Millicom International Cellular SA ( MIICF.PK)

Q3 2011 Earnings Call

October 18, 2011 8:00 AM ET

Executives

Mikael Grahne – President and CEO

Francois-Xavier Roger – CFO

Analysts

Miguel Garcia – Deutsche Bank

David Kestenbaum – Morgan Joseph

François-Xavier Roger

Ric Prentiss – Raymond James

Stefan Gauffin – Nordea

Sven Sköld – Swedbank

Soomit Datta – New Street Research

Lena Österberg – Carnegie

Matthew Robilla – Exxon

Andreas Joelsson – SEB

Kevin Roe – Roe Equity Research

Thomas Heath – Handelsbanken Capital Markets

Luigi Minerva – HSBC

William Miller – JM Hartwell

Mark Walker – Goldman Sachs

Barry Zeitoune – Berenberg

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Millicom Quarter Three 2011 Conference Call. For your information, this conference is being recorded. May I also remind you that this call is being audio-streamed over the web and is accessible at www.millicom.com, together with the presentation summarizing the key features of the results.

I would now like to hand you over to the hosts of today’s conference, Mr. Mikael Grahne, President and CEO; and François-Xavier Roger, CFO. Please go ahead.

Mikael Grahne

Thank you, operator, and welcome to you all. As usual, you can find the slides for this call on our website. Please go to slide number 3.

In Q3, we recorded underlying local currency revenue growth of 9.1%. We have seen the stabilization of ARPU in Latin America with a loss of some international traffic in Central America being offset by the attractive development of data. In Africa, there has been a further decline in ARPU as we focus on affordability of our product and services.

We are seeing the continued development of us across the group, and our non-voice services now contribute to over one third of our recurring revenue, most specifically in Latin America, half of our growth in recurring revenue is coming from mobile data services.

Despite an acceleration of investment in 3G and other services, we produce an EBITDA margin of 46% for the quarter. Normalized EPS increased by 30% year-on-year due to our EBITDA growth in combination with the reduction of our effective tax rate and despite ForEx losses this quarter following the strengthening of the dollar.

We are committed to delivering our previously communicated shareholder returns for the year but with a more even distribution within dividends and share buybacks. The Board did propose 2.5 AGM to be convened in due course on extraordinary dividend of $3 per share to be paid in December. This combined with our ordinary dividend and the ongoing share buyback program which will continue in Q4 would bring total shareholder return for the year close to the 1 billion.

Now let’s look at the financial highlights for the quarter in more detail as shown on slide 4. Revenues for the quarter was 1.150 billion, up 13% year-on-year or 9% below currency. The EBITDA margin was 46%, 1.5 percentage points lower than for the prior year reflecting greater investment in 3G and services. We ended the quarter with 42.2 million customers, up 13% year-on-year.

CapEx for the quarter was 270 million or 19% of revenues. Our CapEx in the year to the end of September has been low due to phasing issues and we expected to increase considerably in Q4. We are revising our CapEx guidance somewhat downward to around 820 million for the full year due to some delays in the delivery of equipment. Our operating free cash flow generation in the quarter was strong, up 327 million or close to 34% of revenues.

On slide 5, you can see how our focus on higher value of customers is being reflected in our subsidy costs which are almost 18% higher than in Q3 ‘10 in absolute term as we aim – as we supported the development. As we increase subsidies, the composition of our customer base is evolving with a growing proportion of postpaid customers. We see this as a positive development as ARPU, revenues and EBITDA all increase in absolute value watch our decreases.

Sales and marketing cost excluding subsidies were 8% higher year-on-year bringing the total investment in data and services to 250 million in the quarter.

On slide 6, we have set out our local currency revenue growth by quarters in the beginning of 2009. This chart shows there is volatility and revenue growth quarter-on-quarter due to our commercial activity in various markets at different times of the year. For example, the third quarter of 2010 produced the highest growth of all quarters last year. For 2011, we are on track to produce revenue growth of around 10% in local currency.

Slide 7 illustrates that it is the quality of our customers rather than their absolute number that is driving our top line performance. Over the last year, the rate of ARPU erosion has slowed by three percentage points as we have been focusing on attracting and retaining higher value customers. This strategy has enabled us to achieve ARPU stabilization in Latin America and will over time slow the rates of ARPU decline in Africa.

Looking at the ARPU development by region on slide 8, you can see that in Central and South America, ARPU was essentially stable year-on-year with the marginal decline in Central America due to the loss of some international traffic. In Africa, mobile ARPU was 9.7% lower reflect the decline – declining revenue in Ghana, Senegal which we’ll talk a little bit more about in a few moments. ARPU in Africa will continue to decline for some time as we pose to penetration gains and greater traffic volumes and minutes of use through affordability initiatives.

On slide 9, you can see our distribution of customers via ARPU level in Latin America where our focus on higher value customers is most applicable. At the end of the third quarter, 35.5% of our customers generated an ARPU of more than $10, up one point year-on-year. We expect a greater proportion of our customers in Latin America to fall into this category over time that we accelerate investment in 3G and other value-added services.

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