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Q4 2014 · Earnings Call Transcript

Feb 3, 2015

Executives

Nicolas Didio - Director of IR Tim Pennington - Interim CEO and CFO Mario Zanotti - Senior EVP

Analysts

Chris Grundberg - UBS Luigi Minerva - HSBC Bill Miller - JM Hartwell Sergey Dluzhevskiy - Gabelli & Co. Nick Brown - Goldman Sachs Georgios Ierodiaconou - Citi Thomas Heath - Handelsbanken Stefan Gauffin - Nordea Bank Gonzalo Fernandez Dionis - RBC Capital Markets

Nicolas Didio

Presentation materials can be found on our website, www.millicom.com. Before we start, I would like to remind everyone that the Safe Harbor statement applies to this presentation, and the subsequent Q&A session.

With me today on this earnings call, are our Interim CEO and CFO, Tim Pennington, and Mario Zanotti, Senior EVP. I will now hand over to Tim and Mario to give an overview of our Q4 2014 results.

Tim Pennington

Thank you, Nicolas. Hi, everyone, and thanks for joining us.

With me is Mario, who runs our Latin American business. He'll talk you through the operational review.

Before we go into that, I'll just give you a little bit of an overview of Millicom's recent progress. In last Friday's Financial Times, it said our Tigo money service in Latin America was uniquely, and I quote, a success story.

In a digital world where there's so much saturation, Millicom keeps finding ways to provide service which is gaining a foothold with our customers. That entrepreneurial drive, which is part of Millicom's DNA, and we see that DNA continuing to evolve.

The digital lifestyle strategy behind what -- behind which is so much momentum, and to which we remain committed, is transforming our Group. Whereas a year ago, less than $1 of revenue came from cable services, today it accounts for over $2 of every $10 that we earn.

In February last year we had no satellite customers. Today we've got over 85,000.

Data penetration has soared by over a third during 2014. And I could go on.

Already this year we've kept up the pace with the debut of Tigo Music in Tanzania, and our exclusive launch with Mark Zuckerberg of free Facebook and online services in Colombia. So the answer let me remind you, that whereas we are facing some factors outside our control, whether that's currency or regulation, Millicom's fundamental strength and progress remains.

And that's why we've called 2014 a year of transformation and progress. And it's a pace of change and level of commitment that we are determined to repeat in 2015, and with the added discipline of the financial rigor and the sharp focus on financial returns.

So let me go straight into slide three of the presentation. And here you can see some of the highlights from 2014.

I think the centerpiece has been the completion of the merger with UNE, which happened in August. It's not just a historic moment for Millicom, it's our largest ever transaction.

It was a huge step, creating, as it does, the number two challenger and a diversified digital company in Colombia. And in fact this month, Fortune magazine recognized Colombia as amongst its seven recommendations for strategic investment.

At the start of the year we launched Tigo Star. That's now in six countries in LatAm and creates a stunning new dimension to the Tigo brand with its lineup of cable, broadband and TV services.

This is part of our business, and now comprises one of the fastest growing parts of our overall business. I think another important step was the launch of our first satellite pay TV service, which happened in five markets.

It allowed us to gain access to even more households, especially in rural areas, and complements the cable service we already offer. And one of the key success factors has been that many of our customers use MFS to pay for this service.

We also had 4G services launched in four markets. These will initially be used by businesses and households to access high-speed Internet.

And in 2014, it was a stunning year of innovation for our mobile money services. We became the first operator to offer cross-border transfers with automatic currency conversion, the first to provide returns on balances and with inter-operability, the first in Africa to enable transfer between users of other networks, a significant boost to the whole of the mobile money category.

And there's much more to come in 2015. So let me now hand over to Mario to give you some insight into the key drivers of this quarter.

Mario Zanotti

Thanks, Tim. And let me start with slide number five.

In Q4 we had exceptionally strong demand for smartphones in all countries, from our existing customers, but more importantly, also from new customers attracted by our digital propositions that complement our smartphone offers. And this translated in a record quarter in terms of mobile net additions.

Data growth is accelerating, offsetting SMS decline in voice as well as in some markets. In short, the appetite for data is obvious in all the markets, which is very comforting, given our strategic choices.

Our momentum in Colombia remains very good, with service revenues growing in the mid-teens. We are also starting to see the momentum behind data growth in Africa, and we continue with expansion of our cable footprint in LatAm, with more than 100,000 additional home passed added.

Turning to slide six. This is a familiar slide, which shows our key financial and operating indicators for the quarter.

The 10.8% organic growth recorded in Q4 means we ended the year at the higher of our guidance previously given. As we said in Q3, our commercial momentum is good, and genuine, and even if the quarter benefited from strong smartphone sales, our service revenue growth remains very healthy.

The commercial performance is clear when we look at the quantity, but also when we look at quality. Mobile data penetration rate keeps increasing month after month.

And revenues continued to grow very strongly, at 37% data revenues continued to grow strongly, at 37% year-on-year in Q4, with total mobile data revenues around $1 billion in 2014. More and more customers are using smartphones, which will unlock new revenue opportunities for us, on mobile, but also as well on MFS.

As you can see, the volume transaction transacted in MFS is up 45% year-on-year at almost $2.8 billion. We set our sights on increasing EBITDA in Q4, knowing that there would be some margin dilutions, and we achieved it.

We will discuss more details about the drivers of the EBITDA margin decline in a few minutes. Slide seven.

Now turning to the composition of our revenue growth in Q4. As I said, our organic growth was 10.8% in Q4, up on the previous quarters.

The slide also shows that we saw more currency headwinds in Q4 than we have done in previous quarters. Data growth accelerated to 37%, offsetting the pressure on SMS and voice in some markets.

Data usage has grown more than 20%, with an average of 772 megabytes per user per month, and a strong intake of smartphones in Q4 provides support for 2015 growth. Voice was flat in Q4, negatively impacted by two MTR cuts, a 47% reduction in Paraguay and a 25% reduction in El Salvador.

Cable is up 15%. Fixed telephony was down, but that was offset by strong growth of fixed broadband, and to a lesser extent, by the growth of pay TV.

We continue to see an acceleration of the growth of MFS with a year-on-year increase of 53%. Slide eight.

As I said, the key factor of this quarter has been the strong demand for smartphones across all our operations. We sold more than 1.6 million smartphones in the quarter, which is a record for us.

So we now have a total of more than 13 million customers using a smartphone, representing approximately 24% of our base. Unlike most developed markets, we have in emerging markets a big role to play in equipping our customers with smartphones.

And you can see in the next slide that we are pushing hard to do so, because we believe that putting a smartphone in hands of our customers is key to fully deploy and realize the benefits of our digital strategy. Slide nine.

On this slide, I show you that close to 80% of the handsets we have sold in Q4 in LatAm have been smartphones, with the top five sellers being entry level and android devices. The average prices of the first four is between $40 and $70.

The least -- the last one is around $170. As we have said several times in the past, having our customers using a smartphone is important, as it reduces the reliance on voice and SMS.

But above all, it unlocks new usages, new opportunities. These opportunities that make the change in the day-to-day life of our communities and unleashes the true potential of our approach to digital applications and services.

Without smartphones and hands of our customers, they will never truly get the full benefit of our partnerships with FIFA, for example, or Facebook or our Tigo music offer, or many of our MFS products. So you should expect us to see that to continue to push the smartphones into our customer base.

Now turning to slide 10. It's clearly not all about smartphones in Q4 or in Millicom's strategy.

Cable is also a big priority for us, and we are expanding our footprint. As you can see on the map, we have made strong progress over the last three months, particularly in Bolivia and Paraguay, where the number of home passed have grown by 17% and 15% respectively.

Guatemala and Colombia have also been growing as well. In total, our number of home passed has increased by a bit less than 200,000, bringing the total number to 5.6 million.

A key component of the growth of our cable and digital business is our satellite pay-TV customer base. We launched our first platform in May, ending the year with five countries in total, and our satellite customer base is now around 85,000, and should pass the 100,000 mark in the next few coming weeks.

This is a strong achievement, and a feat that we are -- will receive from the ground is a strong encouragement to continue enhancing our pay-TV offers. I will now hand over to Tim again for the financial review.

Tim Pennington

Thank you, Mario. I'll take you through the financials, and then we'll go into some Q&A.

So on slide 12, we finished the quarter pretty strongly, which positions us very well to go into Q1 2015. Revenues continued the momentum and actually strengthens two local currency growth rate of 10.8%, as Mario said.

And this is up on Q3. A lot of that momentum was from smartphone sales, which had diluted our margins.

But we still saw organic service revenue growth at 5.7% in the quarter. Overall we did hit our revenue targets for the full year.

Overall organic growth was at 9.4%, at the top end of our guidance range. UNE made a full quarter's contribution.

Revenues in local currency were basically in line with the guidance we gave at the Capital Markets Day, although the headline reflected the currency devaluation we saw in Colombia. Since the Capital Markets Day, the peso is down 18%.

Still our EBITDA came in strongly at $81 million for the quarter, $160 million since they joined us, comfortably ahead of our CMD guidance. And that has given us a stronger margin.

So overall, we're very satisfied with the progress made on the integration of Tigo in Colombia. Excluding UNE, EBITDA grew by 1% year-on-year and 2% on Q3, which was very satisfying.

We've now had two sequential quarters of EBITDA improvement. Overall our cash flow ended stronger, so net debt landed at just over $4 billion, and net debt to EBITDA was 1.9x.

Okay, on slide 13, let me start by looking at the revenue drivers in the quarter. As I said, we saw strong momentum across most of our businesses in Q4, not least in Colombia, which grew by 35%.

We also saw growth in Guatemala. Bolivia grew by 7%, and Honduras and El Salvador both returned to growth in the quarter.

We even saw some growth in Paraguay, although this was offset by some currency headwinds. Overall, Africa maintained its momentum, growing by 13% in the quarter.

However, once again the hard work was offset almost entirely by currency. But overall, mobile service revenue grew by 1% and cable revenues were up 14%.

On slide 14, the EBITDA evolution, as I said, we saw EBITDA of 2% on Q3, and with UNE we recorded quarterly EBITDA of $588 million. A strong performance from Central America, again especially Guatemala, where we had the best quarter in terms of gross adds over the last two years.

In Africa, EBITDA was $48 million, that's $10 million down on last year. But much of this was one-off in nature.

In fact, we incurred round about $10 million of restructuring and one-off charges, mostly in respect of the network money managed service outsourcing contract that we undertook during the middle of the year. We certainly haven't got Africa fully right yet.

But I think during 2014, and especially during Q4, we started to see some of the benefits of our actions. I think also noticeable, we held our corporate costs steady at $63 million, and our focus will be on bringing those down in 2015.

Slide 15 looks at the margin which was 31.6% that was diluted 120 basis points by UNE. On a comparative basis, the margin was 32.8%, and that compares to 33.3% margin for the full year.

However, as I've said, the margin in Q4 was diluted by strong smartphone sales. And if we normalize that and look solely at recurring revenues, our margins were 36.5%, which was 40 basis points better than Q3.

The mobile business in Colombia, and that's excluding UNE, recorded headline EBITDA margins of 26.7%. Again, although the recurring revenue was 770 basis points higher at 34.4%, and this is one of the key reasons why we are under our EBITDA guidance for 2014.

But given the growth we are achieving, the market share where gaining, and the underlying margin we are actually achieving, I firmly believe this is the right course. And even if we have to accept margin dilutions for several more quarters to come, we believe it's the right thing for us to be doing.

So, slide 16, I just to emphasize the point on margin dilutions as we entered Q1 2013 we had a 200 basis point margin dilutions from handset sales. Today that's widened to 330 basis points.

The sale of handsets is our future, so we make no apology for these margin dilutions at this time. Our smartphone users, as Mario said, are nearly 13 million today, in fact our are over 13 million today.

They almost doubled from the year before, and we've got much more penetration to go, with less than a quarter of our users using smartphones. And with handset prices coming down, all the time, we expect that to continue to change rapidly.

So on slide 17, there's a quick look at the full year. Excluding UNE, we saw organic revenue growth in the year of 9.4%, which we are certainly very happy with.

It came in at the top end of our range. EBITDA of $1.96 billion was also ahead of our own targets, reflecting some cost savings towards the end of the year.

And as I said, we discussed the margin dilutions, so I won't repeat that. Operating profit was lower than in 2013 on additional G&A.

This was largely due to the modernization of our network and the impact of the full consolidation of Guatemala. Including UNE there was a much higher G&A than we -- as we have performed UNE's asset life policies now to our own.

Further down, the large credits you see in the other non-operating income line, which left profits before tax of $3 billion, relates to a non-cash revaluation of our Guatemalan stake. And we are just for that and a couple of other non-recurring items, adjusted EPS was $1.82 per share.

I want to turn to UNE now, on slide 18. We saw revenues of $316 million, again, as I pointed out earlier, affected by the currency depreciation.

The before we see nearly 20% fall in the peso since the end of Q3. I think if that continues at this rate through 2015, we'd expect to see that knock $350 million to $400 million off Colombia's revenue for 2015.

But I think now most analysts seem to have made the currency adjustment to their models. We were pretty pleased with UNE's performance, actually, in Q4.

EBITDA $81 million, as I said earlier, head of our expectations, as was the margin at 26%. And also, I'm pleased to see positive operating cash flow.

Overall, we are making very good progress on the integration. We are now very confident indeed on the $600 million of MPV synergies.

This year we see around $70 million of restructuring costs, of which $50 million will go through the P&L. The benefits in 2015 are likely to amount to around $30 million to $35 million in 2015, although we expect that to climb strongly in 2016.

Slide 19 now, looking at the cash flow. Overall, there was CapEx catch up in Q4, plus we added the CapEx from UNE, so after a working capital swing, the Group's operating cash flow was just over $190 million.

Taxes paid of $132 million took us to $380 million for the full year, slightly higher than earlier indications, due to higher levels of withholding tax, interest at $108 million. This was $23 million above last year, reflecting the interest payments on the UNE bond, which left us with cash interest for the full year of $330 million, and a P&L charge of just over $400 million.

And the difference between the two related to timing differences and finance leases. Dividends to minorities, fairly normal in this quarter at 36 million, gives us a full year total of 300.

But that, if you recall, doesn't include a special dividend from Guatemala of $170 million this year. That left us with negative equity free cash flow of $85 million and $130 million for the year, $131 million, I should say.

Coming to net debt on slide 20, net debt was lower than we expected, basically on fracture and timing differences, just over $4 billion -- sorry, just under $4 billion. And the net debt to EBITDA ratio 1.9x.

And on a proportionate basis, that was 2.2x. It remains our target to keep leveraged between 1x and 2x on a consolidated basis.

We expect releverage to be a little bit north of 2x by the middle of the year, but will then start to see deleveraging. So in conclusion, on slide 21, we have commercial momentum in business, and despite some weaker margins, we are driving underlying EBITDA growth.

Our cash flow is growing, and we will not only focus on revenue growth, but on cash generation going forward. So finally, on slide 23, turning to our view of 2015, we expect the momentum to continue, albeit offset by some currency headwinds.

So we see Group revenue between $7.1 billion and $7.5 billion. EBITDA we expect to be around $2.2 billion and $2.35 billion, which I'm sure you'll compute is lower margin than 2014, but this reflects our expectation on handset sales.

It doesn't deter us from our 2017 ambition of EBITDA margins in the mid-30s. CapEx in absolute terms will remain similar to 2014, but will be a lower percentage of revenues.

And just to let you know, with basic numbers on our constant FX rate, those are the rates prevailing at the start of 2015. With that, I will now hand over and take questions.

Thank you.

Operator

[Operator Instructions] And we’ll now move to our first question today from Chris Grundberg of UBS. Please go ahead.

Chris Grundberg

Thanks very much. I just have one quick clarification question to start with.

Tim, you said that the guidance is set at current FX rates. Just to be totally clear on that, am I right in assuming that that means you are taking spot rates and basically running them flat for the entirety of this year?

Or are you assuming any further weakening in those prevailing rates?

Tim Pennington

Thanks for the question, Chris. Yes, I think that we are basically taking the rates that we entered 2000 in -- 2015 in, and projecting those forward for the full year.

And I think the big one for us is the Colombian peso, which we basically think we'll stick around 2400 for the year. At least, that's our operating assumption, compared to roundabout 2004 the whole of 2014.

Chris Grundberg

That's really helpful. And just as a follow-on to that, on the 2017 ambition is, can you just give an update there?

You mentioned that the margin guidance -- margin ambition is unchanged. Just on the revenues, any change to view there?

Tim Pennington

You know, I think when we put that revenue targets out of $9 billion, we knew it was a tough targets. It certainly hasn't been made any easier.

But I think there's a lot of momentum behind our business, and we continue to drive for that. And I still think that's achievable.

Certainly, we set our guidance for 2015 on the trajectory that gets us to that overall 1727 target of $9 billion.

Chris Grundberg

That's great. Just one last one, if I may.

Just on Africa, you mentioned that obviously you carried some further restructuring costs through in Q4. Just any update on what you expect there in FY 15?

Should we be looking for more of those to be suppressing the margin?

Tim Pennington

I think we'll probably see a little bit of that going into Q1 and is possibly Q2, which will sort of distort a little bit the underlying story. But Africa is tough for us.

You know that, we are in a turnaround phase. I think the first phase of that turnaround phase was to get the revenue kickstarted again.

And I think, delivering a 13% revenue growth in the fourth quarter is evidence that we're getting there. We're very conscious we have to drive the margin as well.

And I think we strip out these one-offs, and Q4 was a bit of a mess the quarter for us then. We have seen some progress in Q4, and I'm really looking forward to seeing that continuing in Q1.

But we do have a lot of work to do there.

Operator

Thank you. Well turning to our next question from Luigi Minerva of HSBC.

Please go ahead.

Luigi Minerva

Yes. Yes, good afternoon.

Just a question on the proposed reform in Colombia for the corporate tax rate. I understand that there is a plan to increase to 39% and possibly even more in the year forward.

So if your view on the process, and what could be the impact for the Group? Thank you.

Tim Pennington

Thanks, Luigi. Yes, we are seeing tax reforms in Colombia.

The Colombian tax code is quite a complicated code. There are -- we are hit by several taxes.

I think based on what we currently seeing, there are going to be some ups and some downs for us, but net net we expect to be basically in the same place that we were. So we're making no change to our own views or our guidance on Colombia tax.

Obviously if things change again, then that could change things. But on the current -- on what we know currently, we don't think there'll be a material change to our overall tax rate in Colombia.

Operator

Well turning to our next question from Bill Miller of JM Hartwell. Please go ahead.

Bill Miller

Can you go into a little more detail, Tim, or Mario, on the -- how you're going to get there in Colombia, what further steps you have to take when you say it's going to be 2016? How do you see the progress over 2015 and in order to get to your 2017 targets, you're going to have two make tremendous progress in the next three years, basically, in 2015, 2016 and 2017.

So could you give us a little more color on that, please?

Tim Pennington

Thanks for the question, Bill. Let me give you a quick overview, and then I'll hand it to Mario to take you through it.

I think we've made enormous progress on the integration. Mario and I were down there last week, and enormous progress has been made.

I think we'll make -- we'll make that progress in 2015. I think you'll see the results of it more effectively in 2016.

I think that was the only point I was making in my intro, Bill, that these actions are taking place now, they'll take place in -- actually in the first few quarters of this year. But we won't see the full run rate until we get to 2016.

Mario.

Mario Zanotti

Hello, Bill. Good to talk to you again.

Bill Miller

[Multiple speakers].

Mario Zanotti

And you know we are big believers in the business and the business plan we have for Colombia. And not only for Colombia but for the whole Group.

I think that Colombia is basically the place, given the demographics and the macroeconomics, it's where we can actually reap the most benefits of our strategy. So bottom line, the progress is going to be in all areas.

Very well known to you and to all. But also in some new focus areas like, for example, B2B which is an area that we don't usually comment too much.

But we are making good progress there in that arena as well. So I think that things are going to accelerate, yes.

And we are going to basically continue to apply our basic strategy and use our -- all our abilities to get to the target in 2017.

Bill Miller

Can you give us a little more light on the impact of music and all the other services you're providing and your churn, which will help margins dramatically?

Mario Zanotti

Yes, of course. Music is just one of the services, as you mentioned.

And it actually helps, together with MFS for example, in returning -- in retaining customers. We see a substantial drop, as we mentioned in the capital markets day, the difference between a subscriber with and another one without.

And this is all very statistically verifiable, which we have done with the different control groups et cetera. The difference is substantial.

It's between 30% and 50%, depending on the service. So clearly it not only increases revenue but also has a positive impact on churn, meaning retaining that -- those customers and reducing costs.

So it's a very positive cycle that we have there.

Operator

Next question from Sergey Dluzhevskiy of Gabelli & Company. Please go ahead.

Sergey Dluzhevskiy

Good morning, guys. A couple of questions, if I may.

First question on Africa. A broader question.

The bulk of the business is clearly in Latin America but Africa is still part -- and integral part of your Group. Tim, could you share with us your thoughts on why Africa still belongs under the Millicom corporate umbrella?

And how do you see its role in the corporate portfolio developing over the next five years?

Tim Pennington

Sure, look, clearly you're right, the weight of our Group has moved towards LatAm. It now represents 85%-plus of our overall business, given the UNE deal.

But that said, we've been in Africa a long time and it's a market where we see huge potential in the future. I've said this to many people, it's probably one of the few areas in the world where you can potentially double your revenues in the medium term.

That said, it's a very difficult operating environment and we have to find a way to get a return on capital in Africa. So I don't think we sit here and think we're in Africa and LatAm and they don't mix together well.

I think we are in two great markets of the world with great opportunities, great growth opportunities. And they share enough similarity in terms of the digital lifestyle or the evolution to the digital lifestyle.

Africa's quite a bit behind LatAm but we can learn a lot from it. But they've also got different challenges.

So we need a different focus for each of those businesses. So I think it does sit neatly as part of our Group.

I think we see LatAm as an emerging market, Africa as a frontier market. And we can benefit from what we've learned in one market to the benefit of the other, principally LatAm to Africa.

Sergey Dluzhevskiy

Okay, and another question. You mentioned in the press release that the Company will be sharpening focus on effective cost management as you enter 2015.

Could you talk a little bit about where you see the biggest opportunities for cost reductions in 2015 and beyond? And maybe about potential magnitude of those cost reductions over the next year or two.

Tim Pennington

Yes, look, I think we have been -- in our five-year plan, if you like, the first couple of years we focused on kick starting revenue, really getting that going. I think we can tick that box and say we've done it.

I think we set out, back end of 2014 and into 2015, that we need to convert that revenue growth into profitability. That is not just selling customers great services but also looking at the way we run our business and managing it more efficiently.

So I don't think there is a single area we'd look at cost, we'd look at all aspects of cost. So staff at Colombia, we've got huge opportunities there in integrating the business.

And we talked a little bit about that. We've looked across our Central American businesses to streamline the way they operate.

The way they operated five, 10 years ago is not necessarily the right way to operate in the next five to 10 year. We're looking at those opportunities.

In Africa, we can do things more efficiently and more effectively as we've done with our network outsourcing transaction. And in the corporate center, we've started to look a lot harder to say, what is it that you bring to the table?

Is it a cost saving? Is it a revenue growth?

If it doesn't tick either of those boxes then we've got to question whether those costs are appropriate in our Group as a whole. I think people have focused on our corporate costs and we focus on them as well.

We saw in Q4 we kept them steady. We were just slightly below and we've got -- I think we said in the script that we're planning to see those come down in 2015.

And certainly that is a focus for the Group that we'll be looking at all areas of our cost management to make our business more efficient and improve the returns on capital that adds to the targets we set out at our capital markets day. So Sergey, I can't give you a -- and I'm not going to give you a specific figure of what our target it.

I think just it is top of mind for us in terms of our organization and the way we go forward. How do we deliver profitable revenue growth that delivers down to the cash flow of our business.

Operator

Next question from Nick Brown of Goldman Sachs. Please go ahead.

Nick Brown

Thanks, just a couple of questions, please. Firstly, if I could just follow up on [technical difficulty].

Mario Zanotti

That sounds very low.

Tim Pennington

We're having trouble hearing you, Nick.

Nick Brown

Can you hear me now?

Tim Pennington

Yes, yes a lot better.

Mario Zanotti

That's better, yes.

Nick Brown

Thanks, a couple of questions, please. Firstly, if I can just follow up on corporate costs.

Can you give us a sense of how much lower you think it can go? What's the right sustainable level there?

And secondly, I'm not sure I completely understand how you can get back to mid-30%s margins if you're going to continue to push smartphone penetration. Are you expecting it all to come from cost cutting or should we expect you to scale back marketing, for example, in 2016?

Thanks.

Tim Pennington

Okay, Nick, thanks for the question. I'm not going to go into more detail on the corporate costs, but suffice to say we recognize the direction of travel on our corporate costs.

Indeed, we recognize the direction of travel on all of our overhead costs and will continue to push that. I think the reason why I'm still confident on the mid-30%s in 2017 is that 2014 we had an exceptional year, particularly in the latter half of it, of handset sales.

As I attempted to show in the presentation, that diluted our margins by about 130 basis points straight off the bat. I think there is growth for us to get in 2015 and I think Mario would echo this, and Arthur would here, that we should just keep our foot flat to the floor to try and get that growth.

Because we have a successful formula, its working, its building subscribers, its building revenue for us and we should keep doing that. But if I actually look at our underlying EBITDA margin, I strip out the handset costs, we're at 36.5% in Q4, we're 40 basis points up on where we were in Q3.

I think if I look again at Colombia where we've got -- that is a big business and it's below our average, and I look at the underlying recurring margin in our mobile business in Colombia, that's at about 34.4% in Q4. And then I look at UNE, which is running about 26%, well below the margin.

But with the actions we've put in place and the high degree of confidence we've got in synergies now, I think that is going to move quickly to our -- to the Group target and the Group average. So I'm saying it's not going to happen in 2015, I think we are -- we should focus on driving market share gains, revenue growth, subscriber growth in 2015.

But I think as we get into 2016 and 2017, these things will start to unwind themselves, the scale of the business will grow, the impact of handsets will be lower. And then you will start to see the underlying recurring revenue margins take more prominence in achieving -- getting us to our target range.

Mario Zanotti

The speed of penetration should also start to slow down a bit in -- later in 2016. And data margins will also improve,

Tim Pennington

Yes.

Nick Brown

Thanks for that. Just to follow up quickly on Colombia, I understand you've reiterated the original synergy guidance for UNE, so I'm assuming that's off the same $100 million as annual free cash flow synergies you guided to?

So if that's off the old dollar guidance at the old exchange rate, have you found an additional 20% additional underlying savings?

Tim Pennington

Yes, I think in terms of that, Nick, we sort of updated at the capital markets day on [indiscernible] the $600 million NPV, I don't think we updated on the cash flow and I wasn't around when that cash flow guidance was given. I think we -- there's a complicated sort of equation in terms of currency on our cost base in Colombia.

On the one hand, a lot of our costs are obviously in local currency, which helps us enormously, however, some important costs and some big costs like programming costs for our cable business are in US dollars. And that is not easy to absorb.

So I'm not going to comment on free cash flow figures other than to reiterate what I said in the narrative, that we expect about $50 million of P&L hit on restructuring charges this year. $30 million to $35 million of EBITDA benefit.

And then when we get into 2016, we'll start to see the full benefit and the full impact of that.

Operator

Thank you. We’ll now move to our next question from Georgios Ierodiaconou from Citi.

Please go ahead.

Georgios Ierodiaconou

Yes, hi. I've got two questions, please.

The first one is relating to the revenue -- sorry, the revenue diversions in performance. Obviously it's quite clear part of it is down to Colombia and the change in subsidies.

If you could give us an idea how much of it is driven by that? And whether, as we look into 2015, you would expect there to be not just a revenue benefit but also from the other side a service revenue deceleration because of this change?

And then my second question, again on Colombia. There seems to be some appetite from the regulator to make it attractive for new operators to emerge.

And I was wondering if you could comment a bit on the spectrum rules and whether you would expect a fourth player to emerge in the next couple of years? Thank you.

Tim Pennington

Thanks, Georgios. I'll just start that and the answer to the first question on service margins and ask Mario to comment on it.

And then take the second question on the regulator. So you're right, we did see a little bit of step down in the middle of the year on our service revenue growth.

I think that is almost entirely due to Colombia. As you know, the handsets -- well, rather the rules surrounding the enforceability of term contracts changed in the middle of the year in Colombia.

That changed the way we could well handsets, i.e. we couldn't subsidize them anymore.

And therefore there's a technical change in the way the revenue grows there. So all of a sudden we ended up with the full price of the handset in the handset sales column and the monthly recurring charge became just service charge with no reimbursement of what previously was a subsidy and the way the things worked.

So that really was the step-down impact of that. Between Q2 and Q3.

That said, I think we were pretty pleased with the way the service revenue performed in Q4 and we think there's enough underlying momentum in it to continue that. And we'll be focused on driving that forward into 2015.

But Mario, maybe you should give more color on that.

Mario Zanotti

Well there's not too much more to be said, really. I think that we all know what is the impact of this change, gives more -- perhaps more freedom to consumers, which is usually a good thing.

But from the -- on the other hand, I think that it has an impact on the operators and this is what we're seeing. Nothing to be concerned about from a business standpoint.

We continue to grow, we continue to sell, the number of consumers preferring our brand is -- continues to hold and grow. Our brand is very healthy, therefore I don't see any reasons for any serious or major concern there.

Going to your second question, let me just say that there are already operators in Colombia. Additionally to the more well-known three.

Given the LTE options in the past, as you know, several other operators acquired frequencies. Therefore, yes, it is something that in the foreseeable future certainly will continue to unwind.

But we are confident in the future and we are confident in our strategy. We're very confident in the way that consumers appreciate our brand and our digital offers.

Therefore we remain very, very strongly committed to our business model and the projects in Colombia.

Georgios Ierodiaconou

Do you see someone emerging as a threat? Or is it more going to be like Chile where nothing really happened from the new spectrum?

Mario Zanotti

That's a good question. Unfortunately I don't have the crystal ball to see the future.

Obviously I would prefer that nothing happens, but we never know.

Operator

Thank you. We’ll now move to our next question from Thomas Heath of Handelsbanken.

Please go ahead.

Thomas Heath

Thank you, Thomas Heath here with Handelsbanken. Few questions if I may.

Firstly, perhaps for Mario, if you could say anything about the operational trends within the consumer group that's already moved to mobile. So if you track them on a like-for-like basis.

Because from an external point of view, we sort of see the mix effect as a lot of people move into that cohort. But -- so what happens to people when they've been smartphone users for a while?

Second question on UNE, you highlight a cash flow margin of 7.6% now. Should we expect UNE to contribute cash from here on?

Or will the EBITDA be used as CapEx? And then thirdly on Paraguay.

It's been some tough times. And what should we expect going into the -- to 2015 here?

Thanks.

Mario Zanotti

Well, let me tell you then about the smartphone users' behavior. Clearly data cost goes up.

Many of these users were already using some data because they were coming, probably, from feature phones that used some data but not so intensively. So obviously ARPU in that sense goes up there.

And that can be seen clearly in the acceleration of the data revenue growth. You can see, obviously, that the churn also goes down.

Interestingly, once a consumer starts to use a smartphone for data, and all the applications that we offer, even more so with Tigo Music, for example, they -- the churn or the likelihood for the customer to leave is reduced, obviously, but interestingly also the revenue sharing with other operators, especially in prepaid, is substantially reduced. So Tigo obviously becomes the primary sim for those users.

That is also very important. Another interesting factor is that Tigo Music, for example we ended up the year with approximately 650,000 active users.

Which is a lot of users. We are the largest legal seller or reseller of legal music in our market.

We launched a prepay offer, with a lot of success actually, in Guatemala first. And then we are replicating in the other markets.

We are launching also a set of new products known as smart apps. And this is all very, very towards the end of the year.

So still a little early to say, but the early signs are very encouraging. So definitely there is a clear benefit from a personal standpoint, because people now start to enjoy a lot of things that they didn't before.

And from an operator point of view, of course, we see also the benefit that I just explained. So this is a two-way street; consumer benefits, the Company benefits.

Tim Pennington

Just on your UNE cash flow question. The answer is that I hope so.

We do have a positive operating cash flow in 2014. But our intention, given the growth opportunity we've got there, is to invest all of our EBITDA back into CapEx in 2015.

And then the final question was on Paraguay.

Mario Zanotti

Paraguay, we have started in 2014 a year of transformation and progress, as we call it. We launched several new offers.

We launched data subscription services, for example, that are going very, very well. Consumers like it, substantially.

Net promoter score in these new plans are -- it's very high. So we are very encouraged on that.

We have a strong growth and very, very good momentum on fixed business as well. The progression of broadband, for example, fixed broadband, is very strong and therefore we are investing behind that.

And from a business standpoint, also important to mention the growth and the opportunity in B2B in segments like small and medium enterprises or -- which is a segment that we are now starting to target a lot more actively with different associations and alliances with -- in country. So overall, I see Paraguay still as one of the top operations in Millicom.

It is, of course, an area of a lot of focus and progress for us.

Operator

Next question now from Stefan Gauffin of Nordea Bank. Please go ahead.

Stefan Gauffin

Yes, I would like to start first with a question relating to depreciation of UNE, which was really high. And you gave a comment around that.

I didn't quite follow. Is this a level that we should expect for 2015 and 2016 as well?

Secondly, I would like to go back to Africa. For full year 2014, a minus 14% operating free cash flow.

There's a great subscriber intake but it's in -- mainly in Tanzania and some of the markets like DRC, Ghana and Senegal, you still have fairly low market share. And therefore, it's likely fair to assume that it could have more value for another owner.

Just how do you view that you can turn the trends in Africa and go back to showing healthy operating free cash flow? Or are you questioning the fit within the Group?

Tim Pennington

Thanks, Stefan. A quick one on DNA and UNE.

Yes, this is the likely trend rate. And what we did with UNE is we had to rebase all their assets lives to the Millicom policy on asset lives.

They had longer asset life assumptions than we have. And that's why the depreciation charge looks higher.

I flagged this at the capital market -- not the capital market, the Q3 I flagged this as an issue. IT will not move that greatly.

I think the second question on the cash generation in Africa, clearly it is an area of focus for us. Going back in history, I guess we decided two years ago to really invest in Africa, really pull back our market positions.

And I think after two years of pretty heavy investment, and we've been investing at 20%, 30% of revenues, we've got the business back on track in terms of its revenue generation. It has started to generate revenue.

I think the focus for us over the next two years is to turn that revenue generation into cash flow. And we'll see our CapEx spend come down this year, we -- despite the current weakness in Q4, underlying it was stronger than it showed.

We are focusing on getting that business -- I don't think it'll be operating cash flow positive in 2015, but I'm very hopeful that we'll get that business to operating cash flow positive in 2016. I'm not going to talk about specific countries.

We've got better and less good positions in some of the markets. We've got more to do in some markets than in others.

But the reason we're in all these markets is they all offer us a huge opportunity in the future. I think our job is to work out how to exploit that opportunity.

And that's what we'll continue to focus on in 2015.

Operator

Our final question today comes from Gonzalo Fernandez of RBC. Please go ahead.

Gonzalo Fernandez Dionis

Hi, thanks for taking my questions. Just two follow ups on things you're [previously] talked about.

On B2B, how exactly should we see this opportunity? And what CapEx commitments does that bring along?

And then on Colombian tax, you've talked about it before, are you referring to net net effect from the increase in the corporate tax and also the one that they've talked about on book value of equity? Or is it just on corporate tax?

Thanks.

Tim Pennington

So perhaps if Mario does the first one, I'll do the second.

Mario Zanotti

Sure. On B2B, basically we're not specifically reporting on -- separately on B2B yet.

That may happen at a later stage. But my intention was to comment that there are business areas that, for the simple fact that we don't talk about them, that doesn't mean that they don't exist and we don't focus on them.

So obviously in terms of CapEx intensity of the sector, it's not very strong. Of course, depends on the different areas that one chooses to be active or not.

We don't foresee that that should put significant pressure on the Millicom overall CapEx.

Tim Pennington

And then just on the Colombian tax. I was talking about the effective tax rate overall.

And it is -- the equity tax that they're talking about, there are a couple of other taxes that will be superseded by this equity tax. So although they're on a different basis, net net, we think that they overall impact on our Colombia business is not going to be significantly different from where it was last year and where we'd expect it to be in 2015.

Operator

Thank you, that concludes today's Q&A session. I'd like to hand the call back to Tim Pennington.

Please go ahead, sir.

A - Tim Pennington

Well I think we are very happy with the quarter and we've got a lot to do going into 2015. And we have great opportunities in front of us.

And we thank you all for your time and look forward to talking to you again in Q1. Thank you.

Operator

Thank you. This concludes Millicom's financial results conference call.

Thank you for your participation, you may now disconnect.

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