Mobile TeleSystems PJSC (MBT) 2006 Q1 法說會逐字稿

Welcome to the Mobile Telesystems first-quarter 2006 financial results conference call on Thursday the 15th of June 2006. I will now hand the conference over to Mr. Andrei Terebenin. Please go ahead, sir.

Good day, everybody, and welcome to MTS' conference call to discuss the Company's first-quarter 2006 financial operation results. Before beginning our discussion I would like to remind everyone that, except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks.

These statements may relate to one of the following issues -- first, the strategic development of (indiscernible) business exchanges both in Russia and abroad; second, revenue and/or subscriber growth (indiscernible) facilities and their usage; third, financial indicators such as operating income before depreciation and amortization, average revenue per user, cash flow projections and/or return on invested capital; and fourth, the capital expenditures and operating expenses.

Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include Company press releases, earnings presentation and personal report and Form 20-F as well as other public filings made by the Company with the United States Securities and Exchange Commission all of which are available on the Company website, www1.MTSGSM.com and that of the U.S. Securities and Exchange Commission and www.SAC.gov.

MTS disavows any obligation to update any previously made forward-looking statements made on this conference call or make any adjustments to previously made statements to reflect changes in risk. (indiscernible) the presentation and materials used and referenced in this conference call are available on our company website.

I want to introduce the MTS team today at the conference call. Mr. Leonid Melamed, the President and CEO of MTS; Mr. Vsevolod Rozanov, Chief Financial Officer of MTS; Mr. Eric Franke, Chief Operating Officer of MTS; and Mr. [Mark Burton], Chief Financial Officer of UMC, our Ukrainian operation. Now I would like to introduce Mr. Leonid Melamed, the President and CEO of MTS.

Good day, ladies and gentlemen. I would like to first thank the shareholders of MTS for recently electing me President and CEO of MTS, not only a leading Russian blue-chip company, but the top mobile operator in the region. MTS has gone through a period of rapid growth, demonstrating though that we are an effective operator in the market of the former Soviet Union. As the Russian market matures and as the Ukraine nears a saturation point we aim to further solidify our leadership position by improving upon the effectiveness of our operations and seek additional opportunities for growth abroad using our economies of scale.

We witnessed a difficult Q4 '05 and Q1 '06, but currently are pursuing a number of initiatives covering our entire value chain aimed at increasing our revenue in our home market and optimizing business processes to improve upon our margins. We will be aggressive in examining costs and seek an acceptable rate of return on our investments and expenses.

As a benchmark we are seeking a return on invested capital of not less than 25% over a five-year period through organic and inorganic growth. At the same time we will adhere to the highest principal of corporate governance and broaden our dialogue with investors and clients. Now with our recent performance that didn't meet our expectations we are confident that our optimization efforts will bear fruit towards the end of this year and lay a base for healthy growth in '07 and '08.

In Q1 '06 we maintained our leading revenue share in Russia and Ukraine while showing a clear lead in market share in Belarus, Uzbekistan and Turkmenistan. In Ukraine, the mobile market has entered a more competitive environment after the acquisition of QRS by Vimpelcom in November '05. Nevertheless, UMC maintained its revenue leadership in the post-paid market. Our subsidiary in Uzbekistan increased its market share from 55 to 57% and remains a clear leader in the country's telecommunications market.

In Turkmenistan, our subsidiary continued to dominate the local market and now boasts a 75% market share compared to 74% at the end of the previous quarter. During the first quarter, MTS' joint venture in Belarus enjoyed a 51% market share as penetration in the country reached 46%. The company remains committed to acquiring a controlling stake in the joint venture.

Looking back more closely on the first quarter of 2006, we witnessed a slight drop in revenue in Russia of 2.6% to $929 million q-o-q. We attribute this loss to seasonal issues, namely fewer working days and lower guest roaming revenues, as well as inappropriate price policies in a number of regions. We have adjusted prices in these regions and are now refocusing our marketing both on a national and local level. Our first step was to launch a new brand, a brand chosen as much for its innovative feel and its clarity.

We are introducing segmented tariff plans for all services, targeted sales policies by region and loyalty programs, at the same time strengthening our proprietary distribution network by remodeling sales and service centers. On Tuesday, we also announced the gradual move towards fixed ruble-based tariffs as we simplify our payment process. The goal of the steps remains to increase sales, stimulate traffic and improve customer service.

In Ukraine, the first quarter is also a weak quarter due to the winter holiday period and the effects of holiday-related promotions. Since the beginning of Q1 2006, interconnect payments received from state-controlled Ukrtelekom fell by 16.7%, and in turn rates between the mobile operations decreased accordingly.

In Uzbekistan, revenues remained flat at $25.4 million, though net income fell by 8.7% due to a change in the Company's accounting policies. The group's OIBDA margin of 46.5% was higher than Q4 2005, but fell slightly short of our expectations due a onetime charge of $16 million in our provision for doubtful debt. If it wasn't for this cost item, our OIBDA margin could have been more than another percentage point higher. For the group, we expect an OIBDA margin of about 50% moving forward as we more fully optimize our operation expenses.

Three factors contributed to our lower net income of $184 million. Firstly, on a quarter-on-quarter basis we witnessed a decrease in revenues from our Russian and Ukrainian operating units. Secondly, we incurred an increase in other non operating expenses mostly related to roaming fees. And lastly, we recorded an increase in depreciation and amortization expenses.

ARPU in Russia fell 15% q-o-q to $6.2. We expect that the introduction of CPP, coupled with targeted measures to stimulate voice traffic and the development of value added services, should allow us to stabilize ARPU in 2006 and lay a foundation for growth for the future. As for value added services, we plan to improve upon its contribution to ARPU from the current level of 14%. For Ukraine, intensified competition will result in a future dilution of ARPU, though we are pleased with the rise in value added services as a percentage of subscriber revenue and naturally view this as a driving factor for future growth.

Our advertising spending in Russia remains high, but we will reevaluate our expenses as we migrate from share of voice measure to principal of cost per net adds. In Q1 2006 we introduced a new system of dealer commission and we expect it will stimulate the acquisition of more profitable subscribers and exercise greater oversight of our business.

In addition, we are reevaluating our approach on a group-wide basis to capital expenditures by placing more emphasis on payback periods and internal rates of return. Each macro-region is being given a set of key performance indicators, quality benchmarks and operational standards. We are already witnessing benefits from the system, as our CapEx blend is moving from one focused on coverage to capacity.

Within the entire group we aim to improve our cost controls by delegating more decision-making authority to the regional level. We will be creating profit centers according to our previously established [market regional] management system. We are (indiscernible) business processes and management structures both at the macro-regional level and through our foreign operations which will allow us to evaluate regional performance with closer scrutiny. At the same time we are prepared to apply key performance indicators to measure the detailed managerial effectiveness of our original operations and subsidiaries.

On April 24, '06 the Company appointed Vsevolod Rozanov as the Chief Financial Officer of MTS. Vsevolod brings a great deal of finance and Telecom experience to MTS having played an active role in the integration of (indiscernible) fixed client operators and led the successful initial public offering of Comstar UTS in February '06. His appointment naturally will strengthen our management team at a crucial time for MTS. And now I would like to pass the phone to Vsevolod who will elaborate more fully on OpEx and CapEx reduction measures.

Good day, ladies and gentlemen. First of all, I would like to thank you in turn. I'd like to thank you for entrusting me the role of CFO in such an exciting company, one of the leading companies in Russia. And hopefully we will all fulfill the expectations of our investors.

Leonid has already taken you through the major financial highlights of the Q1 (indiscernible) and our main goals and strategic initiatives for year 2006 and beyond. In my pitch today I would like to give you more details in two areas -- OpEx and CapEx optimization initiatives. I would like to start with some specifics of our OpEx optimization program.

At the beginning of the year we launched an OpEx optimization program with (indiscernible) providing counsel and support. The main goal of the project was to help us identify various areas in our operating expenses budgeted for year 2006 and -- which would lead us to OIBDA margin for the year at the level of 60% or higher. We also targeted long-term cost optimization growth (indiscernible) to year 2007 and beyond. All of the projects were structured in a way to help us identify quick wins that can be done in the year 2006 and long-term cost optimization plans to help maintain healthy margins going forward.

Over the course of all these initiatives we successfully identified a number of areas where optimization is required. We currently have a detailed execution plan in place which will lead us to significant OpEx reduction in the year 2006. Just to give you an example -- for example, dealer commission. Effective this year we have changed our arrangement so that our partners are on a fixed revenue sharing commission scheme. This helps us to achieve two major objectives. One, to attract [quota] subscribers; and two, to avoid paying for subscribers who are not generating adequate revenue. The effect of this initiative can already be seen in Q1 in the reduction of effective dealer commission rate in Russia to $9.1 or by 13% when compared to prior quarter.

Another area we have identified for improvement is network maintenance. We have started contracts in -- contracts are in negotiations with a few of our larger vendors and we have revisited our network maintenance plans for this year. We also see some cost optimization as a byproduct of our CapEx review program. For example, a reduction of rental costs due to the consolidation of some of our network coverage projects.

In addition, we have finalized our call center and [accounting] center in [television] projects which we consolidated in our macro regional level and these services are no longer provided at the regional level. While these projects do not necessarily generate immediate cost savings, they do improve the efficiency of our internal processes as well as drastically improve our customer service quality.

Now I would like to turn to our CapEx review program. As you are aware, we previously announced guidance for year 2006 for CapEx for the group at the level of $1,950,000,000. This number was in our budget for year 2006 and it was approved by our Board of Directors. Over the last quarter management has performed a detailed review of our CapEx plans for year 2006 to [change] some of the previous assumptions with the goal of lowering our CapEx levels.

Our CapEx program is broken down into three main areas -- radio network, core network and other including maintenance. While we review all three components, we specifically focused on our radio network spending that in turn can be broken down between capacity and coverage CapEx. Primarily as a result of capacity versus coverage CapEx review, we have been able to optimize and reduce our 2006 spending program to approximately 12% for Russia, which actually means decreasing from $1,308,000,000 to $1,165,000,000 in Russia, a total for the group of $1,800,000,000.

In Russia we currently have over 50% of radio network CapEx rolling into the capacity compared to slightly over 40% in the year 2005. The main driver for this shift is expected growth in traffic volume and development of value added services. We have also reviewed our CapEx plans for older markets where we operate and in some cases we have made minimal changes. For Ukraine our budgeted $563 million in CapEx remains unchanged.

Overall, after the extensive review processes just described, our management is confident that our new CapEx guidance for the year 2006 will help us meet our revenue subscriber targets for the year. Having said this, I would like to stress that excluding acquisitions the year 2006 and going forward we expect to have a positive free cash flow.

Now I would like to add a few words on our leverage structure and dividend policy. The Company's net debt to OIBDA ratio at the end of Q1 was 1.05. Our average cost of (indiscernible) remains stable at 7%. In April we signed a $1.53 billion syndicated loan facility with a number of leading international financial institutions to refinance our existing syndicated loan at a lower interest rate as well as for (indiscernible) purposes. Our net debt to OIBDA ratio including the new syndicated loan facility is estimated to be at 1.20 by year-end, still providing us with a sufficient flexibility to attract new financing if necessary.

In respect to the dividends, our Board of Directors recommended approximately 50% of net income payout for the year ended December 31, 2005. This is a 10% increase compared to year 2004. The decision to increase dividend payout is based on the fact that the Company had a strong cash flow from operations, expected to be cash flow positive in the year 2006, and has no immediate acquisition targets to use available cash.

While the Company doesn't have a formal dividend policy, we expect that future dividend payouts will be in a range of 40 to 50% of our U.S. GAAP net income. In conclusion, I would like to emphasize that our management team is focused on delivering strong and sound performance through the rest of the year 2006 and making progress on improving the Company's profitability, cash flow and revenue growth. Now I would like to thank you and hand the call back to Andrei.

Thank you, Vsevolod. Now I would like to open the call to questions.

(OPERATOR INSTRUCTIONS). Anna [Copiova].

My name is Anna Copiova and I'm calling from (indiscernible) capital. I have two questions if I may. The first one is related to your guidance on OIBDA margin. You've mentioned in your press release expectations for an OIBDA margin of above [50]% going forward. Could you please explain how do you plan to eliminate the problems associated with bad debt and the (indiscernible) subsidies? Would you be paying (indiscernible) the main reason for low OIBDA margin in this quarter? Could you please also comment, is it bad debt and equipment subsidies are associated with your (indiscernible) businesses? The second question is related to your non operating expenses which, as I understood, (indiscernible) of your net income. Could you please provide us a breakdown for this item? That's all. Thank you.

Can you please repeat for us the second question.

My second question was related to your non operating expenses which affected your net income as I understood. (indiscernible) some other net of other income or other expenses following -- before the price before taxes (indiscernible)?

This is Vsevolod. Thank you, Anna, for your question. Speaking about our OIBDA margin target of 50%, as I said, we launched an OpEx optimization program which we believe will be -- which is actually -- has started to be implemented this quarter. We believe said the first results will be brought in the second half of the year. We expect to optimize certain business processes and there are also certain budget optimization initiatives and purchasing optimization initiatives which can basically be split roughly in equal parts, like one-third for budget initiatives, one-third for purchasing, and one third for business processes efficiency improvement. And we expect that implementation of these initiatives will lead us to an OIBDA margin of 50% plus for the whole year 2006.

So Vsevolod, what about your bad debt and (indiscernible) subsidies.

Speaking about bad debt, the amount of bad debt was $60 million. This is the one time situation in the second quarter -- on the first quarter of year 2005. We conducted an investigation of the situation and there were certain initiatives undertaken by the management, i.e., a new [SO] agreement with the (indiscernible) provider, the new business processes between the IT and the finance functions which will allow us to highlight this problem as it can appear in the future. But we actually do not expect any repetition of such a problem in this year. The second Item was the --?

The group subsidies, (indiscernible) gross loss of (indiscernible) so a net loss of about $24 million. Could you please comment on that?

I think that first to stress that that situation has happened in Russia and to answer the question about the handset subsidies I would pass over to Mr. Burton.

Basically in terms of handset subsidies, Anna, we have reviewed our policy overall because we use them only for contract clients. And basically in line with discussions with MTS and looking at our margins and our strategy, we are going to be moving away from handset subsidies in Ukraine in the second half of the year. We will probably leave them in place only for those at the top end of our market, the more profitable segment of the business side.

Thank you. And could you please answer one more question about this non operating expansion, what kind of expansion (indiscernible) payments?

Unfortunately there was a situation with the roaming expenses which were -- which happened in the fourth quarter of year 2005, but unfortunately were delayed in arrival to us and they arrived in the first quarter in the amount of $22 million approximately, which were written as non operating expenses because they occurred in Q4 in fact. And however, the amount was not material enough to review the results of year 2005.

Okay, thank you very much.

Vladimir Postolovsky, UBS.

Good day, gentlemen. It's Vladimir Postolovsky from (indiscernible) from UBS. A couple questions for me. Actually, on the last one -- I didn't quite catch, what was the issue with operating expenses -- just the reason for this expense? Second question was, margins in Turkmenistan are still quite sharp. Is there anything going on in the country or is it just mostly subscriber additions and pressure on margins as a result? And finally, taxes in this quarter obviously the effective tax rate is very high and can you explain why and, again, is it recurring or is it just a one of? Thank you.

I would take the first question. The non operating item, i.e. the roaming expenses has basically occurred due to the certain logistics issues we had. Now we are already fixed the business process and basically there were no accruals made during the fourth quarter of year 2005 for such roaming.

So basically should have been sitting in service costs in Q4, right?

Sorry, I just can't hear you.

This number in reality should've been included in -- service costs?

In fact it should be OpEx for fourth quarter year 2005.

Okay, thank you.

Herve Drouet, HSBC.

Good afternoon. This is Herve Drouet, HSBC. Two questions. The first line is regarding your tariff policy. Can you say more about what is your strategy about your new tariff policy? Are you going to be the cost leader or price leader or do you go more for the value customers? Is it [adhoc] situations depending on the country or do you want to have a global strategy for your pricing in Russia and [CIS]?

The second question is regarding in fact Germany. It looks like looking at the different countries the Q1 churn was relatively high especially in Ukraine in Uzbekistan. If you can shed a little bit more light on that I would be grateful. Thank you.

It seems that we missed the second and third question on Mr. Postolovsky due to some communication issue. The Turkmenistan question was the change in accounting policy of the profit-sharing agreement with the Turkmenistan government which was previously considered as CapEx. But after the -- starting this year part of it -- approximately half of it was classified as CapEx and part of it was classified as OpEx. So basically this was the reason for (indiscernible) increase. And the effective tax rate increase is mainly attributable to (indiscernible) situation and appreciation of ruble against dollars where you know that the majority of our (indiscernible). Thank you.

Thank you, sir. Does that answer your question?

Let me switch to the last two questions that have been asked about the tariff policy and the churn rate. About the tariff policy we have -- through the second quarter of this year we have revised the marketing strategy of the Company and we now apply much more attention to the segmental approach, adopting our tariff rates from region to region and on a segmental basis having identified four main segments of our customers. We will have a nation wide tariff policy with special pricing procedures in each region.

We have also identified the measures to stimulate the consumption of the services of the Company in order to stabilize the ARPU and to create the basis for the increase of the ARPU in the end of '06 or '07 -- and/or '07. So segmental approach and stimulation of the usage, these are two measures we'd like to implement in our newly adopted marketing policy. On top of the new brand that we had introduced in the second quarter of this year and new advertising strategy, that could lead us to the financial results that we plan to achieve, that is to profitable growth.

Regarding churn rate, it has been relatively high in the first quarter of 2006, the same as the ARPU went down on a higher level than we anticipated because of some special tariff programs that had been introduced in the third and fourth quarter of the last year in some regions of Russian Federation that led us to this negative consensus in the third quarter of 2006. After we have revised our marketing strategy we think we can eliminate this type of situation in the future since we plan only to stimulate by our tariffs and products the (indiscernible) of the active users to the portfolio outcome.

Just to be sure on the first question I understood you well. On the tariff are you saying that your new tariffs on let's say for example some of the tariffs where you have free incoming calls or the ruble denominated tariff would be rolled out in all the regions? Or would you only roll it out in some of the regions?

We will definitely introduce -- and we have already introduced these tariffs Russia wide, but in each region there are specific pricing procedures and there have been established specific prices on those tariffs. Now the construction of the tariff and the promotion campaigns for those tariffs are unified for the whole country.

Okay, thank you.

Alex [Kuzensopf], Bear Stearns.

It is Alex Kuzensopf from Bear Stearns. Could you highlight why interconnect revenue in Ukraine has declined so much? Has your share in CPP revenue declined to 50% from 60% because I know that the government wanted to increase share received by Ukrtelekom? And second, what was the reason for the change in accounting policies in Uzbekistan?

Okay. I'll take the Ukraine question first. Yes, there was a change in interconnect rate from January 1, 2006 as part of the process of making Ukrtelekom more attractive, so there was a 16.7% reduction in interconnect on traffic coming in from the [PSTN] and in line with that mobile operators also reduced then their interconnect rates.

This is Vsevolod and I would answer the second question. First of all, I think there was a misunderstanding here. The situation happened in Turkmenistan rather than in Uzbekistan and that was basically the situation where we reached the capitalization level of the license and agreements we had with the Turkmen government. And from the first quarter of this year this ceased to be the CapEx-related expenses, but the OpEx-related expenses. Yes, thank you.

So do you mean that there are previously -- these expense items have been capitalized and starting from this year you started expensing it?

Exactly.

And actually in your press release (indiscernible) Uzbekistan as well -- net income in Uzbekistan declined slightly due to change in accounting policies.

Well, this is the -- the situation we described relates to Turkmenistan and we can get back to you specifically on Uzbekistan the net income later I think, Andrei will get back to you.

Thank you.

Rizwan Ali, Bear Stearns.

Bear Stearns. My question was regards to the cost of launching your new brand. I'm assuming it was all in the second quarter. Was any part of the cost taken in the first quarter -- the cost of rebranding and launching the new brand taken in the first quarter? Then my second question is you had a pretty significant drop in quarter-over-quarter ARPU in Russia, whereas RubiCom also had a drop, it was much, much less. Is there any way you can explain why the drop in ARPUs in Russia for MTS is a lot more than RubiCom?

This is Leonid. The costs for rebranding that we launched in the second quarter were not registered in the financial results of our Company in the first quarter. But we'd like to state that those costs are quite in line with our current advertising budget and would not lead to a huge increase in our advertising expenses in the other third quarters of 2006.

But the ARPU drop, what we can say is that first of all we are in a competitive market and we, by pricing our products, have to a certain extent follow the general market situation, though we would like to change the approach more to the way that we drive the market situation to a high ARPU onward from '06 and onwards. As I've already mentioned, there have been some products and tariffs launched in Q3 and Q4 of 2005 that brought a significant drop in revenues exactly in the first quarter of 2006.

And those were the decrease of -- those customers brought us some increase in churn rate and decrease in ARPU. That's why those products are -- the distribution of those products have been stopped and now we, due to our new marketing strategy, launched a setup of new products and new tariffs that would be more bottom-line oriented and would protect our bottom-line results.

One last question. In the past MTS had trouble in consolidating the operations of the new company they bought in the Far East. Do you think that still remains a problem?

No, we don't face this problem nowadays, though we have established new initiatives on changing on the model of corporate management in the Company to increase the influence and the responsibilities of the (indiscernible) original directors or the P&L results of the Company. But with the new initiatives that would be that as we hope to new achievements and growth of revenues and decreasing of expenses -- based on the effective accomplishment of the consolidation processes of the acquired companies that have been done by the team in the year 2005.

Thank you very much.

Sean Gardiner, Morgan Stanley.

Thank you, it's Morgan Stanley. Firstly, on your income statement, cost of services -- you may have already answered this, but it rose to 18.5% of sales the first few months of 2006. And that's sort of compared to an average of 12.5% in 2005. You just went through the dynamics of it and I'm assuming part of this is new interconnect with (indiscernible). But maybe if you'd just run through any other major changes there? And then the second question just from the (indiscernible) is since you've joined what do you see as the biggest challenge in turning MTS around to be more effective in competing with (indiscernible) going forward? Thanks.

First question -- this is Vsevolod -- speaking about cost of services, the main reason for such a drastic increase of cost of services is the fact that, as we mentioned, during the fourth quarter of year 2005 we didn't account for about $22 million of roaming expenses. That's why the increase in the cost of services quarter-to-quarter is that high.

I thought you answered that question earlier by saying that the roaming expenses you included in other expenses below your operating income line.

Yes, but the thing that -- I mean that during the fourth quarter the (indiscernible) was lower because it wasn't -- during the fourth quarter OpEx was lower for $22 million which actually happened during the fourth quarter.

And then for the first three quarters of last year it averaged around 14.5% as well. So are there any other roaming expenses (inaudible)?

Well, obviously there are other prices in this area. This $22 million is the biggest q-to-q change. In fact, there is also the appearance of interconnect's agreement with Vimpelcom which increased our revenues but also increased our cost. That's another reason for increase of cost of services.

So what you're saying with this roaming issue is that you're going to be running your cost of services with 20 odd million higher expense every quarter because roaming wasn't correctly accounted for in the fourth quarter?

No, I mean that the cost of roaming in the first quarter is relatively -- definitely will change quarter by quarter, but this is the correct benchmark because it's now effected correctly. What I say is that the quarter-to-quarter increase happened due to the fact that the base in the fourth quarter was lower by $22 million due to unaccrual effective on non accruals with roaming expenses.

Maybe I'll ask it a different way then because I still have (indiscernible). If I look at it on a year-on-year basis, your cost of services was 13.5% of sales; in the first quarter of this year it's 18.5% of sales.

Well, this is correct, the second part of my previous answer. Maybe I am sort of not answering clearly here. We definitely expect cost of services to take a bigger part in our expenses due to the increase of interconnect rates which is already happening in the first half of the year, but it's very likely to -- which will happen in the second half of this year, so these are two major factors.

But if -- sorry to (indiscernible) about this. But if I go back to what Vimpelcom said about their revenues, it was about $28 million net new revenues (indiscernible) expense of $28 million net new expense. If I take that off your cost of services you're still running at 16.5% of sales compared to 13.5% a year ago. So it doesn't fully account for the whole increase in (multiple speakers).

I'm sorry, now I can hardly hear you.

Can you just quantify how big the incremental interconnect costs that came to you from the new agreement with Vimpelcom were in the quarter?

It's $23 million.

$23 million, if I take $23 million of your $239 million I still get cost of services around 16.5% of sales, which is considerably higher than it was a year ago. But there's still something else that's growing in there which I don't quite understand.

Yes, but there is a significant increase, again, in interconnect in line rental and the increase of traffic obviously which happened in the first quarter of year 2006.

Okay.

Does this answer your question?

Yes, maybe (multiple speakers).

(multiple speakers) understood we have to do in the Company and that has been widely discussed in the management team and with the shareholders is to by a much more (indiscernible) approach I would say to the business decisions we apply in the Company. And that there is -- a simple statement but that leads to significant changes of the (indiscernible) structure and business process would have in [Amtel].

So we -- right now we understand that our basic (indiscernible) is to -- and we have identified that -- our basic job is to create long-term stable revenues for the investor that I've mentioned. Our ROIC should be in the long-term process not less than 25% and as long as we have it high now we, of course, are conservative in planning, but plan to keep it as high as possible.

So all of the measures we'd like to establish are oriented to increase the revenues for the shareholders. That has resulted in our technical policy and technical strategy in our operational model, in our marketing and advertising strategy and in all the other decisions are key strategies -- other decision that we apply in the Company. So profitable growth is the main challenge I think the Company is facing for the next coming years. And this is reflected in our so called 3+1 strategy model that is available to you in our presentation that is on our Internet site and it would be interest about that and we will be prepared to comment on it in the future.

In general terms I have also to say that our biggest advantages is the size and our geographical spreadings. That's why we have to use the effect of synergy, we have to use the effect of scale sizes, we have to use the expertise of our colleagues as allocated in five countries in the [CIS] region to generate the winning concept in each and every field of our operations and that's what we are oriented to achieve in the next coming months. Thank you.

Thanks.

Sergei Arsenyev, Goldman Sachs.

Good afternoon. Sergei Arsenyev from Goldman Sachs. I was wondering if you could remind me, what is the number of personnel at MTS in Russia and do you have any plans for the headcount reductions in Russia? And my second question is on the Ukrainian interconnects, just to follow up on that. What is the process for this? Do you expect further termination rate charges this year or drops in termination rates this year or is the government done for this year? What is the process for this?

This is Leonid. The headcount in MTS currently is 24,000 employees and this number is quite big. We want to stimulate optimizing of the number of employment positions in the Company, but not by a onetime effort, by -- like it was introduced to us by some advisers I would say. But by their constant liberation of business solutions that would money wise show our macro regions and the (indiscernible) companies the proper amount of personnel they have to keep onboard.

So we introduced a top-down financial indicator, same as top-down benchmarks on employee's efficiency to our macro regions and (indiscernible) companies. And we anticipate they would meet our indicators and on fulfillment of those indicators by improving their topline and improving their bottom-line they would identify the proper measures to use the personnel factor.

So we cannot -- and we would not like to say now that there is some onetime effort to anticipate in the nearest future. But we are pretty sure that the next coming -- nine months there will be a significant improvement on the quality of usage of the employment positions in the Company all over Russia and in the (indiscernible) companies.

And the next to go to Mark, please.

Basically clearly there is a political push to improve the results of Ukrtelekom ahead of any privatization and therefore there is continued pressure on interconnect. All the mobile operators are actively working with the regulator in Ukraine on this issue, but we can't rule out that later in the year there may be some further change to interconnect.

All right. And to follow-up on the headcount question. Do you have maybe some sort of -- in your ideal world, do you have the optimal number of employees for MTS in Russia? What will that number be?

Let me to answer like we don't have now this concrete number. We would deliberate it together with our macro regions and [daughter] companies in the next coming six months and we would meet those benchmarks that we would identify by our management dialogs in the year 2007.

Okay, thank you very much.

Jean-Charles Lemardeley, JPMorgan.

JPMorgan. Just on the issue of Calling Party Pays you provide some positive comments regarding Calling Party Pays in the press release suggesting it to be a factor towards ARPU [civilization]. That's in contrast to what your predecessors had said and what Vimpelcom management still says describing CPP as a mutual to maybe margin negative.

Could you provide us with your analysis of the impact of Calling Party Pays going forward for you? And then the second question would be what you expect in terms of average revenue per minute evolution in the second quarter and beyond. You're saying you terminated some inappropriate pricing schemes. What were they and what would be the impact we could expect on 2Q and beyond particularly with the ruble pricing move now?

Thank you, sir. Does that answer your question?

No, it's just me.

Okay, thank you.

This is Leonid. We are quite unhappy with the current trends in the development of ARPU and we understand that the market -- that we have to make some efforts together with our competitors on stabilizing of the current ARPU level in the Russian situation and by creating the basis for the growth of the ARPU in '07 and onward. We understand that the (indiscernible) introduction, the financial situation of ourselves and our competitors in the market and the future accumulation of usage of additional -- of value added services same as of the voice would lead us to a successful achievements of the target. That is to stabilize the drop of ARPU and to create the basis of its growth in the '07 and onwards.

Of course we enter some period of unpredictable development since of the issue of (indiscernible). But we share the opinion of our rival that it would -- as long as we see right now it would lead to an increase of ARPU on the (indiscernible) federation. On top of this we have a special program to be launched to stabilize the situation of constant dropping of ARPUs in the other countries where we have operations since there is a clear trend of the dropping of ARPU accompanying the increase of penetration level.

So we have to apply measures, marketing measures first of all, to stabilize the ARPU in the other CIS countries where we operate on the higher levels than we have now in the Russian Federation. And I think we've learned good lessons here and can be affective by clearing of this thing.

But in your view synergy will be a net positive for ARPU in Russia?

I'm conservatively positive (multiple speakers).

And in your guidance of 50% margin or 50% plus margin for the year, how much is built in in additional interconnection revenues and costs relative to 2005 -- and coming as a result of CPP I guess mostly in the second half?

This is Vsevolod. First of all, we're now in the stage where we can only intelligently guess about the potential effect of CPP introduction since the regulator has not yet formally announced all the tariffs which will be in place. So basically we know that June 20th is the deadline for such an announcement which will also lead to a review of all the contractual relations between the operators -- fixed and mobile operators in the telecom business.

Speaking about the affect and the incremental revenue and OpEx related to CPP, we believe that the current understanding of the situation means that we will not change our guidance neither for revenue nor for -- with the margin for year 2006. This is I think the most I can tell you at this stage. Thank you.

So just on that, the guidance still assumes a large increase in -- a significant increase in mobile to mobile interconnect revenues and costs, does it or does it not and a result of CPP introduction?

No, we have not built in the significant increase of costs or revenues.

Okay. And on average revenue per minute, you had a steep decline sequentially. You were talking about terminating those pricing plans. What can you expect for second quarter on that front?

We anticipate stabilization of the ARPU level in the next coming quarters and with some increase of MOU that we face. We understand that the [APPM] should slightly go down.

Okay, thanks.

Alexei Yakovitsky, Deutsche Bank.

Alexei Yakovitsky from Deutsche Bank. Can you quantify the impact of this new interconnect with Vimpelcom on your revenues in Russia in the first quarter? And also just a follow-up on the previous discussion. Vimpelcom told us that you pay them $28 million under this new interconnect agreement which is their revenues. And you're telling us that your cost to Vimpelcom -- this new incremental cost was $23 million, where is the $5 million? Can you reconcile or I may not sort of getting this correctly?

And to follow-up on maybe the margin guidance for this year, should we expect to see EBITDA margin of over say 50% or over in the second quarter? Because if not then you need to be delivering mid-50s in the third and the fourth quarter. Can you just confirm that you do realistically see EBITDA margin at 50% or over 50% for the full year 2006, especially given that, again, your overall profitability could decline on a like for like basis because of the introduction of CPP if I understood you correctly from your earlier comments? Thank you.

On our first question, I think we're comparing different numbers. Our understanding is that we have $24 million of costs related to the introduction of an incremental cost. I think the numbers which were given during the Vimpelcom conference call were total numbers. Because we definitely had the interconnect agreement in the year 2005 and certain years beyond before (indiscernible) and this difference is the difference in tariffs.

The second question about OIBDA margin, we can't give the exact guidance for second quarter at this stage, but the initiatives we are discussing, optimization initiatives, will obviously bring fruits in the second quarter. However, certain initiatives such as do as commission reduction were the optimization of the course of certain functions within the corporate center will materialize this quarter. So plus there are also seasonal affects which will, we expect, increase the OIBDA margin to at least late 40s. However, we are not in a position to provide the exact guidance relating to OIBDA margin for second quarter.

And can you, just to go back to my first question, the revenues -- the incremental revenues from Vimpelcom from the new interconnect agreement.

(multiple speakers) $23 million.

You paid them 24 and they paid -- incrementally -- and they paid you 23.

Exactly.

It's the same as --. Okay. Thank you.

Dalibor Vavruska, ING.

This is Dalibor Vavruska from ING. Two questions if I may. One, a follow-up on Sean's question about the challenges that the new management team is facing now in regards to this restructuring. I remember that it was first announced on the restructuring somewhere if I'm correct towards the end of the year 2004 with a (indiscernible) on cost and EBITDA improvement. Can you perhaps say -- assuming it's a fair question -- what were the challenges that the Company faced last year and which things you might want to approach differently in order to achieve better results on the cost side.

And the second question is can you say broadly what are your capacity utilization in Russia and whether some of the efforts to cut CapEx could now perhaps lead to excessive capacity utilization or issues with capacity or whether this is not an issue at all? Thank you.

This is Leonid. It has been stated by Mr. (indiscernible) two months ago when he presented to me as a candidate for the President's position in this Company said that there is a certain change in the periods of development of MTS that the Company is facing. So last year was -- we understand it -- was devoted to finalizing of the process of consolidation of the companies that have been acquired for the period of '03 and '04 and also in '05. And it's been one phase and one challenge for the management in '05.

Now in '06 our task is to increase efficiency of the existing structure to use the scale of sizes and to use the best expertise the Company has evaluated in their headquarters and in the regions for the sake of the whole group. So what we're doing now is we're developing more responsibility to the macro regional level in order to use the entrepreneurial initiative of course under the guidance of our regulations and benchmarkings we elaborate for the region and to explore their knowledge of the local market and knowledge of the specific efforts they can implement in their own regions to achieve better results in revenues and bottom-line.

So this is a new challenge for the Company. We understand that all of the process management and change management systems are quite in order in (indiscernible) so the management can use the existing change management methodology and processes to make this process cheep, quick and affective and this is one of the biggest challenges the management sees in front of itself in the next coming quarter and the next coming half of the year.

If I can recap it, the main difference is the level of delegation that you are going to apply. That previously that was not really part of the restructuring program, is that right?

Exactly.

Yes, my name is Eric Franke. Good evening, good day, ladies and gentlemen. (indiscernible) our capacity utilization, I would like to explain a little bit what changes we have done in order to calculate and recalculate our CapEx and our investments and why we got this nice cut in CapEx which we announced today. Basically the main principal as we did before was to have an overall KPI on the whole Russian Federation which ended up that we were applying actually norms in areas where we didn't need to apply those norms. We have high growing regions but at the moment we also have a lot of low growing regions where the saturation is already up to a very high point.

Basically (indiscernible) said while we have reserves and I can tell you that for instance in seeking capacity, if you look at 2004, 2005 we had reserves of about 40%, even more in some areas, which we had to do to take for the growth. Today we are looking at regions where we have basically only a 20% buffer which we need to (indiscernible) for the normal organic growth of our high penetrated regions.

If you look at the radio side we actually apply one rule and it is very simple. We delegate the responsibility for the quality and the capacity of the network further to our macro regions which was done earlier just centrally which also has a big effect on the possibilities of macro regions to tune and make variations according to their local situation. In that way we can actually achieve an (indiscernible) of the radio network which is close to 90% and so we have a high utilization building our estimations at this moment. I guess that is basically the main change which is also reflected in the reduction of our CapEx that we announced today.

Thank you.

Nadejda Golubeva, Aton.

This is Nadejda Golubeva, Aton. My first question is about Ukraine. First of all, could you specify what was exactly the incremental impact on costs and everything else from this change in interconnect in Ukraine? And also I see your (indiscernible) in Ukraine are up pretty significantly. Was there any free minutes granting and can I expect it (indiscernible)?

And my second question is about your working capital. Back in fourth quarter 2005 we saw a significant increase in working capital and this time I was told it was one off. But it seems to be not one off because this quarter it went in high. So do you see some room for optimization of your working capital or should we expect it to remain at the same levels we see it now? Thank you.

I'll take the -- this is Mark for the Ukraine questions. Basically in terms of the decline in revenue, about 50% of that decline is attributable to the change in interconnect. Costs declined basically less than 50% of that, so that's the (multiple speakers).

Sorry, but could you provide absolute numbers please, just for us?

Let's leave it at that I think, because we don't want to be so specific on some of these numbers.

Okay.

Basically the MOU increase is dealing with a couple of factors. One, we have seen in the market with both [Kiastar] and [Ashlette] increase offerings that encourage additional traffic into the network particularly OnNet traffic. And additionally, as part of our rollout we put much more capacity into the network at the end of Q4 and during Q1 and are using that as a tool for acquiring customers and keeping customers on our network. Thank you.

Speaking of the working capital, I would like to say that we definitely experienced more or less the same level or continue in the first quarter. However, due to the new regulation in the (indiscernible) reclamation and certain other initiatives we are undertaking -- which I mentioned the improvement of the procedures related to bad debt. We expect that there is room for improvement of our working capital over the next quarters.

What (indiscernible) bad debt. So in other words you're saying that this is more or less a normalized level on the working capital? I mean the royalty sales, yes?

I wouldn't say that it's normalized because we definitely -- one of the initiatives we have here is the focus on the reduction of the working capital. However, the effect of these initiatives is unlikely to happen -- to be extremely material during the second quarter. That's probably the right answer.

Thank you very much.

Alex (indiscernible).

It's Alex (indiscernible) from (indiscernible). Most of my question was already answered. But I want you to be a little bit more specific about the onetime charge of $60 million in the provision of doubtful debt. What is this provision related to?

This is Vsevolod. As I mentioned that during the fourth quarter year 2005 the -- certain onetime revenue was incorrectly billed -- a portion of the revenue was incorrectly billed in one of our macro regions. So basically the decision has been taken not to claim these revenues accounted due to the fact that basically it will definitely affect our customer loyalty.

So it's an accounting mistake in the fourth quarter of last year?

It's not an accounting mistake in the fourth quarter, in the first quarter. It's a billing mistake in the fourth quarter.

In the fourth quarter?

Clarified.

Okay. Thank you.

Does that answer your question?

Yes, thank you.

Alexander (indiscernible).

I want to ask you how do you calculate ARPU because it is impossible to get $6.2 per month by dividing -- I mean in Russia, by dividing your revenues in Russia for the first quarter by average number, even adjusted by sales of handsets. I'm making this calculation, I get ARPU of 6.6, 6.7 but not 6.2. Can you please make clear how did you get $6.2 dollars?

This is Vsevolod. The fact that we calculate the ARPU (indiscernible) in the service revenues and the connection fees and sales of handsets. But there are definitely certain items which are not accounted for while calculating ARPU. Special connections fees for example.

I see.

Evgeny Golossnoy, Troika.

This is Evgeny Golossnoy from Troika. I've got a couple of questions. One is on handset subsidies. Then the general question is why do you do that at all and specifically why you do that to corporate customers that are probably most wealthy out of the whole range of your customers. The second as on interconnect (indiscernible) and interconnect costs and service costs specifically. I was just wondering like with the Russian telecom market getting regulated and liberalized there should be a decrease in interconnect costs leaving apart the effects of introduction of CPP, right? But looking at your numbers year-on-year and percentage of service cost as a percent of service revenue we see an increase.

So what's your view? How is that going to change? Do you see that declining or rising? And basically the third question was related to the four customer groups that you identified. Who are these customer groups and how do you plan to work with them to differentiate yourself from the competition or what's your marketing strategy as regards of each customer group?

This is Mark; I'll take the handset subsidy question. Basically the evolution of the market, particularly in the Ukraine, was one such that handset suppliers were not so reliable. And one of the ways sometime ago of settling down the contract market was to introduce handset subsidies and at the same time lock people in to long-term contracts. So those two things go hand-in-hand.

As we see today handsets, there are just generally a normal supply of handsets into the market. And as I said earlier, this is a policy that we have reviewed and are changing particularly in the late second quarter and specifically from the third quarter. But we will retain them for key accounts, it's not so much in terms of looking at it from an acquisition point of view, it's looking at it from a corporate retention point of view and making sure that you keep those people with you. That's clearly very much the market that we have an edge in and that's our strategy to keep those clients with us. Thank you.

This is Vsevolod and I will answer the second question regarding the interconnect costs. We actually believe -- first of all, we understand that there is a global trend related to interconnect costs, but there is a certain specific situation in Russia where first of all there is such a thing as the interconnect agreement between mobile operators and (indiscernible) operators, specifically (indiscernible) and in GTS which tariffs are usually eliminated in rubles and tend to increase significantly year-to-year because it's one of the major sources of revenue for them which is not regulated.

Or which is -- sometimes it's circulated and the ruble price is adjusted, which basically has a double effect on us as the price in rubles has increased and there is a ruble to dollar depreciation for us. There is also the thing which I mentioned before such as the traffic increase year-to-year and going forward and actually we already experienced this starting this year. There is a certain increase in interconnect tariffs between the mobile operators and between the fixed and mobile operators.

So actually what you're saying is that as a percentage of service revenue your interconnect charges will only be increasing?

We can't exclude this. Obviously when we're discussing cost of services we will say that this is one of the items which are likely to increase actually as a result of CPP introduction.

Okay, thank you.

(indiscernible) about the marketing strategy. So therefore (indiscernible) groups for us. This is wealthy individuals, corporate customers, (indiscernible) market and use market. On the wealthy individuals and corporate market we have the leadership position and our main task is to maintain this leadership position by introduction of special loyalty programs that would involved as much of the customers of these two groups as possible all over Russia. And of course we will try to increase the number of those customers in our portfolio, though the competition is very hard in this area and the stock is very -- will be quite high once we would put very ambitious goals in front of ourselves there.

So to keep the leadership by increasing the loyalty of these customers is our target, is our way. Much market and (indiscernible) and the use -- our target is to increase the number of customers and to stimulate the usage by these customers of our services including (indiscernible) to increase the ARPU that we generate out of the customers from this market. So the task is not just to increase the amount of customers there but to increase the amount of [exit] customers.

Of course, we think about our value position in each of the segments. And due to our differentiation in marketing and advertising strategy and in our branding strategy, a differentiation from our competitors, as long as our solutions will be correct ones we will be able to fulfill our goals. The solutions are there, we will se how they will be implemented in the numbers. Thank you.

(OPERATOR INSTRUCTIONS). Olga [Bistrova].

Good evening. A few questions from me. First, regarding pricing strategy. I think some of your competitors currently are looking at keeping pricing stable in the Russian market and I was wondering what do you think of that? Do you think you will follow? Do you have any objections to that? And particularly given that the newly introduced plan has I think lower outgoing (indiscernible) I think lower outgoing prices (indiscernible) minutes.

Second question, regarding the OpEx optimization program that you mentioned for 2007 onwards, can you elaborate a little bit on the exact cost items that you plan to target in your (indiscernible) and what will be the incremental impact on margins from those initiatives? And finally, on ARPU on Russia and Ukraine, I think you said to the press today that you see ARPU stabilizing in Russia at 6 to $6.5 and in the Ukraine 7 to $8. I was wondering which year you are talking about, first of all, and secondly, do you really think that there will be such a disparity in ARPU levels between Russian and the Ukraine? Thank you.

This is Leonid. I will answer your question about the pricing strategy. So first of all I would have to say that in order to be competitive our pricing has to be adequate to the requirements of the competition. That doesn't mean we would like to follow the lowest proposals of our competitors, but we have to be competitive and that -- we have to be competitive in all of the regions and in all of the segments where we operate following our strategy. So depending on our market share, depending on our desire to keep the position or increase our position in this segment our pricing should be different.

Of course, as I've already mentioned, as long as our plan is to stabilize ARPU or increase it we have to apply the prices that would lead to achievement of this proper task. That's why our EPPM is the key indicator that we have to orient on while introducing our new prices in order to achieve the targets of keeping the ARPU and to create the basis of its development.

So we have to be competitive, but by different identified methods we have to stimulate the high use of correctly priced product of the Company and to give the correct messages to the competition that we are on the way to face the competition but accumulate the increase in EPPM. If I answered your question here.

Yes, that's fine for the first one.

Second question, Olga, can you please clarify whether your question was mainly related to the year 2007 and other years going forward or 2006?

2007, because unless I missed it I think you didn't mention any details on that part of the OpEx optimization program.

Sorry, what did I mention?

I think in the beginning you did not mention details on your OpEx optimization program for 2007 onward. So that's why I asked about it.

That's correct. The thing is that we're definitely working in the environment where it would be harder to forecast the CPP affect for year 2007. We're only making sure that the initiatives we are undertaking now will first last in the year 2007. So these are not onetime initiatives. And the initiatives throughout our discussion to -- which will affect the second quarter of this year is actually the introduction of the certain projects. Speaking for year 2007, we believe that when we are closer to this year we will be able to better guide you on the overall revenues and OIBDA margin and the contribution of the OpEx reduction measures to the OIBDA margin we will announce closer to the end of this year.

Okay, great, thank you. Again, can you also clarify two things. First, I think you also mentioned that you are undertaking a sort of restyling of the service centers, etc. Is it an additional cost to your branding program or is it separately? And if it is separate, how much approximately do you plan to spend if (indiscernible) at all?

This is a call center, so it's basically the call center's centralization -- what we had, we had call centers in all regions of Russia. Now we've centralized them into one each in each macro region, not always in the (indiscernible) macro region or center due to the lower cost, for example, there for the central region. We had our call center in (indiscernible). So that basically gives us better cost basically personnel cost, for example.

(indiscernible). So we do not expect any additional increase of costs related to these call centers. And we are thinking of whether we can sort of optimize this function by maybe bringing together certain macro regional call centers.

Okay. And also on the advertising budget, what are your targets sort of relative terms or any terms that you can mention?

We plan to keep the our advertising budget this year totally in accordance with the levels we had last year in 2005 despite the fact we have a rebranding campaign. This year -- right now we are recalculating the budget for the second half of the year based on the new methodological approach since we have been planning the budget until now on the basis of share of voice principal. Now we're going to change to the cost per net adds principal and it can guide to some changes in the size of the budget, but we keep track the track on staying with conservative numbers and keeping the costs low.

Okay, thank you very much. And also, the last question that I asked about are poll levels in Ukraine and Russia?

Olga, this is Mark. For Ukraine the guidance still remains as previously given between $7 and $8 for this year. And I think that's the extent of the guidance at this point.

Okay. So basically this is not related to your view on the bottom of ARPU in the Ukraine, right? I just want to clarify that.

No.

Okay, great. Thank you so much.

[Yanosh Petranovich], BBVA.

Yanosh Petranovich from BBVA, Banco Bilbao Vizcaya Argentaria. A great part of your debt is in foreign currencies. I'd like to ask about your ForEx hedging policy.

That's a very good question. Actually during the previous years due to the fact that all of our revenues were eliminated -- were paid in foreign currency and the vast majority of the core separating costs in CapEx was also in foreign currency. We believe that that was sort of perfect internal hedging as we call it. However, after the changes in the market and the current ForEx development, we are now starting to consider the opportunities for hedging our loans and basically in discussions with many banks. And I think that (indiscernible) is also one of the potential candidates to consider participation in this area. Now we are in the process of evaluation of the potential opportunities.

Okay, thank you very much. We are definitely a candidate for this.

Anna Bossong, CA IB.

It's Anna Bossong from CA IB. My first question concerns in a way churn. We've seen a new FX rate announced for your customer which is effectively about a 6% tariff increase firstly. Secondly, you've been canceling a very low-priced tariff in the regions of Russia. And thirdly, we're hearing in the Ukraine you're phasing out handsets I believe. I'm wondering, does this mean -- firstly, do I understand all these points correctly? And secondly, does it mean an increase in churn from the second quarter?

And my other question was a very quick one. These roaming one-offs in the fourth quarter of last year, were they all to do with Russia? And lastly, the interconnection rate proposals you've made concerning calling the party paid, you and Vimpelcom to the government -- have they been accepted or are you still waiting word on whether that will be acceptable? Thank you.

Let me first start with the second and the third questions. Definitely the one-off of course items we discussed earlier, they only related to Russia, right? So it doesn't have anything to do with other countries we're operating in. As for the interconnect rate, we basically are in discussions with the regulators. We haven't had any formal position yet. And this also -- the formal position of regulator will also affect the final interconnect rates in the industry.

Do you get the feeling that they're just favorably disposed towards your proposal?

Excuse me?

Do you think that they're favoring your proposal? Do you get the feeling they're happy with it?

Good question. I think it's better -- the question (indiscernible) to regulators. But it's a discussion. It's a discussion and we do not see that they are totally unhappy with this. So we have said that the final solution would be closer to what mobile operators are suggesting. I'll pass it over to Leonid for the first question.

If you look at the numbers for Russia and the churn rate you would see that there is some certain volatility, especially driven by the special factors we had in Q3. And now there is some increase of churn rate. And of course if we will concentrate ourselves on profitable growth measures, that is to attract the more active users, it can lead us so to some increase in churn rate, but we of course -- that would be just the result of increase of our -- as we hope -- will be the result of increase of our revenues and bottom-line. So in this way, if our strategy would be a correct one, we can say some concrete growth in churn rate in the next coming quarters.

And was I right to understand that there's effectively a 6% tariff increase in Russia from this new FX regime?

We don't put our strategy on increasing our revenues just on this sector. But in the current currency situation we understand it can bring us some modest increase in revenues that we actually would be happy to face.

Excellent, I think so too. Thank you.

Vladimir Postolovsky.

Actually it's three full on questions if I may. The first one is on advertising expense. You said that you went to keep them at the same level as in '05. Do I understand it correctly, that as a percentage of revenues as opposed in absolute terms? The second one -- just going back to the Turkmenistan issue, it's a small one. But I never heard of a revenue sharing arrangement there. Could you just tell me what percentage of revenues have you agreed with them to share? And the (indiscernible) EBITDA was massive, so is mid 20's level something that you think is sustainable or is it just (indiscernible)?

And finally, just going back to this issue of your (indiscernible) another question to (indiscernible). We talked a lot about (indiscernible) and CapEx control and obviously if you deliver I'm sure (indiscernible) will owe you that. But in my opinion (indiscernible) problem with MTS over the last few quarters has been massive market share losses of revenues. Why do you think MTS has been losing market share of revenues? And what you can do to stop that and hopefully reverse it? Thank you.

This is Vsevolod talking. I will handle the first two questions. Speaking of advertising costs, we believe that there -- we meant when we answered the question regarding the advertising costs that there wouldn't be any deviations from the budget related to the new branding strategy. So basically there would be certain increases in advertising cost due to the media inflation, but it would be as planned and it would not affect any of the guidance we gave before or we are given now.

Speaking about Turkmenistan, the situation there is as follows -- and I think that it was actually there was a press release on this net income sharing agreement, not the revenue sharing agreement, which is actually 80-20, 80 for MTS and 20 for the Turkmenistan government. And if you wish to get more details on that again we can send some further details and refer you to press releases which were issued during the purchase of this operation.

So in Q1 there was a reversal of everything that has happened so far, right? You've expensed 20% of the income from the costs, right?

Yes.

Okay.

Let's answer the first question. It's a very important one and thank you very much for asking me one. First of all, I cannot say that we faced a dramatic drop of market share, especially in the revenues over the last year and a half. But of course we have some things to improve in our market position and the trends in our position on the (indiscernible) market. I understand that the Company has and we already launched the changes to very seriously change its marketing policy -- the structure -- including the advertising policy and including the structure of the products we offer to our users in order to stimulate the usage and in order to create concrete value propositions to our customers in a simple an explanatory way.

We also have to -- and as has been already started this year, to improve the effectiveness of our corporation with the independent dealers. And of course we have to use the advantage of having the biggest owned network of dealerships to sell more services to our customers.

Also a very important issue is the quality of service. And we really face the problem of losing the level there and to change this we've issued the total quality measurement program in the Company and I'm pretty sure that quite soon the customers would feel the changes based on this.

And the last but not the least here is the corporate culture issue. So the Company was more oriented on say business acquisitions developments and on I'd say expansion models of developments (indiscernible) on customer orientation models and let's say financial targetings and benchmarkings in each business decision the Company is making. So if -- it doesn't mean we need a dramatic change in the Company, but we need certain improvements and I understand that is why the new team is there. Thank you.

Thank you.

Alex Kuzensopf.

It is Alex Kuzensopf from Bear Stearns. I would like to inquire if you are going to increase your tariffs to offset CPP implementation. I understand that the transition to your fixed exchange rate is going to increase your effective tariff, but are you going to increase tariffs above this transition?

And second, you highlighted that you're currently in the process of negotiating a new interconnect rate with (indiscernible). How close are you towards the end of this process, and since only two weeks are left before CPP is implemented? And secondly, I was under the impression that interconnect rates are (indiscernible) on the four dominant operators in Russia. And since Mobile Telesystems is not deemed a dominant operator I thought that interconnect rates are set by negotiating with your business partners?

Answering the question about the increase of interconnect rates, we have to wait until the regulator will offer its standard for the fixed operator users -- the price for the fixed operator users and then based on that it will create also the recommendations for the prices of interconnect from fixed to mobile. And based on these recommendations -- solutions from one side and recommendations from another side, we plan to adjust our interconnect tariff policy of course in the area of increasing of the one that can be a source of additional revenues and should be a source of additional revenues for us since we have a very big network. But as it has been mentioned by Vsevolod, it has not yet been a built-in part of our OIBDA margin forecast.

And speaking about the negotiations related to interconnect rates, as I mentioned of course there are only two weeks remaining before the introduction of CPP, but unfortunately we haven't got the final position of the regulator. So we obviously will be stretched to finalize these negotiations within 10 days because I think the (indiscernible) regulated the last day when they can announce the opposition is June 20th. So basically we'll have ten days to finalize our interconnect agreement. And I think we did a preliminary job, so basically now it seems that we will be able to do so. Speaking about the dominant operator situation, can you please clarify your question?

I meant that interconnect rate for dominant operators or regulators in Russia. But it's my understanding that interconnect rates for operators not deemed dominant can be set through the private negotiation of both parties -- you and Vimpelcom or you and interregional operators.

This is Eric Franke; let me answer that question because this is -- as you know, we had exactly the same situation two years ago in our subsidiary in (indiscernible) where although mobile operators are considered of course not to be a regulated part of the market, and in this case called dominant operators, still you have to understand that when the tariffs are set for the end-user the affect automatically will become also a part of the whole structure of interconnect.

So like it or not and since we are of course together with the other two big players in this market, a sizable part of the telecom structure, we do have to look at the interconnect rates as a part of the tariffs I think for the average person in Russia. We cannot avoid that. So it is always a part of the negotiations. However, we believe that -- so our tariffs will not be set. We have a free market. But we believe that with dialog and explanation towards the government we can achieve a sort of compromise and as Vsevolod has already said, we are very close because it's only ten days. The experiences what we had in (indiscernible) at a certain moment it rolls out and we think it's the 20th of this month.

Ladies and gentlemen, as we are close to two hours already on the phone I would suggest that we'll take just one more question.

Sean Gardiner.

I'll make it a quick one. Firstly, can you just list your top three key performance indicators that have been set by Sistema and also weight them as a percent of relative importance just to sort of help us understand what you're targeting? And then secondly, you've spoken a lot about increasing usage of your subscribers, can you give us maybe a 30 second rundown on what you're going to do about the multiple ownership on your networks? Are you prepared to lower your churn periods or are you looking at other options as in active subscriber counting? Thanks.

Frankly speaking, it's better to ask the shareholder for his requirements from the management, but -- and I think they can be more specific with this. They've been of course much more targets in front of me -- in front of the management team than three. But let's say -- and this gives me some headaches, frankly speaking, for the last two months. But as it has been stated by Mr. (indiscernible) on the conference call when the new president had been introduced two months ago that priority number one is to increase the market cap to a level of $20 billion as (indiscernible) anticipates is the correct valuation of the Company.

And frankly speaking, looking into the observations of the analysis we can say that Mr. [Shankov's] task was not too far from what the analysts think our company is [less for]. Number two is to have stable revenues on the investments. And this is the basis -- that's why this is the basis of our strategy that -- of the renewed strategy of the Company is to keep stable returns on investments on the level of a high of 25% near terms in the next coming five years and onward. And position number three is to -- (technical difficulty).

Does that answer your question?

It went dead just at the beginning of number three.

Oh. Hello, gentlemen? Ladies and gentlemen, we apologize for the pause in the presentation. The call will start again shortly. Thank you, our chair now joins us.

Should I finish answering this question?

Yes, can you hear me? Just at number three -- you were just saying number three and it went dead.

And the third (indiscernible) for us is to create the Company structure and the processes and also the brand in the way that it can be developed to the new regions and to the new let's say acquisition targets once the Company and its shareholders would decide that it's reasonable to develop ourselves to the new markets and new territories.

Ladies and gentlemen, a final remark. First of all, thank you, everybody, for your active participation in our conference call. I would like to remind everyone that materials relating to this call as well as a transcript of our discussion will be available on our website at www1.MTSGSM.com. And again, thank you for participating today and have a nice day.

Ladies and gentlemen, that concludes the conference. Thank you for participating.