Mobile TeleSystems PJSC (MBT) 2003 Q2 法說會逐字稿

Welcome to the Mobile TeleSystems second-quarter results 2003. I will now hand the conference call over to Mr. Andrey Braginski.

Thank you and welcome to MTS' second-quarter and first half year 2003 results announcement. The forward looking statements made during this conference call reflect (technical difficulty) management as of the date of this call. Please be advised that developments subsequent to this call are likely to cause these statements to become outdated with the passage of time. We do not intend however to update the guidance provided today until our next quarterly conference call.

You have received by now by e-mail a copy of our second quarter and first half-year 2003 financial results press release. Our presentation team today consists of Mikhail Smirnov, the President of MTS; Mikhail Susov, First Vice President; Nikolay Tsekhomsky, MTS Chief Financial Officer; and (indiscernible), the company's Vice President. Following the presentation we will turn to the question-and-answer session, and you will be welcome to address questions to the MTS presentation team. Now I would like to hand over to Mikhail Smirnov, the President of MTS.

Dear ladies and gentlemen, welcome to today's conference call announcing MTS second-quarter 2003 results and the company's achievements during the year. During the last few months MTS has continued with this strategy of expanding the operations through acquisition of local operators who (inaudible) had no licenses previously, and also building out new networks and consolidating minorities.

During the second-quarter, MTS has increased its stake in Ukrainian Mobile Communications to 83.7% (ph) percent. Recently we have exercised the last option and became the owner of 100% of the Ukrainian company.

The overall (indiscernible) by MTS is 374.9 (ph) million. The company current reserves is approximately 2.29 million subscribers and its market share is 36%. In the short time that we have owned UMC, we have implemented substantial measures to take full advantage of the synergies of this acquisition.

During July, Russian subscribers traveling to visit the Ukraine, which is one of the popular resorts of the region, are able to use our provincial and roaming tariffs. In terms of CAPEX we acquired (inaudible) jointly for Russian and Ukrainian operations, which gives us a substantial decrease in the capital expenditure.

We have also been able to integrate the marketing strategy and launched G-SPAN (ph) in the Ukraine in early August. Because this movement (inaudible) of the Ukrainian market through the acquisition of UMC is an extremely important stage in the company's development.

In 2003 MTS continued to launch new networks in the region. In April we started to places in Orinbrook (ph) and in July (inaudible) region. Last week we commence operations in (inaudible), which is a key region of the Volga for us. We will be launching the (inaudible) of Parnell (ph) which is tomorrow, and (inaudible) in the near future.

We have also announced a number of significant acquisitions recently. Last week we completed the acquisition of (indiscernible), one of the leading operators in the (indiscernible) region. The company is a holder of the GSM licensed for the (inaudible) region of Siberia (indiscernible).

The company currently services over 143,000 (indiscernible) users. The transactions of the second-largest region in Russia draws license portfolios which is populated by 3 million inhabitants. At the beginning of August, we also signed an agreement to acquire several solar operators from MCT (ph).

These companies are the holders of licenses for the far Easter Macro (ph) regions, some region of Siberia, (indiscernible) and Volga. After the completion of the deal, MTS will hold licenses for 75 regions of Russia, which will cover the population of 127.3 million or 88% of the total population. Including our operations in Ukraine and those are the license portfolio of the company cover a total population of 136.3 (ph) million.

Another important development for the company is the recent changes in the company's management team.

In July we appointed a new Chief Financial Officer, Nikolay Tsekhomsky, who will replace Wim Van Bommel. Nikolay Tsekhomsky as the Director for Finance as of September 2002.

As you probably know, in July I was offered the position as head of MBTS (ph). MBTS is one of the largest (inaudible) line operators in Russia. I decided to accept the new challenging task, part of which is taking MBTS to the international capital market. On August 15 the (inaudible) shareholders meeting approved me as the General Director.

The board has nominated (indiscernible) as the new CEO of MTS.

He is currently the first deputy general director for financing investment in (indiscernible) Telecom. (technical difficulty) majority of shareholders with MTS . Mr. (indiscernible) at the shareholders meeting on October 25.

[MISSION AUDIO BEGINS] Starting September 1st he will be the acting President of MTS. (indiscernible) has been on the board of MTS since 2002. Therefore, we will see a continuity at MTS management. Thank you for the attention and now I would like to hand it over to Mr. Susov, MTS First Vice President, to discuss the marketing developments in the company.

Dear ladies and gentlemen, the growth in MTS financial performance is largely attributable to continuing impressive subscriber growth in other markets and the number of solar users in Russia grew by over 7 million, from 18 million to 25.1 million.

The number of users in the Ukraine in the same period grew by 650,000 (indiscernible) 2.7 million to 4.4 million. The number of users in (indiscernible) grew by 275,000 from 463 to 740,000. The main subscriber growth drivers on the market (indiscernible) MTS operates. The growth in disposable income resulting from other (indiscernible) and the increased of importance of cellular communications in everyday life.

In spite of the high subscriber growth rates, the penetration rate in the regions where we operate still remains relatively low which actually shows that the growth rate will continue to be high. Due to our well balanced market (indiscernible) and the strong brand MTS maintains a (indiscernible) position on the Russian seller market with a market share of 37 percent according to independent sources. A key fact of our leadership in Russia is the unified (indiscernible) large-scale operations.

Overall MTS subscriber base in Russia excluding acquisitions grew by 1.5 million to approximately 49.3 (ph) million. Our 1.2 million were subscribed to the June prepaid (indiscernible) plan. To achieve a (indiscernible) operations in Russia and (indiscernible) country, (indiscernible) for the so-called Internet calls. (indiscernible) rates for roaming in the Ukraine. There we fully understand that the (indiscernible) subscriber growth comes from the mass market we do pay great attention to working with corporate clients.

(indiscernible) we are doing in the segment and in the region. In the (indiscernible) market MTS introduced a new prepaid tariff (indiscernible). The unique (indiscernible) limitation on payment (indiscernible). It's important to say that the new tariffs (indiscernible). During the second-quarter I (indiscernible) from 18.5 in the first quarter to 18.7. This increase is largely attributable to the (indiscernible) growth (indiscernible) summer and also growth in (indiscernible) roaming. Towards the year we do expect a 15 to 20 decline in (indiscernible) Russia. In spite of some positive trends the churn rate in Russia still remains high, 11 percent for the second-quarter.

However, this is in line with the general market tendency and we do not expect a decrease in churn this year. In the Ukraine MTS subscriber base grew by 200,000 (ph) to 2.2 million. According to independent sources our market share in the Ukraine is at thirty-six percent. There we have acquired a company with a strong market standing and a strong brand recognition (indiscernible) transfer to the MTS brand.

As Mr. Smirnov has already pointed out, an important step is the introduction of Jeans in the Ukrainian market. In the first ten days of August, 25,000 units subscribed to Jeans. As in Russia (indiscernible) in the second-quarter grew to -- grew to 17.2 in the second-quarter. The growth (indiscernible) in the Ukraine is attributed to the same factor as in Russia. Our churn rates in the Ukraine are substantially lower than in Russia. Besides we have witnessed a decrease in churn last year to 5.5 percent from 8.9.

There our subscriber base grew by (indiscernible) to 107,000 users. MTS is the undoubted leader in net additions. MTS market share grew to 22 percent. The growth in the subscriber base in that region largely depends on the improvement in coverage. Our (indiscernible) for the second-quarter was around $17. Among other part of (indiscernible) last quarter I would like to point out the decrease in subscriber acquisition costs both in Russia and the Ukraine. This is due to the decrease in dealer commission for acquisition of mass market subscribers.

(indiscernible) MTS is committed to a strategy (indiscernible) leadership on all the markets where we operate. Thank you.

Dear ladies and gentlemen, thank you for your participation on our conference call. I am very happy to briefly discuss the second-quarter 2003 financial performance of Mobile TeleSystems today. (indiscernible) in our knowledge of usage (indiscernible) historically in the second and third quarters are the best ones for all CIS (ph) wireless operators during the year. This quarter as it was mentioned above, is not an exception. Consolidated revenues for the second-quarter 2003 were 606 million U.S. dollars, a 92 percent increase on the same period in 2002, and a 36 percent increase on the previous quarter.

The revenues of MTS Russia in the second-quarter increased by 91 million or 22 percent from the first quarter (indiscernible) $507 million. The increase is mainly attributable to the growth of services, revenues by almost $83 million and the increase in sales of handsets of $7 million which is partially offset by $1 a million reduction in connection fees. Our Ukrainian subsidiaries contribution to the consolidated revenues was 99 million U.S. dollars. Second quarter (indiscernible) income was $225 million, a 100 percent increase on the same quarter in 2002, and a 51 percent increase on the previous quarter.

(indiscernible) margin in the second quarter was 37 percent versus 34 in the first-quarter of 2003.

[MISSING AUDIO ENDS]

The increase in the company’s (inaudible) quarter on quarter was partially due to the seasonal increase in minutes of usage during spring and summer months, continued increases in our subscriber base and lower operating expenses as a percentage of revenues. In the second-quarter of 2003 MTS provisions for doubtful accounts decreased to 8.3 million compared to 14.6 million in the first quarter of 2003.

The decrease in provisions for doubtful accounts resulted from a number of measures taken by MTS management during the second-quarter, to reduce customer and dealer fraud.

Second-quarter net income was 128.5 million, a 98% increase on the same quarter in 2002 and a 60% increase compared to the first quarter. Net income from MTS operations in Russia during the second-quarter of 2003 were $112 million compared to $79 million in the first quarter. MTS (indiscernible) contributed $16 million to net income during the second-quarter.

Net income margin grew from 18% in the first-quarter to 21 percent in the second-quarter. In addition to the increase in operating income our consolidated effective tax rate decreased from 30% in the first quarter to 27% in the second-quarter. The reduction in effective tax rate is the result of the release of $8 million tax provisions upon the completion of tax audits of MTS books.

MTS capital expenditures on positive (indiscernible) during the second-quarter 2003 totaled $227 million, of which $42 million was spent in the Ukraine. Increasing total capital expenditures on property plant and equipment for the first six months of 2003 to $326 million.

In addition, MTS spent $43 million on purchases of intangible assets during the second-quarter of 2003 of which $19 million (ph) was spent in the Ukraine, bringing total spending on intangible assets during the first six months of 2003 to $57 million.

MTS total capital expenditure for the first six months of 2003 is $383 million. We believe that our total capital expenditure in 2003 would not exceed $700 million, as it was reported earlier. MTS additional advances to (indiscernible) subsidiary in Delaruse(ph) amounted to $6 million in the second-quarter and $60 million (ph) for the first half 2003. We believe that our investments in Byelorussia including advances on licenses payments will not exceed $60 million during 2003.

MTS total debt at the end of the second-quarter of 2003 totaled $970 (ph) million (ph) while net debt was at $774 million. We believe that the consolidated debt at the end of the year will not exceed $1.5 million.

Subsequent to the end of the second-quarter the company placed 300 million one year unsecured closing (ph) rate notes in international debt capital markets. It is also important to mention that the purchase price and location of the acquisition of UMC with independent appraisals has not been finalized.

The completion of this analysis could lead to adjustment to the financial statements reported today. Thank you.

Thank you Nikolay. This ends MTS management presentation. Now I would like to take questions from the audience.

(OPERATOR INSTRUCTIONS). Neil Widlake (ph).

Morgan Stanley. Just one quick question and then my main one, if I may. You mentioned on the last part of the call there $700 million guidance for CAPEX. Could you confirm if that includes intangibles? Or is that just tangible fixed assets?

It does include intangible assets as well.

The main question really relates to Ukraine, where obviously results have been very positive particularly actually post period, M (ph), where you have added substantial numbers of subscribers.

Could you give us some indication as to what you think blended ARPU or revenues might be over the year or maybe some updates on EBITDA margin which has historically been very strong, but of course now operationally you seem to be gaining more and more scale.

The first part of the question refers to ARPU trends in Ukraine, and second on operating margin for the group as a whole, right?

No, specifically for the Ukraine. If we take ARPU first, maybe there has been quite a significant step up in the middle quarter or the second-quarter. I wonder whether that is purely seasonal or whether through building out network and generally through maybe increased marketing, etc., you've managed to sort of unlock some pent-up demand.

And so in the context of that whether you could give us some ideas were you ARPU trending at the remainder of the year? And then in the context of that, which I think most of us, for most people looking at the company require an (indiscernible) provision by subscribers and potentially ARPU, then what would that do potentially for EBITDA in the Ukraine and operation as the remainder of the year?

I think Mr. Susov will discuss ARPU trends in the Ukrainian market.

The ARPU trends are relatively the same for Russia and the Ukraine. We do expect a rather stabilized ARPU in the third quarter related to the second quarter. And the difference of ARPU in the fourth quarter are around 15% to 20%.

Generally, we do not like to comment the EBITDA questions. What we can comment, we can comment the margins in the Ukraine. And as we've already said during the conference call, our margin is normally quite strong during second and third quarter. We believe there is going to be a certain reduction in margins by the end of the year. Thank you.

That relates the group as a whole, presumably?

It relates to the group as a whole. Obviously, relates to Ukraine because it is not that different from the group.

And if I could just kind of, in context of the ARPU dilution you mentioned (indiscernible) 20 percent by year-end, you made a similar comment in relation to Russian ARPU. Can I just clarify whether that means by the fourth quarter you'd expect 15% to 20%, or is that as a year-on-year dilution to ARPU, or relative to where we are now in the second quarter?

(indiscernible) influence the ARPU reduction. They are both Ukrainian and Russian market. The company is just operating in the mass market which gives you a reduction in ARPU. (indiscernible) factor due to these high (indiscernible) traffic. That's why in the second and third quarter, ARPU was stabilized and in the fourth quarter it will decrease. And we expect a decline of 15% to 20%, meaning that we expect a decline in the fourth quarter related to the ARPU in the second quarter.

Thank you very much.

Next question comes from Mr. Trevor Shenalda (ph)

This is Trevor. Congratulations on the strong numbers. I'm sorry but you just answered my question with respect to ARPU. I withdraw. Thank you.

Alex Rogriguez.

It's Alex Rodriguez from Renaissance Capital. A couple of questions if I can. The first one, could you give us the details of the amount of roaming revenues which were recorded in the second-quarter, if possible, between Russia and Ukraine separately?

Secondly, I was wondering if you could comment on the impact from the interconnect on your revenues and the margins going forward?

And lastly, the question connected to the second was, again, given you had quite a low increase in operating expenditures in the second-quarter, what is the expectation again going forward, and why there was such a small increase in OPEX in the second-quarter versus the first? Thank you.

Alex, about roaming revenues, I think they were quite consistent with the first quarter. The total roaming revenues were approximately $26 million for the quarter. Sorry, second question?

The second question was the impact of the new interconnect, which Telecom introduced in the beginning of August and what impact it will have on your revenues and the margins going forward.

Interconnect costs are quite consistent with the first quarter and as a percentage of total revenues it didn't change. So I think we will have a very stable situation here with interconnect.

Do you think that going forward will be the same?

Yes, it will be consistent or the same.

Lastly, the slight low increase in operating expenditures, what was the reason? And should we expect the same in the future or it will reverse?

Well operating expense consists of one-offs and recurring items. The one-offs I already mentioned, is a reduction in our bad debt provision of $6 million and also a certain reduction in obsolescent reserve, and also the general dynamic of operating expense as they become less -- growing with less speed versus the growth of net revenues. However, again it could be just a seasonal factor.

Okay. Thank you very much.

John Shalimar (ph).

J.P. Morgan. Just a couple questions. First on the bad debt provision which was a significant decline, could remind us of what your policy is for those provisions and could you explain exactly what happened to account for this decline?

And the second question is on the pricing, just looking at the relationship between the ARPU and MOUs, it would suggest a 10% decline in pricing. Could you just comment on those dynamics in terms of pricing, both in Moscow and in region?

Let me take the first question about bad debt provision. The provision consists of two parts, the specific provision and general press provision. The specific one is based on our knowledge of the kind of post-(inaudible) knowledge of the situation and where we can provide again specific kind of (indiscernible) action. And there is a part which is a generic provision, which is based on our total receivables and historical experience.

Thank you.

Mikhail Susov will take the second part of your question on the dynamics of effective rate per minute.

To retain and attract new customers, the company improves and changes the tariff line. And also gives the subscriber an incentive to use Internet traffic, which is a much lower cost to the company.

At the end of the first quarter, we introduced new tariffs, which gave us a reduction of 5% to the effective rate. At the same time, they really estimated 100% of Internet traffic, which gives us more minutes and which is at a much lower cost for the company.

Can you comment on how much -- what (indiscernible) work capacity available particularly in the Moscow market?

You mean excessive capacity or total capacity of the network?

Yes.

The (inaudible) capacity provides for the operation of 6 million on the network, 6 million subscribers on the network. Thank you.

Alexei Marovov (ph).

I have two questions. The first question is when do you expect (indiscernible) to be fungible? My second question is why not dividends now on (indiscernible) become payable?

What is your -- we can't hear well. What is the second part of your question, it was something on dividends, but we can't hear you.

When would dividends for GDI (ph) and (DDI (ph) holders be payable?

To the best of our knowledge GDLs (ph) can be fungible as soon as we have the permission of federal exchange committee and we (indiscernible) important for this and we believe that this would happen this year. As to the dividend, that should be paid to the shareholders up to 30 of September. Thank you.

Alexi Yasavitsky.

This is Lexi Yasavitsky from (indiscernible). Congratulations on the strong numbers. My first question has already been answered.

My second question relates to the subscriber position cost trend. Do you see any (indiscernible) in the second half of the year in Russia and the Ukraine? Thank you.

As we have announced, will continue to decrease the subscriber commission cost. The (inaudible) for the second-quarter was $21, and we plan to still lower this in the future going forward.

Okay, thank you.

Vladimir Borganof (ph).

Could you please comment on your (inaudible) acquisitions. Do you intend to acquire the additional 50%%of (indiscernible)? Thank you.

Initially the company has the intention to acquire the rest of 50% in (indiscernible) Telephone, and to have the effective management in the company. And we are in negotiations right now to purchase (indiscernible).

Thank you very much.

Steve Frank (ph).

Morgan Stanley. Back to the dividend question. So, my understanding is the dividends will be paid in the third quarter. Can you give us -- my understanding also is the dividends are paid under Russian GAAP. So, can you give us a general idea of the magnitude or the size of the dividend that you think might be paid in the third quarter? That's the first question. Thank you.

We couldn't hear you very well. So your question is when the dividend is paid and what is the guideline for the next year, or something else?

The question is what size, how big will the dividend be because my understanding is it is paid under Russian GAAP, not U.S. GAAP. Thank you.

Okay, thank you.

Actually there is no real difference between the GAAPs here but the amount will be $111 million based on current exchange rate because the dividend will be paid in rubles, so that is the current amount.

So if you were to pay it today it would be roughly $110, $111 million, is that right?

That's right.

The second question is working capital. It looked like working capital cost you about $50 million in the first quarter, and about $45 million in the second-quarter. And I assume a lot of your customers and subscribers are prepaid. So the number seems fairly high. Do you expect it to be about $50 million per quarter? Thank you.

Could you repeat -- we didn't really get the logic. Could you repeat it, please?

If you work off your cash flow statement, working capital expenses or outflow in the first quarter I think was about $50 million outflow, and working capital outflow in the second-quarter was about 45 million outflow. So my question is--is that a good trend, about $45 million to $50 million outflow every quarter, despite the fact you probably have a lot of prepaid customers that pay upfront?

Give us a second, please. Well, as we already mentioned the sequence of the (indiscernible) second-quarter, the company raised $300 million through the (indiscernible) of eurobonds and basically this will include our cash position, but at the same time this will impact our short term liability.

So this will have no impact on our working capital. However, from the cash standpoint it will finance our the deficit(ph) which we have had at the end of the second-quarter.

I have more questions. I'll call off-line. Thank you.

Shawn Chadichi (ph).

Shawn Chadichi from Oaktree Capital. Congratulations on the results firstly. I have two questions. Firstly, regarding the fungibility issue. We are GDR (ph) holders. Can you give us some timeframe as to when we can convert our GDRs into ADRs (ph)?

And secondly, do you see as strong a second half in terms of core Russian earnings as you have seen in the first half? And what sort of seasonality impact do you see in the second half? Thank you.

I will answer the first part of your question. As to the GDR fungibility, the company, we really understands the importance of this issue and we will do our best to make GDR fungible this year through its (indiscernible).

(indiscernible) meaning third quarter, fourth quarter, any timeframe because it's impossible to trade the GDRs. It's impossible. There is no volume, there's nothing.

We really don't like to be that specific, but we will do our best to make it as soon as possible.

There was a second part of your question on earnings trend but I believe we didn't quite get it. Could you please repeat?

Basically my question was do you see as strong a second half as your first half in your Russian operations, because a lot of the second-quarter earnings were marked for the consolidation? And what sort of seasonality trends do you see going forward in the second half, Q3 and Q4?

As we have already mentioned, number one, our second and third quarters are the strongest quarters of the year, and as always the fourth quarter is quite weak. But normally, if you take the halfs, the first-half is almost equal second half. But there could be some reductions in December.

Bill Nord (ph).

Marvin & Palmer Associates and we are shareholders and congratulations on a very fine quarter. My first question relates also to the outlook, not necessarily for the second half of the year, but for the third quarter which is usually the seasonal strong quarter.

Is there anything in the general operating conditions in this quarter versus the second-quarter that would be a lot different than say a year ago third quarter versus second-quarter, when the net income I believe went up about 22% quarter-over-quarter? In other words, I’m more interested in the operating conditions for this specific third quarter, your usual seasonal best?

Generally, we believe that the tendencies we have had in the past, we will be consistent, so we believe that the third quarter will be quite strong. However, I can't be more specific right now.

And second question on the effective tax rate.

You had, as you said, a 27% effective tax rate in the second-quarter. For the full year last year it came out 26 percent. With the lowering of the tax rate and the code in Russia would this be probable then that there will be a lower than 26% tax rate for the full year, in view of the progression of lower rate that you have had in the second-quarter?

Thank you for the question. We certainly have to be include the impact from consolidation of UMC because the effective tax rate in Ukraine is higher than in Russia. Therefore the consolidated effect is the high rate.

But at the same time (indiscernible) look to the future because from 2004, the tax rate in Ukraine will be reduced. So this will impact our next year effective taxation, effective profit tax.

In the sense with that response, would it be a 27% tax rate as you had in the second-quarter, would perhaps be the most logical rate to use for the full year, this year then?

I would use something -- I think 27% is reasonable. I think we should be between 25% and 30%. So I think 27% you can use as a guideline.

Thank you very much.

Steven Pettiburn (ph). [MISSING AUDIO BEGINS]

Merrill Lynch. Two questions please partially as a follow-on from the previous question. It looks as if momentum is fading a little bit in the Moscow market with the prepaid product. I wonder if you could perhaps comment on how you are seeing trends going into the third quarter with that particular product? And secondly, last quarter you gave us an ARPU figure for the, again for the prepaid base, the Jeans product. I wonder if you could give us what that figure was in Q2 please. Thank you.

The first part of your question was on Jeans subscriptions in the Moscow market, right?

Right, it just looks like you are fading a bit competitively versus perhaps (indiscernible). I just wonder how you saw the third quarter progressing.

Okay, thank you. (technical difficulty)

The number of new subscriber is, exceeds 2 million on the overall network and this is for within seven months of operations. Jeans ARPU is 9.25 in Moscow (indiscernible) and $9.7 in Russia.

Can I just follow-up from that. You said $7.00 in Russia, right? The figure you gave us in Q1 was I think 10.3. Should I be comparing 10.3 to 9 in the quarter or seven?

The ARPU in Russia (multiple speakers) ARPU for Russia (indiscernible). ARPU for Russia without Moscow of 7.3. (multiple speakers) ARPU on Jeans (multiple speakers) the majority. Most of the subscribers (indiscernible) revenue yet.

Thank you.

Nadia (indiscernible).

Nadia (indiscernible) from (indiscernible). Congratulations on strong results and my question relates to the EBITDA margin guidance for the full year. So given the very strong performance in the first-half your (indiscernible) guidance of 45 percent EBITDA margin implies very sharp decrease in the second half, down to as low as 43, 42, 43 percent. Do you still stick to your guidance of 45 EBITDA margin for the full year or can you please comment on that?

As we have mentioned before, actually we are likely to comment on EBITDA margin, unfortunately it is not our desire but it is the rule and the regulation in U.S. We can say that we will stay with the former guidelines we were providing. So I will not update any guidelines.

My second question is a follow-up to the previously asked question. Does your roaming (indiscernible) $26 million for the second quarter, does include only Russia or is it full revenue including Ukraine? And if it is only Russia could you provide a figure for Ukraine roaming revenue?

I unfortunately can't provide (indiscernible). I think if you can request it later we can provide the breakdown.

I see, thank you. (indiscernible) directly that this quarter remained flat quarter on quarter?

This is just the second-quarter running revenues.

Yes, but was the dynamic compared to the third quarter?

As we said, it was quite stable.

Flat. Thank you.

Alex (indiscernible)

Renaissance. Just wondering if I could follow-up on one or more things. One is that the new tariff (indiscernible). If you could comment what do you think will be the impact of the introduction of the tariff on your overall ARPU or rather what kind of ARPU you are shooting for with this tariff plan? What will be the impact on the churn, is the first one. The second one, I was wondering if you give us some data on the Byelorussia operation in terms of what is the profitability roughly? How well it is growing and what should we expect the long-term in terms of the type of the margins you can achieve in this market? Thank you.

(indiscernible) Jeans tariff. As we expect we (indiscernible) prepaid tariffs. Because there is limited -- this reduction is limited on (indiscernible) there is no limitation on the (indiscernible) of payment is compensated (indiscernible) by a rather higher rate (indiscernible). (indiscernible) decrease of ARPU which we will not expect will be attributed to the subscription of the (indiscernible). Previously you might want to bound them to the operators by paying an initial fee. The higher rate per minute will compensate on this limitation. As for the (indiscernible) of the new telecom (indiscernible) not really (inaudible) differ from the churn base, and so there will be no difference.

Meaning that for instance if you have a positive balance on the account, but you haven't used the (indiscernible) the year. That is probably counted as an active one or would you sort count them as churned out of the six-month period?

Yes.

Okay. Thank you. [MISSING AUDIO ENDS]

Andre Boganuse (ph).

From Alpha Bank. Again congratulations on the great results. I have sort of an operations from the previous one, with regard to the churn. For the third month in a row you seem to have very high churn rates. It basically is from 10% to 12% for the quarter.

First of all, do you have any guidance going forward for the churn? And second question is given that the churn is high, not only will your company but also your competitors, do you actually believe that all the subscribers, which have (indiscernible) numbers for Moscow first of all, which are published by you and your competitors are all genuine?

In other words, do you think potentially there could be some point of subscriber base in Moscow which is actually not active? Due to double counting even different policies within (inaudible), etc.? Thank you.

Of course we also don't like the high churn rates. Most of the churn rate comes from the annual subscribers who run from one operator to another. We don't think that it is worth it to fight for these types of subscribers.

That is why we are primarily focused on the decrease in the subscriber position cost. As you are right for now, that there is a category of subscribers (inaudible) operating from Moscow.

Long term forecast, we really do think that the penetration rate in Moscow may be over 100%, if the operators do not change their policy to warrant the initial payment.

Anna Botham.

CIB. I just wondered if you could just clarify firstly the churn policy. The question I think a couple of people ago, was whether or not you discontinued after six-month or kept on if there was a positive balance. Which one was it?

Can you repeat that, please?

A couple of people ago someone asked if you disconnected them or counted someone as being churned if they didn't use their prepaid phone for six-months, even if they had a positive balance, or if you kept them on? And the answer I think was yes which didn't, I didn't understand.

Okay, let me try to explain it. It's a very, very straightforward policy for Jeans (ph) subscribers six months with zero or negative account. If a subscriber has a negative or zero account, in six months we stop counting him as a net subscriber if he is a Jeans subscriber.

If a subscriber signed to MTS air (ph) plans, then the same, but two months. If negative or zero balance for two months, we stop counting him as a net subscriber. So it's very straightforward.

So over six months if he has a positive balance then. Fair enough. If I could just ask to your rollout. You sound like you have made quite a few rollouts in the regions in the recent month.

I wonder if you could compare how many rollouts you've made in the first six-months of the year with how many you expect in the second half of the year excluding acquisitions? Actually I have a second question. It is really about your announcement of acquisitions. I am just wondering, I know we (indiscernible) challenge and the MTC acquisitions. There hasn't been a press release to UK analysts. I'm just wondering if that's a new policy or what is happening that is behind that change?

On the disclosure policy we are in so-called quiet period which lasts for 14 days after the notes are placed. We placed notes on August 5 we I believe, closed this transaction. We are in the so-called quiet period four days after that.

During this time we are constrained to release information to non-U.S. based investors. Not to discriminate investors, not to discriminate analysts, we chose to press releases only to the Moscow based media. We understand that might be inconvenient, but you have to understand that this is the requirement.

Thanks.

Yuli Matsavosa (ph).

Duetsche Bank in Moscow. One question, if I may. If we look at your income statement and compare equipment revenues to the cost of equipment that is the (inaudible) of $20 million, could you please explain -- have you used (indiscernible) subsidies? If yes, what are they? Thanks.

Could you repeat the last part of your question?

Yes I was wondering why is there a $20 million loss, and if you're using the (indiscernible) subsidy, what are the subsidies?

The are certain items included in the cost of equipment. The also (inaudible) which obviously are provided free of charge. There are certain handset subsidies in Ukraine, and there is no level of discount provided in Russia. What kind of breakdown do you need?

Looking just what percentage of handset subsidies which you provide in Ukraine, for example.

I think handset subsidies in Ukraine is approximately 50% of the cost of equipment.

And in Russia?

In Russia it's substantially lower. It is a little bit above 10%.

Thank you.

(OPERATOR INSTRUCTIONS). Olga Beschov (ph). Olga Beschov: This is Olga Beschov from CSFB. I have a question on a local listing, whether you have any, could give us any more (indiscernible) date and when you're planning to do that? And the second question on CAPEX guidance for Russia and Ukraine, if you're planning to upgrade it? Thank you.

The first part of the question I'm going to answer. I think I've already given some guidelines about the potential Russian listing, and we believe we will do our best to make it before the end of the year. Thank you.

The second question was on the CAPEX guidelines, right?

Yes, for the full year 2003.

The CAPEX guideline for the full year 2003 we already announced, is $700 million. And about next year, we increased our guidelines for Russia CAPEX, which will include the new companies we've just acquired. The total guideline will be approximately $600 million.

So you are not upgrading 2003 guidance, correct?

We're not.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] A follow up question from Anna (Botham.

I just wondered if you could follow up on that question on the regional launches, whether the second half will see more momentum in terms of regional launches than the first half? And I also wondered with the tax rate, stripping out the one-off in the second quarter tax rate of 8 million reserved for the provision.

I worked out you had a 31 percent underlying effective tax rate, and I just thought with a 30% tax rate in the first half that if you are going -- if 27% is the guidance, you are going for a substantial reduction in the second half, will we see more one-offs such as those provision reversals or what is the reasons you are expecting the rate to fall below the underlying 30%?

In terms of launches of network that we build from scratch, we are opening a network in (indiscernible) tomorrow. And (indiscernible), which is one of the key regions (indiscernible) is planned for the very beginning of November. For this year we started new operations in (indiscernible) and in (indiscernible), particularly in (inaudible)?

You think the momentum will be maintained in the second half?

Absolutely. We came -- I will give you an example. We came as a (indiscernible) GSM operator to Surrota (ph) and despite of that, during the first day of operations more than 1,000 people signed to MTS services in the region.

In first week of operations (inaudible) it is the same numbers, more than 1,000 people signed during the first day and we see a lot of new customers coming. We hope for the same success in the regions we're planning to launch by the end of the year.

That's really great, thank you. And the tax question?

Nikolai will take this one.

Anna about the tax question, you're right, there were certain one-offs in last year and there is a one-off in the second quarter. In terms of the rest of the year, we don't expect any one-offs (indiscernible). As I said before we believe it will be between 25 percent and 30 percent as effective tax rates. So somewhere in this range, (indiscernible) basically.

Thank you very much.

A follow up question from Alexi Yasavitsky.

Just want to get a clarification on the CAPEX figure that you gave for 2004. The $600 million figure, does it refer to the entire group or to Russia only? Thank you.

This is Russia only, as we say.

And Ukraine would be another $150 million, is that correct?

Ukraine, we plan to spend about 200 million 2003, about $100 million next year and $80 million in 2005. And certainly, if we spend less than $200 million this year, we may need to reallocate this money to (indiscernible) next year. (indiscernible) to increase our overall guidelines for CAPEX in the Ukraine for three years 2003 to 2005.

Thank you.

There are no further questions at this moment. Please continue with any other points you wish to make.

Let me clarify one question on SEC, especially with handset subsidies. The figures which we were mentioning are included SIM-cards, so the percentage of total equipment costs includes the SIM-cards, because we don't have the analysis between the handsets themselves and SIM-cards separately, because we provide obviously -- with the new handsets we provide SIM-cards in it.

And the second point on the roaming revenues, there is also one -- I think there was a small mistake. Actually the roaming revenues grew to $37 million in the second quarter from $26 million in the first. Actually there is an increase. And again, there is an increase, but as a percentage of revenues, this increase in revenues is basically stable (indiscernible). The growth is in line with overall growth of revenues. Thank you.

If there are no further questions let me conclude this conference call. Ladies and gentlemen, thank you for taking the time to join MTS second quarter first half year 2003 financial results conference call today.

The recording of the call will be available for the next ten days. If you have any other questions please do not hesitate to contact the Investor Relations Department of the company. Thank you again from all us here. Goodbye.

This concludes the Mobile TeleSystems second-quarter results. Thank you for participating.