Mobile TeleSystems PJSC (MBT) 2007 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Mobile TeleSystems fourth quarter and full year 2007 financial and operating results conference call on Wednesday, 16th of April, 2008.

(OPERATOR INSTRUCTIONS)

I'll now hand the conference over to Mr. Andrei Terebenin. Please go ahead, sir.

Good day, ladies and gentlemen, and welcome to MTS's conference call to discuss the Company's fourth quarter and full year 2007 financial operating 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. The strategic development of MTS's business activities, both in Russia and abroad, revenue and/or subscriber growth, syndicated loan facilities and their usage. Legal actions or proceedings directed at the Company or its representatives, regulatory changes and the impact of Company's operations in the markets in which we operate. Financial indicators such as operating income before depreciation and amortization, average revenue per user, cash flow projections and/or return on invested capital. Technical matters as they pertain to the mobile communication networks, including equipment, licensing or network technologies and capital expenditures and operating expenses.

Important factors could cause actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include Company press releases, earnings presentations, MTS annual report on Form 10-K/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 at www1.mtsgsm.com, or that of the United States Securities and Exchange Commission at www.sec.gov.

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

I will now turn the call over to Leonid Melamed, President and Chief Executive Officer of MTS Group.

Ladies and gentlemen, thank you for joining our 2007 fourth quarter and full year conference call. Joining me today are Vsevolod Rozanov, Chief Financial Officer, Mikhail Shamolin, Head of Business Unit MTS Russia and Andrei Dubovskov, Head of Business Unit Ukraine.

Looking back on 2007, it is obvious that we continued to execute on our corporate strategy as we continued to fulfill the commitments that we have made to capture growth in our core markets, create value in developing markets, develop mobile broadband in our markets of operation, while at the same time maintaining cost efficiency and further developing our group.

For the year, revenues rose 29%, to over $8.3 billion, as we generated strong, profitable growth in each of our markets of operation. Unlike 2006, where we saw a slight drop in revenues from Q3 to Q4, we witnessed an increase on Q-on-Q revenues from both the organic growth of our business as well as the consolidation of our acquisition in Armenia.

In our core markets, our Russian operations continued to showcase positive developments. For the quarter, revenues rose to over $1.7 billion, a 3.4% increase from Q3, while for the year revenues exceeded $6.1 billion. Key drivers of this growth were sustained increase in voice usage as total traffic on our networks increased by 78% for the year. As we have stated, our objective has long been to stimulate usage, and it is evident that our tariff plans are succeeding in this respect.

Of note has been the behavior of our postpaid segment. In the second half of the year, in particular the fourth quarter, total traffic in this segment grew even faster than our prepaid segment, as both corporate and contract users grew in subscribers and usage. As telecommunications is often a proxy for overall economic health, it is nice to see that the Russian economy is in good shape.

Subscriber growth, too, has contributed to our, if I may say, positive results. Our base in Russia increased in 2007 by 12% to over 57 million. Key factors of this are our increasing emphasis on brand promotion and the compelling product offers on the market.

In addition, our investments in CRM activity and brands have allowed us to retain our leadership in the corporate and [HVP] segments, as the number of customers who have been in the network the longest, more than three years, let's say, are growing at the rate of the overall subscriber base. Messaging and other services have been a driver of growth over the course of the year. Data revenue grew 40%, a strong indicator that our customers are gaining greater affinity for their devices, which is a good sign, as we look to launch 3G in 2008.

In Ukraine, revenues rose for the year to just over $1.6 billion, or nearly 8%. As we have described previously, 2007 was a year of significant change for our business. We spent the year investing in networks and service, laying a foundation to build a unique customer experience by enhancing the overall quality of our business and extending the MTS brand into the market.

At the same time, we have seen across-the-board improvements in perceptions about the quality of our networks and scope of our products and service. Towards the end of the year, we began introducing more targeted products and services. For the mass market, plans focused on specific segments, such as families, students, women, et cetera. For the corporate clients, we have wait lists for BlackBerry devices and the uptake of MTS Connect, our high-speed CDMA data service, has exceeded our initial expectations.

Since December, trends have been picking up and we definitely see positive changes in the market. We remain optimistic about our outlook for 2008.

In Uzbekistan, we continue to roll out our networks and strengthen our leadership in this rapidly growing market. Revenues from Uzbekistan rose 82% over the year, as subscriber growth exceeded 93% to $2.8 million. At 22% penetration, Uzbekistan seems on the verge of entering a mass-market growth phase, as we expect further subscriber and usage growth in the market in 2008.

In Turkmenistan, we continue focus on network deployment and subscriber development. Though only 7.4% penetrated, Turkmenistan has the potential to be a significant market, given the possibility of more economic liberalization. Signs are encouraging, but for now we realize incremental benefits from subscriber additions and introducing products like [Red Text], our bundled SMS product, into the market.

We also welcome Armenia into the MTS family this year. Our acquisition of K-Telecom gave us entry to a dynamic market and an asset that has 74% subscriber share, actually continues its growth. We anticipate further growth in the business unit as we introduce more products into the market and look for ways to leverage greater group synergies in this market.

Now Vsevolod Rozanov, our CFO, will discuss our financial position.

Please.

Thank you, Leonid. I am pleased to report that the financial position of MTS continues to strengthen. As forecasted, we met our OIBDA margin forecast of at least 50% as absolute OIBDA for the group, as absolute OIBDA for the group grew 31%.

Our developing markets in Central Asia grew fastest, but our Russian business, where OIBDAs rose 35%, continues to contribute the most absolute growth. In spite of the competitiveness, too, we were also pleased to see our Ukraine operation post a 48.6% OIBDA for the year.

This growth in OIBDA also aided our net income, which rose 93% year on year to over $2 billion. Sensible financial management, increasing revenues from financing activities, due to rising cash flows, an absence of any one-offs due to higher quality control, offset negative pressure from currency change and higher depreciation costs from our expanding asset base. By virtue of our dividend policy, which calls for a minimum payout of 50% U.S. GAAP net income, we will be looking to return to investors MTS's first annual $1 billion dividend.

That strong bottom-line performance also improved other key metrics. Earnings per ADS rose from $2.70 to $5.20 year over year, while the return on investment capital rose from 34.9% to 45.3%. Combined with the top-line growth in the business, we feel confident in our fulfillment of our key strategic objective of creating exceptional shareholder value.

For the group, financial performance improved substantially for the second straight year. Net cash flow from operations improved 41% to nearly $3.4 billion. Free cash flow was positive for the second straight year at $979 million, a positive result that would have been higher as we used cash to finance our acquisitions of K-Telecom in September.

In Q4, we continued our share repurchase program, acquiring an additional 1.4 million ADRs. By year end 2007, we have acquired slightly more than 5.7 million ADRs, representing 1.4% of our outstanding shares.

Though total debt increased by 11% to $3.4 billion, MTS's net debt levels actually decreased slightly in 2007. In late 2007, we drew down the last tranche of our April 2006 syndicated loan to later pay off our euro bond that came due in January 2008 at rates that were extremely favorable to MTS given the current credit markets.

As has been publicly stated, we have filed necessary paperwork with the Russian regulators to return to the credit markets in 2008 in the form of ruble bonds, but we'll only due so when the terms become more favorable. In the meantime, we have ample resources at our disposal to both expand and grow our business.

Thank you, Vsevolod.

Given the strong performance of the business, we are optimistic looking for 2008. We foresee revenue growth of not less than 25% for the group. In Russia, we see current trends extending into the year. Key drivers will include increasing subscriber acquisitions, voice usage growth in the mass market and adoption of data service by all segments in 2008.

In Ukraine, we anticipate an improvement in usage and net subscriber additions as we broaden our segmented voice and data products and realize the impact of our rebranding. In our remaining less-penetrated markets, subscriber additions will constitute the bulk of growth.

Lastly, margins. As we have stated, we witnessed significant margin pressure during the second half of the year and we do think these trends will continue in 2008. In Q1, we have already added nearly 3 million net subscribers, a fact that suggests greater marketing costs and dealer commissions down the road throughout the group. Usage continues to increase, which translates to higher interconnect payments in our core markets.

Our need to increase coverage and capacity in our markets necessitates greater operational expenses to service our growing network, in particular in high-margin places like Uzbekistan. We're seeing media costs and salary expenses continue to rise faster than the rate of inflation and line rental and other costs, such as energy, continue to rise. Considering this, we believe it will be challenging to sustain margins at levels we saw in late 2006 and the first part of 2007, but we will again aim for 50%, as stated in MTS 3+2 strategy, though it will be a challenge.

Provided our markets of operations and our portfolio of assets remain as they are, we will endeavor to meet these goals. Vsevolod will elaborate now on CapEx.

Thank you, Leonid. For the year 2007, CapEx spending came in at $1.54 billion, roughly $450 million less than anticipated in our capital investments. Partially this was due to lower-than-expected 3G spending, as our introduction was delayed in Russia.

The balance of the difference largely derives from the favorable terms we got from vendors on equipment we took possession in 2007. This too will be allocated to 2008 spending.

In sum, we anticipate CapEx spending for the group to reach $2.5 billion in 2008. By country, we see the following breakdown. In Russia, it is apparent that we need to increase capacity and coverage to accommodate the sustained growth in voice usage we saw in 2007 and expect to continue to 2008. Similarly, we aim to increase in the number of dedicated data channels and extend EDGE deployment to accommodate greater data usage. We anticipated the launch of HSPA-enabled 3G networks in up to 10 cities in Russia by the end of the year.

In Ukraine, CapEx should come in at roughly $500 million, as we achieve what we feel are the necessary network levels to satisfy our brand promise on quality to our customers. We are also investing in our CDMA 450 network to meet rising demand for data services. In Uzbekistan, we anticipate significant rise in CapEx to $200 million as we will be building out our network more aggressively in this lower-penetrated market, as well as introducing 3G to major cities at the end of this year.

In Turkmenistan and Armenia, we anticipate that more subscriber additions and rising usage will require us to invest roughly $75 million in both markets. Given the timing of CapEx and difficulties in anticipating issues related to 3G, we think it is sensible to look at CapEx in relation to sales over a longer period. Thus, if you look from the perspective of three years, 2006 to 2008, we think it may be possible to realize CapEx to sales ratio of approximately 23%.

Now I will be passing the word back to Leonid.

To finish, I just want to say a word about our strategic direction. Growth remains our priority as an organization and we have been successful in managing growth profitably. We do have ambitions to increase the size and scope of our footprint and have clear priorities on where and how this may be.

Russia is our first priority, for this market, as we demonstrated by our recent purchase of Bashcell, we see opportunities for consolidation. The CIS as our home market is our second priority and considering the growth in the region and the scale benefits we realize, we are committed to expanding into as many markets as possible.

We are also examining markets beyond the CIS. Though of lesser priority, the prospects that we see in developing markets are too great for us to ignore, given our track record of execution and financial resources. However, moving elsewhere carries a lot of risk and we have strict criteria, including financial, operational and strategic that any such move would have to meet.

In addition to our growth in our markets, MTS has grown as an organization. A key lesson we have come to understand, that beyond base stations, the transmission lines or the licenses, our most important asset is our customer. Creating a unique experience for our customers has been key to our growth over the past two years and it is obvious that our customers have developed a strong affinity for MTS, the MTS brand and the products and services we offer.

Looking ahead, a common theme will be how we can even better utilize the relationship to both meet our customers' communication needs and of course further develop our relationship. So long as we continue to do this, we are confident that we can meet any challenges that our market, our competitors or new technologies may offer. Thank you for your time. Now I'm happy to open the call for your questions.

(OPERATOR INSTRUCTIONS)

Thank you, our first question comes from Will Milner of Arete Research. Please go ahead.

Thanks. Just a couple of questions on Russia. Just looking at the sort of pricing trends in the fourth quarter, it does seem that underlying prices came down fairly sharply now. I just wonder if you could talk around the level of promotional activity you had in the fourth quarter and whether that's sort of spilled into 2008, because it does seem that that trend's got a lot worse. Obviously, usage has gone up, but the pricing looks like it's coming down very fast.

And, secondly, you're obviously going to expand HSPA in Russia next year and data points elsewhere suggest that demand for mobile broadband and USB modems can actually be very high. I just wonder if you can talk about what your sort of implementation plan is for next year in terms of tapping that demand.

Mikhail

Okay, this is Mikhail Shamolin from Russia. Hello, everybody. On the pricing question, basically there wasn't much of a decline in Q4 compared to Q3. We've been analyzing trends in APPM and what became clear is that the main effect came from our expansion in the white collar segment, particularly on some of the tariff plans like MAXI, which offered unlimited traffic like [on net] and in some other directions, and that actually stimulated a significant traffic increase.

So the price for the mass market stayed relatively stable and the APPM effect was mainly in those promotions for white collar. And that allowed us to actually expand our market share in that segment quite significantly and the overall revenues from that segment.

As far as HSPA 3G goes, we do believe that broadband and overall data traffic is going to be growing pretty significantly. We don't look at 3G and HSDPA completely separate from the existing network. We actually look at the overall data capacity that we need to install in our network and we have both plans to expand our EDGE capacity and, on top of that, add the HSDPA. We are building the first wave of cities in Russia this year. We will be continuing next year.

It is to a very large extent dependent on the frequency availability. We are sort of building the network with a slight time advantage before the frequencies become available, so when they are becoming available, we can put networks in operation almost immediately. And, this year, we plan to launch networks in five cities.

Okay, so it does sound like it's probably 2009 before you start to see mass-market adoption of USB modems and you're having a real push in that area.

Yes, it will start in 2008, but the revenue effect will start coming in 2009, yes.

Okay, thanks, and just one quick follow-up on the pricing. Just to confirm, all of your tariffs are now quoted and priced in rubles. That's currently the case, is it?

That is true, yes.

Okay, thanks a lot.

Thank you. Our next question comes from Mr. Jean-Charles Lemardeley of JPMorgan. Please go ahead.

Yes, hello. Could you give us a little bit more color on the G&A line? You had a very substantial increase from 3Q to 4Q of around $70 million, or 22% in U.S. dollar terms. It's not -- we haven't seen that entire year, as we didn't really see that at VimpelCom this quarter. Specifically, is there any management compensation in that number and is it related to stock performance in the fourth quarter? That's the first question.

And the second question would be on the guidance on revenues for 2008, what is the ruble-dollar exchange rate assumption there?

Thank you, Jean-Charles. This is Vsevolod Rozanov. I will take both questions. Speaking about the G&A development in Q4, I first would like to mention that Q4 is usually the weakest quarter in terms of the margins and here seasonality works -- is most pronounced, usually. Specifically, speaking about G&A expense and certain items which were unique to this quarter, I would like to mention the provision for the K receivable and the impairment of certain assets which together account for approximately 1.5% of OIBDA margin.

Speaking about the management compensations, I would say that the effect of the management compensation relation was less material and altogether the Q-on-Q development was less than 1% of OIBDA margin effect.

Speaking about the exchange rate built into the assumptions, this is roughly a little bit higher than the current exchange rate, but roughly 24.5 rubles per dollar.

Okay.

-- of course.

Okay. Just to go back, thank you, on the management compensation, is it stock appreciation rights, is it something like that that is linked to the stock performance?

This is [phantom] shares program which is leading to the stock performance and it is fully disclosed on our website in details.

And you're saying it's around one percentage point EBITDA margin for the quarter in terms of change, sequential change.

Yes.

Okay, thank you very much. Very helpful. Thank you.

Thank you. Our next question comes from Mr. Alex Kazbegi of Renaissance Capital. Please go ahead.

Yes, good evening. The first question is on depreciation, actually. It also shot up in Q4, and if you look at it, it actually ends up about 20% of sales for Russia specifically and that is compared to about 14%, 15% before, so I was just wondering, is it any change in the way how you do that, accelerated depreciation? Is there anything in terms of intangible amortization there, or is it, again, a one-off and we should not expect this translating in the future?

Second, I wanted to also talk about the revenue guidance again. As far as I understand the HSDPA will be probably really switching on towards the end of the year. You did say that you expect quite a large contribution from the data services, but, again, probably from the current EDGE GPRS. And I just wanted to get a bit more color, because it's quite a strong guidance, obviously, and it does seem that most of it probably will come purely from the voice increases.

And with regard to that, also was wondering on your Q4, as far as I understand, I understand it was largely penetration on white collar workers, which probably lifted the usage by about 12%, which is fairly unusual, because Q4 you had actually quarter-on-quarter stronger growth than, for instance, Q3. I was wondering, is this trend going to continue, there will be more price stimulation? Do you expect more penetration of the white collars, the usage is going to be driving most of this increase, or what's your sort of detailed expectation, if you may?

Thank you, Alex. I will start with the first question. Speaking about depreciation, we didn't have any one-off items there and this is, from our perspective, regular course of the business. When the majority of the assets like the network development, we are undertaking over the course of the year, is actually getting into the service in Q3, thus the Q4 has the full impact in terms of the depreciation. We also had a significant increase in depreciation from the Armenian business as we didn't account for it fully in Q3. So that's basically the reason for the increase in depreciation in Q4 over Q3. And, going forward, we don't expect any major increases in depreciation quarter on quarter, at least in the next few quarters.

Thank you.

Alex, this is Leonid Melamed. To comment your second question, I'd like to say that, like on the disclosure of Q3 last year, we gave the optimistic guidance on the development of MOU in Russia and we will now stay on this forecast and that gives us the optimism, by the way, proved by the results in Q4 and the results of the year 2007 in general, that the usage in voice would precede its growth towards the targets that we have described in our previous call, meaning when we said that it could reach 400 minutes in the next coming three to four years.

So usage will be the key driver and, of course, the speed of growth of value-added services would be higher, even higher, than the growth in voice usage, like this year it was almost two times higher than it was in Russia, than it was -- than voice service speed of growth, revenues for the voice service speed of growth.

And to answer your third question, I would say that it's strategically of course a part of our policy to stimulate the transition of our customer base from prepaid to postpaid and we have seen the positive signs in realization of this strategy in our customer base in 2007. And from the other hand, by stimulating the usage in this particular segment of our customers, we achieve the quite impressive results on usage growth.

So to answer your question, yes, we anticipate and we would like to stimulate the slow growth of our postpaid customer segment compared to the prepaid customer segment.

And by postpaid, do you mean self-paid, or is it mostly moving people to the corporate plans?

When we say postpaids, we mean the individuals on the contracts and corporate customers.

Okay, thank you very much.

Thank you.

Thank you. Our next question comes from Mr. Sergei Arsenyev of Goldman Sachs. Please go ahead.

Hi. Good afternoon. I just wanted to stay on the subject, usage stimulation, for a while if I can. If you look at the fourth quarter trend, then clearly it was up or neutral and margin dilutive and of course the increase in usage has been very impressive. I'm just wondering what kind of endgame do you have in mind? Do you intend to stop or maybe somehow limit the promotion, the free minutes activity in the coming quarters, in the first quarter, second quarter, so we start seeing less of a margin dilution effect in the coming quarters. Just I'm wondering what your thoughts are on this. So that's the first question.

The second question is wondering if you can comment on the Ukrainian growth margin and why there was such a massive drop in the Ukrainian gross margin. I haven't detected a massive increase in usage in Ukraine in the fourth quarter, so I'm just wondering what's going on there?

And, thirdly, can you comment on today's discussion on [Yavraset] and Vedomosti, and clearly you can't disclose the price or the structure of the deal, but if you can share with us what in your view will be the strategic advantages of having a distributor, being aligned with a distributor, let's say, that will be very helpful, as well.

Thank you, Sergey. So let me answer in the following way on your first question about usage stimulation and the effect on the margins that it's going to have, we've given our guidance on the margin for the year 2008 today and it is a challenging margin and this margin is totally in accordance with the 3+2 strategy that we as a group follow.

And, from another hand, this margin we would like to achieve in parallel with usage stimulation that would generate at least a 25% growth that we also forecast for the year 2008. So taking into consideration the expenses related with such growth in usage, we still see the possibilities to, like, have our margin on the level prescribed by our strategy, let's say. So it means we have to follow pricing discipline and to use at full the positive elasticity of the market to achieve those targets.

I would avoid myself on giving longer-term guidance on our margins, but numbers for 2008 have been given. On Ukraine, I would pass over to Andrei Dubovskov, CEO of MTS Ukraine.

Please.

Thank you for your question and I am ready to comment about gross margin. And, firstly, it's clear for us it's the impact of interconnect. Interconnect was more bigger than we expected, and second impact was pricing pressure, I mean, inflation. And I mean that it's not a very big fall, from 73% to 71.8%. It's not a very big fall. Thank you.

Thank you, Andrei, and on Euroset, well, from the one hand I would like to say that our corporate communication policy doesn't allow us to comment on any kind of deal in any detail. That's why I would like to avoid any comments on this or any other deal that probably has somehow been discussed, like rumors in the press or anywhere else.

From another hand, I can state that there really must be extremely serious reasons for MTS to consolidate low marginal business in our books and, I mean, let me finish on that.

Thank you, sir. Does that answer your question?

Yes, thanks very much.

Our next question comes from Mr. Herve Drouet of HSBC. Please go ahead.

Yes, good afternoon. My first question is regarding the CapEx. Can you give us maybe a more detailed breakdown of your Russian CapEx forecast. You guided $1.65 billion. If you can give a breakdown between 3G and HSDPA versus 2G? And, similarly, if you can give us a breakdown as well how much you think you are going to spend for the access network, the base stations and also on the backbone.

The second question is again regarding the margins in Q4 in both Russia and Ukraine. From the different answer you gave I got the impression, yes, you are talking about seasonality, you are talking about some one-offs that have happened in Q4. I was wondering, do you perceive any impact of increased inflation, you think, on your customers? Do you perceive any change of trends there?

Thank you, Herve. Speaking about the first question, we do not provide the detailed breakdown for the CapEx expenditures, neither for the 2G versus 3G nor for, say, backbone or access network. We can just generally can elaborate that we still think there is a significant lack of coverage, even in terms of the settlements in the Russian Federation on the one hand. On the other hand, we still -- as we see the usage grows, we definitely need to significantly increase the capacity of our network in the Russian Federation.

Speaking about OIBDA margin, I would say that, yes, we do feel the pressure of inflation. When I was discussing one-off items, this was mostly related to G&A, but we did those within the growth of the G&A costs.

For example, I can give you examples in the growth of the rental expenses, both for the base stations and for [admin] premises. This is the time of the year when we have the review of the annual contracts and there is a certain increase of -- certain increase in such type of costs. Howeverwith our aggressive and consistent program of cost optimization, we think that we will be able to achieve the targets which we were discussing together with Leonid.

I would say that I would like to stress one more time that our strategy prescribes not only OIBDA margin as a key target, but also return on investment capital, which we've seen a significant increase over the last year, over the last two years, and we again aim to maintain a high level of return on investment capital in the five-year horizon.

Could I ask you in this case, what inflation do you perceive or forecast, let's say for Russia, to achieve your 50% EBITDA margin guidance in '08? What is your assumption for inflation?

We don't have an assumption for inflation built into the model or into the budget, so we basically base -- we do our budgeting in sort of fixed rubles, if you wish, basically dollars or rubles at fixed exchange rates, so this is the way we approach the situation.

And do you assume in this case as well a fixed exchange rate between U.S. dollar and ruble in '08?

Yes, that's what we said in one of the previous questions. We assume that the guidance we are giving is basically assuming the approximately 24.5. There is a range there, but approximately 24.5 rubles per dollar.

Thank you.

Thank you. Our next question comes from Mr. Alex Kuznetsov of Bear Stearns. Please go ahead.

Good afternoon. It is Alex Kuznetsov from Bear Stearns. I have just a couple of questions related to Russian regulation. First of all, as we know, a couple of months ago the regulator proposed making local phone calls from local fixed-to-mobile phones free of charge. Could you comment on the most likely implementation of this initiative and the potential impact on your financials?

And, secondly, could you also comment on the risk of regulation after mobile operators are included into the list of dominant operators in Russia? Thank you very much.

Thank you, Alex. The impact of a potential risk of the country announcing the fixed line calls to mobile free is not incorporated in our forecast, as long that we don't consider it to be relevant to our business and we don't see any sign, currently, of implementation of such an idea in reality.

More than that, we don't understand the details of such an idea, since it's not clear who will be, like, liberated from payments, the individual users of the fixed-line handsets or the operators that provide fixed-line services to the individuals. So it's very unclear, no development. We don't reflect this as a risk in our business plans.

Dominant players, we observed the developments. We understand there are different ideas on this topic in the parliament. We don't see big risk for us, once this law will be adopted, but it can a bit increase some discomfort for our operations, but we don't see really a significant risk for that. And we don't know whether it will be in the end of the day adopted or not.

I see. Thank you very much.

Thank you. Our next question comes from William Kirby of Nevsky Capital. Please go ahead.

Thank you. Yes, just one question, on the associate income from Belarus or what is in that line besides Belarus and how should we be thinking about it in the future? I saw a slight loss on that line in Q4. Thank you.

Can you please repeat the question? Sorry, I was (inaudible).

On your P&L, your income statement, there's a line for other expenses or income, which I believe shows income from Belarus. And we saw a loss on that line in Q4. How are operations in Belarus going and what should we be expecting in the future? Thank you.

This definitely was a one-off item and in the future we're not going to see any losses on that front. We do have an income from Belarusian operator, as MTS Belarus continues to pay dividends and also there is a continuous equity pickup every year from the Belarusian operations.

Okay.

Thank you. Our next question comes from Nadia Golubeva of UniCredit. Please go ahead.

Good afternoon, this is Nadia Golubeva from Aton UniCredit. First of all, could you possibly tell us what was the [rate of] growth in 2007 or what sort of growth do you budget for 2008 in rubles? Secondly, if you please could comment on your possible bidding in privatization for Ukra Telecom, what is rational for you, what opportunities you see there and are there any particularities connected to the estate, as I understand it, is going to stay with the voting [stand] in the company?

And, finally, I wanted to clarify the previously asked question. This one-off expense that you mentioned, were they connected with Belarus or was there some other one-off expense which affected this item? Thank you.

Speaking about the salary increase in 2007, it was -- I wouldn't give the exact number, but it was below the 25% and the budgeted number in rubles for 2008 is within the range of 20%, just a little bit below then, for that.

Regarding Ukra Telecom, there is a strategic logic for us coming to this business, first of all, because we consider that in the future we as MTS should play more a role of integrated operator, the one that can offer its customers different types of telecom-linked services, mobile, fixed, broadband, music downloads, gaming, video downloads, et cetera.

And it doesn't mean we have to own all of the networks that will help us to provide the services, but owning of the networks is one of the opportunities for us. So in Ukraine it's the most developed fixed-line operator that has an extensive amount of direct lines with the end users, and it could create certain value for our future marketing development.

On top of this, we will definitely have synergies with our current mobile business in Ukraine, both in the usage of transportation lines and, like, for another example, 3G license that this company obtains and operations that under the 3G license Ukra Telecom has already started.

Of course, our participation should be driven by proper business case, so this purchase should meet our financial and organizational criteria of whether the deal is reasonable or not. And currently we are still deliberating on what we should participate, if we should participate at all in this privatization tender.

So the answer, the final answer, will come in a couple of weeks.

Yes, and just for clarification of other expenses, one-offs, the majority of other expenses come from the losses in the conversion of the currency in our Central Asian subsidiaries, so basically this item will continue to exist, but it will likely be slightly lower in the next quarters.

Okay, thank you very much.

Thank you. Our next question comes from Olga Bystrova of Credit Suisse. Please go ahead.

Good evening, Olga Bystrova from Credit Suisse. If you don't mind, I will try to explore usage, the Russian usage question, once again. Because looking at what you are saying in terms of targets for 400 minutes over the next three years, looking at what has happened in the fourth quarter, do you -- basically, first question would be that implies acceleration of usage in 2008, 2009, 2010, and are you comfortable with that and would that imply for you overall revenue growth?

And the second question is Ukrainian ARPU, because obviously the things are -- it looks like things are improving in the Ukraine and what are your expectations for 2008? Do you think there will be still some uncertainties in the market or do you think we're more in the recovery, ARPU recovery, stage?

And, finally, on margins, you are talking about 50% margin guidance. I was just wondering sort of how difficult do you think it will be to maintain, or do you see some risks to that, or it's basically some level that you are very comfortable with? Thank you very much.

Okay, thank you, Olga, for the questions. On usage, I mean, hardly can say more than's been said. We are not in the positive to disclose -- or to give a forecast on our revenue growth for the year 2009 and 2010 today. But we really believe that our forecast that, in general terms, the market of mobile services in Russia in the year 2012 will grow compared to the year 2007 by 132%. So this number corresponds our views on how the revenues in general terms would grow. And, yes, we believe that the picture we see on postpaid and prepaid segments in Q4 benefits to bolster our strong views on usage acceleration and on the number that describes the growth of revenues in the five-year perspective.

Okay, can I just ask a clarification question, in terms of pricing, the way you think about it, what do you consider a bottom pricing level, effective pricing level in Russia?

Olga, we don't have any, like, specific numbers to disclose today on what would be the lowest APPM in the next coming years. We definitely understand that there shouldn't be any significant decrease in prices in the market in the next coming periods and we should be, as always, one of the leaders, if not the leader, in keeping pricing discipline, like all of the markets of our presence and especially in Russia.

And only this price discipline allowed us, if I may remind, in 2006 to change the extremely negative trend on ARPU development, whilst a year ago, two years ago, if you remember, the Q1 ARPU for Russia was $6.20, compared to, like, $10 we've seen now in Q4 in 2007. So you can rely on MTS pricing discipline, let's say, totally.

So the second question is Ukraine and ARPU. Andrei, would you like to comment? Please?

Olga, thank you for your question. It's Andrei Dubovskov, CEO of Ukraine Business Unit. We expect that ARPU will be growth in 2008 because, as you know, in the previous period, 2007, we have a very good trend of usage of our [MO]. And, in addition, I am going to tell you that our ARPU in 2007 stabilized in Q3 and Q4. And we have very good expectations for ARPU in 2008.

So the margin guidance -- there are a lot of terms, like how difficult, et cetera. We consider it to be a challenge, so we believe we will do our best to fulfill, and let me not build up on that anymore. Thank you.

Okay, good. Just maybe a follow-up question on the Ukrainian ARPU. Do you see some signs of the, let's say, ARPU hitting the bottom and actually recovering on the upside, or you still see ARPU at the current levels for 2008?

Olga, already we see definite improvement in late December and since the beginning of the year. ARPU remained stable at the end of the year, brought down only by seasonal declines in usage. Thank you.

Okay, thank you very much.

Thank you. Our next question comes from Viacheslav Shilin of UBS. Please go ahead.

Good afternoon, everyone. Two questions, please. First is regarding your indebtedness, talking about the total debt that you currently have on your balance sheet, could you give us please the breakdown of the maturities for 2008?

Thank you, Cheslav. This is Vsevolod Rozanov. I wouldn't give the exact numbers, but there is very limited remaining debt to mature in 2008. We have paid out the euro bonds, $400 million, in late January, and, as I mentioned, we used the last portion of syndicated facility we arranged in mid 2006. For the remaining of the year, this is a sum of approximately $300 million and the maturity of the debt and significant sums of the debt maturity will come in 2009 and 2011.

But will you disclose the actual maturities in your SEC filings?

Definitely it is disclosed in 20-F and it will be disclosed as usual, with all the details of the maturities and the interest we are paying, et cetera, et cetera.

Okay, and the second question is regarding your churn. Apart from Russia, you have had a significant deterioration of churn everywhere else. Could you please elaborate? What is the main driver and why is it different from Russian market? Please.

Well, we anticipate -- we see the normal development, actually, of customer acquisition situation in the countries of our presence and we really don't see any big threat on low retention of our customer base since we have significant positive growth of our customer base everywhere except Ukraine in the last year. So there are no specific reasons and, actually, I am not aware that our churn rate anywhere is significantly higher than the market average.

All right, so it's not sort of dependent on MTS in particular, whether you are successful in certain markets with your products, but it's more the country specific?

Will you please address me to a specific country where you would like us to comment on churn? It's difficult to speak about four countries all together, except Russia, so to be more specific I would be able to comment.

It's predominantly Turkmenistan and Uzbekistan.

So I think that, sure, in both countries the level of churn is just reflecting the situation we usually have in the market, where the main growth comes from extensive acquisition of new customers. So we don't see any unusual trends. The ones we have not seen, like in Russia, this period of market development or Ukraine, for example.

Okay, thank you.

Thank you. Our next question comes from Mr. Andrei Bogdanov of Troika. Please go ahead.

Good evening. I have a first technical question, actually second, also. The first one is on Belarus and your outlook for 2008. Can you please clarify your 25% growth revenue target for '08? Does it include potential acquisition of stake in Belarusia, have consolidation of the MTS Belarusian unit, or that's organic, excluding Belarusia?

And, number two, I'm sorry for this question already being asked, I have more specific questions of foreign exchange losses, why in the Q4 it was $32 million currency exchange loss and before, the previous three quarters of the year, it was a roughly similar, a little lower, foreign exchange gain? As far as I understand the dollar trend to ruble was roughly similar in the Q4 as it was in previous three quarters, so can you please clarify? Thank you.

Thank you, Andrei. Speaking about Belarus, definitely we are only giving the forecast or guidance on the basis of the existent businesses which we are consolidating. So any discussed acquisition of Belarusia, as it is not confirmed Belarusian business cannot be included on the guidance, and it's not.

Speaking about the foreign exchange loss, this again -- this item relates specifically to our Central Asian businesses and until the end of Q3 there were significant limitations on the currency conversion. However, we've seen a significant improvement in terms of that in Q4. So it's not related to the ForEx loss, but it's more related to the losses of the actual currency conversion in Turkmenistan and Uzbekistan.

Okay, thank you.

Thank you. Our next question comes from Anastasia Obukhova of Deutsche Bank. Please go ahead.

Good evening, this is Anastasia Obukhova, calling from Deutsche Bank. Congratulations on good results. I would like to ask four questions. What was the amount of interconnect revenues in the fourth quarter? I apologize if it was answered before, because I didn't hear the number.

Also, the question is is it possible to disclose the exact amount of this non-cash accrual relating to the management option compensation or stock option? Is and were there any, say, annual bonuses or [13] salary accrued in the fourth quarter in terms of the non-SAC costs?

Also, the question is CapEx guidance that you are giving for 2008, is there any possibility that it can be revised up or down if, for example, you manage to renegotiate some of your second G equipment contracts? For example, if the 3G is going in part of a replacement of second G CapEx, is it possible we may see some decrease in this figure?

And the last question, these other costs that go below EBITDA, the loss of $19 million, so this includes, what you're saying, this ForEx loss on other countries. Is that correct?

Anastasia, this is Vsevolod Rozanov. Speaking about interconnection, we usually do not disclose the quarterly revenue from the interconnect, coming from the interconnect.

We neither disclose the specific amount related to the management compensation, but, as I mentioned, the change quarter on quarter was less than 1% of OIBDA, meaning thus less than $22 million.

This is all non-cash, yes? Right?

This is, non-cash, of course. And of course we accrue all the bonuses and employee motivations throughout the year, so there were not any one-off accruals related to the annual or quarterly bonuses we have, and we don't have 13 salary in the group.

Speaking about the CapEx guidance, of course, there should be significant reasons for us to change it, and again, as the CapEx guidance, we report and analyze CapEx based on cash and to a very large extent the CapEx guidance depends on the contracts we negotiate with the vendors and the opportunities we can take in discussions with our suppliers. Then, in fact, of course it might be different from what we guide, but I don't think there are any reasons to believe that CapEx guidance would be significantly altered in the nearest quarters.

Speaking about the other expense, again, this is not the ForEx loss, but this is a loss from the currency exchange in the Central Asia, so probably we can speak -- we can discuss it in more detail as necessary, but, again, this is not a ForEx loss, this is the currency exchange loss.

Okay, thank you very much.

Thanks.

Thank you, our next question comes from Brad Radulovacki from Oaktree Capital. Please go ahead.

Yes, Brad Radulovacki. I just had a quick follow-up on Alex's question about depreciation and amortization as a percent of revenues. The absolute number, of course, increased in the fourth quarter and it increased to, I guess about 21% of total revenues for the Company versus a trend line of around 16%, 17% during the year.

I didn't catch exactly what you were saying, whether 21% would be the new level of D&A over total revenues or whether that would trend back to the old level of around 17%. So I'm wondering if you could just clarify that.

Thank you, Brad. This is Vsevolod. We don't give the guidance on the depreciation levels throughout the year. And just as a general observation, I would say that the number should be within the range you are discussing.

Okay, okay. And just another question, since you've got already the first quarter's gone by, you've seen some of the trends, I'm sure. What kind of a pricing environment and what kind of a cost environment are you working under and do you have some confidence from the first quarter numbers that you've seen so far that your full-year guidance that you've given in the press release is on track?

Yes, this is Mikhail Shamolin. Hello. Just on pricing, a little bit of general understanding of what's going on, the market is fairly stable on price overall. There are no major moves or major changes in pricing, and we don't see the price competition intensifying in any way. We do see some regional operators being aggressive in some of the regions, some of the places, because this is the only competitive vehicle they essentially have. But that does not influence the overall situation in Russia dramatically in any way.

We currently have a good balance between the minutes of use and the price and we see that customers are using already a lot more of voice and data and do have the potential of using even more and we are determined, basically, to keep the good balance between the price and MOU, growing MOU in such a way that it doesn't deteriorate the price.

We do have some promotions, particularly in the white collar segment, which at times increase the number of free minutes, but we do control those promotions, so it does not get out of hand and does not put too much pressure on the market. For instance, we have limited some of the promotions on the unlimited tariff plans to put a cap of 2,000 minutes, 2,500 minutes on some of the plans. So we're constantly monitoring that situation, doing the profitability analysis of the tariff plans and, no, we don't see any price deterioration in the market in the first quarter.

Okay, thank you. And on the cost side, do you see those running at the expected levels for the guidance this year?

Brad, as long as we give the guidance today on the 16th of April, we like having the access to the normal management information system of MTS believe we have full -- we take full control on, let's say, what we offer to respective market analysts to consider. So I hardly can say anything else where.

That's fine, that's fine. That's what I wanted to hear. Thank you.

Thank you. Our next question comes from Alistair Jones of New Street Research. Please go ahead.

Hi, yes, good afternoon. I just had a quick question on the Ukraine, more of a sort of macro issue. We've seen inflation rise pretty considerably from about 15.5% average in Q4 and I think the latest March data in the Ukraine showed the inflation up at 26%. Now, that's obviously a pretty significant number, and I just wonder if you could comment on the macro issues that are affecting the Ukrainian market. It's hard to anticipate it to affect your operations in the Ukraine and your intention, obviously, to potentially look at increasing exposure to that market through the Ukra Telecom deal.

It's Andrei Dubovskov. Thank you for your question. I think that macroeconomic issues will not impact our revenues in 2008 and we expect that inflation rate is not more than 15% in 2008 in the Ukraine. Thank you.

Okay, so you're expecting inflation to come down pretty dramatically from these sort of levels. Is that right?

I think inflation level in Ukraine in that year will not be more than 15% and it will be decreased for this level. Thank you.

Okay, thank you.

Thank you. We have a follow-up question from Mr. Will Milner from Arete Research. Please go ahead.

Hi, yes, I just wanted to clarify, what sort of percentage of your cost base, your OpEx and your CapEx, in Russia, is denominated in rubles and what percentage in U.S. dollars or euros? That's one question.

And then, again, secondly, your M&A criteria, what have you actually said or have you set any guidelines for what the criteria are when you assess M&A?

Thank you, Will. Speaking about the percentage of the OpEx and CapEx denominated in rubles as opposed to other currencies, I would say that given the fact that we have fully moved to the ruble pricing and the pricing now on the market, our revenues are not linked to the dollar exchange rate. We are gradually moving to the same trend in OpEx.

However, we still have significant portions, I would say approximately 25%, 30% of OpEx, still being linked to the dollar. As for the CapEx, there is a bigger difference and we have definitely more than 50% of the CapEx expenditures linked to the dollars or other major currencies.

Sorry, that's 25% to 50% of the CapEx is linked to the dollar. Is that what you said?

Yes.

And on the M&A criteria, of course we have the M&A strategy approved by the Board of Directors at MTS, but in a couple of words, to describe what is mentioned there, I would say that we're looking for operators' business, mostly GSM family in technology. It should be the growing market with the penetration lower than, like, 100%, or it could be the consolidation game on the penetrated market where we're already present and where we can use the synergies with existing business and where we can decrease competition and prove it by M&A case.

We are looking for directly -- for the controlling stakes in the assets or a direct way to acquire control, and of course we have very strict financial criteria. Of course, our IRR should be specifically higher than our WACC for the year, [constrained] assets on a specific level that we are not likely to disclose. And of course it should benefit our long-term target of ROIC over 25% in a five-year perspective for the group in general. So our basic guidelines on the returns for investors shouldn't be hampered by any acquisition.

Thanks a lot.

Thank you. Our next question is a follow-up question from Alex Kuznetsov from Bear Stearns. Please go ahead.

Good afternoon. I have a couple of follow-up questions. My first question is related to Ukraine. Could you comment on the market trends that you have seen so far this year, please? I also recall that the Ukrainian regulator was considering regulating interconnect tariffs. Could you let us know if there are any further clarifications of the regulator's position, please?

And, secondly, I understand that you rarely comment on your expansion plans. However, since there were comments in the news already, you probably can provide us with some further clarification of your expansion plans, specifically in Kazakhstan and Tajikistan. I also recall that about a week ago you commented on the potential acquisition of Skylink, a Russian CDMA operator. Do I have correct understanding that acquisition of Skylink won't require approval of the AGM and approval of the Board of Directors should be enough to acquire Skylink? Many thanks.

Alex, thank you for the question. It's Andrei Dubovskov. Speaking about with the Ukrainian market trends in 2008, I am going to explain that just the position, it's cost stabilization and, as you know, we saw that in Q3 and Q4 in the previous year and the second position, it's more growth. And, as you know, in a previous period, for example, in Q3, Q4, we saw that [less] growth and we expect this growth line will be in 2008.

And speaking about consideration of regulation of interconnect tariffs, I think that it's not really in the political situation in the Ukraine. I think it's no more than conversation between some people in government and, et cetera. Thank you.

Well, Alex, on expansion plans that we have the first priority is Russia, our second priority is CIS and our third priority, the one that we really somehow check whether there is a possibility to go there, but we really don't consider it to be the bulk of our growth is the expansion outside CIS.

So I wouldn't comment on any specific view, but bearing in mind this priority scale, you can actually a bit forecast our activities. And I would definitely not comment anything on the rumors on any deal, including the deal with Skylink and please excuse me for this.

Thank you.

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Thank you. We have a question from Sam Voloshin of Voloshin Capital. Please go ahead.

Yes, hello. I wanted to ask a question about your ongoing buyback and why it's not being redirected toward the local shares that are trading at 25% discount. The last time I asked you that question, you told me that the Board didn't like that option because it would reduce liquidity. But, quite frankly, that answer doesn't really make a whole lot of sense because there is enough liquidity now or let's say to date or about 140 million traded on the MICEX exchange, but more importantly, if you can accomplish your buyback goals by paying 25% less for these shares, that benefits the company and every shareholder in both local shares and ADRs.

And I'm pretty convinced that if you start buying back local shares, the spread between the two classes will narrow. So wouldn't it make sense for you to hire one of these investment banks that follows you to do the study to confirm this and present to the Board this option to see if they would be interested in doing this?

Thank you. This is Vsevolod. I think that first the Board didn't change its view on the buyback opportunity. There is still a significant difference in opinion of investors in the Russian shares, whether we should go for a buyback or not, and, actually, we did have a study of various investment banks on that issue and the study confirms exactly what we say.

The trends are hardly forecastable but potentially significantly damaging for the liquidity in the Russian market. So basically this is what we can say about that and, again, I can reconfirm that the Board's position on this topic hasn't changed.

Thanks.

Thank you, sir. Does that answer your question?

Yes, thank you.

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Okay, ladies and gentlemen, thank you very much for your interest. We welcome you at any time to contact our investor relations department for further discussions. A webcast of the discussion will be available on our website if you wish to replay the call. In the meantime, we appreciate your interest, again, and wish you a very pleasant day. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.