Mobile TeleSystems PJSC (MBT) 2003 Q4 法說會逐字稿

Welcome to the Gavin Anderson Mobile TeleSystems fourth quarter and full-year results conference call on Tuesday, the 30th of March. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS). I will now hand the conference over to Mr. Andrey Braginski. Please go ahead, sir.

Thank you, and welcome to MTS' fourth quarter and full-year 2003 results announcement. The forward-looking statements made during this conference call reflect the opinion of 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 Please be advised that developments subsequent to this call are likely to cause these statements to become outdated with the passage of time.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 this guidance provided today prior to our next quarterly conference call. Please note that the reconciliation of non-GAAP measures is available on the corporate Website.

By now you should have received by e-mail a copy of our press release. If not, please e-mail to IRSMTS.RU (ph), and we will mail you the release promptly. I encourage you also to download the presentation that will be guiding this conference call, as indicated in the invitation sent to you. For anyone who has not done so already, the presentation can be found on our Website, MTSGSM.com, in the investor relations financial reports section.

Our presentation team consists today of Vassily Sidorov, the Company's President and CEO; Mikhail Susov, the Company's Vice President in charge of Marketing; Nikolay Tsekhomsky, the Company Chief Financial Officer; and Tatiana Evtushenkova, the Company's Vice President in charge of the Corporate Development.

Now I would like to hand over to Vassily Sidorov, the President and CEO of MTS.

Thank you, Andrey. Ladies and gentlemen, good afternoon and good morning. 2003, the year of our company's 10th anniversary, has been a remarkable one for the Company. We expanded into new markets, significantly increased our subscriber base, and again achieved impressive financial results. MTS has been one of the main beneficiaries of the explosive growth in the markets in which the Company operates.

During 2003 MTS added 7.7 million new subscribers organically and acquired a further 2.4 million subscribers at attractive valuations, ending the year with a consolidated subscriber base of 16.7 million. In the first three months of 2004, MTS added around 2.4 million new customers. And now, with over 19.1 million subscribers, we are the largest wireless operator in emerging Europe.

During 2003 we continued our strategy of expanding into new markets through the acquisition of incumbent GSM operators. These acquisitions (indiscernible) increased MTS' subscriber base and exposed the Company to new markets, most notably in the Ukraine, the Russian Far East and Siberia. The company's license coverage expanded from 116 million to 186 million. Already this year we have secured a number of new licenses from the regulator, expanding our license portfolio in Russia by a further 14 million people.

The issuance of these new licenses completes a very important stage in our plans to become a national cellular operator that provides high-quality, affordable services throughout Russia. We now hold licenses for all but two regions in Russia, encompassing 98 percent of the country's population. (indiscernible) with our licenses for Ukraine and Belarus, MTS now holds licenses for territories with a total population over 200 million. The fact that we now hold a de facto nationwide license in Russia shifts our regional expansion strategy from the acquisition of local cellular operating companies to the integration of regional businesses into a unified management structure.

MTS operates in the fastest-growing wireless market in the world. During 2003, mobile penetration in Russia doubled to 25 percent, as 18 million new customers joined mobile networks. In 2003 we successfully maintained our leading position in Russia with a 37 percent market share. Despite significant growth over past years, the Russian mobile market is still in its early stages of development, and for this year we expect penetration in Russia to increase approximately 40 percent, or around 58 million mobile phone users.

In the Ukraine the market dynamics have been similar to Russia. During 2003 the number of cellular phone users in the country increased by 2.4 million, reaching a total of 6.5 million, a penetration of 13.8 percent. MTS' acquisition of UMC was a catalyst for the company's development, and since then MTS has secured the number-one position in the Ukrainian market with a market share of approximately 51 percent at year end. Overall, UMC's performance has exceeded our expectations. We see further significant potential in the Ukrainian market as its penetration level still remains relatively low. We expect it to grow to over 20 percent by the end of this year, or around 9.7 million users.

Our operations in Belarus are also expanding favorably. Our unconsolidated subsidiary there accounted for the lion's share, 65 percent to be precise, of net additions on the market, increasing its market share from 9 percent at the beginning of 2003 to 42 percent by the end of the year. This joint venture is on track to becoming the market leader. By the end of 2004 we expect our consolidated subscriber base to expand by an additional 8 million subscribers in Russia and the Ukraine, to around 25 million.

The rapid expansion in our subscriber base has led to further growth in our profits. Both MTS' revenue and net income were up 87 percent year on year to 2.55 billion and 517 million, respectively. The Company's management continued to pursue its policy of (indiscernible) cost controls, which resulted in OIBDA margins of 52.6 percent in 2003. The Company remains focused on shareholder returns. In line with this strategy, we paid 41 percent of our consolidated U.S. GAAP net income as dividends to shareholders last year, and we expect to maintain a similar payout ratio for 2003.

The Company had a relatively high churn rate of 47.3 percent in Russia. This churn rate was mainly determined by the absence of term contracts, zero connection fees, and in addition to the comparatively unique and dynamic market conditions in Russia, whereby mobile operators regularly introduce new tariffs, prompting customers to migrate more frequently between providers or tariff plans. This year, MTS is launching a number of nationwide subscriber retention programs that should help us increase customer loyalty and potentially reduce churn levels.

Also, effective February 1st of this year, MTS introduced a new method of paying dealer commissions. They are now deferred over a period of up to one year. Monthly payments from MTS to dealers are tied to the revenues the Company receives from customers signed to the respective dealers. We believe that this new method of payment will, apart from other factors, give dealers less incentive to renew subscriptions or churn them from MTS.

Last year MTS' (indiscernible) management team embarked on a broad corporate change program spanning different aspects of the Company's management and operations aimed at improving the operational and financial efficiency of the Company, enhancing the Company's customer focus, and sharpening its competitive edge in all the regions in which MTS operates. This company includes the creation of 10 macro regional business units in Russia. This is making (indiscernible) will be clearly split between the Company's corporate center, macro regional, and regional business units, which should significantly streamline business (indiscernible). The implementation of this change program will also result in a more structured approach to human resources and performance measurements.

Furthermore, we recognize the ongoing need to promote higher liquidity and create more convenience in trading MTS stock. In this regard, we listed the Company's local shares in Russia last year, and more recently achieved fungibility of our GDRs and local shares into ADRs.

In conclusion, I would like to emphasize that MTS has produced phenomenal growth throughout its history, and we are optimistic about domestic about the Company's future growth. Our strategy is aimed at securing leadership in all of our markets by offering high-quality services through innovative marketing, while continuing the history of outstanding financial performance. Our management team is committed to creating value for shareholders through the Company's successful combination of size, growth, profitability, and first-class business practices.

Now I would like to pass the lead to Nikolay Tsekhomsky, our CFO, for further discussion of the Company's operational and financial performance in 2003. Nikolay?

Thank you, Vassily. MTS indeed achieved excellent operating and financial results in 2003. The financial results of the fourth quarter were consistent with its performance during the rest of the year.

Revenues for the year ended December 31, 2003, were over $2.5 billion, a year-on-year increase of 87 percent. Fourth quarter revenues were around 772 million, up 88.5 percent from the same quarter in 2002, and 6.8 percent on previous quarters. MTS share of revenues in Russia amounted to 2.1 billion, or 85 percent, and further 394 million, or 15 percent, was contributed by Ukrainian business in the ten months of its operations in 2003.

The increase in revenue is mainly attributable to subscriber growth. In addition, in the fourth quarter, increase in revenues was due to consolidation of revenues in the full quarter from companies acquired by MTS in the late first quarter. (indiscernible), resulting in around 7.5 million, or 15 percent, of the quarter-on-quarter growth. (indiscernible) revenue per user in Russia declined from 18.8 percent in the third quarter to 16.3 percent in the fourth quarter, and from 17.8 percent to 15.4 percent in Ukraine.

Minutes of use per subscriber in the fourth quarter of 2003 in Russia was 140, a decrease of 12 percent from the third quarter of 2003. In Ukraine, minutes of use in the fourth quarter increased 114 minutes, or 40 percent, compared to 110 minutes in the third quarter of 2003. The quarter-on-quarter increase in interconnection and line rental expenses were 24 percent, and a 63 percent increase in the course of (indiscernible) were consistent with the subscriber growth rate in the fourth quarter.

The quarter-on-quarter decrease in roaming expenses by 18 percent, from 37.6 in the third quarter to 30.9 in the fourth quarter, was also consistent with the reductions in roaming revenues, which fell from 49.7 million in the third quarter to $40.8 million in the fourth quarter, or a reduction of 18 percent.

Operating expenses were down by 10 percent, from 125 million in the third quarter to around 113 million in the fourth quarter. The main reasons for the reductions are as follows -- the quarter-on-quarter payroll reduction of approximately 6 percent, mainly related to the bonus which was paid in the third quarter, the 10th-anniversary bonus; secondly, the Company's extensive review (indiscernible) in the fourth quarter resulted in the ability to use (indiscernible) parts previously provided for, thereby reducing its obsolescence provision by almost 3 million from the reserve created in third quarter; the consistent lowering of bad debt provisions through the year, in line with the management policies to more actively pursue our outstanding receivables and create control measures, amounting to a decrease of bad debt provision by (indiscernible)33 percent quarter-on-quarter, or by $2 million; and finally, a reduction of 3.2 million, or 60 percent, of (indiscernible) expenses due to year-end accrual (indiscernible).

MTS sales and marketing expenses increased by 28 percent, owing to its intensified Christmas and New Year's sales and advertising activities, and 20 percent increase in gross additions in the fourth quarter from the third quarter. The Company's subscriber acquisition cost per gross additional subscribers in Russia in the fourth quarter of 2003 was up to 24, from $23 in the third quarter. SAC, subscriber acquisition cost, in Ukraine in the fourth quarter 2003 was down to $26.2 from $34 in the third quarter, largely due to the subscriber mix, which was heavily weighted towards prepaid -- more than 90 percent of net additions in the fourth quarter -- and the record number of subscribers added in the fourth quarter of 2003 in Ukraine.

In 2003, OIBDA was up 98.6 percent compared to the previous year to $1.34 billion, giving an OIBDA margin of 52.6 percent. Fourth quarter OIBDA was at 400.6 million, a 119.2 percent increase from the same quarter in 2002 and a 33.2 percent increase on the previous quarter. OIBDA margin in the fourth quarter decreased to 51.9 percent from 53.7 percent. The high OIBDA margin in the fourth quarter is mainly explained before by the 10 percent decrease in the Company's operating expenses. We would like to revise our 2004 OIBDA margin forecast upwards, from high 40s to around 50 percent.

Other expenses in the fourth quarter (indiscernible) to other income, primarily due to income from the (indiscernible) of equity investments from our associates, (indiscernible). In addition, certain reclasses (ph) and one-time (indiscernible) also contributed to the third and fourth-quarter differences. The provision for income tax increased due to the rise in taxable sales, as well as the historical pattern whereby annual tax calculation done at the year end tends to true-up quarterly data. Overall, the effective tax rate for the year was 28 percent.

Minority interest decreased due to MTS' acquisition of minorities in the late third quarter and in the fourth quarter. The total decrease of 9.2 million was mainly due to acquisition of minority (indiscernible).

Net income for the full year 2003 was at 517.2 million, an increase of 86.6 percent on the previous year. Fourth quarter net income was at 152.7 million, up 79.3 percent from the same quarter in 2002, and down 1.9 percent compared to the previous quarter. The capital expansion program to support this significant growth was approximately 958.8 million, as forecasted by the Company, of which 712.5 million was invested in Russia and 246 million was invested in Ukraine. We would like to repeat our 2004 CapEx guidance of $1.2 billion.

MTS' rapid growth during 2003 was financed primarily with the new Eurobond issue. Total debt increased from 454 million at January 1st, 2003, to almost 1.7 billion at year end 2003. The quarter-on-quarter total debt amounted to 265 million, and (indiscernible) million growth of the net debt. At the same time, the total debt (indiscernible) OIBDA ratio was in line with the Company's forecast. The total debt was 1.2, and for the net debt, less than 1.

To summarize, I would like to say that 2003 was an outstanding year in MTS' history in terms of acquisitions, subscriber growth and development of its network. The Company consistently implemented strategy to maintain its number-one position in Russia and Eastern Europe. We believe that the strong foundation has been built, and the Company's primary focus for 2004 will be on integration of its businesses in Russia and CIS. Thank you.

Thank you, Nikolay. And now we are available to take question from the audience.

(OPERATOR INSTRUCTIONS). Alex Kazbegi.

Alex Kazbegi from Renaissance Capital. The first question will be about the regional restructuring program -- when time-wise, and what to expect in terms of the cost-cutting? If you can discuss this issue, please? Related to this, could you tell us what was the EBITDA margin in the Ukraine? And the second question is about the expansion into the CIS countries. For instance, the position of MTS with regard to the bidding of the third license in Kazakhstan. What was the perspective of purchasing a controlling stake in (indiscernible) Russia, and so on?

This is Vassily Sidorov. I guess that was certainly more than three questions there in your little remark. But let us try to answer them one by one. On the regional restructuring, what is happening right now within the Company, as we briefly said, is that basically on the back of the rapid expansion that we have undertaken -- already on all the back of the additional licensed areas that we now have, the build-out should be managed more efficiently by delegating some responsibility, some of the decision-making responsibility, to specialized regionally empowered business units. And these business units are going to be those 10 macro regions that we are going to be creating. They will have responsibilities for managing the budgets and achieving the KPIs for respective regional business units, all prospective regional business units.

We believe that this well, as we have said, streamline decision-making. It will make us more reactive, more immediately reactive to the needs of the regions. And we think eventually we will inevitably, since we are centralizing some of the functions -- and the functions that are going to be centralized are technology, IT, marketing, accounting, finance -- there will be economies of scale also to the management overhead of the Company, and economies of scale as well, which is probably as important. These will yield cost results and cost efficiencies. I would like to stop short of giving you the exact number as to what this will translates into, but you will see them hitting the operating margin line as well as the bottom line of the Company.

Thank you, Vassily. But this program is for 2004, or more like 2004, 5, 6?

In terms of timing, we're launching the first stage of the restructuring -- and to be more precise, we are segregating the corporate center of the Company from the Moscow macro region, which will be empowered to manage the ongoing business activities in Moscow and the Moscow region. This is going to start on April 7th, and this will be the first stage of a gradual rollout across the regions of the same type of restructuring, with clearly defined powers for the regional business units, macro regional ones and the corporate center, which will be created basically starting next week.

It will take some time, obviously. The rollout is going to take several months. We think that if we are done with the rollout by the end of this year, or let's say by the beginning of the budgeting cycle for 2005, this will be a significant achievement. So that's as far as the first question. I will let Nikolay answer UMC. In the meantime I will address the other ones.

On the CIS expansion, we would like to once again reiterate that we believe the CIS markets profile fit our criteria that we would like to apply to any new market that we enter. And these criteria, I think we might have already mentioned, are threefold -- one is the targets need to be sufficiently -- we need to have sufficiently attractive valuations; B, these markets need to be underpenetrated or offer the same type of growth potential that the other markets where we operate do; and thirdly, we need to know that the rules of the game in this market are transparent and competitive enough to allow us to compete freely with whoever else is in this respective market.

Now, there is a certain geographical logic to expand in the CIS. Most of these markets do fit at least one or two of the aforementioned criteria. (indiscernible) -- as we said, we will be opportunistic. And to tell you there is a particular pipeline right now, I would probably stop short of that because we are far from the specifics of any particular deals.

Now as far as Kazakhstan is concerned, this is a country that is certainly of interest to us. Unfortunately, the terms of the tender, the timing of which has been extended -- and again, there may be some changes to the terms; we will be monitoring and watching the situation closely. Considering the fact that these -- we're talking about an 1800 only bandwidth, frequency bandwidth, we don't think that the expectation for pricing this license is fair, or at least fits our profile of a fair price. So we will be monitoring the situation closely. We don't believe that, if we understand the pricing expectations correctly, that we will be bidding at these levels for the 1800 MHz license.

Now as far as Belarus is concerned, we have mentioned before, and I can just reiterate that we are we are certainly looking, same as we are with regard to any other unconsolidated subsidiary, to consolidate control. This will reflect on -- because it reflects also on our ability and willingness to invest in the respective business. There, the situation is fairly unique because it is the only instance in which on the opposite side of the shareholder table we have government-owned, state-owned entities dealing with us, i.e., we deal with the state. So, giving you a precise timeline or even a tentative timeline will be difficult; we are working on it basically on a daily or, certainly, weekly basis.

Nikolay, if you want to answer the UMC question?

UMC -- you have in the presentation the year-end or actually 10 month OIBDA and OIBDA margins, and also the quarter-end OIBDA margin. So you can see that full-year OIBDA margin for UMC was 50.3 percent, and for the fourth quarter we reported 47.2 percent. Obviously, you are well aware that the CPP, or calling party pays, was introduced in Ukraine, and obviously has a substantial impact on both total revenues of the Company. Because, obviously, it's boosting development of the business (technical difficulty) at the same time impacting the margins of the Company. Obviously, margins are (indiscernible) at the same time, the absolute EBITDA or OIBDA is increasing.

So we believe that, obviously, calling party pays -- and as a result, interconnection payments -- will impact our margins, because it is currently equal to approximately 14 percent of our revenues in Ukraine, where before introduction of CPP it was less than 1 percent. So we believe that moving forward, it will impact the margin by a few percentage points.

Alex (indiscernible). Please state your company name followed by your question.

My name is Duncan (indiscernible). I am from Investment Bank (indiscernible). My question is, when are you planning to raise (indiscernible) currency market, or finance your 600 million bonds? And what is the maturity going to be?

This is Vassily Sidorov again. I'll try to answer your question. As you know, there are 2 instruments that we have maturing this year, $300 million each, one in August, the other one in December. We are likely to refinance those two instruments with a public debt instrument. We will not be able to give you a precise timeline on this potentially forthcoming issue, and neither will we be able now to define the size of the potential issue. As far as maturity is concerned, we are obviously conscious of the aspects of our liability management, and are keen on extending some of the maturities within the liability portfolio. So we will be following that logic. We will be looking at extending the maturities of our debt, again, without giving you too many details at this stage.

(indiscernible).

This is Harry (indiscernible) from HSBC. My first question is regarding what you mentioned in terms of deferred payment to dealers. I was wondering if we should expect any reduction of the way you calculate subscriber acquisition cost with this new dealer payment? And if the answer is yes, by how much you think it will impact subscriber acquisition cost in the current definition?

My second question is regarding third-generation license or new licenses in Russia. If you can give us an update of where it stands, if we have any information if it's going to be a beauty contest or an auction process, and how many licenses you still expect to be issued in the short or medium-term?

Thank you for your question. Vassily Sidorov again. On the SAC, we would like to be clear on the new scheme of dealer commission payments that we referred to earlier. We're talking about a deferral in the payments of the same amount of dealer commissions, so this does not reflect on the commission amount as such, and therefore the SAC is not affected by this change itself. Now that being said, we, as we have seen in previous years -- 2003 compared to 2002 with the SAC going down -- we expect to see the same dynamic again -- not percentage-wise, but the same overall dynamic of a decrease in SAC -- to continue throughout 2004.

As far as the 3G license is concerned, we have recently heard that -- once again, from the regulator -- that the tender, which has now been called an auction, actually, is likely to take place this year. We're closely following the situation. No terms have yet been defined. We are likely, unless the terms are completely unreasonable, to participate. I guess I'm being diplomatic; we will definitely participate. And thus far there are no timing or monetary specifics that we can attach to that.

Thomas (indiscernible).

Tom (indiscernible) from Citigroup. A question on your Russian business, and specifically trying to zero down on your regional EBITDA margins. I was wondering if you could give us an indication of your fourth quarter regional EBITDA margin, as well as your expectation for 2004 regional EBITDA margin. And secondly, I was wondering if you could also give us your expectation for incremental new ARPU that you expect in the regions in 2004.

Nikolay Tsekhomsky; I will answer the first question related to EBITDA in the regions. We do not provide the full information on the quarterly results, but we can emphasize on the performance of our regional companies. I can say that this year we see a new dynamic, where many of our regional companies, many of our regional business is becoming very highly profitable. We see (indiscernible) top five companies being over the corporate level of OIBDA margins, so approximately between 53 to 60-plus percent.

I will try to answer the other question. Incremental ARPU -- right now we are seeing a number around $10 for the regions. We believe that the average ARPU throughout this year is likely to stay within the borders of 13 to $14. Hopefully it will not be much lower than $12 at year end 2004. We do not -- kind of taking a longer-term view -- we do not see in the next 2-3 years blended ARPU going down below $9.50.

Olga (indiscernible).

I have two questions. The first one is, what was the effect from calling party pay from your ARPU in Ukraine? And the second question is, can you please provide us with the figures for value-added services revenues for the fourth quarter in Russia and in Ukraine?

Impact from the ARPU -- obviously, the overall impact on the revenues you can see from the performance of UMC. You also can see the increase in minutes of use in UMC, which is taking into account that in the fourth quarter we see also a substantial growth in subscribers, especially in December. We cannot provide exactly the impact of CPP on the ARPUs, but generally, we can say that there is a kind of substantial positive trend, which is offset, obviously, due to the fact that incoming calls are free. So (indiscernible) kind of two contrary directions -- impact, and in total, obviously, the revenues are growing, with the overall impact on ARPU is based on the increased number of subscribers you can also see from our financial results.

Can you please provide the share of revenues from calling party pays in total Ukraine revenues?

Yes. The share I also highlighted earlier was this 14 percent, interconnect costs.

Nick Barnes.

It's Nick Barnes at Thames River Capital. I was hoping -- if you could give us some guidance on your CapEx forecast for this year for Russia, and then separately for the Ukraine?

As Nikolay has previously mentioned, we are continuing to give the same figure -- in line with what we said before -- 1.2 billion consolidated for Russia and the Ukraine, of which 1 is going to go into Russia and the remaining 200 million to the Ukraine.

And can I just clarify that that is based on -- do you expect 40 percent penetration in Russia and 20 percent in the Ukraine?

38 to 40 percent; just under 40 percent in Russia, yes.

And 20 percent in Ukraine?

That's correct.

Andre (indiscernible). Please state your company name followed by your question.

Andre (indiscernible) from (indiscernible) Bank. Two questions, if I may. One, I know (indiscernible) based on the facts; just one more additional question. So far your Russian SAC sat at $24, which is actually quite higher than your main competitors' SAC of 18.1 in the Q4. You said previously that the SAC trend is to go down, of course. But can you give any more color where exactly you think it's going to, let's say for next year, or at least your plans? The second question is a very technical one with regards to the cost of equipment for the Q4. I just noticed that it went up quite a lot quarter-on-quarter. Just a question as to what is the reason for that, and what is that going forward?

On the SAC issue, if you look at the numbers, at the quarterly dynamic for 2003, the SAC did indeed go up from Q4 -- in Q4 compared to Q3. This was related to an atypical situation in Q3 where we levied a significant amount of penalties on the dealers, which affected the gross amount on that. So that was a slightly atypical period, and therefore the comparison does not -- we are not comparing one to one there. So this explains the dynamic there. Nikolai?

Andre, in terms of cost of equipment, you correctly mentioned that it's substantial growth of cost of equipment in the fourth quarter compared to the third quarter -- 52 percent, 53 percent. Obviously, as you know, it includes SIM (ph) cards which are allocated to this line. So obviously, the substantial growth in subscriber base, substantially impacting this figure. Plus, as you know, there are certain handset subsidies in Ukraine which were around 9.5 million in the fourth quarter of 2003. So this is basically the mixture of (indiscernible) items.

Steven Pettifer.

It's Steven Pettifer for Merrill Lynch. I wonder if you could please give us the fourth quarter ARPU in minutes of use for the Jeans prepaid product? And my second question relates to your balance sheet. I see you have got $215 of short-term investments -- I'm sorry, 245 million of short-term investments. I wonder if you could tell us what that is, and what the yield on that is, please?

Nikolay Tsekhomsky here. I'll start with the second question. In terms of the short-term deposits, 250 million is basically the deposits in the bank.

So yielding a very low rate, is it?

It's actually yielding at quite a huge rate, because it's invested in Russian banks. So the yield is around, I think, 4 percent, I would say.

(Russian language).

ARPU in the fourth quarter was $16.3.

(Russian language).

Those subscribers that used MTS had an ARPU of $20.1, and the prepaid Jeans had a 9.3 ARPU.

(Russian Language).

Jeans MOU was 84 minutes, and for the MTS it was 169 minutes in the fourth quarter.

Anna Ivanova-Galitsina.

This is Anna Ivanova-Galitsina from Dow Jones. My question is your interest in the CIS market. You already have said that before, that you are interested in the CIS market, but you never gave any exact country. You said you're not interested in the current Kazakhstan GSM auction. Could you please clarify?

As we previously noted, three criteria apply. If you look at the first criteria, which is valuations, basically, and the attractiveness of valuations of potential targets, I think there's probably only three countries that fall out of the territory, and these are the Baltic states. Any other country except for -- we were present in two others, so you're left with ten countries basically -- I'm sorry, nine countries that are potentially of interest to us. As far as growth potential, I think any country that you look at, besides the ones that I have said falling out because of valuation, of the valuation criteria, they all offer the same level of potential, and they are all lucrative markets for us.

As far as regulation, that is a more complicated issue. Obviously, there are currency controls in certain markets. But basically, any of those markets -- I could name any Central Asian state, with maybe a few exceptions, and any one of the (indiscernible) republics -- they are all of interest to us. Unfortunately, in Kazakhstan's particular instance, the entry into the market by acquiring this license does not seem to be, at this level of our understanding of potential pricing, does not necessarily justify the price that -- is not attractive enough for us the way we see it right now. There are other possibilities of entering this market.

Olga (indiscernible.

This is Olga (indiscernible) from CSFB. My question is on margin outlook. You are graded at the 50 percent, about 50 percent, as I understand correctly. What were the key drivers for this upgrade on the cost side, and some other issues?

It's Nikolay Tsekhomsky here. We revised our margins upward to around 50, as I said. The main reason for that is generally the pickup of our regional businesses and just overall positive view on the market right now.

So there are no specific cost items that we might see decreasing proportionately going forward?

I believe it's the economy of scale, (indiscernible), and basically all parts of our P&L are impacted. It's very difficult to say that there's one particular line which is driving this increase.

Bill Nord (ph).

I'm with Marvin and Palmer Associates. And as shareholders, we wish to congratulate you on a very fine operating quarter. The tax rate was high, as you had mentioned, for the quarter. When I look at your total taxes for the year, as in your numbers provided, it comes to a 29.2 percent tax rate. You had mentioned 28, and maybe you are using other numbers for your calculation, but it leads to my question as to some guidance on what the effective tax rate may be for 2004.

I believe that we correctly calculate 28 percent. In terms of our expectations, obviously, the major impact was from UMC. And the reason is that, as you know, the tax rate in Ukraine is higher; it's 30 percent. And effective tax is even higher than 30; it's actually around 36 percent.

The outlook for the next year is that it will be reduced. The tax rate has already reduced for 2004 to 25 percent. So we believe that the effective rate in Ukraine will decrease. However, the impact of Ukraine will still be substantial on overall effective tax rate of the group. So we believe that it will reduce approximately something around somewhere between 26 to 28 percent.

Anna (indiscernible).

Anna (indiscernible) from CIB. I have two questions. One was on the other financing expenses or income; you had a big positive in the fourth quarter, and I think you were saying this was due to associates. I wondered if that is a figure that we can extrapolate forward on a quarterly basis into 2004? And the other question was really on tariffs in 2004, if you're looking for tariff cuts, and basically what sort of expectation in terms of declines in permanent tariffs can we expect?

In terms of other expenses, (indiscernible) there were several one-offs in the third and fourth quarter as well. And to extrapolate this figure for 2004, you can use the annual results; it is the more correct information (indiscernible).

(Russian language)

We expect the slower pace of lowering of the tariffs, unlike last year.

Olga (indiscernible).

Good evening once again. This is Olga (indiscernible). I am sorry for repeating myself, but can you please provide us with the figures for value-added services revenues for the fourth quarter in Russia and in Ukraine?

Yes. I don't believe we answered the (indiscernible) previous question, so if you don't mind I'll ask Mikhail Susov to answer the previous question, and then Nikolay will handle the value-added services question.

(Russian language)

As was said before, the tariff this year flowed at a slower pace than last year, and it's not going to be any different from the market.

(Russian language)

In markets where all the major players are competing, the competition is going to be --

The competition is going to be primarily brand-based and brand-determined, rather than price-based and price-determined.

(Russian language)

In those regions where Megafon or (indiscernible) are not present or are going to enter, the price war is going to continue.

(Russian language)

We were not planning to lower the cost per minutes by more than 15 or 20 percent, 10 to 15 percent.

Nikolay Tsekhomsky here. I would like to answer the fallout from (indiscernible). The contribution of value-added services to the ARPU in Russia for the fourth quarter was $1.4, and for the full year 2003 it was $1.3. In Ukraine it's 90 cents for the full year and for the fourth quarter.

Tom (indiscernible).

Just a question on your churn. You mentioned that you have initiated this new dealer incentivization program. I am wondering what kind of churn levels you think you can achieve in 2004?

(Russian language)

The churn rate was high at 47 percent.

(Russian language)

We do expect our churn rate to decrease in 2004. In the first quarter we have seen a certain reduction in churn compared to the previous quarter, and it is at the level of approximately 10 percent on a quarterly basis.

(Russian language)

And we expect churn rate for the full year 2004 to be lower than 40 percent.

Alex Kazbegi.

I just wanted to find out about your minorities. I think you always had a plan to buy them out, so I was wondering if you had a number for 2004, or in terms of the overall funds you might be spending on buying out minorities.

Tatiana Evtushenkova will answer this question. We expect that we will not spend more than $200 million on the minorities. This included the first payment for UMC.

And that's in total or for 2004?

We have actually planned to finalize our minorities acquisitions by the end of 2004.

Andre (indiscernible).

Just one small question from my side. What is your expectation for your market share for this year, for year-end, in fact, for both Russia and Ukraine?

(Russian language)

In Russia during 2004 we plan to retain our market share. We don't expect it to decline significantly beyond the market share at the moment.

(Russian language)

And to be not less than 36 percent at the end of the year in 2004 for Russia. As far as the Ukrainian market is concerned --

(Russian language)

-- the competitive environment will largely depend on how aggressive the new entrant, DCC (ph), will be.

(Russian language)

We don't really expect DCC to become full-fledged competitor this year, and (indiscernible) we expect UMC, our 100-percent-owned subsidiary in the Ukraine, to maintain its leading position in the market with a market share above 50 percent.

(OPERATOR INSTRUCTIONS). Anna (indiscernible).

You're ForEx debt targets -- do you have a sort of a structure of what foreign currency you want, or structure of your debt you want to have at the end of this year?

Okay. When we refer to the potential new financing that we will attract this year, on the public debt we are going to be looking at dollar instruments, obviously. And the predominant part of the Company's debt will be dollar-denominated. We are likely to have the same currency in the ECA sponsored and bank loans that (indiscernible) that we will be attracting this year to finance our CapEx program.

We don't feel that the Ruble markets currently offer the level of terms or are competitive enough to go to these markets at this stage. And we think that predominately, as our company is a dollar-based one in terms of how we calculate our tariffs, we -- as well as to a significant degree, on the cost side, in terms of salaries and several other costs, significant cost items -- we are predominately a dollar economy. We are likely to, on the debt side, to also stick to dollars as the favorite currency for this year.

(indiscernible) I understand you correctly, you're saying (indiscernible) in dollars at the moment, too?

Say it again?

Your salary costs are set in dollars at the moment?

Yes. Our salary costs, our salary arrangements are pegged to dollars throughout the Company.

We have no further questions, sir. Please continue with any other points you wish to raise.

If there are no further questions, let me conclude this conference call. Ladies and gentlemen, thank you for taking the time to join our conference call today. The replay of the call will be available for the next ten days. Should you have any further questions, please do not hesitate to contact our investor relations department. Good bye.

This concludes the Gavin Anderson Mobile TeleSystems fourth quarter and full-year results conference call. May I please advise participants that the conference will be available on action replay within one our. Thank you for participating. You may now disconnect.