Millicom International Cellular SA (TIGO) 2015 Q2 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen, and welcome to the Millicom financial results conference call. Today's call 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.

Thank you and welcome, everyone, to Millicom 2015 second-quarter results presentation. Today's presentation materials can be found on our website, www.millicom.com.

Before we start, I would like to remind everyone that the Safe Harbor statements 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 Q2 2015 results and operational performance and strategy, after which Tim will take you through the financials; and we will finish with a Q&A session.

With that, I hand over to Mauricio.

Good day to you all and thanks for joining us today. I am indeed here with Tim, our CFO, whom you all know very well. Let's start this call with our key messages for Q2. This is, in a nutshell, what we would like you to remember from this call.

One; our Q2 was a solid quarter showing strong results, both operationally and financially.

Two; the core of our strategy will be to build a digital lifestyle for our customers and to monetize it for our shareholders.

Three; our integration in Colombia is progressing very well. A year into the process, we have enough confidence now to raise our synergy estimate to $750 million.

Four; our continued effort on corporate costs is paying off. We have now shown a fourth consecutive quarter of reductions.

And, five; we are reconfirming yet again our guidance for 2015, adjusted only for FX.

Let's start a high-level review of our Q2 results.

We're very happy with our strong subscriber growth across all business units. In Q2, we added 1.9 million mobile subscribers; 1.6 million in Africa, and 300,000 in Latin America. This is actually an acceleration on the 1.1 million that we had added in Q1.

In home, we built 114,000 homes. Our footprint now is very close to 6 million homes passed.

Our new Pay-TV platform showed good momentum as well. We added nearly 35,000 subscribers across our DTH and cable footprint. And we also added an additional 28,000 broadband Internet customers.

Our Q2 results were also very strong organically, although that stronger [currency] growth was offset somewhat by currency devaluations across key markets. Indeed, organic local currency revenue growth was strong at 9%. EBITDA was also very strong at 9% organic growth. And OCF grew 27% year on year, excluding UNE, and 41% including UNE.

These are all very strong operational and financial performance metrics. Tim will give you a lot more color and depth in a minute.

Let's now spend a few minutes on our strategic update.

As you surely recall, we are keeping the concept of digital lifestyle as our strategic vision, but we're now giving it a lot more strategic depth. In a nutshell, our strategic focus will revolve around two key pillars: building the digital lifestyle for our customers, and monetizing that digital lifestyle for our shareholders.

A detailed and thorough strategic growth map has been built around these two pillars. But I will, of course, keep it high level here given our time constraints.

Let's talk about mobile first, as recurring mobile is still about 70% of our revenue.

On mobile, building the digital lifestyle means driving smartphone penetration and data consumption on those handsets. Today, just about one in four of our customers has a smartphone. Three years out, we envision three out of every four customers will have a smartphone. It may be higher than that, of course.

We strongly believe that we are now at a tipping point in affordability and penetration in our markets. Entry-level smartphones are now below $45, and at this price level, there is large pent-up demand. In Q2 alone, we added 1.6 million smartphone users to our mobile base.

And data consumption is indeed ramping up quickly. In Latin America, a mobile data subscriber is now consuming 1.1 gigabits per month, up from 0.7 gigabits a year ago.

The key on mobile, however, is it's not just creating the digital lifestyle, but monetizing that digital lifestyle, and this is the key point we want to address today.

Millicom is indeed uniquely well positioned to effectively monetize data, much more so than MNOs in developed countries may have been in the past. 100 days into the job I strongly believe this for two key fundamental reasons. First, about 90% of our mobile subscribers are prepaid. This key fact is actually a tremendous opportunity in a data-centric world where smartphones are rapidly being adopted.

Bear in mind that a legacy voice only subscriber with a prepaid phone can take calls without any cost, and he or she only tops up when he or she wants to make a call. As a result, the voice only phone experience is passive. Prepaid usage and ARPUs are, therefore, low. That is largely our role today.

But mobile data shows a completely different consumer behavior. Mobile data is an always on experience. Consumers cannot get a message or receive notifications or use apps or check the web without doing a top up. In a data-centric world, prepaid consumer behavior is no longer passive, nor reactive; and, therefore, no longer low ARPU, because mobile data must always be on.

Some early signs of this shift are beginning emerge across our footprint. In Latin America, our voice ARPU was $5, whereas our data ARPU on data subscriber was about almost $8 in Q2.

Surely it is early days, and surely early adopters are more bandwidth hungry than the average; but this change in consumer behavior underpins a change in the all prepaid voice subscriber, and is very promising going forward.

The second reason is that monetizing data has typically proven difficult for mobile operators, which unlike us in many of our markets, face strong pressure from robust fixed networks. Those networks offer high bandwidth and unlimited fixed broadband Internet offers. In this context, as you can imagine, monetizing mobile data is indeed very difficult.

Said differently, the availability of a much cheaper and highly reliable price per bit from fixed offers has made mobile data monetization in many markets, very difficult. In most of our markets, however, we are the ones building that high bandwidth fixed network underneath our mobile network.

This is a very important point because it gives us a unique strong position to both monetize data and offer our customers a convergent offer going forward. And this is perhaps a perfect segue to talk about our strategy on cable, or the home segment as we call it.

As many of you know, I was a cable guy. Bringing the digital lifestyle vision into reality, into the home of our customers, is also about building and monetizing the digital lifestyle. In our fixed business, we are simply and literally building cable plant first. Think of it as a cable land grab opportunity. We build it, and then we fill it. It is what we would call cable strategy 101.

Our target indeed, is to reach 10 million homes passed by building the network and by doing some small infill M&A. That should make us very soon the second largest cable footprint in Latin America. This is HFC plant, DOCSIS 3.0, 1 gigahertz, two way, digital set top strategy, with residential Wi-Fi on it.

And we will be announcing our next generation TV rollout strategy some time next quarter, so stay tuned for that [bit] of that.

Monetizing a cable investment is all about penetration, bundling and upselling. We are indeed reaching 20% to 30% penetration on the new homes we build, and we do that 12 to 18 months after we release them for sale.

We're also reaching [1.5] to [2.0] bundling ratios because we are anchoring our product proposition for home on high speed data offerings, and relevant content. For example, we have secured exclusive local soccer content in key markets like Paraguay and Bolivia to help drive that penetration.

So quite simply said, we build state of the art new cable plant. We offer high speed broadband against largely copper or DSL speeds; and we do that with good or exclusive content and a next generation set top box experience. A straightforward cable strategy for an underserved market, with still low cable TV and broadband penetrations, which then leads me to our fixed mobile conversion strategy, which is at the core of what we're doing.

Simply said, it is early days for MFC in our markets, which gives us room to prepare for it, and more importantly, drive convergence in our own terms.

Everywhere we have a strong mobile business, we are rapidly building cable underneath it. It supports our mobile business, as we can expand our product offer and make the relationship with our customers stickier. And it also supports, offloads and enhances the capacity of our mobile network.

So for us, it is not about a [discounted 4-play] bundle to protect our customer base. For us, convergence into the future is about a new high growth and stable cash flow and a stronger customer relationship. It is about delivering multiple services at lower cost by sharing infrastructure between mobile and fixed.

The strategic mandate that we have given our CTO is effectively to deliver a bit to our customer through the most efficient of our two networks. This is our strategy in a simplified and summary way; hope it makes sense.

The cash flow model that stems out of this strategy is equally simple. The key to delivering it is focus. We have the runway to continue to drive organic revenue in the high single digits, as we have in the past. And we will do that on the back of data monetization and cable growth.

Our scale in all markets and across the region is large enough that we can drive operational leverage at or above 50% on each additional dollar of revenue. You heard me say a lot about that on our last call. And with a CapEx to revenue ratio going progressively towards the mid teens, we can also drive cash conversion of EBITDA into RCF of around 50%.

If you do the math, these two things will take us towards EBITDA margins around or above 35%, and OCF margins around the high teens or the low 20s.

This is a very good cash flow model. It's focus that is key. And for us, it is now less about a given and absolute revenue target, and much more about profitable cash flow growth. And this model works because we have high single-digit revenue growth and an increasing exposure to cable and convergence, and strong synergies and focus on cost control.

With that said, it now makes sense to go to an update on Colombia and synergies, which I know is a focus for many of you.

In Colombia, indeed, the mobile market is coping with a major regulatory change. Term contracts have been eliminated by law, effectively removing subsidies from the marketplace. With the subsidies gone, clients are allocating more of their income to the handset and less to the carrier plant.

Those are the dynamics that you see in the marketplace today. This has driven ARPU down while handsets remain very strong, and you see that in our financials.

The pendulum may eventually swing back if regulation is tempered, but for now, we have seen our growth slow down. Whereas our competitors have reported negative recurring revenue, we have remained in positive growth territory, which is good news among a change in the market place. We are indeed gaining market share and growing our mobile customer base.

And most importantly, although mobile growth has indeed slowed down, UNE is growing EBITDA at almost 25%, and our combined EBITDA margins are expanding beyond what we had originally planned, which leads me to an update on the integration and the synergies as the next logical step.

A year into completion of the acquisition, the merger integration process is well advanced. We now have a single management team and an integrated workforce, and a lot more visibility, certainty and some early execution on the synergies. I have to say that the team, which I've visited often, has done an outstanding job. So we are now comfortable in saying that synergies are indeed higher than initially estimated, and we're raising the target to $750 million.

The chart in the presentation shows that we're actually raising the NPV of the synergy targets by about 40%, apples to apples to be clear. If we compare to the FX rate of just south of COP2,000 which prevailed when we first issued this guidance.

But of course, the peso is now at about COP2,600, so this devaluation has indeed eaten into some of our synergy upside. And that's the increased target; with the peso at COP2,600, it's $700 million.

Hope this was clear, and more importantly, however, we want to give you more visibility into our revised and upgraded synergy estimate by giving you a synergy run rate that we show in this slide.

We estimated 2017 synergy run rate of about $70 million. These are network cost synergies and G&A synergies largely. Indeed, 80% of them favor EBITDA and 20% favor CapEx.

And because we are very focused, as you have heard us say consistently on profitable growth and on efficiency, we also want to update you on our continued focus on corporate cost control.

Corporate costs continued to decrease to $55 million in Q2. This is down from $73 million a year ago, and I want to commend Tim again and his team for the strong focus and the great results. It is a strong message internally and externally. Our run rate is now about $220 million a year, and we are certain that we can drive this number well below that in 2016.

And to close our prepared remarks, we want to reconfirm yet again our 2015 guidance adjusted only for FX, as shown on this slide.

Three months into the job with my hands now firmly on the wheel and a very strong team, I feel pretty, pretty good about confirming this guidance and about saying that we're aiming to hit the mid to upper part of our EBITDA guidance range, absent, of course, further pressure on our key currencies.

And on that very positive note, I will pass it on to Tim for a full review of our Q2 numbers.

Thank you, Mauricio. And as Mauricio said, we were very satisfied with the underlying performance in Q2. And starting with our key financial metrics, and as already stated, our organic revenue growth grew well, following a strong trend in Q1, but we did see strong FX headwinds in Q2. They were around about 10%, which is unusual. They normally average around 4%. So this did take the shine off some of the reported numbers.

That said, we still managed the EBITDA pretty well showing 9.3% organic like-for-like growth; and the margin was 50 basis points up on the last year, excluding UNE.

Our operating cash flow was also very strong in Q2, as Mauricio said, up 41% on the year, with an OCF margin of nearly 16%. There will be a little bit of weakening in H2 as we catch up on CapEx, but overall, the trend is positive.

Before getting into the detail, I just want to quickly run down the Group P&L. Headline revenues of $1.7 billion, including $133 million handset sales. Healthy organic growth, 97% organic headline, and north of 50% on handsets, with a solid service revenue growth.

You'll recall that UNE wasn't part of our numbers in Q2 2014, so our year-on-year growth was 18% overall on revenue and 17% on EBITDA, again in line with our expectations when we set our guidance out at the start of the year.

Continuing down the Group P&L, overall operating profit was in line with last year. I think we discussed before the high depreciation and amortization charge at UNE which has explained why D&A was so much higher in this quarter.

In the others line, we took a $44 million loss on FX, and the market-to-market revaluation of our put and call options in Honduras and Guatemala resulted in a charge of $40 million against a credit last year.

Incidentally, we've extended the expiry date on the Honduras option to the end of this year to be coterminus with the Guatemalan option.

Tax was up in the quarter, but this is largely timing. We took a lower charge in Q1. So if we look at the half, we ended with a tax charge slightly lower than in 2014. We're now expecting the full-year tax charge to be under $300 million.

Okay. Let me talk in more detail about the drivers of the performance in Q2. We have maintained a pretty consistent organic growth rate in the high single digits for several quarters now. I think it demonstrates that we have momentum, and this quarter was no exception.

It's not just handsets propelling this growth. The service revenue, which excludes handsets, also showed momentum. Q2 was rock solid at 5.7%. And I think it's worth pointing out that our cable business continued to see strong growth across all properties. Q2 was another notably strong quarter, with 25% plus growth.

And you can see that more clearly on this slide. Obviously, we had a big impact from the UNE business; $264 million in Q2, a 5.8% revenue growth.

The point I want to make though is that our existing cable businesses also grew very strongly in Q2; and Guatemala and Bolivia both growing 80% year on year, Honduras up 25%, whilst Paraguay's cable business grew by 20%, driven by penetration and expansion that Mauricio talked about.

I think it's also worth mentioning that we saw positive net growth in mobile. It was up 3.3%. And that's despite communication revenues falling by over 5%.

Again, we saw a very strong data pickup. Mauricio talked about this so I won't repeat it, but we saw an acceleration of our data revenue growth by 39% in Q2. And that benefits from the rapid rise in smartphone ownership amongst our customers.

Finally, in MFS, we saw some exceptional growth in some of our key markets. Tanzania, which leads the way for us on MFS, accelerated revenue growth, growing nearly 50% year on year; and whilst off a smaller base, Honduras, El Salvador and Bolivia also joined that 50% revenue growth club in Q2.

So turning to slide 22 and you can see that the revenue growth is broadly based regionally. Africa continues to grow at very good double-digit figures, whilst LATAM business posted a very healthy 7.7% organic revenue growth.

Hard to look at this chart and not comment on FX. As I said earlier, it knocked 10 percentage points off our reported revenue growth in Q2. We saw much more aggressive devaluations in Colombia and Paraguay, as well as most of Africa.

I've got a couple of slides on EBITDA now. I think I've said before that we're looking for a balanced scorecard from our business, not just revenue growth, but increases in EBITDA and in cash flow. So overall, the picture in Q2 was a little mixed. Yes, we had EBITDA up 17%. And if we strip UNE out of that, we saw 9.3% organic growth. FX took its toll, and ex-UNE, we ended the quarter flat on the reported basis.

But let me look at the EBITDA performance in more detail in the next couple of slides.

Let me start with Africa. Not quite as strong as Q2, but a few mitigating factors. The major impact on us has been in Chad where a rapidly deteriorating security situation is exacerbating an already fragile economy. Our business there is down 21%, compared to Q1, and that explains much of the organic performance shortfall from the Africa region in Q2. And we don't expect that to change any time soon.

Happily, we saw very strong performance in Tanzania, growing 23% year on year, based on strong customer uptake and MFS revenues. We're awaiting regulatory approval on the Zantel acquisition. We will maintain that as a separate brand, but we see it as a very positive development to help us enhance Millicom position in this fast growing market.

In the Rest of Africa, we see strong organic revenue growth, DRC, Ghana and Senegal all growing in excess of 20% year on year. But we did see a series of one-off items take the shine off what otherwise would have been a decent quarter for this group.

Similar story in LATAM; FX hits in Colombia and Paraguay eating into a lot of the underlying growth. That said, we saw steady progress in Central America, led by Guatemala, which was up 4% organically, and El Salvador up 3%.

South America was again dominated by Colombia, and despite a slowdown in the mobile market Mauricio commented on, we saw very strong EBITDA growth, doubling the level of a year ago. On the part of UNE EBITDA grew 24% year on year, whilst in the mobile business it grew by 37% year on year. So pretty strong progression there.

Finally, just want to mention Paraguay which is going through the process of transformation and recovery. We made good progress in the quarter. We're not quite there yet, but we did see our revenue grow by 2.2% organically.

Okay. Now looking at the cash flow; familiar layout showing the cash flow from EBITDA to equity free cash flow. This is a cash flow before dividend and other one-off items like M&A. I'm looking at the half year here rather than the quarter to give a better sense of direction, since the quarter is often affected by timing issues.

So headline here: cash flow was robust; and OCF, which is after cash, CapEx and working capital, was up 22% on last year. CapEx, as I said earlier, running a little bit behind. We'd expect that to catch up.

Important on taxes, $144 million; a little bit lower than Q1; primarily lower advance payments. But we now expect our cash taxes to be under $300 million, and that is lower than the $320 million I forecasted on the first quarter call.

Dividend to minorities pretty normal, nothing special here. Left us with an equity free cash flow of $52 million.

Finally, the net debt. Net debt increased by $284 million, largely accounted for by the payment of the full-year dividend in Q2. Our debt remains very well balanced between local currency and US dollars, between fixed and floating. We've got a very good maturity profile and a competitive average rate. And we've brought that rate down a little bit further in the quarter by repaying an expensive El Salvador bond.

Leverage comfortable at 1.9 times consolidated, 2.3 times proportionate. In order to conform our covenant set, we intend to issue a [consensus recitation] later today to increase our net debt to EBITDA covenant to 3 times on the bonds that don't already have that set at that level. And this is simply to conform with the new bond we issued in March and the existing Swedish bond that we have out there.

So in conclusion, the underlying trends remain strong. We're facing stronger FX headwinds than we saw in 2014, especially in Colombia, which will constrain some of the US dollar reported numbers. That said, we are confirming our guidance adjusted for FX, and some of the FX impact is being cushioned by cost and efficiency programs that we launched last year. And we see the Colombian integration plans moving extremely well, which is why we've increased our synergy target. We feel it puts us in a very good underlying position to deliver our numbers for this year.

With that, we'll take questions.

(Operator Instructions). Nick Brown, Goldman Sachs.

Couple of questions, please. Firstly, I know you recently increased exposure to Tanzania with the Zanzibar acquisition. Should we take from this that you may look to continue to expand your footprint in Africa? Or are you considering selling assets here?

Secondly, on your target to increase cable homes past the 10 million, can you clarify that is all within your current markets, or are you looking to expand into new countries in LATAM?

Thank you.

So I'll give you a high level on Tanzania, and maybe Tim can follow up on that.

On Tanzania, this was largely an infill, opportunistic transaction that enhances our position there, So you should read into it nothing other than exactly that. Infill, in-market, strengthens our position, and it was opportunistic.

And on the $10 million target, indeed it is within country.

10 million homes (laughter).

10 million homes. Thank you. Yes.

And I've nothing to add to that, I think. That's a full answer.

Okay. Thanks.

Luigi Minerva, HSBC.

I was wondering if you can go back to one remark you made in the Q1 conference call about aligning the management priorities and incentives to total return to shareholders. Yes. If you can give us an update on that over the last three months.

And then secondly, if you can give us your views on M&A, whether it's -- so what are the priorities? So for example, would it be Costa Rica where you're lacking mobile and, therefore, it will be a way to fill your fixed mobile convergence strategy? Or would it be tackling countries where you don't cover your cost of capital?

Thank you.

So on the first one, thanks for bringing that up again. Indeed, the management team is now fully aligned around TSR. We have rolled out a long-term incentive plan that encompasses the senior management of the team, which is squarely aligned around TSR. So thanks for bringing that up and giving it a highlight today because it is key to the way we want to run the business going forward; Board, shareholders and management team all aligned on that one.

On the M&A question, before I go to actual M&A, I do want to underscore and highlight that our eyes are on the ball. And the area where we can drive the most value creation for our shareholders we believe remains organic value creation around monetizing data, about grabbing cable land space, if you will, and tapping on nascent B2B opportunities for us. That's what we're focused on and I think that's where we can drive the most value.

So in that regard, M&A is -- although we're very clued in and we're participating, and certainly very engaged in making sure we're on top of all opportunities, it really is icing on the cake to the organic value creation opportunity that we have.

And your instincts are right in the sense that we give priority to infill, in-market acquisitions that evidently have higher synergy value, because we can drive them off our existing cost base.

Thank you.

[Stefan Bichaud], Citi.

I've got a couple of questions. Your mobile ARPU in Central America declined quite a bit this quarter. Perhaps you could let us know what the main driver of that is.

On the UNE synergies, the extra synergies, are they integration benefits or are they cost cutting, extra cost cutting that you've found?

And then just briefly on Costa Rica, could you give us an update on the regulatory situation there and what your thoughts are in Costa Rica should that not develop according to your plan?

Sure. So we're going to tackle them jointly, Tim and I. So we may be talking on top of each other.

The first one on -- it's Central American ARPU, it's largely FX. Is that right, Tim?

Yes. I think there's a big FX impact on that, particularly coming out of the Colombian -- Colombian FX has devalued 40% year on year, so that is a large part of that answer.

The UNE synergies I think you can put into four key buckets, if you will. The first one is cross-selling synergies. It is a convergence play, and we are selling mobile into the fixed and fixed into the mobile base. And Colombia is not a single given region. We are stronger in certain areas and, therefore, our integration gives us nationwide ability to tap fishing ponds in the area where one of the two businesses, be it mobile or fixed, was stronger than the other ones. So that's bucket number 1, cross-selling.

Bucket number 2 is faster network integration than we had anticipating, and that is basically driving network costs as we integrate the networks faster and more aggressively than we had anticipated.

Bucket number 3 is a faster integration of the procurement functions and content acquisition savings, which are not small for that business.

And bucket number 4 is indeed what you're alluding to, which are larger G&A savings than we had initially anticipated. And that is just a collection of over 80-plus work streams on the synergy.

So effectively, it is a more profitable integration and we have a more positive view on margin and profitability on the business than we did before.

On Costa Rica, no news other than what we have reported. There is still an appeal pending resolution before the local authorities.

Great. Thank you.

Michel Morin, Morgan Stanley.

It's just to follow up on the synergy question. How much has been extracted to date, if anything at all? And can you give us a sense of how the progression will be to your 2017 run rate?

And then secondly, on the corporate costs, very nice progress there. I was wondering if there's any element of savings from FX translation, and also, if there's been any change to how you're actually allocating costs to the regions. Is it --? I guess the question is: is the genuine cost cutting 100% of this?

Thank you.

Okay. In terms of the run rate on the synergies, we expect the full run rate of $70 million in 2017, and to get there, we expect about 50% this year, which is consistent with what I said on the Q1; 30% to 35% impact for us this year, 75% next year; around 100% in 2017.

In terms of our integration costs, we are sticking with the $105 million of integration costs. We've spent about $10 million of that in the first half. I think it will be around the $40 million/$50 million level for this full year with the balance in 2016.

In terms of corporate costs then, yes, there has been a little bit of FX impact on the corporate costs. Our corporate costs run in euros, dollars and sterling, so has been a little bit there. But I think that shouldn't take away from the trend line that we've got. And I think important to say this hasn't been an exercise in just pushing them somewhere else. There isn't a -- we haven't pushed them into the operations. This has been on a fundamental basis. We've brought down both our headcount in the center and our expenditure on non-headcount-related issues like consultants and other T&E-related things.

That's great color. Thank you very much. And if I can slip another one, a quick one on Colombia. You alluded to the regulatory changes. Is that basically all done now, Mauricio, or should we anticipate that we could see further headwinds to mobile service revenue growth in the second half?

No. I would say it's largely done now. If anything, I would hope for the pendulum to swing back a little bit and hopefully for consumers to be given the option to acquire term contracts if they choose to, which is not the case today.

Okay.

I think it was a slight unintended consequence of a change in regulation put through in July last year that we're taking a while to see it through but we're seeing today, and that was the prohibition of term contracts. So we're not -- we don't have visibility fully, but we don't expect anything like that to hit us again in the future.

Great. Thank you very much.

[Bill] Miller, JM Hartwell.

Could you give us a little more [color on] (technical difficulty) [cable plant]? What's it going do to your ARPU? But more importantly, what does it do for your mobile business in terms of reduction of churn there? Because that, obviously, will create tremendous impact on your margins.

So if you could you just give us why this is so important in terms of the other businesses as well as the potential. What is the total size? I know you said 10 million homes in three years, or something like that. Okay, but that's just the beginning. Can you go to 20 million after that? Or what is the finite number of the possible market?

Well, there's a couple of points there. Indeed, if and as the region continues to -- and when it does continue to further create a middle class, then the ability to build more of a footprint will grow with demographics. Cable is indeed a business of density and a business of affordability. So the more there is a middle class in the region, the more we will be able to build the cable plant.

Convergence indeed is about delivering bits in a more efficient way. That's the networking [deal] on convergence, and that's a mandate that we've given to the [CTO]. But from a consumer point of view, it drives down churn significantly, and it allows us to provide a cross-selling opportunity to our subscriber base which drives our acquisition costs down. It drives also churn down and consumer stickiness.

So we're beginning to see the early [days] of that. When we integrate content, say for example soccer, where we have good local content, we put it on our cable TV. That drives consumer adoption. But we also put that on a mobile app and provide a 360 integrated view to the consumer. Those consumers become stickier with less churn and drives for us a larger percent of share wallet.

That is the consumer product deal of convergence that we fully believe in, and those are the two reasons why we believe convergence is so important for us as we build our platform going forward.

Thanks. But what happens to, say, debt? Can you take debt to a higher level because you have a more stable revenue stream; and, therefore, can you put on more debt to do more interesting things with it?

Well, Bill, we've maintained a line of 1 to 2 times net debt to EBITDA. I don't see that changing at this stage. Obviously, that is determined by the cash flow that we get from business and the stability of that cash flow. Clearly, if that changes, then we would review the levels. But we've got fairly significant FX impact this year and I don't see that changing in the short term.

We're paying very close attention to the effect that cable has on the stickiness of our subscriber base, because indeed, the more it reduces churn, the more it gives us a stickier customer base; then, of course, the more stable the cash flows are. That is, of course, a very positive financial impact of our convergence wallet.

And the ARPU on cable would you say in three years will be [6%] a month, [8%] a month, [10%] a month? What kind of prospects do you have for the ARPU at that point, just on the cable?

Well, our view is that cable in the region where we operate today, and you can actually see it flow through the Colombia financials, in the last quarter, we have taken ARPU increases in Colombia while we continue to drive penetration simply because in the markets we operate, ARPU in cable is lower than it is in other countries in the region. So there is runway there for penetration and ARPU pick up.

Great. Thanks very much.

Sergey Dluzhevskiy, Gabelli & Company.

A couple of questions on Africa. Mauricio, Millicom obviously has been and still is largely a Latin American company; nd Africa has underperformed for some time, although obviously, it's slowly turning around. Coming into the Company, how are you going to evaluate Africa's turnaround?

And also, could you talk a little bit about, I guess, longer-term strategy for Africa and whether it should remain part of Millicom portfolio in the longer [term]?

Sure. You've heard me say this before. With all our businesses, there is -- and I say this to the management team often so that we maintain focus -- there is only one plan and one plan only, which is organic execution. And that applies for Africa as well. But where we're squarely focused on fixing the things that need fixing there.

We're squarely focused on driving penetration; we still have runway in Africa to drive penetration. We're squarely focused on keeping or growing market share where we can. And we are very, very focused on improving our service levels.

We've invested in the network quite a bit in certain countries over the last few months and it's beginning to pay off. You see that our growth in Africa is around 20% at the EBITDA level. So it's all about organic execution there.

We have no guidance for ourselves for a long-term plan other than appropriate portfolio management of the countries we operate. So whereas we execute on organic value creation, there are, of course, players that are reconfiguring their portfolio positions in Africa. If there is at a moment in time a better strategy than running our business, and one that we think is accretive to our shareholders, that is the bar we will use to measure that decision. It's just exactly as you would expect us to do.

I have another question on Africa, and you alluded to this.

So yesterday, Orange announced that it's in discussions with Bharti about potential acquisition of some markets in Africa, including Chad, Burkina Faso, Sierra Leone. Obviously, you compete with Bharti in Chad, and you commented on the difficult environment and security situation there and macroeconomic conditions.

Could you talk a little bit about the competitive environment and what could it mean if Orange potentially becomes a competitor? Obviously, we see then in Senegal currently.

We've got a very good business in Chad. At the moment, it's suffering because of the macro environment there. But I think we continue to see that business on an underlying basis actually perform very well from a competitive point of view. So it doesn't change our view on it whether it's owned by Bharti, or Orange, or anyone else, frankly.

Right. And last question on your spectrum position. Could you talk at a high level about your future spectrum needs given obviously the demand for mobile data? And how are you thinking about that over the next three to five years?

We monitor spectrum auctions and spectrum developments closely at our executive team and locally. We are, of course, dependent on spectrum, and in many, many countries we are closely following the awards of 4G spectrum. That's true in Colombia; that's true in Bolivia. It's true in a number of our key markets like Guatemala.

It is, however, very difficult to give you specific guidance as to when and how, because those processes tend to be very political in their timing. So they get delayed; they get moved forward.

But by far and large, we are seeing governments be very, very rational, very much focused on the industry dynamics being healthy going forward and balancing that, as you would expect them to, against monetizing some of that spectrum, as obviously fiscal pressures in many, many countries become more and more demanding.

Those are the trends that we see there: preservation of industry with perhaps more focus on monetizing spectrum to help [shore our] fiscal coffers.

Thank you.

(Operator Instructions). Lena Osterberg, Carnegie.

I was just going to ask you a little bit more on your long-term targets. What's the time horizon? Is it a three to four-year view on the EBITDA and operating free cash flow margin?

And then also, if you could say something about the expected progression. Where do you think you will be maybe next year and in 2017?

And then also to Tim on the equity free cash flow, you had a strong positive cash flow this quarter, so do you still expect a negative for the full year? And also, if you could give some indication on the level you expect on dividends to minorities for the full year.

So on the first part of the question, our cash flow model is midterm; and by that, we mean midterm, that's something that we will grow into.

And the second part of that question is when the time is right, we will be providing 2016 specific guidance in due time.

And I will pass it on to Tim for the second part of the question. Yes

So I think in our definition, Lena, equity free cash flow being the cash flow before dividends and one-offs like M&A and stuff, I'd expect us to be positive this year. It's basically the dividend and a bit of M&A that takes us over that.

And in terms of dividends to minorities, on a normalized basis, we'd expect that to be about $160 million. In fact, I think we will probably be paying a special dividend out of Guatemala in the second quarter which might take that number to -- closer to $130 million; something like that for the year.

So not $160 million; $130 million?

We'll be paying a special dividend out of Guatemala, so that will take it up a little bit outside our normal run rate.

Maybe I'm slow, but you said $160 million, and $130 million is lower. Is the $130 million the extra special dividend or --?

No. Our normal run rate on dividends to minorities is about $160 million. In the next quarter, we'll probably [pay] an extra special dividend out of Guatemala. We'll get part of that and so will our minorities. So in reality for this year, I'd expect the figure to be round about the $230 million level.

Okay, $230 million. I thought you said $130 million. Okay. Then I understand it. And you can't say a little bit more on the midterm, how long that is?

How long?

Is midterm.

I defer to Mauricio's answer on how long the midterm is.

No. You should -- this is the cash flow model that we're driving the business towards; and midterm is exactly that, midterm for us. I think the important thing is that you bear in mind the focus that we have towards growing in to profitable growth, and the fact that we will be giving you 2016 guidance in proper time on top of having confirmed 2015 as we did earlier on. That's how you should think about us running the business going forward.

Okay. Thank you.

Erik Pers, Danske Bank.

Firstly, on Honduras, would you consider buying out the minority there in order to avoid deconsolidating that business if necessary? And would you remind us of the terms to do that under the current arrangement?

Secondly, just curious about the tower companies. When do you think they will start to turn profitable? And how do you look at the value creation in those businesses at the moment? Is it trending in the right direction? And also, do you need these stakes in the long term?

Thank you.

Well, I think on the Honduras issue, we view this as an accounting technical issue. It doesn't really change our view of the business, the way the business operates, the way we manage the business, or our relationship with our partner.

Our terms on that put and call option I don't believe were disclosed, so I don't think it's good for me to disclose them here. But the point is that we haven't and wouldn't at this stage consider exercising that option anyway.

More so, we would drive M&A decisions not on the back of largely accounting matters but on the back of the economics of a given deal.

And, Erik, I think your other question was on the associates and relating to LIH, AIH and the other associates. They're relatively marginal in our overall Group. The LIH, AIH are, as you know, Internet startups. We're not expecting those to be net income positive for several or even many quarters to come. I don't think that's -- all they're focused on at this stage is they're focused on the growth opportunity. And for us, they are now passive investments and we'll operate them like that.

Does that cover that?

Okay. Yes. Thank you.

Johanna Ahlqvist, SEB.

Just one question left for me, basically, and it's related to the cable network and what's your view, or your personal view of the quality of the existing cable network. Do you believe that there are further CapEx to be spent to improve the network, or are you satisfied with the current level?

Thank you.

It's a very good question, Johanna, because embedded in the plan that we highlighted, and ongoing as we speak, so it's already flowing through the Colombia financials, we are indeed upgrading or rebuilding some of our acquired copper network. So that going forward, the majority of our network is either built or transformed into the state-of-the-art network that I described. So it is very much embedded and ongoing in our business plan.

Great. Thank you.

Thomas Heath, Handelsbanken.

Firstly, on the EBITDA target. How should we see this in light of rising handset revenues? And 35%; is that meant to be on total revenues? And if so, what sort of cost aspects are helping you given that you should see dilution of margins from handsets?

Secondly, on cash flow-centric strategy, wouldn't it be fair to say that there are some troubles below EBITDA and CapEx, particularly lease costs in interest and taxes paid out of Africa that arguably should make the case for non-organic value creation pretty strong, particularly in Africa?

And then thirdly, did I see [TEVO] in the slide pack? Curious if TEVO is the core to strategy for the home segment in LATAM.

Thank you.

Right. Well, let me deal with the first couple of questions.

So, look, our target of around the 35% level is for the Group as a whole. We recognize entirely what you're saying in terms of the dilution of handset revenues in that total. It's affected those for the last couple of years. And I think it's -- basically, what we see is a growth in our existing business, the operating leverage that Mauricio talks about flowing through to the bottom line. Plus, I think over the medium term, the handset sales will slow down a little bit in terms of their overall size relative to the size of revenues as a whole.

So the straight answer to the question is, we're not ducking it, we're not qualifying it; we're talking about getting 35% on the Group as a whole, including everything that sails in that group, and that is our challenge. And I'm not underestimating the size of that challenge, but it's the right challenge for us to have.

I think on the below EBITDA stuff, I think you're talking about Africa, I would only make a couple of points on there. Firstly, the tax in Africa is negligible. I'd put that down because we're not making any profits there so I'm happy we're not paying any tax there.

We do have lease payments because of the sale of our towers, and some of that does flow through the interest line. But we look at Africa on a cash flow basis in any event, so this doesn't make a lot of difference to us.

And the set top box strategy, stay tuned.

All right. Thank you very much.

Anders Wennberg, Brummer.

I guess most of the questions have been asked, but I just wanted to hear if you can clarify a little bit more, explain a little bit more the Honduras situation. A lot of companies have subsidiaries that are not 100% owned. Why can't you just continue to consolidate it? I'm not exactly sure why you have to deconsolidate it.

And secondly, can you say anything on what the dispute is about or what the problem is? Isn't this more just a technical thing to prolong the contract?

First thing I'd say is there is absolutely no dispute, absolutely no dispute at all. This is purely and should be looked at as purely a technical accounting issue. And if you've got a long time over a beer, I can explain the whole thing.

But the bottom line is we own 67% of Honduras. We guarantee its debt and it's part of our core business; it carries our brand, blah, blah, blah. But under the technical accounting, under IFRS 11 as amended two years ago, we may be in a position where we have to deconsolidate it.

Really stressing the point that this is technical accounting, so as far as we continue to report to you, we'll report on a pro-forma basis so you can see the full impact of Honduras on our business if we get to that particular position.

So I wouldn't spend too much time prejudging it at this stage, and I'll explain the accounting issues offline to you if you're really interested. But the message is: no dispute, and really no difference to the way we talk or report or operate the business.

Okay. I guess the EPS would be unchanged from this. How much of EBITDA is Honduras today, just to get a sense for it?

Well, again, I would make a point that the EBITDA doesn't disappear. It doesn't go anywhere. It's the same; it will be the same in our pro-forma reported figures anyway. So it's not -- I wouldn't want you to dwell on that side of it at this stage.

Okay. Thanks.

Gonzalo Fernandez, Royal Bank of Canada.

You've talked about the big opportunity in the B2B segment. Can we get a bit more color on that? What's the [addressable] market? Is it something LATAM, or more country by country?

Thanks.

Thank you, Gonzalo. It's a good question and I'm glad you picked up on the fact that we haven't alluded to it too dramatically. And the reason for that is that in the context of my three first months into the job, my 100 days if you will, we've picked up on a fantastic opportunity; but also, we've largely addressed the consumer market so far. But as a result of learning more and digging into it with the Colombia team, we've realized that our B2B business today is different in Colombia as a result of the UNE acquisition than it is in the rest of the footprint.

So in Colombia, we're focused on large conglomerates, government-owned entities, because UNE was a government entity. And in the rest of our footprint, we have focused on mobile services for B2B.

So we have to put those strategies in a cohesive manner together and be able to make a single cohesive B2B strategy so that we can articulate quite definitively the size and the way to tackle that B2B opportunity. It's large and it's different in our different markets, and it's something that we're going to continuously focus going forward.

I hope that gives you a little bit of color on where we are and why we have not highlighted it so much today.

Okay. Thank you.

That will conclude today's question and answer session. I would now like to hand the call back over to Mauricio Ramos. Please go ahead.

Well, thank you, everybody, for joining us today and for giving us with a lot of insight into what's in your mind. It's very helpful to us to continue our dialog with you. And thank you, Tim, and all the team for a fantastic quarter.

This concludes Millicom's financial results conference call. Thank you for your participation. You may now disconnect.