Millicom International Cellular SA (TIGO) 2016 Q2 法說會逐字稿

Today's presentation will be hosted by Chief Executive Officer, Mauricio Ramos; and Tim Pennington, Chief Financial Officer. Following the formal presentation by Millicom's management, an interactive Q&A session will be available. I would now like to hand the call over to Nicolas Didio, Head of Investor Relations. Please go ahead.

Thank you, and welcome everyone to the Millicom 2016 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 2016 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 afternoon and morning to all. Thanks for joining us today. Tim is on the call with me, as usual. As many of you know, Nicol will be moving on to new professional challenges very soon. So I want to thank you, Nicol, for your great work here, all the best to you in your bright future.

As many of you recall, back in October of last year, we disclosed that we had self-reported to the US and Swedish authorities that potential improper payments may have been made on behalf of our joint venture in Guatemala. We also said at the time that we had retained the law firm Covington and Burling, which has also been assisted since then by Kirkland & Ellis and by KPMG, to conduct and independent assessment of our compliance policies and procedures.

We are pleased to report to you today that this review has now concluded, and it has not identified any matters requiring further investigation. That is, of course, good news.

As with any organization and with any diligence assessment, of course, the review has identified potential ways in which we can proactively strengthen our compliance program going forward, like adding personnel resources and continuing to strengthen our training program. And we will quickly and efficiently implement all of those recommendations.

And we're actually already moving very quickly. We recently announced the hiring of HL Rogers as our Chief Compliance Officer. HL will report directly to me and to the Compliance and Business Ethics Committee of the Board of Directors. As you surely know by now, our commitment to the highest ethical and compliance standards is unequivocal and unwavering.

Finally, with regards to the ongoing investigation by the US authorities into the matter we self-reported back in October, there is no new further news to report. The investigation is ongoing. You will have seen, however, from our press release of May 9, that the Office of the Swedish Prosecutor has discontinued its preliminary investigation into the matter due to lack of jurisdiction.

Let's now, as always, focus on our Q2 results. As usual, I would like to highlight up front our six key messages for this quarter, so they're clear. Number one, on the quarter itself, we draw strong smartphone and mobile data user adoptions. We also intensified our cable build. Both of those are exactly what our long-term strategy is all about. But we saw slower short-term revenue growth, even if it was accompanied by a continued improvement in our strong cash flow.

Number two, at the long-term strategic level, we continued to monetize mobile data, both through subscriber growth and growing ARPU. We're delivering the goods on mobile data. Number three, in cable, we are driving high growth and thus, we're raising the stakes with a larger and faster build program.

Number four, we're in the midst of a drive to reconfigure our revenue mix. This is key. The voice and SMS businesses are decreases faster than we had expected. These are sunset businesses, and this is making our revenue growth slow down in the short term. But, and this is a key point here, we continue to drive fast mobile data and cable growth. As this revenue reconfiguration unfolds, the legacy businesses will wash off, and we will keep the high-growth businesses. That's the core of the strategy we're implementing.

Number five, at the same time we're reconfiguring our cost structure as well, with quarter-on-quarter progress. And you will see that in a minute. And we are now turning up the heat on further efficiency gains. We will give you a lot of detail today on that.

Number six, on the guidance for the year we are updating our guidance to reflect slower revenue growth than initially anticipated. But we are confirming EBITDA growth guidance, and highlighting important optimizations in our CapEx for the year, increasing our cash flow expectations. So let's get on with some details on each one of these six key messages.

Let's first take a look at the Q2 results. We had very good mobile data subscriber uptake. By this, I mean strong smartphone, mobile data and 4G subscriber uptake. That is the subscribers that drive mobile data usage, rather than just mobile subscribers, as most of our markets already have over 100% basic mobile penetration.

Indeed, we added 2 million smartphones, about a million mobile data subscribers, and over half a million 4G subscribers. This is a 40% increase in our 4G subscriber base versus the [prior] quarter. And this, of course, is the base that drives huge for mobile data growth, and the base to which we will drive penetration of our Tigo Shop app, and our digital product roadmap, with zero rate of notification, zero rate of discovery, and our app-by-app pricing innovation. We have talked about these innovations in the past.

In cable, we are ramping up our build capacity, just as we said we would. In Q2 we built more than 160,000 cable homes, and we continued to decommission some of the legacy corporate lines, replacing them quickly with fiber and cable. The net result is that the total of number of homes passed continued to grow by 74,000 during the quarter. So we now have 7.8 million homes passed in our fixed network, already pretty close to our 8 million stated target for this year.

Now on to our Q2 financials, our service revenue growth was slower at 2.1%. We did expect and do expect that revenue growth will be softer in the short term as a result of three main factors. The first one is a macroeconomic slowdown in the region. The 2015 weakness in FX is now being seen in increased inflation, higher unemployment, and lower investment across our footprint. Consumer confidence is down.

The second factor is simply intense competition in mobile in Colombia. That's a recurring thing. And the third factor is a more obvious structural long-term trend. The legacy voice and SMS businesses continue to decline, like they have done everywhere else around the world. This is a large drag in our service revenue growth in this quarter, and will be so for some quarters to come. Over the long term, however, the growth of our mobile data and cable businesses will weigh more and more, and revamp stronger growth in our business.

Our adjusted EBITDA growth was strong at almost 5% this quarter, keeping us well on track on our guidance for the year. Our adjusted EBITDA margin increased to almost 36%-- and I will come back to this later-- as we continued to deliver on reconfiguring our cost structure at the same time as we reconfigure our revenue mix.

Our equity free cash flow generation is strong and continues to improve. This is all about better CapEx allocation and procurement efficiencies. And we'll tell you a little bit about what we're doing in that front as well.

So all in all, a quarter that keeps us largely on track. Revenue growth is softer for sure. But data subscriber intake is very strong. EBITDA is on track to our full-year guidance, and our cash flow is improving. So now let me spend some time on the good progress that we're making in our strategic roadmap.

On monetizing data, we're quite simply delivering on the promise. Mobile data subscribers are up. Usage grew and ARPU increased. Indeed, on the subscriber count if you focus on box one, we added more than 2 million smartphone users and over half a million 4G subscribers, spread out throughout our operations.

In box two, you can see that data usage per subscriber increased by 9% in the quarter. That's a very healthy rate. And most importantly in box three, you can see that just as we said we would, we have kept good price discipline. We're holding the line in not giving data away. As a result, data ARPU increased 4% over the quarter. With volume, usage, and pricing up, mobile data continued to grow as a business line segment over 25% year on year. Just as we said we would, we are effectively monetizing data.

A key strategic element of indeed effectively monetizing mobile data, comes from delivering it in more cost-efficient manner. This is all about delivering more and more traffic over 4G networks, where the production cost per gigabit is much lower, the user experience is better, and consumers actually use more data.

So we thought we would spend a little time on the status of our 4G networks, for you to understand what we're doing in this area. In the last 12 months in Latin America, our 4G network coverage has increased substantially, going from 26% of the population to 38% today. We expect to finish the year above 40%. In Latam, we now have 4G networks in all markets, except El Salvador and Costa Rica. And across the region we now have a 4G base of almost 2 million subscribers. About a quarter of our traffic today is on our 4G networks, up from about 10% or so only a year ago.

Now in cable, we're growing fast, and therefore we're raising the stakes. We have said often that our opportunity is meaningful. It is a combination of two important factors; one, low pay TV and broadband penetration across our markets. We have obviously said that. Two, the middle class in our markets is growing at CAGR of 5% per annum, a solid foundation for growth as you can see in box two on this page. And in box three on the page, you can see that our cable revenue is growing at rate of over 10% in the first half of the year. This is because we're adding and reconverting RGUs, while taking ARPU increases across the region.

With these levels of execution and growth in this line of business, as you can see on box four, we are raising our ambition. One, we're now building faster. By year end, we expect to be ahead of the 8 million homes passed target that we had set for 2016. Two, we aim to get to our 10 million homes passed number that we had articulated earlier, a year ahead of our target. We aim to reach that target now by 2018. And three, we have raised our longer-term network size ambition to 12 million homes passed, up 2 million from the prior 10 million target.

As we build our fixed platform, we see ourselves as a good go-to partner to deliver value-added services to our growing customer base. This is what we call internally our mediation plus model. This is basically developing triple-win partnerships with top-of-the-range solution and service providers. You may have seen a recently announced distribution partnership with Netflix and with Microsoft. For Tigo, those partnerships are key. They drive ARPU increase, churn reduction, and increased positive brand perception. They allow us to provide a more complete, compelling, and extensive offer to our customers.

For our partners, we provide access to over 30 million customers in the region. One of our key strengths lies indeed in our extensive distribution network in each country. In Latin America, we have over 700,000 points of sales, and a billing relationship with the customers, of course. And for our customers we provide a more extensive range of products, services, and solutions.

As you can see, all in all, we're building a top-notch mobile 4G platform and a great state-of-the-art fixed network throughout our operations. These are the foundations of our long-term strategy, as we have said often.

As I have said earlier, well, we're underway in a two-fold reconfiguration of our P&L. On the one hand, we're reconfiguring our service revenue mix. This is ongoing every day, and this is what this chart is all about. We've shown it to you before. While a structural decline in voice and SMS will continue and may accelerate, mobile data and cable are growing very strongly. Note that they now make almost 50% of our business, and have a long runway to go. That is the core of what we're doing. The high-growth businesses, mobile data and cable, make more and more of our revenue mix every quarter. And the legacy businesses make less and less every quarter.

Our second reconfiguration is the optimization of our cost structure, which is what we show in this chart. We have tackled this head on, as you know. You have heard us say often that we're using three levers. One, synergies, and we keep delivering on those and the team will speak to those. Two, our relentless focus on corporate cost reductions to make us more nimble and efficient; if you recall, we had a run rate of about $260 million in 2014, which we have now brought down by about $100 million to a run rate of only $160 million today. And we think we still have a bit of room to go there. And three, operational leverage.

The chart on the right hand of this page actually speaks for itself. Quarter on quarter, every quarter we have shown improvement on our last 12-month reported adjusted EBITDA margin. We're already at around 35%.

Now we have also been working diligently on bringing forth a fourth lever into the toolkit. We have earlier this year kicked off internally an efficiency and transformation project that we call internally, Heat. This is a multiyear transformation program for the Company. The program is complex, and it's widespread. It has 41 initiatives across seven areas, and it includes nine major transformations. Each of the initiatives has a well-identified owner, a set of specific KPIs, and savings objectives.

The goal of this transformation is to make the way we do business more efficient and simple, and save money, of course. As examples for you, the initiatives include; one, transforming our IT backend towards an OTT like infrastructure to reduce IT costs, speed up the time to market, and be more consumer-centric. Two, turning our business into a Capex-light model, and by that I mean, one, more managed services agreements; two, more network-sharing agreements; and three, more externalizations of our tower infrastructure. Three, implementing shared-service centers across our footprint, we have the scale to do that across the region. Four, streamlining our device supply chains to reduce working capital.

In the combination of all these transformations, we expect $200 million in annual savings from this program. The purpose is to make us more nimble, more efficient, and better capable. We have started executing on this program a few months ago. And you already see some of the benefits in our improved CapEx profile for this year. All of these initiatives are driven centrally, but executed locally.

So for those of you who know Miami in the heat of the summer, or follow American basketball, you can see where the inspiration for the name came from. If you do not, you can still see that we are turning up the heat on efficiency and effectiveness. These projects support our long-term drive for further EBITDA and OCF expansion, which as you know, is a key focus of ours.

Just to give you an example of what we mean, let me focus on one of the transformations, the IT transformation. We're decommissioning multiple legacy systems, and transitioning to an OTT like infrastructure. We're modernizing our core to allow convergent billing, and building a digital backend connected with digital APIs to enhance experience in all our applications. This OTT IT infrastructure is also necessary for us to leverage big data in the future. And as all legacy systems come off the grid and we centralize and become more efficient, we will drive IT costs as a percentage of revenue from a staggering 5% today to a more acceptable 3% in the mid-term.

Now let me take you back to the short term and have a final word on our 2016 outlook. One, we expect the year to be softer on our top-line growth, which we expect to be in the low to mid-single digit. We have already explained the whys to that. Two, as we continue to focus on (inaudible), we will hit the mid to high-single digit EBITDA growth target, which we strongly confirm. And three, as we have become smarter on CapEx allocation and procurement savings, we are optimizing CapEx, bringing down our spend for the year to around $1.1 billion, supporting stronger cash flow generation.

And with this, I will pass it on to Tim that will go into the details of our financials.

Thank you, Mauricio. And if I start on slide 17, as Mauricio has just said, this combination of market-specific issues and the general macroeconomic slowdown in Latam has left us with lower service revenue growth, as you've heard. But despite these challenges, we saw positive trends in underlying operating metrics of the business. They saw subscribers joining the network in an increasing volume and acceleration of the cable rollout. Also our margin continues to improve, as we've put even greater emphasis on costs. So we do feel comfortable on the EBITDA. And we've targeted our investment focus, and with procurement savings we expect our CapEx to be lower in [2016], which will support the growing cash flow and the strengthening capital structure.

Before getting into the numbers, I want to pick up on the macro outlook. We commissioned a leading macroeconomic forecaster, Oxford Economics, to do a review for us on the macro outlook in the economies we operate in over the next 10 years. We don't have time to go into the detail now. But in a nutshell, we operate in some of the most attractive markets in Latin America, with good economic fundamentals. Albeit, we will see weakness in 2016 and 2017. We will arrange a separate a briefing for analysts and investors for Oxford Economics to run through their report in the near future.

So let me start by just anchoring the core financial metrics in Q2. Revenue grew organically 0.5%. While service revenue, which is shown here, grew by 2.1%. And just a word to link to the reported revenues, we are still suffering the impact of last year's devaluations. So reported revenues in US dollars were 5.7% lower. This FX drag on reported numbers will remain for us for another quarter, even if FX rates don't move from the current level, and they've been relatively stable in the last quarter.

Adjusted EBITDA and the adjustments in this quarter relate to back-dated taxes charges in the [main], organic growth at 4.6% to $560 million. And we are very pleased to see the margin grow again in Q2, up 1.4 percentage points to 35.6%. And this now sits above our medium-term target of 35%. But it will be a few more quarters before we declare victory on the margin.

Also as just mentioned, CapEx will be lower. On our current run rate, we're already $50 million lower than the first half of last year.

So let me turn to service revenue. And it has been a mixed quarter. In El Salvador we saw a steep falloff, reflecting the security situation. Progress on the fixed business in Colombia was offset by the impact of the market slowdown in mobile. Whilst in Tanzania, we were affected by toughening regulatory environments, and increased competition. This all added up to a 200 basis point slip in the rate of service revenue growth.

But let me turn to the next slide to try and explain a few of the underlying drivers. On this slide, slide 21, gives you a bit more granularity on the service revenues. A couple of things to highlight, the impact of signal blocking plus a new tax in El Salvador can be clearly seen. A year ago we had 1.4% service revenue growth. It's now negative 3.7%. That's nearly a 5-percentage point swing.

Guatemala was also constrained by a lack of patents on the camera surveillance project. And in Colombia we saw the mobile business slip further into negative revenue growth, 4.3% down in Q2, although this was offset by a good performance in cable. So overall, we saw a 0.6% service revenue growth in the quarter.

Excluding Colombia, South America had a decent quarter for us. Paraguay is now well on track. It's responded very well to the remedial action taken over the last two years by Jose and his team. And Bolivia is growing well, driven by an extraordinary growth in smartphone adoption.

Africa continued to be a bright spot also. And we're seeing good momentum, not just in revenues, but also in EBITDA. Q2 was a very respectful 10% service revenue growth.

So I now want to pick up the comments made by Mauricio and focus on the costs for a few slides. And this is not a new religion. We've been focusing hard on costs for the last couple of years. I think our management of the central costs is evidence of that. But I want to shed a bit of light on other initiatives we've undertaken under the umbrella of Project Heat.

We spend just over a billion dollars each quarter. About 40% of that are direct costs. These are things like mobile termination costs, handsets, programming costs. And we manage these carefully by managing the gross margin in the business.

G&A expenses represent around 30% of the costs. And they represent principally IT network costs, external services, corporate costs, et cetera. And then finally, we've got sales and marketing costs, things like commissions, our salesforce, advertising and promotion; are just over 28%. Overall what we're targeting to do is shave off 100 to 200 basis points from our G&A, and 100 to 150 basis points out of our sales and marketing costs.

Moving on to EBITDA, the usual EBITDA bridge here. The first thing to note is that the FX drag is still having quite a big impact on reported numbers. I think the second thing to note is that Zantel, the business we acquired in Tanzania, it was profitable for the second successive quarter. And we're now at round about 50% of the run rate targeted in the acquisition.

Now looking at the organic EBITDA, I thought it was a solid quarter, a bit of slowdown from Latam, principally Central America and Colombia, but more than offset by improvement in Paraguay, Bolivia, and Africa. Pleasing to see improvement from Africa. Our EBITDA there is $64 million in the quarter, with a margin of 28.9%. The improvements were across the board, and we last saw this level of profitability back in Q2 2014. So it's good to see Africa delivering the better returns.

I want to spend a moment now just to explain what has happened in Colombia. On the face of it, the margin improvement is below what we might have expected. In the first half of the year, the margin in Colombia was 28.9%. And now, this is 1 percentage point better than last year. But there's a lot going on inside these numbers. And in fact, we have seen very big improvements in the underlying UNE margin, some 3.4 percentage points. And this has benefited from the integration we have undertaken and that we've talked about many times in the last couple of quarters.

Unfortunately the improvement has been almost fully offset by a decline in mobile. Mobile costs have increased by 190 basis points, which has almost fully offset the gains we have made in the fixed business. Clearly driving further margin improvement in Colombia remains a priority for the second half of 2016.

We've also been working hard on CapEx. And on the next slide you can see we can claim some significant success in this area, and not just to achieve procurement savings, but also to ensure that capital is invested in the right areas.

Now as this slide shows, we expect CapEx to be around $150 million below last year, about half of that benefit coming out of procurement savings, and the balance coming from smart CapEx and targeted investments. Moreover, we see an increasing proportion going to the cable business. This supports the increased target of 12 million homes passed just set out by Mauricio.

In mobile we slowed right down on 3G investments in favor of 4G coverage expansion. And as was highlighted earlier, we are rapidly moving ahead with that. We've also made some good progress in IT, with the progressive rollout of our convergent billing system.

Okay, so a quick wrap-up on the P&L, cash flow, net debt position at the end of Q2. Not much to comment on P&L in this quarter. Interest is higher than last year on costs-- on the cost of the Swedish bond transaction. Plus, debts we hold in local currency is largely floating rates, and rates have been rising. So we now expect the interest charge for the year to be around $450 million. Positive benefits in others and associates were mainly non-cash adjustments.

The usual chart to show cash flow, I'd note this is the first half cash flow. Our cash OCF margin is now at 13.2%. This is after $120 million of working capital swing, most of which occurred in Q1. You will recall we tend to see working capital flow out in the first half and then flow back in, in the second half. And I don't really expect that to be very different this year.

Tax will remain in line with our expectations for the full year, round about $270 million. Interest, I've just commented on, and dividends to minorities are lower.

Finally, the net debt has seen a few movements up and down. Q2 is usually the weakest quarter, as we pay the group dividend during May. But this year we have offset the impact with disposals. So on a leverage basis, we remain inside our target. We're at 2 times net debt to EBITDA, and 2.3 times on a proportional basis.

So with that, let me hand back to Mauricio to wrap up.

Thank you, Tim. So as a conclusion, one, all in all a quarter that keeps us largely on track. Revenue growth is softer. Data subscriber intake is stronger. EBITDA is on track to our full-year guidance. And our cash flow is improving.

Number two, on our long-term strategy we can say that's it simply on track. We're undertaking a two-fold reconfiguration process. Revenue is driven more and more from data and cable, with gains on every quarter. And we're undertaking a significant transformation that is also reconfiguring our cost base at the same time.

And three, we've revised our full-year outlook on revenue. But we have confirmed EBITDA with increasing cash flow. And with that as a wrap-up, we're ready now to take some questions.

(Operator Instructions) Stephen Bechade, Citi

Hi. Yes. Good afternoon. I've got three questions. The first one is on the $200 million OpEx and CapEx savings in Project Heat. If you were to dispose of your African operations, how much of the $200 million would you keep afterwards?

My second question is on the optimization of CapEx. Can you point out any countries in particular where we should expect CapEx to decline?

And my third question is I think you've added four new non-execs during the quarter. Could you just briefly comment on what each of them bring, please? Thank you.

Sure. Great questions, thank you, and very straightforward answers. On the first one on Heat, it's 95% Latin America. So that gives you an idea to the rest of your question.

Number two, on the CapEx optimization, it's across the footprint. And it is because it is largely driven, as I said, from centralizing our CTIO functions. One of the first things that we did when we started this new phase of the Company is centralize and bring a stronger CTIO function into the group. And that will provide a good segue in a minute into your last question.

So you have seen that perhaps if you do the math, in the last 12 months we've optimized CapEx by around $150 million. If you do the math, that's where you're going to come out. And that comes out-- about 50% of that is procurement savings. And that's the resource of using our scale to centralize procurement, and as a result of that obtain price reductions on equipment, CPEs, and the rest.

About 25% comes from smart capacity management, i.e. that is focusing the investment largely on mobile network investment on the sites that drive the most traffic, moving a lot of the traffic to the new 4G networks where the cost of delivering that bid is a fraction-- about 20% of delivering it over 3G networks. So rather than going for coverage, we're going for smart CapEx in capacity-based management.

And the last bucket, about 25% of it, is actually the beginnings of the IT transformation that is a part of the Heat Program that we were alluding to. And that's got a lot to do with retiring the legacy systems, standardizing the new systems, and centralizing the IT spend into the new systems. And that's beginning to yield quite a bit of results.

And the last question on indeed my team, it's geared towards more focused and more nimble execution. So you will have seen, we've added a Chief Operating Officer position for Latin America. We've asked Esteban Iriarte, our GM in Colombia, to step up to that position. And that allows me then a team with Xavier, our CTIO; Esteban, our Chief Operating Officer; and Tim, our Chief Financial Officer to be very focused on execution. And that is just the right way to drive the business towards more focused execution.

We also brought on four new directors at the AGM in May. And I would say they are bringing great-- we're very fortunate to have them, first of all. They're bringing really a sort of strong business focus to us. Janet Davidson has great experience in IT and IT transformation. It's helped us a lot. Jose Miguel Garcia built a fixed mobile convergence business, and again is very relevant to the way we operate. We have a new Chairman, Tom Boardman, who brings a wealth of experience from operating all over the world. And Simon Duffy, who brings a lot of financial discipline and experience to us, having also worked all over the world in telco. So I think we're very fortunate we've got a good Board.

And we had our strategy retreat with the newly formed Board a couple of weeks ago. And we spent about a day and a half together with the new Board, Tom and the rest of the Board and my senior management team. And we just are very aligned on the execution of the strategy that we've outlined to you about a year ago. We had full support on the execution of that strategy. And we're just in a very good place in terms of alignment with the Board and all we're doing.

Great. Thank you.

Mathieu Robilliard, Barclays

Yes. Good afternoon. Thank you for taking the questions. So first with regards to the competitive environment, you highlight clearly that it has deteriorated in Tanzania and that it remains quite intense in Colombia. If you could give us a little bit of color as to how you see that developing in the next few quarters.

And then maybe a bit off the chart, but do you have any exposure to the pound in terms of the corporate cost structure, and the recent movement? Is the recent movement something that can be a tailwind for the next few quarters? Thank you.

We do have some exposures to the pound. I mean we have some head office costs based in London. But it's not that significant in the overall scheme of things. I mean we have a lot of costs in euros. We have costs in sterling. But we also have a lot in dollars. So it will help us for sure, but it won't redefine us.

Listen, on the competitive environment in Tanzania and Colombia, let's start out with Tanzania. Indeed, it's an increasing competitive environment. And we never shy away from making those things clear to you, and give you color. Indeed, the levels of competition that we're seeing from the new entrant and the effect it's having on some of our competitors is rippling through the market. It's a competitive environment.

Having said that, however, we continue to deliver quite strongly in Tanzania. We've got strong revenue growth where we're picking up on margin, and we're gaining subscribers in Tanzania. And by that, we're picking up some market share gains there. So our long-term outlook for Tanzania is positive on the margins and the margin expansion. But we remain cautious on the level of competition in the marketplace.

Colombia is a continuation of the competitive environment that we've talked about for the last few quarters. Colombia has a combination of factors that are affecting performance that are on the mobile mostly. A softer macro environment, there was massive devaluation that took place last year. The effects of that on the real economy are beginning to be seen in the marketplace, with increasing inflation, consumer confidence slowing down. And in Colombia, of course, you have the regulatory matters that we've talked about in the past, and a very strong price competition.

The one thing that's important to keep in mind in Colombia as we're looking to our business into the future is that this is the one market where mobile weighs the less of our footprint, other than Costa Rica, of course. Where 50% of our business in Colombia is actually a fixed business, a combination of a large B2B business, and a large residential cable business that we're growing. And Colombia is the market where indeed the largest B2B and fixed opportunity exists, with a network build that is yielding quite a bit of returns going forward. And that will allow us to have a stronger base for our mobile network.

So as we keep the short term in mind for the mobile business in Colombia, we've got to balance that out with a very strong and very promising fixed network business.

Now just to finalize your answer, your question, and then put everything on the table, on the mobile business in Colombia we expect to see continued strong competition. There's no doubt about that. But we're holding on pricing. You've seen us do that. We are holding on pricing as the number one that we're doing.

The number two thing that we're doing is we're focusing our mobile emphasis on digital subscribers as the core of what we do. We're gaining 4G subscribers. Out of the half a million 4G subscribers that I spoke about earlier, about [150,000] came from Colombia. So we're gaining share on participation in that high-growth digital subscriber base, even in mobile. And we're just going to brace ourselves and weather this one out.

Thank you very much.

Stefan Gauffin, Nordea Bank

Yes, so a couple of questions. First, if we start with Project Heat, you still haven't changed your mid-term margin target of 35%, although you're above this level. And given your ambitions in the Project Heat, there should be room to raise this target. So any comments around that?

Secondly, a little bit more detailed question; it's mentioned in the report that the El Salvador margin was impacted by taxes not passed on to customers. How much of the margin contraction is coming from this? And this is a problem that is expected to persist, or do you have a solution for that?

Let me tackle a little bit of the first one, and then Tim can help me out on the rest. So as to reaching our 35% EBITDA margin in a shorter timeframe than we had anticipated, darn us, for doing what we said we were going to do ahead of time. So we take that one. We did hit that number ahead of time. And it does indeed beg the question of what is next. The reason we wanted to bring Heat to your attention, it is a project that we've been working on for quite a while. It started out back in July of last year. We kicked it off to the team towards the end of the year, and we're beginning to implement it.

And the reason we wanted to bring it out to your attentions is precisely so that you understand that this is the project that will underpin further margin expansion at the EBITDA and the OCF level. Because we've been pulling on three levers. And this is our fourth lever. So this is a way of saying to you, this is how we're going to do it going forward.

And on El Salvador tax, I mean, indeed the tax on revenue is difficult to pass on to consumers in a highly competitive market.

You know, it's a very competitive market. It's-- the tax has been levied in order to support the fight against the security situation they've got there. It has cost us-- well, you can see from the revenues, service revenues. It's probably cost us 5 points of service revenue, and in EBITDA terms that's sort of close to about 150 points, basis points on our EBITDA.

Is this long term? It will settle out. It will settle out over time. But I think it will take several quarters before it does settle out.

Okay. Thank you.

Andreas Joelsson, DNB

Yes. Just a question on overall subscriber intake; it slows down a little bit in the quarter, and if there is a sort of explanation to that.

Hey, thanks for that question, Andreas. Because it actually allows me to highlight the way we view the intake of subscribers. In most of the markets we operate in, and Africa is an exception to this of course. Because in Africa you still have the possibility to raise basic mobile penetration a little bit. In most of the markets we operate in, the metric that we're focusing is the one that's completely aligned with our strategy of monetizing, and focusing on mobile data.

And in the quarter we added about 2 million smartphone users, and about a million mobile data users, as I said, with about 600 4G net adds on our 4G network. So from our point of view, the intake of subscribers is quite strong, in the metric that matters the most, which is the one that allows us over the long term to monetize data, which is the business that we're focusing for the future.

I hope that gives you quite a bit more clarity and visibility on how we keep track of our progress when it comes to subscribers. So on mobile data, we think this quarter we hit it just about in all cylinders. The subscribers are up. The usage is up, and the ARPU is up.

Very clear. And if I may ask a second question; you shouldn't read everything that you see in the papers, but there have been a few sort of media speculation regarding Africa and disposals. Could you give your take on that please?

Sure. Listen, just to go back on the big picture context and on what we've said on this call and to all of you repeatedly, I think sometime last year we said our focus on Africa was squarely operational, and that we would endeavor and promise indeed to make Africa operating free cash flow breakeven this year in 2016. We've done nothing but that. And indeed, you see that Africa has had a fantastic first half with service revenue holding strong and margin expansion, allowing us now to sit pretty comfortable on our Africa operations, and see a business that's growing its margins. And it's well beyond being operating free cash flow breakeven.

Now what has happened indeed, is that because we executed the transaction around the DRC in such and expeditious and good manner, to be frank with you, we've been getting a lot of inbound calls around Africa. And there's been a lot of market speculation around Africa. The way we see it, we see it in a business that is improving quarter-on-quarter operationally. And because of this large number of calls, there's a lot of interest from a number of parties on those businesses. That's a good place to be.

Now whether we choose or not to execute on any of those calls will be largely a function of whether that yields a better return for our shareholders than us continuing to execute on a pretty strong operational plan.

Very clear, thank you.

Sergey Dluzhevskiy, Gabelli & Company

Good morning. A couple questions, if I may. First question on your B2B strategy. You had some commentary in the press release about data centers. But maybe if you could comment in greater detail on your target B2B market, the strategies that you're pursuing, and what kind of opportunities you see in B2B over the next few years. And I will have another question afterwards.

So sitting here with us is Xavier Rocoplan, who is our CTIO, and the person that I asked to be here. Because we thought we will give you a lot of detail on Heat. So he can help me out with the remainder of the answer to you here in our B2B strategy.

At the bigger picture level, our B2B revenue as a percentage of our overall revenue is just around 15%. If you compare that with other telcos that have large market shares, like we do everywhere we operate, we're underweight in terms of our B2B as a percentage of revenue. And we think there's a significant amount of opportunity for us to increase our B2B market share and our growth. And that's where we have a very specific B2B strategy.

The B2B strategy is segmented on multinationals, on large corporations, and on small office and medium offices. Now, that's how we segment this. Because that requires specific attention for each one of those segments. The data center opportunity is obviously catered to one of those specific, or two specific segments. The strategy is also coupled with the increase of the fixed network. Of course the more of a fixed network that we have throughout Latin America, the more we are going to be able to offer B2B services to small offices and small businesses.

In the regions we operate, the networks for cable are typically laid out in residential areas that pass, or are not distinct or different from the small office and medium office businesses. So by definition, we have an opportunity there. But all this fiber that we're laying also allows us to then cater to multinationals and large corporations. And it is to those specifically that our data center opportunity is catered to.

And you may have seen us release that we've just launched a tier 3 data center in Paraguay, and that we're doing the same across Africa and elsewhere in Latin America, precisely because we see an opportunity to focus on that part of the segment. And so Xavier, I don't know if you want to add anything to that.

No, just the-- I mean the data center is a big part of our strategy for infrastructure. I mean we started this around 12 to 18 months ago. We've launched the first one in Paraguay, indeed. And we're going to roll out a few of these activities in our markets in Latin America. Because indeed, we can use that for first internally-- to gather for internal needs. And then we leverage the infrastructure for connectivity and hosting services, paving the way for even more services on the B2B segment.

Hopefully that gives you a little bit of clarity there.

Yes. Yes, great. And my second question is M&A related, and also it relates to Colombia to a degree. Maybe you could share your thoughts on how you view that market from a potential M&A perspective. I guess it would probably be mostly on the fixed side, and cable side potentially. And also given your presence in Colombia and given your presence in Central America, do you have any interest to potentially branch out further in the Caribbean region?

Okay, the first part of the question on Colombia; Colombia for us is a build-or-buy market, quite simply put, in terms of our network size. We think we are much smaller in network size in Colombia than the opportunity allows. Colombia is a market of about 45 million inhabitants, call it 13 million to 14 million homes. And our network today reaches today about 4.5 million homes. So clearly there's room to have a bigger fixed network in Colombia by far. And Colombia is a country that's growing well. It's a country that has a lot of diversified cities, as well as small, medium-sized across its footprint. It looks a lot more like the US really, than a typical highly concentrated Latin American market.

So for us, it's build or buy. And we're building in Colombia, aggressively, as you will have seen, not only from our remarks, but from the actual reports. And in that context comes the publically announced decision by the Council of Bogota to put up the Bogota telco, ETB, for sale. And we've publically said that we would have an interest in that opportunity. It's a conceptual, general interest, of course. It's very early in the process. And a lot of things need still to be made specific and clear. But in that context of build or buy, it's an opportunity that we'll certainly spend some time on and analyze diligently. And if the terms and everything continue to be positive, obviously something that we will look at with interest.

In terms of the rest of the region, you can imagine that we're diligent all the time in making sure that our radar screen is attuned to all the opportunities everywhere. But you've also seen that we reiterate time and time again that we've got massive organic growth opportunity in our business. Because mobile data is not well penetrated yet in all the markets we operate. Because fixed broadband is only around 40% penetrated in the markets we operate, and it's growing fast. And even pay TV is also very underpenetrated.

So there's a lot of growth for us in our key organic footprint. I hope that give you a bit of color of how we see, and what we're focused on.

Thank you.

Luigi Minerva, HSBC

Yes, good afternoon. First question is on the Project Heat, if you can tell us in how many years you would reach the $200 million target. And how much of those $200 million is actual savings, and how much will be basically reinvested in the business?

And the second question is on the cable business, especially in countries where macro is quite adverse, whether you can show us evidence that cable is behaving more defensively than your mobile part of the business. Thank you.

Sure. Let me start with cable, and perhaps we can tackle Heat in a minute. And Tim will prepare that answer in a second. Perhaps a better way to give you a view on how defensive indeed the cable business is, is to just give you a high-level indication of our churn. And if you know this market, it will mean a lot to you.

Our overall churn on our fixed network for cable across our markets on average is just shy of 2%, which is a pretty good churn rate for these markets that we operate in. That's how resilient that business is. So that churn level is pretty good for Latin American standards. And that gives you an idea of how resilient this business is.

As you can imagine with economics for that business that have a cost per home pass of less than $100, and churn that is at around 2% or below 2%, the economic value of that client over its lifetime cycle is pretty good. And that in and of itself underpins our cable strategy.

But of course because we're a mobile operator, it makes sense beyond just the cable business. It makes sense because it allows us to become, drive or be defensive on a convergence opportunity, and also because this is the network upon which we can upload a lot of the mobile traffic that we've just been talking about, 4G networks and further networks, mobile networks are largely dependent on a large chunk of fixed network and fiber laid on the ground.

That gives you an idea of how contributive this business is to our long-term strategy. And going back to Heat--

You know, I think it's probably before I answer the more detailed part of the question, for Xavier to just give a little bit more of a conceptual framework of what we're trying to achieve in Heat. Because I think that's important.

Yes. Maybe I'd like first to give some-- to get back to the genesis and the background of Heat. I mean Heat is really an operational excellence program. It's based on the fact that we believe that by operating better and more digitally in a way, we will be able to improve both the customer experience and actually be more efficient at the same time.

So in the second half of last year, we felt it was really important to create an umbrella program to deliver on the execution of initiatives that are usually a little bit more long-term. So Heat is really a combination of transformations, as we call them, and some more technical initiatives.

And within that, you know, we've got about 41 different programs. On average, these programs run sort of two to three years. And we're operating in an inflationary environment, so I don't think it's as straightforward. You know, we have to position the business in order to achieve both our kind of short term EBITDA targets, but our long-term EBITDA aspirations as well.

We're not at this stage going to sort of sub-divide that $200 million target into OpEx and CapEx and working capital savings. But clearly we would expect the delivery of this to be sort of beneficial across all parts of our business. And that's what we're really trying to target.

And so for the-- at least for 2016, I presume that your adjusted EBITDA guidance already incorporates the work in progress on Heat.

Yes. It's unchanged. I mean as Mauricio said, we're not changing our guidance for EBITDA for 2016. And obviously for 2017, we'll sort of address that when we get there.

Yes. Just being even more transparent to you, the benefits of Heat are small in 2016. But they are there. We are optimizing our guidance for CapEx for this year. We would not have been able to do that had we not started working on Heat at the end of last year, kicked it off to the team at the end of last year, and started to gain some of the benefit this year.

And as you can imagine, the first wave of benefits are those that come from optimization of the supply chain. That's the easiest low-hanging fruit that we put in place. And that's largely because we've centralized the CTIO functions out of Miami. So there is a little bit of Heat that is helping us bring and optimize CapEx this year. We would have not been able to do it otherwise.

Thank you for the explanation. Thank you.

Bill Miller, Hartwell

To get back to Colombia for a half a second; how far along in the integration of Colombia do you think we are? You've got 29%, let's say, EBITDA margins. You're well below average there. You've indicated we'd have a $750 million present value cost savings, an additional $200 million will obviously involve Colombia. But how long do you think it will take you to get to a more normal corporate margin, and how far along are we on the $750 million?

Thanks, Bill, for the question. I think as I sort of indicated in my sort of part of the presentation, we have seen some good benefits out of the integration. We've seen sort of north of 300 basis points of margin improvements on the cable business. Unfortunately, the mobile business has been tough, and that has eaten into a number of those benefits that we've seen. I think that's a combination of some macro weakness and some competitive weakness. We don't expect that to live forever. But it's hard to, in the short term, sort of forecast when that might turn.

We're not-- we certainly, I think, have been very successful in unveiling these synergies. And I think the team down in Colombia have done a great job there. But we're not finished there. We're continuing to focus on it. If you like, they're morphing into the Project Heat transformation that we're doing. And there undoubtedly are more sort of synergies through Heat and indeed through the initiatives that the local team are undertaking.

Does that give you a little bit color, Bill?

Can you actually cut costs and get rid of people easily, or make them more productive in some way?

I certainly think we can cut costs. I'm not sure it's wise to sort of speculate on how we do it. But I think there is more we can do there for sure.

Let me give you a little bit of perhaps more of visibility and color on our overall integration process in Colombia, which I think has been nothing short of very well-executed. We have-- as you have heard me say, a great relationship with our partners, a great relationship with the community managing there. And part of the integration process in Colombia now moves on to streamlining indeed the way we do business down there. And we've got a couple of projects that will get us there that are on track. Obviously I want to be cautious on the exact nature of those projects.

More importantly, in Colombia going forward, we have a massive IT transformation that will allow us to streamline our costs down there. Everything I said with regards to turning our IT infrastructure into an OTT infrastructure has a large relevance in Colombia. Whereas as you can imagine, there is a multiple number of legacy systems, both at the network level and at the IT level. And our focus today is indeed, as you point out, on synergies around the operation itself, but also on synergies, and integration around our IT infrastructure. And that's what we're putting a lot of focus on, IT infrastructure, managed services, and network sharing in Colombia.

Those are the three buckets out of which we're going to see a lot of improvement in Colombia going forward. Now they're not easy pickings. They require a lot of work. IT integrations, managed services and network sharing are all things which require a lot of work. So it's not something that will be delivered on a quarterly basis.

That's great. Thanks so much.

And if I go any further than that, I'll be on the press tomorrow in Colombia, Bill.

At this time we will not be taking any further questions. So I would like to hand the call back to Mr. Mauricio Ramos. Please go ahead.

Well, thank you, everybody, for taking the time to listen to us today. I know that we've given you a lot to chew on with Heat and our prospects going forward. We're very happy with the way the execution of our strategy is playing out. We realize that there are some short-term hits here. But we remain very, very focused; very, very committed; and unwavering that this is the right long-term strategy for this business.

We will reconfigure our revenue base, and we are [fast to] configuring our cost structure. So we're going to come out of this quite strong. And we appreciate your time today.

This concludes Millicom's Financial Results Conference Call. Thank you for your participation. You may now disconnect.