Mobile TeleSystems PJSC (MBT) 2005 Q3 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to Mobile TeleSystems third quarter 2005 financial results conference call on the 23rd of November 2005.

Throughout today's presentation all participants will be in a listen-only mode. After the presentation there'll be an opportunity to ask questions. If any participant has difficulty hearing the presentation, please press the star followed by zero on your telephone for Operator assistance.

I will now hand the conference over to Mr. Andrey Braginski. Please go ahead, sir.

Good evening.

Before getting started, I'd like to remind everyone 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 Future developments may render these statements outdated, however, we do not intend to update the guidance provided today before our next quarterly conference call.

Please note the reconciliation of operating income before depreciation and amortization for operating income can be found on the Company's Web site.

By now you should have received a copy of our press release and presentation by mail. If not, the press release as well as the management presentation can be found on our Web site at www.mtsgsm.com in the Investor Relations Financial Report section.

Now I would like to pass the call over to Vassily Sidorov, President and Chief Executive Officer of MTS. Vassily?

Thank you, Andrey. Good evening, ladies and gentlemen. Welcome to the MTS third quarter results conference call.

Our team here is represented by a number of managers and I'd like to briefly introduce them. Eric Franke, the Company's COO, Boris Podolski, the Company's Director of Reporting, Grzegorz Esz, our acting CMO, Mikhail Shamolin, our VP for Sales and Service, and Mark Burden, CFO of our Ukrainian operations.

I will start with some of the highlights for the quarter and the more recent developments, Boris Podolski will then run you through the financials. After that we will happy to answer any questions.

We're reporting a strong set of numbers today featuring significant expansion in our subscriber base and strong growth in revenues and earnings. In the last 11 months we added 19 million customers bringing the Company's consolidated subscriber base to 53.2 million as of yesterday.

Our sequential growth in revenues in the third quarter was up 12% and our net earnings were up 14%. Despite the negative impact on costs from the relatively high inflation in the countries of our operations, as well as the increased contributions to the universal service fund in Russia, the [inaudible] in strength allowed us to improve the Company's OIBDA margin to over 53% in the third quarter.

As our core market gradually matures and SIM penetration in Russia increases, during the third quarter it grew from 67 to 77%, we've been focusing more on customer loyalty and retention in addition to we're developing a variety of unique value-added services that differentiate MTS from other operators.

As I promised during the last conference call we introduced i-mode in Moscow and St. Petersburg in September of this year. This value-added platform will be expanded to encompass further key regions in Russia and Ukraine in the near future.

The pickup has been relatively slow as we've not been subsidizing i-mode-enabled handsets but we expect to step up significantly on the back of more extensive marketing communications. We're also making progress with our discussions with RIM and Russian regulators regarding the launch of a localized version of BlackBerry for our corporate and business customers, segments in which we are the leading player.

We have continued to invest into improving the level of service provided by our call centers and customer care offices. As part of these efforts we are consolidating over 50 call centers across Russia into ten micro-regional units.

In addition to a better level of service this consolidation should provide for material headcount reductions. This consolidation should be completed in the Q1 of 2006.

We've implemented number of initiatives geared to increasing customer loyalty. These include a new image campaign, launch of new set of tariffs, as well as the implementation of a numbers of CRM campaigns since the beginning of the year. We've already seen the positive response to these campaigns.

The CRM campaigns were targeted at the mass market subscribers and were focused on recharging value-added service usage stimulation.

These campaigns resulted in a reduction of quarterly churn in Russia. Since not all these campaigns have a lasting effect on customer loyalty, we do not expect churn to be at the same low level going forward.

As I mentioned previously, we've seen tariff stabilization in Russia as we move together with other players in the market, have become more focused on revenue growth and profitability. With pre-holiday season approaching we are not planning any significant promotional activity that could have a detrimental effect on our financial position.

In Ukraine our operations continue to grow and we're well prepared for potential increase in competition in this market with an impressive team, a strong bond and excellent network quality.

At the same time we continue to expand our presence in Russia through the launch of more greenfield operations. Recently we started to provide services in four more regions with a total population of over two million.

Now we are operational in 83 out of 87 regions of Russia for which we hold licenses.

Another positive note, I'm glad to announce that we have signed a five-year agreement with the government of Turkmenistan which will enable us to operate under a three-year extendible license on favorable terms. This takes away the main obstacle for expanding the scale of our operations there.

On to corporate matters. I would like to highlight some additions to MTS' management team as well as some departures.

Eric Franke, who was previously head of our operations in Ukraine has been appointed to a new position of First Vice President and COO. His responsibilities include technical strategy and development, IT and supply-chain management.

Mikhail Shamolin, a former associate principal of McKenzie has been appointed Vice President for Sales and Customer Service and is in charge of managing the sales and customer service divisions as well as the macro-regional business units in Russia. Grzegorz Esz, previously Deputy Chief Marketing Officer of ERA, the largest GSM operator in Poland, has been appointed acting Chief Marketing Officer.

These appointments bring additional talent and professional knowledge to our management team.

As we reported earlier, Nikolai Tsekhomsky, our Chief Financial Officer has left MTS to join [inaudible] Bank. We're planning to bring in a new CFO by the beginning of next year.

To conclude, MTS continues to expand and develop its business. We are in a unique position to capture significant untapped demand for telecommunication services in the former Soviet Union countries and our management team is committed to further increasing shareholder value by growing revenues while focusing on our revenue leadership coupled with best-in-class profitability.

On this note I'd like to hand over to Boris for the discussion of our financial results in more detail. Boris?

Thank you, Vassily. Good evening, ladies and gentlemen.

Our third quarter consolidated financial results have been strong and are in line with our expectations. The growth in the group's top line was a solid contribution from our operations in all countries where we are present led to 12% increase in revenue compared to prior quarter with our OIBDA margin reaching 53.3%.

We have seen an increase in our two main drivers for top line growth during the past quarter. One, air time revenue by approximately 9%. And two, a 30% increase in roaming revenue.

We attribute this primarily to the organic growth of our customer base and seasonal factors.

Our newly acquired business in Turkmenistan, which we consolidated effective June 30, 2005, contributed approximately 16 million to the group's revenue for the quarter and accounts for 1% of our total revenue growth. In Q3 our gross margin remained almost flat compared to the prior quarter with a 0.4 percentage point decline.

In absolute terms OIBDA for the group increased by 13% in the third quarter to reach 737.5 million. The OIBDA margin, as I already mentioned, reached 53.3% compared to the second quarter figure of 52.7%.

The main impact came from 0.5% decline in dealer's commission expenses and a 0.2 decrease in operating expenses as a percentage of revenues during the quarter. Our sales and marketing, as well as our operating expenses continued to see some growth in absolute numbers but at a slower pace when compared to the growth in top line.

In the fourth quarter we expect a slight OIBDA margin decline by at least several percentage points driven by seasonal factors as well as anticipated increase in year-end marketing and dealers commission expenses.

Our consolidated pre-SAC OIBDA margin for the quarter increased by 12% to reach $885 million from the previous quarter's 793 million. Quarter-on-quarter pre-SAC OIBDA as a percentage of revenues remains stable at 64%.

Our advertising and marketing expenses for the quarter slightly increased by 5.3 million, or 9%, mostly related to the image campaign launched during the quarter. This increase had very limited effect on our OIBDA margins during that period.

Also, while talking about OIBDA, I would like to point out the universal service fund charge for the past quarter amounted to approximately $12.2 million compared to 8 million in the previous period. This is having a negative 2.2% impact on our Q3 OIBDA margin in Russia and 1.7% on consolidated OIBDA number.

Net number for the quarter increased by 14.3%, or approximately 44 million compared to the previous period. At the same time year-on-year net income increase is 3%.

This is largely attributable to significant growth in our depreciation and amortization expenses from 167 million in Q3 of 2004 to $242 million in the past quarter of 2005, almost a 45% increase. This is driven by our continued expansion and extensive investments in the network buildout during the period.

Now I would like to move on from OIBDA and net income to discuss some other areas of our operations.

During our last few conference calls we have been updating you on the status of the most recent routine tax audit of MTS books for the year ended December 31, 2002. As a result of this audit we received tax assessment from the authorities in Moscow for the amount of $13 million.

We then filed an appeal with arbitration court for a total amount of approximately 10 million. In the second quarter our appeal was supported by the arbitration court. Following that appeal filed by the tax authorities also was supported in our favor.

The situation is not final result yet and we may see a third and last round of appeals from the tax authorities. We will continue as promised to keep you updated on the developments.

Moving on to the Company's balance sheet.

Overall, our position remains quite strong with available cash balance at the end of the quarter of $470 million. This is a $167 million decrease compared to the previous quarter.

The main reason for the decrease was a 200 million payout of the dividend as well as a 14 million payout on our syndicated loan facility.

In the past quarter we spent $606 million on acquisition of property, plant and equipment and intangible assets. This is 270 million more than we spent in the second quarter.

We remain on track to meet our $2 billion Cap Ex guidance for the year.

Our leverage position remains strong with net debt to last 12 months OIBDA ratio at 0.7. Our average cost of borrow has been practically flat during the nine months period at around 7%.

This is in line with our effort to improve our credit ratings, corporate governance standards as well as utilize various market tools including hedging of our floating interest rates on the syndicated loan to minimize exposure to the interest rate increase.

With that I would like to conclude our financial presentation to you. I will now hand the call back to Andrey Braginski. Andrey?

Thank you. Ladies and gentlemen, we are now open for questions. Please.

Thank you, sir. [OPERATOR INSTRUCTIONS] Your questions will be polled in the order they are received, and there will be a short pause while participants register for a question. The first question comes from the line of Mr. Sean Gardiner. Please state your company name followed by your question.

Yes. Thanks. The company is Morgan Stanley. Just two things.

Firstly, you're talking about material headcount reductions in the first quarter next year. Could you give us an idea what sort of charge might be related with that reduction?

And then secondly, on the OIBDA margins for 2006 could you give an indication of where you see them going, whether they'll be up, flat, or down, and if you could sort of track one to five [inaudible] as well. Thanks.

On the headcount, we are planning next year to cut approximately, a significant number of excess headcount actually within the Company, and this relates not only to the call centers but a number of other functions. To give an example, we are planning to reduce the corporate center headcount by 20% during 2006 and by 10% at the macro-regional business unit level.

We are talking about potentially cutting their workforce on the call centers down by approximately 500 people. Now, that will not translate into a direct reduction in our salary expense since initially we'll have to pay severance allowances, or severance payments to the people that we let leave. So the actual savings will only transpire beginning from Q2 or Q3 of next year.

And then just on the EBITDA margins for 2006, 'cause you're talking about some pressure coming through from inflation this quarter. You've got the cut cutting but could you give me an indication where you think they could go during 2006?

Right. We are still seeing a number of items significantly inflating. One is notwithstanding the fact that we're cutting back our workforce and are planning to also outsource some of the non-core functions. We are seeing pressure on the salaries as obviously inflation eats into employees' pockets.

We are seeing inflation on technical maintenance as, A, the network expands in this and some of the contracts discontinued there, guarantee periods, and we have to spend more on technical maintenance. We spend more on advertising as per unit advertising gets inflated since, as you know, there is a very high level of media inflation in Russia.

We are spending more money on rental payments of different source be it for land under our sites or our other rental payments. We're spending more, not on per unit but in absolute terms, and relative to sales that translates into higher percentages for leasing transfer capacity from long distance operators.

These are some of the more material items and they are likely to result, as Boris has mentioned, into a reduction in our EBITDA for Q4. Obviously some of those will come on the back of Q4 being usually seasonally not a lot stronger and weaker certainly on OIBDA than Q3, but also grow, translate into a certain reduction in our OIBDA margin in 2006. We are guiding those high 40s at this stage.

Thank you very much.

Thank you.

The next question comes from the line of Mr. Ali Rizwan. Please state your company name followed by your question.

I have actually two questions.

One is regarding the churn which of course is very positive. You massively reduced your churn in Russia and I guess part of it can be attributed to your CRMs during the quarter. But is there any other reasons, or any reason other than your customer retention programs that may explain the significant reduction in churn?

And my second question was regards to the expansion plans. We've heard more recently that you have further expansion plans in seven different markets. Could you just explain that?

On the churn, the primary reason was and the primary result, the primary reason why churn has come down so much in Q3 were the CRM campaigns as part of the, these were developed, the preset has been developed back in 2004 and 2005 was really the first year when we actively started implementing those, the CRM tool set, which became more of an issue in terms of needing to be implemented as we wanted to trace and predict churnable customers amongst the ones that we added in Q4 of 2004 and Q1 of 2005, since they had a significantly higher probability of churning out of the systems.

These include, as one of the instruments to give you an example, topping up accounts with free minutes on the basis of charges. So stimulating recharges by sending out SMSs and then giving some additional air time to those customers.

The effectiveness of the CRM campaigns in terms of the long-lasting effect is such that we do not believe that this is something, these are all the customers that we've won back for long. [What] they may churn out after a certain period of time.

They need permanent efforts to be retained with us for the longer term, and obviously there's a cost element to it that will prevent us from sort of permanently offering them more and more bonuses for staying with the operator. And, therefore, we think that even though they will continue to have some effect going forward, the effect is unlikely to be that drastic as to allow to us retain older customers, all the lighters customers that we added on the back of heavy promotions at the end of last year and beginning of this year.

Now, in terms of the expansion plans, we are actively pursuing seven countries of the former Soviet Union vicinity and I'm pretty sure that towards, or by the, before our year closes we should have at least one announcement of a potential acquisition, or of a completed acquisition.

We are at different stages of negotiation for all these seven countries. Now these are the seven countries that are all the former Soviet Republics where we're not yet present, and that excludes the Baltic states. Okay?

At the same time we're looking elsewhere, we're looking for interesting growth opportunities outside of the former Soviet Union vicinity. And as one example we are going to be bidding for Telsium, we are part of the tender. We have decided to reregister from [SETEMA] the company over to our position, a local company to participate in the tender for Telsium.

And that's one of those examples of a market that we believe possesses very high growth potential and is very similar in many ways to the Russian and Ukrainian markets and other markets that we're present in, and therefore where we can leverage our knowledge and our marketing expertise.

Thank you very much.

Thank you.

The next question comes from the line of Mr. Vladimir Postolovsky. Please state your company name followed by your question.

Good evening, gentlemen. Vladimir Postolovsky from UBS. Couple of questions if I may.

The first one is on gross service margin. If you look at Q3 and compare it with Q3 last year, your gross service margin fell by about three and a half percentage points, whereas rental income for the same period was roughly flat.

Could you explain what's happening? It's been quite continuous in a quarter-on-quarter has been coming down. Are there any structural reasons for that? I mean I thought in the last couple of quarters there were some one off factors leading to that but the trend seems to continue.

One thing I could think of maybe it's Ukraine and, you know, with growth of penetration, mobile to mobile calls increasing which are less profitable, maybe that's a little bit of pressure. But still, Ukraine could probably not explain the whole thing. So whatever you can tell about this would be most helpful.

The other question I had is on churn. Obviously it's great to see that the headline churn number is coming down, but frankly, it's a little bit counter intuitive given the [inaudible] is going up and they're saying that's it's down to the Christmas campaign of 2004 when you were actually much more aggressive than they were.

So I was just wondering, have there been any changes whatsoever to your churn policy? That's the second question.

The final one, you just mentioned Telsium. I'm just curious, would the, apart from the, well, you mentioned growth potential as a rationale but frankly the penetration rate in Turkey is approaching 70% already so it's becoming a very mature market very rapidly, similar to Russia, so it's very difficult to see how it can add to the growth profile of the group as a whole and probably the acquisition is going to be very expensive because the interest is coming from strategic investors like Vodafone and [Telenor], and you know, there are some investors apparently very interested as well so the price tag is going to be very high.

Historically created a lot of value through acquiring [outfits] cheaper early on in terms of penetration rate and growth of the market. That doesn't seem to be the case. So could you just talk a bit more as to why you're going for this particular asset? Thanks very much.

Okay. We're going to, this is Boris to answer your question on gross margins.

You are correct in all four our gross margins for the group was 82.3% and it is declined year-on-year to 80.6%. Really, the main reason for the decline in what we do see is increase in interconnect and line rental cost as well as roaming expenses really, but interconnect and line rental obviously should go up as we continue to expand our network and continue to basically add more customers.

I also will, that's on the group level. I will pass this on to Mark Burden so he can add something on UMC gross margins.

This is Mark Burden, CFO of UMC.

Actually, our gross margin has generally remained somewhat stable although we are seeing that we have a similar pressure on interconnect and line rental, although we are better able to deal with the line rental part for the future as we build out our fiber optic cable network and we would expect that that would improve our margin 1 to 2% next year overall.

Thanks for the input. Maybe as a follow-up, the headline number, you're right, came down by [1.7] percentage points but the gross service margin on your service rating, it's actually came down by about 3.5 percentage points, whereas rental comps is stable. So I was just wondering whether you have an explanation why there's a difference between the two of you? I would have thought they should be facing the same problems.

We don't see any obvious reasons why there should be any drastic differences. I mean, the answer is that there's some differences in potentially line rental costs but --

I think the one to take into consideration, or two things to take into consideration, and that really make the comparison a bit of oranges to apples is the structure of the network and how centralized some of the key platforms are. In our case we've centralized most of the platforms on a macro-regional basis, A. and B, how much transport capacity is owned by an operator.

Okay.

Okay. Let me also contribute to higher or lower expenses and actually it affects both the Cap ex and the op ex, and it really depends on whether the operator has been willing to spend money on the transfer capacity to save some on the op ex and it was deemed to be an [inaudible] project to investor in this transfer capacity. We do some investments in transfer capacity, you know, and we will also rent some, but the distribution of how much we own, you know, is probably different from that of our competition.

Thanks very much.

On the other questions, now, with regards to churn, first of all, I would probably doubt that we were more aggressive in Q4 of '04 and Q1 of '05, but I'll leave it outside the framework of this conference call. There have not been a change to the churn policy.

In terms of being counter intuitive, what I think matters most for us is where the economics of the CRM campaigns. We thought that they didn't cost much, and at the same time the hit rate allowed to us implement those, not so much for the sake of the SIM numbers, but for the economics that resulted from the CRM campaigns. We should have thought were extremely positive.

Now, that does not mean that with regards to, because if your hit rate on the CRM campaign is let's say, 10% or 15%, that means that you're economically better off than without a CRM campaign. This does not mean that the certain percentage may be a meaningful percentage of customers that have been part of the CRM campaign will end up staying with you for a longer period of time.

So I would say that one should analyze the effectiveness of the CRM campaign subscriber-wise over a longer period of time than a quarter.

Fair enough.

[Reporting] to say that over a longer period of time we will be much different save for the fact that this may be a tool set that is unique in the marketplace, and therefore I'm not, again, I don't want to compare oranges to apples. Maybe if this tool set has been implemented by us first then, you know, it may also be implemented by the other players and therefore the numbers, the churn numbers, are likely to be comparable only with the similar tool sets in possession of all the operators.

But on a normalized sort of ex-CRM campaign level we could probably be talking about similar churn rates.

And Telsium?

On Telsium, there is, notwithstanding the fact we are talking about a fairly highly penetrated market, we believe that there's still a certain level of growth potential and it's not insignificant given the size of the market. It's not an easy game to play. The company already has a share of the market.

It sounds more like a turnaround story, a potential turnaround story. It's in many ways a distressed asset, and therefore there is value to be created out of this asset by managing it properly.

In terms of how we price this asset, obviously we're not in the game of paying [emotional] premium for this asset and we don't have excess cash in large quantities sitting in our books waiting to be invested in something at an unreasonable price. Therefore, we're unlikely to be amongst aggressive bidders for this asset.

So I'm not going to attach probabilities for a positive outcome of this bidding process for MTS, but I think it's one of those opportunities, given its size, given its proximity to our market, given its turnaround credentials that we should have looked at and that we should be looking at.

Thank you very much.

The next question comes from the line of Mr. Eric Mueller. Please state your company name followed by your question.

Arthur Capital.

Question for you on the MOUs especially on the low end. It looks like quarter-over-quarter your MOUs are actually diluting. If I look at VIP, at least on an aggregate basis, it looks like you have quarter-over-quarter growth in the MOUs, so can you tell me really what's going on there?

And then also, it looks like your pre-paid ARPUs are pretty low this quarter, 5.7, so what's the incremental ARPU there on your pre-paid? I mean, obviously it's below this 5 to 7 range I think that we had heard earlier.

Okay. Well, we have, I guess, two dynamics that one should note. We are rather flattish on the sequential MOU, [inaudible] at the same time we are seeing certain increase on the MTS sort of heavier end of the market [inaudible].

We are adding lower usage customers. We are seeing quite a significant effect on dual and triple multiple SIM card ownership and that is leading both the ARPU as well as the MOU for our customers and we don't think there's a way around it until the levels of multiple SIM card ownership reduces or gets reduced in the marketplace.

It may be that in our case we're talking about more significant percentage of multiple SIM card users amongst our customer base. We do not know that for a fact but that may be the case.

In terms of how, who we're adding right now in terms of the profile of the customers, we are adding customers on a blended basis of between around $6 for Russia, and a dollar more in Ukraine. So around $7 ARPU customers.

Great. Thanks, guys.

The next question comes from the line of Mr. Alexei Yakovitsky. Please go ahead, sir.

It's Alexei Yakovitsky from UFG. Good evening.

I want to continue on the churn issue. It went down so dramatically quarter-on-quarter. Is this because you have made the decision not to disconnect promotional SIM cards that you had given away in December and January?

The reason I'm asking is because we haven't seen any impact of these potential disconnections in your monthly subscriber statistics for July and for August. And if the answer to my question is yes, can you please give us the number of those, that sold in your subscriber base? Thank you.

Alexei, I can refer you to our previous answers, we have not decided to not disconnect the customers that we added early in the year. We have been giving some bonus minutes to customers on the basis of recharges. We've been stimulating those recharges, and this translated into additional, or a reduction in churn, or additional customer activity.

The level, the magnitude of CRM campaign was more than hundreds of thousands. We're talking about a greater number than that, but I don't think we, since there were a number of different CRM campaigns, it would be, I'd probably stopped short of breaking it down amongst different CRM campaigns because they were all different. Some were VAS oriented, some were usage oriented, some were top-off oriented.

Thank you.

The next question comes from the line of Mr. John Bates. Please state your company name followed by your question.

Hi, there. It's John Bates, ABM AMRO here.

Just a quick question about Cap Ex, please. I noticed that the third quarter Cap Ex number was 500 million, 406 of which was in Russia. Perhaps you can give a comment on how you see in the dynamics of Cap Ex going forward in particular in between the split between the countries?

Also, perhaps you could also comment a little bit on cash balances. I noticed that the Company maintains a fairly healthy cash balance. Is that something that you see maintaining going forward?

On Cap Ex we are planning and that we've guided before and we are still on the same target to spend about $2 billion this year with the split between, within this amount is approximately three-quarters Russia, one-quarter Ukraine, about 50 million for Uzbekistan.

In terms of next year, we are planning to spend in absolute terms, slightly lower amount than in 2005. And that has been our guidance since I think the previous quarter. It remains unchanged.

In terms of the cash balance, I'll just start and then Boris can pick up from me.

By saying that the initial euro bond that we replaced at the beginning of the year was geared towards financing some of the M&A opportunities that we thought were imminent. They were scheduled to be closed either in Q1 or early Q2, and the way the market [felt] we thought it was prudent for to us raise some money.

Some of these, most of these M&A opportunities have been deferred. They're still in the pipeline but we are obviously not happy sitting on extra cash if we don't need to be, and they are likely to be invested in the, [inaudible] this money is likely to leave the balance sheet, this extra cash, if you will, over the next couple of quarters. Boris.

In addition to what Vassily just mentioned, we also are to pay out an additional 100 million, not an additional, but the remaining $100 million of dividends in Q4 from which obviously we will need the cash. The other main reason is we're just, Vassily said, it's potential acquisitions which will materialize at some point. Thank you.

Thanks very much.

The next question comes from the line of Mr. Bill Nord. Please state your company name followed by your question.

Marvin Palmer Associates. Two questions.

With respect to the penetration, mobile penetration, what is it at the end of nine months in Moscow and in the regions, and in the Ukraine? That's the first question.

Would you go ahead and ask your second question.

The second, your effective tax rate for the first nine months of this year was 26.1%. Is that a good working assumption as we go on through next year, and how does that relate to the corporate tax rate in Russia?

Okay. I will take your second question on the tax rate.

It is 24% Russian [inaudible] profit tax rate, and it is 25 in the Ukraine. So we have been historically at 26, 27% effective tax rate, which we do see as a normal operational tax rate for the business, and we would expect obviously subject to any changes into the regulation itself this tax rate to continue to be as the group's tax rate going forward.

On penetration we were at 77% at the end of Q3. We added three more percentage points by the end of October so we're --

Excuse me, could you repeat that, please?

We were at 77% penetration for Russia.

Yes.

At the end of the third quarter.

Okay.

We added three more percent in October and we were at 80% at the end of October. In terms of Moscow, we were at 127% at end of third quarter, and in St. Petersburg, 112%.

How about the regions?

In the rest of the country, we were at 68% at the end of Q3, and are currently, as of end of October, at 71%.

71%. Okay. And in Ukraine?

In Ukraine we are currently at 49%.

49. Thank you.

I'm sorry. 49 was the end of Q3, and 51 approximately was as of the end of October.

51. Okay. Thank you.

The next question comes from the line of Mr. Alex Kazbegi. Please state your company name followed by your question.

Good evening. It's Alex Kazbegi from Renaissance Capital. A couple of questions in there from me.

Your year-ago margin in Ukraine was softer also quarter-on-quarter by about one percentage point. If you compare what was the dynamics for instance with the [KiaStar] side seems that there is quite a big divergence between your reported numbers and their numbers. And again I don't mean to contrast you to those guys but I was just wondering what is the reason for declining margin there.

Also, given what Mark said about possible improvement on the interconnect and the service margin for the next year what could be the outlook again for the Ukraine going forward. That's one.

The second thing is again, we also looked at, for instance, subscriber acquisition costs which, for instance, in your case increased quarter-on-quarter in case of VimpelCom decreased and quite sharply, and although neither they expected to stay there. I was still wondering what is your view on where could subscriber acquisition costs can go from the level of whatever it is, 18.6, do you think there's room for them to improve, or do you think that that's actually a genuine increase which is going to be continuing throughout the next year as well?

And probably lastly, I was just wondering also, you, I think you mentioned in the presentation that value-added services comprise now about 11% of the top of revenues. Given that you've launched the i-note, and I think you have a delay in the BlackBerry launch, but I'm just wondering, I mean, what kind of contribution you've seen from these services and what kind of contribution do you expect it to be both to the revenue [inaudible] for the value-added services overall? Thank you.

Okay. Alex, hi. I'll take the Ukraine and the EBITDA question.

Basically, sequentially, we had a more aggressive quarter than Q2. In terms of [KiaStar], comparison to [KiaStar], we know that their politic is slightly different in terms of they, as you will see from comparing Cap Ex they actually capitalized some things that run through our expense. For example, their transport policy is different, their building policy and some of their technical policies are different which drive a higher EBITDA margin and they would have higher Cap Ex for that.

In terms of our outlook going forward given that the dynamics for next year will be more aggressive as we have an additional entrant, strong entrant coming in that we would also give similar guidance of high 40s for UMC. Clearly there are some things that we will be doing in terms of the fiber optic cable which will help us gradually maintain our margin. Thanks, Alex.

In terms of, Alex, in terms of subscriber acquisition costs, we have seen, if you look at the structure of SAC, we've seen their dealer portion of SAC going down quarter-on-quarter and advertising spend going up.

This came on the back of increased presence advertising-wise in the Russian market primarily as well as to a certain extent in Ukraine. We believe that we were under represented in Q2 and therefore should have been spending more, or should have been more present, not spending more for the sake of spending, but should be more present and therefore it took some investment.

In terms of whether the SAC figures are likely to be going down, I would probably stop short of saying this since we think that we will have to continue investing some into dealer loyalty, since it is one of the obvious instruments of stimulating dealers to acquire more customers for you and not for the competition. And, therefore, there will be some investment from our side going that way, and that may contribute to a stable or a, let's say a not so diminishing start going forward.

But is it worth to the say because you've been investing in your new image in the third quarter that add portion increased because of that and could it be treated as not necessarily one off but there was a sort of abnormal increase?

It's a novel increase. I think the overall presence is likely to stay at either current levels or grow somewhat if you look at the regions. And therefore, yes, I mean, it's a question of how much space we occupy, not only of the content but mostly of the space, and the space we don't think is likely to diminish any time soon.

Now, in terms of value-added services, we are planning to grow value-added service revenue, also as a percent of total ARPU, as a percentage of total revenues. i-mode is likely to be a more meaningful contributor to that beginning from '06.

In '05 we really treat it as more of a, for the initial couple months we're treating more as a testing ground. We were not subsidizing handsets, we're not promoting heavily. We were upgrading the network making sure that it operates seamlessly for this increased demand for capacity and frequencies. Frequency bands in Moscow and St. Petersburg.

And therefore, it was more of an initial launch period and we're going to be moving into a lot heavier advertising towards the beginning of '06. And, therefore, it's likely to contribute more.

So is it correct to say that you're not ready to tell us now what was the sort of the uptake in terms of the subscriber interest and what kind of ARPUs you can get from [that]?

I would not want to mention those figures for the period that has passed since the launch because it's too short. I don't think it's going to be very meaningful.

It has not been as fast as I've said on the back of us not utilizing subsidies as well as not promoting the services actively. When we promote more actively and when we incentivate the dealers more to sell the service we think we're going to get a lot higher figures and therefore the contribution will be more meaningful.

Thank you very much.

Thank you.

The next question comes from the line of Sergei Asenyev. Please state your company name followed by your question.

Good afternoon. This is Sergei Asenyev from Goldman Sachs.

I'd like to follow-up on usage, please. If I understand correctly the sequential drop in usage was due to rising levels of inactivity. Will this be a correct statement? And if that's the case, we talked a lot about this in the conference call in one form or another, but if I contribute my own form of this question, and if you restate the number of subscribers for active and inactive and tracked usage on the active subscriber basis, would you see the same decline in sequential usage as with the normal subscribers that you're using? That's question number one.

My second question is on the balance sheet and whether you believe that right now your capital structure is suboptimal. And then given the comments that you've made on Telsium acquisition, that you're unlikely to be an aggressive bidder in the company of likely aggressive bidders. Where do you see your target debt to EBITDA ratio, and if you can comment on that please? Thanks.

This is Grzegorz Esz] Let me start with the first question regarding the MOU. In Q3 we have reported four minutes of use decline but if you break this number down we actually have increased on MTS MOU use, which is the contract subscribers. And the CEO was earlier talking about this. So this actually shows the improvement of activity on our contract subscriber base.

In terms of decline of, on Jeans, we have reported three minutes from 102 decline to 99 minutes. This is again due to one of the earlier comments or answers we have provided, which is double SIM usage. But as you can see, this is less than 3% drop in total usage on pre-paid market.

The aggregated number drops from 134 to 130 which is actually the result of increasing of our pre-paid subscriber share from 83% to 87%.

All right. And, you know, you're not prepared to comment on the levels of inactivity amongst your pre-paid subscribers, and I can take on board the comments about changing the mix of subscribers but this is also supposed to be the best seasonal quarter for you at least it has been historically.

Right. Sergei, we are probably unprepared to give activity figures at this stage. We are targeting improving activity KPIs within the Company.

For continuity sake, I don't think a random number would be any, or a one-off number will be meaningful to you. What's meaningful is the dynamic, and we are projecting positive dynamic going into '06, and we may consider bringing, or sort of enhancing the [inaudible] lines to such an extent that this KPI is also better represented in the way we report on subscriber numbers in 2006.

Thank you.

Now on the balance sheet structure we are obviously quite aware of being very underleveraged. As you know, there are a set of covenants, a set of covenants, and we are much, much below what is allowed to both us as MTS and for us being a consolidated company for September.

As a group, we could comfortably go up to two to two and a half times net debt to OIBDA. We're significantly under one times net debt to OIBDA and we've been fairly stable in terms of the lower [inaudible] if you look at net debt to [inaudible] OIBDA for the past several quarters and obviously the, our willingness and the necessity to borrow more and to optimize the capital structure will be -- depends on two things.

One is the acquisition opportunities that we decide to go after. And secondly, the decisions made by the shareholders as to the distribution of its profits by the Company.

We planning to increase returns in terms of absolute number for dividend payments for '05, and the rest is going to be left up to the negotiating dynamics for the acquisition target that we're after right now. The total pipeline for these acquisitions is significant, and even ex-Telsium it exceeds a billion dollars.

All right. Okay. Thank you very much.

The next question comes from the line of Ms. Lydia Cooper. Please state your company name followed by your question.

Hi. It's Lydia Cooper from Bearing Asset Management. Actually most of my questions have been answered. I just wondered if you can update us on the fourth quarter in terms of promotional activities? Are you giving lots of free minutes, et cetera?

So let me handle this answer. In fourth quarter this is sales season.

Yes.

So we are, we actually started on Monday our [Novogodnie] tariff which is a promotion on the pre-paid market. We are not giving any free minutes in this pre-paid offer. We are promoting on the cheaper calls for the period of the promotion, which is starting on the 21st of November and is going until end of January next year. So this is a temporary drop of the price on our net calls.

So nothing like what happened in the last Christmas period, promotional period?

No.

Thank you.

In terms of [inaudible] not around a year ago, so I'll say for him.

Thank you.

The next question comes from the line of Mr. Nick Varns. Please state your company name followed by your question.

Hi, Nick Varns [inaudible]. [inaudible] breakdown of minority interest in the quarter and whether you've got any plans to continue buying out minority interests going forward. Thanks.

Let me comment on our strategy in terms of the buying minority stakes.

Our overall goal for Russia is definitely to consolidate 100% and then basically merge the entities into MTS. That goes without saying that we are on track actually to execute all the remaining material buyouts very shortly, so we're on track on this end.

In terms of other countries, we sometimes decide and sometimes think that it's better to have a local partner in and therefore there the schedule for buying out minority stakes is more extended over the life span of, so to speak of, the project, and we are not that keen on going after those stakes.

The only one exception, probably, which is significant exception, is Belarus, the joint venture that we have not yet started to consolidate, and obviously it would be a very material addition to our P&L should we be able to consolidate control in this entity. We're going to be going after that with all means possible but that's a bit force majeure since it remains a political decision.

In terms of actual numbers, the minority interest you can see on our P&L is basically contributed by two companies. One is Recom, which is a subsidiary. We own 54% in the central part of Russia.

The other one is [inaudible] our operations in Uzbekistan where we have a 74% stake. So a majority of what you see on the P&L.

That is great. Thank you.

The next question comes from the line of Mr. Alexander [Kurtznetsoff]. Please state your company name followed by your question.

Good afternoon. It is Alex [Kurtznetsoff] from Bear Stearns. I have tow questions.

First of all, as you pointed out this week MTS announced very attractive new year tariff. I would like to inquire about the interconnection and termination rates you pay to local incompence and other mobile operators.

And secondly, we were quite impressed with the reported stratospheric ARPU in Turkmenistan at $89. And since the reported number of subscribers has not changed much since the time of acquisition, I would like to inquire if it's possible that the actual number for subscribers in Turkmenistan is higher than reported, and this ARPU is the result of lower reported subscriber numbers.

Let me start with the second one. We are reporting $89 ARPU for Turkmenistan on the back of very low penetration and services being priced at a premium. The only reason why customer base has been stagnating was on the back of lack of switching capacity and this lack of switching capacity did not enable us to acquire more customers, and in this sense this was on the back of us not having until recently resolved the legal status of the company going forward.

Now, as I've briefly mentioned in my speech, introductory speech, we have resolved this issue. The agreement signed with the government of Turkmenistan is scheduled to come into effect sometime next week, and then we'll be fully operational. We'll be able to bring in more equipment, expand the switching capacity, expand our radio coverage, et cetera, et cetera, and obviously bring the prices towards where they need to be to grow our presence there, and penetration there from 1.5%, where it is now, up to, all the way up to 10, 15 in the very short-term.

With regards to the interconnect [Novogodnie] tariff is omni tariff which does not influence the interconnect cost increase if we have customers increasing their usage during this promotional tariff.

With regards to the interconnect agreements, it is a subject under development, so that means that we are, this is quite a complex issue with negotiations with both fixed and mobile operators. So I would not like to cover this issue at the moment. But let me repeat in that terms of [Novogodnie] tariff this is [all net] calls so interconnect is not involved.

I see. Thank you very much.

The next question comes from the line of Ms. Anna Bossong. Please state your company name followed by your question.

Hi. It's Anna Bossong. I've got two questions.

My first is on the minutes of use story again in the third quarter. I wonder if it would be possible to have a minutes of use some progression for existing customers. In other words, excluding new customers in that dilution. In the pre-paid side did you see an increase in the third quarter?

And if not, is it possible that maybe promotions from other operators were actually taking minutes out of your networks and if that's the case should we expect more price competition in a permanent pricing competition in Russia in the future?

And my second question is on Ukraine. Obviously now it's going to be a serious player market. Can you give us an idea what sort of ARPUs you might think we should be looking for in 2006? Thank you.

On the minutes of use for the pre-paid market, the decline has been three minutes from 102 to 99. So this is the decline of less than 3%.

Number of reasons behind it, one of them as I said earlier is double SIM usage but this effect, as you can see, is not a very big one. Yes, one of the other effects is acquisition of new customers and we are not picking up all the customer months in this given quarter.

So there is also a dilution of the newcomer's usage that we are not picking up at a full three months. So those three minutes decline on the minutes of use to my mind can be explained with normal course of business for this quarter.

In terms of looking ahead about the price competition, pricing competition is happening on different levels. One level is the regional level and, therefore, we are, and then we are applying regional strategies and macro-regional strategies.

On the federal level, as we were saying earlier, we are getting on the platform where with the competition we're reaching a similar level of promotional benefits so, yes, we have experienced quite a big price war, but it's tough for me to speculate because it's also a competition involved but on the federal level it seems that we are getting on a platform where we reaching a balance.

Could I just follow-up on that and put the point to you that if were losing minutes due to price competition for example from VimpelCom's summer offer, and they had discontinued that offer then it's quite possible in the fourth quarter that you might see a bounce-back. Is that a fair analysis?

I don't know about Beeline what I saw last night on T.V. they are doing Vampire offer, which is a free [all net] minutes during the evening and night hours. So what I see right now is that they're not bouncing back with the offer from summer.

Thank you. Interesting.

As to Ukraine, our expectation for 2005 overall is an ARPU of $10, and for 2006, we would expect that to be in the ballpark of $8. But that is subject to the outcome of some interconnect negotiations that are underway as well, but that would be a reasonable projection. Does that mean as you have a not favorable interconnection rate you might have a lower ARPU with lower costs. Is that what you mean? If the interconnect is down then that would take the ARPU down.

Got it. Thank you very much.

Thanks, Anna.

The next question comes from the line of Mr. Tarish Schmelder. Please state your company name followed by your question.

Good evening, gentlemen. Two questions.

Can you please discuss the competitive environment in Ukraine with respect that Turkcell announced they have I think 1.3 or 1.4 million subscribers now. And are you seeing any let up on the aggressiveness on their part? Also in Ukraine, what are your thoughts or plans with respect to VimpelCom's planned entry into that market?

The second part is in Turkey. Do you have a time line in mind as to when the Telsium bidding will be concluded and what you expect the, whether you're bidding alone or are you part of a bigger consortium? Any detail could you provide there would be helpful. Thank you.

I'll take the Ukraine question.

In terms of penetration of [inaudible] under the Turkcell ownership, they are moving quickly along, but it's very much on the back of significant free offers, which will continue to run through to the end of the year, and they may extend through into early next year. So yes, there is aggression, and we certainly expect that to continue but it's very much on the back of free minutes and they lack still considerable coverage.

In terms of VimpelCom, then we understand obviously they have great experience, but they're coming in as the fourth player in what is already a very aggressive market, and it will take them, as they've said on their words, five to six months before they get the band really up and running. So they will be coming in a long way behind the other operators. So they will have a very tough time.

On the Telsium bidding time frame, 5th of December is the deadline for submitting the bids. 13th of December is the deadline which is currently stipulated obviously it may always change. There's always a chance of it changing or it being extended for selecting the winning bidder. Or may be coming up with a short list of those potential winning bidders.

We are entertaining different possibilities of potentially partnering up with other players, and in an environment, in the Turkish environment we think it may be prudent to have a local partner with already existing strong local presence.

May I ask a follow-up question on Ukraine here?

Sure.

Let's say it does take VimpelCom precisely until the end of the first half, until June 30th, to get its operational launch. How soon before that do you think it would be appropriate for the competitors, that is you and anyone else, to launch some sort of additional promotional program to make the VimpelCom's launch as relatively benign to you as possible?

Okay. In terms of all the operators have very active campaigns currently and will continue active campaigns. When they come in the middle of next year, we will be somewhere between 65 and 70% penetration, so they will have a long way to climb from that. And then they will still be building out their network in a very big way.

Okay. Thank you.

This is Eric Franke. Good evening. I just can contribute a little bit to the discussion about Ukraine. I'm only here six weeks.

Basically one of the things you can see also in Turkcell, they haven't churned any subscriber, so the number of subscribers you see in the network are actually old subscribers that they have accumulated since the start of their activity, which is less than a year. So you would see beginning of next year a huge effect on the churning, which also has a big effect then on their market share. So this is just a pyramid where they're building subscribers on subscribers.

About Beeline, we of course are looking with very much interest to the entrants in the market but we definitely share the skepticism in the rest of the market that coming on an already mature market is very, very tough, which we also see for [inaudible].

Thank you.

We have a follow-up question from the line of Mr. Vladimir Postolovsky. Please state your company name followed by your question.

Couple of housekeeping questions if I may.

Other operating expenses in you P&L in Q3 increased quite noticeably. I was just wondering whether there were any specific items, any one offset you could tell us about?

The other question I had is, if you could just quickly give us the market share that you have in Turkmenistan at the moment. Is competition developing or are you having problems on not?

The third issue, I'd just like to [inaudible] is on pricing in Ukraine. If you look at the effective yield to minute on the pre-paid tariff launch, there's all kind of weird dynamics. Like in Q1 it was quite low and there was a balance last quarter, which I think you explained last time around by discontinuation of free minutes offerings but then this quarter there was almost a full back toward the pricing wars in Q1. So I was just wondering what's going on there?

And finally, I'm sorry to dwell on this, but just looking at your gross additions, in previous quarter, they're very were similar to VimpelCom, this quarter they're about 1 million compared to 3 million, well I'm talking about disconnections [inaudible] the disconnections for you compared to 3 million for VimpelCom. Could you again run through the CRM initiative that you had in Q3 and again give us an estimate as to how many disconnections were kind of saved by this initiatives? Thank you.

Vladimir, on other operating expenses the universal service fund charge is included in there so you see about $5 million increase quarter-on-quarter coming from that. Besides that, there have been some [inaudible] but nothing really which would, I guess, attract attention or nothing to report on this front.

Okay.

On Turkmenistan, Vladimir, there is no reliable data on how many subs [inaudible] which is the state-owned competitor has, but we estimate our market share right now to be from 70 to 75%. Again, no reliable data is quite available on this non-public entity.

As far as the churn is concerned, we, I think, I've already tried to answer that question, and there [is really] much to add. As I've told you there have been free minute offers, or bonus minute offered to, on the basis of account recharges, billed account recharges were stimulated by different information means, and without wanting to go into the exact breakdown, because that would take some time, and I don't think it's necessary, I would probably stop short of giving the exact number of how many subs were addressed within the framework of the CRM campaigns.

Obviously the numbers are significant since the beginning of the year because we started the CRM campaign early in the year and they've lasted for several quarters. This was the result of the CRM campaigns that have been executed back in Q1 and Q2 of this year.

Thanks. And pricing Ukraine?

Pricing in Ukraine, Q1, we had also similar free of charge minutes running in the first quarter. So that certainly depressed the APPN in Q1. Plus, there was a lower than expected level of activity following the political process during Q1 and into Q2 we and [inaudible] realigned our tariffs for the going forward.

All of us introduced new tariffs, and then as we move into Q3, all the players are introducing particular sales promotions for the summer, again, with a mix of various free minutes and special promotion items which are broadly depressing the pre-paid market. The post-paid side held up very well in Q3. The activity is mainly in the pre-paid market.

Thank you very much.

The next question comes from the line of Ms. Nadejda Golubeva. Please state your company name followed by your question.

Good afternoon. This is Nadejda Golubeva from Aton, so most of my questions have already been answered.

I have one question on interconnect. The [inaudible] relation effective 2006 seems to put further pressure on your interconnect and line rental cost. I understand that it's premature to discuss any numbers but can you give us some idea of could be the range for the impact so other things equal? So are you talking about some sort of 10% increase? 20% increase? Or what could be, say, worst-case scenario, if I can put it this way? Thank you.

Unfortunately it's too early to tell or to quantify the new legislative initiatives and the new rules, rather not the legislative initiatives but more rather the,[inaudible] that are being churned out by the ministry, or by the regulator, in the broader sense of the word. Until we have the formulas, and one thing I can say is that we have been participating more in those discussions with the regulator, but until we have a set formula in place, you know, black and white, written black and white, we do not know what the quantification would be.

Okay. And may ask about handset subsidies. I understand you're going to subsidize i-mode handsets next year. Could you comment how aggressive are you planning to be and do your plan to subsidize just i-mode or all handsets?

I want to make clear that we are not planning handset subsidies for the mass market for the time being. We are, at the same time as I've said, we're going to be investing more into pushing i-mode into the market. That will not take the form of handset subsidies.

Thank you.

Once again, if you'd like to ask a question, please press the star followed by the one on your telephone. And to cancel that request, please press the star followed by the two.

Ladies and gentlemen, we would like to give people a chance to listen to the Turkcell conference call which is today as well, so can we please have the last question from your side? Thank you.

Thank you, sir. The final question I have polled for today, excuse me, sorry, I apologize, the final three questions I have polled today, the first of which comes from Mr. Alex Kazbegi. Please state your company name followed by your question.

Just a quick clarification please. You mentioned about Telsium going together with possibly partnering with somebody there. I'm just wondering, would you be interested in taking a minority position in that partnership, or would you only go for anything sort of above 51%?

Alex, we're not in the game of owing minority stakes. If we were to do that regardless of the composition the consortium would only take a majority stake.

Thank you.

The next question comes from the line of Mr. Adam Tuckman. Please state your company name followed by your question. Golden Tree Asset Management. Two quick questions.

With subscriber growth slowing can you just talk about a couple steps you're taking for '06 to improve cash flow?

And then second quick question is on these seven or so acquisitions that might be on the table what is the aggregate consideration that might be paid for those? Thanks.

On the slowing down of growth, we're obviously focusing right now on the growing the top line by whatever, by all means possible. It implies since we believe that if you take Russia as an example, that probably more than half of incremental revenues that the market will gain or gauge over the next three years are going to come from existing customers.

We are implementing all sorts of retention and loyalty-oriented initiatives and are defending as well as building up our presence in the high end of the market primarily, which is our, where we've traditionally been the leader. As well as growing loyalty, or building more royalty on the mass market side of the business.

In terms of new additions, these are going to yield the balance of maybe 40 to 45% of incremental revenues for Russia in the next two years. For this, for these incremental [things] we need to fight. It's a tough fight.

We've been losing some market share in the mass market in the [inaudible] primarily. We want to take more market share back from our competition and we're going to be to focusing on the mass market increasingly in terms of the quality of the products that we bringing to the market in terms of the quality of communications in terms of the [inaudible] proposition in general.

Obviously it's also a question of efficiency. We've stated that the last, our goal is to be dilutive in revenue market share. We also need focus on efficiency, operational efficiency and we'd like to be the best-in-class in whatever national market we're in, to be the best-in-class profitability-wise, or have that goal and achieve that when the time is right depending on the state of entry for our operations.

In terms of the aggregate consideration for the acquisitions that are in the pipeline, ex-Telsium, for the [inaudible] we're talking about a total pipeline that is in excess in monetary terms, of a billion dollars. I wanted to clarify that this is a pipeline that may or may not be executed in the next, you know, 24, 48 months. We are talking about a potential pipeline of deals.

All right. Thank you, everyone. Let me conclude this conference call. Both the dial-in and Web replay of this call are available. Please contact our Investor Relations department if you have any follow-up questions. Good-bye, everyone. Thank you.

Thank you.

This concludes the Mobile TeleSystems third quarter 2005 financial results conference call. Thank you for your participation. You may now disconnect.