Millicom International Cellular SA (TIGO) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for holding and welcome to the Millicom International Cellular earnings conference call for the third quarter of 2003. At this time all participants are in a listen-only mode. After the presentation, should you wish to ask a question, please press *1 on your telephone. May I also remind you that this call is being audio streamed over the web and is accessible at www.millicom.com, together with a presentation summarizing the key features of the results. I will now hand over to Mr. Marc Beuls, MIC's President and CEO. Thank you sir, please go ahead.

Thank you operator and thank you all for joining me today to discuss Millicom's results for the quarter ended September 30, 2003. With me is John Ratcliffe, MIC's Chief Financial Controller and we will both be happy to answer any question you may have after first making a few comments. My comments on the results on the first quarter will follow the structure of the press release issued earlier today. I will begin with a brief summary and some highlights, and will then move on to the review of Millicom's overall financial results and our regional telecom assets. I will conclude with a brief outlook statement, following which we will be open for questions.

The first three quarters of 2003 have been characterized by a concerted focus on our core activity, mobile telephony in emerging markets. This has been possible following the restructuring of the company's balance sheet and the exiting of our Tele2 position [albeit] with a 30% potential upside from the mandatory exchangeable offer, together with strong performance of our operating companies generating increased revenue and EBITDA growth. The result has been strong cash flow upstream into the parent company, Millicom, which by October had already reached its 2003 target of $100m.

On an underlying trading basis, Millicom is now profitable, although in Q3 a couple of one-off payments affected the overall result. Going forward we will be focusing on increasing the bottom line profitability of the company.

Before we look at the results in detail, I would like to point out that we have reconsolidated Telemovil, our operation in El Salvador, with effect from September 15, 2003, following the successful resolution of the shareholder dispute with the local partners.

So, let us look at the main features of the results excluding divested operations. Continuous strong subscriber uptake has resulted in a 43% increase in gross cellular subscribers year-on-year to 5.3m at the end of September 2003. Proportional cellular subscribers increased by 46% to 3.8m and proportional pre-paid subscribers increased by 48% from December 2002 to 3.3m at September 2003.

The sustained increase in minutes of use has continued with prepaid minutes for the quarter increasing by 54% from the third quarter of 2002. Revenue for the quarter was $157m, on up 18% from September 2002 and EBITDA increased by 34% to almost $83m. The EBITDA margin was just below 43%, which makes Millicom one of the most efficient operators in the industry.

The emphasis on upstreaming cash from our operation continues. As of today we have already reached our original target for the year of upstreaming $100m. With two months of the year remaining, we therefore expect to largely exceed this original target.

In 2003 we originally suggested that we expect CAPEX of just over $100m. The opportunity to grow our business by migrating to GSM at a faster rate than we had originally envisaged means that the CAPEX for the year 2004 will be significantly above the original target of $100m. The Board now believes that it is important to expedite the division of investments so that Millicom will be able to sustain its strong growth rate of growth and maximize the current market opportunities.

Moving on to the general operating and financial overview of Millicom, I would like to cover four key areas: subscriber growth, revenue, growth, EBITDA growth and financing. Let us start with subscriber growth.

During the 12-month period ended *September 30, 2003, MIC's worldwide cellular subscriber base grew by 43% to 5.3m. Proportional subscribers grew by 46% on an annualized basis of 3.8m, 88% of whom are prepaid. Some 832,000 net new cellular subscribers were added in the third quarter, including some 460,000 from Telemovil in El Salvador. Underlying subscriber additions for the quarter, excluding El Salvador, were the highest on record.

Revenue growth. Millicom produced total revenues of $156.7m for the three months to September 30, 2003, an increase of 18% from the third quarter of 2002. When El Salvador is excluded from the total revenue results for the third quarter of 2003, the potential growth rate from Q3 2002 is 14%. This is the highest growth rate since third quarter of 2001, reflecting the potential to increase top line growth going forward.

MIC's operation in Asia recorded quarterly revenue growth of 23% from the third quarter of 2002, with Pakcom in Pakistan producing growth of 36% over the same period. The equivalent increase for MIC Africa and MIC Latin America were 27% and 12% respectively.

Let us look at the EBITDA growth. EBITDA for the three months ended September 30, 2002, was almost $83m, an increase of 34% on September 2002. If El Salvador is left out, the percentage growth was still 31%, the highest increase since the first quarter of 2001. Quarterly EBITDA for Asia increased by 34% from third quarter of 2002, reflecting the buoyancy of this market. Cost-cutting continues to be a factor in the 21% increase in EBITDA for Latin America from the third quarter of 2002.

A strong underlying performance in Latin America was shown by the fact that EBITDA, with El Salvador left out, has increased by more than 12% against the first quarter of 2003. Africa produced record EBITDA growth of 107% from the third quarter of 2002, which represents a significant turnaround for the region. The impressive revenue growth recorded by MIC's operation during the third quarter was achieved with no erosion of margins.

The group EBITDA margin was an impressive 52.9%, which illustrates the beneficial effect on MIC's financial performance of the cost reduction measures taken in 2002, and marks Millicom out as one of the most efficient telecom operators in emerging markets. The quarterly EBITDA margins for Asia, Latin America and Africa were 62%, 48% and 42% respectively.

Let us look at the financing. The offering of MIC's subsidiary, Millicom Telecommunications S.A. of approximately SKR2.556m or $310m of secured notes mandatory exchangeable into Series B shares of Tele2 AB closed in August 2003. The notes, which will mature in August 2006, carry an annual coupon of 5% which was prepaid and the exchange premium has been set at 30% with a reference price of SKR285.

MIC has used part of the proceeds of the Mandatory Exchangeable Bond offering to retrieve $167m of its 11% Senior Notes due 2006. It has also repaid the debt facility with Toronto Dominion Bank of over $60m and has prepaid interest for the Exchangeable Bond of $45m.

As at September 30, 2003, MIC reports total net debt after cash and time deposits, excluding the 5% Mandatory Exchangeable Bond and the 2% PIK Notes, of $612.4m. Which* represents a reduction of 46% compared with the total net debt of $1,141m at the end of December 31, 2002.

MIC has reduced its quarterly interest expense from the third quarter of 2002 by 30% to $34.9m at September 30, 2003, including charges on the repayment of the Toronto Dominion facility. A result of both the debt restructuring and for the divestment earlier year of our operations in the Philippines and Colombia that were both highly leveraged.

Coming forward, the interest costs will come down further as a result of the debt reductions done in Q3 and a possible refinancing of outstanding debt at the corporate level.

So, now let us look at the results for each operation in a bit more detail, starting with Sanbao Telecom. Year-on-year growth in proportional cellular subscribers was 45% in Asia, which contributed to the region's increase in revenue of 23% to $69.7m and an EBITDA of 34% to $42.9m. EBITDA margin is 62%. Vietnam, which remains the group's largest revenue in EBITDA contributed, recorded year-on-year increases in revenue and EBITDA of 19% and 31% respectively.

Let us look at Latin America. Revenues for Latin America, for which we saw the third quarter in a row of positive growth, grew by 12% on September 2002 to $63.4m or by 2% if El Salvador is left out, demonstrating the increased federalization of the region. EBITDA increased by 21% to $30.7m or by 12% if El Salvador is left out, demonstrating the positive impact of cost cutting in the region and the EBITDA margin increase from 45% for the third quarter 2002 to 48%.

MIC Africa recorded its best ever quarter in terms of subscribers, adding 86,000 gross new subscribers, an increase of 19% from June 30, 2003. Quarterly revenue for the region increased by 27% from the same period a year earlier to $21.2m, and EBITDA rose by a very impressive 107% to $8.9m, which is a record for the region. Both Senegal and Sierra Leone recorded EBITDA growth of over 100% from the third quarter of 2002, and Ghana recorded a growth of 380%. We are delighted by the performance of our operations in Africa and we are confident that our Asia success story can be repeated there.

This concludes my review of operations, so let us look at what the future is going to bring.

As one can conclude from the top line and the EBITDA growth the company has produced in the first three quarters, the future for Millicom looks bright. Going forward, Millicom will focus on, firstly, increased top line growth while increasing the margins. The growth will come from the low penetration regions of Asia and Africa, and from continuous recovery in Latin America.

Secondly, we will be focusing on lowering the cost and pushing out the maturities of the existing debts, both at the corporate level and at the subsidiaries level.

Thirdly, we will see strong cash flow generation and the free cash flow generation at the top level for Millicom will continue to increase in the following years. We also will be looking at new opportunities in the wireless emerging markets, especially in the countries and the regions where we are active today, in line with the recent acquisition of minority interests in El Salvador, for instance.

This concludes my comments. John and I will now be happy to take your questions. Operator, may I have the first question please?

We will now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press *2. Your first question comes from Tom [Freiburg].

Hey guys, good quarter, beat my numbers, that is what we like to see. Marc, two major questions. One, this clearly, even if you back out El Salvador, is the best quarter you have had ever for subscriber additions. It is certainly is an acceleration of sequential basis. Is this a taste that you think you can maintain? That is the first question.

Number two, the guidance on raising CAPEX for next year. Obviously, if growth is that good and we expect to see a continuation of what we saw this quarter. Where is that going? Is that going to possibly be going into Pakistan if you get permission to provide GSM there? Or do you have to plough something back into El Salvador? Some color on that would be helpful.

Okay, thank you for your comments Tom. I think that we can maintain the growth rate. We have had financial constraints over the last couple of years. We were not able to go as fast as we wanted to go. With our balance sheet restructuring behind us, with our debt levels having come down substantially, we are now in a position to both service our debts as well as grow our businesses much faster. So, I think the third quarter gives you a flavor of what Millicom is going to look like in the fourth quarter and the following quarters.

That is very encouraging.

The CAPEX will go where the growth is coming from and clearly you can see that the growth is coming from Asia and Africa. And that is where the CAPEX will go, will be spent. Clearly if Pakistan will be a big country, with that GSM migration that will happen first quarter of next year. But we are also doing the GSM migration in Latin America, so Guatemala and Paraguay are the first countries that will be going GSM early next year. And that, strangely enough, will not come with a high CAPEX, but at a lower CAPEX, given that prices for infrastructure have really been falling and allows us to buy much more for a dollar than we were able to buy before.

Well that is great. And you are confident that El Salvador, the network there, is in good shape and you do not have to claw back an increment there?

No, we have been there for a couple of weeks and the people who were looking after the business over the last couple of years have done a reasonable job with a business that looks like the Millicom business that looked three to four years ago. It is not like we will have to put an awful lot of money into that business. I mean, it has cash and it has very little debt on its balance sheet. But El Salvador will be, as with the other Latin American markets, on the list for technology conversion in 2004.

Okay. Great, Marc. Thank you.

My thanks, Tom.

Your next question comes from [Adrian Dawes].

Marc, hi, actually Bill Miller. I am curious about the margins that you think you will be able to achieve and when you will be able to achieve in El Salvador. And also, since you had a spectacularly good EBITDA margins well ahead, at least of our expectations, I wonder where we go from here on the margins? How much can you take them up from here in a general sense, not like just El Salvador?

El Salvador, clearly, as you have seen from the results we put out when we announced that we were taking control or we had taken control of the business a month ago. It is operating on a lower margin. That might impact on margins a little bit, our average margins a little bit, in the fourth quarter because then El Salvador for the first time will be accounted for for a full quarter. We, of course, are working very hard to bring down the cost and to roll out a Millicom model there. As a matter of fact, we have the consultants in this week that are working with management, with our regional management, to make the necessary changes, as we have done in all our of other Millicom businesses, in order to get the EBITDA margin up to the 50% level. Because that is where the markets in Honduras and Guatemala are over 50%, that is where Guatemala and Honduras are today. So I think it will take us a couple of quarters for us to get there, but probably by second quarter of next year we should be able to be there.

I think in terms of the margins, the stability of the margins, these margins could still go up, especially when we bring up the margins, the EBITDA margins, of all of our businesses up to the 50% level. And there are still a number of businesses that are not there, but we have set a target for next year to have all of our businesses, except of course for the recent [start of Laos], at an EBITDA margin of 50%.

Mr. [Dawes] has disconnected. Your next question comes from [Steven Mead].

Okay, are you there?

I am there. Sorry, I was in a blackout for a minute. I do not know what happened.

I know I heard you.

You heard me, okay.

I missed the earlier part of the call, so you might have gone into it, but could you just review El Salvador in terms of what your ownership is now? What it cost you? And then I would like to get a little bit more detail on the CAPEX numbers as far as what 2003 CAPEX number looks like. And then just on a directional basis, as you look out to 2004 and 2005, what kind of magnitude of CAPEX you are looking at?

Let us start with El Salvador. We have not publicly disclosed the details of the transaction, but we will be buying, the company will be buying, shares from the minority shareholders over time, and over time we will get 100% ownership of the business. And we will try to make that period as short as possible to get there.

In terms of the CAPEX, John maybe you can answer that question?

So far, year-to-date, on a proportional basis, we spent slightly over $65m as a group for the first three quarters.

The reason why this is relatively low is that the spending in Pakistan for the GSM migration has not happened yet. That will effectively happen in the first quarter of next year; that was delayed a little bit.

In terms of CAPEX going forward on a proportional basis for 2004 and 2005, I would be looking, and we are finalizing budgets as we speak, but I would be looking at a CAPEX of between $120m-$150m annually.

Right. And then, given Latin America's tone of business, are there countries or investments there that you would actually look to move out of at this time in order to free up capital for other parts of the globe and/or not? And why not? I mean, what is it about the existing investments in Latin America that would want you to kind of maintain your ownership there?

I think the reason why we want to stay in Latin America [historically], do not want to exit the region, is that the situation, especially in South America, has bottomed out. We have seen now three consecutive quarters of revenue growth in Latin America, and especially in South America, countries like Paraguay. I think they clearly have bottomed out. Also Bolivia. So, I think it will only go up from here and I think that is the reason why we want to hold on to those businesses, because these are great businesses. And penetration rates, of course, are potentially higher than in Asia and Africa. But also the GDP per capita is higher, so there is no reason why those penetration rates could not grow. And typically penetration rates in our markets are lower than the penetration rates in markets like Brazil or Argentina, Venezuela or Mexico. So, clearly, there is still a lot of room for growth.

Thanks.

Pleasure.

Your next question comes from [Winam Karicks].

Yes, hello. It is Winam Karicks from [Juris]. I have got three questions. I am bit surprised by the $20m hits. Could you explain somewhat better why that actually has been done? That is one.

Secondly, could you give some timing details on the formal approval, final approval, of the Pakistan GSM license?

And thirdly, okay, we know the date of the meeting for the mandatory bond holders, etc. But has there already been a date set when the bond holders will be able to exercise the shares and the unregistered shares will become registered?

Okay, to start with the $20m. The $20m is a very simple thing. At the end, or at the beginning of the third quarter, the Tele2 price was higher than at the time when we did the transaction which was around, let us say, the end of July, and the difference is $20m. And this is the last debt or the last movement on the Tele2 share price we will be taking because there is only an upside now for us. Three years from now there is a bit higher than 30% premium. So, in the past we had the fluctuations to our P&L and balance sheet over the valuation of the Tele2 shares. That, you know, you are probably going to see, the $20m was the last one.

Okay.

Secondly, on the Pakistan GSM, we have [developed] confirmation that this license, the frequency sorry, has been contributed to the company Pactel. And we are waiting for the final paperwork, and it is only when we get the final paperwork that we will be confirming what the terms and conditions are. We, in the meantime, are fully preparing ourselves for rolling out a GSM network and starting services at the end of this first quarter next year.

And then on the PIK Notes, unfortunately, with all the deals we keep doing, we need to keep updating the filings with the SEC. But our plan is to do this shortly so that people can get more liquid stock going forward.

Okay. Thanks. Great.

Marc Beuls. Thanks, Winam.

Your next question comes from Bill Miller.

Marc, do you have any recent word on Honduras and when the licenses or whatever will be awarded to you?

No, Honduras is not a license. It is whether we could eventually increase our stake, but we are still waiting for regulatory approval and that has still not been cleared.

Thank you.

Your next question comes from [Ouzie Zimmerman].

What are you plans on, or do you have any plans, on refinancing the higher coupon notes that are out there? Are you having 11% or 10%? I would think that, given the improved results, you would be able to replace them with cheaper financing.

And second question on the convertible. Any chance you might call those?

On the refinancing of the high yield, that is something we are looking at, as we always have been looking at that more at least over the last 12 months, in terms of trying to improve our balance sheet and also the cost of something. You are right, it looks like interest rates have come down substantially for companies like ours and probably on the back of the results, I think they might come down even further. So this is something that is part of the-- what I was trying to say* [target savings] balance sheet restructuring which we started about 12 months ago.

In terms of the notes, the PIKs, we do not have intention at this point of time to call those.

Thanks.

Thank you.

Once again, if you wish to ask a question please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request please press *2. Your next question comes from James [Findlay].

Good afternoon, Marc.

Hi James.

Can you talk a little bit more about how much flexibility you have in your balance sheet to pursue some of these other opportunities in emerging markets, wireless that you mentioned earlier on?

Yes, let me first clarify what it is we primarily want to do. Our first priority is to focus on the countries and the businesses we have, and there we would be interested in increasing our stake in existing businesses. First off, we have said that probably be done by using cash from the company in the country, so that would not impact our corporate cash flow.

Secondly, as I have said historically, there will be a consolidation at a certain point of time in some of the markets. We clearly want to be consolidated there and we might be looking at acquiring the one or the other competitor, as for instance we did in Pakistan a number of years ago.

And thirdly we might look, but that is very opportunistic, we might look at some opportunities in the regions. I would almost say neighboring, countries neighboring the countries where we are currently operating. New opportunities, green fields, may be an acquisition. But that is very opportunistic and we have a history of not overpaying for assets. So when we do these things, first of all, it is not going to be something real big which we would not be able to digest. It is more opportunistic where we can clearly create synergies with the existing businesses we have. So we do not have any intention to go into China, India or Brazil or any of the other big countries.

Smaller countries, right?

But not necessarily, more the kind of countries that are bordering places where we are, which depending on how you define small.

Right, and just can you give me a feel for-- Once you upgrade to GSM in a country, just give, explain the impact that has on the subscriber growth and any other impact it has.

Well, let me first say that, in GSM migrations, we have been doing this many, many times. We have done it in Asia. We have done it Africa. So, what we are planning on doing now in Latin America is no different. So what we are planning on doing is just building a GSM overlay on existing networks, which can be done at a very low cost, given the lower [infrastructure] prices.

We will probably actively migrate our top end of the market customers to the GSM network, and then we will be taking the new growth into the GSM network. And the reason why we want to do it this way is that we do not want to spend a lot of money to force people to move from one network to another. People are probably very happy using our current network because it has very good coverage and it is a good quality service.

So, we will be continuing running those [TDMA] networks and even the [anti] networks for many years to come in parallel with the GSM networks, as we are currently doing in Sri Lanka, in Tanzania and some other places.

And how much has the equipment come down in price, say, year-over-year?

I mean the prices have really been falling and people are looking at lifetime prices and some of the experts call this like $20 or even below for a subscriber for imported equipment.

$20 per subscriber?

$20 per subscriber where three or four years ago we were still talking about $100, $150 maybe, in some markets $200 for subscriber. So they have come down quite a lot, which I think is fully justified because, of course, usage by the prepaid subscriber we are acquiring, of course, is lower than the subscribers we were acquiring ten years ago.

Right. That is per potential subscriber, is it?

Yes, the subscriber. As we only build in relation to demand; it should be in relation to a subscriber.

Yes, okay. And in Bolivia and Paraguay, are you likely to upgrade to GSM there?

Yes, Paraguay is one of the two first ones.

Sorry, you mentioned that, yes.

Yes, Bolivia will also happen probably later.

2005?

We have not decided that yet.

Okay, thank you very much.

Okay.

Your next question comes from Bill Miller.

Actually it is [Adrian Dawes] here. A couple of quick questions. Can you talk a little bit about if there has been any update on the Vietnam license renewal? And on Pakistan, what rapidity you can bring the GSM network up once you have the final sign off?

Vietnam, as I have said in the past, this is an approach that will take time. It has officially only started in July of this year because it could only be started in the last two years of the current contract. I have had several contacts with political leaders and business leaders in Vietnam over the last months, and we have been given assurances verbally that the Vietnamese partners are very happy with us and that they are looking at extending the cooperation with us. And we are currently working on business plans to decide on what terms and conditions the cooperation should continue, including how much money we will be investing over the next ten years.

So there is nothing in writing and this process will take time. As I said before, this is an important process and it will have to go through different layers of decision-takers.

Secondly, in Pakistan, the reason why we are very bullish about Pakistan is that, first, you have seen that Pakcom was, I think, our top performer in the first quarter despite the [refusing] of PDMA technology. That shows you what the underlying growth in the market, potential growth is in the market. And we know from our GSM competitors in Pakistan that they are doing extremely well. So, we would expect that if we turn on GSM that we will be looking at exponential subscriber growth and also subsequently subscriber, some revenue growth in that country without hitting our margins.

A couple of others. ARPUs. Could you sort of review where you expect corporate ARPU to be, and sort of compare and contrast the regional differences?

I think ARPUs are relatively stable at this point time with ARPUs for prepaid around $9. And they have been at that level, I think, for a couple of quarters now, which clearly shows that we are acquiring the right customers and our existing customers are using their phones more. So, I think ARPUs are stable. They might come down a little bit going forward, which is part of our business plan. So, that does not worry us given that we have this low acquisition model, acquisition cost model, where we acquire customers between a cost of $20-$25, $25 a subscriber. And we know those subscribers typically will stay more than two years on our network. So there is a 20-month period, or more than 20-month period, where we would be making money on those subscribers.

And one final question. With the CAPEX budget rising, what capacity increase do you think you would be able to have for subscribers over the corporate networks? You are at 53 gross now proportional 38 or so. How much additional capacity are you providing for?

I do not have the number for you there. Adrian, unfortunately, I will have to disappoint you there.

Great. Thanks. Wonderful quarter.

Yes, thank you.

Once again, if you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request please press *2. Mr. Beuls# , there are no further questions at this time. Are there any other points you wish to raise?

Thank you, operator. Once again I would like to thank you all for participating in today's conference call. If there are any further issues you wish to discuss, I will be happy to deal with these on a one-to-one basis if you wish to contact us directly. Or alternatively you can call Share Value at 44-207-321-5010. Thank you and good bye.