Mobile TeleSystems PJSC (MBT) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Mobile Telesystems Second Quarter 2009 Financial And Operating Results Conference Call on the 11th of August 2009.

(Operator Instructions)

I will now hand the conference over to Mr. Andrei Terebenin, Vice President of Corporate Communications.

Please go ahead, sir.

Thank you, Daniel.

Good day, ladies and gentlemen, and welcome to MTS Conference Call To Discuss The Company's Second Quarter 2009 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 [business] activities, both in Russia and abroad, revenue and/or subscriber growth, syndicated loan facilities and their usage, legal actions or proceedings directed to the Company or its representatives, regulatory changes and the impact of the Company at duration 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 return on investment 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 [contained] in our report in 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 at the U.S. SEC at www.sec.gov. [There is no] obligation to update any previously made forward-looking statements either on this conference call or make any adjustments to previously made statements to reflect changes in the risks. [Other] presentation materials used in reference in this conference call are available on our Company website.

I will now turn the call over to Mikhail Shamolin, President and Chief Executive Officer [in Moscow].

Thank you for joining us today to discuss MTS second quarter 2009 financial and operating results.

Joining me today on the call are, as usual, Alexey Komya, our Acting Chief Financial Officer; Andrei Dubovskov, Head of Business Unit Ukraine; and Mark Burden, Financial Director of Business Unit Ukraine.

Overall for the period, we saw a general improvement in our operating environment, aided by seasonal and organic growth factors. Though we saw [the same effect] from market economic volatility in our markets, the Group reported 12% quarter-on-quarter revenue growth to over $2.2 billion. Key drivers of growth included 2.8 million new subscribers overall and seasonal usage factors.

Group OIBDA increased to 2% [See Press Release] q-on-q to over $954 million, even with the impact of our increased activities developing our monobrand retail networks. Excluding our retail investments, we realized a margin of 50.6%, a significant, a significant improvement over Q1.

In Russia, revenues grew 9% q-on-q to RUB51 billion due to strong subscriber additions and a positive impact from seasonal usage. We do, however, continue to see relative weakness in demand for the higher value products such as roaming, long distance and international calling.

We are seeing significant subscriber additions through our greater use of alternative sales channels such as temporary stands, kiosks and so forth. These channels bring us the quantity or subscribers we need to maintain our position in the marketplace, but these channels do not attract high quality subscribers.

We have been divided in short-term propositions designed to appeal to higher value users such as our exclusive distribution of new Nokia N97 Smartphone. But as we have related on this call previously, our proprietary monobrand distribution delivers high value customers as ARPU are 20% higher on average.

While still in the build-out stage of this network, we, in fact, officially opened our first concept store just yesterday here in Moscow of new format. This store boasts a look and feel to match our new value proposition to customers as staff trained and [evaluated] to better understand and sell the latest devices and the systems to move devices and [upsell] plans.

The concepts used here will soon be replicated throughout our network, which should allow us to realize revenue and cost benefits in 2010. In Ukraine, revenues increased 6% q-on-q to UAH1.98 billion. We saw continued usage growth as we reached 441 minutes for the quarter and we do see an uptick in active subscribers for the period. Given they have an impact of the economic downturn, we believe that we stand in a strong position in the marketplace.

We have also continued with expanding our network coverage and increasing capacity as well as driving data consumption using our CDMA-450 technology through the MTS Connect data.

Our performance in Uzbekistan during the quarter was impacted by aggressive competition from other players, market economic factors as remittance inflows subsided and the influx of lower value subscribers spurred by more affordable tariffs.

There was also a migration of a portion of the existing subscriber base to the new lower value tariffs. Combined, this fact has contributed to the decrease in our revenues by 4.6% q-on-q to $96 million. Voice usage remains the main growth driver given the market's level of development.

Currently, we have 3G services available in Tashkent, Samarqand and three other cities and we see an opportunity to grow data usage to low fixed line penetration in the country.

In Turkmenistan, top line grew 15% q-on-q to over TMM107. This reflects ARPU and MOU increases as well as the healthy subscriber growth with over 128,000 net additions and limited competition. We're also seeing healthy growth in data revenues, driven by our mobile internet services offered through the GPRS networks.

In Armenia, our revenues increased 9% q-on-q to reach AMD19.5 billion. Our operations continued to lead the market with an 81% market share.

And now Alexey Komya will discuss the Group's financial performance.

Please, Alexey.

Thank you.

In the second quarter, Group OIBDA increased by 15% quarter on quarter to $954 million. As we have forecasted, the build-out for our monobrand retail has put additional cost pressure on our margins.

This was the first quarter where we saw the full impact of consolidating in the previous acquired retail chains, Telefon.Ru and Eldorado. The cumulative negative effect of the Group margin was 3.4 percentage to a total -- for a total margin of 47.2%.

However, margins on our service revenue was over 50%, as growth was aided by the seasonal [decap] in revenue, tighter cost control on SG&A expenses and depreciation of the Russian ruble during the period. We also saw a 2.5 percentage point margin improvement in our Ukraine business, driven by [cost discipline] and driven revenue growth.

The decline in OIBDA margin in Uzbekistan is the result of aggressive pricing in the marketplace and the ongoing impact of the economic crisis.

In Turkmenistan the significant quarter-on-quarter drop of 10.6 percentage points is due to the back payment to the government for the year 2006 and 2007 in the amount of $4.8 million stemming from revision to our interconnect service.

Net income rose to $563 million for the quarter. Key drivers included better revenue, higher EBITDA and the non-cash [forward] gain of $198 million due to ruble [depreciation], [aggressive] U.S. dollar and euro in the [related] debt.

Our cash levels at the end of the period exceeded $1.55 billion as we look toward the second half to pay out our dividend of nearly [$1.2 billion], which was approved by our general shareholder meeting in June and build up our cash position given the economic volatility and our debt obligation for 2010.

CapEx levels remained high with almost $490 million for the quarter, explained in [towards] the first half of the year, due to getting all our projects from last year around $700 million. Total debt reached [4.6 billion] with the net debt to [flow] monthly with the ratio remaining low at 0.6 times.

Our strong financial position has allowed us to attract additional funds in the capital markets. At tenth of June we signed initial finance agreement to receive three separate loans for the total amount of EUR430 million, some of which boasts a tenure of eight years.

In mid-July, we closed the first marketable syndicated loan facility since the beginning of the economic crisis for the total of [695 million] after it was oversubscribed by around [100 million]. We have also kept local debt markets as part of our continued strategy of hedging our overall debt portfolio. We also placed two ruble bonds since the beginning of second quarter. Our fourth ruble-denominated bond in the amount of RUB15 billion in May and fifth ruble bond with RUB15 billion [on May], which came in at an advantageous rate of 14.25%.

Looking ahead, our focus for the remainder of the year and beyond is still guarding our company cash flows.

To date, free cash flow was $109 million, but this figure was heavily impacted by our CapEx spending.

For the first half of the year we spent just over $1 billion on CapEx, largely through carry-over projects from 2008 and investments in our 3G networks. This spending will drop in the second half of the year.

Just as we witnessed in previous years based on what seasonal factors and loss investments we anticipate operating cash flow will improve in the second half of this year.

Now, as Andrei has recently announced, we are now taking the final steps toward our planned acquisition of Comstar-UTS.

For those unfamiliar with the transaction, Comstar provides integrated telecommunication services to residential and corporate subscribers in Russia, Armenia and Ukraine. Servicing over six million customers, predominantly in Moscow and five regions in Russia, Comstar is an ideal partner with which we can jointly address the large gross markets in fixed broadband while jointly realize significant value by developing bundled and convergent products in markets where we both operate.

Both the board of directors of MTS and Sistema, the seller in this case, recently approved our offer to acquire Sistema's stake in Comstar for just over $1.2 billion or $5.98 per share. This represents a premium of roughly 20%, 25%, given recent volatility in Russian issuers, which compares favorably with recent deals in both European and Russian telecommunication markets at 4.4 times EBITDA, based on 2008 financials, where paying what you feel is a very reasonable price for such a high quality asset.

We are currently in discussions with banks on a long-term bordering facility to finance the acquisition, but it is premature to disclose the sources of terms. We expect the deal to close in October, following the seller's shareholder approvals and additional approvals from the federal and the monopoly service.

The timing of the deal is important for strategic reasons. As we have discussed before, MTS's core markets are maturing. The year of inexpensive subscriber growth have come to end. Those subscribers still come in and out of networks. Nearly everyone who wants a mobile phone in Russia has one, so we must identify new drivers for growth.

Moving into fixed line space, in particular broadband development, is a natural development in our business. There are numerous global precedents for our move into fixed line services, but few mobile players have moved into regions where fixed line services are at such low penetration.

Outside of Moscow, cities with a population of over 250,000 inhabitants have a broadband penetration rate of [upward of] 22%, while similar cities -- while smaller cities are only now 5% to 6% penetrated. Given the technology is dated, excess is almost exclusively done through legacy copper or cable networks. With ARPU levels high in the regions than even in Moscow, we view fixed broadband as not only a natural component to our existing asset mix, but a strong growth product as well.

In ways we are already halfway there. We have long spoken about our enthusiasm for 3G and our networks now are operational in 37 cities in Russia to develop our networks while laying significant amounts of fiber to support the speeds necessary to provide the best possible user experience.

As we indicated in Q3 2008, our fiber investments also allow us to realize OpEx savings on line rental as extending our long distance networks lessens our reliance on other companies' networks. Utilizing our core network for fixed line services will allow us to better monetize investments we are making independent of this transaction.

Another channel we can use more effectively is our proprietary sales and distribution networks. Fixed broadband gives us another product to sell for our channels, a service that enables MTS to develop a variety of bundled and convergent products for different customer segments.

Likewise, we can leverage new content platforms to both promote our communication networks to customers and further differentiate ourselves from the competition.

Our first initiative in this direction is Omlet.ru, an online content platform that offers the largest selection of music, videos and games in our markets, downloadable to both a home computer and a mobile phone. Complementing this portal with Comstar's Stream-TV platform as well as potential contribution through our Vodafone partnership clearly will create a product and service mix our competitors will have difficulty matching in this market.

Our move beyond [sequel] mobile access horizontally and vertically is part of our strategic initiative which we call 3i. Our direction is based on three principles. The first one is integration. The communications pipelines are part of a larger development to reach more deeply into the [ones] in the middle of our customers.

To do so we aim to integrate our service portfolio with the global goal of creating a seamless and unsurpassed user experience. And of course, the Comstar transaction is a part of this lever.

Internet is the second one. It is offering universal connectivity which will be critical in the future as more devices and services will depend on mobile and fixed networks. Our objective is to create smarter pipelines so we can better monetize our assets and capture value from the information that we carry. So-called smart pipes will allow us to offer market-leading services, enable transactions and bring us closer to our customers.

And thirdly, it's innovation. The share in the new -- the software rather than hardware -- will be more and more influenced in future growth in the mobile and fixed broadband space. As an operator, it will be critically important how we mix and match our products and services to ensure we capture growth rather than allow ourselves to be marginalized by our current and future competitors.

In providing a compelling end-to-end user experience, whether here at home or on the go, supported by convenient platforms and a variety of services, we believe MTS will best differentiate itself from our competitors in the marketplace.

As we have discussed previously, our markets are changing and MTS needs to adapt to meet new opportunities. In servicing a market that is evolving beyond simple voice products and new subscriber acquisitions, we have built a large and efficient foundation that has proven -- that has a proven track record of delivering growth and value to both customers and shareholders alike.

Now we have laying new foundations for growth -- brand, 3G rollout, proprietary retail development, OpEx [subsidiary] initiatives, content platforms and, of course, the pending partnership of Comstar with MTS. We are confident that these activities put us in a position to meet the challenges are markets present and seize opportunities to create additional value for our shareholders. Thank you for your time and we will now take your questions.

Thank you, sir.

(Operator Instructions)

And the first question comes from Jean-Charles Lemardeley.

Please go ahead with your question.

Yes, hello.

Just to [ask] on the Comstar deal, could you give us a quantification or an estimate of synergies? Maybe cost savings on the OpEx side and maybe future CapEx, any type of [MPV] you may come up with, particularly with regards to, again, to OpEx and CapEx savings.

And then, could you just [give indications] of buying or not buying out the minorities. I mean, what would you be able to do easier if you own 100% of Comstar as opposed to the proposed acquisition of just -- ?

Thank you for your question.

On estimates of synergies, we have not closed the deal yet even though we got approval from both boards for the deal to go forward. We are still waiting for the deal to be closed by late September, early October. And we have decided to hold an analyst day in October at which we will explain our expectations for synergies and give you preliminary numbers.

At this conference call, we decided to refrain from those comments because the deal is not closed yet.

All right.

Can you give me the areas, just without giving numbers, just site the main areas where you see the synergies, just qualitatively or quantitatively?

We couldn't hear your question, unfortunately, because of the connection.

Can you repeat it, please?

Yes, without giving numbers, can you give the examples of the areas where you see the synergies, maybe?

Yes. The examples in the areas are as follows.

Of course, number one priority for us is to expand into the growing [broadband] market. Growing despite the crises you can see from our data, revenue growth in both Russia and Ukraine. So this is -- probably cannot be called a direct synergy, but clearly for us is a revenue -- increased opportunity that we want to embark very aggressively. I guess we can call it synergetic to a certain extent because we're going to use our regional infrastructure that MTS has on our brand to enhance our move into this market.

Then, of course, synergies can take place in the area of capital expenditure, first of all, because we would rationalize our investments and we would build a network for, effectively, an integrated company in the future and also some of the operating costs can be driven out even without full integration of Comstar into MTS.

Then, of course, there is a question of potential integration and all the synergies that come with it, including convergent products and cost savings in overheads and administrative functions and whatever savings that you typically have in combining similar businesses.

But I will also say that part of the convergent products, especially for corporate customers, can be delivered already without integrating the two entities on the basis of agency agreements where the building is done separately by two companies, but one bill is delivered by MTS, for instance, and sort of simply combined in a special software program. And as far as the second question is concerned on buying out the minorities, we have not made yet a decision on that and this is pretty much all I can say at this point.

Just quickly on the -- you mentioned in the presentation that you're in compliance of your debt covenants post this deal.

Can you refer to what debt covenants -- remind us of your major debt covenants?

That is a question to Alexey Komya.

We closely investigated, of course, obviously, this question. And we will not [depreciate] covenants -- nor MTS covenants, nor Comstar covenants after this deal.

I would say specifically this pertains to -- debt to OIBDA covenant, interest coverage covenant. Those are the two most important ones.

Yes, they are mostly disclosed in materials through [months], et cetera. We will not breach them. We are comfortable we can finance both from MTS. And for -- on the loan basis, this deal -- and not breach those covenants.

Just -- would a minority buyout be possible under those covenants as well?

No comments at this point.

Okay.

And just lastly, maybe just -- on the strategy, can you contrast with that of VimpelCom or Golden Telecom? How is it different or is it similar?

Yes, I would not comment what VimpelCom and Golden has done. I can only say that we are going to put a lot more focus on regional broadband expansion and conquering the broadband market rather than on integration, at least at the first time. Because we believe that we have more benefits in gaining broadband market share than in integration synergies.

All right. Thank you.

Thank you.

And the next question comes from Tibor Bokor.

Please go ahead with your question.

Hi. This is Tibor Bokor from Otkritie.

Just staying on the same topic, please. Can you update us on your cash position? How much undrawn credit facilities do you have and how much do you intend to raise for the Comstar deal?

And second question would be regarding the brand strategy. Now, Comstar is offering broadband under two brands already -- [Mtez] and [Stream], if I'm not mistaken. So are you going to acquire new customers under Mtez brand? Do you intend to rebrand the existing Comstar customers?

What is the view on the branding? And if it's under Mtez brand, what would be the revenue sharing with the Comstar?

Thank you.

I will first answer the question -- your second question on the branding and Alexey Komya will take a question on the cash position.

At this point, the intention is to have one brand, which is an MTS brand, and sell broadband services under MTS brand, given the MTS brand penetration, Russian knowledge and power is by far the strongest, in this case. In terms of revenue sharing, again, this is something that we will address in October when we talk about synergies because this is a specific operational question.

And now Alexey, maybe you want to comment on the cash position.

Yes. Right now we have not withdrawn yet the facility mentioned in my speech of EUR400 million on three separate loans under the umbrella. And as for, particularly, financing for the deal, we are not yet in the position to disclose the exact amount of financing for the deal.

However, I can say that we are in the comfortable zone to finance it in the combination from our own cash flow and loan facilities.

Thank you very much.

Thank you.

And the next question comes from Igor Semenov.

Please go ahead with your question.

Yes, hi. Thanks.

I have a couple of questions also on the deal.

First, is the acquisition of Comstar going to have any applications on your dividend policy?

And secondly, can you comment on the decision or rather no decision to acquire the minority stake? Why has been there no decision to acquire minorities at this stage given again your cash flow generation capabilities, your cash on hand, undrawn facilities? So what's stopping you from going ahead and buy out the minorities, especially given that there's only 35%? Free [flow] in Comstar there's 14% treasury stock.

And finally, what are the regulatory implications on MTS' tariffs and so on and so forth?

Yes. First on -- thank you for your question. First, on the dividend policy.

At this point we are not changing the dividend policy. If we come back to this issue next year, we'll definitely discuss it with you in one of our next conference calls. But for now, this issue is not on the table. Why there is no decision on Comstar minorities, it's actually quite simple. Of course, we are in discussions and, of course, we have considerations and, of course, we have computations done and so on and so forth.

But for me, until we make a decision, for me it is very difficult to be even talking about this because everything I say could be interpreted in one way or the other, which could mislead the investors. And that's why I even not talk even about the process of how we think about it because every explanation may be misleading at this point.

So all I can say is that we haven't made our decision yet. Once we do make a decision, we will be swift to announce it and explain why we made it. That's our logic.

As far as regulatory issues with [MTS tariffs] and tariffs are concerned, we don't see any reason for any changes compared to the regulation that exists today. I mean, we -- there is a controlling shareholder change, but it's -- the block of shares is coming from the hand of one private shareholder to another and it shouldn't affect any [government clause], at least nothing that we know of.

Right. Okay.

And finally, on CapEx, you said that your strategy would be to focus on broadband rollout rather than cost integration -- yes, integration of businesses and cost synergies. Does it mean that we should be expecting a potentially sizable increase in CapEx?

We are not planning to have a sizeable increase in CapEx next year as compared to this year.

Right. Okay. Thank you very much.

Thank you.

And the next question comes from Denise Molina.

Please go ahead with your question.

Thanks so much for the call. Just two quick questions.

First on the margins that you reported, the X retail margin versus the reported margin. I'm just wondering how much of that roughly 400 basis point gap you expect to be weeded out sort of at next year if you think some of that is short term and how much of that is more permanent.

And then, second, just a comment on one of your slides in the presentation that talked about expanding the CIS footprint and possibly outside of CIS. I mean, now that you've done Comstar, do you think that you have room to do further acquisitions this year or next year and then what would you be looking at?

On the margin -- okay, on the margin question, it's actually quite simple. Because we will be consolidating our retail business onto our balance sheet, our margin will technically -- percentage margin -- will technically be always lower than the margin of whatever company you compare us to without retail business consolidated. Because simply, retail business has lower marginality, much lower marginality than our core business and even if the marginal retail business is positive, still mathematically when you apply $2 billion of revenues, for instance, in retail business with a margin of 5% on $10 billion revenues in mobile business with a margin of 50%, you're going to get a substance margin reduction mathematically.

We are looking not as much at the percentage margin, but at absolute margin and that should improve. And secondly, we have a target for our retail business to be profitable on the net profit basis, which means that the retail business should cover the cost of capital, taxes and all the expenses associated with it. So it should be neutral or positive for the overall business of MTS and we will realize synergies and benefits on the MTS side from increased loyalty of our customers, high ARPU, bigger sales and so on and so forth.

So this is the ideology behind the retail business. And right now our retail is just in the growth phase. We are building shops. We are renovating retail space. We are improving and training personnel, improving processes and so on and so forth. So business is in a growth stage.

I think in 2010 it will be much more transparent as to what business is like and what profitability we are able to attain. But again, the target is to have it profitable on the net profit basis, covering fully the cost of capital because cost of capital there is borrowed. And therefore, the only effect on the margin will be a mathematical one, not the negative one, if I explain myself correctly.

And second question on the future acquisitions, yes, our balance sheet, even with the Comstar transaction, will remain to be strong enough for further acquisitions. However, we don't have any immediate plans for any large acquisitions except for the Kazakhstan situation where we are looking at an asset which is potentially for sale.

But again, we have not made our proposal yet and we have not made a total decision yet on whether we want to bid for this asset and how much we want to offer.

Can I just follow up on that and ask two things?

First, on the margins, it sounds like you're expecting margins to improve -- the overall group margin to improve next year. And I just want to make sure I'm reading that right.

And then second, on the expansion, would you consider the [Shiam] asset? Would you consider India as a possible target for you in the future?

On the margin, we were sort of looking originally at the margin of around 47% for the mobile business without retail at the outset of this year and this is something which I was communicating in previous conference calls.

As we will see our margin in second quarter, in mobile business is about 50%. So we have been able to demonstrate some margin improvement and we will take efforts to keep margin in the mobile business at a pretty high level, close to 50%. As far as retail business is concerned, again, the impact on percentage is only going to be worsening because of the increased size of this business.

Okay, great.

And as far as Shiam is concerned, we do not have, at this point, any plans for acquisition of Shiam. And we are essentially looking at this business as perhaps an observer and a consultant.

Okay, great. Thanks so much.

Thank you.

And the next question comes from Alex Wright.

Please go ahead with your question.

Yes, thank you.

My first question is on the gross service margin, overall for the Group, which seems to be in line with the second quarter last year despite the weakness in Romania, in long distance and other high value traffic. Could you just highlight sort of the dynamics behind that and how you've managed to maintain the gross service margin year over year?

And then a couple of questions on some of the other markets.

On Ukraine, as you highlight in your presentation, you've introduced some limits on some of your unlimited plans. Can you just clarify, is that your own move or is that due to some regulatory move on tariffs in Ukraine?

And finally, on Uzbekistan, the CapEx in the quarter was very high. Can you just give some detail on what is driving that, please?

Thank you.

On the gross margin question, the answer is quite simple. We've been working pretty hard on implementing efficiency improvements and cost reduction initiatives. And that's what allowed us to keep the margin at substantially high levels even despite the negative economic trends and lower consumptions. It's -- we renegotiated a number of major contracts with our suppliers and we've been able to reduce our budgets and increase the efficiencies of our processes.

Ukraine, on limits on usage, I think this is something that Mark or Andrei [can take].

This is Andrei Dubovskov and thank you for the question.

Speaking about limits on usage in Ukraine, I am going to say that it's not a regulatory issue. It's not a competitive issue. It's our business decision and it's our way to improve our OpEx and CapEx, improve our market position.

Thank you.

Okay. And on the CapEx in Uzbekistan?

And on the CapEx situation -- this is Alexey Komya -- the level of CapEx in second quarter is defined by seasonality because the rollout of network is really coming for in the second quarter and in the third quarter. And the second factor for CapEx level is rollover projects from 2008, which we were still completing in the first half of 2009.

However, as you can see, the level of the CapEx for the second quarter is lower and, as we mentioned in our speech, that we expect a decrease of CapEx for the second half of this year.

Okay. And if I can just follow up with an overall question on the cost reductions. I mean, do you think you already achieved the bulk of the cost reductions that you're looking to put in place over the last few months or is that still an area of focus where you think you can achieve further improvements in the short term?

Yes. Let me address this question.

We are running sort of two initiatives at the same time. One initiative is related to immediate cost cutting which is essentially driving out all possible fat that is left in all the budget of functional units and renegotiating with our suppliers for lower prices, based on the overall economic situation.

And this is ongoing and this will bring us some additional benefits in this year as well. I would not be quantifying them at this point for obvious reasons, but this is something which is ongoing.

And secondly, we have some major improvement initiatives which are a bit longer term, which should also give us significant impact in our cost base, both in OpEx and CapEx.

As an example, I would call a strategic sourcing project or improving our procurement systems which is something we've embarked on recently and we will see the results of this within sort of 12 to 18 months timeframe. And we have a series of initiatives like that which I designed to improve the basic efficiency of the company longer term, not just one offs.

So we are going both. We have some more work to do until the end of the year and some more savings to come. But I wouldn't give you the number.

Okay. Thank you.

Thank you.

And the next question comes from Will Milner.

Please go ahead with your question.

Hello, Mr. Milner, your line is open.

And the next question comes from Nadezhda Goloubeva.

Please go ahead with your question.

Good afternoon. I want to talk to you about retail business.

So first of all, when talking about potential cost reduction, did you mean, in particular, the retail business or I'm interested whether your retail networks, including those you acquired, are running for the optimal margin label or you see potential for improvement there. And so, if you could quantify, it would be great.

And also if you could possibly tell us how much was contributed with the consolidation of Eldorado and Telefon.Ru in the second quarter. And also how much of the total equipment sales is due to Russia.

This is first question and I'll ask second one later, if I may.

On the second question first, how much revenue was contributed by our retail, which is basically 100% handset sales revenue, it's now reporting and it's around $65 million, I believe.

No, I mean, how much came from Eldorado and Telefon.Ru, which you consolidated in the second quarter?

We don't have these numbers at our disposal at the moment. We are consolidating everything. We are not separating Telefon.Ru and Eldorado for the simple reason, for instance, Eldorado, we did not buy Eldorado as a functioning business. We bought a number of shops and locations.

So basically, it's already a part of MTS monobrand network and it's very difficult to differentiate what is Telefon.Ru, what is Eldorado and what is MTS. Because it's all MTS now. So we're not separating those companies and we're not looking at that separately. If you want, those businesses no longer exist as separate businesses.

Okay. Thank you.

Now, retail business is reigning at optional margin rate. No, of course, it's not reigning at the optimal margin rate now because it's in the growth phase. It's in the building phase.

So we are not focused at optimizing the margin of this business at this point. Of course, we have targets for the margin this year, but the focus is on building the network and making sure it's well branded, it's located in good locations, that the personnel is well trained, that we supply it with good products, that we have good stock management systems and logistics and so on and so forth.

So basically, we built an efficient business model and we get the scale that we need to be a leader in distribution in Russia. And once we've done that, in 2009, obviously 2010 is going to be more devoted to efficiency increases in retail.

So when I talk about efficiency increases and margin improvements, I talk right now mainly about the core MTS mobile business. And once we have established the retail in the way we want to see it, then I will talk to you about how we're going to improve the retail marginality.

Okay. And how -- ?

I can tell you that the retail marginality in Russia is improving overall for the market because the competition has decreased because many players have gone out of business. So we have a much more positive outlook to the marginality of retail business than we had in the past. And historically, the market shows.

And how much of total revenues due to Russia? I mean, the equipment sales?

It's almost 100%.

Okay. And I want to ask a couple more questions.

Just -- I'm interested whether you report SMS revenue growth on net of the content provided revenue portion. This is first thing I wanted to ask.

And second, could you please comment on the pretty sharp decrease of your operating cash flow quarter on quarter?

We -- yes, well, we -- that depends how we -- it depends on the term of the agreement. And on contract terms, most of our contract terms imply how they are structured growth reflection of revenue on content. However, some portion comes on the net basis. That depends on how the agreement is structured.

Okay. And on the cash flow?

Can you repeat the question, please?

Your operating cash flow was down 17% quarter on quarter. Coming from is because I see EBITDA improving, but I don't see negative development on the working capital side. So -- ?

Well, this is -- was partially due to the closure of projects which attributable to 2008 and seasonality. If you look, there is a seasonality in the second quarter, operating cash flow seasonally reducing, due to rollout of network and build up of network. We have the same dynamics in last year.

And the second factor is we mentioned that reduction of our payables due to closure of 2008 projects.

And so, but your cost side reflected in EBITDA, yes? If your EBITDA is improving, there is no reason for another [factor] on the operating cash flow, yes? CapEx is not a factor either because CapEx is going below the operating cash flow. I am interested about your operating cash flow. It's down 17%, so -- ?

Yes, that's what I'm saying. There is a working capital line in operating cash flow, which is defined by payables. And payables are --

Yes, but your operating cash flow is --

So a reduction of payables leads to a decreased in working capital and subsequently to a decrease in operating cash flow. So -- ?

Okay. If I may ask this question later, like in person. Because I don't see the worsening of the working capital -- I looked at working capital, but it's okay. So there are some others. I don't know.

Yes.

Okay. Thank you.

Thank you.

And the next question comes from Dalibor Vavruska.

Please go ahead with your question.

Good evening. This is Dalibor Vavruska from ING. Just a few questions.

One is about the regional strategy for the broadband business. I'm just wondering if, at this stage, you can comment about the opportunities that you see in the broadband market, given the fragmentation of this market now. I mean, would you be willing to go for acquisitions of some of the smaller players in the broadband market? What sort of technology are you going to use for build outs? What sort of advantages do you think you have compared to your competitors of [Improcom], for example, in Golden Telecom, in this market. To sort of -- to get a sense how significant the regional broadband story could be for the company.

I'm also wondering how does this play with the context of the intentions of the administrative -- the sales [invest] companies, obviously, the involvement of system or MTS companies with the sales companies is not off the table, so the government is likely to go ahead with some sort of plans with its sales. So how do you see Comstar's position from a competitive situation, not only with VimpleCom, but also the sales invest companies?

And my second question, maybe also a little generally, is that if I look at your price per minutes in Russia and Ukraine, it's roughly $0.03 to $0.04 in Russia and $0.01 in Ukraine. How do you see this is in the next couple of years?

I mean, do you see the Russian prices going down to that level or the Ukraine prices going up or where do you see the main difference between the business case? I know that, at the moment, obviously, Ukraine is much more competitive. But if you envisage maybe in the next two or three years, things might change, where do you see the prices going?

Thank you.

Thank you, Dalibor.

Your first question -- regional strategy for broadband rollout. Essentially, we are looking at two types of broadband -- mobile broadband and fixed broadband. Mobile broadband, we are planning to cover mostly with our 3G networks and 3G networks typically allow practical operating speed of up to one megabit per second, given the network capacity constraints and load and so on and so forth.

And this will also be used to cover such segment as PC cards for laptops, for instance, which we sell quite actively now in the regions. And those PC laptop cards are often used as a proxy for internet connection, even in the desktop computers. And this tendency will remain in the market.

The opportunity, however, for the fixed broadband lies more with the highest speeds that people demand at their homes. Because if we are looking at the writing speed of ten or 20 megabit per second, basically, the only solution that can currently be offered is fiber or combination of fiber with copper inside the building with the [FTB] type of technology.

And this is the market niche which we believe is out there and which we should take. We talked in our statement about 22% or something penetration in Russian cities of 250,000 plus. But in practical reality, this 22% penetration cannot be called broadband because the average speed of those connections is below 500K, in most cases is 256 or even lower. At, by the way, very high ARPU rates in regions, typically, you would about $30 for a low speed connection.

And we want to bring real broadband internet to the Russian market because we believe that entertainment is going to be moving into internet space and the demand for 10 megabit plus is going to be there and it's going to be a very strong demand. And mobile technologies will not be able to provide these kind of speeds for substantial volume of traffic anytime soon.

Even the LTE, which is coming maybe in two or three years still will have similar capacity constraints given that it's already a wave technology and given that LTE is going to be used not only for data, but also for voice. One LTE base station located next to the building will not give you a speed of even one megabit per second in 50 apartments simultaneously. For that you will need to have fiber. And that's why we need fixed broadband.

As far as the regional strategy, I don't think that we are prepared to clearly formulate it at this point and say whether we're going to go through acquisitions and what those acquisitions will be like or organic. I think it will most likely be a combination of both. But at Comstar we have clearly already an advantage in Moscow where we have an extensive network already brought to people's apartments which we can upgrade. Plus, we have TV networks in the regions which have been acquired by Comstar. Those are cable networks which can be easily transferred into broadband internet. And this is the basis on which we're going to start building.

Sorry to interrupt, but is it right to assume that Comstar is not really a key asset for you in terms of the regional expansion because it's not in the regions mostly? So in a way, what you're talking about in the regions, you could have done with or without Comstar. There's no major synergy here.

Dalibor, unfortunately, I cannot hear you for some reason.

Oh, sorry. Can you hear me now?

Yes.

Yes, I'm just wondering what you're talking about in terms of the regions and the fiber rollouts or acquisitions, it's something that you could have -- you could do with or without Comstar because Comstar is not present in most of the regions. So the ownership of Comstar doesn't really bring any significant advantage or disadvantage in terms of rolling out broadband in the regions. Is that right?

Yes. Correct and not exactly. Because building a complete greenfield business in fixed broadband for us would be a difficult endeavor because we don't have expertise in actually doing that and we need a platform such as Comstar, something we can start from.

Besides, Comstar has very strong positions in Moscow market and in some large cities, those TV networks, they have around two million, 2.5 million households subscribe to cable. So this already gives us a very good foundation on which we can build, which is much more effective than building something completely from scratch.

Okay.

Now, how does -- what was the second question? The [Svesina]. We don't see any significant impact of this transaction on the Svesina negotiations. They are still underway and I believe we are going to successfully complete them. I'd say that the outcome of those negotiations, whatever it may be, will not significantly impact our plans.

And the offer that we made to Comstar was based on the assumption that Svesina stake is valued at whatever it is valued right now and the situation does not change. So if it improves, then it will improve our business case.

And the third question was about ATPM in Russia and Ukraine. From my perspective, clearly, ATPM in Ukraine has to go up.

Okay. Thank you.

Thank you.

And the next question comes from [Viktor Klimavich].

Please go ahead with your question.

Good evening. I have a couple of questions.

The first one is one latest usage trend which you could see. And also, Mikhail, you mentioned in the first part of your presentation that currently you still see roam and international call weakness. Do you have any particular numbers on that? So, and currently usage trends for local traffic?

This is my first question.

Thank you, Viktor.

The usage trends are as follows. In the corporate segment, the drop that we had in the Q4 and Q1 has stopped. So basically whatever cost the corporates wanted to drive out, they've driven out. And now the market is following trends in the overall business security given the roaming and the interconnect traffic. So we are hoping once the business activity starts picking up, those revenues will start coming back to us.

As far as market segment is concerned, we basically see consumer behavior when people try to stop all the not necessary services and that impacts things such as SMS and content. But still stick to their core usage despite reduction in their overall income and increase in unemployment and decrease in GDP.

At the same time, we see growth happening in data usage and we see our data mode and penetration and sales increasing despite the crisis. So these are the key trends. Let's say that the market have take the heat in the Q4 and Q1, stabilized. And in Q2, it is following sort of typical seasonality with the exception of roaming, which is weaker. And extras which we, every year will sell. This year it's much more difficult to sell extras than it was in the past.

So you don't see -- currently, you don't see any traffic improvement, I mean, excluding seasonal trends. Am I right?

I think, at this point, it is very difficult to say. One quarter is not enough to make those conclusions. We'll have to wait some more.

Okay. And my second question is regarding the data which you showed for the first time in this -- during this quarter results. I mean, the Russian margin excluding the retail business. Can you please describe -- as we know, or we know MTS had, in the past, had its own retail business and it has some costs and revenues. Have you excluded this as well or have you just excluded the new parts which you acquired during the first and the second quarter?

Just the new part, Viktor. The existing -- whatever exists inside of MTS, whatever is within the MTS' legal entity is included in the 50.9% or 50.6% margin.

Okay. And may I ask a third very small question? Is the current dealer commission for alternative channels can be somehow justified to the normal sales channel and is ARPU offering new customers through these channels differs from the normal channels? Thank you.

So-called the alternative channels, specifically and mostly, we are talking about so-called service points or service stands which we place in supermarkets and train stations and metro and what have you, plus promoters. Those channels deliver slightly less quality customers that we would get through typical channels.

But since we used most of the time revenue sharing schemes, the cost of those customers is not dramatically higher for us than the cost of customers acquired through normal channels. So the cost is relative to the quality of the subscribers that we get. But the quality is not only determined by the type of channel, but also on -- also by the trends which are taking place in the market.

And this year we see more sort of customer movement, if I can put it this way, in the market, due to crisis and economic conditions. People are looking for better offer and they are changing their SIM cards more often than they've done last year. And that's why we have bigger volume and lower sort of value per customer. But still we believe the distribution is highly important and it would be wrong for us not to focus on distribution because this is the fastest way to lose on the revenue growth in the next coming periods.

Thank you very much, Mikhail. Thank you.

You're welcome.

Thank you and the next question comes from [Ivan Ken].

Please go ahead with your question.

Yes, hi.

Refer the question on the prices in Russia. So you're saying that the corporate market has, like, almost bottomed out in the fourth quarter and first quarter '09, which were like, let's say at the moment, at least through the [tough] quarters. But besides there is no input from those on the [EBITDA] and let's say the value-added services. The ARPU has been stable quarter on quarter as well. But given that the [voice] is down 3.5% in rubles still following the first quarter which has the similar decrease and we -- I'm just wondering whether it is reflective of subscribers -- mass market subscribers switching to kind of lower tariff packages despite you actually somewhat increased prices in the market?

And the second small one, on the retail, just when do you think the retail business will be breakeven on the net level. Just not like exactly, but just roughly, will it be 2010 or it will be 2015 or something there.

Thank you.

All right. Your first question, if I understand it correctly, it is mostly around the slowdown in the value-added services and why this is happening, if I understand.

Sorry, Mikhail, it's more like whether mass market subscribers are switching to cheaper tariff class or you don't see it really.

Okay. The ATPM in both of our key market, Ukraine and Russia, has not gone down in Q2 as compared to Q1. So whatever has been happening in Q4 and Q1 has stopped and we believe we've been able to stabilize margin and we don't expect -- sorry, not margin, the ATPM -- and we don't expect ATPM to go any further down in those two markets.

What is happening with our customers, because of people going unemployed, getting less money and less cash on hand, they're trying to optimize their budgets. They are not ready to stop using voice services or reduce the usage of voice because it's an integral part of their consumption basket, a convenience of life which they are not ready to give up. They -- consumers are trying to optimize their spend by getting rid of the extras, which they've been using before, particularly content and SMS and optimize their budget spend.

We've seen some drop in messaging revenue and in data content revenue in Q2, as you see on the page [24] of our presentation. But most of it, I would say, is contributed to seasonality rather than those effects. Because, at the same time, we offset the natural drop in usage by offering more products and services and by penetrating content and messaging into our customer base, which is something we are doing on the daily basis. So I don't expect the messaging and the data to go further down in the next quarters, but we will see. But what's happening in the market is exactly as I explained.

As far as the retail business is concerned, we are planning to -- we are planning for the retail business to reach our profitability targets in 2011 and, in 2010, we will try. I cannot guarantee you that we will do it in 2010 because effectively we are trying to build [Euroset] or [Skasnoy] and make them profitable in sort of two years as opposed to, like, seven years that it took those respective companies.

Thank you.

Thank you and the next question comes from Stephen Pettyfer.

Please go ahead with your question.

Yes, hi. Thanks for the questions. Just wanted to focus on Russia very briefly. If I strip out your accelerating data contribution, in ruble terms, despite the improving customer numbers, your voice revenue is actually slightly negative, it looks like, year on year this quarter. I was just wondering, is that something, the trend you see reversing? Has the drop in the -- or rather the improvement in the conditions stabilizes or is that something we should -- are we sort of now at a point where you think the voice revenues, which is basically --

Can you please repeat your question? It's a very bad line. Sorry for that.

Oh, sorry. My question concerns voice revenues. I just -- looking at your year-on-year trends in ruble terms, you -- we saw a slight decline this quarter. I just wondered, at the risk of looking too hard at a quarter, is that a trend you see stabilizing and perhaps improving? That's my first question.

We believe -- first of all, the reason for this trend primarily is lack of roaming revenues because historically roaming has been one of the major sources of revenue for us given our heavy presence in the corporate customer base and heavy customers. So this is almost entirely due to roaming and once roaming comes back to -- or starts coming back to whatever levels we saw in 2008, we'll have this improved.

Also, I believe that increase in our customer numbers will help for this revenue stream to go up.

Thanks.

And just a follow-up on that. Given the increased aggression in terms of gross adds in the second quarter, can you tell us a little bit about what you would expect from a churn profile of those new customers?

Quite surprisingly, we had lower churn that we expected in the first half of the year. It's kind of hard to predict what's going to happen in the second half, but so far we haven't seen churn numbers going up, despite the sort of lower quality of subscribers and despite the crisis situation.

To offset and further reduce churn, we launched a program in May, which is called NTS Bonus. And we already have around three million subscribers subscribe to this program. So it's very popular. And we believe that this should further enhance our churn reduction measures. So to answer your question, I don't expect churn to go dramatically up. And we've been positively surprised with the churn in the first six months.

Thank you.

Thank you.

We have a follow-up question from Denise Molina.

Please go ahead with your question.

Hi. Thanks.

I just wanted to quickly ask a question about Omlet and when you finally roll that out. And also a little bit about the economics -- how much you're planning to charge customers, say, for a song download. And what percentage of revenue share you have to provide to the media content provider, if any.

Thanks so much.

Yes. I would, with all honesty, I would refrain from comments about Omlet economics at this point because we are still experimenting with the format and we -- it's still a work in progress, so to speak. That's why we're not advertising it and that's why we're not promoting it heavily. The amount of investment that went into it is very, very limited and this is something which we believe can potentially be a big success.

But we really have to first work on the customer experience and making it a great product before we can really push it. But we already see interest from our customers and -- at least on the Russian content and internet sort of horizon. This is more or less the only thing of such format. So we'll see how it develops further.

Okay. Great. Thanks.

Thank you.

And we have a follow-up question from Igor Semenov.

Please go ahead with your question.

Yes, hi. Thank you.

Yes, I just wanted to follow up on trends in Q3 so far. So we're sort of halfway through the quarter, but with regards the usage trends, but I'm not quite sure I understood sort of what the bottom line is. Are you seeing seasonally an improvement? So like in Q3 last year and Q3 all the previous years, there was an improvement over Q2 in terms of usage. Are you seeing it so far, an improvement in MOUs?

And secondly, can we just chat briefly about [Sinthera] because Comstar was in fairly advanced stages. They've done the due diligence apparently. They talked about the rational and so on and so forth. So can you touch on that, please? Whether you'd be interesting in this asset or not and whether we should -- or add any color on Sinthera, please.

Thank you.

At present, Q3 we don't see, as of yet, an improvement in roaming as compared to Q2. So roaming this year is going to be bad and there is not much we can do about it.

As far as the seasonality of Q3 versus Q2, I think we will follow seasonality trend. But I wouldn't give you exact guidance as to how Q3 will look as opposed to Q2. I can only say that we, at this point, don't see any worsening of the situation that we saw in Q2, despite our concerns that our customers in the [investment] may show a drop in usage, given the latent sort of demand drop that it -- when unemployment grows, people don't change their spending patterns in the sort of first six months.

And once they realize that unemployment is prolonged, they dramatically cut all the spending including, perhaps, the mobile. So we've been sort of now looking out for this to happen and so far it hasn't happened.

Okay.

And Sinthera. There is really nothing I can say about Sinthera at this point.

Okay. Thank you.

And it seems like we ran out of questions.

We have a question from Olga Bystrova.

Please go ahead with your question.

Yes. Good evening. Olga Bystrova from Credit Suisse.

My first question is on CapEx for the full year because you have spent $1.1 billion so far in the first half. If I understand correctly, your CapEx guidance was $1.5 billion. Does it mean you will be spending -- you will have to increase your CapEx guidance or could you please help us reconcile these two numbers, basically, particularly given the seasonality in CapEx is skewed towards the second half anyway?

The second question is in distribution on your OpEx side. If we split off your service EBITDA, so to speak, at 50.9% margin in Russia and I, for example, end up with about $30 million to $35 million or OpEx expenditure on the -- for the retail business. Do you think you will have to continue to invest through the end of the year this amount or this was mainly a one off?

And finally, on the revenue side, if we split off -- if we split revenue drivers by voice and data, what Stephen Pettyfer was talking about, data is the only growing item there currently. What kind of data traffic you are seeing? It is GPRS? Is it a lot of [PG] coming through? How many mobile or broadband subscribers you are having and what ARPU are they generating currently?

Thank you very much.

Okay. Thank you, Olga.

Your first question -- CapEx for 2009. Number one, we don't change the guidance. We keep $1.5 billion as our guidance. Explanation for that is very simple. Out of $1.5 billion, as I was saying in our previous conference calls, around $800 million are actually carryovers from 2008.

So if you look practically at our CapEx, it is about $700 million. So if you take the $800 million aside, we spend sort of $300 million in the first half and therefore we're going to spend another $300 million in the second half, which is going to bring us to the target figure. So there is no discrepancy there.

As far as retail OpEx, I'd rather not talk in detail about the retail OpEx and the retail investment and how it's -- and how it's happening because we have a very detailed business plan which we follow. We are not really disclosing it. I'd rather, once we've built this business, I'd rather present you a picture of how it looks like and we'll discuss it there. Perhaps later in the year or perhaps in the earlier 2010.

In terms of revenue drivers, what kind of data revenue we receive, mostly data revenue is growing on the backbone of MTS Connect product, which is a data connection card that we sell. We sell it both in 3G enabled regions and in Edge enable regions and we don't really make a distinction -- 3G versus non-3G. But most of the data traffic growth is attributed to that.

Those MTS Connect cards are used for both laptop computers and desktops computers as a proxy for fixed Internet because, in the regions where we have 3G, our data cards, in most cases, provide faster speeds and much better user experience than existing fixed lines. It's a plug-and-play type of product. It already contains software within itself. So you can just plug it into your computer and within five minutes it can be connected to the internet at high speeds in the 3G enabled agents. It's a very popular product and we are growing sales of this month by month.

Okay. Thank you very much.

And can you give us some numbers on mobile broadband subs that you have ARPUs that they are having because your competition obviously does that already?

It's quite difficult, Olga, to define what exactly are mobile broadband subs. The amount of 3G enabled handsets in our network is around 7% to 10%, I would say. And so those -- these people go in 3G networks. I wouldn't give you exact number how many unique users we currently have.

Okay. Great. Thank you very much.

We are talking about modems.

Yes, I was talking mainly about modems, but I don't know if you have that number.

We sold similar number of modems than our competition discloses.

Okay. Thank you very much.

Thank you.

And the next question comes from Josephine Shea.

Please go ahead with your question.

Hi. Thank you very much. I know it's late so I'll keep it very short.

There is a swing in your accrued expenses and other liabilities on the balance sheet for $1.2 billion from quarter one to quarter two. Was that cash and what will the swing be in the next quarter?

Thank you.

It's dividends.

So this is dividends to be paid.

Dividends to be paid. To be paid. So we have an obligation to pay our -- to pay out our dividends until the end of the year. So accrue -- we show the dividends is our obligation [now].

Okay. Thank you.

Thank you.

And the next question comes from Julia Mustafinova.

Please go ahead with your question.

Yes. Thank you. Good afternoon. I have a follow-up question on the original broadband, if I may.

You have mentioned the high ARPUs in the region and the low speeds that have been offered currently by the company. I'm just wondering, where do you see the main bottleneck for such market order and how do you plan to address these jointly with Comstar when you will be doing your expansion into the regional broadband?

Thank you.

Can you please repeat the question once again because we again didn't get it because of the connection?

Okay. I'm sorry. Sure.

The question is you have mentioned high ARPUs and low speeds that are currently offered in the regions by the company. The question is where do you see the main bottleneck for such market order and how do you plan jointly with Comstar to address that? And where do you see advantages for you to solve this?

Sorry again, we don't get it. Sorry. Can you repeat it for the second time?

Oh, yes. Sure. I'm -- the question is on the regional broadband, the high ARPUs and low speeds that are offered in the regions. I'm just wondering what is the main reason, the bottleneck for such market order and how do you plan to address that situation jointly with Comstar?

Okay. I understand your question about why the speeds of broadband in the region is low and what can be done to increase it. Is that correct?

Yes, that's correct.

Okay. The speeds are low because the initial demand for the internet connection amongst customers was just to have an internet connection and therefore a lot of local providers were very quick on their feet to provide whatever dial-up or DSL connection that they could provide without paying a lot of attention to the quality or speed, simply because people demanded internet now at whatever speed that can be provided because the internet usage was typically looking at the news and going into different social sites.

But -- so effectively, a new technology needs to be brought in. We need to bring fiber to building and inside the building we either will use existing copper lines with the [FTTD] box or we'll have to do fiber to each apartment. Or perhaps, if it is economically feasible, we can install a WiMax, for instance, base station, which, at the end of the fiber line, can provide adequate speed if the capacity demanded -- permits it. So essentially, it's reinstallation of existing networks and upgrades. With the existing networks that local providers have in most cases, it is not possible to provide broadband speeds. So it's going to be new product that they're going to be selling, not competing with the existing providers, to a large extent.

And the last question, please.

Thank you.

The final question comes from Anna Lepetukhina.

Please go ahead with your question.

Yes, hello. Actually, most of my questions have been answered. I just have one.

I mean, do you plan any further increase in tariffs because, to a large extent, the stabilization of ATPM in the second quarter was possible due to increase in tariffs in April and May? And do you think that customers are prepared for this?

Thank you.

Well, we are doing what we call revenue management policy and I have been talking about it in the previous conference calls. We are always constantly adjusting tariffs and we're trying to, basically, make sure that people who can afford to pay more, pay more. And people who cannot afford to pay more and would churn out of the network otherwise have a tariff for them.

So that's basically our tariff policy. I wouldn't call it the overall, across the board increase, but our target is to hold and improve ATPM. That's how we would formulate it.

Okay. And can I -- just a follow-up question on the CapEx?

You just mentioned that the CapEx for this year is about like $700 million of $1.4 billion, which is the guidance. It includes 3G CapEx, as well, of $300 million.

Can you please repeat the question?

Okay. So of $1.5 billion CapEx, your guidance for this year, you mentioned that this year CapEx is about $700 million. Does it include 3G CapEx of $300 million, the guidance you gave before?

That does include 3G CapEx, but 3G CapEx also is partially in the carryover from 2008 because we started building 3G in 2008.

Okay. Thank you.

You're welcome.

All right.

Ladies and gentlemen, first of all, I want to apologize for the lines this time. We will improve definitely next time. Thank you very much for your time and patience. We welcome you at any time to contact our investor relations department with further questions. A webcast of this discussion will be available on our website if you wish to replay the call and I wish you a very pleasant day. Good-bye.

Ladies and gentlemen, this concludes the Mobile Telesystems second quarter 2009 financial and operating results conference call. Thank you for your participation and you may now disconnect.