Mobile TeleSystems PJSC (MBT) 2004 Q3 法說會逐字稿

Good morning or good afternoon, ladies and gentlemen, and welcome to the third quarter 2004 financial results conference call. [OPERATOR INSTRUCTIONS]. And now I'd like to turn the conference over to Mobile Telesystems.

Thank you, and welcome to MTS's third 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 Future developments may render these statements outdated.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 the guidance provided today prior to our next quarterly conference call. A reconciliation of operating income before depreciation and amortization, OIBDA, 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 an e-mail to ir@mts.ru, and we'll send you the release immediately. I also recommend that you download the presentation regarding this conference call as indicated in the invitation sent to you. The presentation can be found on our website, www.mtsgsm.com, in the Investor Relations Financial Reports section.

Our presentation today consists of Vassily Sidorov, MTS President and CEO; Nikolai Tsekhomsky, the Company's Chief Financial Officer; 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 over the call -- over to Mr. Sidorov, please.

Thank you, Andrey. Good evening, good morning, ladies and gentlemen. Today we are reporting our financial and operating numbers for the third quarter of 2004.

It was an exceptional quarter for the Company, as we significantly expanded our operations and achieved further gains in efficiencies. Our strategy of remaining the leading operator was successfully carried out. We expanded the geography of our operations through rollouts and acquisitions. Implemented initiatives aimed at enhancing customer and dealer loyalty continued to introduce new value-added services, and further streamlined our business processes.

During the third quarter MTS's subscriber base increased by 3.85m customers, resulting in a total consolidated subscriber base of 26.63m by the end of the quarter. Since the end of the quarter, our subscriber base has expanded by a further 2.22m, to reach a total of 28.5m as of yesterday.

We remain the market leader in Russia with a market share of 35%. Due to the late timing in obtaining additional regional licenses and frequencies, we have lagged behind our competitors in rolling out in some important regions. As a result, our market share in Russia has been somewhat diluted since the beginning of the year. As we catch up with our competition in a number of commercially launched regions, we should see an improvement in our regional market share.

By the end of the year we are planning to be operational in 8 more regions, which will bring our total number of operating regions to 72. We are also looking at certain opportunities to enter regional markets through acquisitions, where we do have a license, our operations have not yet been launched, and where we see an attractive opportunity to leapfrog to the number 1 position.

If the price of the target is attractive, the benefits of securing a premium subscriber mix and achieving improved economies of scale far outweigh the cost of integrating the acquired business. Our recent successful participation in the tender for a controlling stake in Gorizont-RT, a mobile operator in the republic of Sakha (Yakutia) in the far east of Russia, is an example of the strategy.

The Ukrainian market continues to surprise us on the upside of this subscriber base dynamics and resilience of ARPU. Our market share in the Ukraine at the end of the third quarter of 2004 was up 52%, up from the beginning of the year and a slight decline from the previous quarter. In Belarus, MTS's 49% owned joint venture, [TAIF-Telcom], to become the current number 1 operator in Belarus, a leading position in -- on the market achieved in just 2.5 years of operations. This is a clear testimony of our Company's ability to replicate our success in Russia in neighboring countries.

Our efforts aimed at increasing customer loyalty continued to result in further churn reduction in Russia in the third quarter. We report a quarterly churn of 6.7%, compared to 12.3% in the same period just last year, and 7.7% in the second quarter of 2004.

Our introduction of term contracts and our improved relations with dealers have had a major impact on churn reduction, in addition to our continuous improvements in customer service and brand positioning. Churn increased slightly to 5.9% during the quarter. The drop in churn rate for post-paid subscribers did not fully offset the increase in churn amongst pre-paid customers, due to the intensified competition in this market.

The significant erosion -- expansion of our subscriber base resulted in a 50% year-on-year increase in our quarterly revenues, and a 117% increase in our net income. Our focus on cost efficiency and streamlining of internal processes, coupled with seasonal effects, resulted in further margin growth to a new all-time high of OIBDA margin of 58.4%. In addition, MTS was free cash flow positive for the 9 months of the year, generating approximately $261m.

The Russian mobile market is developing very dynamically, and we expect another couple of years of very strong growth. We also think that penetration levels similar to those of Eastern Europe are achievable in this market. Competition is still largely based on pricing, and we may see further downward pressure on both [ATP] and ARPUs. Our strategy so far has been, and will continue to be, aimed at maintaining and improving our profitability, even as we move down the customer elasticity curve.

As the Russian market matures, we are continuing to seek acquisition opportunities in the CIS. Our entry into Ukraine, Belarus and Uzbekistan has proven to be very positive for the Company. The CIS markets are very similar in terms of mobile penetration profiles, fixed line under-development, usage patterns, offer tremendous opportunities for growth.

We will continue seeking opportunities to expand our presence in other CIS markets and leverage our experience gained in these 3 markets where we already operate.

On a final note, the bonds market, another important development for the Company on the corporate governance front. As for the first time, an independent director joined the Company's Board of Directors. This should further improve the transparency of our corporate decision-making, as well as bringing additional expertise to the Company's Board.

Now I would like to pass the call to Nikolai Tsekhomsky, our Chief Financial Officer, to discuss the Company's financial performance in some more detail. Nikolai?

Thank you, Vassily. And the third quarter was indeed an exceptional quarter for the Company. Quarter-on-quarter MTS consolidated revenues increased by 18.3% to $109b. OIBDA increased by 21.7% to $634.8m, and net income increased by 26.5% to $338.3m. MTS operations in Russia contributed approximately 77% to the consolidated revenues during the quarter.

For the third quarter of 2004, MTS reports an all-time high consolidated OIBDA margin of 58.4%. The Company's OIBDA margin for the first 9 months of 2004 was 56.9%. These are now past experience and due to certain seasonalities in our financial performance, we expect MTS consolidated OIBDA margins in the fourth quarter to decrease compared to the first 9 months of 2004, averaging at the mid-50s level for the full year 2004.

In its financial statements for the third quarter, MTS consolidated 2 months of operations of Uzdonrobita, a mobile phone operator in Uzbekistan, which acquisition we completed on August 1, 2004. Uzdonrobita contributed approximately $10m to MTS consolidated revenues for the third quarter.

The revenue of MTS's 49% owned and consolidated subsidiary in Belarus totaled $85m for the 9 months of the year, with OIBDA margin for the same period at 51.3%. MTS's top line growth could be attributed to the significant expansion of the Company's subscriber base. In addition, we benefited from a seasonal increase in roaming revenues.

In the third quarter of 2004, MTS's consolidated sales of handsets and accessories increased by approximately 47% compared to the previous quarter. This increase is due to the active sell-out program in Russia, as well as to increase in new subscriber additions during the quarter. Cost of sales for handsets and accessories, which includes the cost of SIM cards and Jeans packages, increased by 43% to the previous quarter. Approximately half of this increase is related to the growth in SIM cards and Jeans packages costs.

Another factor contributing to our negative margin on sales of handsets and accessories was our handset subsidies policy for the post-paid contracts and subscribers in Ukraine. The increase in MTS consolidated sales and marketing expenses in the third quarter of 2004 compared to the previous quarter, was primarily due to the increase in advertising expenses by approximately 35% or $11m.

This increase was slightly offset by the decrease we continued to experience from the fact of our new dealer commission payment scheme in Moscow, introduced earlier this year. We believe that the effects of this new scheme have now been fully absorbed.

The Company's consolidated general and administrative expenses increased by only 3%, compared to the previous quarter that's decreasing as a percentage of consolidated revenues. This improvement in G&A expenses is mainly attributable to the increased economy of scale factors, as well as continuous management efforts to control costs.

During the quarter MTS further improved its financial position, with debt service ratio at 19 to 1, as of the end of the third quarter 2004. This improvement is partially attributable to a redemption of 300m Eurobonds with proceeds from the syndicated loan facility that we announced earlier. The interest on this facility is LIBOR plus 2.5%, which is approximately 4.85%, compared to approximately 8% average interest rate in the Group debt.

In the third quarter of 2004, MTS capital expenditures amounted to $262m, bringing total consolidated capital expenditures for the first 9 months of 2004 to $780m. During the first 3 quarters of 2004, MTS spent approximately $237m on acquisition of our mobile apparatus and consolidation of minority ownership in the Company's subsidiaries in Russia.

As we expected, in the third quarter of 2004 MTS was free cash flow negative on a consolidated basis but remains free cash flow positive for the first 9 months of the year.

Thank you.

Alright, thank you, Nikolai. And now we are ready to take the questions from the audience, please.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Olga Zhilinskaya. Please state your affiliation followed by your question

Good evening ladies and gentlemen. This is Olga Zhilinskaya from Renaissance Capital. I have 2 questions, if I may. The first question is, could you please provide us with the roaming revenues and revenues from value-added services in Russia and the Ukraine, in the second and the third quarter of 2004?

And my second question would be, do you have any plans to do the share split as was done by VimpelCom recently? Thank you.

Roaming revenues for the third quarter was 18.8% of our total sales. And value-added services approximately 9.7% of our revenues in the third quarter.

Thank you.

As far as the ADR split is concerned, we are planning to do it. We hope that we should be able to wrap it up by some time in December. And so this is in the workings, hopefully we will get it completed soon.

Thank you very much.

Thank you. Our next question comes from the line of [Alexei Jakeviski]. Please state your business followed by your question.

Hi. This is Alexei Jakeviski from UCH. Congratulations first of all on the excellent results. Your tax expense seems low again, and I wonder what explains this 23% effective tax rate that you posted in the quarter? Because I think you were suggesting that in the second half of the year, your tax rate was normal -- would normalize to high 20s. Thank you.

First of all, I would say that on the full year we're expecting around 25/26% of effective tax rate, as was discussed earlier. If you remember, in the first quarter we had approximately 29% of effective tax rate. Then we had a significant reduction in the second quarter and now it's normalized to approximately 23.7%, so [even approximately] 24%.

However, this is basically related to certain effects of Forex, as we discussed earlier. So it depends on our position, ruble-dollar position. And I believe that in the fourth quarter, when the actual income tax is due for the full year, it will be recalculated on a full-year basis. We will have a normalized figure closer to 25/26%.

Okay. Thank you.

Thank you. Our next question comes from the line of Nick Barnes. Please state your company followed by your question.

Yes, hi. It's Nick Barnes at Thames River Capital. I was hoping you could give us some guidance on what your CapEx will be for the full year, excluding acquisitions? And also possibly some guidance for 2005? Thanks.

For the full year of 2004, we expect to be slightly below our target of $1.4b. As far as '05 is concerned, we expect to be slightly higher in absolute terms, and roughly in line with the CapEx to sales ratio that we will have shown by the end of the year for '04.

Okay.

Thank you. Our next question comes from the line of Tom Furda. Please state your company name followed by your question.

Hi. It's Tom Furda with Citigroup. 2 questions. 1 was on Ukraine; you mentioned that while there was very good ARPU resilience there, I was wondering what you would attribute that to, compared to Russia where you didn't have as much ARPU resilience.

And the second question relates to Deutsche Telecom. Could you discuss their role within the management and just in general, their participation in management decisions and the development of the Company? And what if they were to exit, what would the implications be for you? Thank you.

As far as the usage pattern in the Ukraine is concerned, we believe that was driven by 2 factors. 1 is the overall economic situation and the tax reform that obviously has affected the disposable income, with the reduction of the personal income tax from 14% to 13%, has contributed to a larger usage in -- of mobile services as well.

Also the way we structure our service is inclusive of enhanced usage, so that must have been a contributing factor. And the overall tendency, I think, is for people to use based -- on the back of value-added services, on the back of additional functionality, that people more and more incorporate into their daily -- into their lives. And in Ukraine as well, that is a major contributing factor, both in Ukraine and in Russia.

As far as the Board is concerned, the Board obviously is a direct participant in all strategic conversations. It has -- It always approves our M&A activity, regardless of its size. It is a direct participant in the budgeting, parceled together with the Budget Committee that has been set up under the auspices of the Board.

It is a direct participant in our technical strategy discussions because there is a special -- and there's a special committee set up under the auspices of the Board. It is also a controller, within the framework of the Sarbanes-Oxley and the audit requirements and control requirements. Through the Audit Committee that has been also set up, within or under the auspices of the Board.

Finally, there's a Steering Committee headed by the Chairman of the Board, which oversees the development of our streamlining process or change program, as we call it internally, on a fairly regular basis. So the participation is basically across the board in all key areas of the Company. And this is -- this does not exclude their specific participation in some specific initiatives or key processes for the Company, even outside of these committees.

Thanks. If I could just reconfirm Nick's question earlier, just about the CapEx to sales. Did you say in 2005 your CapEx as a percentage of sales was likely to be higher than in 2004?

It is likely to be roughly in line with what we will have in '04.

Okay, thanks.

Thank you. Our next question comes from the line of Taras Shumelda. Please state your company followed by your question.

Hi. It's Taras Shumelda, American Century. Congratulations on strong numbers. I dialed in a bit late, so forgive me if I'm asking something that you've addressed. With respect to a potential listing on RTS, is this a go, a no-go? And if so, when? Thank you.

Okay. MTS local shares are actually now -- you can trade MTS shares on RTS. They are not part -- They are not listed but they can -- could be traded over the counter since recently. We may consider a full scale listing on RTS as well.

Okay, but you are not currently preparing this? It's not a project that you're preparing? You're just considering it - is that correct?

Yes, we're definitely, definitely looking at this opportunity, and since recently - a few days ago actually - shares are tradable over the counter on RTS.

Thank you

Thank you. Our next question comes from the line of Nadia Goloubeva. Please state your company followed by your question.

Hello. This is Nadia Goloubeva from Aton. My first question relates to roaming revenue. Could you give us a quarter-on-quarter growth of roaming revenue in Russia and Ukraine separately?

And the second question relates to the possible exit of Deutsche Telecom. Do you think it's possible that MTS will undertake a share buyback, given that your debt position or just your cash flow generation ability allow for this? Thank you.

First of all, split of roaming revenues between Russia and Ukraine. Russia contributed approximately 18.6% of total revenues and UMC country was approximately 8.8% of total revenues.

Sorry, could you give quarter-on-quarter growth?

In the previous quarter, Russia was 14.7% of total revenues and UMC was 7.1% of total revenues.

Thank you.

As far as buying -- potentially buying shares that currently belong to T-Mobile International by MTS, we're currently not considering this to be an option at the management level. And we're not suggesting that this would be considered but obviously it can be brought to our attention -- if it should be brought to our attention, we will consider it. By the shareholders.

Okay, thank you.

Thank you. Our next question comes from the line of Andrew Edmondson. Please state your company name followed by your question.

Yes, it's Andrew Edmondson from Legal and General Investment Management here. I just wondered if you could give us some numbers into your marginal ARPU, please? The ARPU for the latest subscribers that you're signing up.

Our incremental ARPU is around $8.

Okay. And is that something you've seen fairly constant over this year?

Well, until the end of the year it may go down somewhat, not overly significantly. We obviously believe that there is still going to be a tendency, an overall tendency of a decline in incremental ARPU as we grow the market and we get deeper into the low margin, low pay -- lower-paying segments of the market.

Okay. Thank you.

Thank you. The next question comes from the line of Anna Bosson(ph). Please state your company name followed by your question.

Yes, hi. It's Anna Bosson from CIB. My first question would be on the gross margin. You did have a very stable gross margin between the second and the third quarter, and we have heard from other operators that there was -- that roaming revenues are very low margin. So I just wondered if your underlying margin actually showed a strong improvement? Do you find roaming revenues to be very low margin as well?

And my second question would be if you could perhaps tell me if you -- what the MOUs are in Uzdonrobita?

Well, the gross margin is in line with overall growth of revenues. Our roaming margin is also in line because the roaming margin includes also within network roaming. So there's roaming between different territories in Russia, which actually has different cost for us than international roaming. Therefore contributing quite a similar margin as other services.

Great. And the MOU for Uzdunrobita?

This is something -- I think we'll be able to provide you with the number after the conference call.

Lovely, thank you.

Okay, thank you.

Thank you. The next question comes from the line of [Jonathan Moore]. Please state your company name followed by your question.

Yes. It's Jonathan Moore at Morgan Stanley. 2 questions on the Ukraine. First of all, I was wondering if you could talk a little bit more to the competitive environment there. It looks like it's getting a little bit tougher. I wonder if you could talk of that in terms of pricing by Kyivstar? Are they spending more on marketing or are they adding more -- or providing more value-added services? I was wondering what's happening with the dynamic there?

And second on the Ukraine, just with regards to the recent election. Obviously there's an element of uncertainty there, and I wanted to get your views, please, on the potential impact on the business, and particularly for mobile phone. Do you think there's any impact there, A, from this continuing uncertainty and, B, from the election going either way? Thank you.

Let me start with the second part of the question. We've certainly already starting feeling the heat on our network with almost 300,000 people gathering in the central square. We've had some work to do on making sure that the network still functions in Kiev. We think that the -- regardless of the development, that is, who becomes President, assuming that there won't be a negative scenario unfolding, that is, a violent one.

Whoever becomes President will be either neutral or positive for the business because any definitiveness in the situation, or any resolution to that situation, I think will be -- will yield some stability and therefore creating a positive overall environment -- business environment. So I think our general feeling is that this will be -- once the uncertainty fades away, it'll be certainly positive for our business. But no radical changes are expected in terms of regulation, nothing that we know of. Not at this stage anyway, because we do not know the telecommunications agendas of either 1 of the candidates.

Let me answer your first question, the competitive environment in Ukraine. Although Ukraine is still a developing market, it is rather competitive. I would say it's a very healthy competition, which drives penetration in this market. If you look at the Q3 dynamics, then mobile penetration rate in the Ukraine went up from 17 to 22%. ARPUs are up as well and usage, as we discussed previously.

Our competitor, Kyivstar, started to respond on our marketing initiatives, particularly the launch then in new pre-pay protocol issues. We -- Our focus today is to grow the market although to maintain our leading market share. As well as there is more emphasis on attracting high usage, post-paid, contract customers, as we mention in our press release.

Ukraine is set to become a more competitive market some time next year, when the third player -- third GSM player, DCC backed by Turkcell, will be potentially launching this operation.

Thank you.

Thank you. Our next question comes from the line of Bob Kramer. Please state your company name followed by your question.

Hi. This is Bob Kramer from UBM. My question is to do with the consolidation of the revenues between the countries. When we had the revenues given for Russia plus Ukraine plus Uzbekistan, we get a total of $1,086m, which is, what, $14m higher than the consolidated revenues. Now the difference has always been about $1m in the past, so is there any reason why there's a much bigger elimination of revenues going on?

Obviously a certain inter-company elimination between Russia and Ukraine, and that's reflecting the growing relationship between these 2 businesses.

But from $1m or to -- $1m to -- in the second quarter to $13m this year, that's a --

It's also related to roaming activities, because certain subscribers are going from Russia to Ukraine. That's quite a normal trend. And therefore the roaming revenues from our Ukraine operator is obviously becoming an inter-company revenue for the Group.

Okay.

Thank you. At this time there are no more questions. Please continue.

If there are no more questions, let me conclude this conference call. Ladies and gentlemen, thank you for your time. A replay of this call will be available for the next 10 days. Should you have any further questions, please do not hesitate to contact our Investor Relations department. Thank you.

Ladies and gentlemen, this concludes today's third quarter 2004 financial results conference call. Thank you for your participation and you may now disconnect.