Mobile TeleSystems PJSC (MBT) 2004 Q1 法說會逐字稿

Welcome to the Mobile TeleSystems first-quarter results conference call on the 16th of June, 2004. Throughout today's 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.

Welcome to MTS first-quarter 2004 results announcement. Please note that the statements made during this conference call reflect the opinion of management as of the day of this call. Future developments may render these statements outdated, however we do not intend to update the guidance provided todate prior to our next quarterly conference call.

Reconciliation of our operating income before depreciation and amortization or IBDA to operating income can be found on the Company's website. By now you should have received a copy of our press release by e-mail. If not please send me an e-mail to IR at MTS.ru and I will send you the release immediately. I recommend you download the presentation regarding this conference call as indicated in the invitation sent to you. The presentation can be followed on our website at www.MTSGSM.com at the Investor Relations financial report section.

Our presentation team consists of Vassily Sidorov, MTS President and CEO, Nikolay Tsekhomsky, the Company's CFO, Mikhail Susov, Chief Marketing Officer and Tatiana Evtushenkova, Vice President for investments and corporate development. Following the presentation we will conclude with a question-and-answer session. You will be welcome at this point to address questions to MTS presentation team. Now I would like to hand over to Mr. Sidorov.

Thank you, Andrey. Ladies and gentlemen, good morning and good afternoon. The first quarter of this year was a successful one for MTS despite seasonal factors that usually have a negative effect on mobile phone companies during the first quarter. MTS performed very well in term of subscribers, revenue and its profitability growth. I would like to specifically point out that the Company was net cash flow positive this quarter. During the first five months of the year the number of mobile phone users in Russia increased from 36 to 46.9 million people. Reaching a penetration of 32.3 percent.

We are now raising our expectations on the mobile penetration growth in Russia from 38 to 45 percent; to over 65 million mobile phone users by the end of the year. Spectacular growth in the number of cellular phone users is driven by the increased affordability of mobile services to a wide range of customers and the increased capacity and coverage of mobile operators in GSM networks.

This year the focus of the Company's advertising activities shifted from promotions of particular (indiscernible) plans to a lifestyle and overall Company image-oriented campaign. Our new campaign called "people talk" has been very well received by the Russian audience. This year we also became the first operator in Russia to launch term contracts. Customers who sign up for annual contracts with us were offered a 15 percent discount on all local traffic.

This initiative was aimed at improving customer loyalty and attracting new heavy users into the network. In addition, we have started to benefit from last year's introduction of our nationwide unified set of (indiscernible) plans. In all to benefit from very strong brand recognition of both MTS (indiscernible) brand names enabling us to achieve economies of scale in advertising in national media.

Our marketing initiatives resulted in the growing market share in the Moscow region from 43 percent at the beginning of the year to 45 percent at the end of May. MTS accounted for 52 percent of net additions to the Moscow market during the first five months of the year. In May alone we added approximately 245,000 subscribers in Moscow, a record number for any operator in a single month.

The Company also managed to retain its 37 percent leading market share in Russia as a whole. During the first quarter of the year we added 2.5 million new customers, bringing our subscriber base to a total of 19.2 million at the end of March. Year-to-date the company subscriber base increased by 5.2 million to 21.9 as of yesterday. Today we have enough numbering capacity to accommodate our customers' demand in Russia.

A couple of years ago the communications ministry allocated MTS 10 DF codes, which provide for 100 million numbers. These number allocations are sufficient for us to continue expanding our subscriber base. Since the beginning of the year we have faced certain delays in obtaining the release of particular sets of numbers from our allocations. Due to the transitionary processes that affected different government bodies. We have maintained an ongoing dialogue with the communication of ministry and this issue is being gradually resolved.

As we originally projected, growth rates in the Ukrainian mobile market have proven to follow the same pattern as those in Russia. The Ukrainian market grew from 6.5 to 8.5 million people in the first five months of the year, reaching a penetration of over 16 percent. In line with the trends established last year MTS is 100 owned subsidiary in the Ukraine continued to grow its market share from 51 percent at the end of 2003 to 53 percent at the end of the first quarter. At the end of May the shares stood at 55 percent.

While talking about (indiscernible) I would like to reiterate the announcement we made last week regarding the office of (indiscernible) generals office regarding the claim in the Kiev (ph) city commercial court against MTS and a number of other parties, seeking to unwind the UK (ph) telecom's sale of its 51 percent stake in the Ukrainian company to us. We believe that MTS acquired EMC in full compliance with Ukrainian law. We fulfilled all the contractual obligations under the deal and believe there are no legal grounds to reverse our acquisition of EMC. We are currently considering all available legal options to defend our ownership rights in the Ukraine and we will keep you informed of the forthcoming developments.

Our continued focus on customer loyalty helped to reduce churn rates both in Russia and the Ukraine compared to the previous quarter. The reduction in quarterly churn in Russia from 12.5 percent to 10 percent can be partially attributed to the dealer commission deferral scheme introduced on February first. Under this new formula as we discussed in our previous conference call, we deferred dealer's commissions for up to one year and each month we pay only a portion of the amount of revenues we receive from customers assigned through respective dealers. I would like to stress that we have not increased the total size of our commissions.

Impressive growth in subscriber numbers is reflected in MTS's financial performance. Revenues in the first quarter were 808.7 million, up 81 percent compared to the same period last year. And net income was 207.8 million, up 159 percent year on year. The increased effective economies of scale has translated into positive EBITDA margin dynamics for both the Russian and Ukrainian businesses. As the result, the companies EBITDA for the quarter was at 54.5 percent. An all-time high for MTS. As I mentioned, MTS was free cash flow positive during the quarter, however we do not expect this to remain sustainable during the course of the year as our CAPEX accelerates.

We paid particular attention to developing new services and have started to contribute a greater portion to our revenues and at least partially compensate for the decline in voice ARPU. We've made an important step towards greater usage of GPRS by launching domestic and international GPRS roaming. We have tested and will soon be launching Agilent (ph) (indiscernible) services. We are also learning to be more proactive and planning to be more proactive in capturing the Y4 (ph) access services market.

MTS also introduces numerous new information entertainment services that are supported by constant (ph) providers. ARPU from value added services was $1.6 in Russia, which represents 11 percent of total ARPU, and $1.4 in Ukraine, which represents 10 percent of total ARPU. MTS's stable financial position and strong balance sheet allows us to pay dividends to our shareholders. The company shareholders meeting next week will decide on a dividend payout of approximately 221 million U.S. dollars or $2.22 per ADR (ph) as recommended by the Board of Directors.

This year we have continued working on our management change program, aimed at streamlining the Company's business processes and restructuring our regional business management. We have appointed directors to the newly created macro regions and from key managers to the macro regional level. The implementation of a new management system has been kicked off in two macro regions, Moscow and the Northwest and we have a tight schedule of launches for the other regions in the country this year. We firmly believe that the implementation of the new management system will further solidify the ground for additional efficiency gains.

In conclusion, I'd like to emphasize that MTS operates on a very fast-growing market and that we are the leading driving force of this growth. We remain optimistic about the Company's prospects for the rest of the year, and we will remain focused on further strengthening our market position and improving our operational efficiencies. I would like to pass the call to Nikolay Tsekhomsky our Chief Financial Officer for more detailed discussion of the Company's financial performance.

Thank you, Vassily. MTS (inaudible) continues to demonstrate strong financial performance in all markets where we are operating. Our financial results for the quarter continued the positive trend of 2003. When compared to the first quarter of 2003 our consolidated revenues increased by 81 percent and to approximately 809 million dollars with corresponding increase in net income by 159 percent to 208 million. As I just mentioned our year-on-year results were significant growth. However we also feel that due to dynamic growth in our operations during 2003 which were also driven by growth through acquisitions of either one of our businesses it is now meaningful to focus our discussion on analysis of Q1 2004 results when compared to Q4 of 2003.

Our revenues grew by approximately 5 percent, and net income increased by 36 percent. The revenue share of our operations in Russia totaled 81 percent of the total revenues and operations in Ukraine contributed 19 percent of the consolidated revenues. Increasing revenues is mainly attributable to growth in consolidated subscriber base during the quarter by approximately 15 percent. In addition, commencing January 1, 2004 and in compliance with our accounting policies, we revised estimated average subscriber life in Russia to reflect changes in the market and our business dynamics. Change in estimation results in approximately 10 million or 1.2 percent of additional revenues recognized in quarter one on a consolidated basis.

While commencing on the revenues, I would also like to briefly discuss our ARPU data. Average revenue per unit in Russia decreased from $16.3 in Q4 of 2003, to $14.7 in the first quarter of 2004. And from $15.4 to $14 in Ukraine for the same period. This decrease consistent with our expectations and overall market trends. In addition, with the change in subscriber base there are seasonal factors that mainly consist of historical high increases and (indiscernible) sales. These factors continued to have affect on our operations for quarter one, 2004 when compared to the previous quarter. Seasonal factors contributed to the decrease in sales of handsets and accessories by 17 percent, with a corresponding 18 percent or 11 million decrease in related costs.

In addition, our sales and marketing expenses are lower in quarter one of 2004 due to similar reasons, and trend includes lower dealer commission levels paid during the previous quarter. Our subscriber acquisition costs for gross additional subscriber in Russia in quarter one, a slight decrease to $23 compared to $24 in Q4 of 2003. Subscriber acquisition costs in the Ukraine quarter four was in the range of $26 while quarter one 2004 was $25, largely due to introduction of a new dealer commission scheme in Ukraine.

General and administrative expenses increased by 14 percent from 102 million in the fourth quarter of 2003 to 117 million in the 1st quarter of 2004. The main reason for this increase are (indiscernible) expenses growth by 14 million, increasing repairs and maintenance expense by 4 million. The latter is primarily driven by expansion of our network. The increase in the total expense was partially offset by decrease of property tax expense and more strict controls of our administrative expenses.

Bad debt provision expense as a percentage of total revenues increased approximately 2 percent or 6 million, while our methodology for calculating provision remained consistent we treated this lesser increase when compared to growth in revenues and receivables to our continued effort on improving creative control function.

First quarter or EBITDA was around $441 million, a 96 percent increase on the same quarter of 2003 and 10 percent increase on the previous quarter. EBITDA margin in the first quarter increased to 54.5 percent from 51.9 percent in the fourth quarter. The higher EBITDA margin in the first quarter is mainly explained by growth of revenues and slight net decrease of expense discussed before.

Change in currency exchange is driven primarily by increasing euro to dollar exchange rate and the fact that we have significant euro-denominated liabilities in UMC and increases in U.S. dollar and exchange rate to Ruble as we have significant ruble-denominated assets. Provision for income tax increased due to overall growth of taxable profit as a result of growth in revenues. Overall, the effective tax rate for this quarter remained consistent with prior periods and was approximately 29 percent on a consolidated basis.

Minority interest decreased due to the acquisition of minority interests in our subsidiaries, FECS-900 in quarter four, 2004. First quarter net income was at 208 million, a 159 percent increase on the same quarter 2003 as I just said before and up 36 percent compared to the previous quarter. In quarter one of 2004, we spent approximately $232 million on our capital expansion to acquire tangible and intangible noncurrent assets. $194 million was invested in Russia and $38 million was invested in Ukraine.

Our growth in 2004 is financed primarily with owned resources with no additional external financial resources were obtained during quarter one. Total debt decreased slightly from 1.7 billion at the end of 2003 to almost 1.6 billion at the end of this quarter. And net debt remained stable at 1.3 billion.

At the conclusion of my speech I would like to refocus our main results of the first quarter and update our operations estimates operations for the full year 2004. First, we believe that our revenues will increase 35 to 40 percent in 2004 over 2003. Secondly, CAPEX for the quarter was 232 as I discussed and we confirm our expectations for the year of 1.2 billion. And finally, our EBITDA margin for the first quarter was at level of 54.5 percent, and we would like to confirm our projections for the year of low 50s. Thank you.

Now I would like to open the floor for questions.

(OPERATOR INSTRUCTIONS) Alex Kazbegi.

Alex Kazbegi from Renaissance. Maybe just sort of two quick clarifying questions. One, you mentioned about the gradual resolution of the numbering capacity. Is it correct to understand that there is some development over the past two, three weeks in this regard and essentially the whole issue is resolved? And the second clarifying question is with regard to the increased penetration forecast which I believe you mentioned goes from 38 to 45 percent. Given that you are keeping your CAPEX unchanged, how this two sort of corresponds with (indiscernible) would you not expect the CAPEX to increase actually correspondingly as well? Thank you.

On the numbering capacity issue there have been some tactical solutions worked out between market participants and the ministry whereby we would not have to wait additional, significant additional time after the government passes a certain resolution that will allow the number issued to get resolved, at least the process to be established and the numbering issue has been resolved. What is being done right now is many things that could have waited or were originally scheduled to wait until such resolution gets passed by the government are being executed so that all documentation is ready at the time when the resolution gets past. So that means that whenever it does we will actually -- it will take us an extra day or so to get everything signed and resolved. So yes, this kind of temporary solution has been found and it will save us some time and at least limit or minimize the time period, the uncertainty time period. So hopefully the timeframe for the resolution will be shortened.

On the penetration side, and the CAPEX side, we even though we as we've said revised our penetration forecast for year ended 2004, we still stick to the original expectation or forecast for CAPEX of 1.2 billion for Russia and Ukraine.

So essentially you are not worried and confident that the numbering capacity issue will be resolved and you will not incur any delays in releasing any numbers?

There will be, certainly will be reallocations internally within the CAPEX program, both in region to region as well as in the type of equipment that we will have to borrow on the back of this growth. This will be done, and obviously this will be brought into compliance with the requirements of the market subscriber dynamics. The overall numbers so far we are not planning to change.

Okay, thank you.

Vladimir Postilotsky (ph).

Congratulations on great results. A couple questions if I may be. First one is on your M&A plans, obviously your cash flows are very strong (inaudible) your free cash positive even though it is not sustainable, I think dynamics is very positive. Do you have any update for us to where you are looking to, if you are looking to M&A activity and in particular when are you planning to complete the acquisition of your unconsolidated businesses within Russia?

And the second one is on the EMC, obviously it's the deep concern for investors at the moment; could you give a little bit more background for investors situation? What do you think is happening? Could you explain? What may be, what is the background for the whole thing so that investors could become a little bit calmer about the whole thing (inaudible)?

Thank you, Vladimir. On our M&A plans, as we've originally said as we have said before, we are planning this year to consolidate some of the stakes in companies that we own 50 or more percent of but do not own 100 percent of. The only company probably that falls out of our plans, consolidation plans is Recom, which we operate in some of the central regions. (inaudible) and most of the companies that we co-own with the (indiscernible) are likely to be consolidated in the next three, four, five months. So certainly by the end of the year.

As far as other M&A plans, we have always been and will be sort of cautiously opportunistic. There are things coming up in the CIS domain. We are looking at them. We are pursuing certain negotiations. There is nothing as of yet that we can say for sure has a strong likelihood of occurring. So there is nothing really to announce at this stage.

As far as the EMC it was a development that was rather unexpected for us obviously. The timing was also very awkward on the back of the freshly released details of the sale of one of the metals companies in the Ukraine. Also we've hired the legal advice that we need to work through the numbers and work through the details of the claims being made by the prosecutor general's office. There's not much we can add really to what has been publicized in the press other than the fact that we have -- it has been a really interesting procedural development. The actual documents had to be withdrawn by the prosecutor general's office because they forgot to translate them into Russian. So they are likely to resubmit them in a few days time. But that just shows you the level of unpreparedness of the attacker if I may use that word, but anyway we're not taking it lightly, we're taking it very seriously. We think it is part of a certain political (indiscernible), we cannot find any other explanation, but we will fight it in a court of law and we are getting all the legal background work done right now in light of the forthcoming hearings.

(inaudible)

(inaudible) from CSFB. Could you please tell us how the revision of the subscriber life estimates will impact the (indiscernible)amortization going forward in the next quarter? Will it be similar to what we have seen in the first quarter, or will it go back to the more normal 4 to 8 million we have seen in previous quarter? And could you please also tell us what the connection revenues were in Q1?

So this is the change in estimate is a regular performance by the management. We regularly review our assumptions, and in this particular case our estimation was we reviewed the historical data for the companies, and we changed the subscriber life for the accounting purposes for accounting for deferred revenue. And the change was from 30 percent or average 39 months to approximately 23 to 40 months. So this is the estimation which we will be used to going forward. Until the next revision of this estimation. So this is the constant change for the financial statements of 2004.

And to answer your second question about connection revenues, there is a slight increase in connection revenues from 15 million in quarter four 2003, to 19 million in the first quarter 2004.

Thank you very much and just to clarify the impact of the deferred revenue amortization has gone into ARPU calculation as well?

Yes, that's correct.

Okay, thank you.

Olga Zilinski. (ph)

This is Olga Zilinski from Nation's Capital. I have two questions. The first one is your MOU in Russia increased and in the press release you have stated that it was due to higher mobile traffic as well as increasing number of (inaudible) customers in the regions. Interestingly, (indiscernible) explained their decline in ARPU, but for the same reasons. Could you please explain this phenomena, and was it due to better structure of tariff in MTS or more wealthy subscribers signing in the first quarter? Thank you. And I will ask the second question afterwards.

Mikhail Susov, the company's Chief Marketing Officer will take this question.

(Russian language)

In the first quarter of the year we experienced a certain increase in MOU (multiple speakers) for the previous quarter.

(Russian language)

Mostly due to the increase in usage of our prepaid (inaudible)customers.

(Russian language)

We also experienced an increased (inaudible) per user for our pre-paid (indiscernible) customers in the first quarter of the year compared to the previous quarter.

(Russian language)

And it was $9.6 in the first quarter of this year.

(Russian language)

Compared to $9.3 in the fourth quarter of the last year.

(Russian language)

Usage of our (indiscernible) MTS subscribers did not change materially in the first quarter compared to the fourth quarter of last year. The average (indiscernible) for this customer also did not change in the first quarter compared to the previous quarter.

(Russian language)

However, the share of prepaid (indiscernible) customers increased in the customer mix, and they report they have a high usage.

(Russian language)

The branded (indiscernible) per user decreases while usage increases.

Thank you, and my second question is could you please provide us the breakdown for nonoperational gain of 10 million? According to my estimates Sprint telephone contributed around one million, and what was the rest? Thank you.

Other periods of income consists of equity pickup in our nonconsolidated subsidiaries which are Sprint telephone, Belarus and others. So in general this growth of net income particularly in Belarus is one of the major factors and also Sprint telephone. So it's generally these two entities which contributes most of other income.

Igor Ribicoff. (ph)

(indiscernible) from Thornburg. Could you breakdown please the new additions in Russia by Moscow regions and could you also comment on the difference in ARPUs?

(Russian language)

The growth in subscriber numbers in the first quarter of the year in Moscow compared to the fourth quarter last year was 9 percent.

(Russian language)

Which is 453,000 subscribers added in the first quarter of this year.

(Russian language)

We do expect and we do experience the accelerated subscriber growth in Moscow in the second quarter.

(Russian language)

So far in the second quarter we had the 460,000 subscribers in Moscow.

(Russian language)

Our subscriber base in Russia as a whole for the first quarter of the year increased by 15 percent.

(Russian language)

Which gives you a number of 1.97 million new customers in Russia for the first quarter of the year.

Could you also comment on if there is any difference in ARPU when compared to Moscow and the regions and how significant this difference is?

(Russian language)

We do not provide the breakdown of (indiscernible) user number for Russia and the regions separately.

Okay, and yet another follow-up, just going forward as you continue growing faster in the regions, can it change the balance of the capital expenditure per new subscriber otherwise regions heavier in terms of CAPEX per sub?

Of course as we are always discussing this issue when we grow in the regions, all elements of our capital investments are low in the region and in Moscow particular because all the elements of the costs is also lower so effectively capital expenditure per new subscriber in the regions is effectively lower in Moscow.

Okay, thanks.

(inaudible)

My question is regarding the introduction of Pushtok (ph) (indiscernible) you had mentioned. Can you tell us, how far are you from producing Pushtok and whether you encountered problems in deploying Pushtok in GSM?

We are currently testing the technology together with Motorola and Siemens and we are still in a testing mode. We've made some demonstrations; they were successful. No particular problems that would prevent us from a broad launch of the service in certain regions have been identified. At the same time, we are currently working on the exact pricing scheme to price the services than being geared towards smaller communities and kind of community-based traffic. So no particular problems envisaged, exact timing will probably stop short of giving you the exact date for the launch because it will differ from one region to another.

And are any of your other competitors thinking of or launching similar services?

It's difficult to comment on our competitors' plans. They might be considering the technology one way or the other, but we have no particular knowledge of their plans.

Tom Ferder. (ph)

Just a couple questions. Firstly, could you discuss what is driving your strong pickup in your Moscow share of net additions? And secondly, I was just looking wondering about the segmental margins EBITDA margins in Moscow and in the regions and what kind of progression you are seeing in both of those market segments. Thank you.

(Russian language)

During the past several months we implemented a number of measures to increase our market share in the Moscow market.

(Russian language)

We introduced changes to our tariff structure to our tariff plans.

(Russian language)

We also become even better in terms of promotion of our services and advertising of our services and brands.

(Russian language)

The fact that we had restructured our relationship with dealers was also important in our increased share of new additions in the Moscow market.

(Russian language)

Today our dealers in the Moscow market are more responsible for the quality of customers that they attract for us.

(Russian language)

We experienced not only increase in terms of net additions in the Moscow market, but we also experienced a reduction in churn in Moscow which does imply for even greater number of net additions in this market.

(Russian language)

To your second question about EBITDA in Moscow the way we look at our business is not -- Moscow is not a segment, so we cannot really provide you the Moscow EBITDA results. (multiple speakers) not lower than average for the group.

And what about in the regions, can you just comment on maybe where the trend is in terms of where you think regional EBITDA margins can come in on a sustainable level.

Regional EBITDA is also a good question because the region EBITDA varies from region to region; we have historically strong regions with about 60 percent EBITDA margin. And there are certain regions with where we just start off with a lower EBITDA margin. So I would say that the solid regional business provides us EBITDA margin of higher than 55 percent.

At the same time we'd like to stick to maybe somewhat conservative but still consistent forecast of a kind of blended going forward OIBDA margin staying at around in the vicinity of low 50s on a sustainable basis. Also one has to acknowledge that as we extend into the regions there are some economies of scale kicking in. For example, on the advertising marketing budgets obviously these are scaled in terms of the federal promotions of our federal tariff plans over to all the regions and therefore they do not have to replicate the same percentage of their costs or allocate to those respective budgets. So there are benefits to the margins in our regional businesses of centralizing many functions that we are scaling over to more and more regions.

Thank you. My major question is are you taking a hit in terms of your Moscow margins to grow your Moscow market share, but also that is being offset by very strong regional EBITDA margins?

Not really. We have recently actually gone down for example to give an example in our dealer commissions and I think the overall -- again we don't -- to segment or segregate Moscow as a separate business unit will be somewhat skewing the picture obviously because a lot of certain parts of its operating expenses are actually scaled over to a much larger territory. But I think on a blended basis there is no ground to think that our initiatives that we launched that help us strengthen the market share in Moscow will negatively affect our margins.

Nick Barnes. (ph)

I got two question. Firstly can I just clarify a point made earlier, which was the 10 million of deferred revenue that you recognized, was that taken within your revenue line? And then the 10 million of other income was effectively your income from associates in the quarter. Am I correct in thinking that?

This is correct.

Okay, thanks. And my second question would be could you give us a split of your subscribers at the end of the first quarter in Moscow between prepay and postpaid?

I will start with giving you the overall number for Russia where JEANS pre-paid customers were 57 percent of total. And we'll give you the number. Okay, the share of JEANS customers in the customer mix in Moscow was around 47 percent or slightly lower than for the entire Russia.

That's great. Just finally on CAPEX, given your (indiscernible)your penetration forecast for the year and maintaining your CAPEX in dollars, are you saying the cost of your incremental subscribers is decreasing this year? Is that because of lower CAPEX costs?

I would not draw that particular conclusion from the dynamic because at the end of the day our CAPEX for the year is going to be a P&L cash flow category. And to really calculate, to do proper calculation of your incremental CAPEX per net add, you would have to look at the whole cycle and a year is not necessarily the right or an ideal (inaudible) an ideal timeframe to add to estimate the CAPEX per net add. (inaudible) that's fair enough. But I would not draw the conclusion that we're actually adding customers at a cheaper price. Although there are some synergies; there are some one-off things that we will not have to repeat, such as for example we are installing iron platforms in the centers of our macro regions, and this will not have to be repeated as we grow in other regions. Therefore you could say that if you include these one off investments that are actually scalable to a growing customer base you would see a certain reduction in the CAPEX per net add.

Your cash flow CAPEX guidance for the year remains at 1.3 billion.

(inaudible)

We need to correct ourselves, actually JEANS were 67 percent of total subscriber base in Moscow at the end of the first quarter, so Moscow 67 percent and Russia was 57 percent as I mentioned.

Okay, thank you.

(inaudible)

I got two questions. One is concerning the interest cost in the first quarter, which calculated over your average debt level looks to show a dramatic reduction in your implied interest cost. I wonder if you could comment on that and if it sustainable or maybe has some one off factors. My second question is if you can give us an idea on the prepaid -- show of net adds what you expect for this year for Russia. It seemed in the first quarter that you had over 100 percent, so I wonder if you're looking for that sort of (indiscernible) picture to continue.

The major reason for the slight decrease in interest expense is certain changes in accounting process. The 6 million of interest expense were capitalized this quarter. Sorry it is not a change in accounting forces just basically outside change in the approach, so 6 million were capitalized. This will be similar in the next quarter.

Could you tell me how much it was in the fourth quarter because the interest expense then was 37 million versus 27 million this quarter?

In the fourth quarter we have substantial (inaudible) so basically this is a change what the more consistent application of the accounting policy would have.

Okay, thinks.

We still haven't answered the previous question.

(Russian language)

The share of JEANS prepaid customers and new additions (indiscernible) from 60 to 90 percent depending on particular regions.

(Russian language)

And as of yesterday JEANS subscribers were 64 percent of our total subscriber base in Russia.

So you are looking for a continuation at 60 to 90 percent share of net adds?

(Russian language)

We do expect the share of JEANS customers to continue to increase in the overall subscriber mix, and we expect the share of JEANS to the new additions to be in 60 to 90 percent range depending on particular regional marketplace.

Thanks very much.

Regina Bierstock. (ph)

My question regards, actually I have two quick questions. The first question is incremental ARPU. I was wondering if you could give the level for Russia versus Ukraine, previously you had mentioned a level of around 9 dollars. I was wondering if that was stable. And then my second question is regarding the 45 percent penetration. Does MTS still expect to keep its market share of subscribers for the end of the year?

(Russian language)

Incremental ARPU to use in Russia is in 9 to $10 range.

(Russian language)

And that is slightly lower in Ukraine in 8.5 to $9.5 range.

(Russian language)

We plan to retain our leading market share in Russia in 36 to 37 percent range towards the end of the year.

Thank you.

Olga Bestrova. (ph)

From CSFB. Two quick questions. First on the Ukrainian operations, what is your outlook on your EBITDA margins for 2004 and perhaps 2005? And your outlook for blended ARPU for the same period? And the second question is roaming expenses in the first quarter. Total service costs came in at about 96.5. I was wondering if you could give us the breakdown between interconnection line rental costs and roaming expenses. Thank you.

In terms of the margin for Ukraine obviously quite reluctant to give you exact figure for Ukraine. In general, Ukraine is in line with overall MTS performance at low 50s and we believe it is also sustainable until the end of the year.

Okay.

What was the second part of your question, you asked for the breakdown of what?

Of service costs because previously you were giving breakdown between interconnection and line rental costs and roaming expenses. And in the first quarter you recorded cost of services about 96.5. And I was wondering if you could give us the breakdown between roaming expenses and interconnection and line rental costs.

Interconnect and line rental for the first quarter is 65 million, and roaming expense is 32 million.

Okay, thank you.

Anna Ivanova-Galitsina from Dow Jones.

I have two questions, if I may. One is about your nonvoice services, what is the percentage of revenue now that you get from the nonvoice services and what is your projection for the end of the year? And if possible a question about borrowing. You said earlier this year that you planned substantial borrowing to cover some of your CAPEX. Do you have any clear plans? Thank you.

On the first part of your question on the value added services we were at 9.5 percent of both voice and data value added services for last year. We will be at 11 percent in Russia. We think that we will be in the vicinity of 11 to 12 percent for the year blended value added services contribution for both Russia and the Ukraine.

What was your second question?

The second question was about borrowing. You said that you wanted to do substantial dollar-denominated debt this year. Do you have any clear plans whether it will be a loan or a bond?

Based on the recent developments in the debt markets we have decided to opt for another alternative to the European market and are currently booking at a few syndicated loan instruments to replace our financing needs or to meet our financing needs for this year.

Okay. Thank you.

(inaudible)

I just had one question. Could you please comment on your expectation for penetration level in Ukraine by the end of this year? Thank you.

(Russian language)

We expect penetration in Ukraine to grow to 23 percent towards the end of this year.

(Russian language)

Which implies more than 10 million mobile phone users in this country.

Thank you.

Can we please have the last two questions for this conference call?

A follow-up from Mr. Vladimir Postilotsky.

Two questions if I may, the first one is on pricing. Maybe (inaudible) in case of (indiscernible) but quarter on quarter there was erosion (inaudible). Could you comment on that, do you see it as a sustainable trend? Obviously there are no price wars but there is a consistent pressure on pricing, or so it seems to be. Do you expect it to continue going forward or do you see any seasonal swing in Q4 and Q1? And the second question I'm terribly sorry, but I missed -- I did not hear when you were talking about the change in accounting forces that affected revenues. Could you please repeat what was the issue there are and what was the affect on overall (indiscernible)? Thanks very much.

Let me start with the second question. Yes, it was not change in accounting policy. It was a change in the estimates. Basically we changed the estimated life of subscriber. So effectively as we changed estimation of the life of subscriber to recognize our deferred revenues. It impacted our P&L, it impacted our revenue line by $10 million this quarter.

Is it a one off?

This is not one off. This will be our estimate going forward so basically we will recognize more revenues because we shortened the life of subscriber basically.

So more of connection revenue will be recognized, right?

That is correct.

Thank you.

(Russian language)

Indeed, the effective yield continues to decline.

(Russian language)

As JEANS prepaid subscribers increase in the total customer mix.

(Russian language)

And as we promote tariffs that offer cheap calls within the network.

Do you have any floor of internally to which you are prepared to go? Any minimum price you are prepared to accept?

(Russian language)

The effective price per minute will be in 8 to 9 cents range.

Olga Bestrova.

I think you did not answer my second question on the UMCR pool outlook for 2004 and 2005.

Sorry we missed that one, but we can answer it right away.

(Russian language)

We expect average revenue per user in Ukraine this year to be in the 11 to $12 range.

Okay, thank you and could you possibly give a breakdown between contract and prepaid if possible?

Post-paid average revenue per user in the first quarter was $35.4, and prepaid ARPU was 8.8 dollars, for the quarter, which does give you blended number of $14.

Yes, but in terms of the outlook for 2004.

We would expect prepaid ARPU to stay at roughly the same level with a slight erosion of postpaid while at the same time the lion's share of new additions in the market, is prepaid. Prepaid customers. And as a result we do expect the blended per user number to continue to decline during the year.

, Okay, thank you very much.

Thank you. Ladies and gentlemen let me conclude this conference call. Thank you for your time. A replay of this 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. Thank you once again.

This concludes today's conference call. Thank you for participating. You may now disconnect.