Mobile TeleSystems PJSC (MBT) 2008 Q3 法說會逐字稿

Ladies and gentlemen, welcome to Telesystems Third Quarter 2008 Financial and Operating Results Conference Call on the 13th of November, 2008. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I will now hand the conference over to Andrei Terebenin, Vice President for Corporate Communications. Please go ahead, sir.

Good day, ladies and gentlemen. And welcome to MTS conference call to discuss the Company's third quarter 2008 financial and 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 relate to one of the following issues, the strategic development of MTS' 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 the Company's operations in markets in which we operate, financial indicators such as operating income before depreciation and amortization (OIBDA), average revenue per user (ARPU), cash flow projections and/or return on invested capital. Technical matters as they pertain to our mobile communication networks, including equipment, licensing or network technologies, capital expenditures and operating expenses, and macroeconomic developments within our markets of operation.

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 and MTS Annual 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 at www.mtsgsm.com or that of the United States Securities and Exchange Commission at www.sec.gov.

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

I'll turn now the call over to Mikhail Shamolin, President and Chief Executive Officer of MTS Group.

Ladies and gentlemen. Thank you for joining our 2008 third quarter conference call. Joining me today to discuss our financial and operating results are Alexey Kornya, Acting Chief Financial Officer; Andrei Dubovskov, Head of Business Unit MTS Ukraine; and Mark Burden, CFO of Business Unit Ukraine.

I am pleased to report to you that MTS has delivered another strong quarter of profitable growth as we continue to execute our strategy of capturing growth in our core markets, creating value in developing markets, developing mobile broadband in our markets of operations, while at the same time maintaining cost efficiency and further managing our organizational development.

Overall, we see a continuation of the same growth drivers that have delivered now six quarters of successive growth. Group revenues increased to $2.8 billion, a 26.9% rise year-on-year. Our total subscribers rose 87.57 million for the group with the greatest gains coming in Russia and Uzbekistan. Although our Ukrainian operations have added a significant number of new additions offset by churn from last holiday season. Likewise, we managed to stimulate additional voice traffic in Russia and Ukraine, while data consumption is increasing throughout the group.

In our core markets, our Russian operations continue to showcase positive momentum. For the quarter, revenue rose to nearly 2.2 billion, a 7.3% rise from Q2 and a 30% rise from the same period in 2007. This is lower than in past periods as we witnessed a depreciation of 3% in the average Russian ruble rate versus our reporting currency the US dollar in Q3.

Subscriber additions remained strong in Russia as total subscribers reached nearly 61.9 million. Gross additions for the period rose 11% versus Q2. MOU growth of 3% was flatter for the period, a fact that we attribute to price increases we introduced in May 2008, as APPM increased 2% quarter-on-quarter despite the ruble loss. This translated to an ARPU improvement of 5% from $11 to $11.5. Balance in usage growth with pricing to ensure we maximize the value we derive from our customers will be critical for our Russia operations moving forward as the ruble has depreciated further since the end of the period.

In Ukraine, revenues rose to $465 million, showing 6.1% growth compared to Q3, 2007. Our efforts to stimulate usage which has been lagging behind our competitors are succeeding as MOU grew 37.7% quarter-on-quarter with most of the rise in usage on-net. Raising on-net usage is critical in increasing customer loyalty and subsequently driving new subscriber growth.

MTS Ukraine also demonstrated ARPU growth of 11% in Q3 versus Q2 of 2008. This ARPU growth has been mostly achieved because of growth in usage as consumer prices remain static from Q2. In addition, we raised ARPU in Q3 as gross additions improved 18% from Q2 a sign that we are simultaneously improving the quality of our subscriber base and attracting better quality of subscribers.

Overall, notable improvement in usage ARPU and in share of new connections offer a clear validation of our strategy of building a high quality yet affordable brand in Ukraine. We believe that in the macroeconomic situation that if the macroeconomic situation further deteriorates our positive price value perception will aid us further in the marketplace.

In other regions, we continue to rollout our networks and strengthen our leadership in this rapidly growing market. Revenues from Uzbekistan rose over 56% year-over-year as we've passed the 5-million subscriber mark to reach 5.06 million for the period. Penetration stands at 38%. After the end of the period, we also launched 3G in Tashkent, the capital and commercial center at the end of October. 3G in Uzbekistan presents interesting opportunities as the country has single-digit fixed line penetration and even less broadband Internet access. Higher capacity networks offered by 3G will allow us to accommodate greater traffic at reduced costs, a factor that will aid us in this still rapidly developing market.

In Turkmenistan, where penetration is now at 16%, we now boast over 760,000 subscribers. We did see a drop in revenue, but this stems from the government's decision in May 2008 to revalue the Turkmen currency the manat, which effectively devalued the currency by 56%. For the period, the underlying performance of the business remains strong; exhibiting the strong growth qualities of a business in the early stages of development.

In Armenia, we witnessed good growth from both seasonal rise and usage and more subscribers coming into our network. Revenues rose to $75 million, a 36% increase from Q1. Our subscriber base was roughly 70% as penetration rose to 80%.

Now, our Acting CFO, Alexey Kornya, will comment on our financial performance. Please Alexey.

The financial position of MTS remains stronger with strong growth of OIBDA in line with revenues. I am pleased to report a strong seasonal margin on 51.7%, a 0.5 percentage point rise from Q2.

In Russia, our growth margin strengthened slightly through improved overall with net traffic balance. Expenses remained in line with revenues for the most part. But in Ukraine, local management success in managing costs allowed us to realize the margin improvement of 1.6 percentage points from Q2. To date we have seen no negative impact from inflationary pressure beyond our own expectations.

That being said, we have been engaged over the course of 2008 in our own cost optimization program. Adjusting tariffs to enhance our interconnect balance and improve OIBDA by 0.6 percentage points year-to-date, since our last group roaming and wholesale agreement that led to 0.8 percentage point improvement of the growth margin year-over-year. Optimized network repair and maintenance services that led to 0.4 percentage points was the same year-over-year.

Recently, in light of the deterioration in market economic situation, we have also (inaudible) other initiatives. Froze salaries and headcount, optimized our advertising and marketing outlay and reduced unnecessary business travel as well as expenses on corporate events, conference, attendance and paid training courses.

As a result we will see saving of 150 million [on notice] by the end of this year. Given our ability to manage operating expenses and to mention that we are rating expenses in local currency we maintain our OIBDA margin guidance of 50%.

Turning to bottom line, net income fell 21% year-over-year, to 560,000. The abrupt depreciation of the ruble in September forced us to recognize a substantial ForEx loss. This loss stems from (inaudible) translation of our debt, which is predominantly US dollar-denominated into our functional currency which is the ruble.

In December 2007, we [RUB30 billion] in debt facilities for 2008 as part of our strategy to match our debt to our revenues. Earlier this year we retired a 400 million Eurobond which was replaced in June with the equivalent in a RUB10 billion bond. We will continue to follow this strategy, but ruble movement vis-a-vis the dollar will continue to be a risk for MTS earnings performance.

The business continues to generate substantial cash flows. Net operating cash flow reached 3.3 billion for nine months ended September 30, 2008. Free cash flow also grew to 1.7 billion year-to-date. By our estimate, we will have sufficient cash on hand to meet our obligation and support our business growth.

For the first nine months of 2008, CapEx spending for the group was roughly 1.55 billion. Over the course of the year we have made efforts to work with suppliers to optimize our purchasing and leverage our group's scale to extract additional value for market of our investments. As a result we will likely fall short of our previously stated guidance of 2.5 billion in CapEx for year 2008.

This is due to a number of factors; the ruble appreciation through the first eight months of the year when we do the bulk of our CapEx purchases. The fact that we did not launch 3G in Moscow, which allowed us to perform any expensing on migrating current users from hours and frequency, continued work with suppliers to secure more favorable payment terms and postponement of projects not related to our core networks.

In sum, we anticipate overall CapEx to roughly 2 billion for year 2008, a reduction in guidance of roughly 500 million.

In Q3, we spent approximately 450 million on the repurchase of 37.8 million ordinary shares in conjunction with the mandatory buyback of securities related to the merger of two subsidiaries. In addition, we purchased 2.8 million ADRs through our existing share repurchase program. This brings in total the number of shares we have on our balance sheet to 102.2 million shares, roughly 65,000 of which is in the form of ADRs.

Overall, MTS balance sheet remains strong. Total debt was 3.2 billion at the end of the period, and now our total debt to OIBDA for the last 12 months was at 0.62. This is a historical low for MTS, which means that we will not have a significant debt burden or high interest expenses if the market economy climate worsens.

Since the end of the period, we placed two additional RUB2 billion facilities through two private placements. The first placement is for five years, while the second is seven. The rate for both is 14%.

In Q2 2009, 684 million syndicated loan comes due. The loan was placed in April 2006, though we expect credit market to be back in action by then. The resources in hand we will ensure -- will be sufficient to finance our business and our obligations and withstand the current market economic environment.

Thank you Alexey. While we are pleased to deliver another quarter of growth, we realize that the immediate future is what is of great concern to our investors. As we all know, the fast pace of economic growth in our markets has long been driven by borrowing and corporate debt is now one of the biggest issues facing our markets.

While we have explained how our position is relatively strong, our clients and subscribers are at risk. We are monitoring usage on adoption rates for signs of weakness, but by the end of Q3, we saw little to suggest anything different than past periods. Yet corporates may lower spending by reducing the number of active SIM cards in an organization or overall voice and data usage, but we believe that the risk is overstated.

Overall, our research suggests that the employees top over the SIM out of their own pockets or in the event of a headcount reduction take the SIM card with them and continue to use it. In any event, our estimate suggests that the potential negative impact on revenue will be insignificant.

Mobile communications have proven resilient in other recessionary environments. Communication is a basic need and consumers in our markets are relatively underleveraged. Weakening consumer sentiment, however, could translate into decreased consumption of higher value-added products like roaming, long distance calling and value-added services.

Our main risk, however, is local currency depreciation versus the US dollar, our reporting currency. Since the beginning of Q4 the ruble has fallen 8.8% versus the US dollar. We have also seen an 18.9% fall in the Ukrainian hryvnia. This obviously impacts our revenue growth outlook as Russia and Ukraine historically accounts for over 90% of our total revenues.

But these economies are still heavily dollarized, only [three] years ago we migrated to local currency pricing in Russia. Therefore, if local currencies do continue to fall versus the dollar, we will have at our disposal pricing levers to maximize the value we extract from our subscribers.

In April, 2008, we offered guidance of 25% revenue growth based on ruble-dollar rate of RUB24.5 to a dollar; with the ruble now near 28, we see no reason to change our revenue forecast for the year at this time.

Distribution, has been a key topic on many people's minds considering the recent de facto takeover of Euroset by one of our competitors. We looked at the asset as well in late summer and early autumn but decided it was -- decided the acquisition was too risky for us because of high amounts of debt, negative profitability and considering the worsening economic environment, the prospect of slowing handset sales.

Instead we are pursuing what we feel will be both more effective and more efficient, building out our mono-brand store fronts. Our experience indicates that high value and more low subs come through mono-brand locations rather than multi-brand retailers like Euroset.

With the growth in data adoption, rising interest in Internet devices and the continuous need to service our own customers, MTS branded store fronts offer greater touch points to the customers and better support our goal of providing a unique and rewarding customer experience.

As Alexey described we have been continuously working to improve our efficiency and the current environment highlights the importance of accelerating long-term cost savings initiative. For example, our long distance and international long distance network. For the past few years MTS has built out long distance and international long distance capabilities. We recently received our final approvals and will soon be carrying our own traffic. We anticipate savings on line, rentals to exceed $120 million US in the next three years.

Repair and maintenance, we continue to over time harmonize our platforms by retiring or relocating equipment to ultimately reduce our suppliers. This allows us to better maintain our networks which so far allowed us to realize a 0.5 point OIBDA improvement year-over-year. We anticipate further savings over time.

We are also looking at half the 2009 on CapEx spending. As we have stated we expect to spend [2 point billion] in 2008 and we aim not to exceed this amount in 2009 by prioritizing investment projects and attaining cost reductions on previously approved projects in the short term and in the long term promote platform harmonization capacity, optimization, relocation of existing network components, outsourcing of network maintenance and exploring equipment leasing versus buying.

Sometime ago we initiated discussions internally that culminated in our conclusion of a non-equity strategic partnership with Vodafone that we recently announced in Moscow. Our partnership covers virtually all aspects of our business and allows MTS to plug into Vodafone's know-how on revenue generating initiatives and OpEx, CapEx benefits.

We will have exclusive rights to distribute the range of products and services including handsets and data services that will support our mono-brand distribution initiatives. The partnership also translates into clear efficiency benefits for MTS such as advantageous procurement terms that will lead to future CapEx optimization, advisory services on network development that will translate into medium and long-term OpEx savings, insight into retail development to enhance distribution as we spend our mono-brand network, innovative CRM practices to increase subscriber loyalty and reduce churn, and key global account management benefits to retain and develop our corporate client base.

In sum, we believe MTS is both well-suited and operationally capable of withstanding whatever changes arise in our markets. We have been successful at capturing growth in our more mature and creating value in our developing markets. At the same time any further deterioration of the market economic situation of our markets will clearly demonstrate the improvements we have made in cost efficiency and group development.

We remain confident that MTS remains well positioned to meet whatever challenges may lie ahead. Thank you for your time, and now I am happy to open the call to your questions.

Thank you, sir. (Operator Instructions)

The first question comes from Alexander Kazbegi of Renaissance Capital. Please go ahead.

Yes, good evening. I was wondering, I mean -- clearly, I mean on the CapEx for the next year you said maximum probably $2 billion; is there a minimum number you would consider to invest which will not jeopardize the business, and what that number could be, if I may ask that?

And secondly, you also said about the mono-brand of the store brands, I was wondering as to how much you plan to invest into that? How many stores you plan to have and by what time? Thank you very much.

Okay. On the CapEx in 2009 we believe that the minimum maintenance CapEx level, the absolute minimum CapEx level is around $0.5 billion. This is not to account for whatever cash transfers we can have from 2008 because we obviously count our CapEx in cash and not in obligations. But the maintenance CapEx for the network is generally $0.5 billion. That makes us comfortable vis-a-vis our cash flows and other needs such as refinancing.

As far as mono-brands targets are concerned, at this point, it is quite difficult for us to say how many stores exactly we are planning to build. The number is anywhere between 2,500 to 4,500 locations, and of course the investment also depends on the combination of M&A and organic development. In case of organic development it will be less; in case of M&A it will probably be more, but quicker -- it really much depends on how the market will be developed next year, what would be the consumer demand because obviously we believe that crisis will impact the purchases of mobile phones. So we will adjust the speed and the pace.

Right now we are in the process of business planning of this network built out for next year and are probably more comfortable to give you specific numbers as we report our Q1 targets -- or Q4 targets, I am sorry.

But would you have a ballpark number for instance, if you were to build organically 2,500 stores how much would that cost potentially?

I have a number of around 400 million in mind of total investment in the mono-brand network.

In the mono-brand thing?

Yes.

Okay.

Maximum.

Can I just follow up on that? I mean I don't know again how much you want to discuss now, but obviously with the discussion about the currency going down to whatever RUB35 per dollar or whatever it is. Let's just assume that it will go down there. You mentioned obvious that you have pricing levers to adjust, clearly we are not talking about going back to the conditional pricing or to your dollar pricing probably, but how much do you think you can really raise the prices and do you think there is a level at which the consumers will actually adjust in their spending down?

Well, we all work in a competitive environment which despite many people saying that the competitive environment is benign the mobile communication sector is the only sector in Russia, if you compare it to whatever other sectors -- where prices have been consistently falling over the last 15 years. So clearly the market, overall market has to support the price adjustment. To which extent the consumers can sustain the price -- to the price adjustment and how will it impact the consumption, at this point, is very difficult to say. But I do believe that if we see, a substantial devaluation as you mentioned, RUB35 per dollar or above definitely we will take steps in adjusting prices and I think we will not be alone.

No, certainly, but do you think it's going to be a 10% adjustment or do you think it's going to be a 50% adjustment to basically compensate for the fall in the exchange rates? Or 50% is something which consumers will not just take it?

Yes, at this point it is early and very difficult to tell. We will have to see what the market presents us with. Of course we are playing with all sorts of scenarios now and we have done our homework. But I mean clearly it's just too difficult to say what's going to happen and what kind of price adjustment is going to take place and how the customers are going to react and it very much depends on the unemployment level on how the income of the people is going to be cut, on the electricity, which may change. There is just too many unknowns at this point.

Yes. Okay. Thank you very much.

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

Hi, good afternoon. I would like two ask questions as well please. The first one is on the dividend, and generally what your thinking on the dividend policy is for 2009 assuming a stress in the economy and pretty much along the same lines that you've discussed with Alex. And so if they -- if you see the stress in your customers and then at the same time you say yourself that you can cut CapEx to $500 million, so you do have some levers to maintain free cash flow at an acceptable level. So how important is it for you to keep the divided at the last year's level, let's say, or how important is for you to keep the divided policy that you've articulated at that level.

And my second question is on Ukraine. We have some pretty horrible macro data for Ukraine for the last month for October, 20% decline in the industrial production. If this already has come after you reported obviously the third quarter numbers, I'm just wondering whether you had any color whether this month of December or, let's say, whether this month of October macro has already had an impact on the usage patterns in Ukraine?

Okay. Thank you. On the divided question, I mean, clearly to ask as a management team CapEx is a priority and business -- strategic business investments are a priority and they come to full dividends and this is the position which will be delivering to our shareholders, the discussion about the divided payout next year is ahead of us and that is basically our position. Once the decision on the dividends is made, we will communicate it to you, but our position is CapEx and business investments comes first, especially in the times of a crisis when it might be limited.

In terms of Ukraine and macroeconomic, in October we haven't seen any substantial changes in consumer behavior so far, which is a surprise to us given the devaluation of the hryvnia and overall macroeconomics, but that just proves the point on how resilient the consumption of basic services such as mobile voice is. We'll maintain to monitor the situation closely, but so far we haven't seen that.

Okay. That's clear. Thanks.

Thank you. The next question comes from Dalibor Vavruska of ING. Please go ahead.

Hello, good afternoon, good evening. Just a couple of question if I may, one is back to the theme of distribution networks. I'm just wondering how much of your revenue from the prepaid subscribers comes from top-ups in the retail shops like (inaudible) and similar, and is that maybe one of the reasons that the mobile industry is moving to the distribution that they want to make sure that for example if one of these companies fails there's no impact on the business or is more the desire to actually go into the handset business with products like iPhones et cetera?

My second question is about CapEx, I think that you're sending here a very reasonable message here that if the economy is going to get tougher that there might be reasons to cut CapEx and you are working with the scenarios, but to what extend do you think that the competition is rational in this respect, and in case if some of your competitors take a different view, maybe more optimistic view than they should be about CapEx, what do you think is the risk that you would have to follow simply for competitive reasons?

And my third question is just very quickly on Ukraine. Just interested to know basically how this business is developing, not necessarily in terms of the macro economy but versus competition, if you had any issues early this year or maybe in the past, how you are addressing these issues and how can we expect that business to develop from a market share and competitive standpoint? Thank you.

Sorry. Thank you, Dalibor. On distribution first, one of the key reasons we believe mono-brand mobile is good for the market not only for MTS, but for the market overall, is because the great number of growth sales and SIM cards sold in the markets that we are seeing for instance in 2008 is largely due to the fact that we have almost no mono-brand distribution in Russia to speak of.

Now, multi-brand distribution being motivated by operator is forcing essentially customers who come to either pay for the contract or top-up or buy a mobile phone, to purchase a contemporary SIM card from an operator. And that creates an artificial churn. We have around 25% of the customer base, not only our customer base but overall in the market of people who are looking for a better deal and being stimulated by the dealers they are churning all the time, so that is essentially a dealer commission and overall acquisition cost without creating any value in the market. And by essentially building a mono-brand distribution we will allow our own customers to buy mobile phones in our own network and not on the network of independent distributor, and that would reduce churn all by itself. I'm sure that other operators will one way or the other follow suit with a mono-brand networks and I think that would be good for overall churn reduction in the market which is quite healthy.

As far as top-ups are concerned, yes, the independent retailers play a role, but this role is decreasing because the amount of points in which you can top up is increasing dramatically. We have at least three major payments; independent payment networks competing between each other such as CyberPlat and [OSM payer] who have already installed thousands of top-up machines not only at the retailers but pretty much everywhere, including food retail and metro locations and whatever other spots. And actually now it's very easy to top-up your mobile phone, you don't have to really go to a mobile retailer now. And I think this trend is going to continue so the importance of independent distribution in mobile payments will go down.

Now on CapEx, obviously we -- when we look at our CapEx plans we think about capacity and coverage. Coverage in Russia over the last few years we have achieved pretty high level of coverage and we are very much on par with our competition investment. As far as capacity is concerned this is driven primarily by voice usage and of course if we see next year usage higher than our estimates, if the market situation stabilizes or goes up consumption continues to grow aggressively as we saw it this year, then of course it would not be a big problem for us to add capacity, but this capacity would be fully justified by the appearance that we would generate.

So right now we have a conservative view on the CapEx news given the consumption estimate that we have for next year, and obviously we are quite cautious in terms of all the projects which are not absolutely necessary for the business and do not drive sort of short-term revenues such as quality projects, ERP systems and such, and those we are putting a bit on the back burner. And also we are negotiating with our suppliers and we have advanced those negotiations quite far to get some favorable terms for payments and given that we look at CapEx from the payment perspective we may actually deal with more infrastructure than we will pay next year.

Okay. On Ukraine, our strategy in Ukraine is to deliver a high quality network at less cost than Kyivstar. We had a problem for quite sometime in Ukraine of customer perception that UMC and then MTS had high price and not very good quality.

We've been working with this and trying to improve this over the last eight months, and we have succeeded definitely in improving on both dimensions and in third quarter we see a dramatic increase in usage and dramatic increase in loyalty. Of course -- and the quality of our customer base has improved, and therefore we see that this strategy is working and we will continue with that.

So basically we have four players in the market, Kyivstar clearly is the leader, good quality and highest price in the market, then we have MTS which is quality, pretty much as good as Kyivstar, lower price, then we have Astelit, bad quality, similar price to MTS, and then we have a fourth competitor which is just small in size in terms of network coverage, so that's pretty much our Ukrainian strategy.

Okay. Thank you very much.

Thank you. The next question comes from Will Milner of Arete Research. Please go ahead.

Thanks a lot. Just after the recent ruble bond issues, can you just confirm what percentage of your debt is denominated in US dollars right now? And if you could also just give some more detail on the terms of the financing behind those ruble bond issue, that would be helpful.

And secondly, I thought it was interesting you saying CapEx and business investment comes before dividends in terms of business priorities. But I mean looking at Sistema's liquidity position it seems they can't really possibly do without the dividend next year. With this in mind, can you confirm that the only way you can upstream cash in Sistema is by dividend payments? Thanks.

Thank you. It's for as for share of our US denominated debt it's constituted approximately 80% of our overall debt portfolio. And as for terms of our debt denominated in rubles which is Russian bonds predominantly it's 14 -- recently we placed the two recent placements we did at 14% interest rate.

Okay on CapEx and Sistema question, there are basically two ways to -- two possible ways to upstream cash to Sistema, one is dividends as you rightly stated and second is purchase of assets from Sistema by MTS.

Dividends, I already made a comment that we will present our position as management from dividends versus our CapEx requirements versus cash available and debt requirements. As far as Sistema is concerned I think Sistema has ways to finance its operations through other means than MTS. And it has a business plan, I think, it's a question that should be asked to Sistema.

I think Sistema is financially sound and will develop with the current economic conditions as well. As far as asset sales are concerned, legally such a sale if it ever is to take place will have to be approved by minority vote and majority shareholder cannot vote.

So basically whatever potential acquisition we are looking at can only be a business sort of reasonable acquisition. And right now we don't have such an acquisition in mind. So to answer your question there is basically -- well, what I said.

Yes, okay, that's clear. Just can I have very quick follow-up that in the cash flow looks like there is $400 million dividend payment this quarter. But I actually thought the dividend will be paid in the fourth quarter. Could you just explain what that was?

Once again, I'm not sure I understood your question correctly.

In the cash flow there's a $400 million dividend payment this quarter. Is that part payment of the full dividend and I thought the full dividend was due in the fourth quarter.

Yes, we have -- we approved the dividend in summer and according to the rules we have to pay fully the dividend by the end of this year and we have basically a schedule and we're just following on to the schedule and we are paying dividends and we will finish paying it by the end of the year just as described.

Thanks a lot.

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

Yes, good evening. The first question is on your strategy in Russia because pricing in rubles has gone up about 4% in the third quarter. Sequentially usage growth has been slightly less than this. And I was wondering can you elaborate what kind of strategy you're pursuing here, for how long, how much of the usage growth are you willing to give up and how much of the pricing and effective pricing increases are you looking for?

The second question is on CapEx for 2008 and 2009 the element that you are saving in CapEx. What is the delay that those specific are not in terms of the payments with vendors but more of a projects that you are willing to give up and postpone in the current environment?

And finally, maybe just a very short question on the distribution costs with your mono-brand distribution strategy. Where do you see those going, for example, you are currently running at [45%] do you see this costs of revenues? Do you see this cost increasing, decreasing? And which levels should we be looking -- should be looking for? Thank you.

Thank you, Olga. First on pricing, we have adjusted our prices in Q2, as I mentioned earlier in previous calls and we've done that to better balance out our interconnect expense because we saw a big pressure coming from this on our OIBDA margin. And we wanted to keep our margin as we promised to you throughout this year at the level of 50%. Now, we see that obviously increase in the APPM has somewhat slowed down the growth in MOU even though the ARPU has increased which is a good news.

And our future pricing strategy will really depend on the results we'll see from our competitors because obviously whatever pricing changes in the market in the competitive environment cannot be done unilaterally for the long-term. If it is appreciated by the market and market goes in the same direction then this is maintained. If it's not then it's not.

So we'll have to look and see at the outcome of the other players for the third quarter. And once we see that we will adjust our pricing accordingly.

But whatever is the case, we still maintain our 50% margin guidance for 2008. As far as CapEx for 2008 and 2009 is concerned there is coverage capacity, strategic projects and quality organization development type of projects. In terms of capacity, this is the easiest CapEx to adjust because we see how the capacity grows and we're just adding it according to our quality standard. So this is a flexible type of CapEx pocket. And we're planning, given certain understanding of how the traffic is going to grow in mind but we can quickly adjust.

As far as coverage, we are being careful to make sure that we are covering areas which will give us sufficient return in terms of customer numbers and revenues and this is specifically important for next year because the cost of funding has increased and therefore when we look at the payback of those investments we have to be more careful.

Now, in terms of strategic projects such as 3G and some of the investments in developing mobile Internet products, things like mobile advertising, content and such we don't really plan to dramatically reduce this CapEx because we believe that the crisis is going to be over and we have to come out of it well prepared. And we cannot lose a competitive gain here.

And as far as all other quality and organizational development projects IT-related and such which are good to have, but not necessary those ones will be postponed. That's our provisional CapEx. Distribution costs, I mean right now not counting the investment that we will have to make and built out of retail distribution, we don't see the SAC per subscriber immediately going up. But again it will depend dramatically on how the competitive environment looks like in Russia. And with some changes in competitive landscape witnessed by the acquisition of Euroset there may be more pressure on distribution costs because the competition in distribution has intensified. So again, hoping for the best, preparing for the worst.

Okay, thank you very much. Maybe just a very quick follow-up on the usage growth, is your strategy on pricing/usage feeds into CapEx that you've talked about right now about $2 billion maximum for '09. And also, on the -- yes, basically so is your -- and related question is your capacity CapEx which you elaborated on implies a significant slow down in usage for next year.

And a full open and distribution costs when you say that you don't -- you will be looking for competitive environment in terms of distribution the magnitude of these distribution costs. If you're having mono-brand stores what kind of competitive dynamics you will be looking for, you are looking for handset subsidies or you will be looking for maybe your mono brand stores with the first part you provide the store -- change agreements with some other operators. What is the rationale for your statements on the competitive environment there? Thank you.

Okay. Yes, of course the CapEx plans for next year include our projection for usage growth. I would probably refrain at this point from guiding you on usage growth next year. We will come, however, come out with the guidance for next year in early spring, once we report on the Q4 and annual results we will give you this guidance. At this point, I am not prepared to do that.

In terms of distribution and competitive dynamics, there are a few things. One, we believe that MTS has a very strong brand and this brand apply to not only SIM sales, but also mobile phone sales can enhance and give competitive edge to a mono-brand network. Secondly, we do have, we have concluded a strategic partnership with Vodafone and that gives us access to Vodafone purchasing power on handsets and this power will allow us to bring cheaper handsets into Russia.

And also because retail overall in Russia, mobile retail in Russia, I think is going to be in a very difficult position in 2009, and we believe that the number of mobile retailers is going to dramatically decrease. The appearance of a mono-brand network will essentially be replacing stores and networks which are coming out of the market and meeting the demand that will still be there, even slower demand, but it will still be there. Handset subsidies, we don't plan to subsidize handsets at this point.

Okay, great. Thank you so much.

Thank you. The next questions comes from Viacheslav Shilin of UBS.

Good day everyone. Quick, two questions, if I may please. Regarding, you provided information on the equity repurchase that you have completed to date. Could you please disclose whether you have repurchased any of your debts, be it bonds or syndicated loans and what the amount have been repurchased so far? What -- and your plans for repurchase of both debt and equity going forward? And the second question, is regarding the government and government-related funding that is available to Russian businesses these days, do you intend to use help from state banks to refinance your debt in fourth quarter this year and in 2009? Thank you.

Okay, on equity and debt repurchases, we are not planning any further equity or debt repurchasing. We don't have such plans. We -- for next year, we applied to Vnesheconombank for refinancing of the debt that is coming out in the second quarter, but we have done that as a precautionary measure because we believe that our cash flow of 2008 and 2009 is sufficient to cover those obligations and we also believe that other sources of funding will become available to us. We have a number of yields now in the pipeline. So this is just precautionary measure, we are not at this point planning firmly on using it.

So, I presume you applied to the --to refinance the syndicated loans.

Once again?

You have applied to Vnesheconombank to refinance your syndicated loan?

Yes, to refinance the syndicated loans that there is coming for repayment in Q2 2009.

Okay. And have you repurchased any of your Eurobonds currently last tendered on the market.

We replaced the 400 million Eurobond in sum of with the Ruble Bond of 10 billion rubles.

But do you purchase the bonds from the market these days?

No.

Okay, thanks a lot.

Thank you. The next questions comes from [Allison Bellers] of JP Morgan. Please go ahead.

Hi, I guess just following on that line of questioning. On slide 9, you have a debt repayment schedule and I think you said I just want to confirm that you said that the syndicated loan amount is 800 million and that comes due in the second quarter. Can you -- if that's the case can you talk about the timing of the other maturities, I guess in '09 that would be 187 million when that comes due during the year?

I am sorry, can you please restate your questions?

Sure. Okay. Regarding the slide 9 in the playback, I think you said that of the 987 million that comes to you in 2009, 800 million of that is a syndicated loan which comes due in the second quarter, is that correct?

Well, the exact number is 678 million I believe.

678 million, okay.

Yes, of the syndicated and then there is some other obligations.

And can you just talk about the timing of the other obligations maybe how much is due in each quarter outside of that syndicated loan?

No, this we don't provide, but the bulk of it is coming in Q2 like April-May.

Okay, that's great. And I guess just a follow-up question. Can you talk about the currency that you keep your cash balances is in? Is that predominately kept in rubles in Russia or is it kept in dollars, or euros or other foreign currency?

It's been a combination of rubles and dollars, but mostly rubles.

Okay, great. Thank you very much.

Thank you. The next questions comes from Stephen Pettyfer of Merrill Lynch. Please go ahead.

Thanks. Good day, good evening. Two questions please. First back to the CapEx and currency issue, just to be clear on that, your 2 billion figure for 2009, should we think about that in ruble terms or in worst case scenarios, you said that currencies slips or either currency slips significantly and secondly in your statement you talked about a new dealer compensation arrangements in the third quarter. I just wondered if you could give me some -- a little bit more color on that, are there is there a deferral actively of costs related to that? Thank you.

Yes, on CapEx, let me just clarify one thing. We are not at this point giving a CapEx guidance. We believe that CapEx will not exceed 2 billion but it maybe less, and at this point, we are not prepared to say exactly what that is and also it is difficult to say what is the split between rubles and dollars because obviously our CapEx consists of the equipment purchases that are predominately in dollars but most of the construction costs are in rubles and construction costs represents a major part of CapEx. And by the way next year we believe that construction costs are going to much less than this year, given the decreased cost of steel for instance and also cost of construction overall. So, that would play in our favor. And in terms of dealer compensation arrangements, I am not sure what change in dealer commission structure you are talking about?

Yes, it was on page 4 of your statement. You say, when you are talking about the Russian highlights, it says there that you in the third quarter introduced new dealer compensation arrangement that allows the Company to reduce its dealer commissions.

Oh yes, that there was a slight change in the way we pay dealer commissions if -- we used to sell our dealers SIM cards or SIM contracts at a certain price, let's say, RUB200, and them dealer would sell this to a consumer and then would revenue share whatever top-ups the consumer does and basically pay the dealer from that. And in third quarter, we started the practice of realizing the SIM cards and SIM cards to dealers at a price at a price of one ruble and the dealer would resell it to consumer at RUB200 and immediately receive 50% of that as revenue sharing. You know that helped the dealers and helped to motivate them further and reflected the practice that existed in the market and made us more competitive.

Okay. Thank you.

Thank you. The next questions comes from [Guy Dor of Ross Child]. Please go ahead.

Okay. My question that has actually been passed down for a bit, essentially, I mean, in a way you can describe I think is the way to offset the negative impact of the devaluation that is to in part raise prices, cut CapEx et cetera. Can you talk about some of the other measures that you might take in the event of 20%-30% devaluation on the ruble? Thanks.

An obvious topic for us which we're working on a daily basis is control of our cost. And even though our cost are in rubles still we believe that it is the time to look at the efficiency of our operations at our overheads and look and look over it again.

Obviously, as I said, in CapEx, the construction costs are ruble-denominated and we believe that we will not be impacted severely in that dimension regardless of the ruble depreciation. And on the equipment a major effort that we're now undertaking is negotiating with all suppliers for a, price decrease and b, receiving payment terms which will minimize our cash outflow next year. And we will spread it out over the next few years. So, those are pretty much the measures we are looking at.

Okay, thank you.

Thank you. The next question comes from [Hank Tomorad of Hunters Bank].

Thank you. Just, when it comes to the expansion into other CIS or beyond that. What is your view on that currently? And then, connected with the Sistema question there, is it interest of CDMA-450 in Moscow, is that an option. Thank you.

Thank you. Acquisition on CIS, I mean CIS remains our priority footprint. Our strategy is maximize our cash balance and the cash quotient, which will allow us to do some of the M&A deals if they become -- if they come on line and if they are attractive. There are still some countries in CIS where we are not present and there are still some assets in those countries which maybe potentially interesting to us. And, we believe that the crisis may present us with some very good opportunities. So, we are looking at the situation very carefully.

In terms of CDMA-450, potentially it could be an interesting opportunity for Moscow. Specifically, for PC cards and modems because that effectively is an equivalent of 3G. So we are looking at the situation. We made our position clear to our shareholders of SkyLink and we're basically waiting for them to decide on the strategy of how this asset will be developed in the future.

But of course the -- whatever price we're willing to pay should and we will be consistent with the overall market conditions and the cost of money and the economic outlook.

Is it fair to interpret it as you're looking at it and you made an offer for it or -- for SkyLink?

We made our position clear to shareholders. We said that we're interested in the asset and here is the price we're willing to pay for it and we are waiting for them to decide on how they wanted to take this asset further.

And then what you see the main thing -- what kind of role you are playing in Moscow in 3G?

Once again?

How do you see 3G over CDMA to play out in Moscow? Is it primarily on the PC side or also on the handset side or?

Yes, 3G we are working with the Ministry of Defense, I mean right now there is a commission which is testing radio side of 3G and how compatible that is with some of the defense technologies, particularly in metro and in buildings. And we're hoping to get the results of this research by the end of December. And we're also planning to start compatibility research for outdoor early next year and that research should be concluded in July 2009.

It is too early to tell at this point, how many 3G base stations will be allowed in Moscow and how powerful those 3G stations may be in terms of what's -- per base station and therefore how much capacity we will have in this network and how fast will the speed be of transmission.

So at this point it is too early to tell what will be the size of 3G network and what will be the quality of 3G network in Moscow over the next coming years. As far as CDMA-450 is concerned, here we know exactly what the capacity is, what the speed is, and we can clearly put a business case together on the PC side, PC modem side. We don't believe that CDMA-450 is going to drive the mobile handset usage simply because mobile handsets are not really available.

Thank you very much.

Thank you. The next question comes from Anastasia Obukhova of ETB Capital. Please go ahead.

Good evening, this is Anastasia Obukhova of ETB Capital. Congratulations on good results and the question is as follows. You saw just a modest increase in usage in the third quarter supported fully by the solid increase in every stores, a little jumps and I am wondering what is your, say, usage near term policy i.e., in the fourth quarter and the first quarter, are you going to support this level of usage or are you going to be more aggressive as that it will -- how it will impact your pricing and your usage policy as well?

And the second question is on the interconnect revenues in Russia. If possible, can you provide the number? Thank you.

For now we're maintaining our APPM, ARPU, and usage policy which was started in the second quarter. We, of course, will have a New Year promotion, but that will not be an aggressive sort of SIM card giveaway type of promotion that we used to have back in 2004 and 2005. It will be a normal New Year promotion. So for now we maintain our pricing policy. We will, of course, after we see the results of Q4, make adjustments for Q1 2009 and going further.

Obviously, we will make adjustments depending on how the market economic situation develops and how the customers -- how our customers react for whatever possible disturbances in the market.

And on the interconnect, unfortunately we do not disclose those numbers.

Thank you.

Thank you. Next question comes from Igor Semenov from Deutsche Bank. Please go ahead.

Yes, hi. I have a few questions. First of all, on distribution, can you just reiterate, you said you're looking at 2,500 stores and maybe potential spending of about $400 million. Is there a timeframe for that and is this the total number of stores you want to have, or it's just additions for, whatever, next year or can you talk a little bit about that?

Secondly, on Vodafone, are there any monetary terms related to that agreement? For example, you have to pay for use of Vodafone's, I don't know, consultants or the brand name or whatever. So can you give us some color on that and whether we should expect any impact on your margins as the result?

And a final question on SkyLink and CDMA business. Can you, maybe, give us a little bit of color on your Ukrainian CDMA business? How big is that, what percentage of total Ukrainian revenue comes from the CDMA business and how many customers you have there so we could -- and also just how difficult it is to support two networks basically?

And finally, sorry, finally on CapEx, how much investments have you already made into upgrading your existing network preparing it for the 3G launch and how much more major investments is needed? Is it just adding base stations or you'll have to prepare your existing networks to run both 2G and 3G? Thank you.

Thank you, Igor. On distribution, it is really at this point, I would not be comfortable telling you exact numbers of stores and how this whole network is going to look like, because number one, we have quite a volatile environment in the market and the eventual number of stores and the investment will clearly depend on how many players will remain in the market after the crisis is over. Because we have quite a large number of mobile retailers in the market, in my view, much more than the market actually needs. And the reason we have -- I mean, overall we have around 40,000, I believe, locations throughout the marketplace right, and this is much more than the market actually needs. The reason it happened that way was because throughout the period of dramatic increase in mobile penetration of SIM cards, also we had a dramatic increase in penetration of mobile phones and therefore the volume of sales grew so quickly that it was a very attractive business for many small entrepreneurs who opened up just thousands of those shops. And therefore, the size of the network relative to existing number of stores will have to be, for instance, 4,500 or maybe 5,000. But if this total size shrinks and it may shrink actually quite dramatically then the amount of stores that we will have to construct is very much smaller.

So we will go along diligently and we will plan carefully and we will see how the market develops and we will adjust. I think in spring we will be in a much better position to tell you exactly what will be the number and what will be the economics. But the overall logic and the overall strategy I think is pretty clear. As far as the timeframe is concerned, I believe that we are looking at sort of 12 to 18 month period in which we will construct the bulk of this network.

Now, in terms of -- as far as Vodafone is concerned. We have an arrangement with Vodafone in which we have a small fee, a small fixed fee that we have to pay, but the majority of whatever payments may arise, will come as revenue sharing from the benefits that we will generate, proven benefits and we have a methodology, agreed with Vodafone on how those benefits should be accounted for and how they should be proven. So there will be no negative margin impact from that partnership. There will be only positive or if there are benefits, then they will be positive margin and revenue impact.

Now, as far as Ukrainian CDMA -- no, let me first answer the CapEx question and then I would revert to Ukrainian team to answer the CDMA question.

Overall, we plan to spend around 1.5 billion for 3G networks. A number which we announced last year. And right now, we are moving along with the plan. I don't think that we are prepared to disclose the exact amount which was spent this year. I can only say that this year we will have a network, a 3G network opening up from 15 to 20 cities depending on the licensing approvals that we receive from the authorities in December.

And on CDMA please Andrei and Mark.

Thank you for your question Igor, standing question for Ukraine. Speaking about CDMA I am going to say that this exhibit in an increase in our subscriber base by more than 58% and in case we receive more than $6.5 million in revenue. And I am going to add that this has recently extended the reach of the network to all at (inaudible) around cities and towns throughout the Ukraine. Thank you.

Good, thank you very much.

Thank you. The next question comes from Evgeny Golossnoy of Troika. Please go ahead.

Yes. Hi. I've got a couple of questions on your margins. I understand it's too early to talk about 2009. But just in case, did you try to estimate what could be the impact of a major ruble devaluation. Let's say ruble is at 33 on your margins. What's the percentage of costs you have denominated or pegged to US dollars and what specifically are these costs so that we could kind of understand how flexible you maybe in responding to these pressures coming from your suppliers pricing in dollars?

Yes this question is easy to answer. A major bulk of our revenues, pretty much all of them are in rubles and the major bulk of our costs are also in rubles. So, we don't really see a significant impact on the margins from the ruble devaluation. Pretty much the only dollar-denominated or euro-denominated costs are in the CapEx. And for that I already stated what the strategy is.

Okay. And probably, I missed it. But could you probably specify when it comes to CapEx reduction, what could be absolutely the rock-bottom you will be happy or you could afford to have in case, while things take the worst route. I mean the $500 million maintenance CapEx, is that the indication where you can end up, just if things start to deteriorate very rapidly.

Yes, the 0.5 billion without transfer from 2008, 0.5 billion is our estimate of the maintenance CapEx. Of course, we can spend less than that. If we are -- it's sort of -- it very much depends on how soon you are willing to accept that your network will start deteriorating quality.

If you spend 0.5 billion your network will never deteriorate, it's just no new capacity and no new coverage will be added. If you spend 200 million, you will have problems with your network in three years. If you spend zero you will have problems with your network in a year-and-half. So if worse comes to worse we can really squeeze down the CapEx down to bare-bones minimum, but we of course, are looking at further than just one year and that's why we would like to maintain our network and that includes whatever technology improvements that vendors come up with. Like for instance, you have -- just to give you an idea of why we need to spend the money. Software upgrades that sometimes are mandatory by equipment manufacturers that we have to do replacement every year and so forth.

Okay, thank you.

Thank you. The next question comes from Anna Kurbatova of UniCredit. Please go ahead.

Yes, good evening. The first question I would like to clarify your earlier statement about our current steps to reduce your operating cost. Did I understand correctly that these measures will allow you to save 150 million that was of this year in the fourth quarter I mean.

That is correct. We have implemented the number of cost efficiency programs this year which have in total amounted to an approximate reduction of 150 million in our OpEx. That is within our 50% margin guidance. So that is not on top of this guidance.

Thank you. And then the follow-up question. Where do you see the major source of the OpEx optimization for the future? So it should be headcount, penetrative costs, and so.

Yes, it's clearly -- there are a few pockets of OpEx optimization that we are looking at. A major one of course, is interconnect. And that very much depends on the pricing policy and the competitive response and therefore it's very difficult to predict what sort of optimization potential we have there. Then we have headcount and not only headcount, but also the overhead structure and the overall organizational and management structure. And we have plans to further centralize the management structure particularly in the areas of network planning and network monitoring and some of the technical areas where we believe we have still some work to do in optimization. Also things like looking at the number of employees per manager and making management units larger and therefore eliminating some of the more expensive positions and so forth.

So, a normal optimization process without slashing headcount because we don't think that this is necessary at this point, even though if you look at, for instance, such benchmarks as customers per employee. We have dramatically improved over the last couple of years on that dimension.

Then, we look at network maintenance costs. We are looking at some outsourcing opportunities that we see and overall optimizing, how we do network maintenance. We are looking at and at fiber optic line rental costs and also at interconnect costs when it relates to our long distance network which I already stated which also represents some saving potential. So, those are the major line items which we are looking at. Also of course, administrative, travel and all of that, administrative and those dimension.

Thank you. And a final question. Could you split your ARPU between voice data? Thank you.

15% of the ARPU is data.

Thank you.

Thank you. The next question comes from [Elaine Timtem] from Credit Suisse. Please go ahead.

Good evening. I have two questions, first one on Vodafone partnership. You say that you expect a benefit from launch of range of product services and devices together with Vodafone. Could you please just highlight what those could be, what handset offers or probably what mobile services could be expect? And when those are planned to be launched? And together what this the second question on distribution of iPhone, how the progress goes and could you just talk a little bit on the lot of value-added services? Thanks.

Yes, thank you. On Vodafone basically all products related to broadband internet usage and the broadband related product we will be looking to adapt. Starting with the things like Vodafone music shop and Vodafone portal and how we can enhance MTS portal using their experience. Devices is an important aspect, for instance Vodafone has received rights to exclusively distribute, in US BlackBerry device and we will be distributing that exclusively in Russia as well, just an example.

So basically, overall we are -- we have things like mobile advertising for instance. Vodafone is working on developing mobile advertising platform and it is a substantial effort which we will not have to do by ourselves. We will be able to join and receive benefits. Now, on the iPhone, we are moving sort of according to plan, but on the conservative side of this.

I expect the --

The iPhones of course will be included in our reporting because we buy and sell iPhones, so they are on our balance sheet.

And on your BlackBerry?

Pardon me?

BlackBerry?

BlackBerry's?

Yes.

Yes, BlackBerry as well but the amount of BlackBerry sold so far is not significant to make any changes in our balance sheet. Even though BlackBerry are extremely important for our corporate customers and even though the number of BlackBerry is not that significant but the impact in our relationship with our consumers is significant. We haven't yet started selling BlackBerry for mass market in Russia because of some certification, difficulties but that will happen soon.

Okay. And a quick follow-up, if I may, on the iPhone, have you adjusted the prices of this handsets or are you planning soon and by how much? If so, given the a version in macroeconomic environment is a primary reason for instance and then the BlackBerry, there was information on the press that there are certain limits on the number of imported devices, is it still valid and will you able to sell more, together with Vodafone if the agreement still exists?

Yes, on iPhones, our price very much depend on the that we should have purchased devices at Apple. We basically make no margin or very little margin on the iPhone and therefore any price reduction will either have to be a reduction of the original price by the manufacturer or a subsidy of iPhone by ourselves. We are not planning to subsidies iPhones at this point. And we are of course talking to Apple about the pricing policies especially going in to 2009 given the macroeconomic situation. We will report on that in our next conference call as to how these talks are progressing. On BlackBerry at this point we evolved issues with limits on devices and we can now sell as many devices as we want.

Okay. Thank you very much.

Thank you. The next question is coming from [Josephine Shepard] with Investment Management.

Hi, just quickly since you yourself mentioned that the foreign exchange is one of your biggest risks, will you consider any hedging policies regarding interest CapEx or debt repayments?

Thank you. This is Alexey Kornya answering. As for interest hedging we have about 20% for our debt portfolio hedged, in terms of interest expense and as for currency hedging we will consider the opportunities for hedging as far as there is financially attractive terms in the market.

I can add that, right now there are no attractive terms in the market for hedging against the ruble devaluation. Whatever hedging instruments are available are prohibitly expensive. At least from what we have been offered by various financial institutions.

Okay. Thank you.

Thank you. The next question comes from Olga Bystrova of Credit Suisse.

Yes, just a very quick and small follow-ups. On the CapEx breakdown between construction and equipment or let's say ruble component and dollar component whether it is a equipment of service. Can you provide this breakdown approximately, please? Then on the Ukrainian CapEx that has been running at a $0.5 million consistently for the past several years. When you are looking forward, are you -- is this one of the area where you are planning to reduce a capital expenditure. And finally bad debt has increased quite materially, in fact double in the third quarter I think, can you elaborate on this a little bit? Thank you.

On CapEx I can only give you a very rough estimates, very rough estimates about 30% equipment, 70% construction on CapEx. On Ukrainian CapEx we have a good quality network and we are now looking to fill this network with more active subscribers and Ukrainian CapEx will clearly depend on the amount of effective subs that we -- that we are adding to this network, so that will be a clear driver of CapEx in Ukraine. And bad debt increase Alexey Kornya will comment on that.

Okay. On our bad debt loans we increased our loans for bad debt by 45% on Q2 which in turover with our OIBDA margin by nearly half of the percentage point. These (inaudible) had a conservative policies in an anticipates a slowdown in market development.

Okay. Thanks, and look on the construction 30% equipments or 70% usages and 70% of the CapEx is in rubles or I misunderstood something?

Alexey Kornya is correcting he is saying that the ratio is closer to 46% -- 40% equipment and 60% construction.

Yes.

Bulk of the construction is in rubles.

Bulk of the construction is in rubles, okay, great, thank you very much.

Thank you. (Operator Instructions). We have a follow-up question from Viacheslav Shilin from UBS. Please go ahead.

Thanks a lot. Just a follow-up question regarding your M&A activities and strategy. Is there anything you are currently considering at the moment, any plans for the future, and any updates on situation with smart. I don't remember, there was an article that you obtained a regulatory approval, so what happened in there? Thank you.

On, I think it was a great question. On M&A we are -- as historically we are quite conservative, looking at -- the target especially now given that the situation is still unclear. We do not know whether we have passed the bottom of the crisis or not and therefore we don't know how justified are the asset prices. So we are looking at the situation and as I said we are focusing on cash and accumulating cash and we will use it only when we are absolutely convinced that whatever M&A opportunity is good for us to strategically and financially. In terms of smart I can only say that this deal has been in the card for a number of years and it's clearly a question of price. We were compared to purchase the assets for a quite a long time but I think it clearly depends on the sell side. And even now, our position is made clear to the sell side, and the sell side can decide whether it wants to sell the asset or not. But we are certainly not prepared to overpay to what we believe the true price of the asset is.

Thank you so much.

Thank you. (Operator Instruction) We have another follow-up question from Igor Semenov. Please go ahead.

Yes, hi. On the iPhone; can you just tell us -- so you're buying them, can you tell us how many you have already bought? What the commitment is? And how should we think about it? So you're basically putting it as an inventory on your balance sheet, and then if they if they're moving slowly it basically means that you are tying up your capital. So working capital is -- cash flow is not looking great, but there's no impact on the P&L, and is that right?

Yes. Unfortunately our agreement with Apple does not allow us to disclose this information. Therefore, I cannot tell you exactly how many units we sold and what are the plans.

I can tell you that this year impact on P&L is not going to be significant.

Right. But, for example, next year, how should we think about this, is this -- what sort of impact on the P&L we might be expecting? A charge for -- I mean, is there a penalty, or there's no penalties if they are not really moving for various reasons?

Because of the units going through our balance sheet, you will see impact on the OIBDA margin, not on the absolute OIBDA. Because the eventual cost to us is only a cost of capital as it rotate within those sales. This -- you will see this emphasis impact, it is not dramatic, but you will see that. I cannot tell you exactly what this impact will be. It will depend on the volume that the -- on the volume of the iPhones that we'll be able to process.

And in this contract we are together with Apple, both of us are interested in selling the maximum volume. And we are working with them on both prices, and marketing support, and tariff plan support to maximize the sale of this handset, given that iPhone is one of the drivers of mobile internet and 3G usage on our networks. So it's in both of our interest and we are planning to cooperate rather than talk about fines and disputes.

Okay. But the bottom line is, are you concerned with the impact that might have on your P&L, or you're not really worried, is what I meant to say.

At this point we're not really worried. Given that all three operators are selling iPhone in Russia, and the market situation impacts all three players. And I believe that market is a market.

Okay. Okay. Fair enough. Thank you very much.

Okay, ladies and gentlemen, I think it's time for us to wrap-up. Thank you very much for your attention. We welcome you at any time to contact our investor relations department if you have any further questions. A webcast of our discussion will be available on our website if you will wish to replay the call. In the meantime we appreciate, again, your interest, and wish you a very pleasant day. Thank you.

Thank you. This concludes our conference today. Thank you for participating and you may now disconnect.