Mobile TeleSystems PJSC (MBT) 2005 Q4 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to the fourth-quarter and full-year 2005 financial and operating results. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS) I will now hand the conference over to Mr. Andrei Terebenin.

Good day, ladies and gentlemen, and welcome to MTS's Q4 and full-year 2005 financial results conference call. I would like to introduce MTS's executive team today. Vassily Sidorov, President and Chief Executive Officer; Eric Franke, Chief Operating Officer; Grzegorz Esz, Chief Marketing Officer; Boris Podolsky, acting Chief Financial Officer; Mark Burden, Chief Financial Officer of our Ukrainian operation; and myself, Andrei Terebenin, Vice President for Corporate Communications.

Before getting started I would like to remind everyone that statements made during the conference call reflect the opinion of management as of the date of this call. Future developments may render the statements outdated; however, we do not intend to update the guidance provided today before our next quarterly conference call.

Please note that the reconciliation of operating income before depreciation and amortization for operating income can be found on the Company's website. By now you should have received a copy of our press release by mail. If not, the press release as well as the management presentation can be found on our website, www.mtsgsm.com, in the Investor Relations financial reports section.

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

Thank you, Andrei. Good evening, ladies and gentlemen. I would like to start with a brief overview of 2005; and then Grzegorz and Boris will take you through financial and operating KPIs of Q4 and annual results in more detail.

Grzegorz will also give you a brief update on the recent marketing activities and competitive dynamics. After that we will be happy to answer any of your questions.

Let me start by going through what I consider to be key achievements of 2005. Our main goals in 2005 were to retain leadership, integrate the business, and lay the foundation for strengthening the Company's lead and further international expansion in 2006 to 2008.

The latter included executing a number of crucial integration measures, such as the full-fledged rollout of our new management system, migration of our prepaid customers to a new billing platform, consolidation of call centers, and radical enhancement of customer service quality and other key operational processes. These measures were successfully implemented.

Our financial results for 2005 demonstrate solid growth of our top line and earnings. Our revenues for the year were up 29% at $5.011 billion. OIBDA was up 21% at $2.539 billion. Net income was up 14% year-on-year at $1.126 billion. The OIBDA margin for the year was 50.7%.

The growth of our top line by $1.1 billion in 2005 was unrivaled by anyone in our peer group. We added more than 24 million subscribers to the Company's consolidated subscriber base in 2005. At year-end we operated in 82 out of 86 regions for which we hold licenses in Russia. We added a further 2 million subs in the first two months of this year.

Our marketing initiatives of Q4 last year and Q1 of this year have been geared at strengthening our customers' loyalty and enhancing their [trustingness] of our services. The Company's subscriber market share at the end of 2005 stood at 35.1% and remained stable in the first two months of this year.

In Ukraine the competitive environment has changed with the entry of an aggressive new player, Astelit, in February 2005 and the acquisition of Velcom by Vimpelcom in November of '05. Despite increased competition, UMC continued to post strong results with impressive revenue and earnings growth. Our goals for 2006 are revenue and subscriber leadership in Ukraine.

Our operations in Uzbekistan showed a healthy subscriber and top-line growth dynamic. Our subscriber market share was at a level of 55% at year-end 2005.

In Turkmenistan, MTS brought its ownership in BCTI to 100% in November. We are well placed to continue being market leaders in this country as we invest in strengthening both our network and distribution channels.

Our expansion into some of the former Soviet Union countries has introduced us to new and at times unpredicted risks, as represented most acutely by the events in Kyrgyzstan. In this regard I would like to reaffirm our position on Bitel.

The acquisition that we announced in December 2005 was completed after proper due diligence and in accordance with the international and Kyrgyz legislation. We reiterate that the seizure of Bitel's offices was unlawful, and we will continue to defend our ownership title in courts of appropriate jurisdictions. Currently, MTS has no operational control of its offices in Kyrgyzstan.

There are a number of regulatory challenges to be faced in Russia in 2006, including Calling Party Pays, Mobile Number Portability, and MVNO regulations. CPP is to be introduced on July 1. The exact terms are currently being worked out. These terms may potentially have a negative effect on our profitability, as revenues may decrease without a similar reduction in associated costs.

In Ukraine the implementation of a Universal Service Funds charge is contemplated for this year.

The liquidity of our stock increased in 2005 with the sale of the remaining stake by T-Mobile in September, and recently MTS was added to the RTS Index with a 5.7% weighting, which should further increase our stock's liquidity.

We have recently added a number of high-caliber professionals to our management team. Andrei Terebenin, the Company's new VP for Corporate Communications in charge of public and investor relations; Garrett Johnston, the new Director of Marketing, that will work alongside Grzegorz Esz, the Company's freshly appointed CMO.

Andrei has a wealth of experience in corporate indications after having run one of the top five PR agencies. Garrett used to be the Chief Marketing Officer of Kyivstar prior to his move to MTS. Grzegorz has been acting CMO of MTS for the past four months.

To summarize, we feel that our achievements in 2005, coupled with competitive lessons learned, should be a solid foundation for robust performance in all of our operating markets in 2006. We remain committed to increasing shareholder value. The focal points for 2006 are customer loyalty, revenue growth, and operational efficiency. The Company's capital structure should support our ability to combine nonorganic growth with increasing cash returns to our shareholders.

On this note, I would like to hand back to Andrei. Thank you.

Thank you, Vassily. Now I would like to pass the call over to Grzegorz Esz, Chief Marketing Officer of MTS.

Thank you, Andrei. Good day to everyone. MTS led the market in Q4 both in terms of gross sales and net acquisitions, which resulted in strengthening positions of market share leader in Russia on the level of 35%.

Total number of subscribers at year-end 44.2 million and 58.2 million for the Group. The main contributor to strong acquisitions was New Year promotions with $0.02 on net calls price mark.

Very strong sales uptake in the month December resulted in $1.06 decline in ARPU from $8.90 to $7.30 in Q4 due to high number of customers without the chance to talk the full month. The drop in ARPU is also driven by seasonality, lower guest roaming. Ukraine has experienced the same impact; and their drop is from $10.80 to $9.10 in Q4.

Minutes of use lowered Q4 to Q3 from 130 to 123, but continued to grow in contract segment from 309 to 348. The decline of seven minutes in prepaid segment from 99 to 92 was again due to a strong [mark-market] gross adds uptake in December.

Successful gross add sales during New Year promotions allowed MTS to reach 7.7 million gross adds, which was 33% higher than Q3. The price point of this promotional offer was $0.02 on net calls, which was actually the main driver of effective price per minute, EPPM, decline of 14% versus Q3.

Churn for the year was 20.7%; and Q4 was 5.2%. Percentage of churn for the fourth quarter has also been affected by the strong gross adds in this quarter.

Value added service revenues increased by 6.6% Q4 versus Q3, which resulted in $0.90 per user in both quarters. Year-on-year growth is 20.7%. The increase is driven by rollout of GPRS coverage and growth of content usage.

The year 2005 was very competitive, which resulted in an increase of mobile penetration in Russia from 51% to 87%; and 29% to 63% in Ukraine. Such strong competition caused price erosion and drop of EPPM and ARPU, respectively. Main growth was driven by prepaid offers, reflected later in mix of prepaid subscribers growing from 77% to 88% of the customer base. Dilution of the customer base was one of the strongest drivers of ARPU and MOU decline.

Key marketing initiatives were targeted to sales promotions, implementation of new tariff plans, and strong development of value added services and CRM campaigns. Rollout of GPRS to 63 regions; we have added another eight in the beginning of 2006.

i-mode service and other content services set sound ground for fast development of value added services in 2006 both in Russia and Ukraine. In Ukraine, where value added services share at year-end 2005 reached 14.9%, we started the year with strong campaign of value added services, which resulted in 16% growth of GPRS traffic January to December.

We will continue focusing on stimulating usage and recharging. Thus we launched very innovative in Russia market promotion called [MTS.Premia], later followed by MTS.Bonus in March. We can already see quite satisfactory results. Sales campaign three favorite numbers brings MTS majority share in net adds in first two months of 2006.

Main directions in marketing are applied according to specific market situations in Russia and in Ukraine. In Russia, penetration already reached very high numbers; and incremental new users are only coming from regions where MTS holds strong positions. Therefore, main marketing goals are targeted to revenue growth via usage stimulation, CRM, and value added services.

We will change visual identity and strengthen our brand values to increase brand loyalty, focusing both on mass-market and high value segments. Upcoming rebalancing of the tariffs after CPP implementation will be used as a vehicle to review and simplify our price plans. Therefore ARPU is expected to decline at a much slower pace than 2004 or 2005 and should be reaching $6.00 to $7.00.

Ukraine, due to a still low level of penetration, is the market which is focused on subscriber acquisitions and taking our rollout of network quality, coverage, and capacity. Thank you. Andrei?

Thank you, Grzegorz. I am passing the call over to Boris Podolsky, acting Chief Financial Officer of MTS.

Thank you, Andrei. Good day, ladies and gentlemen. MTS's 2005 annual results show another year of significant growth for the Group. Revenues reached $5.011 billion, with a year-on-year increase of 29%. Our OIBDA increased by 21%, and net income from operations increased by 14%.

The Company's Q4 results reflected the usual seasonal trends, with a significant growth in the number of net subscribers additions and a decline in roaming revenue, as Q3 is the highest season for roaming revenue in all the countries in which we operate.

The consolidated Group revenue for Q4 was $1.333 billion, with OIBDA margin reaching 46% or $613 million in absolute terms. Despite the decline in total revenue in line with seasonal expectations, air time revenue remained approximately at the same level as in Q3; and we see that as a very positive sign.

The Company's total revenue for the quarter in Russia was $954 million. In Ukraine, revenue was $338 million, representing a slight increase over Q3. The contribution to our consolidated revenues for Q4 from our operations in Uzbekistan and Turkmenistan were $26 million and $18 million, respectively.

Value added services totaled approximately $650 million and 2005, up from $430 million in 2004. This growth was due to the increased volume of point-to-point SMS, as well as launch in 2005 of a number of new services including i-mode and GPRS service to our prepaid customers and various promotional activities. We see the trend towards value added services increasing as a percentage of revenue as well as in absolute terms to continue in 2006.

In Q4 we had gross additions of 11.1 million subscribers for the whole Group. In line with achieving this healthy growth, our gross margin decreased slightly when compared to the prior quarter from 80.6% to 78.9%. The main driver for this was the growth in costs associated with the new subscribers attracted in the quarter, i.e. in December, during our New Year promotional campaigns. These new subscribers have mostly started to contribute our revenues only in Q1 of '06.

In addition to the impact on the gross margin, this significant number of new subscribers required additional sales and marketing expenses. For example, in Russia, where the subscriber acquisition costs or SAC were $19.80, up from $18.60 in Q3. Thus reflects the increased emphasis on promotional activity, in contrast to the campaign in Q4 of 2004, when the focus was on free minutes and giveaways.

In Ukraine SAC declined from $15.70 to $9.40, largely reflecting the significant increase in net additions, the vast majority of which were prepaid subscribers, which have significantly lower SAC than contract subscribers, as we do not provide handset subsidies for such customers.

There was the usual significant seasonal increase in Q4 in overall traffic volume, and a corresponding increase in interconnect and line rental expenses, which grew for the Group by $15 million or approximately 12%.

The negative OIBDA factor was compensated by $31 million or 53.2% decrease in roaming expenses related to the seasonal decline, as I just mentioned.

With regards to general and administrative expenses there was an increase in Q4 by $13 million or 7% on [P on Q] consolidated basis. The main reason for the growth was the increase in repair and maintenance expenses and some other less significant increases in P&L line items.

As a result of the seasonal factors mentioned, OIBDA for the Group decreased in Q4. In 2006 we except a slight OIBDA margin decline to high 40s range, near 50%, driven by several factors, such as general expenses inflation in Russia and Ukraine and, in particular, some specific cost items impacted by inflation. For example, advertising expenses, premises rental cost, plus some increases in interconnect rates, as well as line rental costs due to the increased volume of traffic and number of lines rented.

However, at the same time and in order to address the potential decline in our OIBDA margin, we have launched several cost-cutting and process optimization projects, such as outsourcing some of the noncore functions, reducing [cash] balance, and consolidating our call centers in Russia.

We are very focused on cost efficiency, and we have set a target of 1% to 2% of OIBDA per year to be saved from various cost optimization measures we are taking on right now.

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

Balance sheet. Overall our position remains strong with an available cash balance at the end of the quarter of $78 million, representing a $384 million decrease when compared to the previous quarter. The main reasons for the decrease were a $100 million payout of outstanding 2004 dividends and a $230 million repayment of debts related to syndicated facility and debt financing in Ukraine.

In respect of CapEx, in the past quarter we spent $808 million on the acquisitions of property, plant, and equipment as well as intangible assets. This is $202 million more than we spent in Q3. The main reason for this increase was the timing of payments for assets acquired. As was planned for 2005, we spent slightly over $2 billion on CapEx for the year.

Our free cash flow figure for the year was -$700 million, comparing to -$4 million in 2004, mainly due to significant growth in CapEx by $822 million year-over-year. In 2006, we expect CapEx to be lower than $2 billion. We also expect growth of cash generated by operating activities expenses and thus to be, excluding potential acquisitions, free cash flow positive for 2006.

The Company's net debt to OIBDA ratio at the end of 2005 was 1.1. Our average cost of borrowings has been basically flat during 2005 at around 7%. This is in line with our continued effort to improve our credit ratings and corporate governance standards, as well as to utilize various market tools, including the hedging of our floating interest rates on our syndicated loan to minimize exposure to any interest rate increases.

In the first half of 2006 we're planning to refinance a part of our existing debt and obtain additional financing in the form of syndicated loan facilities to serve our CapEx and acquisition plans.

In conclusion, I would like to emphasize that 2005 brought another year of strong financial and operational results and growth for MTS. We as a management are intending to further enhance these results in 2006. I will now hand the call back to Andrei Terebenin. Andrei?

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

(OPERATOR INSTRUCTIONS) Sean Gardiner.

Morgan Stanley. Just on the -- two questions. First one, on the CapEx you said less than $2 billion. Is it possible to try to give us the bottom end of the range? I mean, less than $2 billion is quite wide. So maybe you could indicate how much you think the minimum you have to spend is in 2006.

Then secondly on your margin guidance for 2006, does that include any potential restructuring charges you feel you might have to take in order to improve your cost efficiencies going forward?

On the first question regarding CapEx, when we guided and we are still guiding towards just under $2 billion, we're really implying just under $2 billion. Just under means by $50 million less or $100 million less; but it is in that vicinity.

It is not going to go significantly lower than that, unless we're really successful in our negotiations with the vendors, which is not impossible but will be a tough call. So it's just under $2 billion for this year.

As far as the margin guidance is concerned, there are no further restructuring charges as such that we foresee for this year. Our high 40s margin guidance remains intact, save for the carveout mentioned by Boris. We have implemented this cost-cutting program, which should yield anywhere from 1% to 2% of additional OIBDA in the 12 months into the project's implementation, part of which will fall on '06, part on '07.

But the cost related to that project is not included in your guidance?

It's not, but it is insignificant. It is totally immaterial for us. So it is also contingent on the successful implementation of the cost-cutting measures.

Okay, great. Thank you very much.

Vladimir Postolovsky.

UBS. A couple of questions from me. The first one is -- I think I am coming back to that every quarter -- but another question on pricing discipline. I think you have been saying that you see that improving in the market; and yet another quarter and your EPPM came down by 14% sequentially in Russia.

You also recently launched a promotion I believe where you offer people for -- was it the $5, $10 worth of free calls, and (indiscernible) was $20 worth of free calls, which effectively it sounds to me like another package essentially offering free minutes.

So do you see the competitive situation changing? As in, are you retracting your previous statement that pricing discipline should be implementing very rapidly? Or just give us guidance on [that]. (indiscernible) why are [they] seeing all the (indiscernible) all that I've just mentioned.

The second question, you mentioned a Universal [Respond] Charge that it is contemplated in Ukraine. Any guidance as to what size could that be? (indiscernible) the questions that might have been answered. Thank you very much.

On the first question with regards to pricing, our New Year promotion had $0.02 on it benefit. For example, right now MegaPhone has the $0.03 tariff. So $0.02 price point, which we already were announcing in Q4, was the price point, which is not [stocking] up the price war. So $0.02 promotion was limited in time from November till end of January.

The impact of EPPM or ARPU as you mentioned is consisting of two elements. One element is, yes, there is a cost of promotion for the quarter. But the biggest is seasonality and increased strong -- increase of gross adds in one month, which is December. So again I would like to stress all those facts, not only a drop in price point.

Moving on to the promotion which we run right now, which is MTS.Bonus or MTS.Premia. This is a promotion targeted to all MTS users. Our expectation is that the number of customers that will be joining this promotion is going to be on the single percentage levels.

That promotion brings the benefits of delayed benefit for the end-user, which is then increasing our churn, and regional pricing policies set to a level where it stimulates to increase ARPU from customers.

So looking from this perspective at those three elements, we do not see that such a promotion is again eroding price or is stimulating the competition to run on a much lower EPPM level.

Vimpelcom launched the tariff a week ago which is similar in their direction. They're also stimulating usage of customers. They give free minutes. I do not see that this offer is undercutting our offer; or I do not see the threat of a price war after implementing of those initiatives.

With regard to Universal Service Fund in Ukraine, the legislation is only in its draft form at this point and is contemplated at 2%. This is something that the operators are in discussion with the regulator, as we already have additional levies with a pension fund charge, which was increased from 6% to 7.5% last year. So this is at the early stages.

Thank you very much.

Rizwan Ali.

Bear Stearns. My question was regarding CPP. You mentioned that implementation of CPP is going to have a negative impact on your revenues and your margin. I just wanted to know -- why would that be the case?

Second question is about the CFO's replacement. Where are you in the process of finding a permanent replacement for the CFO?

Okay, let me start with the CPP part. The reason why we are alleging that there is a possibility that the introduction of CPP, if phrased in such a way -- and the terms are still being worked out by the regulators -- that are detrimental to our business, to the whole industry, not to us as such, but to the whole mobile part of the telecommunications industry in Russia, [may] have a negative effect on margins on the back of the fact that if the fixed to mobile rates are insufficient to cover our costs and offset the traffic redistribution which will take effect on the back of the CPP, if this pricing is insufficient to cover our costs, we will have a dual effect of both a redistribution of traffic from mobile to fixed and from making outgoing calls from your cell phone to making those calls from a fixed line by calling back.

Then it is exacerbated by the fact that the termination charges are going to be materially lower, potentially, than the current market EPPM.

At the same time the cost structure and the termination charges levied on us should not change materially vis-a-vis our other partners, fixed and mobile, which puts additional pressure on both, on the one hand, the top-line and, on the other hand, the margins.

(indiscernible) we still have several weeks or maybe a couple of months to work with regulators inasmuch as we can and lobby for a more favorable outcome of this regulation so that it doesn't hurt us as mobile operators in the industry.

I will not attach probabilities to what the outcome is going to be. But we are alerting you to the fact that this may come into effect on July 1; and the effect may be -- would at best be neutral and at worst be slightly negative or negative for the business.

As far as the CFO search is concerned, we are in a final stage of negotiations with a few candidates. Unfortunately they are in positions within public companies; and we are therefore not at liberty unfortunately to disclose the names until we sign a contract with one of them. We expect this to be completed very shortly.

Thank you very much.

[Alex Simler].

From [Georgia] Horizon Associates. I actually had just -- I had the same question regards to the CPP introduction.

Thank you. Sergei Arsenyev.

Goldman Sachs. Can I follow up on the question on the subscriber acquisition costs in Russia? You are reporting an increase year-on-year, yet the ARPU is going down, went down on the year-on-year basis by 35%. Normally in the situations like this, when your ARPU is going down by so much, subscriber acquisition costs go down as well alongside it.

Do you believe it is worth paying -- continuing to pay that much money for a subscriber, essentially a much lower-quality subscriber? Is this the trend that we will see or continue seeing in 2006? So that's the first question.

My second question is to just clarify on the guidance, on the EBITDA margin guidance front. The EBITDA margin guidance that you are giving, does it include the potential [universal] fund payments in Ukraine, this additional 2%, potential 2% that you've mentioned? So that's it.

I'm going to start with the second one. The guidance of high 40s or just under 50% OBIDA margin does not include the introduction of the potential up to 2% Universal Service Fund obligation, as we do not know when it comes into effect and if it does at all. Okay?

Grzegorz, why don't you handle -- ?

On the first question, stock year-on-year has declined from $21 to $18.80 in Russia. The question whether it is worthwhile to invest in lowering ARPU customers such amount of stock, obviously yes. Stock per -- the return on investment in customers is in single months. So from my experience from other markets, this is within benchmarks.

The main driver of increase of increase -- of decrease in 2004 to 2005 is actually a reduction on dealer commissions. Marketing part, which is advertising part of subscriber acquisition cost, has increased from $7.10 in 2004 to $7.50 in 2005.

The situation here in Russia is the following. That there is high demand for advertising with a very low supply. There are very few TV channels. Therefore there is inflation of media, which happened in 2005. I hope it is answering your question.

Sort of, but if you look -- I mean, I take your point about the year-on-year subscriber acquisition costs. But if you look in the fourth quarter, your fourth-quarter 2004 subscriber has an ARPU of over $11; and you had SAC of $19.40. If you look at the fourth quarter of '05, you're reporting $7.30 and $19.80.

So clearly the return path is deteriorating quite rapidly over the last four or five quarters. The question is, is this going to continue going forward? Especially when you guide towards $6, $7 ARPUs.

I think what we [see] in the markets is that when ARPU goes down to $6 to $7 we will see a substantial decline in subscriber acquisition costs. Clearly the trend that MTS is showing is very, very different.

Sergei, let me alert to the fact that in Q4 a year ago, on the back of the heavy promotional campaigns, the quality of subscriber intake was quite different from what it was at the end of last year. Okay? This needs to be taken into account when you look at these figures and look at the potential quality of these incremental subs that we added at the end of last year vis-a-vis the 2004.

I think generally we will see stability in SAC, and we should not see unreasonable dynamics. That being said, I think it would be not completely comparing oranges to oranges when we refer to Q4s of '04 and '05.

All right, thank you very much.

Mr. Drouet.

Herve Drouet from HSBC. My first question is, first of all, thank you very much for the detailed presentations country by country. That is well appreciated.

But I was wondering, can you give us as well the incremental ARPU blended overall, but also per country as well for the fourth quarter, to get an idea on how incremental ARPU is evolving as well over time?

My second question is if you can give us an update in terms of your expansion plans either via your mother company, Sistema, or either through just MTS. Thank you.

Let me start with the second question on expansion. We have stated before that our strategy is in fact pretty aggressive or ambitious in terms of propelling MTS to a top 10 market cap mobile operator by 2010. That requires going after significant markets for MTS as such.

Obviously we're looking at the GSM operators, and that is our business. Sistema is also looking at the other fixed line opportunities. Potentially some acquisitions may be made at Sistema for Sistema, some for MTS.

But I think the agreement with Sistema as the largest shareholder is that we always have a right of first refusal, so to speak, on any GSM acquisition opportunity we're looking at.

Is it possible at this stage to -- I mean, does the different opportunities that have been highlighted in the press by the markets, is it possible for you at this stage to give a list already of opportunities you are currently looking at?

I think generally, not to be too precise about it, but the things that we have alluded to probably are some opportunities in the Southeast Asian region; our opportunities in India that have so far not transpired into any real deals. We're looking into bidding for the third GSM license in Egypt.

We are in some other high-growth markets outside of the former Soviet Union. Obviously there are also six former Soviet republics that we have not entered and that offer significant growth potential.

But there the market size, the untapped market size for us is 40 million PoPs, which is of course much lower than some of the other, bigger countries that we're looking at right now.

Okay. Some of the incremental ARPU?

Incremental ARPU is different in the markets, in the regions. So for Q4 Russia I can give a bracket number. For new customers it was between $5 to $7. For Ukraine it was between $4 to $6.

Can you remind me a year ago where the incremental ARPU was, if you have the data? Q4 '04.

Unfortunately I don't have it on my hand; so let me come back to you later with this data.

Okay, thank you.

JPMorgan. Three questions really. First on the $6 to $7 ARPU guidance you provided, can you provide for both the high-end and low-end of the range the underlying assumptions for subscribers, for MOUs, and for pricing? If you could provide that, that would be interesting. And what would cause it to go all the way down to $6?

Can you update us also on your plans to move to ruble based pricing? It seemed like a good idea with the ruble continuing to strengthen.

Finally on the Ukraine, just if we look at our year results relative to Kyivstar, there is underperformance in a number of metrics, subscriber market share. On ARPU also you had a much bigger drop sequentially than them from third to fourth quarter. Finally your margins are now -- were 8 full points below theirs in the fourth quarter.

So if you could comment on your performance relative to Kyivstar and how you see that in the Ukraine.

Okay, we will start the last part of your question, or your last question first, with Ukraine. We saw that the dynamics of Kyivstar during the year were more aggressive.

This is something that we are now counteracting as you'll see from a number of things. There are a number of initiatives to deal with quality, innovation, particularly focusing on coverage and distribution for us. So we would see, in terms of how we see the dynamics of the market going forward, then you'll see a much more aggressive UMC for 2006, particularly focusing on those areas.

In terms of EBITDA margin, there has always been a differential. They have a different approach to certain accounting policies. They have higher ownership in buildings and motor vehicles; and their CapEx policy is slightly different to ours. So basically our performance in terms of EBITDA margin was in line with our normal seasonal performance in Q4.

So presumably, if your accounting policy or your buy versus lease, I guess, policy is different, at one point it should have an impact on CapEx sales ratios. Should we expect your CapEx to sales ratios to be lower than some of your key benchmarks?

That is true; but you'll see that they are -- if you look at the history, then Kyivstar had seven quarters of higher CapEx than UMC over the last -- out of the last eight quarters.

So where would you expect your CapEx to sales ratio to evolve to in the Ukraine?

Basically next year it will be improved significantly. That as much guidance as I can give.

Coming back to the first question about our expectations or guidance for 2006 Op levels, the brackets I had provided is $6 to $7 for ARPU. The main reason for decline in ARPU is, as I said, still the impact of dilution of the customer base to prepaid.

What happens with MOU, minutes of use, our expectation is they will decline at a much lower pace than 2004/2005. As I said earlier, corporate segment is significantly increasing minutes of use. The prepaid segment is on the level of 90 minutes.

So coming to the last question, which is effective price per minute, I will say that this is again the year where we're going to be revising our tariffs. We will be revising our tariffs also because we have CPP coming in the middle of the year, and we have to revise our competitive position in all the regions. Also we have to take into account to what extent we have to be rebalancing our tariffs after CPP implementation.

Right. Do you think with the CPP you would introduce -- you would start to pay a termination to the other mobile operators?

Yes, of course. I'm not sure if I understood the question correctly. We have a termination agreement or interconnect between mobile carriers.

Coming back to the ruble tariffs, it is coming in the second half of the year. I agree with you, yes, this is a good idea to switch to ruble tariffs. [It's] Russia. Inflation is not skyrocketing, so it is actually meeting customer demands and expectations.

So would you expect that to have a positive effect on your [USL] or EPPM, wouldn't it?

[Especially] it could have a stabilizing effect on our EPPM, of course.

What about the implications of Calling Party Pays on EPPM (indiscernible) in rebalancing of your tariffs caused by Calling Party Pays?

I'm not ready to answer to your question because the regulations from the government are not yet finalized. Let me give you an example of how this could change.

For example, we can have much more minutes terminated on mobile network with a lower termination charge from fixed operators to mobile operators, lower than what we're charging right now the end-user. So therefore there is positive price elasticity effect, because customers on fixed lines are calling mobile. So we have more minutes, but we have them at a lower price that we receive from the fixed operator.

So then this could be a negative -- one side of negative CPP impact on EPPM. The positive side we can have is that mobile usage is going to be increasing, so therefore ARPU could in this case maintain on the same level.

Okay. Finally could you make a comment about the claims by Eurosat that the SIM ratio in Russia is actually 2 to 1, and that actual real penetration is much lower than what most people assume at this point? Do you think that's reasonable? Or do you think -- would you disagree radically with their assessment of the state of development of the Russian market?

I'm not sure what they imply by 2 to 1, but we certainly think that between 20% and 30% of the overall market customer base uses more than one SIM card.

The claim is basically that there is over two SIM cards in circulation for every user in Russia.

No, that does not imply that. It implies that more than -- between 20% and 30% use more than one SIM card between operators, or between regions, or within one operator. That gives you roughly, let's say, 25% access penetration figure vis-a-vis the nominal [stated] penetration.

I understand what you are saying, but what do you think of what they are saying? Do you think that is unreasonable?

Well, I can only answer for our analysis; and maybe they have their own reasons to believe that their analysis is right. We think of it [rather] differently.

Thank you.

Alexi Yakovitsky.

Deutsche Bank. I have two questions if I may. You show a very dramatic decrease in SAC in Ukraine versus the previous quarter. Are there anyone one-off factors here? Or should we expect most of this improvement to be carried into 2006? That is the first question.

I want to go back to CapEx. You said that your CapEx will be just under $2 billion in 2006. In your presentation you stated your CapEx per net add should not exceed $120. This implies that you expect to add about 16 million new additions in 2006.

Let's assume for a second that you have 10 million this year. Does this mean your CapEx is unlikely to exceed $1.2 billion? Or if you add 12 million then your CapEx is unlikely to exceed $1.5 billion?

Is this a correct way to interpret your guidance, given that you're throwing this $120 figure? Or math should be more complex? In other words, regardless of how many subs you actually add, are you going to spend just under $2 billion? Thank you.

And maybe in addition to this question, how connected -- well, I'm assuming it is -- how connected your ARPU guidance is to your CapEx and your underlying subscriber assumptions? Thank you.

I'll take the second question for Ukraine. Basically there are no real one-offs. We are working with our dealers to control dealer commission; and we're looking at handset subsidies, which we took down in Q4 overall.

In terms of guidance for going forward, then if you take the SAC for the year, then I think, apart from some pressures we are seeing in Russia in terms of marketing expenditure, it will be broadly in line with -- 2006 will be broadly in line with 2005, with seasonal fluctuations within the quarters.

This is for Ukraine, right?

This is for Ukraine, yes.

Thank you.

Alexei, as far as CapEx is concerned, we are expecting to add approximately the number of subscribers that you have mentioned. Actually around 16 million, which gives us the estimate of about $120 or just under $120 per net add.

Obviously there are some -- the breakdown between capacity and coverage, and the link between those subscribers and the ultimate CapEx figure, is slightly more complex than just multiplying subscribers by $120. Because you have CapEx driven largely by traffic and traffic patterns, rather than subscriber numbers as such.

So there is the MOU part of the equation as well, and the way we look at the MOU dynamic for this year. But it is unlikely -- let's say, it is likely if the subscriber intake subsides materially vis-a-vis our expectation, we may be able to review our CapEx figure.

Obviously we will -- we are unlikely, as we are guiding now, go beyond $120 -- spending $120 of overall CapEx per net add.

Yes, I can now add to that. A huge part of our CapEx that we're planning to spend next year is not really subscriber number related. So that means that we can definitely say there is a cap on the CapEx. We will not spend more even if we add more subscribers.

So if you do reverse engineering of your figures, you may end up to the wrong conclusions. Most of the CapEx that we were going to spend next year is guided to quality improvements, introduction of new services, etc., and not really on the subscriber numbers.

We will add slightly less CapEx next year on coverage. But as I already said, most of it is just for quality improvement. So the relationship within the subscribers and the CapEx that you are used to do, when you're looking at fast-growing markets, is in this case not any more relevant.

Okay, thank you.

[Alex Kotnetko].

I have two questions. First, it appears that net income for fourth-quarter '04 has been restated. Could you explain the reason for the restatement?

Second, it also appears that handset subsidies have increased. Could you elaborate on this issue?

Yes, in Ukraine we subsidized handsets for the contract subscribers. Normally we have been running slightly in excess of $100. We are looking at keeping that down for fourth quarter; and we would see that continuing into 2006.

On your second question about the restatement of 2004 numbers, the only restatement on the revenue side I actually do recall was a restatement due to the change in the estimate of the subscribers' life within the network and related recalculation of the deferred connection fees. That is the only, quote unquote, restatement of the revenues I recall.

May I ask one follow-up question? Could you disclose what is the handset subsidy per subscriber in Ukraine? Could you also explain why the question regarding Bitel acquisition has not been resolved so far?

So that handset subsidy, well, our postpaid subscriber for Q4 was just under $100. The acquisition cost was $95, and the large part of that is the handset subsidy.

As far as the situation with Bitel, as we have mentioned, we are using all legal means to protect our ownership title in the court of law in at least four jurisdictions. That implies that it is taking obviously time to protect it.

The current -- the raiders that took over the asset are not yet willing to give it up, because they need to have a reason for that. And the reason we think should be a legally binding decision by the appropriate courts in the appropriate jurisdictions. Therefore we are pursuing this in a court of law.

Unfortunately things take time. We would have liked to have taken a lot less time.

I see. Thank you very much.

Andrei Bogdanov.

Alfa Bank. I have two questions, if I may. One, can you please clarify in absolute terms -- in dollars, not as a proportion of the ARPU -- what is your target, if you have any, for VAS in Russia and Ukraine both? I guess now it is about 15% of ARPU. But (indiscernible) in absolute terms going forward.

Second question is today was an interview of Goncharuk in Vedomosti, where he basically said that by this May you will have the umbrella brand for all Sistema's telephone companies.

My question is, do we expect any kind of impact on your margins [and] business in money terms from this rebranding? Because as far as I can recall, [Repoco] rebranding was quite successful. If you have any kind of thoughts on that side, thank you.

Let me start with the umbrella brand. We do believe that this -- the introduction of an umbrella brand and the rejuvenation of our brand as part of that will have a very positive effect on the business going forward, in terms of subscriber loyalty, in terms of [remembering] the little things that we will help our brand get even stronger.

We still believe we have a very strongly positioned brand in terms of leadership, in terms of reliability, in terms of quality, association. And there are some things that can be added and can be strengthened in our brand proposition, which we're doing within the framework of rolling out this umbrella brand.

In terms of the costs of the project as such, most of them come out of our ordinary budget. The costs that are extra to the ordinary marketing budget will not be that material to significantly adversely affect the margin for this year. Our margin guidance includes those costs for '06.

With regards to value added services, for the year 2005 it was $1; Q4 was $0.90. What goes forward for we -- those were the numbers for Russia. I will not give a detailed breakdown of how much in value added services we're going to have within our forecasted number for ARPU in terms of revenues.

What I said in the beginning was that we are really dedicated to grow ARPU via value added services; and I think this is one of our core strategies to maintain profitability and grow the business forward.

I will just add to that, [while] we are seeing a good dynamic in (indiscernible), it is not really the theme of this telephone call. But we are seeing a good dynamic right now, as we speak.

The focus on value added services for us has shifted from going after many different services to focusing on the core things that are leading demand, and making sure that they work across the country, so that we can help with federal propositions and federal bundles. This strategy seems to have started to pay off starting from Q1 of this year.

Okay, thank you.

Evgeny Golossnoy.

Troika Dialog. I have got a question related to interconnect terms. You mentioned that they are going to become worse for you in 2006. I wonder just could you please explain how that can be?

In that you seem already to be paying for termination of costs with other mobiles and with fixed lines. At the same time you applied for a long distance license, meaning that you'll be able to gain more from long distance calls. How then can be that you expect the interconnect costs to rise?

Does that mean that the volume of business or generated by the customers will improve? But in that case, if it does, those will be the billable minutes and the costs will be borne by the clients.

Let me take this question. With regards to mobile to mobile interconnect rates, they're already here in the market. We have current interconnect agreements with all the players. I do not see the risk of them worsening. This is the market where we negotiate based on the commercial terms with other players.

With regard to fixed to mobile termination, I think Vassily was saying this earlier, that we are going -- after CPP we're going to have a regulated price point for the fixed line customer. The price point will be regulated of fixed call to mobile network.

This regulation will also impact the interconnect regime or the cost -- for us it's actually a revenue -- from the fixed mobile operators for terminating the calls on our mobile network.

So in this sense, this is where we have not finally got direction from the regulator, from the government. So this is an open question this year with regards to CPP.

The discussion whether it is going to worsen or be better, this is now too early to say. We are working with different scenarios; and we are also educating other players in the market what would be the best model.

Not to paint too dark of a picture, this is one of those things that if done right can work actually for the positive of all the businesses in the market. What we're saying is that we would like to alert you to the fact that there is a bit of uncertainty.

This uncertainty is likely to go away in the next month, month and a half, maybe two months at most. Then we will be able to say exactly how it is going to turn out. But we think it is prudent for us to alert you to the fact that there is this element of uncertainty out there.

Okay. I have then one follow-up question, please. (indiscernible) does that mean that the profitable improvement or worsening of interconnect terms is not included in your EBITDA margin guidance for 2006, or is it?

No, it is not. The CPP model or the effects of CPP on our business model for this year are not included right now, for obvious reasons. We do not know the variables to put into the formula.

Okay, thank you.

[Yuri Kureykov].

Credit Suisse. Actually my first question has just been addressed about the CPP impact on EBITDA margin.

My second question is, given that the Company plans to grow quite substantially and has ambitious expansion plans, I assume that that would be funded by a combination of debt and equity. Could you give us a guidance as to where you would expect your net debt to EBITDA by the end of the year?

The third question is, if you could answer during the call or subsequent to the call, could you please clarify cash tax paid in 2005 and cash interest paid in 2005? Because these numbers tend to be different from P&L and cash flow numbers provided in the statements. Thanks.

Okay, as far as how much the covenants allow us to borrow, we can go up to two times net debt to OIBDA. Now, that does not mean that we want to fully utilize the [shoulder], and obviously there are other means of financing those acquisitions, such as leveraging the targets themselves, such as bringing in partners, and bringing in additional financing at the level of these operating companies.

Now obviously how much we gear up towards year-end will be driven by, on the one hand, the acquisitions that materialize, if at all; and on the other hand by the dividends that the shareholders will decide to pay out this year for '05.

So it's probably too preliminary to give you any particular guidance on this.

Okay, thanks. So you basically imply that you would not go over and above the covenants. That's clear. But is there a kind of corporate policy as to [how] you can go this year?

We are certainly not going beyond our covenants. But as I said, it does not mean that we are limited in terms of our financing possibilities to this covenant threshold, since we can bring financing from our partners and we can gear up the companies that we acquire or take stakes in.

Okay, thanks. The second question on cash tax paid and cash interest paid, if you could address this (indiscernible) subsequent to the call, that would be helpful.

Okay, that is fine. Boris will address that. Thank you.

Anna Bossong.

CA-IB. My first question is on your ARPU guidance, the $6 to $7. Is that relating -- is it a blended figure, or Russia, or Ukraine? I am not quite sure exactly what that relates to.

Secondly, I noticed that your net interest charges rose by 17% quarter-on-quarter in the fourth quarter. I'm just wondering, are there any one-offs in that? Or is that just in relation to the debt rising?

Thirdly, can you give us a percentage of total revenues which come from incoming calls, so we can gauge the effect of CPP? That's all.

All right, we will answer your second questions first, related to the charges. There are two things you have to consider when you're looking at the interest expenses.

Number one is, as you correctly pointed out, the net debt or basically the debt we carry at the end of '05 has increased, in particular on the back of some of the financing we have undertook for UMC operations, for our Ukrainian business. So this is an increase in interest expense.

The second thing you also have to take into account is that part of our interest is being capitalized. That is in accordance with U.S. GAAP requirements. So those two factors basically have (indiscernible) difference. But all in all there is an increase in debt and related to this interest expense growth in Q4.

Is it possible to split out capitalized amounts?

Sorry, can you repeat it?

Is it possible to the amounts that were capitalized in the third and the fourth quarter?

Yes, absolutely. If you will ask this question to our IR people, we will get you exact numbers.

Will do, thanks.

ARPU question, $6 to $7 dollars guideline was blended for Russia. With regards to Ukraine, I will pass it over to Mark Burden.

Anna, one question on -- as we have -- interconnect rates are being discussed in Ukraine and adjusted as part of the Make Ukrtelecom Beautiful campaign. But our anticipation for next year would be somewhere in the $7.50 to $8 range for ARPU if, as we expect, the interconnect runs as we expect.

Super, thanks.

The percentage for incoming calls is around 12% for Russia.

Lovely. Thanks very much.

[Olga Kostrova].

Credit Suisse. My question relates to let's say potential net impact of your cost-cutting programs, and potential increase in sales and marketing expenses that are likely to be incurred due to saturation of the market and your increasing campaigns, loyalty campaigns, etc.

What do you think? Because you said that you expect 1 to 2 percentage point margin improvement on the back of cost-cutting programs. Is that a net improvement? Or this basically will be partially offset by the increased sales and marketing costs, in your view?

I think that includes -- the 1% to 2% as we said over the 12-month lifespan of the implementation of the cost-cutting measures will accrue regardless of the dynamic of sales and marketing expense. This is just on the back of these cost-cutting measures, which will affect different functions within the Company obviously (multiple speakers) marketing.

Can I just -- sort of clarifying questions? First of all, on your revenue payback targets, the way you see them, currently in Russia it is 2.2 times for the full year and about 1.5 times in the Ukraine. Where do you see these figures going forward?

Sorry, what revenue payback target exactly?

Your revenue payback, stock over ARPU metric, where do you see it going forward from the current 2005 figures?

I don't think it would be prudent for us. We don't particularly use this measure internally, honestly; and I would refrain from giving you exact guidance on this.

Okay. Then if I may, again, the last question. In terms of like net impact from on margins from cost-cutting and potentially increasing sales and marketing expenses, if you see them as such, do you think in the next couple of years your margins overall will be going down or up?

Let's just go back to this for a second. There are three main factors affecting the margin expansion or contraction. One is the way [market is going to grow] in (indiscernible) overall; and that depends on us but also on the competition, in terms of how pricing-wise people behave, and how the pricing environment develops. Okay? One.

Second, (indiscernible) depends on the cost efficiency of our operations, which is much more in our hands, which is much more controllable by us as the management of the Company and the Board of Directors.

The third aspect is the regulation and regulatory changes that may potentially affect both the top line and/or the bottom-line. Depending on how they play out, margins may evolve differently.

I think it is completely [prudent] for us to go beyond that timing horizon that we have been using before, in terms of '06 as such, to give further guidance on margins.

I think there is going to be a lot more clarity as we progress towards Q3, Q4 this year on how regulation evolves, how the pricing environment evolves, and how successful our cost-cutting measures will be. On the back of this year we will be in a much better position to judge what the margin outlook is going to be for '07 and beyond.

Okay. Thank you so much. If I may, the last question on dividends. I think [Rota] stated that you might see dividends flat in 2005 versus 2004. I think there was some information that it will be about 41% payout ratio this year. Is that a correct statement? What do you see over the next couple of years evolving as well?

I think generally what has been confirmed by the largest shareholder is that the payout ratio of over 40% of U.S. GAAP net income that has been proven in the past (indiscernible) two years is as good guidance as any for this year as well.

Okay, thank you very much.

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

Thank you, ladies and gentlemen. This concludes the fourth-quarter and full-year 2005 financial and operating results. Thank you for participating. You may now disconnect.