Mobile TeleSystems PJSC (MBT) 2011 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Mobile TeleSystems first-quarter 2011 financial and operating results conference call on the 26th of May, 2011. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to Joshua Tulgan. Please go ahead, sir.

Welcome to MTS' conference call to discuss the Company's first-quarter 2011 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 may relate to one of the following issues. The strategic development of MTS' business activities, both in Russia and abroad, revenues and/or subscriber growth, syndicated loan facilities and our usage, legal actions or proceedings directed at the Company or its representatives, regulatory changes and their impact on the Company's operations in the markets in which we operate, financial indicators such as operating income before depreciation and amortization, average revenue per user, cash flow projections and our return on invested capital, technical matters as they pertain to our mobile communications networks, including equipment licensing or network technologies, capital expenditures and operating expenses and macroeconomic developments within our markets of operation.

A comprehensive overview of these issues is available in MTS' annual report in Form 20-F, which is available on our website or through the US Securities and Exchange Commission.

Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include Company press releases, earnings presentations, MTS' 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 US SEC at www.sec.gov.

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

I'll now turn the call over to Andrei Dubovskov, President and Chief Executive Officer of MTS.

Ladies and gentlemen, thank you for joining us on today's conference call to discuss the Company's financial and earning results of the first-quarter 2011. Joining me today are Aleksey Kornya, Vice President, Chief Financial Officer; and Mikhail Gerchuk, Vice President, Chief Commercial Officer.

Given that we only recently reported the last set of numbers, when we discussed it in great detail the development of our business during 2011, we will provide a quick overview of the results we achieved during the first three months of the year.

Group revenue for the quarter increased 12% year over year to reach $2.93 billion. Naturally, the Company's performance was impacted by traditional negative seasonal factors. The first quarter is historically the weakest due to fewer working and calendar days, and that, when combined with poor weather conditions, translated into slowdown of business activity and the decrease in voice usage, in particular high value roaming income business revenue.

Relative to Q4, total revenue in Russia was in line with our seasonal expectation. But year over year, our revenues in Russia, including mobile, fixed and handset and equipment sales, increased 14% year over year to RUB74.3 billion. Our mobile business contributed 15% year-over-year growth to RUB61.3 billion. Drivers include higher subscriber gross addition, totaling 8.6 million for the period, higher voice and data usage, and increased handset sales that enhanced our retail portfolio.

As I mentioned before, data continues to be a strong driver of growth. Data traffic revenue grew 18% from Q4, far higher than voice messaging or content services, which reflect the impact of our increased modem sales and growing 3G networks.

Our fixed line business revenue increased 5% year over year to RUB14 billion. Key drivers included growth in long distance and international long distance calling, subscriber growth and tariff revisions. In Moscow, (inaudible) on average sure increased by 9.2% beginning from January 2011.

In Ukraine, revenue increased by 7% year over year to UAH2.1 billion. Key growth factors include rise in voice usage and increased usage of value-added services, including content promotions and a 69% rise in data traffic revenue.

In Uzbekistan, revenue increased slightly year over year to close to $105 million. During the quarter, we demonstrated very good subscriber growth with around 329,000 customers added to our network. We continued to lead the market in terms of subscribers, with a 42% market share.

In Armenia, revenue decreased by 8% year over year to AMD16.3 billion due to seasonality and the increasing competitive pressures.

Our Turkmenistan operations remained suspended for the entire duration of the first quarter with no revenue being recognized. In Turkmenistan, we're still pursuing all the avenues that are open to us so as to come to an amicable resolution on the situation.

Now Aleksey Kornya will further discuss the Group's profitability and financial performance. Thank you.

Thank you, Andrei. In the first quarter, Group OIBDA declined by 3% year over year to $1.1 billion with the OIBDA margin for the period reaching 38.4%. Starting from this quarter, we will be reporting only one OIBDA margin for our Russian operations. The reason is simple, our business has changed. MTS is no longer a mobile-only operator. We are an integrated telecommunications provider offering both mobile and fixed services. Like many other integrated operators, we manage our own networks together and it does not make sense for us to continue to allocate costs between the different business units.

Our Russia OIBDA margin increased sequentially from 37.7% to 39.1% in first-quarter 2011. The improvement is mainly attributable to the solid USB modem sales and the expanding 3G network that helped drive higher margin data traffic revenues. Having said that, traditional seasonal factors did affect the quarter. In our mobile business, these include lower service and the roaming [they didn't] use due to the holidays, shorter days and fewer calendar days.

Also, the number of gross subscriber additions continued to be relatively high during the first quarter, with 8.6 million subscribers. And as a result, dealer commission expenses remained high and put additional pressure on our margin. However, as we already stated during our last conference call, we began scaling back on our gross addition in April of this year, and we'll continue to do so provided the competitive market remains stable.

A reduction in gross additions as well other initiatives we're currently undertaking should lead to an improvement in marginality starting from second quarter. Overall, our fixed line business continued to demonstrate lower profitability due to our consolidation of regional [revenue].

In our [Legacy] concerned business, we saw significant high G&A expenses due to our holding of the Comstar merger that resulted in severance payments and recognition of employee retention bonuses and impairment of equipment.

In the regions, we continue to integrate our businesses we have acquired over the past 18 months, having closed the Comstar merger and many other deals. However, we do expect profitability of fixed business to gradually improve. The OIBDA trends in our CIS markets were consistent with seasonal factors and are reflective of the top line performance and competitive factors. Obviously, the suspension of activity in Turkmenistan deprives us of a higher margin operator and we did incur material cost in the shutting of our networks.

Group net income for the quarter was around $322 million, more than double the level in the fourth quarter. We did realize a slight currency gain of roughly $89 million when compared to the previous quarter. There were no significant one-offs affecting the bottom line.

At the end of the first quarter, our total debt was $7.5 billion. For the period, we did not attract any additional debt, but the net increase in our debt portfolio is attributable to the rubles appreciation against the US dollar. Interest expenses amounted to a little over $170 million. We continue to look for opportunities to amend the terms of the outstanding credit facilities as part of our strategy aimed at lowering interest rates, extending maturities and limiting currency risks.

At the end of April, we announced the recommended dividend amount of RUB14.54 per ordinary MTS share for the full year 2010. This comes to RUB30 billion or approximately 78% of US GAAP net income for the year 2010. The dividend will be subject to the approval of the Company's Annual General Meeting of shareholders in June 27, then it will be made in the period of two months following the approval in accordance with the newly introduced changes in Russian law governing the process.

Free cash flow for the quarter came at $621 million. CapEx for the quarter totaled $279 million. Spending has been almost exclusively aimed at expanding our 3G networks and improving our call capabilities. We also reaffirm our CapEx to sales guidance for 2011 at 22% to 24% range, as we aim to capitalize on the opportunity presented by the Russian market.

Thank you, Aleksey. As we discussed on our last call only six weeks ago, we remain an organization in transition. In Q1, we took significant steps, however, in realizing our strategic goals set out by our 3i Strategy. But MTS continues to change and this continues to be visible in our financial results.

In our fixed-line business, the closing to our Comstar merger, now (inaudible) has to focus on the broad optimization of our business. Operationally, we can now focus on rationalizing headcount to eliminate redundancies and rationalize our workforce. We can also begin to examine assets disposals, like real estate in our fixed-line business, to lower costs.

Meanwhile, we continue to identify unique M&A opportunities, such as our recent acquisition of Kurgan based alternative provider, to open our networks. Likewise, we are reviewing the Group structure to determine whether or not we can streamline our overall Russian business to create further [efficiency] for the customer. We can move ahead with critical steps in integrating our business, including convergent billing.

We remain committed to improving churn dynamics. As we mentioned on last call, we have began scaling back our gross addition. Moreover, we are going to continue to do it so as long the competitive environment allows us to. However, better products, like convergent products and different tariff bundles, will allow us to begin login in our better clients.

In sum, we remain in transition, but the steps we are taking now will gradually move us to our goals. Thank you for time, and now I'm happy to open the call to your questions.

(Operator Instructions).

Will Kirby, Nevsky.

Looking at your Group income statement, a lot of the margin decline seems to have come from the cost of services line. There is increased expense there due to more backhaul requirements or is there interconnect payments, please?

This is Aleksey Kornya. I'll take the question. Decline in our gross margins to a logic sense is attributable to our increased interconnect costs. Still, however, we do not see that our rental costs or other element -- or any other elements of cost of sales are sufficiently affecting our margin.

Okay. Thank you. And then just a follow-up for H2. Is there going to be some change in your promotion mix or what factors do you think are going to lead to that percentage declining again, please? How are you going to reduce interconnect payments?

Absolutely. We do intend to change or to focus in our propositions more on on-net costs and reduce the focus of our promotions on off-net costs. I would give probably to go in more details to our Chief Commercial officer, Mikhail Gerchuk.

Thank you, Aleksey. Yes, indeed, in the second half of last year, we used gross net tariffs as a tool to attract more customers from other networks, that we can successfully done building up our market share in terms customers and in terms of revenue.

Now it's time to monetize this acquired base more effectively, and we now shift our focus into promotion on-net tariff and on-net communication, therefore, changing the balance from off-net costs to on-net costs.

Indeed, on the 11th of May, we launched a super zero tariff using a model that led us to big success in customer acquisitions in Ukraine. Now we launched it across Russia. First results are encouraging and the tariff explicitly stimulates on-net costs.

Okay. Great. Thank you.

Alexander Balakhnin, Goldman Sachs.

I have two questions. First is on your dealer commissions, which appear to be up quite a bit in the first quarter. And on your full year results, you mentioned that you plan to discontinue the alternative distribution network. Could you probably quantify what is the contribution of the alternative distribution on your dealer commission so we can calculate the potential margin uplift from that?

And the second question is on your guidance, again, on the full year results publication. It looks like your second quarter and the second half should have quite a noticeable expansion of profitability. Can you probably quantify what will be the contribution of the tariff changes toward the on-net, which you just mentioned, the change of basically dealers relationships and the headcount reduction, which you mentioned in your press release?

Well, as we guided in our last call, we are planning achieve on the annual -- annually 42%, 43% margin on the Group level. So as a number of initiatives, we include those which you mentioned specifically, we will go down on volume of our sales. We will look at improving the mix of our tariff propositions, as earlier was discussed, so that we put more focus on our on-net costs and a number of other initiatives.

We will not -- we're not in a position to quantify each of them. But generally, over the year, they will give us the results which we are looking for.

And in terms --

Sorry. It's Andrei Dubovskov, and I'm going to add some information about, number one, in my opinion, we have the two main questions. Number one is dealer commissions, and number two is interconnect. It was the previous question.

And speaking about the split of this problem, in my opinion, it's approximately 50-50. But if you're going to talk about headcount, it's a long-term impact because if we're going to reduce our headcount, we need to pay some payments to our colleagues. And again, the main question is number one, it's interconnect, and number two, it's dealer commissions. And we have a very strong plan how we're going to decrease this payment.

Just to give you a bit flavor on dealer commissions, in December, we acquired more than 3 million customers -- significantly more than 3 million. In the last month, we acquired just over 2 million. So we reduced the number of connections by half, and we're planning to reduce it now a little bit further, if market allows.

Thank you. And probably just a follow-up on your guidance. Given that the handset sales are normally skewed towards the second half of the year, you're still comfortable with the profitability guidance of 42% to 43%. So you basically expect for the core business quite a meaningful profitability improvement?

At this stage, we confirm our guidance, and we do not see any signs that it needs to be revised. It takes into account.

Thank you.

Nadezhda Golubeva, UniCredit.

First, I wanted to ask you about your G&A expenses [where] share were quite sharply upwards on quarter, and I believe it came at a higher percentage of service revenue and revenue as a whole. So can you please elaborate a bit what were the factors which drove them up? Was it in particular due to the increase of social tax or there were some one-offs in this increase?

And should we expect like this high G&A continuing through the second quarter or do you see some potential for the cut of G&A as a percentage of revenues? This is my first question.

And secondly, also I wanted to ask you about margins. So today media reported that you are about to decrease the commission which you pay to the terminal payment owners, and so there was some testimony that this could give substantial positive impact to your margins. So when you are guiding your 42% to 43% OIBDA margin, was this potential decrease of the payments a part of this or will it come on top of the guidance? Thank you.

On your first question related to G&A expenses, yes, there are two major factors which affected our G&A. And this is the increase in social tax and another factor, which might be even slightly more material, is our one-off associated with consolidation of Comstar, including some impairment of equipment, which also falls into this line, and some payments, one-off payments to employees which are leaving -- which have left the Company.

So that is the major driver. One of them is sustainable, so we'll see some -- this effect in the future quarters. Another is not. So, in total, you might expect some decrease of G&A as a percentage of sales. As for your second question --

Excuse me, a follow-up on my first question. When you're saying there was a one-off, there is a one-off like impairment in your P&L, do you mean this impairment or there was another impairment?

No, I mean the impairments which we have in our financials.

Okay. And --

(Multiple speakers).

Okay. But -- okay. And then I will ask you, how (inaudible) the one-off when you are saying there are two factors, yes. And one is non-sustainable and another is sustainable. So could you give a bit more color on how the impacts drove sustainable and non-sustainable in all [splits]?

Well, it's roughly 1 percentage point of this factor comes for social tax, so that we'll see about 1 percentage point up. And it might be some other continuous factors which are affecting on G&A's share of our sales. Others are temporary, and we will reduce -- we will get rid of them in further quarters.

Okay. Thanks.

And speaking about your second question -- it's Andrei Dubovskov. As I mentioned before, we have a very strong plan how we are going to reduce our expenses. And the decrease in commissions to terminal payment owners, it's one part of a many deal in this way.

So it's already a part of 42% to 43%, yes? Hello?

It's correct.

Okay. Thank you very much.

Viktor Klimovich, VTB.

May I have two questions? The first one is regarding data traffic. We still see a quite high uplift of data traffic and data revenues. And can you please share with us information regarding gross margin of this business?

As we were commenting on our previous calls, the marginality of our data revenues are much higher because they do not have -- this revenue does not have interconnect part in its cost structure. So, of course, increase of share of data revenues in our revenues split will positively affect our marginality. Roughly, we estimate the marginality of this revenue at a level of around 80% or -- yes, 70% to 80%.

It is on OIBDA level, right, Aleksey?

Right. Correct.

And my second question is to Mikhail Gerchuk. Mikhail, we just got data from EC&M, which shows that in April you had flat net additions, but you just said that you had gross additions of around 2 million customers. So this probably means that you significantly reduced your churn as well. Should we expect that the churn will go down throughout the year or is this just a one-off in April? How should we look at this data?

Well, the churn that we have in April is churn from the end of last year when we had a quite high number of connections. Since then -- and especially in the last few months, we are working very actively on the quality of our customers. We reduced the number of connections, but worked on the quality of acquired customers and also increase number of data connections that also have lower churn. As a result of this, yes, we expect positive churn dynamics because we consciously work on improving quality of our connections and reducing churn.

And what is the approximate percentage of data customers in your gross [additions]?

Approximately, 10% to 15%. Sorry, 10% to 15% is modem customers -- yes, modem customers. So customers who --

Yes.

-- buy modems and use it for data only. In addition to that, we now have very popular kind of voice and data tariffs with very nice data options on voice tariffs. Also, we plan to almost double smart phone penetration this year, as we discussed in the previous call. So a significant proportion of data revenue is generated not by pure data connections, but also from voice connections.

Okay. Thank you.

Alexander Balakhnin, Goldman Sachs.

I just wanted to have a quick follow-up. In your data revenues, there was quite a noticeable jump quarter-on-quarter of your content revenues. Could you probably elaborate on the nature of this growth, because in the previous years the first quarter content revenues were flat to down, this year it's quite a noticeable up?

And my second question, second follow-up, is on your CapEx guidance. You reconfirmed your 20% to 24% CapEx sales guidance, but just can you probably share your thoughts. When you complete your network rollout plans and, say, achieve the number of base stations similar to MegaFon, like 25,000 base stations, do you think you will be able to reduce your CapEx spendings or you will have something else to spend on? Thank you.

I think I will answer the first question and then pass to Aleksey. This is Mikhail Gerchuk. In the first quarter of this year, we are on a special kind of content revenue generating initiative kind of a lottery that proved to be popular and generated nice additional revenues. This was a one-off initiative, but this helped us to drive -- to drive revenues up in the first quarter. Okay.

As for our CapEx guidance, we believe that this year and the next year will be the main years when we will be investing and rolling out our 3G network, and after that, the major rollout will be completed. So you can see -- you will see some reduction in CapEx spend starting from 2013.

And just very quickly on this one-off on the content revenues. Can you share with us the rough profitability of those revenues? Is it like a normal revenue share you have or it had some different revenue share assumption?

This was more or less average.

Okay. Thank you.

Wycliffe Shinan, Deutsche Bank.

I just wanted to ask a couple of questions, and first is on your guidance. If you are able to provide any guidance in terms of OIBDA or net leverage for 2011, that would be great.

Well, we believe that it will not efficiently change from the level where it stands right now, 1.2. So you might see something like 1.4, 1.5.

I mean, you have the guidance on CapEx, you have now the diligent factors, so you might approximately came to the amount of our debt-to-OIBDA level.

Okay. And of your CapEx, how much would be on the maintenance level?

We estimate that it is below 10% goes to maintenance levels.

Okay. And finally, if you have this number at all, is there an overall approved borrowing limits for 2011, the domestic markets or external markets?

Well, in our financial policy we speculate that we have limitations of our debt-to-OIBDA level of 3. But to go beyond 2, we need to have some extra generated non-organic transaction. So organically, we vision our debt-to-OIBDA ratio within 2.

Okay. Thanks so much.

Nadezhda Golubeva, UniCredit.

Yes, sort of one follow-up. When you are saying that you expect to decrease the additions, yes, if the market allows. So we're already in the -- so -- yes. The market's pretty important because you understand that it's not within your control only because it depends on the competitive behavior.

So given that we're already in end of May, essentially, yes, do you have some evidence on that the market will allow you to, let's say, be not that aggressive in SIM card selling and that the competitors will also act like in a more rationale way in that regard? Thank you.

Well, so far we already have reduced the levels quite drastically, as I have explained, from about -- from 3 million at the end of last year to close to 2 million now. And so far we plan to continue this route, yes. We definitely do not plan to increase number of gross additions. Generally, our strategy is to focus more on high-quality connections, fewer high-quality connections, and focus very significantly on churn reduction and customer development.

We believe that in our market with such a high mobile penetration, this is more prudent than a rate for connection that we observed last year. So, so far, if market allows.

Okay. So putting it a different way, the market is a bit more favorable, yes, now compared to what we saw in 2010.

Yes, yes, I would say so. Just overall number of connections on the market now is significantly lower than we observed last year. So, yes, if market allows.

Okay. Thank you.

Nadezhda, look at our market more deeply. If two operators in the Russian markets go in to reduce new additions, it will differ. It's enough. And, for example, look at first quarter, speaking about MTS and our main competitor.

In my opinion, it is very good situation because, for example, if all three operators are going to reduce new additions, new subscribers, it will be so much, and a lack of independent retailer will disappear from our market. Thank you.

Tibor Bokor, Otkritie.

I got a couple questions on our CIS operations. I have noticed a significant pickup in [four more] subsidies in Ukraine. What is your experience with this and are you thinking about implementing similar steps in Russia? And a bit color on Uzbekistan and Armenia. A bit disappointing results. Any sign of a turnaround in these countries in terms of the revenue growth? Thank you.

Zoltan Palfi, Credit Suisse.

Operator, hold on.

I'm sorry.

And we are going to answer that. Please be patient.

Okay.

In Ukraine, we have had a very impressive growth of our CDMA data sales and penetration. And, yes, we kind of -- we sold more CDMA modems than we used to, and this is what you observed in the data.

And with regard to Uzbekistan and Armenia, on both of the markets, just to remind you, we have very high market share, and in both countries there are aggressive third entrants that behave very aggressively on the whole on the market. Our objective is to secure our profitability in the market is much as possible. But what we see in the results is explained by the aggressiveness of third players on both markets.

Any change in the second quarter in terms of the nice dynamics coming out (technical difficulty)?

I mean, no significant changes, I would say.

Understood. Thank you.

Operator, any more questions?

Zoltan Palfi, Credit Suisse.

I have two questions, please. Firstly, can you give some color about how the profitability of MTS retail evolved in the first quarter? Is the profitability likely to change as Svyaznoy is handing over the management of these stores later in the year? And the second question, can I just ask why did you decide not to break down your Russian OIBDA into mobile and fixed as of this quarter?

So I'll start from the second. This is Aleksey Kornya. As we discussed, since we merged our legal operations with the fixed business, we are unifying our costs. Our costs are not simply breakable or we do not see much logic in the sense in breaking our common costs. That includes basically almost all the cost. So we do not see any rationale behind breaking it artificially.

So that is why we are unifying. And this is similar to what you can see in many other integrated players through the market.

Thanks Aleksey.

It's Andrei Dubovskov speaking about your first question. Profitability of MTS Retail right now is around zero, and you know that in this market the normal profitability is approximately 5%, 7%, no more than 10%. And in my opinion, it's a very good result. Speaking about Svyaznoy transferring management, I'm sure that you know it's not a very problem for us, because our management more professional and we have no very big problem in this area. Thank you.

Thanks very much. So just to confirm, we shouldn't expect profitability of MTS Retail to improve just because you're managing it yourself going forward. Hello?

: Yes. Sorry. Could you repeat your question?

Yes. Sorry, Alexey. So I was wondering whether we should expect the profitability of the retail chain improve a little bit if you are able to manage it cheaper than how Svyaznoy does at the moment?

Yes. Absolutely. I think that we are -- this year we will be more focusing -- in previous two years -- we will be more focusing on building up the retail. This year we will be more focusing on picking up the fruits from this network and improving its profitability. And effectively, already starting from the first quarter, we demonstrated less -- we see less of impact of retail now on margin than we had in the fourth quarter and in the third quarter of previous year.

I see. Thanks a lot.

(Operator Instructions).

We'll take one more question. Are there anymore?

Thank you, Mr. Tulgan. There appear to be no questions at this time. Please continue.

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

Thank you. This does concludes the Mobile TeleSystems' first-quarter 2011 financial and operating results. Thank you for your participation. You may now disconnect.