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Edited Transcript of MIICF earnings conference call or presentation 25-Oct-17 12:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Millicom International Cellular SA Earnings Call

Bertrange Oct 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Millicom International Cellular SA earnings conference call or presentation Wednesday, October 25, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mauricio Ramos

Millicom International Cellular S.A. - CEO

* Michel Morin

Millicom International Cellular S.A. - VP of IR

* Timothy Lincoln Pennington

Millicom International Cellular S.A. - CFO

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Conference Call Participants

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* Georgios Ierodiaconou

Citigroup Inc, Research Division - Director

* Henrik Nilsson

Nordea Markets, Research Division - Senior Analyst of Capital Goods

* Johanna Ahlqvist

SEB, Research Division - Analyst

* Julio Arciniegas

RBC Capital Markets, LLC, Research Division - Analyst

* Stefan Gauffin

Nordea Markets, Research Division - Former Senior Analyst of Telecoms & Sector Coordinator

* William Christian Miller

J.M. Hartwell L.P. - Principal and Portfolio Manager

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Presentation

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Operator [1]

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Good morning and good afternoon, ladies and gentleman, and welcome to the Millicom financial results conference call. 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 Michel Morin, Millicom's Head of Investor Relations. Please go ahead.

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Michel Morin, Millicom International Cellular S.A. - VP of IR [2]

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Thanks, Lauren, and hello, everyone. Welcome to Millicom's Third Quarter 2017 Results Conference Call. Before we begin let me draw your attention to the safe harbor disclosure on Slide 2 of the presentation, which is available on our website.

And with that, let me hand it over to Mauricio Ramos for his remarks.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [3]

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Good morning or good afternoon to everyone, and thank you for joining us today. As always I'm here today with Tim, our CFO whom you all know.

Let's get right on it on Slide 4. Overall, we're extremely pleased with our results this quarter. We continue to build high speed data networks in Latin America, both fixed and mobile, at increasingly faster speeds. We also continue to add record number of customers on both our 4G and our HFC networks. And as a result, service revenue growth is now back.

As we had anticipated, in Q3, we saw growth come back in all of our Latin American markets, and that was so squarely as a result of the operational strategy that we put in place a couple of years ago. So we're extremely pleased to see that happening. And we're now entering the last few months of the year with strong momentum, and this is very important, across all our businesses in all our markets in Latin America. That's the key point, our strong momentum.

Now let's look specifically at the strong process that we made during the third quarter beginning on Slide 5. In mobile, the chart on the left shows that we continued to expand our 4G networks to tap into the unmet demand for high speed data in our markets. Over the past year, we have increased the number of 4G points of presence by almost 70%. That is almost doubling the size of our 4G network in that timeframe.

Our 4G networks now on average cover 52% of the population in our Latin American markets. In some of those countries, these 4G networks now cover almost as much of the population as our 3G network, which is typically 60% to 70% coverage. And note that we're adding capacity and density to these 4G networks to give our customers an even better user experience and make it easier for them to consume more data.

You have heard me say this before, but let me repeat it because it is important into the future. 4G in this market is not an upgrade from 3G. 4G is a new product in this market. User experience is much better. Speeds are much, much faster and allow access to more functionality and many more user cases, whether it's social media or shopping or hailing a ride or gaming or gaining work productivity.

This means that when a customer migrates from 3G to 4G, he or she consumes a lot more data, about 40% more in our very specific case. And because you've seen that we're very disciplined on price, we do monetize the increased data traffic. In our case, we get roughly a 10% uplift to ARPU on a same-subscriber basis when a user moves from 3G to 4G. So the key for us is to continue to accelerate this fast adoption of 4G in our markets.

And on the chart on the right, you can see that indeed we continue to fill our 4G networks at a very strong pace this quarter. For a second consecutive quarter, we added about 900,000 4G mobile customers. That puts us well on track to constantly beat the target of 3 million 4G net adds for this year. Just do the math on that run rate.

During the last quarter call, we made the point that if we had the opportunity to continue to add customers at a fast rate, we would not hesitate to invest in sales and marketing and acquisition costs in order to grow faster. That is exactly what we're seeing and that is exactly what we are doing because there's a significant growth opportunity right in front of us that we want to tap now.

Sure mobile penetration rates are very high, around or over a 100%. But that is only true for the legacy voice business. We're focused on the fast growing high speed mobile data business, 4G. In 4G, data penetration is still only 18% of our customer base. We think there is a long runway of growth still ahead of us, which is why we're not being shy about investing to accelerate our growth.

Now moving on to cable on Slide 6. Here too we continue to build our state-of-the-art HFC network faster than before. You might recall that last quarter we raised our target number of homes passed from 12 million to 15 million in the midterm. We're trying to get there as quickly as possible.

In this third quarter alone we added more than a quarter of a million new homes passed to our network. Year-to-date, we have now added almost 1 million home passes to the network already. That is more than double what we did in the first months of last year.

So it should be somewhat obvious that we will finish this year well ahead of our target of adding 1 million homes passed in the year. Just as with 4G and as we had anticipated last quarter, we will invest, we are investing more and faster because we are seeing the opportunity for growth become available. And that is exactly what is happening also in cable as you can see on the right hand side of the page.

We're now connecting subscriber homes to our network at a faster rate than ever. In the third quarter, we connected a record 70,000 HFC homes. We have connected 200,000 homes year-to-date. That number is 70% more than last year.

The pace is picking up because we now have a larger stock of homes built and because we have much larger and better trained sales and distribution teams that we have been putting together over the last months.

Now to the punch line on Slide 7. This slide speaks for itself. The left hand chart simply says revenue growth is back, the operational turnaround is working. As you can see service revenue growth for the quarter was 2.3%, just as we said we would get to.

Third quarter of consecutive improvement, our best performance in more than a year and most importantly now positive and with operational momentum behind it.

The top right chart simply shows why, the result of the strategy. Mobile data grew almost 20% in Q3. This is our consistent performance on mobile data growth. But note that we increasingly have more and more mobile data in the revenue mix. So this growth carries more weight now than before. And that's a good thing.

Home grew almost 9% driven Bolivia, Guatemala and Paraguay, and without much contribution yet from Colombia. Colombia is only now building up momentum as we will see in a minute. And B2B, which includes both mobile and fixed services, grew almost 6%. We're now out of the negative shadow of the loss of the B2B surveillance contract in Guatemala. So the underlying true growth potential of our B2B business is beginning to come through.

Indeed we see a lot of opportunity to accelerate growth in B2B over time precisely because we're expanding our fixed networks across the region. So the "revenue reconfiguration" that we have been talking about for the past 2 years is now becoming very real. The operational turnaround, what really matters, is happening.

Said differently, revenue growth from our high speed data networks is now more than enough to offset the decline of our legacy voice business. An important element of this "revenue reconfiguration" is that we have been quietly but consistently growing the relative size of the subscription-based revenue within our mix.

Take a look at this. Cable is subscription revenue, B2B is subscription revenue, and we increasingly have more and more of these businesses in our mix. But we have also been steadily increasing our base of mobile postpaid subscribers this year as we have gotten the ship in shape.

As a result you can see on the bottom right chart that almost 60% of our total service revenue today is already subscription based. That means that we are no longer a predominantly prepaid mobile business. We're rapidly becoming a subscription-based broadband business.

Now, let's go to (technical difficulty). This is actually my favorite slide, 6 charts here, one for which one of our large markets in Latam. All of the 6 charts say exactly the same thing.

Every single one of our large Latin American markets performed better in Q3 this year than they did last year. Growth was more than 6% in Bolivia and Paraguay in the third quarter, where our strategy is ahead. In El Salvador, Guatemala and Bolivia, our growth rate in Q3 was our highest since 2015.

And in Colombia, we are back in positive territory even after taking a hit from regulation early this year and with strong operational momentum behind it. So like I said at the beginning, we now have good momentum in all of our large markets in Latin America.

Let's look at Colombia in more detail on Slide #9 because there are interesting things going on. As most of you know, we have some unique challenges in Colombia. It is the only market where we are not the clear market leader or at least a very strong #2 in mobile.

We don't have the skill advantages that we enjoy in other markets. And there is a dominant and aggressive #1 player there. We also have a large number of legacy copper customers that we're migrating to our HFC network as fast as possible. We talked about that often.

That migration is strategic and necessary and will allow us to cross-sell and bundle down the road. But it entails some short-term cost with little short-term revenue pickup, but a long term significant opportunity.

So the challenges are there. They're not small and we're not blind to them. But here's the key thing, we have stayed focused on our strategy. And we are now on positive growth territory and growing again in that market. We also see now more stable and healthier competitive mobile environment already in the making and a very strong long-term opportunity in fixed.

And our operational KPIs in Colombia are quickly gaining strength. And as you have heard me say before, in this business revenue follows customer pickup. On the top left hand chart, you can see that we have been steadily and consistently connecting homes to our HFC network every quarter. Many of these are upgrades from copper. You can see that in the same chart, that the number of customers on copper has been steadily declined.

In Q3, and this is important, the growth in HFC or cable connected homes was more than enough to offset the churn in copper. And we added 70,000 homes on a net basis in the quarter. You can see this on the bottom left chart. This was by far our best performance over the past 2 years.

The point is basic, but very important. We're now adding net connected homes in Colombia, not just replacing copper homes. So we're now in [kudos] territory. And as you know in the subscription business, once you start building up momentum it begins to pileup into the future. This is therefore a turning point for us in Colombia.

And on the right hand side of the page, you can see that on the mobile front 4G adoption is also accelerating. We added 0.25 million 4G customers in Q3 in Colombia. So yes, we still have some challenges in Colombia, but we now have really good operational momentum in that market. And that's what matters into the future. And to support our strategy, we're also launching new products and services as you can see on this next slide, Slide 10.

Last month on September 14th, we launched our next generation TV product in Colombia. This is a state-of-the-art, very sleek, product. It has seamlessly integrated access to Internet video apps, search functionality across linear programming, our own VOD platform, and third party video apps and other functionalities that will help further position and differentiate our video and high speed product presence in that market. Reception so far has been as positive as we expected. And we will roll out this product in the rest of Latin American markets in 2018 and 2019.

Earlier this month, I was also in Colombia to inaugurate our new tier-3 data center. We're broadening our product portfolio and offering higher service leverage in our B2B offering not only in Colombia, but across the region. This data center launch comes on the back of the launch of a similar data center in Paraguay last year and planned data centers to be launched in Honduras and Bolivia next year. All of these will support and enhance our growing B2B business.

All of this is our consistent approach to capital discipline. We're investing where we see areas of strong growth ahead, mobile, data, cable and B2B, and accelerating when we see the opportunity to do so.

So now let's get a bit more financial and move to Slide 11. This is in essence -- in a single chart, our track record as a management team so far. All focus on healthy and sustainable cash flow growth. This is, in a single page, the storyline of the last 3 years.

We have been investing heavily to build high speed networks, both 4G and HFC, at neck breaking speeds. We have been adding customers at similarly fast speeds and not hesitating to invest in sales and marketing and distribution in order to tap that growth. This is now resulting in the operational turnaround that has brought back service revenue growth. Our areas of a strategic focus now grow fast enough to offset the legacy mobile voice business, not a small point.

The company is no longer a prepaid mobile voice company. It is now an emerging, high speed, data company, mobile and fixed, predominantly an increasingly subscription-based with revenue growth ahead of it. And this is happening as we have brought back equity free cash flow to the business. Money speaks, it is the ultimate measuring stick for us.

You have seen the left hand side of the slide before. Our equity free cash flow has gone from negative $43 million in 2014, just before we joined, to positive $269 million in 2016. We have picked up more than $300 million in 2 short years. And this financial turnaround continues in 2017. We have added $33 million of equity free cash flow so far this year when compared to the same period last year or up 19% year-on-year.

Now before handing the call over to Tim, let me wrap up on Slide 12. We're extremely pleased with our result this quarter. We're nearing the end of the year with strong commercial momentum across all our markets in Latin America and across all our lines of businesses. Our revenue growth is back and improving, and we're seeing some operating leverage coming through.

Overall, Q4 looks better to us than Q3. And for our Latin region in Q4, we expect service revenue growth of between 2% and 4% and EBITDA growth of between 4% and 6%, right where we want it to be coming out of the year. And finally with our balance sheet in order, our operational strategy working, and our equity cash flow growing, we feel we're building momentum for a strong 2018. And this is exactly where we wanted to be towards the end of the year.

Tim will now walk you through our financials.

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [4]

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Thank you, Mauricio. And let's start on Slide 14. So you just heard from Mauricio the operational building blocks are rapidly falling into place, customer uptake is accelerating, our Latam businesses are delivering revenue improvements and we have been able to maintain and sustain our margins whilst investing in higher levels of sales activity plus the cash flow continues to show strength. So in short, Latam is trending in line with where we want it to be.

Let me turn to the key financial metrics in Slide 15. And service revenue growth swung by more than 300 basis points on Q2 turning us to positive service revenue growth after 4 quarters with negative growth. This is flowing through to EBITDA, which was up 3.4% year-on-year and with cost discipline margins improved 80 basis points to 36.8%. And for the record, FX was not a major factor this quarter.

The 9-month CapEx has picked up to $632 million reflecting the rapid build there now underway, but we expect to be in line with our guidance which adjusted for Ghana and Senegal would be revised to around $1 billion for the year.

And Mauricio has already gone into detail on service revenue growth but I just want to take a second to disaggregate where the sequential growth came from. The biggest contributor was Latam ex Colombia, which contributed more than half of the improvement. But what really made the difference in this quarter is that both Colombia and Africa showed sequential improvements.

Turning to Latam on Slide 17. The overall Latam service revenue growth in Q3 was 2.3%, a big improvement in B2C mobile now less than 1% down year-on-year. And whilst we are -- and we're also seeing data continuing to grow at the 20% per annum rate. Moreover, Paraguay, Bolivia and Guatemala all reported positive mobile service revenue growth, which helped drive the strong performances in each of these markets.

The home business grew well across most geographies, up 8.8% with robust growth, again, in Paraguay, Bolivia and Guatemala and an improvement in Colombia. And it's also notable B2B made a positive contribution growing by 5.7% our strongest performance this year on a bigger B2B market. And our biggest B2B market, Colombia, it was pretty solid in the quarter as well.

EBITDA grew 2.5% organically in Latam. It's a great improvement from Q2 and we expect to continue this improvement into Q4.

Latam OCF is broadly flat as we pushed hard on the network build. It's worth mentioning that customer equipment deployed to support the growth of our fixed customer base increased almost 50% year-on-year and it now accounts for 25% of our Latam CapEx. So in short, a lot more of our CapEx is being deployed into direct revenue generating investment.

Let's look at Colombia in a bit more detail on Slide 18. As we said, we're pleased to report a return to growth this quarter. The strength of this, however, is obscured by the significant impact we had from regulatory changes earlier this year, specifically the wholesale caps on MVNOs and national roaming. As I said last quarter, we have a disproportionately large share of this traffic in Colombia. So these actions at the end of Q1 had a disproportionate impact on us. You could see here the cost to us was 260 basis points of growth. Additionally, if we add the discontinuation of UNE fixed wireless business, which we had planned for, this added a further 90 basis points impact.

Now this is only part of the story. Given the opportunity outlined by Mauricio, we pushed up our sales on marketing spend by 19% in the quarter and we make no apology for such a rise in market -- in the market where we can see such growth opportunities. However, we are mindful of the margin, we particularly -- or when we partially compensated for that increase by 12.5% reduction in our G&A costs. Notwithstanding, the results show 350 basis points, lower EBITDA margin, and this margin is likely to remain muted for the next couple of quarters.

Now moving on to Africa, on Slide 19, and before talking about the performance, let me spend a moment on what constitutes the Africa group now. Senegal and Ghana are both out of our consolidated numbers. Ghana, we got regulatory approval to proceed with a merger with Airtel at the end of the quarter. So from Q4, this will be treated as a JV and equity accounted for. We haven't quite got regulatory approval for Senegal, but we are expecting it some time during the next quarter.

That leaves us with just Tanzania, Chad and Rwanda, and it now represents less than 10% of group revenues. These are the numbers shown on the slide here. So in the quarter, there was some let up in Tanzania with stronger revenue growth although we do remain concerned about the operating environment. Chad continues to see a substantial revenue impact from the sales tax imposed in Q1 and that is largely why service revenues continue to fall, albeit at a slow rate.

You recall that our main objective is to set Africa on a standalone financing basis and we remain comfortably in positive operating cash flow territory. I'm confident that the Africa region will be fully equity free cash flow positive in 2017.

Okay, let's turn our attention to group EBITDA on Slide 20. EBITDA for the quarter was $556 million, up 4% year-on-year in U.S. dollar terms and 3.4% on an organic basis. That is in constant currency and excluding Senegal and Ghana.

For reference, Ghana generated EBITDA of approximately $8 million in the quarter. On the chart, you can see that EBITDA growth was fueled by Latam and corporate. That includes the benefit of a $19 million one-off credit.

That leads to cost now on Slide 21. Our operating expenses declined 0.4%. Although this is more modest than in recent quarters, underlying there was a 7% increase in sales and marketing cost to support the growth initiatives, offset by a 7% reduction in general and administrative expenses.

So we continue to actively manage our costs aided by the work we're doing on Project Heat. And despite the investments in sales and marketing, you can see on the right hand side of this slide the rolling 12 months EBITDA margin continues to pick up. And you can see that we've been solidly through the 35% barrier now for 4 quarters.

All right. Turning to the full P&L and a couple of things to highlight. Firstly, we recorded a credit in other operating income on the accounting gain on the sale of the Paraguay towers. Second, the net finance charge includes $28 million from the redemption of the 2020 and 2021 bonds we made in the quarter and that's why it's a little higher than usual.

Next, taxes. They were higher in the quarter on higher profits. But we continue to expect the full year P&L charges to be in the region of $260 million. Finally, you can see there in discontinued operations, that's where we've recorded Senegal and Ghana's contribution.

So turning to the year-to-date cash flow on Slide 23, as Mauricio mentioned, cash flow has remained robust. As already mentioned the equity free cash flow is 19% or $33 million higher than in the first 9 months of 2016.

A lot of this uplift is in the cash CapEx which is just under $100 million lower than in Q3 '16, largely on timing differences. Tax paid was flat in Q3, which left our OFCFs, mainly the after-tax cash generated by operating activities, up $140 million so far this year.

Net financing charges increased mostly due to the net debt management activities just mentioned. So the free cash flow increased by just short of $100 million. Dividends to minorities, and that's mainly Honduras and Guatemala, were $114 million, and the (technical difficulty) distribution in Guatemala in 2016 were atypical.

So this is a more normalized level. In fact, total dividends to minority should hit around $150 million for the full year. And net equity free cash flow of $204 million in the 9 months to September was pretty strong.

Finally, Slide 24, net debt was around $100 million low at $4.3 billion on both cash flow generation and receiving the first tranche of the cash in respect of the tower sale in Paraguay. During Q3, we continue to actively manage our debt, extending maturities and lowering our average cost of funding. We completed the redemption of both of our short maturity bonds through the issue of a new 10-year bond, which has got a coupon around about 150 basis points lower than the 21s redeemed.

We also have issued a further BOB 80 million local currency debt in Bolivia, carrying a coupon of 4.7%. So this means that pro forma we now have 40% of our debt in local currency. And we also have more than 3 quarters of it on the balance sheet of our local operations.

On leverage, net debt to EBITDA was 1.99x, proportionate net debt to EBITDA was 2.15x. These are unchanged from where we ended 2016, albeit a little bit down from the 2.22x at the end of Q2.

That brings us to the end of the Q3 presentation. And to summarize, we saw another great quarter for customer additions, another quarter of rapid build of our high speed data networks, good signs, the strategy is delivering with a return to service revenue growth across all Latam countries.

We've taken the opportunity to invest in higher sales activity, which has constrained the margin in a number of markets. But this is an investment we believe will return dividends in the coming years. We've also invested more in delivering more homes passed and more 4G presence. At the same time though, we are maintaining cost and capital discipline.

That brings us to the end of the presentation and we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Johanna Ahlqvist with SEB.

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Johanna Ahlqvist, SEB, Research Division - Analyst [2]

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Yes, only one question. So how do you sort of look upon the margin potential going forward? You mentioned that you see Colombian margins being muted for the next couple of quarters. But how much is it really sort of left in terms of cost and margin expansion do you foresee in 2018 versus where we are now?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [3]

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So on a general level, once we have recuperated revenue growth as we have now and attained the operational momentum that I was describing, margins will continue to grow as service revenue grows. My favorite language and one that has been adopted quite clearly here at Millicom is operational leverage. And it's much easier to attain that once you have service revenue growth as we now do. So we see some upside potential naturally as a result of focusing more operations in Latin America where we have a higher margin. But also because we continue to be adamantly focused on headquarter costs. But also because we see in some of the operations there's upside for margin expansion. Now regarding specifically with Colombia because I think your question had both angles to the group and Colombia, on one side remember that in the long term our margins in Colombia are structurally lower simply due to differences in the mix. We have a call center in there and our lower market share in mobile simply means that it's harder for us to attain the benefits of a very strong, large market position. But bearing that in mind, as we recuperate revenue growth in Colombia, and we are doing that, we will also start to expand our margins there. When and exactly how much will really depend particularly in Colombia as with the rest of the group, but to a lesser extent on growth. And the point here is that if we continue to see the opportunity that we're seeing particularly in Colombia where we've increased our sales and marketing, we've increased our acquisition costs and we've increased the size and the strength of our distribution teams, we will continue to invest. So there is a tradeoff between short-term EBITDA margins and capturing in the short term that long-term growth that we have an opportunity to tap. The more this business is a subscription business, the more it is important to build momentum in the short term to secure long term sustainable growth.

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [4]

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Can I just add to that. If I look at the margins of all of the businesses ex -- our fixed mobile markets in Latam ex Colombia, all of them improved margins in the quarter and no another margin less than 36%. So our challenges are in Colombia which Mauricio has addressed and in Africa which is a sub-30% margin still and the point I would make on that is it now represents sort of less than 8% of our group EBITDA. So it's becoming increasingly marginal in the impact. So the focus on margin improvement is ultimately in Colombia. And we continue to express confidence that we will improve the margin over time. But at this point in time, it's better to capture the growth that exists there.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [5]

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It's just a lot easier to do it when you got revenue growth, because you can tackle operational leverage and help support not just cost reductions.

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Johanna Ahlqvist, SEB, Research Division - Analyst [6]

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Perfect, thank you very much. And if I may, just one follow-up question, a detailed one for you, Tim, on financial net outlook sort of. I see that you ended up at 106 underlying in the quarter and if you can say anything of how we should view that figure going forward given the sort of tower deals you made and so forth?

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [7]

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Sorry, Johanna, I didn't quite catch that. Financial -- what were you talking about?

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Johanna Ahlqvist, SEB, Research Division - Analyst [8]

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The financial net if you exclude the redemption fees, sort of the underlying financial net in the quarter.

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [9]

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Oh, okay, okay, the financial charges in the quarter. I think it's sort of -- no, I think, it's probably better Michel follows up with you in more detail. But we're going to end up round the $440-ish million and $450 million dollars of finance charges for the full year. It obviously was distorted in the quarter by the $28 million dollar redemption fee on the 20s and the 21s that we took.

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Operator [10]

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Our next question comes from Julio Arciniegas with RBC.

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Julio Arciniegas, RBC Capital Markets, LLC, Research Division - Analyst [11]

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Thanks for taking my question. My question is also about Colombia. We have seen that basically EBITDA has been somehow penalized by subscribers growth or at least sales and marketing. Can you give us some color of what sort of actions are you doing? Has the [SAC] per subscriber increased, because -- for example when I see subscribers -- actually, well broadband has growth in this quarter, but for example mobile net ads in Q3 they're actually lower than the previous quarter. So I would like to have a better sort of feeling of where the dynamics are actually that are driving this subscribers and marketing growth?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [12]

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So as we said last quarter, Julio, and -- hello. We've significantly ramped up our sales and marketing and our distribution, commercial distribution networks in Colombia. And we are adding a number of, on home business, subscribers that is effectively twice what we were adding a year ago if you look at the HFC. That's a significant pickup in our focus on the market. We've also launched this quarter, and in preparation to our launch last month we've also launched a new product which as you can imagine has a fair amount of momentum. And in 4G in Colombia in particularly this quarter, we added a strong 250,000 4G net adds, which is an acceleration. So out of that 900, which is a good number, 250 are from Colombia. Now at a good level, indeed this 900 is similar to Q2 on a run rate or year-to-date. We're almost now at that 3 million mark that we had spoken about as our target. So that's what we think into 4G, we're going to be comfortably ahead of that guidance that we had put out for 3. And you've seen us and I realize that we don't give you a lot of detail on this. But we've got a lot more postpaid into the business. We're adding -- I am not sure, I am looking at Michel to see if I can say the number. But we're adding over a -- north of 100,000 postpaid subs so far. And that obviously has an additional cost into the line that you are referring to. But as I was saying before, when you have that kind of opportunity, you got to dive right into it and take it because any postpaid subscription business that you're bringing to the house in this business stays with you for the long term. That's the color I think that we can give you on that.

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [13]

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And Julio, just to remind you, in terms of looking at the total subscriber base in Colombia, we took a cleanup in the fourth quarter of last year. So that would be in that kind of in that comes at just over 0.5 million subs. So that distorts the year-on-year comparison in total sub base.

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Julio Arciniegas, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Okay, so if I may follow up, are we seeing churn improving due to the mix because at the end if cable subscribers that are growing, that requires less commercial activity because at the end churn is decreasing so that translates into more net adds?

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [15]

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Yes, so I think the key to your question is indeed looking at churn as you're growing, as we're beginning to grow in Colombia. The area where we've seen churn decrease the most in Colombia is copper, and as you recall at the beginning of this year towards the end of last year, we had a double whammy which was one we had taken a price increase at cost some churn early in the year, February and then January of this year, which was also coupled with the copper losses all on the context of fairly low consumer confidence in Colombia. We're now out of that phase because of the price increases now being so far behind churn has gone down, but also we're being a lot more able to retain those copper customers because of the [hardware] that we've been doing to the network over the past. And as a result of that, the net churn is much lower. And now we're now in growth territory in Colombia, which is as I said earlier pretty much a good turning point.

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Operator [16]

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We'll go next to Stefan Gauffin with DNB.

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Stefan Gauffin, Nordea Markets, Research Division - Former Senior Analyst of Telecoms & Sector Coordinator [17]

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Yes. Sorry to continue on Colombia. You say that you increased investments due to the growth prospects that you see in this market. Can you give a little bit more understanding of where you see that you can take this business, both in terms of growth and in terms of margin. Secondly, just a question on the RGUs this quarter, cable RGUs, which increases quite significantly as compared to homes connected. Just wondering what is driving that development.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [18]

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Yes, so the second part of the question, Stefan, and thank you for noticing that one. Very keen eye there, it's called cross-selling and it's called better bundling. So we have a base in Colombia that we can cross-sell to, and that's a quick way that we're beginning to take. I may have said this earlier, but we are not evenly distributed in our subscriber base in Colombia. There are some areas in which we can cross-sell into our existing fixed base and some areas in which we can cross-sell into our motor base. We're doing a lot of that. And also as a result of these upgrades from copper to HFC, we have ability to cross-sell broadband into our subscriber base. So it's just the effect of bundling and cross-selling. And again I won't stop making this point. We don't hesitate to invest in that at all because this is HFC customers that have significantly lower churn than any of our other costumers, which means we get to keep these customers for the long term. So that's what you got there in terms of the dynamics. And we didn't want to highlight because we usually report a number of homes connected, but we had a significant number of RGU pickups in Colombia indeed, much more than the actual number of connected homes. Now on Colombia in general, and you've heard me say this before, we are extremely, extremely positive. This is a large market in which we see a significant opportunity for us to drive our network growth, add customers as we're beginning to add, and also pickup on our 4G net adds, and see a recovery of the mobile market. Now the one thing that I think is important to highlight about Colombia going forward is that it is a country with tremendous growth in population. It is now about 50 million inhabitants and our network only still covers a small part of the available homes. So there's growth there for us in broadband for sure.

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Operator [19]

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And we'll go next to Bill Miller with J.M. Hartwell.

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William Christian Miller, J.M. Hartwell L.P. - Principal and Portfolio Manager [20]

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The cable second (inaudible) I'm not sure of interest in a sense really (technical difficulty) make sure (technical difficulty).

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [21]

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Bill, we can -- good morning, we can barely hear you.

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William Christian Miller, J.M. Hartwell L.P. - Principal and Portfolio Manager [22]

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Okay, I'm talking about the economics. Can you hear me now?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [23]

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Yes we can.

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William Christian Miller, J.M. Hartwell L.P. - Principal and Portfolio Manager [24]

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Can you hear me? Okay.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [25]

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We can hear you.

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William Christian Miller, J.M. Hartwell L.P. - Principal and Portfolio Manager [26]

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The economics of cable, could you run through that again, the investments and the monthly subscriber fees, because it would appear after a certain amount of time it's almost 100% payback return? Could you give us more color on just exactly how that works and how long it takes for somebody to become a full subscriber and after you've passed the (inaudible)?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [27]

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Surely. Yes, that is a great questions. So first the opportunity which we alluded to in the last quarter, we've set a target of 50 million homes in our market that by the time we complete that target it would only be 50% build out ratio, about effectively 50 million homes out of a market that has 30 million homes, that we think are the available market. So that's 50% build out ratio compared very favorably to what is an 80% build out ratio in Puerto Rico and then 75% build out ratio in Chile which are sort of the aspirational comparisons. It'll still be 50% against 75%. So it is a target that could be much bigger, but there's no point in putting it out there if we're only building about 1 million, 2 million homes -- 1.5 million homes per year. Now the economics themselves are pretty simple. The cost to build a home for us is about $100. A little less in Colombia, a little more in other countries. But on average, you can use about $100 per home passed. The cost to connect a home is about $150. That's the installation, the tab, the crews, the [CPE]. And that's per installation. And as we've said before, we're aiming in the in state, so that's about 3 years out, to connect about a third of the homes that we passed. So call it 30% to 35% penetration rates on the homes that we build. So the last piece of the equation here is, of course, the ARPU that we get per household. And we are now getting around $20 per household on average in the region per home per month on what is a 2x bundling ratio. We've actually increased that number from around about 27 a year ago. So we're taking a little bit of ARPU pickup. The last bit of the equation, because I've given you basically the math around revenue and the math around CapEx, is the time it takes us to get to that 30% to 35% penetration and the EBITDA margin that we get on that. It takes us typically about 3 years to get to that 30% to 35% penetration. But if you've done the math on the numbers we showed you today, over the last year give or take we built a million homes, and we've connected 200,000 HFC homes. That's what I said on the call. So -- and realize that this is not specific [cohost] math, but it's back-of-the-envelope math. We're connecting about 20% the first year out, 15% to 20%. And if you do the math on the numbers we just showed you, that is consistent with that. The last bit of the equation is that you all know cable lies in EBITDA margin, and standalone cable drives a margin of somewhere between 35% and 45% of revenue. But we're not a standalone cable operator. Our brand already exists in the marketplace, our G&A is already paid for, our network already has a lot of cable and back-holding the ground. So we drive what I call marginal EBITDA margins, which are north of 50%, because we already got a lot of the fixed cost base. Now the whole point of this is we see a tremendous opportunity even without the benefits to the mobile business, even without factoring the strategic relevance of having a convergence placed in our market. All that I've said before is effectively standalone economics, but there's a strategic rationale for us to go out and do that. And I'll just tag into the last point that I'm going to make here. This is why the faster we do it, the better. And I've made the point about this being subscription based revenue already. So you've seen in this quarter that we've already reached -- almost reached 1 million home passed bill target for 2017. I think the exact number is 955,000, so we're talking about 1 million already. But we're not stopping. By the end of the year, we'll be way north of 1 million in terms of the number of homes that we build this year. They'll be somewhere between 1 million and 1.5 million, a 1.5, somewhere in that range. Don't know exactly where we'll fall. The point is we're not hesitating because of the economics that you're alluding to invest in our growth. It would be silly for us not to go ahead and do it given the economics, given the penetration and given the market opportunity. So like I said last quarter, we're not hesitating. That may be an impact on our operating cash flow. So be it. We're not going to take short term decisions just so that we can drive self-imposed OCF guidance number. We're going to grab the opportunity when we can, and if we can get closer to 1.5 million homes build this year, we will.

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William Christian Miller, J.M. Hartwell L.P. - Principal and Portfolio Manager [28]

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Mauricio, that's a terrific answer, thank you. But I have a follow-on since you gave such a great answer which is, okay, can you throw more CapEx, sales, marketing, whatever, at this and accelerate the pace of cable penetration conversion from copper whatever? And can you give us any idea since you've had well, well above your estimates for this year what the estimates might be for next year?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [29]

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Yes, we shouldn't have given you a comeback. I'm hoping that we're going to end the year closer to a run rate of 1.5 than 1. It's going to fall somewhere between 1 and 1.5 and that's going to be a run rate. And the number of homes that we're connecting is increasing, especially now that we're out of -- partially out of the copper (inaudible) net adds. So we're pretty excited about the penetration that we're getting. And by the way, we're getting this penetrations and this pickup in countries like Paraguay and Bolivia as much as we are in Colombia. So it is quite broad based. And we're going to be as adamant as we've been in this last 2 quarters on tapping the opportunity when it is right there right way.

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William Christian Miller, J.M. Hartwell L.P. - Principal and Portfolio Manager [30]

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Okay, but you didn't answer the question about the outlook for next year. And that would be very helpful for us. Oh, you coward.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [31]

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Yes, but well, because we're very disciplined in terms of providing that. And because we're getting better and better every quarter, that's also part of the reason. And we're looking to a strong fourth quarter and that will give a better idea on how to put out the guidance for next year. Tell you this so that we can settle this. We're not looking at less than 1 million, how about that?

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Operator [32]

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Our next question comes from Georgios Ierodiaconou with Citi.

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Georgios Ierodiaconou, Citigroup Inc, Research Division - Director [33]

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I have 2 questions please. The first one, I was wondering if you could give us an update on spectrum events you are anticipating. I know the one in Colombia is probably going to come a bit later now, but if you could talk more broadly about the other ones that you may be expecting for 2018? And my second question is on cable speeds in Colombia. There was a report out in the summer by the regulator which kind of showed that kind of just taking around 45,000 of your subscribers take speeds of more than 10 [megs] and the majority of the base was in the region of 2 to 5 megs, while your main competitor had a much better mix than you. Do you want to explain to us the drivers there and any action you are taking to perhaps reduce the gap between the speeds versus [AMA]?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [34]

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Yes, you bet. So on spectrum, there's been a lot of activity in the last 18 months or so. Some of it kind of goes without releases. We'd renewed all of our licenses in Bolivia. We also got our Paraguay license maybe some 12 month ago or so. So we're looking pretty good there. We also just renewed a little bit in Ghana in the context of closing the transaction. So we increased the number of years on our license, and we've also renewed our (inaudible) earlier this year, all within our budgeted numbers. Those 4 are the ones that have occurred over the last call it 12 or 18 months. Now looking ahead there is a very debated 700 megahertz auction in Colombia, which has now been postponed into 2018. And it's hard to handicap whether it will or will not happen in 2018 because the electoral process has already started in Colombia and these things tend to go hand in hand. So who knows it will be a 2018 event or not. In Paraguay, and also coming up a possible AWS license. Again, that could happen before year-end or it could move into 2018. Obviously, we look towards it very positively. We're having the natural dialogue with the government about the right price for it. This is a government that has been very rational and very focused on making sure the private sector has the resources needed to make economy continue to grow. So we would hope it happens this year, but maybe it does move into next year. And we think it's going to happen at very reasonable prices. We also have an El Salvador renewal, the second part of our licenses that's coming up with possible new spectrum. And we think we're going to close out well within the number that we think are very reasonable and within our budget. And then largely, there is the Guatemala 4G/AWS auction that has been postponed and postponed and postponed for the last 2 to 3 years. And it still remains uncertain whether it will be a 2018 event at all or not, certainly not a 2017 event. Did I miss any?

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [35]

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I think on the spectrum, the speeds -- I think our point #1 will be that there's a bit of inconsistency in the way the regulator captures this space. We seem to be in a pact with everyone else and then (inaudible) is sort of at a different spectrum. At the end of the day, we offer a range of speeds. Our customers buy the speeds that they want to and I think we've said in the past we are -- most of our customers are in that sort of 5 to 10 megabits per second band. And that just gives us plenty of upside and opportunity. So we're not very comfortable with where our customer base is in the main.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [36]

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So let me give you a -- sorry I missed out. Let me give a little bit more color on my long-term view on this because speed is our friend and I'll tell you why in a minute. So when you look at the picture today in Colombia, you got to remember that we still have quite a bit of copper there. Just factor that in mind. And got to remember that we still have a little bit of [MNDA] that we just gave up, and that had fixed broadband on it with speeds on copper and MNDA that are not comparable to the one that an HFC, like the one we're building can offer. But that data likely captured a lot of that. That's the picture today. The picture going forward is us building at the neck breaking speeds that I just referred, state-of-the-art, 1 gigahertz 2-way DOCSIS 3.1 ready network. So once you have that kind of network in place, like we're building, at the rate we're building, and you have DOCSIS 3.1 modems on the house and routers on the house, speed becomes our friend. And it is up to us how we monetize it and how we drive that market because there will only be a couple of HFC networks in that market that will be able to drive speeds into the marketplace. When and how we monetize it is a commercial decision, but speed is our friend with the kind of plant that we're building. And you already know what -- the last point I would make is the network that we're building is identical to the network that the large MSOs have in the U.S., no difference, 1 gigahertz DOCSIS 3.1 HFC networks [M50].

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Georgios Ierodiaconou, Citigroup Inc, Research Division - Director [37]

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If you don't mind me following up, is there a difference in the subscriber base they're addressing because in the last 12 months they had around an 8% growth in RGUs, so around 0.5 million customers being added, or services being added to be more precise. Is it because their subscriber base is more -- it's easier to upgrade to this kind of speeds versus yours? What would then explain the difference in the performance?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [38]

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Well, listen, there's 2 things. One is the bigger network, so you're comparing apples to oranges. And 2, we have the copper effect that we just described that we've just begun coming out.

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [39]

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[Claro] doesn't have any copper. If you compare our HFC gross adds with Claro's and you see a similar type of trend.

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Operator [40]

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And we'll go next to Henrik Nilsson with Nordea.

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Henrik Nilsson, Nordea Markets, Research Division - Senior Analyst of Capital Goods [41]

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Three questions if I may. On the impact of the UNE fixed wireless decommissioning, will that roll through the numbers until annualized or is that a project that takes a longer time to complete? So what's the character to expect there. Then on -- moving away from Colombia and maybe focusing on a smaller market, on Bolivia, we see a solid acceleration of net adds. It's on the highest level since 2014, I believe. Is there anything specific driving that and how sustainable do you think that is?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [42]

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And there was a third one, Henrik?

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Henrik Nilsson, Nordea Markets, Research Division - Senior Analyst of Capital Goods [43]

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I'll come back to that, sorry.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [44]

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He's holding it back, it's a comeback. I'll let Tim answer #1.

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [45]

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Very quickly, the fixed wireless will come out of our numbers after Q4. So it's just an annualized thing.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [46]

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So the Bolivia question, Bolivia's on fire and is the playbook playing out faster than the other countries and right by the book. We added 30,000 -- this is the fixed or the home or the cable. We added 30,000 net adds this quarter and we had added another 30,000 last quarter. We have been building in Bolivia and adding subscribers like (inaudible) is selling hot cakes. And we're pretty bullish into next year, and as you can imagine we're going through a budget and we're just putting capital right there, that's what we do. Same is true on 4G. Bolivia added about 160,000 4G net adds and that's on the back of putting money into the 4G network. And then just being ahead of the pack in terms of 4G deployment. So it is just a playbook playing out quite as we would expect it would once you get to operational momentum. The other element that is specific about Bolivia is that it's a market where we first started putting all the sales team, selling all products. First market in which we started selling fixed and mobile in a single unified commercial team, and the benefits of that are beginning to show.

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Timothy Lincoln Pennington, Millicom International Cellular S.A. - CFO [47]

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I think it's interesting, Bolivia, because a couple of quarters back it sort of had slowed down, yet we saw the opportunity there, we've seen the opportunity. We actually significantly upped our CapEx investments into Bolivia diverting it from other markets. And I think that investment is actually sort of showing that it's paying off quicker than we thought actually with the speed in which -- particularly in the cable business it's taking place, so very happy with that.

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Henrik Nilsson, Nordea Markets, Research Division - Senior Analyst of Capital Goods [48]

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Thank you for that. And then to my third and last question, this might be a stupid one, but is there a seasonality effect on your subscriber intake in Latam specifically? I mean, looking back a number of years it looks like Q3 is always rather flat or negative or is that just by coincidence?

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [49]

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Well, there is seasonality in mobile. It tends to be fourth quarter for sure. That's definitely the case and that's where we're like confident that we're going to be comfortably ahead of the 3 million 4G net adds, which was our target for the year because we had a pretty good [clip] now. And fourth quarter tends to be seasonally very strong. You will recall that. I think last quarter -- last year, fourth quarter we did about 1 million or so plus. Now on cable, the element of seasonality in the numbers is a lot more difficult to see because we're building so much and we're entering such a growth phase. But the element of seasonality is going to get subdued by simply the pickup in subscribes on the back of the pickup on our network.

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Michel Morin, Millicom International Cellular S.A. - VP of IR [50]

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Lauren, I think that we're already at 9:00 o'clock. So I think that that had to be our last question. So Mauricio, I don't know if you want to share some final remarks.

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Mauricio Ramos, Millicom International Cellular S.A. - CEO [51]

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Sure. I think the key point that we're making today is that our Latin American business is performing right in line with our expectations and adding tons and tons of operational momentum. And we just have a market opportunity right now that we're grabbing faster than we had anticipated. And that's a great problem to have. I think we're going to be building more than that 1 million homes that we had targeted we would build. And we're penetrating them better than we had expected. We were adding 4G subscribers or users at a fast clip and we're going to end up ahead of our target. That's another opportunity that we have to tap. We're now adding 70,000 HFC subscribers on a quarterly basis. And that is an opportunity that we have to tap. So as a result of that we're investing more and more in sales and marketing and in acquisition. And we've taken the view like we told you before that we want to grab that opportunity, because it's a subscription based business that we want to build momentum for the future. And it would be absurd for us not to build more, not to spend more, not to spend more on sales and marketing and acquisitions simply to meet short term guidance. It would be meeting guidance, but we would miss the market opportunity and we don't want to do that. We shouldn't be doing that. And as a result of that we're pretty pleased with the kind of momentum that we're building for our business into fourth quarter for Latin America and the fact that we're building a strong 2018 going forward. Thank you for joining us today.

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Operator [52]

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