Millicom International Cellular SA (TIGO) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Millicom 2004 second quarter results conference call. [Operator Instructions].

I would now like to hand you over to the host of today's conference, Mr. Marc Beuls, President and CEO of Millicom International Cellular. Please go ahead, sir.

Thank you, operator, and welcome to everyone who has joined us today to discuss the results for the quarter ended June 30 2004.

Bruno Nieuwland is with me and we will be happy to answer any questions you may have after first making some brief comments. So let's look at the highlights of the quarter ended June 30 2004.

Strong subscriber uptake continued in the second quarter, resulting in a record quarterly increase if one excludes El Salvador and the discontinued operations of course. The 43% increase in total sales of subscribers year-on-year led to a total of just under 6.4 million subscribers at the end of June 2004. Proportional cellular subscribers also increased by 43% to 4.4 million.

The sustained increase in minutes of use has continued, with total cellular minutes for the three months ended June 30 2004 increasing by 48% from the same quarter 2003.

Revenue for the quarter was $216 million, up 50% from the quarter ended June 30 2003, and EBITDA increased by 47% to $107.7 million. The EBITDA margin is maintained at 50%.

Before moving on to the general operating and financial overview of Millicom, where I'll be dealing with subscriber revenue and EBITDA growth and also say a few words about financing, I would like to first take a minute to talk about the Pakistan and GSM launch, and also the license renewal process there, followed by some comments on our situation in Vietnam.

Paktel, one of our operations in Pakistan, has finished the build out of the first phase of its GSM network. Paktel has asked permission from the PTA, the Pakistan Regulator, to start a nationwide service. Paktel's license, as some of you might know, was modified in 2002 to allow the company to market GSM services, subject to Paktel committing to invest $150 million within 3 years, paying 200 million Rupees as an administrative fee, that is about $3 million, and lowering existing tariffs by at least 20%. Despite Paktel being in compliance with the modified license terms and conditions - for instance the administrative fees were paid, it has already committed to half of the $150 million of CapEx and is ready to lower the tariffs - it has been prevented from launching its GSM network and has been ordered by the PTA to pay an additional $38.8 million in order to launch its GSM network.

Paktel fundamentally disagrees with the order and has, in line with the prescribed process, launched an appeal in the Pakistan High Court. We had a first hearing this morning in Islamabad, and a second hearing is scheduled for Thursday of this week. It is Paktel's intention to deal with the issue of the license renewal fee subsequently.

As a final comment on this issue, I would like to stress that this issue is a very specific issue to Pakistan and that we don't envisage any replication elsewhere within Millicom.

In Vietnam, we continue to experience strong subscriber growth. The tariff reduction has increased the minutes of use by 8% and 11% respectively for postpaid or prepaid markets from May to June. Our mobile phones network has sufficient capacity to cope with the increased traffic. The internal investigation that was order by the Government of Vietnam into the Vietnamese Posts and Telecom does not at all, in any way, involve Comvik International Vietnam, our subsidiary. It did, however, slow down the investment approval process for Moby Phone, given that all investments have to be approved by the VNPT. We expect that process to resume shortly.

The negotiations with respect to the continuation of our operations at Vietnam continue, and we will inform the market as soon as a milestone is reached.

Let's now focus again on the strong operating results for the second quarter.

Let's start with the subscriber growth. During the 12-month period ended June 30 2004, mixed worldwide cellular subscriber base grew by 43% to 6.4 million. The proportional subscribers grew by 43% on an annual base to 4.4 million, and 89% of whom are prepaid. A record, almost 475,000 net new total cellular subscribers were added in the second quarter. More than double the amount added in the first quarter of the year, partly as a result of increased investment in CapEx and the success of our prepaid mass market distribution and price leadership strategy.

Focusing on revenues, I can say that Millicom produced total revenues of $216 million for the 3 months to June 30 2004, an increase of 50% from the second quarter of 2003, reflecting the increasing trend of growth in our operations.

MIC's operations in Africa recorded quarterly revenue growth of 91% from the second quarter of 2003. The equivalent increase from MIC Asia was 21%, and in Latin America revenue increased by 78%, or by 13% if El Salvador is stripped out, pointing to a sustained recovery in the region.

Turning to EBITDA growth, EBITDA for the 3 months ended June 30 2004 was $107.7 million, an increase of 47% from June 2003. Quarterly EBITDA for Africa was $14 million, increasing by 68% from the second quarter of 2003. Latin America recorded EBITDA growth of 78% to $46.4 million, and Asia recorded growth of 24% to $47.4 million. The Group EBITDA margin was 50%.

When we turn to financing, I would like to point out that in April this year, Millicom called the entire outstanding amount of its 2% Senior Convertible PIK Notes Due 2006 for redemption in cash in accordance with the terms of the Indenture covering the 2% Notes.

A total of $63,371,000 of the 2% Notes was converted into shares of MIC common stock, with a par value of $1.50 each from the initial amount of $63,531,000. This conversion has increased the equity base and reduced the debt and interest costs for the Company again.

So now let's look at the results for each region. Let's start with Asia. Year-on-year growth in proportion to cellular subscribers was 40% in Asia, which contributed to the region's increase in revenue of 21% to $81.5 million, and an EBITDA of 24% to $47.4 million from the second quarter of 2003.

In Southeast Asia, which compromises of our operations in Cambodia, Laos and Vietnam, proportional subscriber growth of 57% was recorded, and in Southeast Asia compromising of Sri Lanka and Paktel and Pakcom in Pakistan, the increase was 28% from the second quarter of 2003. Revenues for Southeast Asia and South Asia were $51.8 million and $29.7 million respectively, and EBITDA was $32.4 million and $14.9 million respectively. The EBITDA margin for Asia as a whole was 58%.

Let's move on to Latin America. Revenue for Latin America for the second quarter increased by 78% from June 2003 to $97.3 million. If El Salvador is stripped out, the quarterly growth rate is 13% relative to the second quarter of 2003.

South America continued to demonstrate recovery with Paraguay and Bolivia reporting their highest year-on-year quarterly increases in revenue for several years, of 14% and 6.5% respectively.

The Central American market continues to perform strongly, showing the highest growth of proportional subscribers of all clusters at 141%, leading to an increase in revenues of 130% from the second quarter of 2003. EBITDA increased by 78% to $46.4 million for the second quarter of 2003, or by 16% if El Salvador is stripped out.

Guatemala showed a strong increase in EBITDA, growing by 22% from the second quarter of 2003. The EBITDA margin was 48% for the region as a whole, 51% for Central America and 38% for South America.

At the beginning of July Telecel - MIC's operation in Paraguay - launched GSM services in the 850MHz frequency, covering 95 cities and towns under the brand name of Tigo. Its migration to GSM services will provide Telecel with further opportunities to strengthen its competitive position in Paraguay, and will create further operational facilities for Millicom when similar services are launched under the Tigo brand by operations in Guatemala, El Salvador and Honduras later this month.

Let's turn to MIC Africa. In the 12 months to June 30 2004, MIC Africa added 385,000 proportional subscribers, resulting in a increase of 130% from June 2003 and contributing to an increase in revenue of 91% to $35.2 million and an EBITDA of 68% to $14 million. Ghana performed particularly strongly, producing revenue growth of 170% from June 2003. EBITDA margin was 40% and we will work towards bringing this up to the 50% level in the coming quarters.

So what's the outlook? MIC has built on a very buoyant start to 2004 by producing record subscriber growth in the second quarter and quarterly revenue and EBITDA growth of respectively 50% and 47% from the second quarter of 2003, keeping its EBITDA margin at 50%.

Following our recent investment in 4 GSM networks in Latin America, we anticipate even stronger subscriber growth and an improving market share in that region. The benefit of further investment in GSM networks saw MIC Africa perform particularly strongly, producing a year-on-year quarterly growth in revenue and EBITDA of 91% and 68% respectively.

The subscriber growth will further be enhanced once we will be able to switch on our Paktel GSM network. We remain very bullish about the outlook of the Pakistan telecom market.

Our operation in Asia and Central America continues to show good growth, and in South America both Bolivia and Paraguay produced the highest quarterly revenue increase for several years, giving us confidence that these markets will continue to improve.

We remain confident of reaching favorable outcomes in the outgoing license renewal processes in Pakistan and Vietnam, and we look forward to updating the market on developments once the negotiations have been concluded.

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

[Operator Instructions].

We will now take our first question from Mr. Andreas Ekstrom with Handelsbank. Please go ahead, sir.

Yes. Hi, Marc. It's Andreas Ekstrom from Handelsbanken.

Hi, Andreas.

Could you just give an updated view on Pakistan when it comes to your expectations regarding the total cost and the payment timetable for renewing the licenses? I know it's difficult for you to answer, but especially given the fact that Mobilink signed an agreement that they will pay the same amount as Telenor did.

Maybe, secondly, also on Pakistan again, the $39 billion that now, does this impact in any way the negotiation for the renewal of the licenses, in your view?

And maybe thirdly, if I may, also the Vietnam operation. Are you continuing to invest in Vietnam, given the negotiations that you still have or have you put on hold to that, so to say, during the remainder of 2004? Thanks

Okay. So let me first deal with the license fee in Pakistan. I guess Orascom has its reasons, which I can only guess what those might have been, to accept a deal with the PTA and agreeing to pay the amount, the same amount Telenor and Warid Telecom agreed to pay. The reasons, I'm not going to speculate which they might have been, but at the end of the day, they might have had, this might have been a lower amount for them to be paid than if they had decided to stick to the position we are sticking to. And at this point in time, with us taking this action in court, this has nothing to do with the license fee as such. This has to do about the GSM network, which we have built out, which we want to switch on, and we think we are entitled to do so. So that's why we are in the normal process. Once you get an order from the PTA, the only way you can change that is by going to court and ask the judges to take a decision in the matter. And the maximum amount that that would cost us is 38.8%, which in no way influences or changes our position with respect to the license fees to be paid after April 2005. So those are 2 separate issues. The things should not be linked one to each other.

In terms of Vietnam, we continue to invest in Vietnam. We still have a substantial amount that is in the pipe, which substantial amount of investments which we have approved at the Millicom level, which are in the process of being approved by both VMS and the VNPT, which will go in between now and the end of the BCC, which is second quarter of next year. So we continue to invest in Vietnam, otherwise we wouldn't have been able to take this very strong subscriber intake and also minute increase during the first and the second quarter of this year.

Okay, thank you.

Thank you.

We will now take our next question from Mr. Bill Miller with Hartwell. Please go ahead, sir.

Hi, Marc.

Hi, Bill.

Thanks for the call and for the good quarter. In terms of Pakistan and going to the courts, you went this morning. You've got another date on Thursday. Do you have any idea how long this appeal will take or is there an appeal after this that you or the Communications Ministry can go to? Can you just tell us how you expect this process to unfold and how long you think it will take to unfold? And then I've got some other questions.

What we're doing is nothing unusual. As I just said, we are following the process that says the if you get an order from the PTA, or with the Pakistan regulator, the only way to fight that or to disagree with that, is to go to court. And that's what we did last week and we had a first hearing this morning.

The fact that we got a second hearing already this week, on Thursday, shows that the judge has the intention to treat this with some urgency given that we have our network built and that we would like to start taking subscribers in and start generating revenues. So I would be very hopeful that this process is not going to take too long. How much exactly? I can't say because, as I say, it is in the hands of the courts now, but I wouldn't expect this to drag on for several quarters. I would hope that we'd come to a conclusion, as I have said previously, in the third quarter of this year.

Great. The other-- Can you tell us about any new markets you were thinking of entering and can you bring us up to speed on where we stand in Iraq, the timing of, perhaps, getting that network up and operating? Whether there's any backlog there? And one of the interesting aspects of the Orascom agreement was they announced that they were growing their subs at 50%. Could you give us any indication of how much pent up demand you think there really still is in Pakistan and whether, how fast you can realize that in terms of subscriber growth, say, over the next 12 months from the time you actually get it turned on?

So we haven't changed anything about the outlook of the Pakistan market. We remain extremely bullish about it and the 1 million new subscribers, intake of subscribers, within the first 12 months after the start of the GSM network. I'm still very confident that we will meet that target. I have been told that Telenor said publicly that they expect to launch a service in April of next year only, but that still gives us plenty or ample of time to get into - as you said yourself, judging from the Orascom numbers - the very strong market growing very rapidly with, at this point in time, not enough competition in that market.

In terms of business development, I guess when you said Iraq I guess you meant Iran?

Iran, yes.

Yes. So, we are, we have people on the ground there. So, the orders have been placed and we're still planning on launching service. Not ourselves, because we're only managing a project there in the fourth quarter of this year. And the partner there and the group we are dealing with there have signed the contracts with suppliers, and we have engineers on the ground who are doing the network design. We have people on the ground who are setting up a special purpose vehicle that will allow us, at a certain point of time, to exercise our option if we think the time is right to do so. So that is all ongoing and, as I said, we think launching a service in the fourth quarter of this year.

In terms of new markets, I'm not going to be country specific, but we do see some opportunities in Africa and we are making some progress there in some markets, but we're also looking at some interesting opportunities in Asia. But that is a business development project, process, and that's always very hard to say when those licenses are being awarded, given that we typically stay away from the very expensive license auction processes as we have recently seen in Saudi Arabia.

Right. And Mark, can you give us any additional color on the EBITDA margin, because I think you have gotten to the 50% level faster than some people expected and it looks as though it can only improve from here. Am I missing something, or do we look as though this is now the base and with the new consolidation of call centers, for instance, in South America and GSM startups, etc., in the end, obviously, there's subscriber growth - can we look at something better than 50% in each of the remaining 2 quarters for the year?

I'm sure that some countries and some regions like, especially, Africa and also South America, I would say have some upsides. We have been able, by using the same brand name, Tigo, across Latin America for our GSM launch, to keep the cost for launch in the GSM service low, but that should not impact our margin. We also expect that the margins in Southeast Asia and South Asia will continue to be at the level where they are today. So if you add all of these things up, there might be a slight increase in the margin going forward this year.

Great. And could you talk, just for a second, on any financing plans? Obviously, you've done a wonderful job of reducing your debt [APL], what they call the Texas stutter. Do you see any need for more financing of any kind to satisfy any opportunities that you see?

Let me first say that the debt at the operating company level was, again, slightly reduced in the quarter. So we continue bringing down the debt. At the same time, as I have said on previous calls, we are looking at raising some, maybe $100 million at the corporate level in the form of some revolving credit facility with one or a couple of banks. So we are making progress on that front. But that's the only fundraising exercise we have in mind at this point in time.

Great. Marc, thanks a lot and again, just a terrific quarter. Well done.

Thank you, Bill.

We will now take our next question from Mr. Irwin van Daldum with Asterix. Please go ahead.

Yes, good afternoon. I have a couple of questions. First, on Vietnam, you were confronted with a price cut in Vietnam and will be confronted in the next quarter again. Could you give us more details about that and what kind of impact that will have on the ARPU in this region, because this one came down quite considerably in the second quarter. Should we expect the same happening in the third quarter?

And then I have some several questions about Pakistan. You mentioned that the second hearing is already this week, but do you believe that it will be a matter of quarters or just a couple of weeks or even longer? And are you not afraid that they stall time just to let Telenor start at the same time as you do? And I also want to know what kind of additional cost you could expect from the launch of a GSM network in terms of marketing costs and other startup costs?

Okay. So in terms of Vietnam, let me first say that these tariff reductions, I see all but negative news. I think this is great news because, as I've said previously, on previous calls, tariffs in Pakistan are still fairly high and in order to continue to fuel the growth, tariffs will have to come down. So in that sense, the tariff reduction we saw in the second quarter, with the elasticity we saw, has allowed us to basically have a payback of around about 3 months. So tariff reductions in the third quarter, which were announced by the VNPT, and [it's fair to say] we don't influence that process. I think if you add all the things up, it will probably lead to a kind of 5% tariff reduction, at an average. And again, I think it will, at the end of the day, increase demand for the service, it will increase the subscriber growth, and that is the only way we will be able to increase the mobile penetration in Vietnam from the current 3% to 4% level to the double-digit number.

In terms of Pakistan, in terms of the timing, I think the people in Pakistan do realize that there is an issue. We have been told by the PTA that they have written a letter to the Government very recently, alerting the Government to the issue of us disputing a license fee to be paid for renewal of the license and starting the GSM network. And the view I take is that if you don't think you have a problem, you don't send a letter. If you think you have a problem, you do send a letter, and they have requested a committee to be set up in order to resolve this issue. The process we are taking now is a legal process, which again is a normal course of action which should not take several quarters. It should take, like I said, should be resolved hopefully within this quarter, the third quarter, and given that we've had a hearing, a second hearing, agreed so quickly shows that, I think, the judge also realizes that this is a matter of urgency.

So I remain very confident that this issue will be resolved shortly, and then once this is resolved we will also deal then with the license renewal fee after April 2005.

In terms of the additional cost for the GSM launch, we have been preparing this Company for the GSM launch during the second quarter. With the training, with the distributors, we have brushed up our brand, Paktel - new logo, new colors. So we are ready to launch a service, so there should not be any additional cost related to this process in the third quarter when we hope to start this service.

I still have another question on Vietnam. What kind of price cut do we face and how much can you compensate by just higher volumes, which is increasing every month?

Like I said, we are expecting an average, in the price reduction that was announced by the VNPT that starts from August 1 onwards, we expect an average that would be about 5% price reduction. So, I would expect that we are going to see a very similar payback as we saw in the third quarter, i.e. 3 months.

So the price, a little over 5%, but ARPU will probably decline by less than that?

Yes. ARPU by less, because what we have experienced and again, this is not the first time this happens, this has been happening to us over the last 15 years and we've been dealing with price reductions since we started going into this business, shows that there's a lot of elasticity and that people do decide to spend, let's say, $10 a month on a telephone bill irrespective of how many minutes they get for that. They control their budget. So we would expect that there's not going to be an impact in the medium term on ARPUs and that in the medium to long term we're going to see more subscribers and we're going to see much higher mobile penetration as a result of this.

You have launched a GSM network in Latin America. What do you believe will be the impact? Is it just subscriber growth or also the ARPUs are much higher in the GSM network than they are on the old network?

What we said is that we see the GSM migration as just the next step of providing additional capacity, mobile telephony capacity, in that country. So our plan is to just take the new growth into the GSM network rather than in the existing TDMA networks or CDMA networks that are full now. The only thing we will do is that we will migrate, actively, some high users away from TDMA to the GSM network, given that GSM has a higher functionality, more attractive features on phones and much nicer looking phones and better priced phones.

We also expect that with the introduction of GSM that in South America the consumption of, or the use of, SMS is going to increase. And as far as Pakistan is concerned, we expect that also we're going to benefit for the time ever in Pakistan of some roaming revenue, which we know from our markets in Vietnam, for instance, go up to 5%/6%/7% of overall revenues at times. So in that sense, we do expect to generate additional revenue out of this GSM migration.

I must say, for Paraguay the launch was done about a month ago and the first feedback has been very, very, very positive. Hopefully, the event that took place over the weekend, this terrible fire in the shopping mall, will not create any issues. But the impact, the first month was very, very positive. So we would expect the same in Central America in 2 weeks when we launch those networks.

Okay, thank you.

Thank you.

We will now move to Steve Flynn with Morgan Stanley. Please go ahead, sir.

Good morning, just a couple of questions. Marc, can you give us, for the quarter, how much cash was sent up to the holding company, and maybe what you expect to send up for the full year '04?

Well, we are ahead of our budget for the, we had given a budget of $160 million for the year. We have [saved] for the first 6 months $85 million.

So another about $40 million this quarter?

$41 million, I think, was for the quarter, yes.

Thank you, okay. And then just as a follow-up on Pakistan, if we assume you have to pay the same fees as the auctions and what are Orascom did on a, just for the size of your licenses. I think you talked about $214 million per license as a potential cost. Can you give a little more color on if that came through how you would fund it and is that why you would put in $100 million credit facility at the [wholesale] level?

The $100 million, let me answer that question first. The $100 million credit facility is something I started speaking about in December of last year, and that we might want to do this. So this was something we discussed way ahead of this auction process, to kicking off in Pakistan. But I've said that the [indiscernible] call after the first quarter. The $214 million as a license fee is spread over the term of the license, being 15 years. We expect that the operating companies will be able to pay that out of operating cash. So there's no need for Millicom Corporate, if you want, to make money available under that assumption.

Okay, then I'm a little confused. What would be the potential use of proceeds for the $100 million credit facility--?

As I said, it's a revolving standby facility.

So there's no need to put it in place--?

If you read between the lines, given that we discussed it in December, if there had been a high urgency to put in place, we would have put it in place much earlier. So in that sense, it's not that we need that money in the short term. It's a facility, and a rollover standby facility for new events, opportunities we see in the market.

Okay, great, great. And then, just as a follow up to Vietnam. Can you talk a little about at the end of the current contract when the Government has the right to buy the net plants for $1, what would happen in that case to that plant that gets transferred over to the Government of Vietnam? Would your context of the joint venture then be renting out the capacity that the Government would own? What happens to the network when it gets transferred over to Vietnam, if that's what takes place?

The way forward, as I've said in the past, is that the Government of Vietnam has decided that the BCCs, the Business Corporation Contracts, as a way for foreigners to cooperate with local telephone companies, is a form that they want to discontinue at the end of the current contract, and that they want to move to joint venture companies, amongst others, as a result of the fact that Vietnam does want to join the WTO next year. And the assumption, and we know that VMS, our partner, who [indiscernible] that we will be paid the $1 at the end of the contract, has been one of the companies earmarked by the Government for what they call equitization, which is a privatization process. So the way forward I see is that we will be a partner in our privatization process of VMS, and that is something that we are currently discussing and that will be, hopefully, implemented at the end of the second quarter next year.

Okay, great. Thank you, Marc.

Thank you.

We will take our next question from Mr. Steve Werber with Apis Capital. Please go ahead, sir.

Hi, thank you, a couple of questions. First of all, on Pakistan. Can you just give us an update on the wireless local loop licenses there and whether or not you are interested in bidding on those and just the timing of those auctions?

We have decided not to bid for those licenses. We have 2 licenses in the country with very attractive spectrum that, amongst others, will allow us, if we wanted to do so, to compete very closely with the wireless local loop activity. So we've decided not to focus on those activities.

And are those networks that will be built out? Should we think as those as somewhat similar to the PAS networks in China, or is it somewhat different?

I don't know whether they're going to be built out. I know that they are awarded on a regional basis and I don't know what the different companies, there are quite a lot of them, have shown interest for those networks, what they are going to do with them. But I can say that the Pakistan regulator has learned from the situation that existed in India with reliance, where reliance on the back of a wireless local loop license, managed to get into the mobile business. So we have been told that all the holes have been closed so that those licenses can only be used for wireless local loop licenses purposes and not for mobile services.

Do you, as those licenses are built out, or those networks are built out, I should say, my understanding is that those are going to be targeted at low ARPU non-mobile subscribers, i.e. people who stay in their city areas. Given the positioning of your networks in Pakistan relative to the mobile [indiscernible], how do you think about the competitive pressure in the future for you in Pakistan from those networks?

We have exactly been focusing for the last couple of years on the low ARPU subscribers, and so that's exactly our strength. So that is a market segment that we know very well and where we have a very strong brand recognition. Amongst others, as a result of the very strong distribution we have in that market segment or across the country. So it's something we know well. The GSM migration will allow us to go a little bit up into the market, the middle end to the high end of the market, where we were, at this point in time, not able to compete with Orascom and NuFone, given the technology disadvantage.

So we will be able to compete at both market segments going forward with our--

But is it reasonable to assume that pricing is going to be, as in China, at a pretty good discount, 25% plus, per minute?

I'm not familiar with the pricing in China, so I can't comment on that.

Okay. And then on Iran, can you give me just a little more? From the last quarterly conference call, just looking, I'm just trying to get any details on when you can purchase this 47% stake and under what terms that valuation is put?

Well, what I've said is that we have an option to acquire that stake within the first 5 years from operations, or from, sorry, signing of the agreements, and that the cost for us is going to be book value and that book value I estimate to be between $25 million to $50 million for our share.

Okay. Then, in your revenues, what portion, just globally, what portion are handsets or infrastructure of total revenues, or it is all just voice minutes that you record?

Very limited. We have some countries where we are in the handset business, but that's a very small percentage. I don't have the exact percentage, but it's very low.

Okay. So there's no equipment that's resold through your revenue?

No, no, no. We want to be in the minutes business.

Okay. One of the things - this is a general question regarding this whole building networks and managing networks. When I was speaking to Barty and Ericsson and Siemens, and Barty recently signed a large contract to have their networks managed by Siemens, I'm just trying to understand the economic incentive for an operator to give you a business cooperation agreement as opposed to what Ericsson and Siemens are very aggressive in building, which is this network management business where they sell the equipment and then manage the network. So I just wonder if you have any comment on how I should think about that, as Ericsson puts much more focus on this kind of business. To me, it looks like similar to what you're doing in Vietnam but with much better economics than what Ericsson, generally, is able to pull out of these networks?

Yes, but these things are not comparable. You're talking about completely different things. What Barty has done is outsourcing its network build-out and management, which, I guess, has had its reasons and I'm not familiar with those reasons. The BCC in Vietnam was the only way for a foreign company 10 years ago to get active into the mobile telephony business, and that is just a cooperation which at the face of it is not so different from a joint venture construction which we have in all the other countries. So those are 2 completely unrelated issues.

So now, as we look then towards the renewal in Vietnam, besides the capital, what would you be bringing to the table in that renewal?

Well, we have been bringing to the table for the 9 years we've been operating there is capital and expertise, both from the technical point of view but also more importantly from a marketing, pricing and distribution point of view. As you know, that is what is important nowadays.

What we also can bring is, for instance, going forward, is new technologies like 3G. We can leverage all the experience we are building up in our sister company, TeleTwo, in Sweden where they have started their 3G network. So those are things we can bring to the Vietnam market, as we can do it into other markets.

Okay, thank you. Sorry, just my last question. Is there any chance you would renew just one of your license in Pakistan and just migrate all subscribers onto one network, or are you--?

No, we said that our intention is based on the assumptions we made to renew both licenses.

Thank you very much.

Thank you.

We will now move to Mr. [Sandy Bihami] with Lehman Brothers. Please go ahead.

Good morning. My question is in terms of cash flow requirements in the coming years. You have 2 licenses up for renewal in Pakistan, but what is the important stake in Iran, a possible stake [equity speaking] in the [indiscernible] joint venture? And concerning CapEx and network rollout in all your markets, what are your financing plans in order to meet the growth in all these different markets?

Well, the plan is, as you know, to pay all of these things out of operating cash flow. As I said before, in Pakistan I expect the license fee to be paid over the time of the license and our operating companies can do that out of their operating cash flow. So that doesn't put any burden on us.

In Vietnam, over the last 9 years we have been able to pay our contribution amongst others out of the cash flow we are generating out of that business. So the only upfront payment you should be looking at is eventually Iran, but it all depends on when we exercise our option. We have 5 years to do so. So at the same time, our cash flow and cash upstream continues to be very strong, with $85 million being up-streamed in the first 6 months of this year. We don't need all of that money at the corporate level, so at least 50% of that can be used for other purposes.

And then, if I may add, and as I said earlier, we are looking at putting a credit facility together at a corporate level.

And just as a follow-up question, in case the [indiscernible] stake is corporate rights, in that case will it restrict the up-streaming of cash flow to the corporate level?

I can't answer that question because we haven't finalized our negotiation in Vietnam.

Thank you.

Thank you.

[Operator Instructions]. We will now take our next question from Mr. Oulie Selaman(ph) with JMG Capital. Please go ahead, sir.

Did you mention what the cash at the holding company level is right now?

The overall cash consolidated is over $190 million, and about half of that is at the corporate level.

Yes. Did you have guidance for the second half for capital expenditure? I think at the beginning of the year it was $150 million.

So we'll probably go over the $150 million we have set as the target for this year, but as I said, that is driven by the strong subscriber intake and the good growth we see in the different markets. So I would say that the number for the total year is probably going to be somewhere around $180 million to $200 million.

Thank you.

Thank you.

Our next question will come from Mr. Kevin Rowe with Rowe Equity Research. Please go ahead.

Thanks. Marc, a couple of clarifications. First, in your prepared comments regarding the license renewal in Pakistan, you said you expected a favorable outcome. How would you characterize, what is a favorable outcome in your eyes financially?

Favorable outcome for the legal case we launched last week is that we will be allowed to--

No. The license renewal.

We are not in court for that. So, we're just in court for switching our GSM network on. So the favorable outcome is that we get something that's in line with what we discussed before, which is payment over time and $214 million.

$214 million over time?

Yes.

Regarding Vietnam, in the press release in your discussion of Asia it ends with a sentence saying "We expect to see a similar impact in Q3 versus Q2." Are you implying that you expect to see another sequential decline in revenue in EBITDA in Q3 as we saw in Q2?

No, I would expect that we should be able to stay at the same level as we were in the second quarter.

For both?

We saw very good subscriber growth and minutes growth in the second quarter as a result of the tariff reduction. So we should start seeing increased revenues as a result of that, and that should somewhat compensate the tariff reduction.

So for Asia, consolidated flat revenue in EBITDA sequentially?

For Southeast Asia.

For Southeast Asia. And lastly, on Africa, the EBITDA margin in Africa for the quarter was dropped below 40%. It was 42% in the first quarter. Why the sequential drop in margins in the quarter?

That's the result of us making some provisions for bad debts on incumbents in 2 countries.

Could you be a little more specific?

In Sierra Leone and Tanzania.

Great, thanks a lot.

We are making provisions against receivables we have which we don't expect, or at least applying our cautious rules we make in those provisions if money hasn't been paid off in 90 days.

But that's essentially a one time--?

That's a one time. That's right, yes.

Very good, thanks, Marc.

Thanks.

We will now take our next question from Mr. Richard Marshall with Stanwest(ph). Please go ahead.

Hi, Marc, good quarter. I just wanted to, I'm just trying to lay things out. So it looks like next quarter, you said, EBITDA flat for Southeast Asia given this tariff reduction. Are you expecting a similar, is this a, should be an ongoing thing or fourth quarter that should be over?

No, I don't think this is an ongoing thing. I think this is something where the [indices], the pairing, the entrance of the new, the phone operator in Vietnam, TSL, who is expected to launch services, or who has [indiscernible] launched services. So I think this is a kind of an anticipation to this additional competitor coming to the market. So I don't expect it to be ongoing.

Okay. So, in the absence of that, in the fourth quarter of this year and perhaps for the first quarter you should, your growth and EBITDA should pick up again with the launching of this GSM? You figure Latin America keeps growing and your other markets are going to keep growing. Would that be right?

Yes.

Your growth should accelerate again in the fourth quarter?

That's right, because I would expect it to accelerate also in the third quarter on the back of the good growth we see out of Africa and Latin America and Central America, and also with the GSM launch in Pakistan shortly, hopefully. So we will see good numbers coming in there. So the only one that we expect to be flat this quarter, the third quarter, is Southeast Asia. I would expect that all others, even South America, to continue to go up.

Okay. So third quarter a better growth and then fourth quarter even better growth than that?

Yes, as far as I know today. But in the first quarter we didn't know that the VNPT was going to reduce the tariffs in the third quarter. So I can only judge of what I know today.

Okay, thanks a lot, Marc.

Thank you.

Our next question will come from Mr. Bill Miller with Hartwell. Please go ahead, sir.

Marc, just a couple of catch-up questions. One, has there been any movement in Honduras in terms of buying out their minority interest? Secondly, can you give us an idea of what the book value of Iran would be, say in December or January coming forward? And thirdly, is there a dispute as to the facts in Pakistan or not?

Okay. So, let's start with Honduras. In Honduras, there is going to be a new license agreement signed between our Company and the Government that will no longer require what they call a strategic telecom operator being a shareholder of that company. Okay? So that, hopefully, will allow us over time to finalize the negotiations we have been having over the last 2 years now. So it's not done, but at least we see a favorable development there with this new license without this requirement there.

When does that take place?

I think this is in the next couple of weeks, I would think. So I think the agreements are more or less ready. I think there were some small bits and pieces to be sorted out, but it's a process that started a couple of months ago and I expect to finalize shortly. But that doesn't mean that we will subsequently increase our ownership, then we will have to go back to the shareholders and see whether they're still interested in selling out. Okay?

Okay, thank you.

In terms of Iran, book value at the end of this year will still, I don't know what the value is because, as I said previously, I don't know how our partners are funding this project, whether they're putting a lot of equity or debt in there. So I can't really give you an answer to that. I stick to what I said before, I expect over time I assume there's about $25 million to $50 million to acquire our 47% holding in that company.

And then with Pakistan, the issue is not whether we should be allowed or not allowed to operate a GSM network or whether we should or should not be allowed to renew our license there going forward. It's just a price issue. So that's what we are currently disputing with the PTA.

Right. So it's not a question that if you had put in the right number of dollars or complied with the contract. They agree to comply with the contract, they just want more money.

That's right. If I put $38 million in their bank account tomorrow, they will allow me to start my GSM network. I just feel that that's a ridiculously high amount of money.

I agree. Okay. Thanks a lot, Marc.

Okay, thanks.

We will now move to Mr. [Frank Reardon] with Fidelity. Please go ahead, sir.

Yes. Just a question again on Pakistan. Could you just give us some more details on what arguments they are using to extract this price?

The arguments they are using is that they finalized the deal with us about 2 years ago. So there were still 2 years left and they just use the same price as paid by the 2 new entrants. So, divide $291 million by 15 multiplied by 2. That should get you to that number. Although, we still don't have the frequency. They still have not given us the frequency. So we have not been able to operate the frequency, so there's no reason why we should be paying for the last 18 months where we were not able to operate the network.

Right, okay, thank you.

Thank you.

[Operator Instructions]. We will now move to Mr. [Rees Summerton] with Smith Barney. Please go ahead.

Yes, hi. I'm fairly new to the company, so excuse some of the questions. I just wanted to get a feel for your CapEx per subscriber across the Group going forward. From what I can see at the moment, it looks like your CapEx looks quite low for the growth that you anticipate.

Well, in terms of the imported CapEx number I just mentioned to the market some time ago was that for the GSM migration in Latin America, so that is with an existing network, we had a cost of $17 per subscriber for import and equipment. And given that most of our investments are additions, additional capacity on built out infrastructure, meaning towers, rooftops and everything else, the local cost is fairly low.

If you start from a brand new network, of course from scratch, I think you're looking at something between $50 to $60 per subscriber, but there then you have to acquire the land, build the tower, buy the air conditioning, the batteries, the shelter, you have to do it all, plus, of course, the radio equipment. But if it's for adding capacity, it's about $17/$18 dollars a subscriber.

We were complimented very recently in Southeast Asia where some multinational finance organization was doing some due diligence for making a small loan available to our operating company there about the low CapEx per subscriber we have there. So they witnessed this [stuff], it works with the low CapEx per subscriber.

So what kind of number can we expect in Pakistan going forward, given that you probably do have the sites already?

Yes. Pakistan, given that we're doing built out of a GSM network where we do have to change switches and where we have to grow the network in order to comply with the conditions, we're looking at $42 million in our cost for a million subscribers. So that's somewhere in between.

And then, could you give me a feel just across the Group, the percentage of your operating expenses which are hard currency denominated?

At the operating company level, in principle, everything is local currency, except, of course - and that's not operating expenses - except for the imported CapEx. But everything locally - rent, salaries and stuff like that - is all in local currency. So the only thing that's not in local currency is the cost at the corporate level, but locally it is all local currency.

Okay. And then just finally, on Iran, I think you said early on in the call that you'll be starting in the fourth quarter, hopefully. What is the actual state they're at now? Have you started rolling out a network? What is taking so long before you can--?

Well, it's the planning of a network. So it's the negotiation of the contracts, the procurement exercises done. A contract was signed with Siemens. The network planning is ongoing in all kinds of things, interconnect and stuff like that, that is being dealt with as we speak. And then hopefully we'll be able to start building the network shortly, so that we can launch a service in the fourth quarter.

So you're still on track to launch in the fourth quarter then?

Yes. And again, it's not us. We're just managing the process, we don't own that network. We're not paying for that network. Then we have a management contract with an option to acquire a 47% stake in the company later on.

And sorry, if I just might slip in one more. In your Africa operations, what kind of penetration would you have as a target penetration, let's say, 3 to 5 years out, Tanzania, Sierra Leone, [indiscernible]?

What I've said is for Asia and Africa, that within a timeframe of 2 years we should be looking at double-digit mobile penetration. For Central America and South America, that is going to be higher. South America and Paraguay, I think, are over 20% now. In Central America, some markets we are approaching 20%. So there with targeting the 25% to 30% level, even maybe, let's say, [try] the 30% level.

Thank you very much.

Thank you.

It appears there are no further questions at this time. Mr. Beuls, I'd like to turn the conference back over to you for any additional or closing remarks.

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'll be happy to deal with those on a one-to-one basis. If you want to contact us direct or alternative you can call [indiscernible] at +44 207 321 5010.

Thank you very much and have a great day. Goodbye.

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation and have a nice day.