriber based on the fixed business, we’re squarely where we want to be as well on budget, as we continue to fill the network that we’re building. So, we’re pretty comfortable that our subscriber intake, as you call it, is focused, A, on value and on data, because that is our strategic focus into the future. And you’re seeing that come through the numbers with 30% mobile data growth.

And on the cost part of our focus, and I think we said this earlier, and I will continue to articulate what our strategic levers are, if you will, to continue to improve our EBITDA margin or drive operational leverage, as I call it. One is the synergies in Colombia, which we continue to deliver right on track; secondly, is continued focus on corporate costs, which we continue to deliver right on track; and thirdly, it is straightforward operational leverage in each one of our operations. And we have set our budgets for 2016 and our long range plan on the back of operational leverage in each one of our operations that has a higher EBITDA contribution that gives us some margin. Those are the three levels that will continue to provide us with a more cost-efficient structure and help us drive continued operational leverage towards long-term targets that we’ve articulated. And, I’ve forgotten what question number two was.

Unidentified Analyst

Low hanging fruit noted to come?

Mauricio Ramos

Well, it’s a part of these three buckets. I mean there is more to come in all three buckets. Synergies continue to deliver, we gave you the run rate that we’re expecting to achieve in 2017. We’ve articulated what our marginal operational leverage should come in at and we also think that in corporate costs, we haven’t finished our work as yet.

Tim Pennington

But, we’ve done a good job on corporate costs, so I am not guiding that we’re going to take them down a little bit further than that. I think there’s more for us to look forward. I’ll let you know. On the cash tax charge and we were expecting the cash in P&L to not be 2%, I think it is going to be in the I think we said in the past around that sort of 250 to 300 level, I would imagine this is going to be in mid to high end of that range in 2016.

Thomas Heath

Thomas Heath with Danske Bank. Question on cable, you’ve shown some very high growth rate for cable across the footprint. Just curious what you see -- what’s hindering you from doing it even faster; what sort of on the ground are the inhibiting factors and maybe a word on competition in cable, how that’s going?

Mauricio Ramos

So, it’s not a capital constraint; it is not a strategic constraint. It is both a physical constraint and a regulatory constraint. By physical, I mean just to share a ability of construction crews. We’ve ramped up our ability to build and have articulated that we’ve built in the last 12 months some 800,000 HFC homes. Of course, I’ve also said earlier that we are focused first on reconverting some copper homes that have high value customers for us and as a result of that the net gain in the number of homes that we’ve had is below 800,000. The second constraint is just the ability that we have to get permits in time. And those are just the physical and regulatory constraints that limit our ability to grow faster. As we build the homes, 18 months out, we already carried penetrations in those homes that are about 25%, so very good by any industry standard within the network that way with very good ARPU.

So, as much as this business is one, growing; 2, giving us a strategic fixed network upon which we can build our B2B business; and 3, providing us with the ability to down the road, provide a convergent offering to our subscriber base. The word that I think I must also use is cautiousness and patience in our ability to deploy any faster.

Listen, in most of our markets, we are building the alternative state-of-the-art HFC network to the existent copper based incumbent, that is true, not everywhere with the notable exception of Colombia in which there in an existing HFC network and there is an existing copper ADSL network. Now Colombia has more competition, but it’s a bigger market, and one that continues to grow in fixed quite well. We grew 8% this quarter, and we think our footprint there can significantly expand all the time. I hope that gives you a very balanced view on a portfolio basis.

And as I said earlier, I believe we think in Africa, whereas there is not a clear opportunity to cater to the home business, there is the opportunity to build pockets of fixed network fiber, to service B2B businesses there that are rally very granular project finance base. That gives you a complete view across the portfolio.

Unidentified Analyst

[Question Inaudible]

Mauricio Ramos

Sure. I’ll take the HTA answer, while I will let Tim perhaps clear on a little bit more on your first question. I think on HTA, we’ve indeed said now that we have lived up through the current company and we feel the consolidation that seems to be occurring in Africa, this may be an opportune time for us to monetize our stake and indeed we hired advisor to that end. And is a process that is ongoing. M&A is not something that one should ever try to time. So I’m going to lead my answer -- we’re making progress; we are committed to our strategy with regards to HTA, but it’s difficult for me to give you an idea of timing or even the probability of execution.

Tim Pennington

In terms of our overall operating costs, were down to 11%. I mean, part of the answer is the year-on-year impact of corporate costs, part of it was the efficiency programs in the businesses, and there was a little bit of FX benefit to us with regards to the impact we’ve see on revenues. In terms of sales and marketing costs, I don’t think that specifically moved too much in the quarter in many ways, I see that as an area where we can do more. One of the areas we are looking at is our entire distribution model. And looking at how that evolves to the new environment that we’re in, I’ll give you an example of that. We’ve historically sold a lot of our SIMs and top-ups through freelancers, through people on the street. That isn’t necessary the way we are going to sell a smartphone, a bundle sort of package or sort of cable subscription. So, I think it’s too early for us to say that we are getting our sales and marketing costs to levels that they ought to be. And we’ve got more work to do there. But net-net I think there is a positive quarter for our cost programs and reflects some of things that we are putting in place in 2015, so [indiscernible] in 2016.

Stefan Gauffin

Okay, Stefan Gauffin, Nordea. And I will follow up on that. You mentioned in the report that efficiency program is bearing fruit. Can you say a little bit about what you’re doing and if there is more to come? Secondly, go back to the B2B business in Colombia on cable, how much did this impact this quarter and do you think that will come back in the coming quarters?

Mauricio Ramos

Sure. So, listen, the B2B, it’s a delay in those contracts as a result of the reasons that we just mentioned. So, it doesn’t change our yearly outlook for B2B in Colombia and it certainly doesn’t change our yearly outlook for B2B as a Group. We view B2B as a growth engine and one of our areas of focus, among other things because it’s synergistic to the fixed networks that we are building. So, we are quite bullish on our ability to grow B2B quite significantly. We do view it as a growth engine. So don’t that one quarter which you asked there; it is a business that carries a certain amount of fluctuation from quarter-to-quarter as indeed the pipeline sometimes get delayed for the reasons that we just mentioned.

On our ability to drive synergies across the group, this comes from a number of buckets. The more important one, the low hanging fruit is procurement. We are procuring everything now on a global basis. This is something that we put in place in 2015 and is beginning to bear fruit. So, this includes cable, it includes handsets, it includes IT equipment, everything is now centralized. But, it also includes procurement of some of our costs like international bandwidth, which we’re now negotiating as a whole for Latin America and the same for programming, which is increasingly important for us, as we become more and more of a pay TV provider. And international bandwidth of course is more and more important as we become more of a data centric business. But, it also includes a transformation of the company that we are going to be into the future. And it is a program that includes single network operating centers for us throughout Latin America as part of our ability to drive cost down in operations, going forward.

So everything that can be done centrally, we’re doing centrally, programming, international bandwidth, procurement, network cost. And even if it isn’t done on a regional basis, we are further and further moving into external managed services for our network. We’ve done this successfully in Africa and that’s part of the 2016 numbers that you begin to see for Q1. And we’re moving in that direction in Latin America, starting in Central America and then moving down the chain, as that will allow us to outsource a part of our cost that can be most efficiently undertaken externally. Hope that gives you a pretty good view of what’s to come in terms of becoming a more efficient quarter. I think I addressed it early on.


[Operator Instructions] And we will take the first question from Sergey Dluzhevskiy from Gabelli. Please go ahead.

Sergey Dluzhevskiy

I have a question for Mauricio on overall M&A philosophy of the company. So, obviously, you addressed some parts of it on the call already, but as you look out a couple of years and given that circulation levels in Latin American being now depressed given the macro environment and foreign exchange. Do you see an opportunity for acquisitions in Latin America or do you have interest in owning cable assets maybe in markets where you are not already present, so just your thoughts on M&A environment and your M&A philosophy?

Mauricio Ramos

Listen, you all know my background and you all know that I will always be focused on non-organic manners of growing our portfolio. And we will do that in opportunistic and very, very smart capital allocation way. You’ve seen us already do that in the DRC. And I’ll address that in a minute. But, just as I say that, I have to also say where our strategic focus lies on everyday basis. And we wake up every day to drive the single most important opportunity that we have, which is organic EBITDA growth. This is a company that sits on markets that have limited penetration on fixed broadband, limited penetration on Pay TV and still growing penetration on mobile data. And that’s why we think that we have a fairly long runway to increase EBITDA and we’ve articulated this on mid-to-high single-digit growth. That’s a meaningful opportunity that carries a reduced risk profile for us. So that’s squarely, Sergey, where we’re focused on a day-to-day basis. Now, having said that, if along the way came opportunities to reshuffle our portfolio, of course, we would look at them, and we remain very open every day to looking at those opportunities. I hope that gives you a pretty good view on our approach to M&A and what our focus is, which is basically tapping on significant organic growth opportunities that we have.

Sergey Dluzhevskiy

And within this framework, maybe you could share your thoughts on Africa now that you see the divestiture is behind; what are your thoughts on what’s organic and inorganic opportunities for your African business?

Mauricio Ramos

So, on Africa, we view Africa the following way. We know in Africa and I’ve this repeatedly, and I think I’ve actually already used the term plan A. Plan A in Africa for us is and will continue to be to drive and operate our business to the best of our capabilities in the long-term. And we’ve demonstrated our ability to reconstruct our cost structure there so that we can drive a more profitable P&L in Africa. That’s what you’re seeing in Q1. If you recall, last year, we actively said that you should expect us to drive Africa in 2016, be operating free cash flow positive. So I think our EBITDA is bigger than Africa CapEx. We are squarely on track to deliver that which gives us tremendous flexibility to continue to deploy this plan A.

Now, we just completed in record time and in good valuation a transaction in DRC, which effectively demonstrates to you and to us that if there is a plan B out there that gives our shareholders better value than what we can deliver by executing on plan A, then we’ll go ahead and actively pursue that plan B. That was precisely what did in DRC where indeed the particular circumstances allowed us to find a buyer that had a business plan, given the synergies, the market synergies were available to them than what we could execute as our own planning. So, we’re focused on plan A but should there be plan B to deliver to you, shareholders, more value than plan A, then we will obviously exert our fiduciary obligation to pursue those plans. I hope that gives you a full picture of what our philosophy is particularly with regards to us.


And we now move to Michael Morin with Morgan Stanley. Please go ahead.

Michael Morin

Mauricio, thank you for giving additional details around your mobile data and some of the metrics that you’re tracking there. I was wondering if you can help us maybe give us a little additional color on any differences that you see between countries, specifically as it pertains to the penetration of mobile data in your base; it looks like you had around 30% now; where can that realistically go and how quickly can you get it there based upon what you’re seeing in some of the more advanced countries? I guess that would be the first question. And then the second question is on Colombia on your slide 17, maybe I missed it, but I wanted to understand better the negative 1.1% on cable that was on the right hand part of that chart just to understand what would happen between the fourth and the first quarter.

Mauricio Ramos

I’ll take the broader one, Michael, while Tim looks at slide 17 in more detail. So, I think that’s a bridge that we’re trying to show there. On mobile penetration, overall, in our portfolio, as you would expect the more developed markets stayed atop higher penetrations. So, those are markets like Guatemala and Colombia. And markets like Bolivia and others, stay atop lower mobile data penetration. So, you can expect that on the markets that have higher mobile data penetration like Colombia, then the growth is obviously smaller than the ones that have smaller penetrations levels. And I said in Colombia, we grew 12% mobile data revenue in Q1 whereas in other markets, we were still growing 20% to 30%. Now, this strategically leads, Michael, to why we are building a fixed network everywhere underneath our mobile network, because, obviously from an industry structural point of view, what we want to do is strategically is be able to be on both sides of the data centric proposition, mobile and fixed. Fixed is all about all new products, mobile is all about mobility and ubiquity of that profile. And we want to be able to straddle along those. On your specific question on Colombia?

Tim Pennington

Yes. I mean the fixed and mobile data, here, we saw 1% sort of Colombia decline for the contribution to our service revenue, 1.1% of that was fixed; and of that, roundabout, I think it was roundabout 80 basis points of that came from the fixed B2B. So, the big sort of impact that hit us in Q1 was that fixed B2B sort of slowdown. Now I think it’s sort of complicated answer to this because I think this happens every year. The reason why it’s prominent this year and wasn’t prominent the last year or the year before, is because mobile was growing so well last year and a year before. And what’s happened is it’s just about keeping his head above water at the moment. So it hasn’t been able to cover sort of a slightly weakness sort of Q1 for the fixed B2B section.

Michael Morin

And you also in the prepared remark also talked about competitive intensity in Colombia. Has that stabilized now -- specifically I thinking in mobile, has that stabilized now or is it more of the same?

Mauricio Ramos

No, the answer, Michael, is it’s the continuation of the trend that we’ve highlighted in Q3 and Q4. With the continuation of the trend that sees us continue to do better than our competitors in terms of market share gains and our ability to try to sustain or maintain the sustained price levels in the market. But, it’s still a business that as you can see, remains very, very price driven. And whereas we’re doing better than our competitors, the market is still challenging.


The next question will come from Chris Grundberg with UBS. Please go ahead.

Chris Grundberg

Just following up on my last one, on the Colombian competition, I wonder if you could flesh that out a little bit further. I understand that it’s a continuation of the theme we’ve seen in the last few periods. But can you get a bit more granular in terms of what you’re seeing on the ground and any recent price evolution have been? And then maybe fleshing out a little bit more what your assumptions are for the rest of this year. I understand you wouldn’t necessarily want to call it through some on the competition but how do you see things evolving from here, that will be the first one, and then I’ve got a couple of just very brief follow-ups. Thanks.

Mauricio Ramos

So, a little bit more color on the overall environment in Colombia. There is a number of elements going on there. One is of course an element of economic slowdown, which I referred to as weakening of consumer confidence level, which for those of you who follow Colombia, you will have seen the statistics coming out early this year. If you couple that at the macro level with the significant FX devaluation, that effectively has made the cost of the handsets in Colombian peso terms that much more expensive. And if you add to that macro, then the change that occurred about 15 months ago, give or take, decoupling service contracts, on handset contracts, which led consumers to use more and more of their disposable income on the handset rather than on the service contract, therefore putting pressure on the contract offers. Then, you have the perfect storm, if you will, from a macro and industry point of view to reduce the growth in our marketplace. Then, on top of that was three elements; then you have to add a very, very price driven player in the market, leading player in the market that is using that price competition to maintain and sustain his market position, both in voice and in data. And as a result of that, you have a very, very weakened mobile environment there in which, just to give you further color, we’ve taken the view to try to preserve the long-term health of that market. And we’ve been, as you’ve noticed in our remarks, willing to sacrifice volume gains in order to maintain the revenue levels in that marketplace. And we believe we need to continue to do for the long term. That’s a lot of color there in 45 seconds. I hope that’s helpful to you, Chris.

Chris Grundberg

That is helpful. I mean, I guess the question as I say is what’s your forecast there? Do you anticipate and I appreciate this is half piece [ph] necessarily but do you anticipate that market continuing with this strategy in which case the markets are really going to keep saying that’s price erosion or what are your expectations for the rest of the year?

Mauricio Ramos

Rather than speculate on what they may or may not do, I’ll tell you what we’re prepared to do. And we are certainly prepared in our budget and in our long term to see this business segment continue to be challenged because our portfolio in Colombia continues to grow on the back of our investment in fixed. So, we’re prepared, if you will, for a continuation of this trend which has occurred for the last few quarters. And that is what we have baked in our budget. And that is what we have baked in our guidance. I think that’s more helpful than me trying to speculate what the others may do.

Chris Grundberg

That’s very helpful. So, two follow-ups, they are very brief. Can you just confirm following all the various latest fund raisings, what is your shareholding as of today in African Internet Group? And then just on Guatemala, probably it’s a no comment, but is there any update at all on timing for the news around the investigation in those potential improper payments? Thanks.

Tim Pennington

Our dilutive stake is now down 12% in AIG, Africa Internet Group.

Mauricio Ramos

And I think the valuations around that have been made public. So there’s no reason for us to comment on those. And on Guatemala, the update that we have given you Chris is the update that we can give you today, which is basically that there are no new developments to report. We don’t have a lot of visibility, nor do we control the timing of investigations. We remain in full collaboration with the authorities, active collaboration with the authorities, but that’s really all the visibility we have on time. So, I am afraid we can’t say much more.


Thank you. And the last question will come from Bill Miller with JM Hartwell. Please go ahead.

Bill Miller

Mauricio, and as much as you have now been there for a year, I wonder if you could look out three years, based on your current experience and your past experience over the last year? And give us a profile on what you think the growth rate will be in three years, what percentage cable data et cetera or in just rough terms, LatAm versus Africa; could you just set some line on that or is it still something that you are waiting to define?

Mauricio Ramos

No, it’s a great question and thank you for it Bill. I think we’ve articulated to you just about a year ago, I articulated to you what I thought was our long-term cash flow profile. And every now and again, we put out that chart; we actually did today; we did put it up again. And that business as a target out a few years looks like a mid to high single revenue growth business. That business looks on an EBITDA margin of around 35%, which we’ve already achieved. So, you can expect us of course to revamp that at some point in time. And most importantly, it looks like a business that has, what I call, cable light that time OCF margins of around 20%. And that is because we are increasingly becoming more of a fixed provider and it’s also sold because we believe that our CapEx on the mobile business is coming down. Therefore, allowing us to have a cash profile that is closer to that 20% margin than where it sits today. And we’ve shown over the last few quarters, since I came in that every quarter we moved towards that 20% cash flow objective margin. And the last thing I think, Bill, I would say on that point, which I think it might be relevant to our reconfiguration of our cash flow profile is that we are squarely focused on getting there. We continue to make progress every day at all levels, getting to that target.

Bill Miller

Where they go -- what do you think the upsized prices could or will be?

Mauricio Ramos

Once -- what will really drive our ability to complete our strategic turnaround, if you will, is us being able to deliver on the two strategic fronts that we’ve articulated to you. Our story is articulated around our revenue service mix conversion that we clearly articulated to you today. And every quarter, we’re going to be focused on that growth of that home business and the growth of that mobile data business because that is what’s going to allow us to drive the company to that mid high single-digit revenue target. And the second upside that we have is to continue to drive operational leverage into our business. We’ve already reached 35% and we’ve done that very quickly. But I think there’s a lot more that we can do on the initiatives that I alluded to earlier with regards to cost savings and procurement savings across the organization. I think those are the upsides that lie within our organic stores. Is there upside from inorganic, of course, but we’re going have to be very disciplined at looking at those. And we have a long way ahead of us just topping on that organic growth.


Thank you. I would now like to hand the call back to Mauricio Ramos. Please go ahead.

Mauricio Ramos

Well, thank you very much all for joining us today, for your terrific question. It tells me that we now have a simplified articulate story that we’re largely all now on the same page with and that we have clarity on the things that we’ve said we’re going to deliver and the things that we are indeed beginning to deliver to you. So, all I can say is thank you for joining the call and thank you for the questions and look forward to talking you in about a quarter’s time.


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

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