Mobile TeleSystems PJSC (MBT) 2004 Q2 法說會逐字稿

Welcome to the Mobile TeleSystems second quarter results conference call on Tuesday, the 31st of August. 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. [Caller Instructions] I will now hand the conference over to Mr. Andrei Braginski. Please go ahead, sir.

Thank you, and welcome to MTS second quarter 2004 results announcement. Please note that statements made during this conference call reflect the opinion of management as of the date of this call. Future developments may render these statements outdated. However, we do not intend to update this guidance provided today prior to our next quarterly conference call. A reconciliation of operating income before depreciation and amortization to operating income can be found on the company's website. Our presentation today consists of Vassily Sidorov, MTS President and CEO; Nikolay Tsekhomsky, the group'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 the MTS presentation team. Now I would like to hand the call over to Mr. Sidorov. Vassily

Thank you, Andrei. Good evening and good morning, ladies and gentlemen. It is is my pleasure to begin this conference call to discuss the company's financial and operating performance in the second quarter of 2004. During this quarter, MTS maintained or strengthened its leading positions in Russia and other countries of the CIS by significantly increasing its customer base, consolidating ownership in some of its subsidiaries, and further improving the strength of its financial performance. The markets in both Russia and Ukraine continued to demonstrate impressive growth rates during the second quarter with mobile penetration reaching 34% from 29% in Russia, and 18% from 15 in the Ukraine. By the end of the year, we expect mobile population in Russia to grow to over 66 million, and in the Ukraine to over 11 million; representing penetration levels of around 46% and around 24%, respectively.

During the quarter, our company added 3.6 million new customers. Expanding its consolidated subscriber base to 22.8 million as of the end of June. We successfully retained our leading 37% market share in Russia and further increased our market share in the Ukraine to 55%. Among other reasons, our market leadership is based on very strong brand recognition, superior network and customer service quality; as well as well structured plans. Another positive development for MTS was that, during the summer, the company regained its leading position in Russia's key market, Moscow. The market in Belarus, where MTS is present via its 49% joint venture is also developing very dynamically. By the end of the quarter, 16% of the country's population used mobile services. MTS' joint venture further expanded its market share to 46% providing services to 0.74 million customers. In addition, the company's efforts to improve customer and dealer loyalty started to payoff. These efforts included introducing changes to our dealer relationships which were aimed at giving them less incentive to rotate customers, and the term contract plans that MTS started introducing in Russia from April. As a result, quarterly churn in Russia declined to 7.4% and church in the Ukraine declined to 5.2%.

During the second quarter, we're continuing to consolidate ownership in our subsidiaries in Russia. At the end of the quarter we acquired the remaining 50% in Primtelefon, a mobile operator in the far eastern and Siberian parts of Russia. During the quarter, we also increased ownership in our Omsk subsidiary to 91%, and in our Udmurt subsidiary to 100%. Full control of our joint ventures in Russia allows us to better manage our regional businesses and fully consolidate these ventures into MTS' operation. MTS maintains its interest in further expanding into the CIS country. Recently MTS made a significant acquisition outside of Russia in Uzbekistan, the third largest CIS country in terms of population. Expansion into the Uzbek market is in line with our strategy of exploiting growth opportunities outside the company's existing markets and further strengthening its position as the leading mobile operator in the CIS region.

The acquired 74% stake in Uzdonrobita, the largest mobile operator in Uzbekistan, for $121 million and signed call and put options to acquire the remaining 26%. This acquisition immediately propels us to the position of a leading player in this market. Uzbekistan's mobile service dynamics have made -- have many similarities to those of the countries in which we already operate. The Uzbek market is characterized by a very low mobile penetration load, just 1.5%, providing ample opportunity for expansion. Our experience of domestic and international business development will enable us to scale our managerial, marketing and technical expertise to our best advantage in this new market.

Before concluding I would like to take a moment to update you on the legal case brought in June by the prosecutor general's office in the Ukraine, which questions the legitimacy of MTS's purchase of Ukrtelecom's stake in UMC. As you may be aware, the Ukrainian court rejected all the claims on August 1 2. We believe that this decision was testimony to the strength of our legal case. While we understand the prosecutor general's office did not appeal this decision and the deadline for appeal was August 25, it was made public yesterday that it had asked Ukraine's constitutional court to clarify whether the sale may have breached the country's prioritization legislation. If the constitutional court accepts this request, it has up to three months to review the case. We remain confident that our purchase of UMC in 2003 was made in full compliance with law and we would like to ensure that you that, if necessary, we will continue to use all of the legal resources we have available to prove the integrity of our purchase.

I would like to summarize by saying that we continue to remain focused on expanding the company's business, to make it even more efficient, and to deliver on our promise of creating value for our stakeholders. I would now like to hand over to Nikolay Tsekhomsky, the company's CFO, to discuss the company's financial performance. Thank you. Nikolay.

Thank you, Vassily. MTS did indeed continue its outstanding growth during the past quarter and first half 2004, with total revenues for the first six months almost equal to the nine months revenues in 2003. When compared to the first quarter of 2004, our consolidated revenues increased by 14.4% with corresponding EBITDA increase of 18.3% and net income increase of 28.7%. During the second quarter, we demonstrated a record high EBITDA margin of 56.8% and we believe that our EBITDA margin for the year will be in the mid-50s level. The revenue share of operations in Russia amounted to 79% and our operations in Ukraine contributed 21% of the consolidated revenues. In Belarus, revenues of our unconsolidated subsidiary totaled 50.4 million for the first six months of the year, with EBITDA margin for the same period at 50.7%. The increase in our service revenues during the second quarter was caused by a number of factors. I will mention just the most important. Growth in the consolidated subscriber base during the quarter increased to approximately 17.5%. MTS loyalty and brand awareness advertising programs took effect. We also continued our investment in network development on all markets in which we have the rates.

During the first months of 2004, we experienced a slight decrease in hand set sales as compared to the same period in 2003; as most of the new customers signed to our network with handsets purchased elsewhere. While commenting on the revenues, I would also like to briefly discuss our average per user data. As disclosed in our press release, we have made insignificant adjustment to our previously reported quarter one ARPU number in order to make the calculation consistent with previous quarters, previous periods, and quarter two. Comparing our revised quarter one and quarter two ARPU numbers, ARPU in Russia remained flat quarter-on-quarter in 2004, and increased by 68 cents in Ukraine. The 7.9 increase in our selling and marketing expenses in the second quarter compared to the first quarter was primarily due to increase in our advertising activities, including launch of two new campaigns, in 2004.

Seller commission expense increased only by 1%, mainly due to the introduction of our new dealer compensation system in February, 2004 whereby dealers operate commissions only after revenues from subscribers are received. This is largely a timing difference, and we expect dealer commissions to remain at relatively stable levels through the rest of the year. Changes in currency exchange was primarily driven by the fact that over the total roll, we had net ruble assets position in both quarter one and quarter two. The ruble to US dollar rate decreased in quarter one by approximately 4% as the result of the appreciation of ruble, and increase by 1% in quarter two resulting in a foreign exchange gain in quarter one and subsequent loss in the following quarter. This change in exchange gains and losses was also the largest contributor to the decrease in our effective tax rate in the second quarter compared to quarter one.

In quarter two, 2004, we spent approximately 244 million on our capital expansion to acquire tangible and intangible noncurrent assets; 182 million was invested in Russia and 62 million in Ukraine. We would like to increase our CapEx guidance for the year 2004 to $1.4 billion from 1.2 billion announced before. Our growth at the beginning of 2004 was financed with your our own resources, as no additional external financial resources were obtained during the first quarter. During the second quarter, we drew on a 200 million bridge loan to partially finance the repayment of 300 million euro loans. Our total debt decreased from 1.7 billion at the end of 2003, to almost 1.4 billion at the end of -- at the end of quarter two of 2004; and net debt from 1.3 billion to 1 billion. Our net debt to the most recent 12 months EBITDA, the ratio at the end of quarter two, is 0.6; indicating a healthy level of business leverage.

At the start of the third quarter, we signed a 500 million syndicated loan with a number of leading international banks. Due to our strong market position and excellent financial performance we were able to negotiate an interest rate of 4.45%. Remarkably low considering current market conditions. During the second quarter, we remain cash flow positive, primarily due to our relatively low level of acquisitions. However, it should be noted that during early quarter three, we completed a number of acquisition transactions, including the acquisition of 74% stake in Uzbek Uzdonrobita for 121 million. Also, consistent with our strategy to consolidate 100% interest in our subsidiaries, we recently exercised a call option to acquire the remaining stake in Thai's Telecom for $63 million. And acquired the remaining 50% stakes in our Astrakhan and Volgorad ventures. We will continue with our minority acquisition strategy for the rest of 2004. To conclude, I would like to emphasize that MTS continues to demonstrate positive trends in our activities set in 2003. The company consistently implemented strategy to maintain number one position in Russia and in central and eastern Europe. Thank you.

Thank you, Nikolay, and now we are prepared to take questions from the audience.

Thank you, sir. [Caller Instructions] Our first question comes from Mr. Alex Kazbegi. Please state your company name followed by your question.

Yes, good afternoon. Alex Kazbegi from Renaissance Capital. The first question I wanted to ask was that looking at your margin performance, which was obviously very exceptional, I was wondering how much of the improvement in the margin was coming from the regional restructuring which MTS had launched in the beginning of the second quarter? Namely, should we expect any further potential improvements in the margin going into the third quarter, especially in Russia given that the regional restructuring is still an ongoing process? Second question, if I may, is just to clarify also the effective tax rate which the company paid in the second quarter, was about 21% versus 29 in the first one. Quite a large deviation there. Maybe normal quarter-on-quarter, but in general, what should we be guided towards the end of the year? Thank you.

Alex, on the margin performance, there are indeed effects relating to the economies of scale in the business that we believe will be fully realized once we restructure the company in accordance with the new model of the way we expect to manage the business, and we have started managing the business to a large extent. These have already started to kick in, but as we've said before, there are other tendencies working in a different direction, such as the inflation of certain cost items that hit the bottom line negatively. So there will be two different tendencies affecting the bottom -- the profitability lines and, therefore, we will stop short of saying that we will -- we can still improve margins significantly. For the next couple of quarters, we don't believe the margins are going to be dramatically hit by these inflationary pressures. At the same time as we've said before, I could only repeat that over a medium to long-term period, we believe that low 50s are a more sustainable profitability level.

Thank you. And on the tax side?

As I mentioned in my speech, that you correctly recognized that this quarter we have 21% effective tax rate, compared to 29% in the previous quarter. However, if you look at the six months effective tax rate, you will see that it will be -- it will be around effective or statutory rate of 24+%; so actually it's 25% for six months. The main reasons for these changes within the period is the changes in foreign exchange. So, as I mentioned, there was 4% -- 4% appreciation of ruble in the first quarter, and then was 1% depreciation, or falling, of ruble in the second quarter. As a result--as a result and effectively as a result of these gains and losses, you have changes in the taxation. However if we take the total full year, or we review on a full year, our forecast is to be closer to a statutory rate or, as we previously said, around 25, 26%.

Okay. Thank you very much, Nikolay.

Our next question comes from Mr. Vladimir Postolovsky. Please state your company name followed by your question.

Good evening, gentlemen. It's Vladimir Postolovsky from Brunswick UBS. Just a couple of questions, if I may. The first one, you mentioned something on Thai's Telecom and I couldn't hear it quite well. Have you exercised the option or are you planning to exercise the option to acquire the remaining stake there? That would be the first question.

And the second one, just coming back to tax, I was under the impression that your effective tax rate, on average, fluctuates around 28, 29%; and is actually quite consistent with VimpelCom and that was down to the fact that there are some expenses that are not allowed by the Russian tax authorities. So are you now saying that, in fact, going forward we're going to be closer to the statutory rate and this non-allowed expenses is no longer an issue? So just wanted to clarify that one as well.

And finally, the third question is about effective interest rates. For the second quarter in a row it's somewhere between 6 and 6.5%, significantly below what you actually can attract that at. The only explanation I can come up with is that it's capitalization of interest. Is that the case? And if yes, it the practice you're going to maintain going forward? Thank you.

Let me answer the second question. You are correct, that's a correct assumption to say that this certain amount relates to the deductibility of some expenses; and, as I mentioned before, the biggest part-- the biggest part of this tax, the effective tax inflation, if you want, is the for ex. So for your model, I think you can -- well for the modeling, you can use 26% as a tax for -- for the whole group of MTS, considering that we have a higher tax rate in Ukraine, and also still there are a number of expenses which are still not deductible in Russia and Ukraine.

Okay. Thanks very much. It's still going to be a significant reduction from 28, 29% you used to show historically. I mean, I was just wondering whether there was any specific reason for the decrease in the effective tax rate from the levels that it used to be at?

No, I would -- I would use 26, 27%.

Okay. Thank you.

Vladimir, on the first question, we are -- we have started the procedures relating to the exercise of the call option for the remaining Thai stake. The deal has not closed yet. We will make announcements in due course when the deal in fact closes.

Thanks.

As about interest capitalized. In quarter one, we capitalized around 7 million of interest, and in quarter two around 8 million; so quite consistent quarter-on-quarter.

And you're going to maintain this structure going forward, right?

That's correct.

Thank you very much.

Our next question come Mr. Havay Juray. Please state your company name followed by your question.

Yes, good afternoon. This is Havay Juray from HSBC. Two questions if I may. The first one is, you have increased your CapEx forecast guidance. Do you anticipate, looking forward, especially for the second half of this year, accelerating growth and is it the explanation why you are increasing your capital expenditures guidance? And my second question is, I'm sorry to come back on this effective tax rate. On your P&L, in terms of detail, you show that the currency impact in terms of gain as being --has impacted the P&L by around 5 million but your change of effective tax rate from 29 to 21%, give, you know, a reduction in tax in the region of 28 million which, I mean is quite different from only the $5 million coming from the FX. Were there any other one-off items in the calculation for taxes or is it a change of your accounting practice towards tax? Thank you.

On your first question, the first and primary foremost explanation is obviously in the fact that we have -- the market has been beating our own forecasts, numerous times, and apparently, once again so this year. So we've had to invest much more in certain regions than we had originally envisaged. We are also launching new regions at a pace that we believe is going to accelerate in the remaining part of the year. We are expecting to launch 11 more regions by the end of this year. We have entered into certain regions, some of the regions we got licensed for only in the beginning of the year, and we had not previously included them in the particular schedule for launches this year. Now, we have and, you know, they're on track to be launched this year. It is also a question of, obviously, the usage patterns and the load -- the traffic load that we have between subscribers on, you know, the intranetwork traffic that is growing and that we also have to incorporate in how we -- how much additional-- we invest additional funds into CapEx. So it's driven by growth in subscribers and usage and traffic and it's also driven by new regions.

Okay. So does it mean we can -- we can conclude from that that you may see some accelerating growth in the second half? Compared with the first half? In terms of supply.

I think we're going to be in line with what we are projecting, you know, which is to -- against the penetration forecast that we have announced, you know, to, more or less, retain our market share in Russia; to retain our market share, or grow market share in the Ukraine; to grow, further grow, our market share in Belarus. So I guess, you know, that, you know, one makes one's own calculations. It will be in line with our forecast for growth for this year.

Okay. It was second question on the effective tax, if you may give us sort of more insight, if it's possible.

Absolutely. The problem is very simple. The thing is that our tax return, effective currency for tax return is rubles and effective currency for financial statements as you see here are dollars. So the ForEx. which we are disclosing in the P&L is ForEx related to change from our ruble position. However, in the tax return and obviously our effective taxation is based on Russian tax returns, statutory tax returns, you have the opposite situation. So for example, if you have-- in US GAAP financials, you have a net asset position in rubles, because we have VET, and so on; and obviously, all dollar denominated positions will be neutral for US GAAP financial. For Russian statutory tax return, you will have substantial debt and changes which is definitely dollar denominated; the substantial changes in currency, or even that not -- very substantial, 5% change in exchange, obviously leading to substantial changes in ForEx in the ruble treatment. So as a result you have the kind of opposite situation with the ForEx.

Okay. So does it seem that -- I mean the effects of currency, you know, translation loss you put in the U.S. GAAP P&L in fact undervalues the impact of what you have in a ruble denominated accounting standards, where your tax payment is based? Am I correct in saying that?

That's right, yes. It's linked to -- basically to ruble, as an effective currency.

Okay. Thank you.

Our next question comes from Mr. Jean Charles Lemodle. Please state your question, followed by I by the question.

Yeah, Jean Charles Lemodle from J.P. Morgan. Just a question on the subscriber penetration potential, you talk about the 46% at the end of this year. VimpelCom is stating that, you know, because essentially 30% of the Russian population will never be served by mobile networks because they're in remote rural areas, they expect a significant slow down once we hit 50%. Can you address specifically this issue of, you know, exactly how large the addressable population is? And you know, exactly how large a section of the population that's in remote areas is specifically? And the second question is, we're hearing, you know, speculation out of Turkey that you might be interested in buying the Telesim operator there. Is -- can you just comment on that and if it's true, can you just restate again your international expansion strategy? Or philosophy, sorry.

If I may, I will start with the second question. On Telesim, we have looked at this opportunity before. We are not considering it right now. We've weighed our risks with regard to this particular target and we believe they were a bit excessive with the amount of money that would have been involved in this transaction, and we just decided against recommending to the board.

As far as the strategy of rural, we are usually applying three criteria to potential targets. One is growth potential for the market and the company. Second, price of the target, which has to be reasonable. It has to be -- it has to fall into a positive calculation for the acquisition. And thirdly, the regulatory environment has to be understandable and transparent and you know sufficiently workable for us to enable us to operate on a competitive and transparent basis. And these are the three criteria that we apply.

Applying those criteria, there are certain countries that immediately fall into the realm of our immediate interests, and these are all -- basically all of the CIS countries. There are some European countries that potentially fall in -- could fall in this set of criteria. We are cautiously opportunistic. We always are very mindful of the returns that we need to get on these acquisitions and, therefore, we are not, in some cases, prepared to pay top bucks for something that "geopolitically" falls within our strategy. So that, you know, limits the geography of our potential expansion to basically, you know, maybe a couple dozen countries. But again, that being said, we are being opportunistic in a positive way, so we look at targets as they come in, and primarily staying focused, you know, -- focused on the territory that I've mentioned which is the CIS and the neighboring -- some neighboring European countries.

There's been some resurfacing of some concerns over maybe India and Pakistan. Is that still --

We are not as of today, and we have not and are not, as MTS, considering any particular acquisition targets in either Pakistan or India.

Okay.

To answer your first question on the potential penetration levels in Russia. We're perhaps a bit more optimistic on the market development in Russia compared to the competition. As we said-- as we said, by the end of the year, we expect the penetration to grow to 45, more close to 46%. For the year en '05, we're looking at around 60, 65% potential penetration. And towards the end of '06, at perhaps around 75%. And in the main metropolitan area in Moscow-- in Russia, Moscow, we are looking at around 100, almost -- at around 100% by year-end. And perhaps -- and perhaps even exceeding 100% in '05, '06, we are looking at somewhere 116% penetration for the main city.

Just a follow-up. What about the -- this comment by VimpelCom that there is a large section of the Russian population which is not going to be economical to cover because it is too disbursed and too remote. Do you have a comment on that, do you have an estimate yourselves?

We perhaps agree that a relatively significant part of the Russian people will never be using, or in the foreseeable future, will not be using mobile telephony. At the same time, we'll continue to execute the plan that we've noticed over the past months, pr past few years, that many people have more than -- have more than one mobile subscription, many people have more than one sim card.

Do you have an estimate for what the ratio of sim card to actual users is? Right now? In your network?

Looking at the Moscow amount, we estimate that not less than 5% of mobile subscribers have at least -- have more than one sim card.

Okay. Thank you very much.

Thank you.

Our next question comes from Mr. Olga Zilinska. Please state your company name followed by your question.

Good evening. This is Olga Zilinska from Renaissance. Two questions, if I may. The first one is what was the main reason for 4% decline in Russian ARPU? Was it the dilution of the subscriber base, or new tariff initiatives and increase in Internet work traffic? And do you expect the same pressure on ARPU to continue? And in what regions of Russia it will be more profound? My second question is what was your incremental ARPU in Russia in the second quarter? Thank you.

First of all, I would like to say it again that ARPU in Russia was stable, flat, quarter-on-quarter, at 14.1. And I also described the change we made, the slight change, that is the small adjustment we made in the first quarter to correctly reflect ARPU in accordance with our policy. So the first quarter ARPU is also 14.1.

Thank you. I didn't hear that.

To answer your second question on incremental, average revenue per user in Russia. In the second quarter, incremental average revenue per user in Moscow was around $10. Average for Russia is around $8 And Ukraine, it is around $13.50.

As far as the -- for further pressure on ARPUs, obviously we've stated before that we never -- we never lead in terms of price aggressiveness, unless we come in--into a given region, you know, being number five, number six. That being said, there is a certain competitive environment within which we have to operate and sometimes the other players are much more aggressive in price, in cutting their prices and then, you know, being extremely aggressive on tariffs and, obviously, to a certain extent we can withstand this pressure; but at some point we have to go with the flow. Being mindful, obviously, of the margins that we really want to maintain, we are really very conscious of the profitability as a key KPI for us as the management of the company. So there will be pressure, and these pressures will -- coming primarily from the other players in the market, and if you look at any, you know, highly penetrated market with a significant number of players, you will -- you should be expecting further price pressure in all these markets and Moscow, actually, will not be an exception either .

Correct. Also incremental average revenue per user in Ukraine was $9.

Thank you.

Our next question comes from Mr. Martin Taylor. Please state your company name followed by your question.

The company name is Tamdrove Capital. I had two questions. The first one relates to working capital. In the first -- well for the last three quarters, your working capital management has been excellent relative to your sales growth. Are there any special factors and do you expect that to continue? And then the second question relates to your provision for doubtful accounts in the second quarter which was quite low. Again, are there any special factors there and what kind of level do you think we should expect going forward? Thank you very much .

Excuse me. Referring to working capital, you mean short-term assets versus short-term liabilities?

Sure, sure, absolutely, yeah.

Well, talking about working capital in the second quarter, actually, we're reflecting sort of negative working capital. The reason for this is generally the accounting for -- the dividend accrual at the end of the second quarter, because we had our general shareholder's meeting on the 30th of June and the announcement of our dividend of $220 million. In addition to that, we have the short-term payable of -- repayment of our bond in December, so it's another 300 million. So overall, I think these are the major factors. So we believe that definitely working capital will be improving in the next quarter. As we -- as I already mentioned, as we raised additional financing, we -- we have the-- we attracted $500 million new debt, of which we have drawn only 200 in the third quarter. So we will replace the short-term liabilities with the longer term liabilities. So we will move to a positive working capital.

Uh-huh.

In terms of bad debt provision, there are a number of outdated and manual procedures which were introduced into the company since there was a problem with bad debt in 2000--in the beginning of 2003, so we continue to improve this area; and as a result, our bad debt provision is going down substantially.

Okay. And can I ask one final question as well? In terms of minority interest, how materially will that -- will the run rate of the minority interest be impacted by the acquisitions that you've made since the beginning of the second quarter, including obviously those acquisitions you've made so far this quarter?

Well, minority -- you referred to P&L?

Correct.

Minority interest, first of all, will reduce going forward because of consolidation of Primtelefon which we acquired the second 50% at the end of the second quarter. So you still have the minority interest of basically -- in the P&L side, you will still see it in this P&L. But, obviously, starting from the second -- third quarter, this part will be consolidated. However, the same issue with Thai's Telecom. But you will still see Belarus which we own 49% of.

Could you give me an idea of what percentage -- the $9.5 million minority interest charge in the second quarter, how much of that, in dollar terms, was accounted for by Primtel?

So the total decrease in minority interest is 11.6 million.

So in millions of dollars how much of the minority interest in Q2 was Primtel, please?

Sorry, in Q2, it was zero. It was none. Sorry, it was my mistake. In Q2, because of consolidated, there is not enough info of Primtel.

So Primtel was consolidated at the end of the -- at the beginning of --

That's right, that's correct.

Okay. Alright. Thank you very much.

Our next question comes from Mr. Constantine Chernyshev. Please state your company name followed by your question.

Go this is Constantine Chernyshev from Nikoil Company. Could you provide information on the share of non-voice services in MTS revenues in the second quarter?

Now, the data that we provide relates to value added services, both data and voice. The share of value-added services for Q2 was actually -- was actually 9.3% of revenue, for-- overall. Which was seasonally, slightly lower than what we had in Q1 of this year, which was back down at 11%. Of the overall value-added services contribution to revenue, about 60% comes from data-- 60, 65% comes from data and the remaining part comes from voice services.

Thank you.

Thanks.

Our next question comes from Mr. Tom Ferda, please state your company name followed by your question.

Good afternoon. Good afternoon, it's Tom Ferda with Citigroup. Just back to the pricing strategy in the regions, particularly, your competitors are also saying that they are not really driving the lower pricing trends that we're seeing in the numbers; and I'm just wondering what your take is. And, particularly, since you say you're not driving the price trends, then who is, for example, pushing prices lower? That was my first question. And then my second question is regarding your CapEx, particularly in Moscow, and I was wondering if you could give us an indication of what you expect this year, your CapEx in Moscow to be. Thank you .

As we've discussed so many times, MTS is not the price aggressor in the market. Most of the regions we operate in Russia, which are -- we actually will have higher tariffs compared to the competition. Perhaps with a few exceptions for the regions where MTS is a very late entrant into the market, into the license allocation. Often, when we -- sometimes when we come to a new market, where we're late arrival to the market, we introduce certain temporary reductions on our tariff with the aim to increase rates again, when we establish a certain market share in the new region for us.

Hi. Tatiana Evtushenkova, I'll answer the second question, the investments in Moscow in 2004 is planned to be around-- the CapEx, sorry is around $200 million. Thank you.

Thank you. Could you also give us any guidance on --

Excuse me sorry, I -- it is 400.

Sorry, so 400 million this year?

Sorry.

In Moscow? Yes, is that correct?

Yes, that is correct.

Yes, that's correct. Around $400 million dollars in Moscow, the CapEx.

Thank you. And then just on UMC, if you could also give us that CapEx guidance. Has that changed at all?

The CapEx in Ukraine in 2004 will be slightly more than $250 million. Thank you.

Thanks.

The next question comes from Ms. Mayesa Golubeva. Please state your company name followed by your question.

Good morning. This is Mayesa Golubeva from Aton. My first question is on whether you plan any new customer retention initiatives, in particular connected with some pricing discounts. And second question is, there are line items called other operating expenses on your P&L was down 9% quarter-on-quarter. So could you please comment on this, and what can we expect from this item in the third and fourth quarter? Thank you.

We need the second question. Can you can repeat it, please?

The item on the P&L statement, which is called other operating expenses was down 9% quarter-on-quarter. So I wonder what does it comprise, and what was the reason for the decrease -- the sequential decrease and what can we expect quarter-on-quarter.

Alright. We'll go to this, thank you. The first question.

We're definitely are planning a few marketing promotion campaigns in Russia to attract new customers. But this will be relative to packaging of existing tariffs and offers, rather than price reductions. So the new -- the new promotion offers will be structured the way not to reduce the effective price per minute.

I'm sorry but my question related to customer retention, not customer attraction.

Recently, we came with a number of initiatives to retain some of the more important users in our network, in particular the discounts for customers that sign a term contract with us. The two marketing initiatives this year was first the reduction-- 15% reduction on calls for a customer that signs -- signs a term annual contract with us. And the real recent initiative was a 50% discount for conference customers but -- but to get this discount, the customer has to pay an additional monthly fee. As a result, as a result, we do not -- we don't really expect a decline in the effective price per minute because of the -- of this recent -- of this recent initiative.

Thank you.

About your question on other expenses and income, generally, we reflect here first of all our equity pickup from the companies which we own less than 50%. This amount is consistently around $6 million. Also, we reflect here some one-off items. And in the first quarter, we reflected-- and I think we discussed it in the first quarter, that we reflected 4 million recovery of previously written-off debts. So I would say the 4 million in the first quarter is one-off and 6 million would be consistently -- you can use it consistently as other expense. Or other income. Thank you.

Thank you.

The next question comes from Mr. Steven Pettifer. Please state your company name followed by your question.

Good afternoon. Steven Pettifer from Merrill Lynch. I just wanted to ask you, please, about Moscow market share, whether you could tell us how important it is for you to retain leadership there, especially given that we heard from VimpelCom last week that they're quite keen to take back market share and whether or not have you any thoughts about whether we should expect further pricing pressures in Moscow. I think as you've already indicated or indeed whether you think subscriber acquisition costs in Moscow will start to rise as a result of that. Thanks .

Indeed, MTS has returned its leadership position in the Moscow market. We gained the market share, as we -- as we had the better marketing campaign in the market compared to competition. We also significantly increased the customer loyalty and, thus, decreased churn in the Moscow market. As a result, we've caught up with the competition adding an extra half a million customers. In addition-- in addition, VimpelCom had to churn customers during the summer months of the year because of the lack of the numbering capacity in Moscow. With the arrival of the numbering capacity for the competition, we expect VimpelCom churn to somewhat decrease which may give VimpelCom a chance to catch up with us bit. We give our word that we won't be initiating any price reduction in the Moscow market in the -- at least in the short-term.

Thanks.

As far as the acquisition costs the matter of the fact is that most of -- a significant portion of our advertising expenses are -- is centralized in Moscow, and to segregate Moscow's site from that of the regions would yield a figure that would be somewhat distorted so we'd rather present the overall figure. The blended figure.

Okay. Thanks.

The next question comes from Ms. Sunnen Bilgin. Please state your company name followed by your question.

Hi, this is Sunnen Bilgin from Alliance Capital. I have one question on CapEx. First of all, could you give some guidance on next year's CapEx? Also if possible what a break down on Ukraine and Moscow as well. And also, the second question is on your CapEx guidance this year, 1.4 billion, where did the increase come from? Was it mainly a revision Moscow? Because the Moscow CapEx seems to be quite high. Or was it an increase in Ukraine or in the regions? And also, how much are you planning to spend on acquisitions?

As far as our CapEx expectations for next year, we do not expect the figure in absolutely terms to be significantly different from what we will -- what we've just presented as a re-write figure for this year. As far as the break-down between the regions, I think it is a bit premature to give a break down for 2005. The revisions for this year came on the back, as I've said, primarily of the subscriber growth and on the back of the traffic load on the network, and the congestions that have started occurring ever more frequently in all key areas. And that related not only to the Russian regions, it also related to the Ukraine. We had to revise upward, revise our CapEx plans for the Ukraine, significantly. We've had to do the same for Russia. Therefore, it's really across the board.

Across the board, okay. And on acquisitions?

Acquisitions, well, the consolidation of minority stakes has largely already taken place, there are some minor stakes that we will continue buying out. Prices are always difficult to predict, obviously, you know, we will announce them as we reach agreements, a this stage it's difficult to forecast. We are looking at some acquisitions that may be -- that go beyond the consolidation of minorities, but that the exact numbers I probably stopped short of giving out right now, since we're at the -- at fairly early stages in these negotiations.

All right. Thanks.

Thanks.

The next question comes from Ms. Anna Bosson. Please state your name followed by your question.

Hi. Anna Bosson from CRB. I have two questions. One of them, the Uzbekistan market, if you could you perhaps give us some of your views on where you see penetration going in the next few years from the currently very low level. And the second was if you could, perhaps, just give us for the second quarter the roaming expenses and connection fees from you P&L. I think that detail used to be released so it would be very helpful.

On the Uzbekistan, the penetration levels are certainly go up, but the -- being serious about, it we're currently revising our own model for penetration, and sort of modeling the penetration going forward. We believe that it -- we will be somewhere at around 2% only by the end of current year. About 7 to 10% by the end of 2005. And about 15 to 20% more -- more towards 20 than 15, by the end of 2006.

Do you factor into that a third operator in the market?

Excuse me, say it again.

Do you factor a third operator in the market in that sort of scenario?

We are factoring are own projections and our own plans on this forecast. Nikolay.

Roaming expenses in the second quarter were around 80 million.

80?

I'm sorry, 28 million, sorry.

28 million, thanks.

And interconnect, 80 million.

80 million. Thank you very much.

Our next question comes from Mr. Andrei Bogdanov. These state your company name followed by your question.

Good evening. It's Andrei Bogdanov from Alfa. Two questions, if I may. One with regard to your free cash flow. It seems like that you're really on the way forward to achieve the free cash flow positive for 2004, regardless of your increased CapEx guideline. Is it still the case? That's the question number one. Because even if I exclude the, sort of, extra free cash flow, which you got from lowering your capital in the first half, still I come up with a plus number for the source costs. So the question is, will you have the free cash flow positive for 2004 overall? And the second question, just more general, with regards to the margins. At what kind of level are you saying EBITDA margin or EBITDA margin will stay flat? Because it seems like every quarter, both you and your main competitor are showing the same trend with the flat or even declining ARPUs, alongside the growing margins. So do you think it will it be continue for some quarters going forward? And when do you think it will stop in your case? Thank you.

Yeah, Andrei, on the free cash flow situation for this year, we are, notwithstanding the fact that we did show the almost 300 million dollar cash flow, positive free cash flow, in H1 2004. We, on an annualized basis, we do not believe that we will be significantly free cash flow positive, even though you're probably right, we will be above zero, but it will not be -- it will not yield -- the operations will not yield a significant positive free cash flow. However, as we've said before, we expect to be free cash flow positive, significantly free cash flow positive starting from 2005. Now as far as the EBITDA margins are concerned, we do not see any particular reason right now why our margins should dramatically decrease in the next couple of quarters. At the same time, as we said before, a sustainable level is still -- inflationary pressures on certain cost items that are extremely significant for the company, we are likely to see low 50s as a sustainable level rather than high -- rather than mid-50s.

Thank you.

We have a follow-up question from Mr. Alex Kazbegi. Please go ahead, sir.

Thank you. To sort of clarify on your regional sort of strategy, given the VimpelCom entered Kazakhstan and obviously you had planned before, how does that change your strategy with regards to this particular country? Secondly, on Belarus, obviously there is a possibility of issuing the third license, and there's a big lineup of the potential bidders for that license, and in general, how do you see business developing there? Related to that, I was -- I think, if I'm correct, to pick up something which Nikolay Tsekhomsky mentioned, the $6 million equity pickup. Why is that stable? Is the -- as far as I understand, that comes from Belarus, and why is that the profitability then in Belarus, not growing with the -- obviously growing the business there? Thank you.

Okay, as far as Kazakhstan is concerned, we've looked at this company. We actually even, you know, submitted a bid for this company, but our bid was materially different than the one submitted by our competitor. This does not change the basic motion that we would like to be in this market. There are other means of entering it, either by acquisition or by acquiring a license, and we will be looking at both opportunities.

As far as Belarus is concerned, we are waiting for the competition to come in, but as we've done in the -- and as we're doing in the Ukraine, with a third entrant likely to appear sometime later this year. We are fighting to gauge as much market share as we can before this new entrant comes in, and you know, being extremely aggressive in our marketing-- not aggressive in terms of price, but aggressive in terms of creativity and customer care and customer focus; which is paying off. It's paying off in the Ukraine, it's paying off in Belarus.

And the first mover advantage or the second mover advantage have a very significant bearing on the distribution kind of -- sustainable distribution of the market shares between the main competitors. So we, you know, think that it was and has been rather key for us to be in this phase of the market's growth. It will be as important to be in that, you know, next year, year and a half, but by the time the new entrant comes in, we will be in the proper position to compete, properly both in the terms of the quality of the network and the quality of the service and the brand recognition in the market. So we're waiting for this competitor to arrive but we will be fairly strongly positioned to meet this newly-emerging competition.

And you're still trying to get the control in Belarus?

We are certainly -- we are certainly expecting to at some point, you know, sooner or later, to acquire -- to bring our stake to controlling one, even though at this stage, no agreements have been reached in this.

Okay, Nikolay, Am I correct to understand that --

Yes, I would like to confirm, yeah, you're correct, the equity pickup from Belarus is -- it's a little bit higher than 5 million, actually, because there are some other minorities in there.

And is it stable?

The equity pickup, yes.

And it's stable?

It is.

And you don't expect it to grow considerably over the next --

Oh, sorry, I mean it is -- it is growing, obviously.

Right.

It's growing.

Okay. Just finally, also, the Uzdonrobita, are you planning also to consolidate this from the third quarter?

That's correct.

Okay. Thank you very much.

Our next question comes from Mr. Andrew Edmondson, please state your company name followed by your question.

Yes, good evening, it's Andrew Edmondson here from Legal and General. I was just wondering if you could talk us through your plans for any external further external financing going forward. You mentioned you're basically slightly free cash flow positive in 2004 but there's still a big maturity coming up and some more CapEx to be paid for. I was just wondering if you could just talk us through how you're intending to finance that please.

As you know, historically, we were raising bonds to finance our acquisitions. This year, we were able to first time go to a syndicated loan market and effectively, we were able to attract around 500 million loan, with very -- I would say very good rate, for this -- for this country, around -- around 5%. Obviously, if any, we'll look at potentially tapping this -- this loan. However, as you correctly mentioned, our plans to be cash flow positive next year. Thank you.

Okay. So it is --

In addition, we are obviously looking at some additional sources of financing, ECA financing is a -- is a means that we've introduced to a large extent this year. Planning to -- this will also be a source of financing our CapEx program for 2004 and 2005 and going forward.

I see. So the bridge loan that you mentioned earlier is more related to an early draw-down under the bank loan rather than bridge financing to more bonds?

It is bank loans, it is basically ECA guaranteed bank loans.

Okay. Understood. Thank you.

Ladies and gentlemen, can we please have the last two questions from the audience? Thank you.

We have a last question and a follow-up question from Mr. Vladimir Postolovsky. Please go ahead, sir.

There are four questions if I may, but they're small ones. The first one has to do with churn. If you allow me, I'd like to graduate you on very impressive churn dynamics. But my question would be, could you go into detail on how you managed to bring down churn so quickly and what is it exactly about it, is it a reduction in internal churn or external churn? And is there further significant scope for bringing churn to levels of whatever, 4, 5% a quarter? And the second question is to do with ReCom. I believe it's the last large of the subsidiaries where there's significant minority interest. Is there any chance of acquiring that stake from your partners in that company?

The third question, Moscow sales, could you give us a very rough idea of what proportion of your Russian sales at this stage comes from the Moscow market. Just a rough idea would be good enough. And finally, of all the markets that you said are you considering going into, could you perhaps point out two or three that you believe are more interesting for you than the others? And within that question, in Belarus, the problem to acquire the stake from your partner, is it -- or some of it to get the control, is it more political or is it a question of price they want to get for that stake? Thank you very much .

It would be with the positive trend dynamic. There are a number of factors that contribute to the lower churn that we reported for the second quarter. First of all, and the main is the new relationship with our dealers. As we now pay commission to those differently than previously, we tend to add a better quality and more loyal customers to our network. The other significant factor that contributes to lower churn is the end of migration between MTS and teens customers, between (indiscernible) in other words. The third contributing factor is the loyalty program that we first launched in the first quarter of the year. Looking forward, we do hope for a continuous positive trend in the churn rate. And for the -- for the entire year, we expect -- we expect -- we expect the blended churn for the group to be -- to be at around 30%.

And that is you saying is a sustainable -- is a sustainable level going forward? Or it could be brought down further the next year?

We think that this is a sort of a normal churn rate for the market and that this -- this is relatively sustainable going forward.

Thank you.

And answering your second question regarding the sales in Moscow, I can say that Moscow share in total consolidated sales is around 40, 45%.

As far as the ReCom consolidation is concerned, we're obviously expecting to, at some point, consolidate 100% in this company. We are technically looking for the right moment to reach agreement with our other partner and right now is not yet the moment. As far as Belarus is concerned, we are, in fact, in kind of ongoing more or less active conversations on this with the state. It is a political decision. And it is a decision that will be made, if and when it is made, by the top political figures in this country so that, therefore, it is to a certain extent political. It is certainly not -- it does not relate to the -- to a price conversation, the price conversation we would have reached agreement on a lot faster. As far as the other markets, I don't think I -- I would like to go into specifics right now. The ones -- the overall few of interest that I mentioned before is the one within which those potential targets fall into.

Thank you very much.

Thank you. Ladies and gentlemen, 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 the MTS Investor Relations department. Thank you.

This concludes the Mobile TeleSystems second quarter results conference call. Thank you for participating. You may now disconnect.