Millicom International Cellular S.A.
Q2 2017 Earnings Call Transcript

Published: 20 Jul 2017

[Operator:]

Good morning and good afternoon ladies and gentlemen. And welcome to the Millicom Financial Results Conference Call. 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 Michel Morin, Millicom's Head of Investor Relations. Please go ahead.

[Michel Morin:]

Hi everyone, and welcome to Millicom's second quarter 2017 results conference call. As usual, the results will be presented by our Chief Executive Mauricio Ramos and by our CFO, Tim Pennington. And before we begin, let me draw your attention to the safe harbor disclosure on Slide two of the presentation, which is available on our website. So with that, let me hand it over Mauricio for his prepared remarks. Mauricio.

[Mauricio Ramos:]

Thank you, Michelle. Good day to all, and welcome to our second quarter earnings result. Let's get started. Overall, we are quite pleased with our second quarter. We still have some work to do, especially in Colombia. But overall, this was a very good quarter for us. We are making very impressive strategic process and that's what is important into the future. First, the twofold reconfiguration of our business is dead on track. Our opportunity to tap into pent-up demand for high-speed data services remains unique. And we are building as fast as we can, the networks that provide these services. Q2 was yet again a very good quarter in our build program. And net adds are coming in at higher rates than ever. This was our best-ever quarter in net additions of both 4G and Cable users. And on the back of those additions, revenue growth is coming back. This was the second consecutive quarter now of improvement in service revenue growth, particularly in Latin America. We will give you detail on all of this in just a minute. Second, during this quarter, we made further progress in reallocating capital through the sale of part of our tower portfolio in Colombia. And third, in the first half of this year, we have continued to very significantly strengthen our equity free cash flow generation. Revenue is gradually coming back, while equity cash flow continues to grow. So let's get to the details for the quarter. The premise for our strategy is the unique opportunity to satisfy the continuously-growing and yet unmet demand for high-speed data services in Latin America. Look at the left side of this slide. With about five million 4G users out of a total 32 million mobile users in Latin America, our 4G penetration is only 15% today. That is about half of the 4G penetration already in a market like Chile and about 4x less than the 4G penetration in North America. Simply said, these are early and promising days for 4G in our markets. The same is true for Cable, which you can see on the right-hand side of the slide. We have about 8.5 million homes passed with our Cable network today, out of about 27 million total households in our footprint. That means that only about 30% of the total homes in our markets are covered with high-speed data network today. In Chile, a market that I know quite well, the fixed high-speed data networks cover about 70% of the total households. Our opportunity lies somewhere south of that benchmark, but significantly north of where we sit today at only 30%. And we are seeing extremely positive results adding Cable subscribers everywhere we deploy new Cable networks. And you will see that in a minute. As a result, we are confident now to raise our ambition to build a Cable network of 15 million homes passed in the mid- to long-term. That 15 million target is up from our prior target of 12 million homes passed. This means that we aim to just about double the size of our Cable network today. And yet, this new target will still only represent about 50% of the homes in our markets. Part of our confidence comes from the fact that we are building these networks faster than ever. During the second quarter, we added approximately 600 points of presence to our 4G network. That means that over the last 12 months, we have almost doubled the size of our 4G network. And that network now covers more than 50% of the population in our markets in Latin America. On the right-hand side, you'll see the continued speed at which we are building our Cable network. During the quarter, we built another 328,000 Cable homes focused more importantly on our annualized build rate. Over the last 12 months, we have added 1.2 million Cable homes to the network. This is now our fastest-ever annual build rate, better than the 1 million build rate that we had anticipated for this year. The numbers on this slide say one thing. We continue to make increasingly strong progress in our build program, both on 4G and on HFC. This next slide shows precisely the accelerated momentum in our unique Cable opportunity. On the left-hand side is our build rate on an annualized basis. That run rate, as I mentioned a minute ago, is now about 1.2 million homes built per year. But it is up from about 800,000 homes per year only six months ago. On the right-hand chart is annualized net add rate of HFC subscribers. It is also and consistently so picking up momentum. We are now connecting on an annualized rate just shy of a 0.25 million new HFC connected homes per year. That would be about a 20% fill ratio on the new build. And as you very well know, that's pretty darn good. The next slide is a key one. The principal messages here are important. One, in Q2, we added over 1 million 4G users, over 900,000 of those in Latin America and about 400,000s of those in Colombia. This is a record number for us as a group in Latin America and in Colombia. It is our highest-ever quarter addition of 4G users. The second point is that we have doubled the number of 4G users from where we were a year ago, which puts us well on track to add over 3 million 4G users this year, as we have said we would. And we have, in the first half of this year, added over 800,000 overall Mobile users. This is after a net loss of overall Mobile users last years. All of these numbers say the one same thing. We have sustained strong 4G user intake and this is true across all of our markets in Latin America. The point here, of course, is that first come the adds, then the revenue follows. On this slide, we have our new net add figures for the fixed business. The chart on the left is the HFC or Cable net adds measured in new connected homes. This quarter, we connected a record 68,000 new homes, topping our already strong first quarter of 63,000 homes. We now have a strong rhythm of quarter after quarter consistent and increasing strong net adds in HFC. The number of HFC net adds so far this year is over two times the net adds in Cable the first half of last year. And note that this Cable net adds are now driving consistent positive net adds in total homes connected for us. That is the point on the chart on the right. We had another quarter of strong net adds in overall connected homes. That is 4 quarters now in a row. And quite positively from the first half of last year when overall net adds were flat as we were still having net copper losses back then. One key point then for this quarter should be very clear by now. We are increasingly and consistently improving our user intake in both fixed and mobile. Indeed, this is a record quarter for us on both fronts. So our strategic story line should be very simple to follow. There's a unique opportunity in high-speed data. We build the networks. We add the users. We hold the line on price, and we recruit growth. So the next obvious point should be the ARPU update on our strategic user base, 4G and HFC. Let's first focus on 4G ARPU on the top left chart. Our overall average Mobile ARPU in Latin America, as you know, is just short of $8. The average ARPU for our 4G users in Latin America is coming in at around $20, so over 2x. Now, and I have said this often, we don't expect that we will turn all of our 32 million Mobile users into $20 ARPU 4G users. But 4G ARPU is holding up pretty well, even as we have been adding record 4G users. That is the point on the chart on the bottom left. 4G ARPU this quarter remained right around a healthy $20, while we added almost a million more 4G users. The reason for this is simply that 4G users are a lot more data. That is the point on this slide on the top right. When a 3G user moves to a 4G network, consumption goes up by about 36%. On the chart on the bottom right, is the punch line. When consumption grows the price per gigabyte surely goes down, but less so than the uptick in consumption. And it is that mix that drives ARPU up. We are indeed seeing an 11% pickup in ARPU, when the same user moves from 3G to 4G. Now let's take a look at the Cable ARPU. The same story. We have held them steady. Even a bit of a pickup both in local currency and in dollar terms over the last few quarters and consistently so. And the reason is the same

[Tim Pennington:]

Thank you, Mauricio. So you have just had Mauricio talk about our positive operational progress, signs of broadly based recovery in Latam revenues, that margins were sustained, cash flow is on track and there's a strong uplift in equity free cash flow. And we also took steps this quarter to manage the balance sheet. So in short, Latam continues to trend in line with our expectations, which is why we are confirming our guidance. However, it is clear that Africa's performance has turned materially negative. So we are going to be at the lower end of that outlook range. Let me turn to the key financial metrics. Service revenue improved 24 basis points on Q1. We are still down 1.3% year-on-year. But this is largely because of regulatory headwinds in Colombia and those challenges in Africa. This is flowing through to EBITDA, although cost discipline in these margins we are able to tick up a little bit. First half CapEx was lower than last year, even with the record rollouts on homes passed in the 4G build. So we were able to record a 4% improvement in our operating cash flow. Let me start on service revenue. And this is the slide that shows the bridge from growth in Q1 to Q2. As Mauricio said, we still got work to do, but it was a 24 basis point improvement. Five out of our 6 Latam countries there were trend improvements. Ex Colombia, it's pretty broadly based; in particular, El Salvador saw much improvement. Bolivia and Paraguay both continued strong positive service revenue growth and Honduras got back to positive territory. Things went further south in Africa with difficult conditions in Chad, now combined with the slowdown in Tanzania. And Colombia faced additional regulatory headwinds and I'll talk about this on the next slide. So what is our situation in Colombia? I think, in short, it is positive Home B2B and Mobile. It's being offset by adverse regulatory impacts. We talked about the regulatory headwinds last quarter. MTR cuts came down and are now less than $0.005 per minute. But what we haven't anticipated was the mandated tariff cuts for MVNOs and national roaming, which took effect at the start of Q2. Now, this may not seem significant, but we have a much bigger share of this wholesale revenue than our competitors. So much so that most of the year-on-year revenue decline is down to these regulatory tariff cuts. You can see from the slide, it represented 210 basis points of the year-on-year change. And that accounts for almost two-third of our reduction in EBITDA margin. In addition, we are still carrying the impact of the discontinuation of the fixed wireless business, resulting from the spectrum return at the end of last year. Now before leaving Colombia, I want to make the point that we have pushed hard on sales and marketing. We hired 1,000 new sales agents for Home. We have pushed much harder on Mobile acquisition, hence our sales and marketing expenses are up 8%. But - and this is a point here. This is being funded by reduced G&A costs. Okay. And now we take a step back from Columbia. Latam, overall, had a decent quarter, showing resilience of this business. The Home business grew well across most geographies. In Bolivia, for example, it was up nearly 50%. Mobile data performed well everywhere and propelled Paraguay to the 4.5% service revenue growth we saw this quarter. And El Salvador, which I highlighted a bit earlier, it has had a very tough time recently, but we started to see improvements. Service revenue was down just over 1% and that compares to down 9%, two quarters ago. Turning to Africa, I think, on our last call, we told you that the conditions in Africa had deteriorated substantially and unfortunately, there've been no let up in Q2. Chad continues to see substantial revenue impact from the sales tax imposed in Q1. And now, we are seeing Tanzania barely achieving positive growth. And this is largely resulting from customer contraction following more stringent regulations on customer registrations. However, we remain comfortably in positive operating cash flow territory. And we are confident that the Africa region will be fully equity free cash flow positive in 2017. Finally, looking at how we are doing on cost management also. And in short, I think, we are keeping good control of costs. OpEx in Latam was 1.5% lower organically. Africa was flat and corporate continues to reduce being nearly 2% down year-on-year. Project Heat is hopping up, lots going on here and we are well into the various projects we have across the business. We are still targeting more than $200 million in savings. And you can see the impact is showing through on our margins, our cash flow. There are a few examples here of what is going on. But basically, we have lots of activity here. Okay, let's turn our attention to group EBITDA, $535 million in the quarter and margin of 35.3%, up 40 basis points on the year ago. Improvements in the Latam EBITDA and also positive impact from FX. But as the slide demonstrates, the impact of the weaker performance in Africa really held the group back. The next slide tracks the rolling 12-month EBITDA margin, which is a key KPI for us. And in short, despite the tougher numbers from Africa, we have held the margin above 35%. The resilience of the business is showing through. So as usual, we have got a few items to explain below the line on the P&L. And we booked a $15 million charge in respect to the 2020 bond redemption in the interest line. So the big movements were the swing of just under $90 million in others and associates. Note that these are largely noncash movements. In others, we have got FX losses on currency debt, whereas we had gains last year, whilst associates largely reflects losses on disposals and again, conversely, we had gains last year. As a result of these noncash movements, pretax profits was sharply lower. And Mauricio has made this point already on the cash flow. The evolution of our cash flow, it is progressing very well. It's not being dampened by the accelerated level of investments in our commercial activity. And the first half equity free cash flow is up $82 million. We talked about EBITDA. We have cash CapEx, which is around $70 million lower and on lower CapEx and timing differences. Working capital, which despite being over $100 million in outflow was slightly better than last year. Cash taxes were lower. We expect the full year to be similar to last year. And that's offset by cash finance charges and minority dividends. Net debt was around $200 million higher, $4.4 billion. This is largely as a result of the dividend payments in Q2. You will recall that we pay the full dividend in May. And this is why net debt to EBITDA ticked up a little bit to two times on a fully consolidated basis and 2.2 times on a proportionate basis. Finally, a note on the Colombia towers deal announced today. It will have a small positive impact on our leverage. And as with Paraguay, the contract will be treated as a finance lease. In fact, the Colombia towers deal is one of a number of examples of the work we have been doing on the balance sheet. You will recall that we set a target of 40% local currency financing, and we also want around three-fourth of the debt at the local level. We also target around two-third of the debt to be fixed rate and an average maturity of over five years. With the latest deals, we are pretty close to these goals. The $300 million loan in Colombia was upstream and those proceeds were used to call the 2020 bond. And that pushes the amount of head office financing down to 27% of group debt. With the towers deal and the local currency financing in Paraguay, we'll also move the proportion of our local currency debt to around 37%. So that brings us to the end of our Q2 presentation. And to summarize, we saw the best-ever quarter for customer additions, another quarter of rapid build of our high-speed data networks and signs in five of our 6 Latam markets is coming through in revenues. At the same time, we are maintaining cost and capital discipline. It is not without challenge and it will not be a linear progression. This quarter, the setbacks in Africa had a material impact on the group and will limit our growth to the lower end of our guidance. Plus our Colombia numbers were overshadowed by regulatory impacts. But fundamentally, we believe our Latam business is firmly on the right track and see positive underlying signs. We will now take questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question today is from Bergae Telovisky from Gabelli and Company.

[Bergae Telovisky:]

Good morning. Thank you for taking the questions. My first question is on towers. So obviously, you have done two transactions in Paraguay and Colombia. And we estimate that you have about 8,800 own towers left in Latin America. First, I guess, is this the right number? And also, if you could share your thoughts on your plans with regards to those remaining towers, whether we should expect more sale leaseback transactions and where do you have the largest concentrations of towers that are left?

[Mauricio Ramos:]

Sergey, it's Mauricio. Thanks for the question here. I think the number of remaining towers in Latin America is around 8,000 give or take. And we can follow-up with an exact number. I'm just netting out of that number the ones that we indeed have sold; counting for Paraguay and Colombia, we should be around there. And on the second part of your question, our template is pretty clear and the kind of deals that we think make strategic sense for us to free up capital and reallocate it elsewhere. Going forward, you can expect us to be pretty strategic. We'll pick the right countries where the portfolios are ripe for in this monetization. And we'll do it in the smart way in which we have done it so far. So stay tuned.

[Bergae Telovisky:]

That's great. On your HFC network build out, obviously, it's picking up pace and you are tracking against your targets and probably ahead of your targets. Could you talk a little bit about penetration levels in broadband as if you are achieving maybe 6 months to 12 months after the HFC build and also, about penetration levels in your most mature HFC markets?

[Mauricio Ramos:]

Yes. Sure. I think the headline here is we are tracking ahead of our own expectations. And you have seen me over the last two years since I joined, increasingly becoming more and more confident with our Cable rollout. If you recall, initially, I thought we could do 10 in the mid-term, as we made progress in both being faster on the build and penetrating them just as we expected we would. And as I get to better and better understand the markets and the potential embedded in those markets, I feel more and more confident is that we can build effectively about 50 million homes in the medium to long-term, which is massive. And it's doubling the size of our already, what is quite a big build there. We continue to hit the penetration levels that we have articulated to you. We typically get to somewhere between 18% to 20%, two years out. And 3 years out, we are getting to 30% to 35%. Now we don't have new networks that is that old. But we are tracking pretty, pretty close to the numbers I have just mentioned. Indeed, we did some back of the envelope, if you will, on the chart that we showed. And that basically tells you that we are at 20% with the newer network, which as I said, by the way is pretty darn good. You know those numbers are pretty darn good.

[Bergae Telovisky:]

Right. And last question for me. Could you talk a little bit about your strategy for markets, where you don't provide consumer wireless services like Costa Rica and Nicaragua. I mean, obviously, they are smaller markets. But do you see a path to eventually having wireless ownership and [all mixed into] this market? Do we need it? And what are the pros and cons of operating those asset sources, monetizing them as part of your monetization process that you are...

[Mauricio Ramos:]

Great question. Yes, Costa Rica and Nicaragua are small. There are opportunities in Nicaragua, but let me just focus on Costa Rica for a minute. In Costa Rica, we are effectively a typical Cable operator. That's what we are there. And you can put two plus two together. There's a tried-and-tested model for a Cable operator to enter the wireless space, absent building a network. And that seems to be a capital-light smart way to grow about it. They were just additional auctions in Costa Rica today actually and the existing operators got spectrum. I think our approach in Costa Rica would be consistent with that of a Cable operator entering wireless in a market of a Cable operator. And there's a template for that. It's being used in the U.S. and has been used in Europe as well. That's I think where our thoughts are on it.

[Bergae Telovisky:]

Thank you.

[Operator:]

And moving on our next question is from Julio Arciniegas from RBC.

[Julio Arciniegas:]

Hi, Mauricio and team, thanks for taking my question. So currently, in the first half organic growth and revenue, EBITDA is more or less 1% negative. But the company has confirmed the guidance, which is low single-digit at revenue and mid-single-digit EBITDA. So basically this require a very good second half on the year. What are going to be the drivers of this growth? That's one of my questions. And the other one is related to the timing of the deployment of the 15 million homes. How should we think about the timing of this project?. Thank you.

[Mauricio Ramos:]

Julio, on first question, I'll give you the broader view, which I think is super important here. And there may be some math involved. I'm sure Tim will have to add a little bit to that. Listen, we are confirming our guidance. And we are confirming our guidance because our performance in Latin America is just dead on track. We are extremely happy internally about the way things are panning out in Latin America. All the markets are hitting on all cylinders. Colombia is coming right behind that. You heard me say that about Colombia. The revenue will follow the subscribers. The only reason the guidance is kind of at the bottom end is because Africa is a little bit more challenging than we had expected, and we have to flag that. And you are right. We had acknowledged from very early on that this was a year that was back-ended. I think we set out that loud and clear. And the reason we feel confident on the second half is precisely because the first half has so much operational momentum in it. And then you have heard me talk about that. But it is important for you to know that just about all the Latin American countries had a very strong Q2, five out of 6 financially and Colombia operationally had a really good quarter. Last year, in most of our markets, in the first half, we were down-trending. This year it's the opposite. Q2 was better than Q1 and that bodes well for the second half. Paraguay is hitting 4.5 with great momentum. Bolivia is not far behind Paraguay, has great momentum. And you have seen the net pickups especially on Cable in Bolivia are nothing short of fantastic. And El Salvador and Guatemala. You have seen El Salvador recoup from last year and that's significantly stronger momentum. Also, in the second half and you know this, we simply have easier comps. And it's not just the operational momentum, it's not the fact that we thought, but in the second half of last year, El Salvador was suffering from the Mobile network shutdowns, if you recall, around the prisons. Paraguay had the effect of the mandated data roll over that kicked in the fourth quarter, actually, I think. And in Colombia, we took in some headcount restructuring charges in the fourth quarter. So all of that makes for the second half comps to be a lot easier. But the key point and I'll go back to this is that we have upswing momentum into the first half going into the second half, whereas last year was the opposite way. And Q2 was better than Q1 operationally and financially for our markets. So we are tracking for a very strong second half of the year. Now, before you sort of catch me on this one, in terms of our guidance, if we were to go into a second half that has this amount of operational momentum in terms of net adds, I think the only thing I would caution you towards is we will not hesitate to take that growth. We will invest in order to get that growth if we continue to have this kind of operational momentum in the second half. I hope I have answered your questions and Tim, you may want to add a couple things there.

[Tim Pennington:]

Yes. Actually, I think you were pretty comprehensive there. I would only make the same point about the momentum we have got. And then to some extent it was a tough second half for us last year, so the comp is a little bit easier than second half, but that doesn't take anything away from the momentum.

[Mauricio Ramos:]

And on the second one, Julio, listen, I think we have been cautious in terms of Bolivia. And you have heard me get increasingly comfortable with the rate of build. I think only a quarter or two ago, I was saying 1 million is tops because that's a pretty well-oiled machine. We are now at 1.2 million, and we just got to make sure that, that continues to be a very well-oiled machine. But don't expect our build rate to be significantly higher than that. It is massive to be building over a million homes a year across multiple markets. Even in my experience building networks elsewhere, this is many times that rhythm of build. So when will we get to 15? Do some back-of-the-envelope math on that one.

[Julio Arciniegas:]

Okay. Thank you very much.

[Mauricio Ramos:]

You bet.

[Operator:]

Moving on, our next question is from Soomit Datta from New Street Research.

[Soomit Datta:]

Yes, hi. Couple of questions, please. Just back to the guidance quickly, firstly. And I think the biggest miss this quarter was in terms of EBITDA, was Colombia, rather than Africa. It does feel a bit like Colombia has perhaps driven the guidance downgrade. What are your expectations for the margin there? Can it bounce back from the 26% or so level towards 30%? Is that baked into your thinking? That is the first question, please.

[Mauricio Ramos:]

Yes, so listen, on Colombia, a little bit more color there. You have already heard me say that the key thing here is that there's a lot of noise in the numbers. And that noise has the regulatory element that we already alluded to. And those are meaningful as just Tim explained. The MTR costs, the MVNO, changes in regulation, the national roaming tariffs and the shutdown of the wireless fixed network; without those, the revenue would have been growing. But the second key point here is that behind that operational momentum, behind all of those net adds in Colombia, which by the way are record. And if you recall Colombia was losing subscribers a year ago. So now we are adding significantly. Behind those numbers, there's obviously an investment. And Tim alluded to investments in sales force, especially, in the fixed business that we will continue to do into the second half. I think importantly missing from the ability to see underneath all this dust is the fact that the competitive environment in Colombia remains quite stable. And this is different from the early part of last year. As you know, our main competitor has backed off on Mobile from regional price discrimination, that's much better. You actually see their results are actually quite positive. And you don't see that trickling to our sole use yet because of the regulatory hits that we are alluding to. And that's just quarterly dust, if you will. And on Cable, as we have alluded in the past, now all the operators are charging installation costs. All of which are signs of more stability in the marketplace. And the point here is that we now feel more confident to continue investing in Colombia. Put us at the regulatory situation for a minute. Our build program in Colombia is on track. We are adding over 1,000 sales force, basically, to sell more of this fixed network. You are aware that we will be launching in the second half, our next generation TV product. And we feel like we are finally cracking the nut on cross-selling mobile to our fixed base. That's part of what you see in the Mobile pickup in numbers. And vice versa, by the way, fixed into our mobile base. So we are getting a lot smarter on [civil tees] customer base management of our subscriber base. The point here is that strategically, we are quite pleased with the way Colombia is going. Even if some of the Q2 missed in EBITDA is the result of what we think is a Q2 over-performance in our subscribers. And that's part of what is going on here. And that just is a good way for me to repeat what I just said, which includes Colombia. If we continue with this kind of momentum operationally, we won't hesitate and I expect that you wouldn't expect us to hesitate, in investing in subscriber acquisitions for future growth. That is the key tenet of this business, revenue follows net adds.

[Tim Pennington:]

I think I would also look at it, Soomit, the Latam business overall was up $2 million sort of year-on-year. So I use the word resilience a lot in my section and I do believe the business is resilient. So Colombia was weaker for the reasons that Mauricio said in terms of operational momentum. And the rest of Latam was able to cover that and add an extra couple of million dollars. Africa was down $10 million. And that was difficult for us to cover. [indiscernible] Africa had a decent Q2 last year, life was a bit harder for them. And I think, when we looked at our guidance, and we looked at where we are going in the second half, we had sort of anticipated that we would be making investment into Colombia. And what has given us the confidence, if you like, is the strengthening of the market. The strength in Paraguay, Bolivia, the return in Honduras and in El Salvador and the easier comps we have got. Specifically, as Mauricio mentioned earlier, Guatemala, we'll no longer have the surveillance contract and in Colombia, we won't have the big restructuring charge we took.

[Soomit Datta:]

Okay. That's really helpful. Can I just follow-up with another quick one please? And just on the - and again, on the fixed side, in Latin America. The homes passed target is very helpful for thinking about framing the growth on B2C and I think the market can sort of see that growth coming through. Where I'm a bit more unsure is on the B2B side. And the trends have been a little bit weaker there and there's the Guatemala one-off there not helping numbers at the moment. But what are the best parameters to think about in terms of B2B growth going forward? Slightly open question, but if you could help that out, it will be great.

[Mauricio Ramos:]

No, no. Soomit, I actually think it's a very good question because there's still B2B businesses if you will. There's the large corporations and the government business. And then on the other hand, you have like the small, medium and small offices kind of business. So today, we are heavily weighted towards the first business. Because Colombia has a lot of government contracts in B2B and Guatemala and others still have a lot of government contracts. As we build more and more networks, we will have more of that steady, stable, predictable Cable-light B2B business, which is predicated on small offices and Home offices. And we will continue to grow on the government contracts and the large corporation contracts because we have a large footprint in Latin America, but it will, over the long-term, be less lumpy than it is today. The problem with the B2B business today and it's a good problem to have, but it is because it's so heavily weighted towards government and large contracts, it is very bumpy from quarter to quarter. If you go back, you do kind of a last 12 months' view of our B2B business today, it is about 5% growth right there in there. We don't think that is the long-term goal. We think it's north of that. But it will kick in significantly as we build more Cable network. I hope that gives you a pretty strategic view of where we are going with this business. It is a predicated part of our Cable build to transition that business more and more into a more stable Cable-light B2B business.

[Soomit Datta:]

Okay, really helpful. Thank you.

[Operator:]

Moving on, we will take a question from Chris Grundberg from UBS.

[Chris Grundberg:]

Couple of questions, if I may. Just on the tower deal in Colombia. Just wondered if you could step through the mechanics, understand it's a finance lease as it's been put into place. Can you give us the effective rate of financing on that? And then, I guess, just some commentary if you can around how you think it's going to impact, say [first of all] in FY '18 on both Colombian EBITDA and then I guess, group EPS? Any thoughts around that would be helpful? I have got a couple of follow-ups, but maybe I'll start with that.

[Mauricio Ramos:]

I'm going to put Tim on the hotspot.

[Tim Pennington:]

I think, Chris, these deals are treated as finance leases. The accounting rounded is pretty complicated actually. Then the net impact for this Colombia deal is very small impact on either the group numbers or Colombia numbers, actually. There'll be a little bit of extra debt that is recognized. We do it on a fair value basis. So it's a fraction of the $148 million we'll receive. And there's a marginal benefit in leverage as I said in my remarks. In EBITDA, again, it's not going to be no split. it's very, very mildly positive to us. And at group level for FY '18, it is not going to be significant at EBITDA and at earnings. You see our earnings, our EPS gets battered around by all sorts of noncash movement. So you won't be able to see the impact, but I mean it's marginally negative in EPS basis. But the effective financing rate is, for this Paraguay deal, is something less than around the 7% level. And in fact, we have got a good comp because at the same time, we did the local currency financing. So here we get effectively 12 year money at an effective rate of 7%. Whereas, the five year money we got from the bank is at an effective rate of north of 9%. So again, if we just look at it as a financing activity, it's a very, very good deal. But again, it's more strategic, more important for us in terms of flexibility and the way we operate the business.

[Mauricio Ramos:]

Yes. There's two reasons why I like this deal. One is we don't typically and you know this, have access to a lot of local currency-denominated debt. Tim's been doing a fantastic job and he told you about that and try to maximize that. So this is one way to do that because effectively we put this deal in local currency. So it's one way of adding local financing. That's one reason. The other reason I like this deal is because it simplifies our operation. And that has a lot of meaningful impact as we are running our business. Especially, in Colombia, where we have complex networks. And that's part of the Heat Project that we have talked about in the past, is becoming a more nimble, more capital-light telco and unlocking capital from areas in which we don't need it to be deployed. So on top of this tower deal, and you heard us talk about this, we are putting managed services deals just about everywhere in the region to simplify operations and focus on what we do best, which is the customer. We now have put in place managed services deals in 4 out of our 8 countries, including Colombia. And those deals bring savings because they simplify what we do. And that's the second reason for doing this kind of deals, which is more strategic than just financial.

[Chris Grundberg:]

That's great. Just on that topic then. My next question was going to be on that unlocking capital, as you say. But on the rollout, if you are increasing the number of homes passed, I'm just curious, as you say, having learned over the last couple of years more about what the kind of addressable target is, going to 15 million homes now, can you comment on how you are seeing the shift in cost per home passed? And I guess, what gives you the confidence that the 15 million is addressable from a tier sort of cost versus payback basis?

[Mauricio Ramos:]

Yes. That's a great question, and it goes right into the heart of what Cable economics are. And it probably provides a very good opportunity for me to address those. We are building these homes on the cost of the network that is at around $100 per Home passed. Colombia is a little lower than that simply because Colombia is lot more dense. And the reason why that $100 per home is less than the number you see in developed countries and I have said this often, is simply because very urban, very dense population. It is 99% aerial, so there's no digging streets and that adds a lot of cost. And obviously, deploying fiber cable is labor-intensive and labor-intensive is relatively unexpensive in our market. So that, that $100 per home, and we are tracking to that a little south of that actually. And then we penetrate long-term, you can do math somewhere between 30% to 35% of those. That's consistent with just about every rollout I have ever been involved with. It's consistent with our own current penetration. And the cost of adding a CPE to a connected household is somewhere in the $100 to $150, depending exactly on what CPEs are deployed. And you have got the ARPU numbers for us on Cable, which are around $30 per household. So with that, you got the Cable economics of a build, quite clearly explained. The difference is, these are marginal economics to us. The only place where we are a Cable-only operator is in Costa Rica. Everywhere else, we have already a very large established Mobile business, which means we have a brand name, which means we have a mobile network, which means we have the retail outlets, which means we have the G&A and executive team. So the economics of Cable for us are marginal Cable economics, i.e. we should be able to drive more of that EBITDA into the bottom line simply because we are already paying for a lot of the fixed expenses. And the last point about the strategic nature of our Cable rollout is that we are a mobile operator. So effectively, although these are not going to be easily put into the economics that I just described, either it's stand-alone or the converge economics, the fact is that we are increasingly putting a lot of our traffic on that fiber, mobile traffic. So we are effectively building a fairly future-proof Mobile network, simply by building a lot of Cable. Look at what is going on in Bolivia. Just if you could, I don't know if we gave enough visibility on the Bolivia numbers. But we basically build - we were at about 100 - I'm speaking out of memory here, so I could be corrected. 170,000 homes last year in Bolivia, Cable homes. We are now at 370. So we built about 200, and we have added about 66,000. So on that, it's about a 30% connect ratio. Why? Because broadband penetration in Bolivia is less than 20%, fixed broadband penetration. That's a perfect example of the kind of opportunity and the economics that we are driving here and if you look at the Guatemala numbers are very similar. I just won't give you the same number yet again. Hope that helps.

[Chris Grundberg:]

That's really helpful. Yes. just on that, I'm just wondering specifically, when you talk about the $100 a home, that presumably doesn't change then. You are saying the density is the same, the cost of rollouts for the next five million doesn't change. I'm wondering if you are at least in any way worried about the penetration rates. If you are moving down the income curve, which I guess you probably are with the next five million. Is there any risk on the penetration rate or the ARPU for those next five million homes?

[Mauricio Ramos:]

Well, here's the tried and tested. You are absolutely right. That is the name of the game. But I have been playing this game for a long time now. And as I tried to explain in my remarks and probably didn't do a very good job at it, the name of the game is, you start raising speeds, so that your existing base has a more valuable product. And that allows you then to penetrate with lower speeds, the lower socioeconomic segments of the population. So you start tiering your product and trying to keep your base higher and higher by offering more for a little bit or a little bit more of the existing price. That's the tried-and-tested cable broadband model. And we have been doing it in Latin America and Chile and Argentina and Puerto Rico for a while now. That's just tiering the market. Having said that, the game is exactly that. It's trying to penetrate while holding your average ARPU. And there will be a game of elasticity there for sure. In terms of the cost part of the equation, the densities in our markets do not change when you penetrate the low socioeconomic segments of the population. If anything, they get better. In our markets, it's the higher parts of the population that have the lower densities. It is the middle- and lower middle-income classes that have the more density. All you got to do is, go take a look at Medellin, Bogota, Guatemala, Cochabamba and Bolivia and you'll see this played out. So the density plays in your favor even if the ARPU, of course, balances that equation. That's a lot of Cable economics there.

[Chris Grundberg:]

That does indeed. thank you very much indeed.

[Operator:]

Moving on, we will hear from Lena Osterberg form Carnegie.

[Lena Osterberg:]

Yes hello. I was going to ask a little bit about Colombia. Do you expect, now that you have a full quarter of effect in Q1, so that the margin drop to 26.6. That's the new level going forward, or should we see some additional headwind as you didn't have a full quarter effect? That's the first question. And then on Africa, do you fear that maybe you are under-investing at the moment, to which you are equity free cash flow neutrality and that's why you are losing a bit of momentum? And that may be damaging for the value of the business if you are trying to sell it. And then, also, I was wondering a little bit what you plan to do with the proceeds from the Columbia tower deal. Is that all being upstream to refinance the 2020 bonds? And a final question, sorry. A overlap on your own Mobile customers in your Cable base because you said that you are starting to up sell Mobile to your fixed base. Could you maybe say something about triple-play penetration, or the percentage of your current Cable base that now also take your Mobile services?

[Mauricio Ramos:]

So I got to ask before we start answering. Do you have more questions Lena?

[Lena Osterberg:]

I do, but understand it’s too much..

[Mauricio Ramos:]

Don’t worry, we got it, we got it. We wrote them down. So, why don’t we tackle the finance question first, because I think, it’s a straightforward answer.

[Tim Pennington:]

Yes. I mean the tower deal, I mean, firstly, Lena, these things sort of roll [the hedge prices] of the proceeds that we [some] immediately impact on the Paraguay deal. We are still closing that. So we haven't earmarked anything to pay off the 2020 bond. In fact, the $300 million loan we did in Colombia, that was to repay an intercompany loan from Millicom. And that's what we have used to repay the 2020. Obviously, it's a joint venture down there, so proceeds from this tower sale will be effectively reinvested back into the business.

[Lena Osterberg:]

Okay.

[Mauricio Ramos:]

All right. So onto the others. On Colombia, the effect of the regulatory changes indeed will stay for a little bit with the business. And that onetime step change, that stays with the business. I think the point you were making is really that it confuses the story and the underlying momentum because they take away a little bit of revenue, and obviously, make the story line difficult to explain. It is also difficult to explain why regulatory changes will actually handicap us, the challenger and somehow help the dominant player. But the more important point there, I think, is that none of those changes really impact or affect our long-term strategic story or our investment theory. If you look at what the MTR cuts do is, sure, they take away revenue. But they take away a legacy [indiscernible] business that we into the future are not focused on. The same with the Wind MVNO. That's a nonstrategic revenue line. So our investment thesis remains unchanged. More important thing on Colombia with regards to margins and I think, Tim made it quite well, is we continue to drive improvements on our cost structure in Colombia. What we have done in this first half is reinvest that in sales and marketing. And that is the momentum you see in Colombia. And going into the second half, we got momentum and we are adding sales forces to tap into that momentum. Increasingly, our Columbia business is a subscriber-driven business, but it's a Cable business. Increasingly, it's a postpaid business in Colombia and increasingly, it is a cross-selled business with more revenue, more bundled revenue coming out of a single household, which makes all that cash flow more and more stable. So as I said earlier, if we continue to have this momentum into Columbia, I will not hesitate to reinvest in the second half into growth that will stay with us into the future because it is more stable, more subscriber-driven. And I hope that's really helpful. And tied to that is actually your question on cross-selling, which I alluded to there. As I know that you know our Columbia market quite well, we have an interesting opportunity in Colombia, in which we have higher market share in certain areas in fixed and higher market share in certain areas in Mobile. The key for us is to quickly build networks that support each other and allow us to cross-sell mobile into fixed and fixed into mobile. And that's what I meant when I said cross-selling vice versa because you fast forward strategically in Colombia, we will have acceleration similar to the rest of the countries we operate in, in which we have the ability to cross-sell or bundle, if you will. Running out of breath here. So Africa. There's no doubt.

[Tim Pennington:]

I think the Africa question is we are not under-investing at all. This last quarter, we invested CapEx at the rate of 18% that is higher than we are investing here in Latam. Even there are some specific issues in Africa. Chad, we talked about that sales tax revenue. In fact, the Chad business is doing okay underlying, but to be able to absorb the sales tax affects both revenue that we can report and EBITDA and allied to that was the customer registration requirements in [indiscernible], which has required us to disconnect certain customers and also more importantly, involved a much more complicated registration process, reducing our rate of growth there. So I don't think it is to do with underinvestment. I think the investment is fine. It's progressing. I think these are specific issues in two markets which are predominantly regulatory-inspired but have affected the quarter.

[Mauricio Ramos:]

Two last points on that just, Lena, so that you rest assured. We fulfilled the operating free cash flow return covenants in 2016. We are on track for the 2017 equity free cash flow promise. And that would give us, with regards to Africa, portfolio value. That's the way I look at it. And will allow us to continue with our strategic focus in Latin America.

[Lena Osterberg:]

Okay. I'm not going to ask anymore. Thank you.

[Tim Pennington:]

Thank you.

[Mauricio Ramos:]

Thank you. And we have time for one more.

[Operator:]

Unfortunately, that is all the time we have available for questions. I would now like to hand the call back to Mr. Ramos for any closing remarks. Please go ahead.

[Mauricio Ramos:]

Well, thank you everybody for being with us today. And I hope you have heard how positive we are internally about our strategy really, really working. We have absolute confidence internally that it is working. As a matter of fact, we are very reassured with the net adds that we are having and the good net adds that we are having. We are also seeing that we can deliver those more efficiently. It is giving us the ability to invest in the business, growth into the future within the same CapEx envelope and that's what is driving that equity free cash flow. So we think we have got the right mix. We got the right mix and it's really working. And as I say internally often, subscribers follow the networks, revenue follow the subscribers and that's the path we are in. Thank you very much.

[Operator:]

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